Memorandum submitted by the Trades Union
Congress
THEMES AND
TRENDS IN
REGULATORY REFORM
1. INTRODUCTION
1.1 The TUC represents 59 affiliated
unions with a total of nearly 6.5 million members. Members
of TUC affiliated unions are employed in a wide variety of industries,
sectors and occupations. The TUC welcomes the commitment of the
Government to better regulation. Trade unions are essentially
organisations that regulate relations between employees and employers,
largely on a voluntary basis. We believe that while it is essential
to have in place a floor of statutory employment protection measures,
as far as possible statutory regulation should be kept out of
employment relations.
1.2 The TUC welcomes the opportunity to
submit evidence to this inquiry. Our submission focuses on the
workplace, as that is where we operate. Nonetheless our members
are also consumers, tax payers and users of the NHS and local
authority services, so we have a general interest in how regulation
is applied, how it evolves and why it is there. We have been represented
on the Government's former Better Regulation Commission and are
represented on the Risk and Regulation Advisory Council. We engage
regularly with the Better Regulation Executive.
1.3 The TUC believes that the debate about
employment regulation should take into account the positive advantages
of employment rights. Employment rights help labour markets to
operate more effectively by creating security, reducing poverty,
inequality and social exclusion, and promoting the long-term trust
relationships that are essential if the UK is to succeed in internationally
competitive markets.
1.4 In this submission we respond in turn
to each of the points put to us in the letter of invitation from
the Committee's Inquiry Manager.
2. CURRENT DEVELOPMENTS
2.1 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?
2.2 It is plain that regulatory reform will
be one element of the new global financial settlement. This is
as good as certain when even Alan Greenspan can say, in February
2009:
"I still believe that self regulation is
an essential tool for market effectiveness—a first line
of defense. But, it is clear that the levels of complexity to
which market practitioners, at the height of their euphoria, carried
risk management techniques and risk-product design were too much
for even the most sophisticated market players to handle properly
and prudently. Accordingly, I see no alternative to a set of heightened
federal regulatory rules for banks and other financial institutions."
(Alan Greenspan, speech to the Economic Club of New York, 17 February
2009, downloaded from http://online.wsj.com/public/resources/documents/EconClub.PDF
on 23 February 2009.)
2.3 At this stage, we are still fighting
the recession day-by-day, and there has not been enough time to
design the policies that will be needed in the coming decades
to guard against financial instability setting off another recession.
Nonetheless, it is already possible, in a broad-brush fashion,
to identify some of the likely features of the new settlement:
— Much more attention being paid to off-balance
sheet risks,
— Tougher rules on disclosure/more transparency,
and
— Regulations to deal with rating agencies'
conflicts of interests.
2.4 In whatever way we choose to respond,
de-regulation seems unlikely to be the keynote. There is a very
strong chance that we are at a turning point, when revulsion at
the effects of banking de-regulation will lead to general acceptance
of a shift in the balance between regulation and flexibility.
2.5 That is in the future. Today the debate
is still conditioned by the assumptions of the past. Every day
the Government faces calls to freeze the national minimum wage
or delay the introduction of new maternity and equality rights
or the agency workers' directive, all justified because they will
save jobs.
2.6 In fact, employment standards and employment
levels are not linked in any simple way. If we look at what has
happened to employment rates since the last recession we get the
following picture:
LFS data, men and women of working age, seasonally
adjusted
2.7 The National Minimum Wage Act 1998,
the 1998 Employment Rights Act (which introduced the rights
to paid leave, to lunch breaks and to union recognition) and the
1999 Employment Relations Act (which introduced enhanced
maternity leave rights, new rights for part-time workers and new
rules on union regulation) did nothing to impair the UK's strong
employment performance. The employment rate has, remarkably, remained
between 74% and 75% since the second half of 1999.
2.8 The Employment Act 1990 (which
outlawed secondary action and made it easier for employers to
dismiss striking workers) and the Trade Union and Labour Relations
Act 1992 (which abolished the Wages Councils) did nothing
to stop the collapse of employment.
2.9 A supporter of these Acts will argue
that this pattern of employment is caused by the business cycle,
not the legislation. And they will be right—by far the most
important determinant of employment is the level of demand in
the economy. And, by the same measure, weakening workers' employment
rights will do nothing to save jobs.
2.10 Indeed, in the case of the 850 temporary
workers at Oxford, dismissed by BMW Mini in February, early implementation
of the agency workers directive might have saved their jobs. Across
the country, workers employed by multi-national companies fear
that the fact that it is easier to make staff redundant in the
UK will leave them exposed to a higher risk of unemployment than
their opposite numbers on the Continent.
2.11 International comparisons send the
same message. A 1999 OECD review of the evidence on the effect
of employment protection legislation (EPL) on employment found
that "EPL strictness has little or no effect on overall employment".
EPL was broken down into different dimensions, including the regulation
of regular employment, temporary employment and collective dismissals.
None of these aspects of employment regulation "indicate
a significant impact on unemployment," the report concluded.
(Employment Outlook, OECD, June 1999, chapter 2.)
2.12 A later US study, using data for 20 countries,
found that "there is no simple bivariate relationship between
standard measures of labor market institutions and unemployment
rates across countries." (Labor Market Institutions and
Unemployment, Dean Baker, Andrew Glyn, David Howell &
John Schmitt, Center for Economic Policy Analysis, 2002, Working
Paper 2002-17.)
2.13 How does the Government balance the need
for an effective regulatory framework—providing the necessary
benefits and protections—with the commitment to improve
the conditions for business success?
2.14 The TUC is very pleased that the Committee
has recognised that a balance has to be struck. Some reports and
briefings only discuss regulations with regard to economic or
business efficiency—but this approach makes it harder to
justify any regulation. Work safety, employment protection, environmental
health and other regulations were created because these are valuable
ends in themselves and excluding the benefits of regulation is
unbalanced. As Robert Solow commented in his Keynes lecture:
2.15 "Every one of these regulations
or restrictions was intended to promote a desirable social purpose.
Some may do so ineffectively or inefficiently. That is worth knowing;
but the fact remains that wholesale elimination of these 'rigidities'
is neither desirable nor feasible." (R Solow, "What
is Labour-Market Flexibility? What is it Good For?", Proceedings
of the British Academy, December 1998, p 200.)
2.16 It is also important to recognise that
a well-designed regulatory framework can create business advantages.
The minimum wage, for instance, has led to an increase in productivity
for many firms; many firms have responded to the need to spend
more on their wage bill by investing in training and IT, and the
Low Pay Commission has noted an improvement in recruitment, retention
and motivation in the low paying sectors. (See for instance Building
on Success, 4th report, LPC, 2003, p 231.)
2.17 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?
2.18 Please see our response to the first
question. The TUC is currently developing policy on how regulation
in the finance sector could be improved. There is a consensus
now that the current light touch regime was an important factor
in the development of the crisis. TUC policy will focus on:
— Regulating the bundling together of different
financial products, either by prohibiting the sale of bundled
products unless each has been evaluated individually by the issuer,
or requiring considerably greater collateral for the sale of bundled
products;
— SIVs and other off-balance sheet vehicles
should be brought on balance sheet with the same capital and other
regulatory requirements as on-balance sheet investments and with
full transparency;
— Regulation should be consistent and tight
across the whole of the financial system including the shadow
banking system to ensure that the interests of beneficiaries,
consumers, investors and workers and the wider economic system
are protected effectively.
— To address the use of excessive leverage,
the Government must restrict the preferential tax treatment of
debt to investment in organic growth. It should not be available
for company acquisitions. Rules should be drawn up to restrict
tightly the use of leverage by financial institutions such as
banks.
— Credit rating agencies must be restructured
so that they are not dependent for their revenues on the organisations
whose products they are rating.
— Current incentive structures must be
fundamentally altered, so that remuneration packages encourage
prudent, long-term investment strategies from bankers, credit
agencies, institutional investors and also company directors.
Remuneration packages in the financial sector must be aligned
with long-term stability and the needs of the real economy. The
incentive proportion of pay should be cut back to no more than
10% of total remuneration. Golden handshakes and parachutes should
be banned. Incentive-related elements of pay should be linked
to a range of performance indicators, including social and environmental
performance and should be linked to long-term performance only.
— The role of mark-to-market pricing in
accounting systems and the regulatory system should be examined,
and alternative proposals put forward for debate.
— Short-selling should be prohibited or
tightly controlled.
— Trading on futures markets for commodities
should be restricted to those who have an interest linked to real
economy activity, namely, producers, traders and major consumers.
— New financial products should be examined
by regulators for their impact on the financial system and the
real economy before they are allowed to be traded.
— Mechanisms to facilitate investments
in the real economy through a straightforward, transparent and
single-purpose intermediary system should be developed as a matter
of urgency to allow investors to channel money to where it is
needed without taking on the risk of the current financial system.
— It is essential that an international
financial regulatory system is established to undertake regulatory
oversight of the international financial system.
— The interests of employees in the financial
sector must be protected, and a condition of Government assistance
for the banks should be that no compulsory redundancies are implemented.
— Appropriate banking models for the future,
including issues of size the separation of retail and investment
banking should be examined.
2.19 How could the Government improve its
capability to regulate in a proportionate and effective manner?
2.20 The TUC commends the report of the
former Better Regulation Commission, "Risk, Responsibility
and Regulation", which was published in September 2006. This
report made the important link between risk, responsibility and
regulation. In particular it recommended the establishment of
a Fast Assessment of Regulatory Options (FARO) panel to examine
calls for government intervention when incidents, accidents and
other issues were leading to a clamour for more regulation. This
panel would be independent and politically neutral. With some
tweaking to the remit set out in the BRC Report it would also
be able to continue with the work recently done by the short term
successor body to the BRC, the Risk and Regulation Advisory Council,
whose Chair is to give evidence to this Committee at a future
hearing.
2.21 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.
2.22 The BRE has been working in this area.
The TUC is by no means convinced that it is possible or desirable
to have on the statute book a package of regulatory measures for
improving the conditions of business success. The BRE has been
concerned about employment and other regulation imposing a "burden"
on business and the main thrust of initiatives to date have been
to reduce the amount of regulation as far as possible without
removing vital employee and public protection. The TUC is not
aware of any particular regulatory measures for improving conditions
for business success other than ensuring that regulation is fit
for purpose and that useful practical guidance is readily available.
Clearly the current economic crisis has shifted the focus onto
issues such as the availability of credit, particularly for small
business.
3. DESIGN OF
NEW REGULATIONS
3.1 Does the Government understand businesses
sufficiently to design effective regulations? Is sufficient emphasis
given to small businesses and competition issues?
3.2 This question presupposes that the design
of regulation is only important in as much as it affects small
businesses. Whilst they are an important constituency there is
a far wider regulated constituency—indeed society as a whole
is regulated, as is much of how we live our lives. Assuming that
the Committee is on this occasion only interested in the design
of regulation in terms of how it affects small business we make
the following points in that context.
3.3 The range of regulation affecting business
is, of course, far wider than employment and health and safety
legislation. Business is also affected by financial regulation,
taxation, planning regulation, environmental regulation and whatever
regulation applies to what it is that they are making, selling,
or providing, eg, food safety regulation. The TUC understands
that the impact on small businesses should be one of the assessments
made before introducing or amending regulation but that consideration
should not take precedence over the prime consideration, which
must be to ensure that the intended protection is provided effectively.
Good regulation is regulation that has a clear objective and is
as easy as possible to comply with and to enforce. We commend
bodies such as the HSE that keep regulation under review and provide
clear and helpful guidance on it. In many cases it is not the
regulation that is a problem but the "risk actors",
such as insurance brokers, "consultants" and lawyers
who make their living out of exaggerating and complicating the
compliance measures needed. We have supported the work being done
by the Risk and Regulation Advisory Council on health and safety
and small organisations, which has explored in some depth the
issues that cause problems and has encouraged the main players
to work together to improve risk assessment and compliance.
3.4 The Government appears to us to think
of small businesses before many other important constituencies
when it comes to regulating. Our concern is that the Government
thinks of the impact on small businesses without paying sufficient
attention to the benefits of having the regulation. It of course
easier to measure the administrative burden that to quantify the
benefits but that is not an argument for not measuring the benefits.
The TUC welcomes the recent initiative by the BRE to improve the
measurement of benefits. The objections of small businesses to
regulation is often based on a disliking of the substance as much
as a disliking of the process of applying the regulations. If
the Government did more to explain the benefits to small businesses
it might make regulation more palatable to them. The TUC wants
to see businesses flourish but believes that good and clearly
explained regulation can actually help them to grow and prosper.
3.5 Is there sufficient consideration of how
regulations will be implemented, including an appropriate focus
on compliance and enforcement issues?
3.6 The expertise of the TUC is in employment
and health and safety regulation. The Government has done a great
deal to protect workers by improving the regulation of the employment
relationship and by introducing important new basic rights. However,
the existing system, which is now based primarily on individual
rights, has serious weaknesses, and is often not enforced, or
only enforced as far as each individual complainant is concerned.
3.7 The decline in collective bargaining,
which is a very effective means of regulating the employment relationship,
has contributed to the creation of a system which relies on individual
workers to instigate litigation. This has two particular consequences:
it does not address systemic workplace problems and it often relies
entirely on an individual worker being prepared to take their
employer to court. The current mass litigation on equal pay is
a good example of the painstakingly slow application of legislation
in an attempt to change workplace systems that fundamentally fail
to reflect the original purpose of the law.
3.8 The TUC is currently considering what
changes are needed to help to ensure that workers' rights are
not violated and that there are higher levels of compliance with
employment legislation. At the same time, we acknowledge that
the majority of employers treat their workers well and abide by
the law. The solution may be to set up a system that recognises
that where there is effective voluntary regulation, often through
an agreement with a recognised union, a different approach could
be used, whereas for the employers who wilfully ignore the law,
or don't bother to understand and apply it, a more interventionist
and proactive system is needed.
3.9 We support the case for better regulation,
though we reject the argument that employment legislation is a
"burden on business". In the 2004 Budget, the then
Chancellor asked Philip Hampton to conduct a review of regulatory
inspection and enforcement. The focus of the review was whether
there was the scope for reducing administrative burdens by promoting
more efficient approaches to regulatory inspection and enforcement,
without compromising regulatory standards or outcomes. The TUC,
in general, welcomed the approach adopted in the final report
published in 2005, which sought to draw a distinction between
the "policy costs" of regulation and the "administrative
costs".
3.10 Employers have to accept responsibility
for treating their employees fairly; the Government has to accept
their responsibility for devising regulation that is fit for purpose,
clear, and user friendly for both employees and employers. Unfortunately,
the endless squeals of pain from "burdened" employers
is too often a proxy for not really accepting that working people
should and do have basic rights, for example, to take paid time
off when they have a baby and return to their job afterwards.
Employers do not live in a money making bubble—they are
part of society, they benefit from all the systems that support
their infrastructure, including the well being of their workforce,
and they should be prepared to accept a share of the social responsibility
that this entails. Good employers do all this and flourish. Bad
ones don't and then blame red tape or the "litigation culture"
when they are eventually caught out.
3.11 The Government also has a clear duty
to ensure that its legislation is properly enforced. There is
a growing consensus that the current enforcement system is not
working well. Poor enforcement allows "cowboy employers"
to undercut responsible employers. It also enables "rogue"
employers to pass on some of their costs to the taxpayer in general
through increased spending on benefits, the NHS and other public
services.
3.12 While the majority of the workforce
continue to be employed in standard employment relations, since
the 1990s there has been a growth in casualised forms of employment,
including agency work and freelancing. Such workers often benefit
from limited employment protection and are reluctant to complain
about mistreatment for fear of the employment consequences. Using
LFS statistics, the TUC estimates that at least 170,000 workers
still do not received the National Minimum Wage in full. According
to the Labour Force Survey more than a million people do not get
their legal minimum of four weeks paid holiday, including bank
holidays. Recent case studies gathered by the TUC's Commission
on Vulnerable Employees have uncovered a range of unlawful practices
by employers, including employers and employment agencies employing
people cash in hand below the minimum wage, taking unreasonable
deductions from workers on the minimum wage to pay for accommodation',
making illegal deductions from individuals on the minimum wage
for transport, food and utility bills, so that in some cases workers
end up paying for the privilege of working for their employer
and refusing pregnant employees paid time off for ante natal care.
3.13 To deal with those employers who do
not comply with the law the TUC has a number of proposals for
improvement in enforcement. The existing enforcement agencies
must be better resourced to ensure workers' rights are not violated
and that employers comply with their legal duties. They need to
be accessible to workers and their representatives and to increase
awareness amongst employers of their legal duties. They need increased
capacity to undertake proactive and preventive enforcement activities,
in addition to responding to complaints by individuals or their
representatives.
3.14 In addition, there is a need for greater
co-ordination between existing enforcement agencies based on better
targeted and shared intelligence. Enforcement agencies must be
equipped with a toolkit of effective sanctions which act as a
deterrent against, and appropriately penalise, unlawful activities.
3.15 As the Employment Tribunals will still
have a major role in handling individual rights breaches we are
anxious to improve the operation of the Employment Tribunal system
in two vital respects. Firstly, Employment Tribunals should have
power to enforce their own awards rather than applicants having
to rely on the County Courts. Enforcement of awards via the tribunal
system would be less intimidating, swifter and less expensive
for claimants.
3.16 Secondly, enforcement through Employment
Tribunals is dependent upon claims by individual workers. Many
individuals are reluctant to take such steps, for fear of victimisation
or dismissal. There is also no provision for unions to bring representative
actions on behalf of groups of workers, even in equal pay cases
which clearly have a collective dimension. New procedures should
be developed to permit unions to bring representative actions
in multiple claimant cases to employment tribunals. We welcome
the interest shown in this proposal by the Government and the
support given by the Equality and Human Rights Commission.
3.17 Finally, we acknowledge that there
are plenty of good employers around who very rarely end up being
reported to the enforcement agencies or in an Employment Tribunal,
so consideration needs to be given to other means of regulating
employment practices. For a start the government should harness
and enhance the role of trade unions in enforcing employment rights
and promoting safe and healthy working environments. It is of
great regret to the TUC that the Government has rarely loudly
championed the role of unions in working with employers to deliver
safe, compliant and productive workplaces. One example is the
consistent refusal to reinstate the former duty of ACAS to promote
collective bargaining. Nobody is suggesting that union recognition
should be forced on employers and employees who genuinely don't
want it but as a means of delivering better standards it should
be on offer as a positive route to better delivery of employment
relations. It has been instructive recently to see public support
for union rights for groups such as the police. In a democratic
society people understand the need for democracy in the workplace
too.
CONCLUSION
4.1 The TUC is grateful for the opportunity
to submit evidence and looks forward to meeting the Committee
on 29 March.
March 2009
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