The limits of regulatory capture: explaining the UK payment protection insurance mis‐selling scandal

To what extent does regulatory agencies' failure to protect the public from harm result from undue industry influence? We argue that “regulatory capture” is invoked too easily to explain regulatory failure. To re‐examine the relationship between regulatory capture and regulatory failure, we use process‐tracing to study UK regulatory decision‐making about payment protection insurance (PPI), a product synonymous with one of the largest financial mis‐selling scandals of all time. We analyze the case through three different perspectives on regulatory decision‐making: regulatory capture, organizational reputation, and organizational blind spots. The findings show that only the combination of all three theoretical lenses enables us to make sense of the Financial Services Authority's approach to PPI. We advance regulatory failure theory by showing how different external pressures on regulators and internal organizational constraints interact to result in failure, thus providing a comprehensive framework for the study of regulatory failure that future studies can apply.