Bridge over ocean
1 July 2016 Position Paper

Corrupt or Collaborative?

An Assessment of Regulatory Capture

  1. Elin Cherry, JD
  2. Bob Dannhauser, CFA, FRM, CAIA

To learn more about how much the actions of those who apply and enforce regulations are unduly restrained or even manipulated by those being regulated, we interviewed regulators, CEOs, chief compliance officers, general counsels, and chief risk officers. A majority believe that the perception of regulatory capture has been exaggerated by the media and anecdotal reports and that regular interaction between regulators and the industry is vital for effective regulation. Acceptance of the positive rationale for coordination and cooperation could help reduce regulatory capture by encouraging the enforcement of new conflict-of-interest policies and an increased focus on ethics and transparency.

Corrupt or Collaborative? An Assessment of Regulatory Capture View the full article (PDF)


Regulatory capture refers to the corruption of the regulatory process such that the public good is sacrificed in favor of the commercial interests of the regulated entity. The global financial crisis of 2008 reignited questions about whether regulation of the financial markets had been compromised, or “captured.” CFA Institute wanted to assess practitioner perspectives on the degree of any such capture, with a view to understanding where the regulatory process might be strengthened.

Study Design

The study comprised a series of structured conversations regarding regulatory capture and regulatory conflicts of interest in the financial industry, specifically relating to large banks, broker/dealers, and investment advisers globally. We sought to interview those with functional responsibilities close to the regulatory process, including some of the leading global regulators, CEOs, chief compliance officers, general counsels, and chief risk officers in the United States, Canada, the United Kingdom, and Asia. To encourage maximum candor from those we contacted, CFA Institute retained outside consultants with deep knowledge of the regulatory and compliance process to conduct the interviews and promised that responses would not be for attribution and that interviewees would not be identified either to CFA Institute or in this report.

The Potential for Regulatory Capture

Interaction between regulators and the financial industry reflects the asymmetric character of the industry, in that industry participants have more information than either clients or regulators. As a result, necessary dependencies exist between regulators and firms, dictating a high degree of interaction between regulatory staff and firm staff in order for regulatory mandates to be fulfilled. It is difficult to objectively characterize these relationships as being either essential or corruptive to the public good, although it is easy to understand how the appearance of some of these relationships creates public doubt as to the integrity of the regulatory process. This effect suggests a need for regular examination of standards of conduct that govern how firms and regulators interact and who has access to information about those interactions.


The majority of those we spoke with do not believe that regulatory capture exists as a persistent or harmful feature of the regulatory landscape. Interviewees did not offer many examples of the diversion of public interests in favor of industry priorities through corruption of the regulatory process. There is more agreement about the appearance of corruption. Especially in the United States, participants expressed a significant sense that political influence from the legislative branch of the government, rather than direct industry influence on regulators, exerts increasingly outsized pressure on financial services regulation.

Most interviewees acknowledged that personal relationships between the regulatory and industry staff involved in a regulatory interaction are important. But they also cited the quality and rigor of the arguments as an important factor in influencing regulatory decisions.

Those we interviewed believe that conflicts of interest between regulators and firms are mitigated by procedures adopted by both the industry and regulators. Despite the potential appearance of conflict of interest, the practitioners and regulators we spoke with are in general agreement that more interaction leads to better regulatory outcomes, perhaps in recognition of the inherent asymmetry of information between financial services firms and their clients and regulators. Many of those we spoke with believe that in the years since the global financial crisis, the tendency has been toward less collaborative relationships between firms and those who regulate them, at least in part because of suspicions that the crisis was evidence of corruption of the public interest.

Suggested Response to the Comprehensive Findings

We find the idea of constructive interaction between regulators and industry personnel to be compelling as a factor in effective regulation. We also acknowledge that many such interactions create either the appearance of a conflict of interest or actual divergent interests that can compromise regulatory effectiveness and public confidence in the integrity of the system. Accordingly, we suggest the following actions in response to the study’s findings:

  • The conflict-of-interest policies of regulators should be reviewed regularly, and exceptions to these policies should be granted infrequently.

  • Regulated firms should supplement existing conflict-of-interest policies with language that specifically addresses interactions with regulators.

  • Regulators and firms should continue ethics training that develops meaningful ethical “muscle memory” and that includes a section on appropriate interaction between regulators and firms.

  • Regulators and firms should endeavor to provide more transparency in their interactions for public consumption. Audio or video recordings of interactions should be maintained as part of the public record.

  • Regulators should be recognized as professionals with compensation that reflects the complexity of their task and the opportunity costs of a career in public service. Appropriate compensation will attract and retain qualified experts with fewer incentives to seek opportunities outside of government.


Since the financial crisis of 2008, numerous commentators in the media and academia, as well as elected officials, have remarked that the crisis was brought on by regulations developed during a long period in which deregulatory initiatives were in favor. These commentators have suggested that deregulation was a result of regulatory capture, an economic theory that suggests “regulation is acquired by the [regulated] industry and is designed and operated primarily for its benefit” (p. 3).1 Moreover, popular opinion holds that subsequent efforts to “fix” the regulation of financial services have been ineffectual or imperfect.

CFA Institute sought to examine perceptions of regulatory capture by soliciting feedback from an international cross section of the financial services industry—incorporating buy- and sell-side professionals, including chief compliance officers, general counsels, compliance consultants, and former regulators in North America, the United Kingdom, and Asia—on what could be done to mitigate the tendency toward regulatory capture. Although viewpoints differed on whether, or the degree to which, regulatory capture exists, interviewees expressed a concern that regulatory reforms and enhancements need to be developed in an environment of cooperation and compromise among elected officials, regulators, and industry professionals.

Since the financial crisis, journalists, academics, and populists have tended to view the tight relationships between the industry and regulators as partially responsible for the crisis. Industry professionals expressed concern about future interactions with regulators and offered a number of suggestions to reduce the perceived degree of influence that the industry may have on regulators. Notably, interviewees supported efforts (1) to enhance training at regulatory agencies to develop better institutional knowledge of the operations of and products offered by financial firms, (2) to enhance and increase industry ethics training, (3) to increase pay to encourage longer tenure for agency employees, and (4) to strengthen agencies’ policies regarding ethics and conflicts of interest both during and after government service.

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