Simplifying regulations is not so simple

Opponents of government regulations typically complain about the burden they impose on private-sector firms that have to comply with them, burden that they say dampens economic growth.

Part of that burden has to do with the sheer complexity of the regulations themselves, especially when taken together as a whole.

One financial industry consulting firm describes that web of regulatory mandates as a “complexity risk.” In a new industry report flagged by Joe Nocera, the consulting firm Federal Financial Analytics argues that “the sum total of all the U.S. and global rules aimed at preventing financial crises” can end up having unintended consequences.
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The study points out that both regulators and industry players tend to look at regulations in a “silo” fashion, without considering how the individual parts may overlap, contradict or otherwise work against each other. Federal Financial Analytics emphasizes that it doesn’t oppose many of the new regulations, per se, but that many critical pieces need to be streamlined.

For example, the firm proposes creating “a more uniform capital framework” to make it easier for firms to comply with new U.S. and global capital standards. It also wants CEOs to be responsible for monitoring only risks that truly threaten their own firms or the financial system instead of “the minutiae.”

But there can be big differences between how regulators and industry leaders would simplify byzantine regulations. The suggestion to reduce the number of risk factors that bank chiefs are responsible for monitoring which might concern regulators. But giving more discretion and power to regulators would likely concern industry. And finding a compromise between the two can often make a law even more complex.

Federal Financial Analytics blames such regulatory complexity on “overengineered standards” produced by a host of expert regulators. But industry lobbyists are also driving these deliberations to carve out exceptions if things aren’t moving in their direction. As a result, achieving “simplicity” can be harder than it sounds in the abstract.

That said, there’s another way to simplify regulations that may attract more consensus. Rep. Bruce Braley (D-Iowa) introduced a bill this week that would require that all federal regulations be written in clear, simple language that their intended audience can understand, reducing compliance costs for the private sector. He helped pass a similar bill last year to promote plain language in government, but it didn’t touch regulations.

“Sadly, gobbledygook dominates the regulations issued by government agencies, making it almost impossible for small businesses to understand the rules of the road,” Braley said in a statement about the bill.

The congressman offered an example of that “gobbledygook” when I interviewed him this week: The 300-page Volcker Rule, he said, “seems excessive to me,” arguing that regulators trained in plain language would be able “to produce a document that’s much simpler and much easier to understand.”