Effects of Lobbying on Regulatory Scrutiny Essay

Introduction

Due to lobbying, financial regulators’ regulatory monitoring and the interests of civil society stakeholders have been adversely affected. The UK Public Affairs Council (UKPAC) defines lobbying as “attempting to influence or advise authoritative figures in the government, parliament, or local government on areas that may require external expertise” (Bew, 2013, p. 12). In the context of the United Kingdom’s financial services industry, everything that has to do with influencing legislation or government programs and policies fits under this umbrella term. For informed debate and the availability of professional information, lobbying is critical in the political process. Lobbyists play a significant role in the UK’s political and legislative processes. They use their knowledge, network connections, public relations abilities, or a mix of these to persuade legislators and regulators on a specific subject (Igan et al., 2019). Even though there are many other elements at play, the lobbying environment and the regularity with which lobbying crises arise in the UK are without a doubt two of the most critical concerns that hamper regulatory scrutiny by financial regulators. This paper discusses the effects of lobbying on financial regulatory scrutiny and the interests of civil society stakeholders.

Restricted Regulatory Scrutiny of the Financial Sector

Lobbying hinders financial regulators’ ability to enact legislation that adequately governs the banking industry in the public’s interest. A clear implication is that the regulatory authorities are more likely to implement and evaluate financial rules. Because of regulatory capture, banking rules have become less stringent. Prior to the Great Recession of 2009–2010, the banking sector in the UK lobbied for looser rules. Lobbying groups were less likely to be prosecuted (Igan et al., 2018). Unlike in 2000-2007, when UK banks were allowed to make riskier loans, resulting in poor crisis consequences (Cassidy, 2010). Igan et al. (2019) looked at the failure of bank resolution as a post-crisis issue. They looked at the resolution process through the prism of lobbying to see whether a financial regulator’s discretion might undermine or improve its efficacy. Their results imply that although lobbying may reveal both aspects of secrecy, it may also result in lobbyists gaining regulatory power. They observed that vigorous lobbying of banking regulators in the UK raises the odds of winning an auction by 26.4 percent, while increasing lobbying expenditures by one standard deviation increases the likelihood of winning an auction by 6.6 percent (Igan et al., 2019). These results sustained after adjusting for bidder characteristics and target fixed effects.

Bank lobbying may taint regulatory results by introducing private incentives into the policy-making process. Rent seeking for preferential treatment may explain how private interest in making profits by lobbying banks and financial regulators leads to lax scrutiny of the sector (Igan et al., 2019; Schuknecht and Siegerink, 2020). Regulators have been accused of serving their own and regulated institutions’ interests above the public good (David-Barrett, 2017). Rent-seeking may hinder the settlement of bank failures, harming society (Schuknecht and Siegerink, 2020). But by presenting vital facts to decision-makers, lobbying may assist in hastening the decision-making process. Regulators appreciate information on how to manage a certain circumstance as well as insights on the skills and intentions of potential acquirers. This may speed up the resolution process.

As evidenced in recent lobbying scandals, some politicians and public officials utilize their official positions to favour commercial interest organizations in exchange for money. For example, in 2013, MP Patrick Mercer was found guilty of severe wrongdoing and had to retire. In June 2013, four MPs and Lords decided to work as paid lobbyists and ask parliamentary questions (Igan et al., 2018). Banks lobby to prevent costly enforcement proceedings due to regulatory capture and informational lobbying. Technically, this implies evading regulatory inspection. Regulatory capture happens when banks improperly influence regulators, forcing them to act in the industry’s interests rather than the public’s (Igan et al., 2010). In this context, there are two types of regulators: those who set and enforce final bank regulations and those who set and enforce basic laws that underpin those regulations (Admati and Hellwig, 2013). A case of “regulatory capture,” when elected officials are driven by business interests rather than public welfare. Lobbyists, thus, have a significant negative impact on the development and implementation of financial and services legislation as regulatory capture leads to supervisory failure and financial catastrophes.

Conflicts of Interest and Effects on Trust Deficits

Conflicts of interest among legislators and regulators promote distrust in financial regulators’ efforts to engage in financial scrutiny, which may undercut the willingness of other financial players to obey the rules. That is not to say that lobbying is always unethical, especially if it is done primarily for personal or political gain. Due to a lack of transparency in private-interest lobbying and decision-making processes, the public is unable to determine if such choices are made in the public interest (Igan et al., 2019). Officials and politicians who benefit financially from their role as spokespeople for special interests are more likely to engage in corrupt behaviour (McKay and Wozniak, 2020). Therefore, the public loses trust in the laws that they are supposed to police.

Banking and financial regulators’ efforts are limited by rules and regulations, which are often national but may also be European. Regulators, such as the Prudential Regulation Authority (PRA), are bound by a code of conduct while communicating with their regulators (Igan et al., 2019). This is stated in several corporate plans and other regulatory documents. Stakeholder engagement is required for better regulation. Consumer groups and government bodies may also provide recommendations. The two most significant UK laws are the Financial Services and Markets Act 2000 (FSMA) and the Bank of England Charter 1998. On the other hand, laws like the Bribery Act and the Freedom of Information Act must be observed (David-Barrett, 2017). Soft law, such as codes of conduct, memorandums of understanding, the regulator’s code, and good corporate governance norms, must all be considered.

On the other hand, closeness to lobbying groups has been shown to impede compliance. Regulators will be in close touch with the industries they are supposed to control because of this. They should be free of (commercial and political) intervention, but not so far removed from the regulated that they are incomprehensible (Schuknecht and Siegerink, 2020). Finance is a fast-paced, technologically advanced, and highly complex sector. Having a good working connection with the private sector may help government organizations hire top people (Schuknecht and Siegerink, 2020). In fact, the regulatory agencies’ effectiveness is predicated on the trust that the people have in them.

If regulators grow too close to the institutions they are supposed to be monitoring, they risk losing their independence. The capacity of corporate regulators to join and leave the regulators poses a challenge to the independence of the regulators (David-Barrett, 2017). Because some UK government officials are backed by the companies they supervise, they seem to be prejudiced. Statutes and internal rules of behaviour may provide some protection for the time being, but they are insufficient. Regulatory agencies may be influenced by political participation (Schuknecht and Siegerink, 2020). Many of the Cabinet’s senior officials are chosen by the Treasury. While the former must make decisions based on personal autonomy and professional need and may only terminate staff for specific reasons, the temptation to choose favourites may be tremendous (Igan et al., 2019). The government is also concerned about financial stability because it affects public budgets, smart financial policies, and well-functioning financial markets.

Even as Tim Yeo MP was cleared of any misconduct by the Parliamentary Standards Committee, local Conservative Party members declined to elect him as their MP in February 2014. As chair of the Commons Energy and Climate Committee, Mr. Yeo was accused of having conflicts of interest (David-Barrett, 2017). Stephen Dorrell, the former Minister of Health and Chairman of the Health Select Committee, was asked to step down owing to a conflict of interest. According to reports, Mr. Dorrell competed with KPMG for $1 billion in NHS contracts (David-Barrett, 2017). Lack of transparency in lobbying may taint policymaking, or at the very least give it a poor reputation. As seen in the following examples, transparency and accountability are hampered.

Effects of Poor Transparency on Regulatory Scrutiny Rigor

When financial institutions are less transparent about their institutional risks, regulatory authorities find it difficult to scrutinize their credit, market, and operational performance. Therefore, financial institutions may be more vulnerable to economic crises, as was the case during the Great Recession of 2009–2010. In a competitive market with asymmetric information, the revelation of important information affects market participants’ behaviour (McKay and Wozniak, 2020). Consumers who are more educated and able to make informed purchases will create a more competitive market. This is a good way to figure out how much policymakers are involved, but it’s not clear how well it will work in practice.

In the UK, firms such as telecommunications, postal services, gas, electricity, and water must make this information public. Lobbyists may seek the protection of regulators and politicians to conceal this information (David-Barrett, 2017). Lack of transparency in lobbying efforts may raise questions regarding regulatory organizations’ responsibility in regulating certain financial issues. Because most lobbying occurs behind closed doors, few people in the UK are aware of it. In the UK, only ministerial and permanent secretary meetings must be made public. MPs, civil servants, local government officials, elected members, and a broad range of public organizations cannot track who is lobbying for what reasons or how much money is spent lobbying (David-Barrett, 2017). Thus, the public is typically unaware of the financial industry’s lobbying effect on regulators.

Hence, the public has no idea how much lobbying has affected legislation. The lack of transparency in the lobbying industry may lead to improper activity charges (McKay and Wozniak, 2020). The personal privacy of ministers and officials has been known to be infringed. Above all, the public is worried about unethical influence in these informal contacts. In 2010, Prime Minister David Cameron lamented that lobbying would be the next biggest scandal. At least 15 major lobbying scandals involving ministers, lawmakers, and other public officials have occurred in the five years since (Goodrich, 2019). Unregistered attendance at a five-star London hotel dinner with lobbyists and business executives was later exposed in 2011. Pickles was at the dinner hosted by Bell Pottinger, according to the Bureau of Investigative Journalism (David-Barrett, 2017). TAG Farnborough Airport CEO Brandon O’Reilly was also in attendance, waiting for a response from Pickles. As part of the airport’s long-term growth strategy, Bell Pottinger Public Affairs was recruited. An appeal and a planning inquiry were required to get the design to the federal government. On February 10, 2011, DCLG and the Department for Transport agreed on airport development plans. Opposing O’Reilly and Bell Pottinger during the lunch, Pickles denied being persuaded (David-Barrett, 2017). The event demonstrates the lack of transparency in lobbying. The lack of openness in lobbying and decision-making processes prevents the public from understanding if such actions constitute an abuse of power. This may lead to a scenario where a public official who is supposed to represent the public interest favours one group’s economic interests while disregarding others.

Compromised Tax Policy Scrutiny and Recommendations

Lobbying leads to a situation where financial analysts counsel their clients in the government on how they may misuse those regulations to reduce the amount of tax they pay for their personal businesses. In turn, this complicates the process of regulatory scrutiny by the regulatory authorities (Igan et al., 2018). Accounting firms help political parties with tax planning. In 2014, PwC disclosed that it had given the Labour Party £626,895 in human secondments since the 2010 election (David-Barrett, 2017). Many Shadow Cabinet members’ offices have had PwC staff on a temporary basis. Business, education, housing, and international development have all been shadow ministerial portfolios. PwC workers helped the shadow treasury team pay certain invoices (David-Barrett, 2017). Corporate tax evasion is addressed by a broad anti-avoidance provision.

Because government decisions are complicated, lobbying assures a distorted interpretation of government policy. In 2014, KPMG was accused of compromising financial services industry analyses to fit their personal and client interests as lobbyists. KPMG employees were not included in the parliamentary secondments registry since they worked for party headquarters rather than MPs’ offices. While in opposition, the Conservatives received £1.5 million from accountancy companies (David-Barrett, 2017). Political funding and lobbying are another important source of concern in the UK. Democracies need political parties. This is a great way to get people talking about policy. They may assist those who wish to become politically active or pursue a political career (Igan et al., 2019). When traditional funding sources like membership dues are dwindling, political parties need money to do all of this plus campaign. However, political parties are powerful and influential (Schuknecht and Siegerink, 2020). As a result, donors demand preferential treatment in return for contributions, and parties are more willing to be swayed.

Affluent individuals and groups may be able to influence large donations, which is concerning. Between 2001 and mid-2010, political parties received £432 million from individuals, companies, and unions (David-Barrett, 2017). It raises the question of why and what people desire in exchange for giving a political party so much money. The Electoral Commission, an independent watchdog, said in May 2014 that the 10 legally recognized political parties in the UK had earned £14,230,841 between January and March of that year. As of March 31, 2014, the parties owed £15,096,219 (David-Barrett, 2017). In the UK, there have been various political financing scandals. This enabled corruption, as shown by the March 2012 “pay for access” affair. During the 2006–07 “cash for honours” scandal, it was revealed that certain Labour Party peers had loaned the party large amounts of money (David-Barrett, 2017). Therefore, lobbying leads to situations where financial analysts advise government clients on how to exploit legislation to lower personal business taxes. This complicates the regulatory oversight procedure.

Agitated Focus on Profit Motive and Regulatory Arbitrage

Profit motive, market mechanism, and competition, which are core interests of lobbying banks and financial institutions, jeopardize financial regulation scrutiny. Lobbying leads to compromised legislation targeted at promoting the financial interests of a few lobbying organizations and complicit policymakers rather than the public interest (David-Barrett, 2017). When lobbying enables or facilitates privileged access to certain organizations or persons, or when it serves narrow interests rather than the wider public benefit, corruption concerns develop. However, policymakers should try to account for this since certain organizations and people will always be more qualified to participate in public policy and lobbying than others.

Regulatory arbitrage is an important part of regulatory competition because it gives lobbying banks regulatory options and allows them to maximize their market benefits. If demand for regulators’ services is more elastic, they will be held more accountable. Regulatory arbitrage has a cost, despite its benefits (Nabilou, 2017). Because of the hedge fund sector’s complexity, investors, operational mobility, increasing attrition rate, and lack of transparency, market discipline alone is insufficient to govern the externalities of regulatory arbitrage by hedge funds. These characteristics confound market signals, limiting the apparent advantages of further regulatory monitoring (Cassidy, 2010). When it comes to providing financial services, hedge funds have a lower reputational cost than other providers of financial services and mainstream financial institutions. They also have a lot more private investor exemptions, which makes regulatory arbitrage easier.

In the UK, money could be used to purchase lobbying expertise and effort, as well as most likely influence. It is difficult to define “excessive” access and establishing that access caused interference or that interference was inappropriate is much more difficult (Admati and Hellwig, 2013. Despite this, the sheer volume of lobbying may create concerns about uneven access and the possibility of judgments favouring those with more power (David-Barrett, 2017). For instance, after receiving an avalanche of lobbying from the alcoholic beverage industry in 2012, the UK government was persuaded to change a policy proposal on the minimum alcohol price in the interests of lobbyists, who were led by profit motives. The UK government established a minimum price for a unit of alcohol in March 2012. A minimal price would target the cheapest items and persuade those who drink the most to reduce their consumption. A price of 40 pence per unit was estimated as capable of lowering 50,000 offences and 900 alcohol-related deaths every year by the end of 2020. In July of 2012, however, the House of Commons broke its promise on the last day of the session before the summer holiday (David-Barrett, 2017). Hence, a policy was changed to encouraged profitability after lobbying.

Civil Society Detriment/Stakeholder Detriment

Lobbying may restrict the participation of civil society organizations (CSOs) in regulatory scrutiny and the pursuit of their interests in areas of conflict (such as taxes). Taxes, electoral reform, and lobbying rules are only a few examples of legislation and administrative procedures that may have an influence on civil society groups (Igan et al., 2019). While attempts by lobbyists to restrict CSO activities in the financial services sector may not be intended to harm them, they may have an adverse effect (European Union Agency for Fundamental Rights, 2017). Many legislative acts are accompanied by additional measures, putting a regulatory burden on civil society organizations and making it more difficult for them to carry out their tasks. One such adverse effect is that

An area of interest that may lead to conflict with lobbyists who have ingrained business interests is money laundering. A study by the European Union Agency for Fundamental Rights (2017) revealed several concerns expressed by CSOs in the UK and beyond. First, the fact that non-registered CSOs are not recognized by certain Member States, while others require them to re-register. Second, the unjust design and execution of transparency standards and lobbying restrictions may limit CSOs’ ability to educate the public and promote their causes (David-Barrett, 2017). Even though CSOs have quite different resources and purposes, the same regulations that apply to corporate lobbying and human rights campaigns may be applied too liberally to them. Former UN Special Rapporteur on the Rights to Peaceful Assembly and Association, Maina Kiai, criticized the UK’s Transparency of Lobbying, Non-party Campaigning and Trade Union Administration Act 2014 (the Lobbying Act of 2014) in this context. Kiai argued that the Act was a product of lobbying (European Union Agency for Fundamental Rights, 2017). He explained that if one plans to spend more than a specific amount of money on an election or if he or she is seen to be interfering with voters’ will, he or she must register to vote. Hence, CSOs must choose between registering as a party-political organization and incurring fines for lobbying during election season in order to retain the public’s perception of them as neutral and nonpartisan. Because CSOs are afraid of being accused of political action, charities were unable to register with the United Nations. As a consequence, 63 percent of CSOs objected to adopting the Act, arguing that it would make achieving “some or all of their organization’s or charity’s purposes” more difficult (European Union Agency for Fundamental Rights, 2017). Therefore, lobbying may restrict the participation of CSOs in regulatory scrutiny and the pursuit of their interests in areas of conflict.

Conclusion

Lobbying makes it difficult for financial regulators to pass legislation that appropriately regulates the banking sector in the public interest. Conflicts of interest among lawmakers and regulators foster scepticism of financial regulators’ efforts to conduct financial oversight, which may undermine other financial participants’ desire to follow the rules. Regulatory authorities find it harder to analyse financial institutions’ credit, market, and operational performance when they are less open about their institutional vulnerabilities. Lobbying leads to a scenario in which financial analysts advise their government clients on how to use legislation to lower the amount of tax they pay on their own enterprises. As a result, regulatory examination by regulatory bodies becomes more difficult. Profit motives, market mechanisms, and competition, all of which are important to lobbying banks and financial institutions, jeopardize financial regulatory oversight. Lobbying results in compromised legislation that serves the business interests of a few lobbying firms and complicit legislators rather than the public good. Lobbying may limit CSOs’ ability to participate in regulatory oversight and pursue their goals in contentious areas like taxation. Legal and administrative processes that could have an impact on civil society groups include tax changes and changes to the way elections are run, for example.

Reference List

Admati, A. and Hellwig, M. (2013) The bankers’ new clothes. Princeton: Princeton University Press.

Bew, P. (2013) Strengthening transparency around lobbying. Committee on Standards in Public Life. Web.

Cassidy, J. (2010) How markets fail: The logic of economic calamities. London: Penguin Books.

David-Barrett, E. (2017) Lifting the Lid on Lobbying: The Hidden Exercise of Power and Influence in the UK. London: Transparency International UK.

European Union Agency for Fundamental Rights (2017) Challenges facing civil society organizations working on human rights in the EU. Luxembourg: Publications Office of the European Union.

Goodhart, C. (2010) ‘How should we regulate bank capital and financial products? What role for living wills?’, in Turner, A., Haldane, A. and Woolley, P. (eds.) The future of finance: The LSE report. London: London Publishing Partnership, pp. 165-186.

Goodrich, S. (2019) Accountable Influence: Bringing Lobbying out of the Shadows. London: Transparency International UK.

Igan, D, Lambert, T, Soleddad, M and Peria, M (2019) Bank lobbying: Regulatory capture and beyond. International Monetary Fund, 171, pp.1-30.

Igan, D., Lambert, T. Wagner, W. and Zhang, E. (2018) Lobbying and the efficiency of bank sales.VOX CEPR. Web.

Igan, M., Lambert, T., Sole1. MacNeil, I., O Brien, J. (eds.) (2010) The future of financial regulation. Oregon: Hart Publishing.

McKay, A. and Wozniak, A. (2020) ‘Opaque: an empirical evaluation of lobbying transparency in the UK’, Interest Groups & Advocacy, 9, pp. 102–118

Nabilou, H. (2017) Regulatory arbitrage and hedge fund regulation: The need for a transnational response’, Fordham Journal of Corporate and Financial Law, 6(557), pp.1-12.

Schuknecht, L. and Siegerink, V. (2020) ‘The political economy of the G20 agenda on financial regulation’, European Journal of Political Economy, 65, pp. 1-19.