Assuring Public Safety and Assessing Risk Across Sectors The Essence of Regulatory Focus John Paterson University of Aberdeen

Robust Risk Regulation The essence of regulatory focus in contemporary conditions – Ensuring safety – Assuring the public – Assessing risk across sectors What unites those elements? 2

Ensuring Safety Industrial society becomes risk society Reliance on contract and tort supplemented by regulation Recognition of externalities Responsibility of the state 3

Assuring the Public Risk society – awareness of/fear of risks Inability to protect self/family Lack of control Expectation of state protection 4

Assessing Risk Across Sectors Industrial society characterised by functional differentiation Risk society characterised by increasing internal differentiation Complexity – systemic risk Replicated by specialisation in regulatory agencies 5

Resources What are the priorities? How are they determined? Who decides? Tension between long-term planning and the need to respond to emergent problems 6

Systemic Risks Systemic risks are embedded in the larger context of societal, financial and economic consequences and are at the intersection between natural events, economic, social and technological developments and policy-driven actions. Such risks are not confined to national borders; they cannot be managed through the actions of a single sector. (IRGC) 7

Complexity – systemic risks Example – Climate Change – Regulator concerned to: Understand current situation and project future scenarios Reduce GHG emissions Reduce energy demand – Requires close coordination with energy policy 8

Complexity – systemic risks UK approach: Department of Energy and Climate Change – Functions include: Energy security Maximising hydrocarbon recovery Reducing carbon from UK energy supplies Promote competitive markets Stockpiling for emergencies 9

Complexity – risk-based regulation Example - Banking Regulation – Basel II Risk-based approach to capital adequacy Greater sophistication of bank’s risk assessment and management allowed less capital to be retained Allowed unprecedented risks to be taken – Basel III Tightened capital adequacy requirements Reduced ability to lend Risk to economic growth? 10

Complexity – risk-based regulation BoE response to financial crisis – Willingness to cut lending rate – Quantitative Easing – Long term risk to savers/pensioners? – Inflation risk? 11

Complexity – risk-based regulation ECB response to financial crisis – Resistant to rate cuts – Refusal to engage in quantitative easing – Long-term risk to growth and employment? – Deflation risk? 12

Complexity – deciding how to decide Previous recognition that ignoring high probability, low profile risks was problematical But did this mask consideration of low probability, high consequence risks? How do we decide where to focus? Proactive horizon scanning? Reactive crisis management? 13

Complexity – deciding how to decide Quantitative methods have served us well The ability to assign probabilities to the occurrence of hazards But what happens when we lack data? Decisions under ignorance instead of decisions under risk? Can we still make rational decisions? 14

Complexity – absence of data Precautionary principle Variously interpreted as: – Principle of insufficient reason – Principle of inaction But neither of those things 15

Complexity – absence of data Precautionary principle Implementation by way of: – Test of plausibility of hypothetical harm – Test of reasonableness of response Rational decision making remains possible 16

Conclusions The essence of regulatory focus – Decision Who decides? How do we decide? 17

Conclusions Who decides? – A shift from risk regulation to risk governance – Risk governance deals with the identification, assessment, management and communication of risks in a broad context. It includes the totality of actors, rules, conventions, processes and mechanisms and is concerned with how relevant risk information is collected, analysed and communicated, and how management decisions are taken. (IRGC) 18

Conclusions How do we decide? – Risk governance applies the principles of good governance that include transparency, effectiveness and efficiency, accountability, strategic focus, sustainability, equity and fairness, respect for the rule of law and the need for the chosen solution to be politically and legally feasible as well as ethically and publicly acceptable. (IRGC) 19

Conclusions How do we decide? – A broader range of stakeholders – A broader range of factors to consider – The importance of science – The importance of understanding science – The importance of understanding what science is – But the science is contested! – Good! That means its science! 20