British Chambers of Commerce evidence to the Regulatory Reform Committee inquiry: The Better Regulation Executive and the Impact of the Better Regulation Agenda

 

March 2008

 

 

1. The British Chambers of Commerce welcomes the opportunity to submit evidence to the Regulatory Reform Committee's Inquiry: Getting Results. The Better Regulation Executive and the Impact of the Better Regulation Agenda.

 

2. The British Chambers of Commerce is the national voice of local businesses, acting on behalf of a network of Accredited Chambers of Commerce across the UK.

 

3. Representing over 100,000 businesses and 5 million employees, Chambers of Commerce are the Ultimate Business Network. Lying at the heart of their local community, Chambers serve all businesses with a passion no-one else can match.

 

 

Introduction

 

4. British business is still feeling the pressure of an ever increasing regulatory burden. Survey data collected by the polling firm Populus on behalf of the British Chambers of Commerce showed that regulation remained the number one concern for businesses ahead of education and skills and the UK's tax burden. Our 2008 Burdens Barometer figure has risen to nearly 66 billion, which is the cumulative cost of new regulation to business since 1998. This has increased from 10 billion in 2001 when we first compiled it.

 

5. If we are serious about creating the conditions for businesses to be successful in the UK then reducing this burden has to be a priority for the Government and opposition parties, because while it continues to rise the competitiveness of the UK will suffer.

 

6. In this year's Barometer there are three regulations, which actually produce an annual saving for business. For example, the Fire Regulatory Reform Order (regulation 77 in our Barometer), has provided a saving to business of 67 million. The impact of this saving was to cut the cumulative total by one tenth of one per cent. This serves to underline the scale of the challenge that government faces and therefore the urgent need for action. If the 10.4 billion cost of regulation that now falls on business annually is to be reduced, then many more deregulatory measures will be necessary.

7. Unfortunately despite two Acts of Parliament designed to make this possible: the Regulatory Reform Act (2001) and the Legislative and Regulatory Reform Act (2006), the increase in regulation surges on.

 

8. Small to medium-sized enterprises (SMEs) are the backbone of the UK economy constituting 99.9% of all private enterprises in the UK. It is also smaller enterprises that are disproportionately affected by regulation.

 

9. The economics of small business is not well understood by civil servants[1]. The British Chambers of Commerce's annual Impact Assessment audit will be published on the 31st March 2008 and this will show that in 2006/7 only 1% of (R)IAs quantified the additional costs of regulation for small firms and 64% claimed no additional burden for them.

 

10. Some of the reasons why small firms incur higher policy costs of regulation, as well as higher administrative costs are as follows:

a. There are fixed costs associated with most regulatory change e.g. searching for and assessing the appropriateness of new equipment to comply with a regulation (such as the 'Work at Height' rules). Small businesses have fewer economies of scale over which to spread these costs.

b. For similar reasons, new equipment and assets tend to be more expensive for small operators per unit of output. Small firms also tend to have to acquire multi-purpose equipment as they have to compete on the basis of flexibility and service.

c. Small firms incur higher costs of capital than larger businesses. Thus all forms of investment expenditure are more expensive for smaller firms.

d. Small firms do not have in-house regulatory expertise such as a health and safety officer. Consequently new regulations require the attention of the owners to understand and make decisions about the appropriate response. Thus regulatory change constrains or exhausts the supply of general management talent more quickly in small firms than in larger businesses.

e. If the owners feel unable to cope with the additional volume or complexity of regulatory work they will have to recruit external advisers, often consultants, who will probably be relatively expensive. Consultants may also exhibit a tendency to advise clients to over-comply, at the margin, in order to reduce the professional indemnity risks that consultants face.

f. Small firms' profits are smaller and more volatile than large firms, small businesses are therefore less likely to be able to offset the costs of regulation against tax. Even in years when the costs can be used to reduce tax charges, the applicable tax rate will tend to be lower than for large firms. Thus small business owners incur a higher proportion of the net costs of regulation than do larger companies.

 

11. Embedding within government departments an understanding of the disproportionate impact of regulation on small firms is an important step towards creating the economic conditions for businesses to thrive and grow.

 

 

The BRE and the impact of the regulatory reform agenda.

12. The BRE is absolutely key to the successful delivery of regulatory reform. It is crucial that the better regulation agenda is driven from within Whitehall by an influential unit capable of holding departments to account and driving regulatory culture change and standards. However, it is our view that in order to do this the BRE must be pushed further towards the centre of regulatory activity within Whitehall and must be backed by strong political support. The BRE would consider its primary function to be that of an adviser to government departments on better regulation rather than policing the system. While we understand that the BRE must work with departments to achieve results, we are not convinced that they exert sufficient influence over the activity of departments. As evidence of this we would like to draw the Committee's attention to the publication of the Command Paper[2]. The publication of this document has been delayed year on year. The latest version was published on the 24th January 2008, this covered all (R)IAs up to the 30th June 2007. When we analysed this document it was clear that some 90 (25%) had not been captured by our own monitoring of departmental websites, a rigorous process necessary to produce our own annual publications: the Burdens Barometer and our (R)IA audit. The Command Paper only has to list what has already been published, being unable to do so for nearly seven months indicates that departments are still failing to take seriously the regulatory reform agenda. Since the BRE are tasked with compiling the paper, we can only conclude that their influence over departments' work and priorities needs to be stronger.

Assess the extent to which the BRE has developed a coherent strategy for implementing regulatory reform.

 

13. We would separate the work of the BRE into two broad categories: that which is aimed at reducing the stock and that which is aimed at tackling the flow of regulation. By stock we mean the existing legal framework and the total cost that is attached to it. By flow we are referring to the throughput of new regulation annually.

 

14. Progress on the former has been better than on the latter. For example, the implementation of Hampton has progressed well. Principles like 'risk-based enforcement' are becoming embedded in the thinking of regulators and initiatives like the retail enforcement pilot are starting to turn theory into practice. While the recognition of this from the business community may not be immediate we get the sense that over time we will see results.

 

15. On flow, the progress has been slow and there are three steps the BRE must take to address this. First of all, the UK needs a robust Impact Assessment process, which displays a better understanding of the economics of small business. Our research indicates that only 1% of Small Firms Impact Tests actually quantify the additional cost of regulation to small business and 64% claim no disproportionate impact for SMEs[3].

 

16. Second, better linkage is required between the EU and the UK Impact Assessment (IA) systems. 71% of our 2008 Burdens Barometer figure is EU sourced regulation. This could be reduced if member states were required to carry out IAs before the European Commission make their own assessment of costs. The benefit of this would be twofold: UK interest groups would be consulted on EU proposals much earlier in the policy making process well before any formal negotiations between member states begins and for the Commission there would be a ready supply of data on which to base their analysis.

 

17. Third, parliamentary scrutiny must be increased to stem the flow of regulation. More than 3000 Statutory Instruments go through Parliament every year[4]. Most of these are relatively insignificant, which masks the minority which impose heavy burdens on business. These minor administrative orders need to be filtered out to focus Parliament on those regulations, which impose significant costs.

 

18. Where the Government has really failed to make progress has been in making a strong case for better regulation at the citizen or individual level. While better regulation is absolutely vital for business success there must be a buy-in to the agenda from a wider audience than just the business community. It should be absolutely clear that better regulation is about making people's lives easier, freer and allowing business to create more jobs and wealth for the UK.

 

Whether the BRE works effectively with other areas of government to implement regulatory reform initiatives.

 

19. There are two measures of success: one is the degree to which they have influenced departmental simplification plans and the second is the extent to which they have influence over Impact Assessments. Success has been better on the former measure than the latter. Through direct involvement with the development of annual plans the British Chambers of Commerce is confident that the BRE has a positive influence on this process.

 

20. On Impact Assessments the evidence is that the BRE is reducing its scrutiny role and not increasing it, this was confirmed in their evidence session to this Committee. This is a serious concern and it is our view that the BRE's confidence in the (R)IA front sheet as a means of increasing accountability and improving analysis is misplaced. Whilst we believe that the introduction of a front sheet is extremely important we do not see it as an immediate solution to the poor quality of analysis that is endemic in the system. Our 2007 IA report highlighted the following:

 

a. 71% of (R)IAs assign benefits to business without quantifying them.

b. Less than 8% of those that carry out a small firms impact test identify additional costs to small firms.

c. Over half of UK RIAs do not explore the 'do nothing' option.

 

 

 

21. The front sheet will help drive culture change within departments, but this is a long term process. In the short term scrutiny by the BRE needs to be increased

 

 

If the approach to measuring and reporting on performance and outcomes is sufficiently robust and.

 

22. From the outset we have questioned the robustness of the Standard Cost Model and the extent to which it can be applied to a national level Administrative Burdens Exercise. The SCM, as adopted in the UK, has provided a very high level estimation of the total Administrative Burdens resulting from regulations on business. However, because of the small sample sizes that are part of the SCM design, it will not be possible to interpret the figures as equivalent to the true cost of administrative burdens to UK business. However, despite methodological flaws we recognise that this exercise has some value for our members.

 

23. We have significant concerns about the analysis of costs and benefits within Impact Assessments. We urge the committee to review the findings of our annual Impact Assessment which provides a detailed analysis. Our latest IA report will be published on the 31st March and will be available to download from our website www.britishchambers.org.uk. We will circulate copies to the Committee.

 

 

Whether the current approach to regulatory reform is delivering genuine results.

24. The Government's approach to regulatory reform is delivering limited results. The UK's regulatory burden continues to increase at an alarming rate and our members are faced with annual additional costs of more than 10 billion. As discussed in paragraph 14 there has been some progress on simplification and the implementation of Hampton, but not enough, as yet, to really make a substantial difference to businesses. There have been two acts of parliament to give ministers additional powers to deliver change. However, as a result of the first Act (2001-2005) the Government only issued 29 Regulatory Reform Orders and since the new 2006 Act only one Legislative Reform Order has been laid before the House: the Local Authorities Consent Requirements (Laid 25 July 2007). This compares with over 300 new regulations each year.

25. Despite expressed concern with the total volume of regulation, their pace of introduction, as measured by (R)IAs, has continued to increase. About 130 regulations per annum were generated in the first four years of this government. The number has increased progressively to about 350 in the year to the 30th June 2007. The cumulative burden on British business since 1998 is, according to the (R)IAs themselves, nearly 66bn., of which 71% arises from EU sourced regulation (73% last year). In terms of the number of regulations, the EU accounts for a smaller proportion only about 35%. The financial cost shown by the (R)IAs is only part of the burden; keeping track of changing legislation is a major burden in itself.

 

26. In paragraphs 15 to 17 above we have set out our recommendations to tackle the increasing flow of regulation.

 

 

 

 



[1] Chittenden F and Ambler T, 2007, Government Regulation and Small Firms: a role for the Comprehensive Spending Review?, in Talbot C and Baker M (eds), The Alternative Comprehensive Spending Review, Manchester University Press.

[2] The Command Paper lists all (R)IAs published over a six month period.

[3] Statistics are taken from the forthcoming British Chambers of Commerce study: The British Regulatory System, Tim Ambler, Francis Chittenden and Stefano Iancich.

[4] The Burden of Regulation: Who is watching out for us? Tim Ambler, Francis Chittenden and Deming Xiao, The British Chambers of Commerce, April 2007, p.9.