What Does Risk-Based Regulation Mean?

From: The Regulatory Review


When the U.S. Federal Trade Commission undertook a review of its performance some years ago, its Chairman recommended precisely such a portfolio approach: “The agency should view all of its matters as part of a portfolio that should be balanced across low-, medium-, and high-risk activities.” From an efficiency standpoint, of course, the balancing of risks per se is not what matters; the key is to balance the benefit-to-cost returns of regulating them, so as to maximize overall net benefits across the full suite of the regulator’s actions. The precise balance that will be efficient for any given regulator will vary based on the actual costs and benefits due to the types of problems and economic circumstances the regulator confronts.

Risk-based regulation—like regulatory excellence more generally—is not a merely technical enterprise. It requires not only technical competence, but also principled decision-making, transparency, careful attention to empirical evidence and on-the-ground implementation. In a world where risks are omnipresent, complex, and potentially extremely costly, taking a risk-based approach to regulation is essential.

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