When I was first asked if I had joined Pinterest, an online pin board, I was surprisingly sparked. Looking back it was probably my subconscious recollection of the wonderful times I spent years ago musing over the definition of public interest.
Most likely, readers will find the term familiar. Countless commentaries and headlines have coupled variants of the terms “regulation” with “public interest”1. Legal, political science, competition and economic literature and authorities, along with the vast and growing book of regulatory provisions are extensively littered with the term2.
Often no definition of public interest is included3, which in the case of regulatory provisions could be interpreted as purposively providing or enhancing the discretionary power of the regulatory body. Academically there is a continuing debate on what the public interest comprises4.
That may be because it cannot be defined academically, in other words, in isolation from the subject matter to which it applies.
Questions and concepts are often dismissed as being only academic implying that the question or concept has no value practically. The public interest concept however, is of frequent practical application, inside and outside of the regulatory world.
Thus, I was professionally excited about the recent issue of an International Federation of Accountants Position Paper, prescribing its own definition of public interest5.
Context for the Position Paper
IFAC is the global organisation and standard setter for the accountancy profession and dedicates itself to serving the public interest6. It thus understands that it needs to clarify and then advance its understanding of what the public interest is7.
It is however, very difficult to devise a concise definition that is also practical. IFAC’s definition reads:
“The net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy.”
Fortunately, the IFAC Paper provides necessary clarification and goes on to give examples of the application of the definition8. It asserts that to ensure that the public interest is promoted and protected when performing regulatory and standard setting functions, there should be two general assessments:
1 Costs and benefits
(“the net benefits derived for”) and
(“procedural rigor employed”).
The first general assessment has been widely applied for some time. The UK’s Financial Services and Markets Act 2000 charged the FSA with rule making powers but imposed an obligation to perform a cost benefit analysis to justify the exercise of those powers. Other regulatory bodies around the world followed suit and introduced requirements to assess costs and compare to perceived benefits for all new regulatory requirements9.
IFAC’s position paper does refer to the usual quantitative costs and benefits but also qualitative which it states should be measured by opinion and judgment and can include for example, staff moral and the social implications of business. It also takes the stance that the public interest assessment must not only relate to private enterprise or sectors but must assess the impacts on society as a whole and consider the distribution of costs and benefits between different parts of society.
IFAC second general assessment, the Assessment of Process provides that principles of proportionality, transparency, independence, due process and accountability be applied to any regulatory or standard setting process. This effectively ties these principles to the concept of public interest specifically in the context of policy making and standard setting10. The process itself must be efficient and proportionate. The tensions between the regulator and regulated along with the accountability of the regulator, can easily lead to excessive analysis and bureaucracy and this tendency would be avoided if the process was subject to an appropriate “procedural rigour” requirement11.
Who is the public?
Returning to the definition itself, it must be highlighted that according to IFAC the ’public’ is described as the widest possible scope of society, and includes non-economic or business objectives of those, including persons “seeking sustainable living standards and environmental quality for themselves and future generations”.
The paper acknowledges and categorises three groups within the public: 1. Investors, shareholders and business owners, 2. Customers and suppliers, and 3. Tax payers, electorate and citizens12.
What are its interests?
“Interests” of the public are also broadly defined as “all things valued by individuals and society”, including:
- Rights and entitlements
- Access to government
- Economic freedoms
- Political power
- Things to acquire and control
- Protection from harm and disadvantage
The following examples are particularly pertinent to the accounting profession:
- Increased economic certainty
- Sound, decision-useful financial and non-financial reporting for stakeholders, investors and market participants.
- High degree of comparability of financial and non-financial reporting and auditing across jurisdictions
- Sound and transparent financial and non-financial information and decision making by the public sector.
- But there are other examples that are of wider application:
- Sound corporate governance and performance management in public and private entities
- Increased efficiency and minimal natural resource depletion and
- Producing goods and services to enhance welfare of the society.
The IFAC definition then might be thought inappropriately broad but it is supported by other commentators. Of note the ‘public interest’ has been described as a socio-political concept justifying any regulation or interference as being for the common good13.
Thus social factors are brought into play in matters of regulation, since in reality all regulation, even if only of financial or professional services, does affect, although to a lesser extent, this broader class of public.
In the writer’s view, the public interest remains composed of a list of factors that are constantly shifting according to the policy of the day. Agreed, there is some objectivity and permanence, in that certain factors are indisputable, given that their removal or amendment is impossible without controversy and opposition14.
Ideally immovable, indisputable and general objectives should be enshrined and protected for medium to long periods of time.
The upshot is that the objective of protecting the public interest cannot be absent-mindedly thrown in with other objectives, such as “furthering and promoting the economy”, as the economy of today and its short term profitability are not likely to satisfy the wider interests of society.
It seems that policymakers will have to embark on further thought and secure some analysis to define these interests of society in light of the medium to long term planning of the nation, region or the world, otherwise policy making will be blind and in jeopardy.
Regulatory arbitrage and international standards
Considering competition in financial services between jurisdictions and regulatory arbitrage highlights the value of analysing and evaluating the public interest as every jurisdiction will have some unique characteristics or circumstance that will require it to have a different list of public interests than other jurisdictions.
Distinguishing the public interests of different jurisdictions will assist in policy making as it reduces the number of conflicting interests. As is well known, the regulation of international financial services is easier and more efficient than of domestic markets.
One reason is that the latter must factor in consumer protection objectives, since financial illiteracy of the consumer body must be addressed to ensure access to and confidence in financial services, which is in the public interest. Another is that regulation of the financial sector makes a relatively smaller impact upon the wider economy and society of the jurisdiction.
At the international or global level however, public interests should see less variation. This is what enables international standards to be issued relatively easily, that and the fact that there is no need to worry about implementation and direct enforcement. This can create tension for national policy makers seeking to implement and adopt international standards.
Dynamic and ever changing
Regulatory policy makers should clearly not replicate the regimes of others nor continue with existing provisions. Looking back in time for precedents is not the answer. It was stated as far back as 1897; “I look forward to a time when the part played by history in the explanation of dogma shall be very small, and instead of ingenious research we shall spend our energy on a study of the ends sought to be attained and the reasons for desiring them…..”15
The world is changing in many ways at an alarmingly rapid rate. The financial crisis, which continues to unfold and reveal its effects, is leading to big shifts in political and public thinking. Most expect increased regulation. However, without an understanding and agreement on what the public interests to be protected and promoted are, existing and enhanced new regulation is unlikely to be ‘good and effective’ regulation.
- Self-regulation in the public interest was defined as “..a range of public interest-orientated regulatory systems which allow the regulated to manage the regulatory process.” Baggott R, Regulatory reform in Britain: The Changing face of self-regulation, (1989)67 Pub Admin 435 at p436. See also Daintith TC, The Techniques of Government, in Jowell J and Oliver D (eds) The Changing Constitution (1994) at p227.
- E.g. Section 4 of the Cayman Insurance Law 2008 refers to public interest in Authority’s decision to grant a licence, the Mutual Funds Law s36 refers to public interest regarding appeals against revocation of licences, See also, the Anti-Corruption Law, Immigration Law and too many others to cite. There are nine references to public interest in the UK’s Financial Services and Markets Act 2000.
- BVI is an exception. It refers to public interest in its Insurance Act 2008 regarding decisions to issue licenses and did include a partial definition of public interest “Where the Commission is permitted or required by this Act to consider the ‘public interest’, the ’public’ includes (a) the public inside and outside the Virgin Islands; and (b) any persons who have a legitimate interest in the decision to be made by the Commission.
- See Christensen JG, Public interest regulation reconsidered: From capture to credible commitment, paper presented at Regulation in the Age of Crisis, ECPR 3rd Biennial Conference, University College, Dublin, June 2010.
- IFAC Policy Position 5, A definition of the Public Interest, June 2012 (www.ifac.org/publications-resources/definition-public-interest)
- It declares that this is achieved by strengthening the profession and contributing to the development of strong international economies.
- IFAC has invited comments on its definition and has committed to reviewing and revising it where necessary two years from the date of issue. Primarily IFAC wishes to develop a definition that will assist it in setting standards and in its oversight of accountancy institutes’ compliance with standards and IFAC member obligations. Note also that member bodies themselves are, according to their obligations as members of IFAC, required to act in the public interest according to their own definition of that and also accountants are also required to act in the public interest. Specific independence requirements may apply when a client is a public interest entity.
- It should be remembered that this definition was developed in the context of IFAC’s mission, to enable IFAC to assess the extent to which its actions and decisions are made in the public interest.
- The impressive FSA policy making mechanism, supported by teams of lawyers and economists was arguably too effective and was culled when it became difficult for the regulated to keep up with the volume. From July 2004 consultation exercises were restricted to quarterly consolidated consultation papers regarding proposals and amendments.
- It will be interesting to see how useful this is to other areas where public interest is applied to guide rulings and decision making e.g. natural environment protection or employment equality laws.
- The FSMA allows the FSA to dispense with the requirement to prepare a cost benefit analysis where it considers that its proposals will not result in a material increase in costs and where any delay resulting from consultation with harm consumers. Section 155
- Whilst it is acknowledged that the impact of the accounting profession upon the three groups, will differ, a fundamental obligation is stated to exist to act in public interest regardless of proximity to these groups.
- Schmitthoff, Law Reform in England,  JBL 219 at 232 and  JBL 309 at 319.
- For example in insurance regulation, capacity for certain risks is in the interests of the public in most, if not all jurisdictions, where property and assets are privately owned. By contrast, profitability for insurance companies or even capacity may not appear on the agenda in a socialist state.
- Holmes OW, The Path of Law, (1897)10 Harv LR 457, at 474.