In the wake of the housing market crash in the U.S. and the subsequent financial crisis, the Obama administration created the Consumer Financial Protection Bureau. The Bureau is using crowd-sourcing technology to collect tips from millions of consumers about deceptive new financial practices, from misleading mortgages and improper “gotcha” fees on credit cards to outright fraud.
The Bureau also runs an intelligent FAQ database that ”grows and improves in response to what you [the consumer] tell us. Rate answers, suggest new questions, find related categories and questions, and share helpful answers.” The Bureau regularly tweets, for example, explaining that it is “making markets for consumer financial products and services work for Americans, in 140 characters or less.” The Bureau’s Facebook page is constantly updated and has been liked almost 15,000 times.
This is a stark departure from conventional wisdom. In the old model, regulatory agencies pored slowly and methodically through a random sample of the products offered by banks. But as financial “innovation” outstrips the ability of regulators to catch up, the Bureau believes that crowd-sourcing will make regulators more responsive. That way it can collect and analyze data faster and get on top of problems as they occur, not years later.
It’s a good idea that could be applied to other sectors of the economy. Just about every domain of regulation today -- from air and water quality to food safety and financial services -- could benefit from vigilant citizens helping to protect the public interest.
During the 1980s and ’90s, many governments dismantled large regulatory bodies and asked industries to police themselves. The public was told that self-regulation would be more efficient. Governments were to be the “regulators of last resort” -- stepping in only after self-regulation was deemed to have failed.
The problem, in practice, is that most industry self-regulators have lax rules or inadequate enforcement. Also, governments (for the most part) have proven unable or unwilling to take prompt action when market failures become evident. Indeed, after years of under-funding, it’s no surprise that many regulatory agencies are ill-equipped to pick up the slack, let alone confront novel challenges for which they have neither the resources nor the expertise.
With the old model of command-and-control regulation broken, the Bureau new public-involvement model is a dramatic improvement. Initially, efforts to increase transparency and public participation are likely to be most effective in areas that affect the welfare of our children, families and communities, but they could grow from there.
Rather than allow a small group of powerful companies to police their own activities, I propose the reverse: open up the regulatory process. Make everything transparent on the Web and let citizens and other parties contribute their own data and observations. Where possible, let citizens help enforce regulations, too, perhaps by changing their buying behaviour or by organizing public campaigns that name and shame offenders. As an early proponent of the Bureau put it, “The power of enforcement will be partly about the agency. But it will be partly, in the future, about how people crowd-source around identified problems.”
Skeptics may doubt the capacity of citizens and advocacy groups to help regulatory bodies develop more effective systems of monitoring and enforcement. But like the new Consumer Financial Protection Bureau, a growing number of regulatory agencies are already convinced, as evidenced by the U.S. Environmental Protection Agency’s efforts to open up its rule-making processes and the SEC’s announcement that it is developing new systems for collecting anonymous tips in the investment community.
Even when inertia prevails in government, other organizations are taking the lead. The FDA may not require manufacturers of processed foods to indicate on the label a product’s origin; whether it contains genetically modified organisms; or was produced using synthetic hormones, antibiotics, and pesticides. But retailers such as Tesco in the UK and a legion of online product guides are making this information available anyway. Why? Because customers are demanding transparency.
Transparency is not a substitute for better regulation by national governments and international institutions, but more disclosure and increased civic participation would add significant muscle to traditional regulatory systems.
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