Thursday, February 6, 2020

Rory Van Loo on Private Firms as Public Enforcers

Boston University's Rory Van Loo has a new paper examining how private firms now serve as public enforcers and gatekeepers.  It tackles the new pressure for businesses to police conduct by other businesses.  Consider Facebook for example.  After the way Cambridge Analytica used data acquired from Facebook, Facebook faced oversight from the FTC, culminating in an enormous $5 billion fine. Notably, the fine and pressure came primarily to force Facebook to more intensively monitor and control other companies's behavior.  Amazon, Google, and others have faced similar actions---all to force the platforms to better control third parties.

Van Loo shows that these pressures are not unique to technology firms.  Banks now face pressure from the CFPB to monitor debt collectors.  Oil companies like B.P. must oversee environmental compliance at offshore oil platform companies.  Pharmaceutical companies must oversee suppliers and third-party labs.  Government regulators now routinely conscript private firms and force them to enforce standards--making them "enforcer firms."

These conscripted enforcer firms playing quasi-regulatory roles put pressure on the idea that they are purely private entities.  The draft defines and explores the new model without endorsing it as the right approach.  Enforcer firms will use their power as contracting parties to create different rules than a more public process might generate.  Their enforcement processes will also differ. They may also be stable in ways that traditional regulators will not--they will not suspend operations if a Congressional appropriation process fails.  Enforcer firms's size and resources may also ensure that Congress never appropriates resources to oversee them in any comprehensive way.  

Van Loo's analysis shows that a new realm of private regulation has appeared.  Although we have had self-regulatory organizations operating in the financial sector for some time, the enforcer-firm model differs substantially.  These enforcer firms do not operate with power delegated by Congress and overseen by some other regulatory body.  Rather, the firms use their own contractual power to regulate third parties.  This approach offers real advantages--efficiency, expertise, and responsiveness.  But it's also potentially dangerous and risks "creating a vast sphere of regulatory arbitrage out of public sight and judicial review." Van Loo rightly calls for administrative agencies to keep a close eye on these new gatekeepers.

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