Memorandum from Tim Ambler and Francis Chittenden[1]

 

Evidence to the House of Commons Regulatory Reform Committee

 

 

 

We are pleased to respond to your invitation to submit evidence on the progress of regulatory reform. That has two components: improving the impact assessment process, notably to screen out unnecessary regulations, and secondly to repeal or simplify existing regulation. We have, as invited, provided brief answers to your specific questions as the second section of this paper but first we provide an overview because we considered the questions (a) do not really challenge overall performance and (b) ignore the massively important EU dimension.

Overview

Our evidence is based on seven years of examining UK, and latterly EU, Impact Assessments. Our next report is due out in April and the previous ones are noted below.[2] While both contribute to the network of laws with which UK businesses have to comply, we have found that the processes for creating and/or reforming regulations are very different from each other and also from the utopian claims made, by both EU and UK executive, for their regulatory systems. What is claimed to be open and transparent is concealed behind a blizzard of paper and delay so that both EU and UK officials and ministers are, in practice, free to regulate with little regard for accountability.

 

In the last decade, regulation has become a major UK industry. Tens of thousands are employed not in business to grow GDP but, in effect, to reduce it. Regulation is frequently ineffective, notably in financial services where it may even have made the UK crisis worse.[3] The original purpose of Impact Assessments, namely challenging the need for regulation and the serious consideration of alternatives, has not been met. The National Audit Office has reached similar conclusions.[4]

 

The effectiveness of both the UK and the EU Impact Assessment systems are undermined by their lack of synchronisation. It is not enough to publish the first UK impact assessments for consultation or to send EU legislation to the EU Legislative Scrutiny Committee of the House of Commons, after the EU has finalised the regulations.

 

New regulation, as measured by IAs, declined in 2007/8 to 264 after three years which topped 300 per annum. About 130 regulations per annum were generated in the first four years of this government. In terms of the number of regulations, the EU accounted for only 18% and the reduction for the previous EU level of about one third is the primary reason for the overall decline in numbers in 2007/8. In terms of the financial burden on business, however, the EU is responsible for much the greater part. The financial cost shown by the IAs is only part of the burden; keeping track of changing legislation through the forest of legislative paper is a major burden in itself.

 

At the same time, some improvements are being lead by the BRE, such as two-page summaries of IAs and the IA Library. These are welcome and we acknowledge that regulation is not solely a financial or economic matter: social and environmental factors deserve consideration. We should also acknowledge that the World Bank considers that the UK is relatively lightly regulated compared to the EU as a whole. Our own figures broadly agree: the low cost of setting up a business in the UK is a key factor. At the same time, that is not an argument for abandoning any competitive advantage the UK may have.

 

The comparison of EU and UK impact assessments leads to a simple conclusion: the EU very rarely employs IAs, and even more rarely quantifies them but, when it does so, the system works very well. Conversely, the UK goes through the motions with all directives and regulations but so superficially that the system does not work.

 

It is curious, with hindsight, how much attention has been given to perfecting the UK domestic system, in theory, with so little regard to the EU which has been the source of the heaviest burdens on business. The UK strongly supports the EU in achieving the single market and a single market requires a single set of regulations. Every time Whitehall puts forward business regulation not required by EU law, we are not only burdening British business relative to the rest of the EU (and the world) but we are giving the lie to our own demands for a single market.

 

We will recommend that

1. no new business regulations, which are within EU competence, should be introduced by the UK government;

2. all existing UK business regulations not required by EU law are repealed en bloc;

3. EU business legislation which has not been through due process, i.e. had a proper IA procedure, be rejected by the UK Parliament. This recommendation would need to be examined by lawyers but we have been given to understand that Parliament does have that right. In any case, it would be embarrassing for Brussels to have to explain why they were not following their own procedures.

 

 

Brief answers to the specific questions

(Your questions in italics)

 

1. Current developments

*       what are the implications of recent economic developments (for example, the economic downturn; credit crunch and problems within the financial sector) for the design and delivery of the regulatory reform agenda, including risk-based regulation?

Regulations should be designed for the long term, good economic conditions as well as bad ones. We are not aware of any specific changes in regulatory thinking in relation to economic conditions, nor do we think there should be.

*       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?

 

The government appears not to join up their regulatory thinking with the need for improving the conditions for business. There is just a general unsupported claim that the former will lead to the latter whilst simultaneously recognising that regulation, beyond the minimum necessary for orderly markets, burdens business, competitiveness and is bad for GDP. The current business climate ought to reinforce the latter consideration. In the case of financial services, regulation has provided little or no protection and may have worsened the crisis. The problem is an excess of theoretical regulation leading to a lack of practical intervention, i.e. regulators are not doing their jobs because they are confused by the quantum of regulation. Regulation gives only the illusion of control if intervention is not effective. More regulation is unlikely to bring more than marginal benefit and may well confuse the situation further. For example, the Bank of England effectively regulated banks, albeit informally, before the introduction of the FSA, and the excessive number, in the view of some, of new regulations over the last 10 years. See Adam Smith Institute briefing paper: "The Financial Crisis: Is regulation cure or cause?"

*       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?

 

The main planks of the deregulation (reform) agenda are ineffective: admin burdens reduction, regulatory budgets and repeal/simplification. Some genuine wins have been achieved on admin burdens but it is largely cosmetic with the changes not recognised by business. Regulatory budgets appear to be on hold. Progress on repeal/simplification is glacial. The main lessons for the reform agenda are (1) that the importance of Brussels as the main regulator should be recognised and UK systems designed to deal with that instead of pretending the UK is totally independent; (2) that the IA process should be substantive and not merely box ticking (there is some evidence of early improvement in the UK, but none from Brussels); and (3) that a more radical approach should be taken to simplifying and/or repeal inherited regulation - see our main paper.

*       how could the Government improve its capability to regulate in a proportionate and effective manner?

See (2) above.

*       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.

 

Government interventions in business, however well intentioned, generally do more harm than good. Emergencies such as rescuing failing banks are indeed necessary but the strategy should be to avoid such things being required, i.e. by the regulators who are supposed to be maintaining orderly markets doing what they are paid to do. The general strategy should be to assist the EU moving to a genuine single market, with only the necessary EU regulations for that purpose, and otherwise (1) refraining from UK only business regulation[5] and (2) repealing all UK business regulation⁵ not required by EU law.


2. Design of new regulations

*       does Government understand businesses sufficiently to design
effective regulations?  Is sufficient emphasis given to small businesses and competition issues? 

In brief, no, no and no. The BRE guidelines require departmental IAs to give specific attention to SMEs but they rarely do so. Most Departments appear to have a poor understanding of the economics of small firms and as a consequence they do not appreciate why most business regulations create substantially higher costs for SMEs.

*       is there sufficient consideration of how regulations will be implemented, including an appropriate focus on compliance and enforcement issues?

 

We thought the Hampton Report[6] was very good and set out the compliance and enforcement issues well. We agree with covering those issues in a general way, as Hampton did, rather than separate consideration regulation by regulation.

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[1] Senior Fellow and Professor at London and Manchester Business Schools respectively.

 

[2] Tim Ambler, Francis Chittenden, and Stefano Iancich, The British Regulatory System, British Chambers of Commerce, March 2008.

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

Tim Ambler, Francis Chittenden and Kapil Ahuja, Regulators: Box Tickers or Burdens Busters? British Chambers of Commerce, April 2006

Tim Ambler, Francis Chittenden, and Chanyeon Hwang, Regulation: another form of taxation, British Chambers of Commerce, March 2005.

Tim Ambler, Francis Chittenden and Mikhail Obodovski, Are regulators raising their game? UK regulatory impact assessments in 2002/3, British Chambers of Commerce, March 2004.

Tim Ambler, Francis Chittenden and Monika Shamutkova, Do the regulators play by the rules? An audit of UK regulatory impact assessments, British Chambers of Commerce, January 2003.

 

[3] Tim Ambler, The Financial Crisis: Is regulation cause or cure? Adam Smith Institute, November 2008.

[4] National Audit Office, Evaluation of Regulatory Impact Assessments 2006-07, Report by the Comptroller and Auditor General, HC 606 Session 2006-2007, 11 July 2007.

 

[5] i.e. in an area with EU competence

[6] 16 March 2005, HM Treasury.