Regulation fails if the touch is too heavy

October 1, 2013

Earlier this year, Murdoch University received notification from the Tertiary Education Quality and Standards Agency (TEQSA) that its registration as a higher education provider had been renewed for a further seven years.

Vice Chancellor Professor Richard Higgott

The following opinion piece, authored by Vice Chancellor Professor Richard Higgott, was published in a recent edition of the Australian Financial Review.

Regulation fails if the touch is too heavy

I have followed regulation of the global financial system from the "big bang" in 1986 through the repeal of the Glass-Steagall Act in the US, the wide adoption of "industry standards", "self-regulation", "light touch regulation" and all those (non) regulatory instruments that created the conditions for the global financial crisis. I thought I was versed in the pitfalls of regulation: regulatory capture, regulatory creep, regulatory group-think and the like.

On becoming Murdoch University Vice Chancellor in 2011, I was told we would be among the first universities to undergo the registration process of the Tertiary Education Quality and Standards Agency (TEQSA). My education on regulation was about to take a new turn.

Two years on, Murdoch has been re-registered. This is a positive outcome with useful internal lessons and one useful reputational externality (given our 6000-plus students in Singapore). In theory, Murdoch is no worse off. So let me communicate my concerns. I juxtapose regulation in higher education with the failure of global financial regulation prior to GFC. The weaknesses of the financial regulatory system and what I see as the excesses of the TEQSA process represent two ends of a spectrum which is, in part, explained by four contrasts.

First, financial regulation underwent a process of "cognitive capture" by the industry, encouraged by a "revolving door" process. It is common for figures from elite sectors of the finance industry to spend time in one of the regulatory bodies (say the late FSA in London, or the Securities Commission in New York) before re-joining the sector after several years. This process discourages the overly zealous wouldbe regulator from biting the hand that feeds. Options for a return must be kept open.

A similar process does not exist in higher education. Examples of academics moving into senior regulatory roles do exist, but they are rarer than in the financial sector – and returns to the university are rarer still.

Regulators in higher education tend to be career public sector officials more likely imbued with its culture than that of the university and thus less amenable to capture. Biting the feeding hand can give pleasure.

Neither position is optimal. One exhibits little independence, the other little sensitivity to the legitimate needs and concerns of the sector.

Second, the lobbying power of the higher education sector is dwarfed by that of the financial sector. The global financial sector has been successful in seeing off all but minimal regulatory intrusions into its affairs. "G20-ism" notwithstanding, little has changed since the GFC.

By contrast, resistance from the universities seemingly only encourages higher-education regulators. Moreover, the growth of regulation has exacerbated a compliance culture within the universities. In finance, regulation calls forth "innovation" to circumvent it. Would-be regulators in the financial sector invariably fight the last war. In higher education the very suggestion of pending regulation can see universities establish battalions of compliance officers ready to oversee the surrender.

Third, in finance, the spread of "global best practice" has meant wide acceptance in host countries of home country rules. In higher education the globalisation of best practice has, by contrast, meant the reinforcement and accretion of both host country and home country regulation.

As national regulators have come to know their international counterparts in recent years they have, by processes of cross-national information sharing, policy transfer and emulation, reinforced each other.

Lastly, if financial institutions provide as little information as possible to regulators, the reverse is the case in higher education. Indeed, swept along by a compliance culture and desire to convince TEQSA that we had met the "threshold standard’. Murdoch University, for example, provided 530 pieces of evidence; a move which merely encouraged TEQSA to ask for more, effectively embarking on fishing expeditions into domains that bore little relevance to threshold standards.

Everyday change in a university (a school restructure for example) that should be beyond the reach of the regulator more appropriate for scrutiny by the Academic Council was seized on as of "material interest" to them. What is learned from Murdoch’s registration experience? First, with only a touch of facetiousness, had the global financial system been subject to a similar regulatory scrutiny then we may have avoided the financial crisis. But then, there would have been little or no global banking innovation either. This is not a recommendation for the regulatory zeal to be found in the higher education sector. Rather, it is to suggest that universities would benefit from a "lighter touch", "self-regulatory" regime characteristic of the world of global finance. Second, there is a wider debate to be had about the balance between enabling and compliance cultures in universities. In their desire to comply, universities have for too long made rods for their own backs. There is no easy via media, and universities are not finance houses driven by an ingrained dynamic of avoidance.

But universities are not, or at least should not be, supplicants to a process that grows as it feeds. My suggestion to universities about to be TEQSA’d: don’t overfeed the regulators; it only encourages them.

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Media contact: Candice Barnes
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