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"Themes and Trends in Regulatory Reform" 1.1 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.
2.1 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, 17-2-09, 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
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
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, Dec 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, p231.)
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 ten per cent 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. 3.1 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 29th March.
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