1. Better risk management in support of regulatory quality Incorporating risk assessment tools in RIA to prepare better rules Charles-Henri Montin Senior regulatory adviser Ministry of Finance of France http://smartregulation.net Taipei, 7 October 2011

2. A few concepts to start with  Risk  Hazard  Risk analysis  Precautionary principle  Administrative certainty and security  Risk management  Risk based regulation

3. Definition of risk based regulation Range of meanings (1) Regulation of risks to society (2) Loose collection of approaches expressed terms of risk (3) In banking and insurance regulation, the use of firm’s own internal risk models to set capital requirements (4) Systematised decision making frameworks and procedures to prioritise regulatory activities and deploy resources, principally relating to inspection and enforcement, based on an assessment of the risks that regulated firms pose to the regulator’s objectives Definition (4) is that used here

4. Main elements of risk based regulation  Setting the risk tolerance  Risk identification and risk assessment  Assigning scores and ranking firms or sites  Linking supervisory resources and responses to the risk scores.

5. Key issues in design  Approaches taken to risk tolerance  The choice between objective and subjective indicators  The relative roles of impact and probability  The role of weighting  Integrating broader external risks with firm level risk assessments  Dealing with ‘bulge’ –the low risk firms which are usually the majority of the regulated population

6. Challenges in implementation  Combining simplicity with complexity  Knowledge and data –getting the right data, and making better use of the knowledge the agency has  Structure and operation of internal risk governance processes – how to balance the need for organisational structures to ensure the accuracy and consistency of assessments with speed and responsiveness.  Changing the culture to embed the risk based approach across the whole organization  Ensuring internal compliance with the risk based regime  Ensuring that assessments of firms are forward looking  Going beyond the individual firm in assessing risk  Managing blame  Making resources follow risks  Managing political risk

7. Lessons from OECD experiences  Starting out –Start with risks not rules –Ensure the organisation has sufficient powers to implement the approach –Beware of other regulatory or governmental policies which may contradict or hinder the adoption of a risk based approach –Ensure you know what your goals are-it is worth doing, but don’t do it for the wrong reasons  Dealing with transition –Designing and implementing a risk based framework will take time –Organisational challenges are significant and shoud not be underestimated –Think beyond the risk assessment to how the organisation will respond  Challenges of maintenance –Keep the framework simple to use and be prepared for the need to make continual adjustments –Think in terms of achievability  Need for communication internally and externally  Need to recognise that risk based processes require regulators, and politicians, to take risks.

8. The risk cycle in policy making

9. Definition of risk analysis Communication on Consumer Health and Food Safety (1)  A systematic procedure comprising:  the scientific evaluation of hazards and the probability of their emergence in a given context (risk assessment)  The assessment of all measures making it possible to achieve an appropriate level of protection. It includes assessing the impact of policy alternatives in light of RA results and the desired level of protection (risk management)  The exchange of information with all the parties concerned (risk communication)

10. Principles for sound risk management  Separation between scientific advice and regulatory responsibilities  Risk assessment advice to be provided by independent scientific committees  Scientific committees to be structured and to work in accordance with principles of excellence (highest possible quality), independence and transparency  Members, minutes, opinions, minority opinions to be published  Open calls for expression of interest for membership  System of indemnities

11. 11  Endorsed in 2005 OECD Guiding Principles for Regulatory Quality and Performance  Risk assessment helps avoid opportunity costs of regulatory failure:  Failing to regulate when there is a need (type 1 error)  Regulating when there is no need (type 2 error)  “Quantitative risk assessment improves the capacity of a government to focus on the most important risks and reduce them at lowest cost while identifying those risks that fall below a threshold justifying government action.” OECD 2002  RIA has been adopted by all OECD countries for at least some forms of new regulation  But formal risk assessment not comprehensively applied Risk in Regulatory Impact Assessments (RIA)

12. Uptake of RIA in OECD Countries 12

13. 13 1.Problem definition 2.Objectives of Government action 3.Consideration of alternative options 4.Impact analysis – costs, benefits and risk 5.Consultation 6.Recommendation 7.Implementation and review Steps in Regulatory Impact Assessment

14. 14 Defining the problem  What will occur under a ‘do nothing scenario’ ?  What is the probability that the outcome will occur?  How serious is the harm or injury that could occur?  How widespread will it be and who will be affected?  What is the level of uncertainty? Govt objectives are often to “reduce risk”  Any reduction in risk involves costs  Need to determine how much risk is acceptable  What is the value of the risk cost trade-off?  Goal should be the minimum effective regulation to meet objectives Risk analysis is in all steps in a RIA

15. 15 Alternative Options  Risk avoidance – prohibit activity  Risk transfer – cause another party to accept the risk (contracts, compulsory insurance, privatization)  Risk retention – accept the loss from the risk event  Risk reduction – reduce the probability of the risk event (licensing, codes and standards, enforcement strategies) Impact Analysis  Calculate costs and benefits of each option; show net benefit  Sensitivity analysis can reveal implications of uncertainty for decision makers Analyse the impacts of alternatives

16. 16 Consultation  Explore the consequences and probabilities of risk for each option analyzed  Obtain feedback from all groups likely to be affected  Seek expert opinions Recommendation  Select option with highest net benefit, only after accounting for risk in the analysis Build in implementation and review  Was the risk adequately identified?  Has government intervention been effective?  New science - what has changed, is it still appropriate? Promoting Transparency

17. 17  Managing complexity  Getting the right data can be difficult  But the systematic framework of a risk assessments can be still be useful  Develop in house risk tools  Even simple approaches have merit  Build the capacity for risk assessment over time  Post implementation reviews reveal lessons  Recognize that risk based processes require regulators and politicians to take risks  Manage communication of risk cost trade offs But not without its challenges…