Regulators and their Customers

Customers are reason why businesses exist. Businesses create value for which customers pay them – directly or in some other way – leading to creation of surpluses for the producers. That’s how it has been and will be in the future of businesses. If the customer is at the center and around everything that an enterprise does, an interesting question pops up about industry regulators. Who should regulators count as customers?

On one side of the regulators are the businesses that are regulated. It is the responsibility of the regulator to ensure there are level playing fields, non-discriminating policies, compititative environment and a healthy set of guidelines that ensure long term viability of the industry. The word “viability” is nuanced. It can be interpreted to mean assurance of a steady stream of supernormal profits, which it clearly does not – or should not – construe. Viability should rather mean ensuring a fair exchange for a service provided. And the fair exchange should be determined by the market. Regulators have to step in when market forces either break down or are ignored via collusion or such practices amongst suppliers. This is where the regulator starts serving the other end of his relationship structure – that with the consumers. Consumers in a retail heavy industry do not have the luxury of collective bargaining (or lobbying) like the suppliers have. This places an onus on the regulator to devote a disproportional share of attention and protect interests of consumers in the industry. It is indeed a fine balancing act that some regulators – especially those in India – find difficult to juggle

Regulators in India are notorious for being personality oriented. There is always enormous pressure by the firms in an industry to get an “insider” as the head of the regulating body. An “insider” is most likely to frame policies that are supplier friendly and at times conveniently look the other way when malafide happens. Industries that have enjoyed directed policies are most vociferous about getting insiders to top positions in regulators. Financial services in India is a nice example. For the past several years the industry has languished. Accusing fingers for the state of affairs have been pointed at every direction except the most important one. Inwards. The industry has made no efforts at innovation, business model disruption and such mechansim to break the logjam yet has had resources focused trying to fleece customers through bad product design, collusion and reckless sales practices . Just search the internet on misselling of financial products in India and you will be submerged with what comes back. HSBC had to suspend selling its mutual funds and insurance products when it possibly could not digest anymore the rampant malpractices. The Insurance regulatory authority in India, IRDA, is looking for a new boss and guess what the industry is clamoring for? An insider

Businesses must realize that pulling wool over consumers’ eyes is as transient a business policy as a drop of water is on a parched sand dune. The raison d’etre of a business is to create customer value. Steve Denning in a Forbes article argues, on the backdrop of Michael Porter’s firm Monitor Group declaring bankruptcy, that there is only one force (an oblique shot at Porter’s five forces) that matters – that of the customer. In situations where suppliers have abandoned pursuing that force with religious zeal, the regulator has to step up and play a much larger role for betterment of the industry. And in doing that it just cannot fall prey to the asymmetrical force of collective bargaining that skews the table in favor of the suppliers. In fact it must use its weight to overbalance in favor of consumers – and if required shake up the supplier mix such that it benefits the industry. Industries gather lard and gunk running for long patches of time with antiquated business models and policies that have unnecessary protective moats. Innovation is just a committee name for these businesses. Forward looking regulators need to self disrupt these industries to make them more efficient. For that they must make a choice. Who do they count as customers?

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