Tomasz Klemt, Chapter 3: Methods and tools of regulating markets from a praxeological perspective in:

Robert Grzeszczak (Ed.)

Economic Freedom and Market Regulation, page 69 - 100

In Search of Proper Balance

1. Edition 2020, ISBN print: 978-3-8487-6724-3, ISBN online: 978-3-7489-0846-3,

Series: German and European Studies of the Willy Brandt Center at the Wroclaw University, vol. 10

Bibliographic information
Methods and tools of regulating markets from a praxeological perspective Tomasz Klemt Key words: Better Regulation, market regulations, soft law, regulation ef‐ ficiency, freedom of economic activity Introduction Praxeology is the science of efficient action. This term was used for the first time in this meaning in 1882 in Louis Bourdeau’s book Theorie des Science (Alexandre, Gasparski 2000: 119). This new approach to the study of empirical phenomena was then further developed by other researchers, including Alfred Espinas, Eugeniusz Słucki, and Ludwig von Mises. The latter called praxeology the foundation of any action, in particular econo‐ mic (Mises, 1949: 34). At present, there is a growing trend towards in‐ creasingly detailed regulation of market sectors, which in its extreme form takes on the nature of a command-and-distribution economy, the essence of which is the state's interference in most economic decisions. These two statements inspired an attempt to present the methods and tools of market regulation from a praxeological perspective. The considerations were sys‐ tematised, based on the achievements of the most eminent Polish represen‐ tative of praxeological sciences: prof. Tadeusz Kotarbiński (1975: 1-19). The purpose of this chapter is to analyse the regulatory process from the point of view of praxeological analysis, thereby creating a structured mod‐ el of regulatory action. Following prof. Kotarbiński, the elements of this action are: originator, material, product, arbitrary impulse (pressure), cir‐ cumstances, result, and purpose (1972: 33). The action’s originator is the regulator, i.e. the entity that wants to achieve something and is trying to make sure that this "something" takes on a given form. Its purpose in this case is to change a certain state in a desired way or to maintain the statusquo. This "something" is the material (subject of regulation). For instance, when an information obligation is to be imposed in relation to the pur‐ chasers of insurance products (customers) in order to limit misselling, the Chapter 3: 69 purpose is to raise customers’ awareness, with the insurance distributor serving as the material. Thanks to regulatory action, a product is obtained from the material in the form of the distributor acting in the best interests of customers. The achieved state of affairs is the result of regulation, and not its product, because the result of the action is the change of the materi‐ al into a product with specific qualities. The entire process takes place in a specific environment and circumstances and within a specific time. Anoth‐ er constant element of regulation is the manner in which it is shaped. When it is general enough to be used repeatedly, it can be called a method of regulation (Kotarbiński, 1972: 42). The tool of regulation is an addi‐ tional element of action, which is used when the originator does not exert direct pressure on the material. Such direct pressure is not possible in the case of actions involving large communities, hence various information, educational, economic, and legal instruments (tools) are used for this pur‐ pose. Detailed aspects of the most important elements of the praxeological model will be discussed later in the chapter. The main task of praxeology is to design and justify efficiency stan‐ dards. This, in turn, as prof. Kotarbiński claimed, needs to be supported by practical experience and the achievements resulting from the efforts of countless operating entities (1975: 8). The practical aspect is therefore of particular importance. At the same time, it is a source of observation of good regulatory techniques, as well as a verifier of the regulator's actions indicating whether, in a given case, there is "good work" (Kotarbiński, 1975: 8). Based on an identical assumption, this analysis has been extend‐ ed to include an empirical aspect. It concerns market regulatory practice in the fields of: competition law, financial market law, telecommunications law, and energy law. The empirical research was carried out by a research team, including the author of this chapter, by means of individual in-depth interviews: IDIs (see: Grzeszczak, Introduction to this Book), covering the indicated fields of law. The subject-matter of the empirical research was adopted based on two criteria. The first is the importance of the regulations mentioned for the modern economy. Secondly, it reflects the tri-partite functional div‐ ision of regulatory authorities relating to specific markets (including ener‐ gy and telecommunications), markets defined by type (financial market) and the overall market (competition protection issues) (Jaroszyński, Wierzbowski, 2011: 312). The introduction of a practical element in the form of interviews with representatives of administration and business was aimed at answering the question about the acceptable scope of interference Tomasz Klemt 70 of regulatory tools with the freedom of establishment and at verifying the importance of soft law in the practice of regulatory activities. Referring to the experience of market participants and regulatory bodies allows indica‐ tion of the desired actions in the field of regulation and to gather experi‐ ence as to the standards already in place, which is the basis for formulat‐ ing praxeological conclusions. Action’s originator: regulatory body Tadeusz Kotarbiński stressed repeatedly that homo faber, i.e. a man treated as an action's originator, is at the centre of praxeological research. At the same time, he can also be the material – when the aim of his actions is to influence human activity (1972: 6). This type of influence is typical of law, which implies a double role of the man: as the originator and the ma‐ terial. In the context of regulation, the originator is called the "regulator". The very concept of a "regulator" as well as "regulation" can be under‐ stood doctrinally in a wide or narrow sense. This is still a relatively new issue and has not been clearly defined in literature (Meuwese, Popelier, 2011: 455). Nevertheless, behind every regulator, regardless of its type, name and legal form, there is a person who directly influences the shape of a given regulation. The final effect of the regulatory actions undertaken depends on their knowledge, awareness of their own intended action, skills, and causative power. Furthermore, the regulator’s activity itself is subject to certain influ‐ ences, which means it can be treated as an economic good. This is nicely illustrated by the theory of economic regulation (TER) developed by G. Stigler. It gave rise to a concept according to which regulation is under‐ stood as an activity subject to the laws of supply and demand, along with the price determining the amount of balance. The demand for regulation depends on the expected benefits for the interest group concerned. An interest group can, for instance, consist of consumers or businesses, usual‐ ly represented by their associations. Regulatory supply is, in turn, provid‐ ed by political decision-makers influenced by a given interest group (Stigler, 1971: 4). Such conditions are also true for regulators, to whom the theory of economic regulation can be directly applied. That is why it is so important to determine the methodology of the regulator's operation in a given market and to select methods and techniques (specifying the meth‐ Chapter 3: Methods and tools of regulating markets from a praxeological perspective 71 ods) of regulators' actions, which in turn determines the efficiency of regu‐ lation. For the purposes of the research carried out, the concept of the regulator as a derivative of the regulatory function has been adopted, due to its broad scope covering all entities performing the regulatory function (see: Sześciło, Chapter I in this Book). This approach is very useful because of the variety of responses obtained from the respondents in empirical sur‐ veys. This has prevented valuable responses that do not fall within the nar‐ row definition of the concepts adopted from being rejected a priori (Sosay, Zenginobuz, 2005: 2). The adoption of a broad definition is also a result of the doctrinal research conducted. It is based on the understanding of the concept of regulatory authority under EU law. This research perspective results from the significance and the magnitude of the impact of EU law on all Member States (including Poland, which was the subject of the em‐ pirical research). Using the notion of a regulatory authority, EU law has significantly shaped its European meaning that manifests itself, among other things, in the emergence of specific EU regulated markets and the bodies regulating these markets. Undoubtedly, sectoral (infrastructural) regulatory bodies (such as the President of the Office of Electronic Communications or the President of the Energy Office) are examples of regulatory bodies in the strict sense of the term. They were established under the influence of a model developed in the United States (Gentot, 1994: 19), which was the birthplace of regu‐ latory bodies that are independent (from the influence of the executive, i.e. the President), collective (reflecting the composition of the Congress), set up by law, organisationally separate (they are external to the federal ad‐ ministration structure), and whose function is to conduct sovereign opera‐ tions aimed at shaping the behaviour of regulated entities within the scope and in the manner specified by law (Breger, Edles, 2016: 14). The Euro‐ pean Union did not directly assimilate the model developed in the USA (and similarly – in the UK). However, this model served as an important source of inspiration and a point of reference in the way the agenda of EU independent regulatory bodies was shaped (Gentot, 1994: 19). The origins of EU regulatory bodies dates back to the 1980s and 1990s, and was inspired by the concepts of New Public Management and neolib‐ eralism (De Somer, 2012: 93). The difference between the solutions adopt‐ ed in the EU and the structures typical of the USA is primarily due to the different historical experiences of gradual liberalisation of infrastructure sectors, where monopolists originally operated (Vogenauer, Weatherill, Tomasz Klemt 72 2017: 33). In most cases, it was the so-called natural monopoly resulting from the need to incur huge expenditures on the creation of networks (en‐ ergy, telecommunications, rail, etc.). Therefore, access to these networks and regulating it became a key task for the newly formed bodies. The obli‐ gation to establish the so-called national regulatory authorities has been included directly in a number of directives, for instance in the areas of postal services1 and the energy market2. Regulation also covered the behaviour of companies in key markets from the point of view of the European Union, which was closely linked to the establishment of legal rules aimed at achieving a competitive mar‐ ket. The financial market is an example of such markets, and the way it is regulated has been based on a negative historical experience as the manner of functioning based on self-regulation, structuring and particularism that used to be recognised by international financial entities eventually failed (Emeseh, Ako, Ogechukwu, 2010: 255). This gave rise to the adoption of a full harmonisation of law within an integrated EU legal order. As a re‐ sult, the European System of Financial Supervision was created with the aim of preventing regulatory arbitrage by adopting uniform rules for im‐ plementation and compliance with regulations3. The regulatory authority's political position results mainly from the principle of the separation of regulatory and operational functions. In ac‐ cordance with this principle, the Member States should ensure the inde‐ pendence of national regulatory authorities to enable them to make impar‐ tial decisions, and the regulatory bodies should have all the resources (hu‐ man and financial as well as the expertise) necessary to carry out their tasks. Consequently, with regard to, for example, the postal market, the Member States should, in particular, ensure that the tasks assigned to na‐ tional regulatory authorities are carried out by the competent bodies, to 1 Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) OJ L 108, 24.4.2002, p. 51–77. 2 Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity OJ L 27, 30.1.1997, p. 20–29. 3 Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board OJ L 331, 15.12.2010, p. 1–11. Chapter 3: Methods and tools of regulating markets from a praxeological perspective 73 guarantee the independence of the authorities by making sure that they are legally separate and functionally independent from any organisations pro‐ viding electronic communications networks, equipment or services, and to ensure that the authorities exercise their powers impartially and transpar‐ ently4. It is this independence, combined with the obligation to establish na‐ tional regulatory authorities, that is the essence of EU regulatory law (Chamon, 2016: 117). Regulators are, however, considered to be a transi‐ tional phenomenon, as are the sectoral regulations on the basis of which they operate (Sosay, Zenginobuz, 2005: 3). Yet, according to the European Commission, national regulatory bodies are likely to continue to play an essential role, particularly in those Member States where the transition to a competitive market is not yet complete5. This indicates a dependence of regulatory methods on the development of the regulated market con‐ cerned. In view of the strong Europeanisation of market regulation, it should be noted that EU institutions are also regulatory authorities6, and it is particu‐ larly true of the European Commission, which performs its regulatory functions through senior officials in charge of issues concerning a given market, for example the Commissioner for Economy, who oversees the work of the Directorate General for Financial Stability, Financial Services and Capital Markets Union, and the Directorate's staff. Other examples of regulatory bodies are the executive agencies responsible for specific sec‐ tors, such as the European Insurance and Occupational Pensions Authority or the Agency for the Cooperation of Energy Regulators (ACER). Therefore, when constructing the definition of an actions' originator, i.e. the regulator, it should be stated that it is a public administration body per‐ forming a regulatory function in relation to a given market or, in the case of horizontal competences, in relation to the entire market (which implies equipping it with the competence to determine or give concrete form to 4 The judgment of the Court of Justice of 6 October 2010 in Case C-389/08, ECLI:EU:C:2010:584. 5 Proposal for a Directive of the European Parliament and of the Council amending Directive 97/67/EC concerning the full accomplishment of the internal market of Community postal services {SEC(2006) 1291} {SEC(2006) 1292}. 6 Opinion of Advocate General Yves Bot delivered on 30th June 2016, Case C‑424/15 Xabier Ormaetxea Garai, Bernardo Lorenzo Almendros przeciwko Ad‐ ministración del Estado, ECLI:EU:C:2016:780. Tomasz Klemt 74 the behaviour of enterprises). This body is characterised by a high degree of independence, which is manifested, inter alia, in the way it is estab‐ lished and the way the sources of financing for its activities are ensured (however, this is not an absolute feature and it rather concerns the factual sphere). These are the two classic elements allowing for the identification of a regulatory body, i.e. the function and political features (Jaroszyński, Wierzbowski, 2011: 314). The two components should be complemented by another one: being anchored in EU law. The tasks, competences and political position of the regulatory body are closely related to the EU legal order as the necessity to set up the body derives from EU acts (directives, regulations). National regulatory bodies are therefore part of multi-level governance in the European Union, cooperating closely with EU institu‐ tions, and any changes to their competences and position are conditioned by the processes taking place at EU level7. The systemic reflection on regulatory bodies is therefore closely related to the substantive sphere ex‐ pressed in the specificity of regulatory competences, which concern the determination of the effects of administration's actions, in particular through the sovereign shaping of the legal status of a business in the mar‐ ket (Sosay, Zenginobuz, 2005: 8). The conclusions in this respect are confirmed by the results of empirical research, where the respondents proposed a very broad definition of the regulation itself as well as the regulator. A functional approach prevails, referring to the real possibilities of exerting influence by a given entity on shaping market behaviours, which is consistent with the praxeological analysis, which is focused on elements leading to efficient operation ("good work"). Regulation’s efficiency The main task of praxeology is to raise awareness about, formulate, justi‐ fy, and systematise general recommendations and warnings about the effi‐ 7 It should be noted that the EU component undermines the sovereignty of the state over the economy by excluding governments from the cooperation that takes place at the level of independent national regulators and their counterparts at EU level within the network of administrative authorities. As a result, a supranational, multilevel EU administration system is being created, which favours regulation based on soft law standards. Chapter 3: Methods and tools of regulating markets from a praxeological perspective 75 ciency of actions, i.e. their practicality. The efficiency of a given action boils down to the question of whether the method chosen leads to the goal pursued (efficiency) and whether it allows achieving the objective in the fastest way possible (cost-effectiveness). An effective regulation is the one that leads to the intended goal, while an economic regulation is one that engages as much resources as needed (efficiency) and as little resources as necessary (cost savings) (Kotarbiński, 1972: 18). Efficient regulation should therefore be characterised by an appropriate methodology, princi‐ ples, methods, and techniques, which is the sine qua non of achieving effi‐ ciency by a given regulation. The term "method", which was first used in the work entitled Teajlet by the Greek philosopher Plato, is the most frequent notion for conceptually systematising the efficiency of regulation. The term "method" thus derives from the Greek language, where "metha" means "in accordance with", while "hodos" stands for "manner", "road" or "journey". (Yanow, Schwartz-Shea, 2006: 28). Therefore, a method means "following a cer‐ tain path". This is in line with the doctrinal concept of this term, according to which it is a way of doing things that leads to solving a problem and achieving a defined goal. It consists of specific and repetitive stages (Yanow, Schwartz-Shea, 2006: 28). A distinction must be made between a method of regulation and a regu‐ lation technique. A technique is a method that has been defined in great detail. In other words, a technique is a procedure or recipe (Black, 1997: 85). An example of a technique is the rules on how to draft correct – in editorial terms – legislation at the European Union level in the form of the Joint Practical Guide of the European Parliament, the Council and the Commission for persons involved in the drafting of European Union legis‐ lation8. In Poland, the Principles of Legislative Technique serve a similar role9. Techniques, therefore, represent an ancillary function to substantive decisions. They do not ensure the rightness of regulation, but merely put it within a specific framework resulting from the practical achievements of an action. Therefore, techniques are activities related to the development of the content and style of regulation, in a way that ensures its adequacy, 8 European Union, Joint Practical Guide of the European Parliament, the Council and the Commission for persons involved in the drafting of European Union legislation, Luxembourg 2015. 9 Regulation of the Prime Minister of 20 June 2002 concerning the "Principles of Le‐ gislative Technique" (Journal of Laws of 2016, item 283). Tomasz Klemt 76 unambiguity and communicativeness. It may be misleading to use the word 'principle' here, as a principle is a method that has been generalised (Black, 1997: 88). Thus, regulation's method is a manner (way) of imple‐ menting the regulating process adopted by the action's originator, i.e. the regulator. A method should be adequate for the adopted goal of regulation (effectiveness) and at the same time it should be compatible with the adopted regulation technique. Methodology, on the other hand, is the science of the principles on how to build reasoning systems. Thus, it is a set of views about the methods applied in a given field that form a systematised whole (Yanow, Schwartz- Shea, 2006: 38). For instance, Recommendation No C (95) 21 of the Council of the OECD on Improving the Quality of Government Regu‐ lation adopted on 9 March 1995 can be mentioned here. This Recommen‐ dation obliges the Member States to reform the lawmaking process. In Poland, this has been taking place over the last few years, covering many stages. It should be noted that as early as in 1961, the Principles of Legis‐ lative Technique obliged the legislator in Poland to introduce a justifica‐ tion of the purpose of issuing an act and to discuss the results of public consultation and dialogue with social organisations (Rogowski, Szpringer, 2007: 5). The methodology used in the previous century was, however, in the nature of a facade, which is an evidence of a total failure of the activi‐ ties undertaken in the field of social factor involvement. Today, the processes linked to the lawmaking methodology in Europe largely take place at international level and are closely related to the mem‐ bership of the European Union. The first steps to improve the quality and transparency of European Union law were taken in the early 1990s. The problems of over-regulation and the poor quality of law were already known, but they were intensified along with the further development of processes and the shaping of common EU policies (Grzeszczak, Klemt, 2019: 279). With the development of integration processes, the European Union has become a "regulatory state", which – with a relatively small budget and without its own executive apparatus – engages primarily in regulatory activity, which then translates into national law (Mayone, 1999: 1). A specific approach of the European Commission to achieve efficiency while refraining from precise legislative activity is currently being ob‐ served. The Commission is creating regulation through the "back door" by empowering individuals and using private enforcement means. Therefore, European acts introduce high penalties and the possibility of compensation Chapter 3: Methods and tools of regulating markets from a praxeological perspective 77 for incorrect implementation of EU rules by the Member States. They are designed to encourage individuals to fight for their rights in court. During lawsuits, lawyers ask for clarification of the rules, and as a result the courts fill the general legal framework established by the European Union with their case-law (Kelemen, 2011: 121). Different principles derive, however, from the current Interinstitutional Agreement of 13 April 2016 on Better Law-Making, which contains four main tools: impact assessment, public and stakeholder consultation, and feedback, as well as ex-post evaluation of existing legislation10. This is in line with the methodology of the Better Regulation process, which aims to restore legislation to its core role and to give priority to the effectiveness of regulation. It is about making legislation flexible, adaptable, and at the same time sufficiently durable, which means reliability and, above all, consistency, from the moment the idea is conceived to its application in practice11. This methodology distinguishes between a number of methods, including analytical methods for comparing options and assessing results and methods for assessing costs and benefits, which are, at the same time, tools for better regulation, with a total of sixty-five12. However, there are a number of issues with the Better Regulation agen‐ da which raise doubts about the quality of the currently adopted regu‐ lation's methodological paradigm. A key problem concerns impact assess‐ ment. It is used mainly as a source of information helpful for the Commis‐ sion when taking policy decisions. The assessment justifies the need for EU action, identifies the value of such action, and provides information on who will be affected, and how, providing an overall picture of the econo‐ mic, social, and environmental impacts. By the end of 2018, the Commis‐ sion produced 259 evaluations. Unfortunately, the subsidiarity assessments presented within the impact assessments are often too general, overly le‐ galistic, and formalistic. There is also no link between the subsidiarity, and 10 Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European Commission on Better Law-Making, OJ L 123, 12.5.2016, p. 1–14. 11 Opinion of the European Economic and Social Committee on Better Law-Making (2006/C 24/12). 12 better-regulation-why-and-how/better-regulation-guidelines-and-toolbox/betterregulation-toolbox_pl (access 2020-04-21). Tomasz Klemt 78 proportionality assessments of the different strategic options13. The assess‐ ment therefore becomes more of an information and bargaining device for stakeholders in the legislative process than a decision-making tool. This is coupled with the tendency to expand the possibilities of participation in the regulatory process without increasing the real rights of participants in the process (Meuwese, 2011: 537). In addition, the European Parliament, the Council, and the Commission have not yet adopted a coherent approach to the evaluation of legislation, despite the commitments made under the Interinstitutional Agreement on Better Law-Making14. This is due to the lack of availability of information on the functioning of individual legislations in the Member States, which, in turn, results from the lack of measures to collect such data efficiently and systematically. Ad hoc evaluations of legislation tend to have dead‐ lines too tight to be carried out well15. This indicates a significant flaw in the current processes from the point of view of praxeological analysis, which should be eliminated at the stage of monitoring and improving the results of regulatory activity. As regards the application of a result-oriented approach, the European Commission is still not convinced strongly enough that the application of target-oriented regulation has a certain cost. Focusing on the extent of these costs is a transparent but ineffective approach, which makes it diffi‐ cult to achieve the assumed objectives16. This means that the cost-cutting aspect has now outweighed the efficiency of regulation, which is a major mistake from a praxeological point of view. Similar problems also affect national regulators. While in the realities of the 1990s, it was sufficient to use standards that were simple to apply and that set out a clear way forward, now the standards’ objectives are much more complicated. They have to take into account a number of gen‐ eral clauses, weigh up interests, define markets, use economic legal analy‐ 13 European Commission, Better regulation taking stock and sustaining our commit‐ ment, Luksemburg 2019, p. 10. 14 Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European Commission on Better Law-Making, OJ L 123, 12.5.2016, p. 1–14. 15 Ibidem, p. 10. 16 European Commission, Better regulation taking stock and sustaining our commit‐ ment, Luksemburg 2019, p. 12. Chapter 3: Methods and tools of regulating markets from a praxeological perspective 79 sis, analyse the competitiveness of markets, and adopt appropriate mea‐ sures that involve specific cost (for the state, businesses, or consumers). In conclusion, the diversity of markets requires different regulatory methods and techniques that are sector-specific and ensure effective regu‐ lation. However, they should remain consistent with the comprehensive regulatory methodology developed over the years by the OECD and the European Union, based on the practical experience of successive genera‐ tions of regulators. This guarantees the consistency of actions taken with the basic principles justifying the intervention in the economy in the form of regulation and ensuring their high quality. This applies to regulatory ac‐ tivities taken at the level of the European Union, the national parliament and other market regulators. At the same time, it is important to remember about the problems affecting regulators that impact the results of actions taken, which requires continuous improvement of the regulatory method‐ ology and the knowledge and competences of persons involved in regula‐ tory activities (Izdebski, 2006: 96). From the point of view of praxeology, this process is ongoing and guarantees the development of regulatory effi‐ ciency. Implementation of actions by means of regulatory tools A consequence of the circumstances indicated in the previous part of this chapter is the diversity of legal measures applied that are typical of state's intervention in the economy, depending on the sector and the purpose of regulation. In the case of regulation, these measures constitute tools of ac‐ tion (instruments) which are necessary in the context of its specificity as the regulator never has a direct possibility to influence every subject of regulation (material). Modern political and economic theories distinguish three main types of state intervention in the economy (tools): income re‐ distribution, macroeconomic stability, and market regulations (Majone, 1999: 53). The instruments used in the case of redistribution are, for instance, the transfer of funds between social groups and the provision of specific goods or socially useful services (including health care). The instruments of macroeconomic stabilisation include the fiscal, monetary, industrial, and labour market policies (Majone, 1999: 53). Regulation, in turn, is a type of intervention that should take place where markets fail. It is justi‐ fied particularly in the case of interference in civil law relations (for more Tomasz Klemt 80 information see Dorociak, Chapter IV of this book). Regulation itself is therefore a tool in a broad sense of the term, with a number of more spe‐ cific instruments. The understanding of the term "tool" needs, however, to be clarified since from a praxeological point of view it has a fixed meaning. A tool re‐ ceives the pressure from the action's originator and transfers this pressure (or the pressure of other intermediary elements) onto the material. The pressure may increase, decrease, or be modified (Kotarbiński, 1972: 17). In other words, through the tools of regulation, the influence of regulatory bodies is transferred to the regulated entities to the extent corresponding to the regulatory priorities at a given time. The status of a tool is also deter‐ mined by the fact that it is permanently and consciously used to achieve the objectives in question (it must not be a tool used accidentally in the regulatory activity). A measure, on the other hand, is a concept broader than a tool, and can encompass an activity that may be helpful to achieve a specific objective. The measures used under the regulatory process are usually referred to as market regulation tools or instruments. These are synonymous terms and can be used interchangeably (and so are used in this book), although it should be noted that the expression "regulatory tool" is more common. It should also be stressed that the method, technique, and tool of regulation should be adapted to the subject and purpose of regulation and not the oth‐ er way round. This is a common mistake, which also manifests itself in treating the above terms as equal (Garben, Govaere, 2018: 97). A tool should therefore be an object used to implement a selected regulation tech‐ nique, which is an consequence of the goal of the action's originator, i.e. the regulator. There are a number of criteria for the division of regulatory instru‐ ments, the most important being the breakdown by objectives and by types of the measures used which form a matrix allowing the choice of the right regulatory tool. As for the first of the systemisation methods mentioned, regulatory tools can be divided into three groups: measures aimed at the protection of end users, measures aimed at achieving economic objectives, and measures to protect the common good17. The choice of end users is a socio-political choice, which may concern a specific type of consumers (customers), small and medium-sized enterprises or people with a given fi‐ 17 OECD, Regulatory Policy and the Road to Sustainable Growth, 2010. Chapter 3: Methods and tools of regulating markets from a praxeological perspective 81 nancial status. In this case, regulatory tools will include state policies, obligatory conclusion of an agreement, price tariffs, price supervision, fi‐ nancial support instruments for the purchase of a given good, and ele‐ ments of technological innovation support. As for the achievement of economic objectives, these may be instru‐ ments relating to the division of economic entities, control of mergers and acquisitions, access to transmission networks, promotion of technological modernisation, and measures supporting economic efficiency in the case of natural monopolies18. When discussing the measures to protect the common good, it is important to stress the significance of instruments in the area of environmental protection, which, since the Treaty of Amster‐ dam (1999), have been integrated into all EU sectoral policies in the framework of the Sustainable Development Strategy. Regulatory instruments can also be divided – following the European Commission – into four main categories: hard law standards, otherwise known as binding laws, soft law standards, education and information, and economic instruments19. Legally binding standards, secured by a sanction, represent the most re‐ strictive manner of regulation, used in cases where uniform standards are required that are relatively simple to draft and apply (see also the part of this Chapter devoted to tools for interfering with the freedom of establish‐ ment). Currently, their role is declining, and they are usually applied when other (softer) measures cannot be used, or they are introduced to supple‐ ment soft law. This is due to the fact that more flexible measures allow for a more effective adaptation of regulation to the individual situation of the economic entity, thus reducing the global cost of introducing a given regu‐ latory tool20. 18 OECD, Regulatory Policy and the Road to Sustainable Growth, 2010. 19 Better regulation Toolbox, online:‐ cess/planning-and-proposing-law/better-regulation-why-and-how/better-regu‐ lation-guidelines-and-toolbox/better-regulation-toolbox_en, (access: 2020-03-15). 20 For instance, the largest burden (bureaucratic costs for companies) in Germany in the reporting period 2017/2018 was caused by the Directive of the European Par‐ liament and of the Council of 20 January 2016 (EU) 2016/97 on insurance distri‐ bution (€5.6 million) – see more on this topic: Annual Report 2018 of the Na‐ tionaler Normenkontrollrat (National Regulatory Control Council) pursuant to Section 6 (2) of the Act to Institute a National Regulatory Control Council (NKRG), on-line: Tomasz Klemt 82 This trend is so apparent that as early as the 1990s the European Union was declared to enter the 'era of non-binding law'. (Flynn, 1997: 2). Nev‐ ertheless, the universally binding law remains the dominant type of regu‐ lation, and within its framework one can distinguish instruments in the form of the so-called standards, i.e. provisions defining the mandatory (recommended) manner of operation or defining the mandatory (recom‐ mended) characteristics of a product (and service) (Surdej, 2014: 72). Standards, in turn, can be divided into: purposeful (obliging the achieve‐ ment of given objectives), resultant (obliging meeting certain conditions but leaving flexibility as to how to do this) and specific (detailing the re‐ quirements necessary for implementation) (Surdej, 2014: 72). In the European Union, there is currently a tendency to move away from the preference for specification standards. The same goal is achieved by using the judicial activity of the European courts (Kelemen, 2011: 121). Also, the experience in the US system shows that constitutional and democratic deficits in secondary (agency) regulation can be successfully compensated by a judicial regulatory review (Voermans, Schuurmans, 2011: 524). Soft law, which has no binding force, is an alternative to the standards that are binding. Soft law measures are characterised by greater flexibility, which allows for their adaptation to the changing realities and different factual situations. On the other hand, it is argued that there is a lack of clarity, precision, and legitimacy to adopt such acts and that their conse‐ quences are unclear (Voermans, Schuurmans, 2011: 511). Reservations concerning such measures were expressed in the European Parliament res‐ olution of 4 September 2007 on the institutional and legal implications of the use of 'soft law' instruments21. It is a paradox that the European Parlia‐ ment uses a resolution, which is a form of soft law itself, to criticise this kind of measures. The resolution addresses, among other things, unjusti‐ fied legislative pressure related to the issuance of white and green papers, the imposition of new obligations by means of interpretative communica‐ tions of the European Commission, and the fact that this institution resorts to soft law too frequently, which leads to the gradual replacement of EU law by soft law. Despite the criticism of such solutions at EU level, they are still widely used by national regulators. Moreover, such solutions are 548226/a53ca395512296087f96a45d0b839d44/2018-11-09-jahresbericht-englisch -data.pdf?download=1 (access: 2020-02-01). 21 OJ, C 187 E, 24.7.2008, p. 75. Chapter 3: Methods and tools of regulating markets from a praxeological perspective 83 desired by the entities subject to supervision, as demonstrated by the re‐ sults of the research discussed in the empirical part of this chapter. A special form of soft law is self-regulation, which in certain cases (af‐ ter it has been given such a normative meaning) may become a generally binding law. The literature indicates that for self-regulatory solutions to be effective there must be a real threat to the interests of a given group by the inappropriate behaviour of an entity belonging to that group (Gunning‐ ham, Grabosky, Sinclair, 1998: 375). Often, self-regulation occurs within the framework of state facilitation, as is the case with distribution agree‐ ments in energy law. This prevents, inter alia, the limitation of free compe‐ tition through self-regulation (Surdej, 2014: 81). Another type of regulatory tool is education and information. This type of instruments includes, among others, training, promotion and informa‐ tion campaigns, development of information guidelines (for instance in the form of a set of key case-law theses on a given problem), and reporting. It is a particularly effective tool in situations of information asymmetry, where the possibility and cost of obtaining data make it impossible to achieve the intended regulatory goal. Another case is when the lack of ef‐ fectiveness of a given act results from the lack of information on how to observe or enforce it22. There are also hybrid tools in the form of legally binding standards requiring certain information obligations to be met, for instance in the form of information about an insurance product, aimed at preventing misselling23. The last type of regulatory tools are economic instruments, usually in‐ volving hard law regulations. The OECD defines economic instruments as tools that affect the estimates of benefits and alternative costs by the regu‐ lated entities when they choose the options available (Opschor, de Savorin Lohman, Vos, 1994: 11). In other words, where the tool affects the market price of a good or service, it is an economic instrument. This type of regu‐ lations works well in situations of externalities or other market failures and includes: taxes, fees, fines, penalties, damages, subsidies, loans, de‐ posits and tradable permit and entitlement schemes. 22 Better regulation Toolbox, online:‐ cess/planning-and-proposing-law/better-regulation-why-and-how/better-regu‐ lation-guidelines-and-toolbox/better-regulation-toolbox_en, (access: 2020-03-15). 23 See: T. Klemt - Financial market - in search of optimal consumer (customer) pro‐ tection. Tomasz Klemt 84 The outlined spectrum of regulatory tools overlaps with the need to use these instruments in combination with an ex-ante analysis of their impact. In addition, an extensive system of administrative sanctions to secure the implementation of regulatory obligations, which requires systemisation and standardisation, does not encourage legal certainty in this respect (Klemt, 2018: 285)24, hence the initiatives to set standards for regulators, such as the European Code of Good Administrative Behaviour initiated by the European Ombudsman. According to the provisions of this document, the activities of good administration should be characterised by legality, non-discrimination, proportionality, impartiality, independence, objectivi‐ ty, consistency, credibility, and courtesy25. In view of the establishment of the right to good administration in Article 41 of the Charter of Fundamen‐ tal Rights, these standards have enjoyed a special legal basis since 1 De‐ cember 2009. A number of features of the instruments are related to the principles defined in this way, such as effectiveness understood as acting with appropriate, proportionate means and intervening in accordance with the principle of subsidiarity, ensuring the achievement of the intended ob‐ jectives in due time (Grzeszczak, 2015: 21). Appropriate selection of in‐ struments results, in turn, from the knowledge of those tools and reference to the practical experience in this area, while the practical experience is based on a praxeological process of controlling, improving, and applying the results of regulation. Controlling, improving, and applying the results of regulation The last stage of any task is to use its products and results. At this stage, the praxeological approach requires verification of the results of the activi‐ ties undertaken so far, which is an initial phase before making further steps. It serves a very important function, aiming at detecting potential er‐ rors and taking improvement actions (Kotarbiński, 1972: 27). This re‐ quirement becomes particularly important in the context of regulation, 24 T. Klemt, Evolution of administrative sanctions in European Union law, Матеріaли міжнародної науково–практичної конференцїї “Теорія та практика адаптації законодавства України до законодавства ЄС”, Kijów 2018, p. 285 ff. 25 European Ombundsman The European Code of Good Administrative Behaviour, online: (ac‐ cess: 2020-04-20). Chapter 3: Methods and tools of regulating markets from a praxeological perspective 85 which by its very nature covers repetitive, but also individual, circum‐ stances related to individual entities that are subject to regulation. Such an approach should be applied especially if any untypical event that has not been foreseen by the regulator takes place in the practical sphere. There‐ fore, it may be expected that the coronavirus epidemic will also require an adjustment to binding law as it will be necessary to prevent difficulties similar to the present ones in the event of outbreaks of subsequent epi‐ demics. As for European law, this element of the praxeological model takes the form of an evaluation aimed at verifying whether EU legislation and fund‐ ing programmes are delivering the expected results and remain relevant and up to date to achieve the objectives. However, the fact remains that the results of this process are not taken into account in the work of the European Parliament and the Council26. This calls into question the advis‐ ability of carrying out evaluations. It also represents a marginalisation of the control process and of the improvement of regulatory outcomes. Demonstrating errors in actions is not sufficient. On top of performing this cognitively negative function, it is necessary to apply a project-positive approach, aimed at improving the currently identified factual situation. Similar conclusions with regard to regulation and doctrinal findings have motivated the researchers to verify how participants in the regulated markets in Poland perceive the current state of the markets and the func‐ tioning regulations in practice. To this end, a number of in-depth inter‐ views were conducted with representatives of the administration and busi‐ ness in the anti-trust, financial, energy, and telecommunications sectors. During the interviews, the respondents were asked, among other things, about the preferred forms of operation of market regulators and about the effectiveness of particular regulatory methods and tools. The answers and conclusions indicated below provide a unique opportunity to confront the theory with the practice of regulatory bodies (i.e. law from books with law in action), and at the same time provide an indication de lege ferenda for the legislator. The assumptions about the importance of this issue were confirmed by the respondents themselves. In the course of the conducted research, one of the respondents from the energy market drew attention to the fact that 26 ECA, Special Report No 16/2018: Ex-post review of EU legislation: a well-estab‐ lished system, but incomplete, online: m.aspx?did=46063 (access: 2020-02-11). Tomasz Klemt 86 there are shortages when it comes to determining the methodology of ac‐ tion. This is due to the fact that action's objectives are not clearly defined, which should be followed by the selection of methods, rules, and instru‐ ments appropriate to achieve the goals. For example, the so-called tariff is treated as methodology, while in fact it is a tool and should only be a re‐ sult (effect) of the regulation process and should be based on a benchmark for best solutions. This therefore constitutes a practical confirmation of the approach put forward by praxeology. The importance of soft law in regulatory practice: results of empirical research The research shows that almost all respondents, regardless of the market, pointed to the growing importance and legitimacy of soft law actions. Soft measures have an advantage over traditional legal acts as they can be cre‐ ated by some entrepreneurs and do not limit the business activity. When building good market practices, their core is the agreement (consensus) between market participants, and the measures which are imposed exter‐ nally are usually disadvantageous for all the actors. One business repre‐ sentative pointed out that from his point of view, the most effective forms of actions are those in which the regulated entity can see some benefit for itself. Then the entity willingly accepts the regulation. According to this respondent, at the current stage of market development in many EU Mem‐ ber States, including Poland, solutions enabling dialogue with the market, rather than strict regulations, should be preferred. Another respondent points out that the effectiveness of soft law depends on the attitude adopt‐ ed by a given entity in a given situation. It is best to conduct a dialogue with some entities, whereas in relation to other operators that do not re‐ spect soft law, sovereign solutions should be preferred. The entities examined in the field of competition law indicated that "soft" measures applied by the President of the Office for Competition and Consumer Protection (the issuance of non-binding guidelines) may have a positive impact on legal certainty and thus the respect for the economic freedom of entrepreneurs. This could increase entrepreneurs' awareness of the existence and functioning of competition law provisions, thus increas‐ ing economic freedom consisting in the certainty of economic entities that their activities will not be affected by the unfair practices of other en‐ trepreneurs. In addition, all the respondents pointed to the generally posi‐ Chapter 3: Methods and tools of regulating markets from a praxeological perspective 87 tive or neutral effects of implementing compliance programmes in busi‐ ness. They have a self-disciplining role for entrepreneurs, which should limit their legally dubious actions. Almost all the respondents operating in the financial market generally paid attention to education as a form of soft market impact. Educational measures should be directed both at the entity applying the new regulation in practice and at the client. This is due to the fact that the supervisory au‐ thority is also a recipient of regulation, which is created to a significant extent at EU level and then adjusted to the Polish reality by the parlia‐ ment. One of the respondents indicated that educational activities should be addressed to the legal and market community, especially focusing on ensuring consistency between regulations. At present, such an approach is lacking, as a result of which the regulated entities have problems with combining obligations resulting from different legal acts, which are often contradictory. More than half of the respondents raised the fact that the currently functioning regulations, through their complexity, add more work, making it more difficult to perform the basic activities of a given entity. The representatives of the regulatory authority (Financial Supervision Authority – KNF) pointed to soft measures that have no legal basis and aim at influencing the market (guidelines) as a positive example of KNF's actions. These are non-controversial acts as they contain the positions of the KNF and the Supreme Court in certain detailed scopes. The represen‐ tatives of the supervisory authority also expressed their preference for soft measures to influence the supervised market. The supervisor is aware of the key role of information. Entrepreneurs most often expect an informa‐ tion approach in connection with new regulations. This applies in particu‐ lar to the lack of knowledge about the interpretation of the provisions. This issue particularly affects small entities, where legal awareness is low and cannot afford the expense of comprehensive legal services. In the case of international companies, the problems concern discrepancies between the so-called "international options", i.e. different ways of implementing the same directives in various EU Member States (this issue is also raised in the framework of the review of the Better Regulation methodology27). The market strongly expects information that the authority does not pro‐ 27 European Commission, Better regulation taking stock and sustaining our commit‐ ment, Luxembourg 2019, p. 10. Tomasz Klemt 88 vide. However, the representatives of the authority indicate that it is very difficult to provide information in a situation where there is a large circle of addressees with different specifics of activity. Attempts are made in this respect in the form of recommendations, positions, and communications: these are indications based on the supervisory practice and case-law as to the application of certain legal regulations. However, they often generate additional questions and doubts. One of the respondents also stated that they are not adapted to the specifics of smaller entities, which cannot af‐ ford to create costly internal documentation concerning new obligations. Yet another area of soft law application is the organisation of meetings with market participants: at least once a year or several times a year. The meetings discuss various topics, with the regulatory body presenting its position. They are usually related to the occurrence of some serious issues in the practice of the financial market. It is also possible to obtain a free opinion of the supervisory authority; this procedure is not enshrined in any legislation but remains the practice of the authority. On the other hand, many supervised entities are not aware of the existence of such a proce‐ dure, which was unanimously confirmed by the respondents from the busi‐ ness sector. In addition, they pointed out that it is very difficult to contact the authority and virtually impossible to talk about a given issue over the phone as the authority always asks to submit the inquiry in writing or send it by e-mail. The representatives of the KNF admitted that there are many people working within the authority, but in fact very few of them deal with specific markets and sectors. At the same time, the supervisory authority itself is a recipient of the regulations and does not have full knowledge of the way the regulations are interpreted. Also, the lack of inspection activi‐ ties is an issue. The respondents in the telecommunications sector pointed out that the forms of action taken should be adapted to the realities of a given case. The representatives of the Office of Electronic Communications drew at‐ tention to the need to use the tools provided for by law, while the represen‐ tatives of businesses stated that it is necessary to engage in a dialogue with the market and use soft measures before – in case those measures prove inefficient – sovereign solutions are used. However, this is conditioned by the realities of a given case. There are situations where soft law works bet‐ ter but there are also cases where there is a need for a hard administrative decision that is immediately enforceable due to a threat to competition or social interests. In such cases, it is necessary to take action in the form of a Chapter 3: Methods and tools of regulating markets from a praxeological perspective 89 sovereign decision that is quick and enforceable from the very moment it is delivered. As for soft forms of action, business representatives from the telecom‐ munications market pointed to the issuance of guidelines and opinions on businesses' positions, for which the authorities are currently very reluctant. One of the respondents proposed to use a dialogue-based approach. It is a faster, more efficient, and better solution but it does not always work. Its effectiveness depends on two factors: the attitude of the entrepreneur and the market situation. The regulator should treat hard solutions such as de‐ cisions as the last resort, only in cases where an agreement with a given entity cannot be reached. In the opinion of respondents, there is no need to use repressive solutions in relation to the entities that are willing to engage in a dialogue, while in relation to the operators that do not want to submit to soft measures it is necessary to apply sovereign tools, even the ones that are immediately enforceable. The entrepreneurs surveyed indicated that positions or opinions ex‐ plaining the correct understanding of certain issues as well as soft law su‐ pervision would be very helpful in their activity. This would interfere with economic freedom to the smallest extent possible and would not under‐ mine the effectiveness of regulations. It is not desirable for the sector reg‐ ulator to set standards because regional or international standards are the best while specific standards cause limitations in attracting investors. Therefore, regulations drafted at the European Union level are preferred. With regard to energy law, the respondents pointed to the growing im‐ portance of communications, guidelines, and information. However, three respondents stated that for soft law to be fully effective, it must be accom‐ panied by "hard" measures that can be enforced administratively. Accord‐ ing to two of them, such "hard" measures already accompany "soft" law, making it increasingly effective. The discussed form of action makes it possible to achieve the desired regulatory goal without the need to decide on each case individually, for instance imposing fines in an open way en‐ sures that all the addressees of a communication become familiar with the reasoning of the President of the Energy Regulatory Office and can adapt their actions accordingly. Two respondents referred to the work on a model distribution agree‐ ment as an area where "soft" regulatory actions proved to be very effect‐ ive. Such an agreement is concluded between the seller and the operator, regulating the relationship between the two parties. It is negotiated with the participation of the regulator (which performs mainly a mediation and Tomasz Klemt 90 advisory function), which leads to the development of a standard agree‐ ment in this area. Market participants are willing to engage in such projects as they allow them to have a greater influence on the shape of the binding regulations. A slightly different type of soft law is the Instruction for the Grid's Operation and Maintenance, which is developed by meet‐ ings of market participants and then approved by the regulator. Such solu‐ tions seem to be also applicable in other markets, for instance insurance law. The multitude of problems related to the interpretation and presence of abusive provisions in the General Terms and Conditions of Insurance (GTI) indicates the need for this type of action on the part of the Financial Supervision Authority, which would unify the practice of formulating the GTI for individual insurance products. One respondent pointed to press releases as an example of effective "soft" action of the President of the Energy Regulatory Office. The instru‐ ments in question make it possible to communicate clearly the regulator's expectations and enable a smooth process of market adjustment. At the same time, it is pointed out that certain procedures need to be de-bureau‐ cratised for smaller entities. Two respondents recommended increasing communication between the regulator and regulated entities, which could improve market regulation: one of these two respondents placed emphasis on sending information and the so-called "reminders", while the other stressed the importance of explaining decisions made to the entities oper‐ ating in a given market, which is due to the difficulties in correct interpre‐ tation and application of regulations by smaller entities which do not use professional legal services. Communication should take place particularly in sensitive markets. It should be based on the principles of partnership, as well as on explaining how the rules are applied and interpreted. Irrespec‐ tive of any subsequent judicial review, this may reduce risks at an early stage of the regulated entity's activities. Regulatory authorities should therefore use both of the most classic forms of administrative action, i.e. issuing administrative decisions, and certain formal and informal consulta‐ tions and partnership approaches to businesses, for example, in order to explain the way the regulator operates, thereby achieving greater trans‐ parency. One of the respondents recommended that when taking "soft" measures such as developing guidelines, the President of the Energy Regulatory Office should be obliged to consult the public – as is the case in the law-making process – in order to give stakeholders an opportunity to comment. Another respondent pointed out that in a situation where soft law becomes similar to classic legislation in terms of its consequences, it Chapter 3: Methods and tools of regulating markets from a praxeological perspective 91 is necessary to regulate the process of lawmaking itself in order to prevent a violation of the fundamental principles of the rule of law. Tools to interfere with freedom of establishment: results of empirical research Another issue that has been examined through empirical research is the extent of interference of individual regulatory tools with the freedom of establishment. There is a consensus concerning the effectiveness of deci‐ sions that are immediately enforceable by law. The practice of the respon‐ dents shows that the more imperative, i.e. normatively regulated, the form is, the greater is the scope of its implementation and the possibility of its enforcement. Administrative decisions, in particular those prohibiting something or imposing penalties, are effective in the sense that they dis‐ suade an entrepreneur from taking an action, while on the other hand they completely block certain initiatives. The effectiveness of a form of action also depends on what market it concerns and at what stage of development a given market is. The market looked different 10 or 15 years ago, and back then such repressive tools were more justified. Currently, the market is at a different stage of development and soft law tools may already be sufficient, with no need to introduce every regulation by force. Unannounced searches organised in order to obtain evidence on restric‐ tive practices are the most frequently indicated (by 7 out of 10 respon‐ dents) regulatory tool of the President of the Office for Competition and Consumer Protection that, in the opinion of the respondents, interferes most with the freedom of establishment. In this respect, there is a risk that, if the manner of carrying out the inspection and searches is inadequate, the current activities of a business entity may be destabilised, the authority's actions may be arbitrary and the rights of certain persons may be violated. The entrepreneur has to endure the presence of the searchers that demand the release of certain equipment and may temporarily block access to mailboxes. This is also a great stress for the entrepreneur's employees. A significant portion of the respondents (six of the respondents) also pointed to decisions recognising the practices to have restrictive effects on competition and imposing penalties on businesses. This applies in particu‐ lar to ambiguous cases (practices contentious as regards their effects on competition), which intensifies in the era of economic development and new strategies of businesses (sometimes regulations do not “keep up" with Tomasz Klemt 92 the changing economic reality). Two out of ten respondents stressed that economic freedom can be limited by overly extensive and detailed ques‐ tionnaires to entrepreneurs, requiring very detailed information to be col‐ lected by the entrepreneurs' employees. One of the respondents empha‐ sised that, in practice, the inspections of the President of the Office for Competition and Consumer Protection may limit the freedom of establish‐ ment to an extent higher than searches as they involve the entrepreneur's employees more (in the case of a search, it is the searchers themselves who select the evidence; in the case of an inspection, however, it is the employees of the entrepreneur that are responsible). Another respondent pointed out that the freedom of establishment may be violated by overly vague legal regulations concerning the liability of an agreement's facilita‐ tor or the scope of liability of the parent company for the actions of its subsidiary (these concepts are based on a broad interpretation of Article 101 TFEU by the CJEU). Examples in this respect are the lack of explicit regulation concerning the antitrust liability of the "facilitator" and the problem of a parent company's liability for the actions of its subsidiary. Prohibitions of restrictive practices are very vague and general in nature, and in fact, if understood literally, nothing can be derived from them. It is necessary to know the comprehensive case-law and decision-making prac‐ tice in this area. However, doubts arise as to whether, given the quasicriminal nature of the antitrust rules, the liability of the entities should not be explicitly enshrined in legislation instead of being interpreted by the CJEU. This may violate the requirement that prohibited practices should be clearly defined by law (nullum crimen sine lege). As for the most effective tools to regulate the financial market, one of the business representatives said that interference in the ownership struc‐ ture serves no purpose at all. It is circumvented by means of increasingly complex legal structures. Moreover, penalties no longer have the intended effect, being only a one-off disciplinary measure. The market, on the other hand, is very sensitive to reputational risk. Business representatives indi‐ cate that they prefer “either/or” rules to general rules, especially if they are secured by a sanction. The financial market is highly flexible and volatile. That is why one of the respondents (a representative of an authority) indi‐ cated that "we try to catch and describe the reality by means of some legal standards, but in fact our responses are a few steps behind". Hence the proposal to use "soft" means of influence, for instance education, to a greater extent. Chapter 3: Methods and tools of regulating markets from a praxeological perspective 93 One of the respondents believes that interference in the ownership structure is a good solution as it allows sorting out certain issues, although some people find it troublesome. Representatives of the Financial Supervi‐ sion Authority also believe that in extreme situations sufficiently high penalties have a preventive and deterrent function. They also point out that the effectiveness of the tool used can be demonstrated if it is possible to actually punish the person directly responsible for a given infringement in a dissuasive manner. In addition, it is important that sanctioning proce‐ dures are implemented faster. Mediation is considered a good measure, but not with respect to penalties. The method of imposing penalties should be based on two pillars: the time that elapsed between the detection and im‐ position, and the inevitability of the penalty. The representatives of the au‐ thority in question indicated that they try to apply measures starting from the least onerous ones. Punishing someone is called a failure of the author‐ ity. Therefore, among the representatives of the administration, there is no feeling that punishment is the best disciplinary measure. One of the respondents indicated that it is best when regulators can lim‐ it themselves to monitoring the market and intervening when the provi‐ sions of the law are not respected. First of all, they should, in an open way, enter into such a relationship with the entrepreneur that would enable ex ante prevention of certain phenomena that could later contribute to punish‐ ing the business entity. They should also issue rulings which would pre‐ vent certain practices. Decisions, on the other hand, are in their view a so‐ lution that has a certain element of a dispute. The regulator, however, should obviously be able to issue various decisions and take actions aimed at inducing entrepreneurs to cooperate when, despite statutory regulations, they do not cooperate of their own free will. The respondents unanimously indicate that the forms of action, whatever they may be, must be provided for by law. In other words, the regulator should only use the tools that are granted by law. As far as regulatory tools are concerned, one of the respondents recom‐ mended the creation of a progressive financial collateral, depending on the revenues generated by the regulated entities. The purpose of this instru‐ ment would be to secure the losses of the State Treasury in the event of activities inconsistent with the rules of operation in the energy market. In the opinion of another respondent, the most effective methodology of the regulator may be the so-called "qualitative regulation" that calls for defin‐ ing good indicators and adapting them on an ongoing basis in order to achieve regulatory objectives, for instance in the form of increasing the ef‐ Tomasz Klemt 94 ficiency of a given entity’s actions. The achievement of the assumed ob‐ jectives would result in obtaining specific benefits for the supervised enti‐ ty, and their absence – in negative supervisory consequences. This is a more effective approach, but at the same time it is also much more diffi‐ cult to regulate as it requires providing a definition of good indicators for the legal standards created. Another respondent pointed out the inefficiency of the tarification pro‐ cess of heating companies, resulting from two factors. The first one is the poor wording of the regulation, which in itself causes a lengthy tariff ap‐ proval procedure (up to eight months). The second factor is a change in the methodology of the Energy Regulatory Office President's approach fo‐ cusing on the consumer, while the interests of all market players should be balanced. Another survey participant pointed to the effectiveness of nonlegal market impact tools in the form of financial (especially EU) funds and ownership policy. Conclusions So far, practical experience has been the main source of general knowl‐ edge about the efficiency of human activities. Gathering observations on the experience of successful and unsuccessful actions will certainly remain an important element of the regulators' activities. Nevertheless, the adop‐ tion of a praxeological perspective presented in this chapter has allowed for looking at the regulatory process in a more systematic way that is em‐ bedded in the theory describing efficient operation in general. Neverthe‐ less, as a science characterised by the transition from the stage of qualita‐ tive to quantitative treatment of events, as well as the transition from the inductive method to the deductive method in justifying general statements, praxeology facilitates redefining the model of regulatory actions. Following the demand of praxeological practical verification of the ac‐ tions taken, empirical research was carried out to complement the doctri‐ nal and dogmatic analysis presented in this chapter. It answered the question about the importance of soft law in regulatory practice and the scope of preferred regulatory tools in relation to the freedom of establish‐ ment. In this respect, the threat of arbitrariness of the authority's actions and law instability is significant. It is therefore important that the authority explains its decisions comprehensively to a wide range of market players and that the process itself is transparent and impartial. Chapter 3: Methods and tools of regulating markets from a praxeological perspective 95 Efficient regulation should be effective and economical at the same time. As regards the effectiveness of regulatory tools, a certain consensus is emerging on how they should be shaped. It is necessary to make the onerousness of a measure dependent on the revenue derived by the regu‐ lated entities from a breach of existing regulation. At the same time, this is an incentive for individuals to pursue their rights in the courts, as a result of which the general standards established at EU level are being clarified. Effective regulation must also ensure swift action. There is a consensus that soft measures should be used first, while hard measures, in particular in the form of financial penalties, should be treated as the last resort. This results in an increased role of soft law in the activities of market regulators, which is affirmed by almost all the respondents. The current state of development of markets in many EU countries, including Poland, justifies the development of instruments within this method and their wide use. These include, among others, communications, guidelines, recom‐ mendations, positions, and educational and information activities (which can be used together with non-legal financial and ownership tools). They allow for achieving regulatory efficiency (in terms of goals that should be clearly and visibly defined and communicated) with a minimum level of interference in economic freedom, implementing the praxeological call for economising on regulations, which determines their efficiency. At the same time, they can provide flexibility with respect to taking account of market and country specificities. Soft measures can contribute positively to achieving legal certainty and thus the respect for entrepreneurs’ econo‐ mic freedom. Irrespective of any subsequent judicial review, they may also reduce the risk of irregularities at an early stage of the regulated enti‐ ty's activity. However, they must not be too vague and general in nature as there are examples where nothing can be derived from such measures if they are interpreted literally. The implementation of regulatory actions also requires taking into ac‐ count an appropriate methodology for the creation of soft law regulations. The growing importance of this type of measures requires considering the voice of market players who are willing to engage in such projects if their opinion is taken into account. It is proposed to create standards for the functioning of regulated markets by way of "soft" influence of an authori‐ ty whose role may be to provide advice, expertise and approval concern‐ ing the resulting standards (in particular in situations where there are enti‐ ties with opposing interests). The creation and communication of 'soft' measures requires increased contacts between authorities and market oper‐ Tomasz Klemt 96 ators. This is of paramount importance when the new regulation comes in‐ to force and there is a considerable lack of knowledge on how to interpret and apply the emerging obligations correctly. This particularly affects smaller-scale entities, which cannot afford professional legal advice in this area. Unfortunately, it is often the case that the body itself has yet to learn the new regulation. As a result, a wide use of information and educational measures should be called for. The crucial importance of the stage of verifying the results of the regu‐ latory actions taken cannot be overlooked. This is because the praxeologi‐ cal approach requires checking whether what has been done has been done well. At the same time, the results of the control process should be a pre‐ requisite for further regulatory action. At present, however, there is a sig‐ nificant shortage of such measures, which is a major limitation of the Bet‐ ter Regulation methodology. However, the results of the research conduct‐ ed indicate that market players are strongly interested in engaging in the regulatory process. 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The regulation of various markets has increased significantly in recent years. Although the lack of appropriate regulation can be very dangerous, it is nevertheless important to avoid overregulation in order to not jeopardise economic freedom as the basis of the socio-economic system in the Western world. This comparative study covers competition law as well as sectoral regulations of the telecommunications, energy and financial markets, and aims to examine common principles against which the actions of different regulators can be assessed. The authors’ second step is to establish common standards for the assessment of regulatory intervention in economic freedom. This book will be of importance not only to private sector practitioners, but also to regulators in EU Member States and national and EU legislators, and already takes into account the implementation of increased regulation in the coronavirus crisis. With contributions by Robert Grzeszczak, Dawid Sześciło, Artur Szmigielski, Tomasz Klemt, Michał Dorociak, Maciej Sokołowski, Michalina Szpyrka, Paweł Wajda


Die Regulierung verschiedener Märkte hat in den letzten Jahren deutlich zugenommen. Obwohl das Fehlen geeigneter Vorschriften sehr gefährlich sein kann, ist es dennoch wichtig, eine Überregulierung zu vermeiden, um die wirtschaftliche Freiheit als Grundlage des sozioökonomischen Systems in der westlichen Welt nicht zu gefährden. Die vergleichende Untersuchung deckt das Wettbewerbsrecht sowie die sektoralen Vorschriften des Telekommunikations-, Energie- und Finanzmarktes ab und dient dem Ziel der Überprüfung gemeinsamer Grundsätze, anhand derer die Maßnahmen verschiedener Regulierungsbehörden bewertet werden können. Der zweite Schritt ist die Festlegung gemeinsamer Standards für die Bewertung der Eingriffe von Regulierungsbehörden in die wirtschaftliche Freiheit. Das Buch ist nicht nur für Praktiker des Privatsektors von Bedeutung, sondern auch für Regulierungsbehörden der EU-Mitgliedstaaten sowie für nationale und EU-Gesetzgeber und berücksichtigt bereits die verstärkte Regulierung in der Corona-Krise. Mit Beiträgen von Robert Grzeszczak, Dawid Sześciło, Artur Szmigielski, Tomasz Klemt, Michał Dorociak, Maciej Sokołowski, Michalina Szpyrka, Paweł Wajda