Memorandum submitted by PricewaterhouseCoopers
LLP
RESPONSE TO
REGULATORY REFORM
COMMITTEE INQUIRY:
THEMES AND
TRENDS IN
REGULATORY REFORM
SUMMARY
1. The global financial crisis has spurred
unprecedented levels of government intervention in business and
highlighted the importance of government's role in addressing
global and systemic risks. Government is no longer a bystander
but an active participant in business. Citizens, as taxpayers,
have become the new owners and guarantors (through loans) of large
swathes of the financial services sector and are now entering
other sectors for example automotive.
2. Today, the need for businesses and governments
to understand each other and work together in the teeth of a global
recession has become critical to citizens worldwide.
3. The burden of regulation is still seen
as one of the top issues of concern by CEOs internationally. In
the UK, despite attempts by Government to reduce regulatory burdens
the perception of the business community is that there has not
been any noticeable improvement. PwC's most recent Global CEO
Survey indicates that the UK is performing less well in this regard
than other developed nations.
4. Many UK businesses contend that the aggregate
cost of complying with all regulations is too high and increasingly,
putting UK firms at a competitive disadvantage. Business would
welcome a debate about the level of the aggregate cost of regulation
that is sustainable. This needs to be linked to an agreed mechanism
for measuring these costs and could inform an overall Regulatory
Budget. We see this as potentially benefitial for UK business
provided the intention is to deliver an overall reduction in regulatory
burdens.
5. We think that it makes sense, at least
in the short term, to draw a distinction between the financial
sector and the rest of the economy with regard to regulatory reform.
There is a growing consensus for a review of both regulation and
its enforcement in the financial sector. We welcome such a review
if it is done methodically, comprehensively and calmly, with an
understanding that regulation is not a panacea—it can never
prevent every possible instance of failure.
6. In the non-financial sector, largely
as a consequence of the difficulties caused by the credit crunch,
there is increasing pressure on businesses of all size to cut
costs in order to survive. Therefore, more than ever, there is
a responsibility on Government wherever possible, to simplify
and reduce both the policy and administrative costs associated
with regulation. Government has an important part to play both
in helping businesses survive the downturn and maintaining levels
of compliance.
7. The business community would welcome
greater coherence and simplification in the regulatory environment.
It is important that all "regulatory" requirements,
whether statutory or not, should be part of an overall approach
rather than a fragmented approach, for example banks are subject
to a variety of regulations from a number of different sources.
It is very important that regulatory action is only brought after
rigorous up front assessment of regulatory costs. Regulation should
only be made on a benefit over cost basis.
8. We consider that it is imperative for
the Government to ensure that regulatory action in the UK is transparent
and robust, fully financially assessed with benefits for action
clearly identified and articulated. It is only by doing this that
UK business will have confidence in the need for regulatory action,
when taken.
RESPONSE TO
REGULATORY REFORM
COMMITTEE INQUIRY:
THEMES AND
TRENDS IN
REGULATORY REFORM
Introduction
9. We welcome the opportunity of responding
to the Regulatory Reform Committee Inquiry: Themes and Trends
in Regulatory Reform.
10. Before addressing the specific questions
asked, we would like to make some general comments on the economic
environment and on regulatory reform.
Economic environment
11. The environment within which governments
interact with business has undergone a seismic shift during the
last year. Around the world government and business leaders were
caught unprepared for a global financial crisis which has evolved
into worldwide economic deceleration. Business confidence has
fallen off a cliff and as a result, public authorities have been
taken into uncharted territory.
12. The global financial crisis has spurred
unprecedented levels of government intervention in business and
highlighted the importance of government's role in addressing
global and systemic risks. Government is no longer a bystander
but an active participant in business. Citizens, as taxpayers,
have become the new owners and guarantors (through loans) of large
swathes of the financial services sector and are now entering
other sectors for example automotive.
13. Today, the need for businesses and governments
to understand each other and work together in the teeth of a global
recession has become critical to citizens worldwide.
Regulatory reform
14. For over a decade, PricewaterhouseCoopers'
(PwC's) Annual Global CEO Survey (http://www.pwc.com/ceosurvey/)
has provided an authoritative barometer of CEOs' views of the
most pressing issues facing them. The recently released 12th Survey
finds that CEOs' generally want governments to take the lead by
creating institutions, policies and mechanisms for collaboration
that are appropriate for global flows of capital, knowledge, labour,
goods, services and information. The survey also indicates that
the burden of regulation is still one of the top issues of concern
internationally.
15. The UK business community welcomed the
Government's target of reducing the administrative burden of regulation
by 25%. However, despite the efforts of departments and agencies
to reduce burdens, the perception of the business community is
that there has not been any noticeable improvement. Evidence from
our latest Global CEO Survey indicates that the UK is performing
relatively worse than other developed nations in reducing regulatory
burdens.
16. UK businesses are not of the view that
regulation per se is a bad thing. All regulation is intended to
deliver benefits and some of these benefits help create and maintain
open, competitive markets, without which many businesses would
not survive. On the whole, business makes significant efforts
to comply with regulation. However, what many businesses do contend
is that the aggregate cost of complying with all regulation is
too high and increasingly, putting UK firms at a competitive disadvantage.
17. As identified in the recently published
National Audit Office report on the Administrative Burdens Reduction
Programme[107]
there is still concern by the majority of businesses as to the
burden of regulation with only 1% indicating that complying with
regulation had become less time consuming in 2007.[108]
The report also identifies that reported reductions in administrative
burdens should be treated with caution as a result of the measurement
methodology used by Government Departments.[109]
18. One of the difficulties surrounding
the debate on regulation is that there is no agreed measure or
authoritative benchmark of the aggregate cost of regulation
on business (comprising direct and indirect compliance costs,
not just administrative costs). For any budgetary system, using
a monetary amount as its basis, to be effective there must be
confidence in the accuracy of the information obtained.
19. Business would welcome a debate about
the level of aggregate costs of regulation that is sustainable
if UK businesses are to survive in the global economy. This debate
could help inform the setting of the overall regulatory budget
for UK government. We note the recent consultation on Regulatory
Budgets conducted by the Better Regulation Executive and re-iterate
one of the key points in our submission that this proposition
has many potential benefits for UK business, if the intention
is to deliver an overall decrease in regulatory burdens.
Response to your questions
20. In the following pages we turn to your
specific questions using the structure outlined in your invitation.
CURRENT DEVELOPMENTS
21. We think it is important to draw a distinction
between regulatory requirements and the supervision of those requirements.
There is a danger that collectively, authorities in different
jurisdictions will make the assumption that the current economic
difficulties have arisen because of a failure of regulation rather
than a failure in the supervision of existing regulation. Both
need to be reviewed.
22. As Lord Turner, Chairman of the Financial
Services Authority, recently said "we have to make sure
[regulation] is intelligent and focused on where the risks really
are".[110]
It is important that any proposed Governmental regulatory action
is carefully considered with a responsibility on Government to
reject any proposals that impose box ticking requirements that
result in disproportionate burdens on business. This is particularly
true as Government and Regulators consider what, if any, regulatory
action is required in response to the current economic difficulties.
QUESTION 1
What are the implications of recent economic developments
(for example, the economic downturn; credit crunch and problems
with the financial sector) for the design and delivery of the
regulatory reform agenda, including risk-based regulation?
23. We think that it makes sense, at least
in the short term, to draw a distinction between the financial
sector and the rest of the economy with regard to regulatory reform.
24. There is a growing consensus for a review
of both regulation and its enforcement in the financial sector.
We welcome such a review. Knee jerk reactions and the imposition
of hastily drafted regulation should be avoided. A proper assessment
of what contributed to the "credit crunch", what went
wrong and what needs to be addressed is key. This needs to be
done methodically, comprehensively and calmly, with an understanding
that regulation is not a panacea—it can never prevent every
possible instance of failure.
25. In the non-financial sector, largely
as a consequence of the difficulties caused by the credit crunch,
there is increasing pressure on businesses of all size to cut
costs in order to survive.
26. In this environment it is possible that
there could be a temptation to cut corners, potentially resulting
in reduced levels of compliance. Therefore, more than ever, there
is a responsibility on Government wherever possible, to simplify
and reduce both the policy and administrative cost associated
with regulation. Government has an important part to play both
in helping businesses survive the downturn and maintaining levels
of compliance.
QUESTION 2
How does Government balance the need for an effective
regulatory framework—providing the necessary benefits and
protections—with the commitment to improve conditions for
business success?
27. It is very important that regulatory
action is only brought after rigorous up front assessment of regulatory
costs. Regulation should only be made on a benefit over cost basis.
28. We note the various concerns around
the measurement of costs and benefits. Impact Assessments, for
example, are not conducted in a consistent or comparable way,
nor are they necessarily validated by business themselves. Engagement
with business is essential to produce an accurate and consistent
assessment of the costs of regulation. We recognise that only
those businesses affected by proposed regulatory action can properly
assess the financial cost of that action, for example, only audit
firms can accurately estimate the costs of changes in auditing
standards.
29. For there to be confidence in the process
there must be proper recognition of the time and cost commitment
that will be needed to collate and assess this information. We
believe the business community, through a body such as the CBI,
should be incentivised to produce accurate costing information.
One key way in which this might be achieved would be an agreement
that regulatory action would not be proceeded with in instances
where disproportionate cost had been identified. This is one option,
others might need to be considered; what is important is the production
of accurate, reliable information.
QUESTION 3
How might a proportionate and targeted response
to improving the regulatory framework in the wake of the financial
crisis be made. What lessons are there for the wide regulatory
reform agenda?
30. For specific suggestions related to
the banking industry, we refer you to the paper of 10 Feb
09 from the ICAEW Financial Services Faculty to Rt. Hon John
McFall MP, Chairman of the Treasury Committee—which identifies
ideas for enhancing confidence in bank reporting.
31. The general point is that professional
bodies may be well placed to advise Government and be able to
provide specific examples of proportionate and targeted regulatory
action. Government is not always best placed to develop regulatory
requirements and needs to engage broadly with business groups,
professional associations and regulators.
QUESTION 4
How could the Government improve its capability
to regulate in a proportionate and effective manner?
32. Co-operation and dialogue are increasingly
seen as the best way of ensuring alignment of aims and incentives
between business and government. One example of a collaborative
partnership, identified in our 11th Global CEO Survey, comes from
Australia. The Australian Taxation Office explicitly recognises
that involving business leaders more actively in the design of
policy improves compliance. This is because it creates a better
understanding of regulatory objectives and ensures that unintended
consequences are designed out of policy at an early stage by those
who have to implement it.
33. We suggest the creation of formal links
between Government, regulators and business groups to discuss
regulations during the early stages of development. This could
help ensure that appropriate and proportionate regulations are
created which have "buy in" from businesses directly
impacted and, that regulators have the ability to enforce them.
QUESTION 5
Whether there is a coherent package of regulatory
measures for improving the conditions for business success; and
how regulatory reform initiatives fit into wider government support.
34. In general, the business community would
welcome greater coherence and simplification in the regulatory
environment. It is important that all "regulatory" requirements,
whether statutory or not, should be part of an overall approach
rather than a fragmented approach, for example banks are subject
to a variety of regulations from a number of different sources.
35. Coherence is particularly important
for Small-Medium Enterprises who have to spend disproportionate
resources understanding and complying with regulation. It is worth
noting some of the findings of the recent Anderson Report which
identifies issues related to a lack of clarity around guidance
provided by government departments and agencies and how this adds
to the uncertainties in the business environment.
36. We would support measures to develop
an overall approach from Government to the regulatory environment.
DESIGN OF
NEW REGULATIONS
The European context
37. The role of the EU is increasingly important
as the majority of new regulation stems from European legislation
and there is little room for the UK Government to manoeuvre once
EU Directives have been enacted. That said, there is an important
role for the UK Government to guarantee that Europe has proper
policies in place to ensure that European legislation is brought
forward on a "benefit over cost" argument. In addition,
the UK should avoid any "gold plating" if at all possible.
QUESTION 6
Does Government understand business sufficiently
to design effective regulations? Is sufficient emphasis given
to small business and competition issues?
38. As previously noted there should be
a close relationship between Government and business in the development
of regulation. This was our position before the current economic
downturn and we believe this still holds true in the current climate.
39. With regard to small business, we think
that Government needs not only to engage with representative groups
during the design stage but also to seek direct input from business
likely to be impacted by regulation—including small businesses.
QUESTION 7
Is there sufficient consideration of how regulations
will be implemented, including an appropriate focus on compliance
and enforcement issues.
40. We stress the need to involve regulators
and enforcers in the design and development stages.
41. Whilst it is very important that regulatory
action is only brought after rigorous up front assessment of regulatory
costs, provision must also be made for ongoing periodic assessment
to reflect subsequent changes that may have occurred.
42. We also believe that each regulatory
action should be subject to the cost and benefit test after a
suitable period of time has elapsed, for example, a three year
period, and that any regulatory action that is subsequently identified
as disproportionate or as not achieving agreed policy objectives
should be removed.
CONCLUSION
43. In conclusion, we consider that it is
imperative for the Government to ensure that regulatory action
in the UK is transparent and robust, fully financially assessed
with benefits for action clearly identified and articulated. It
is only by doing this that UK business will have confidence in
the need for regulatory action, when taken.
March 2009
107 Link: http://www.nao.org.uk/publications/nao_reports/07-08/0708944.pdf Back
108
Paragraph 17, page 7, of NAO report. Back
109
Paragraph 10, page 6, of NAO report. Back
110
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4959789.ece Back
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