Capture Theory and the Public Interest: Balancing Competing Values to Ensure Regulatory Effectiveness

Regulatory Capture of Regulators: The Case of the Investment Dealers Association of Canada

“…This claim is in alignment with the wider literature on self-regulation, where SROs attempt to ward off mandatory government regulation through stricter enforcement of offences that appeal to the public interest (Brown & Davis, 2009;Croley, 2008;DeMarzo et al, 2005;Leight, 2010;Potter et al, 2014). The mere threat of government intervention may provide the SROs with the incentive to promulgate and enforce regulatory standards that are aggressive enough to prevent the government from doing its own enforcement of the SROs' written rules.…”

“…Self-regulation in particular, has been accused of serving the interests of industry above those of the public, for example, circumventing rules regulating financial markets, inconsistencies in sanctions and lacking accountability as in government regulation (Lokanan, 2015;Raine & Dunstan, 2011;Potter et al, 2014). In this regard, an examination of the IDA's enforcement record provides ideal fodder for a more thorough probe of a self-regulatory framework and would be another entry into the ever-expanding catalogue on the use of selfregulation in Finance.…”

“…While capture may occur in all regulated sectors, this phenomenon is expected to be particularly severe in the financial industry where there is a conflict-of-interest between financial firms trying to maximise profit and regulators who wants to regulate in the public interest (Brockman, 2004;Lokanan, 2014a;Novak, 2014;Veltrop & de Haan, 2014;Potter et al, 2014). The conflict that arises between regulatory functions and their business interests, determines their ability to effectively investigate and discipline their members (CFA, 2007: 22).…”

“…Regulation thus captured is said to serve the special interests of these groups rather than the public interest (Carpenter, 2014;Potter et al, 2014). With the benefit of over twenty-four years of enforcement data from the Investment Dealers Association (IDA) of Canada, now the Investment Industry Regulatory Organization of Canada (IIROC), the present paper explores one aspect of regulatory capture -weak enforcement of existing standards.…”

“…While not an exhaustive list, capture theorists from both the centre right (Stigler, 1971;Posner, 1974) and the liberal left (Kolko, 1963;Lowi, 1969;Merrill, 1997;Dal Bó, 2006;Etzioni, 2009) have outlined various ways in which regulatory capture occurs. Some of the more common ways of regulatory capture, as highlighted, in the literature are as follows: special interest groups using their influence to shape regulation (Novak, 2014;Leight, 2010;Schwarcz;Potter, Olejarski, & Pfister, 2014); diluting of regulation through amendments (Croley, 2008;Veksler, 2015); repeal of existing regulation to suit special interest groups (Benmelech & Moskowitz, 2009); manipulation of regulators (Lokanan, 2014b;Wu, Johan, Rui, 2014); and, weakened enforcement of existing regulatory standards (Carpenter, 2014;Coates, 2007;Etzioni, 2012;Braithwaite, 2013).…”