13 March 2020

Rules Britannia: are our regulations fit for purpose?

By Victoria Hewson

The Better Regulation Task Force. The Bonfire of the Quangos. A Red Tape Challenge.

Successive governments have acknowledged the burden of regulation in this country and tried to do something about it. But it seems, not to the extent of actually stopping passing more regulations or giving more powers and duties to existing regulators.

This week the Institute of Economic Affairs launched a Regulatory Affairs Programme to examine why this is, and whether the regulators and regulations that we have are doing a good job in correcting market failures and improving peoples’ lives. My first paper for the new programme, Rules Britannia, was also published this week. It goes back to first principles: what is regulation? Why do governments regulate? Do we know what it costs?

There is no settled definition of regulation; the concept is amorphous, and there is no clear boundary between regulation, law and policy. Broadly, regulations are rules that apply to specific sectors or activities, often made by ministers or lower rule-making bodies in order to implement laws passed by a legislature. This is in contrast with the idea of laws setting out binding requirements that apply to an entire population, which are passed by a legislature or developed through the common law.

The concept of regulation is broader than simply the legal rules, though, and includes guidance, notices and decisions (sometimes called ‘soft law’), as well as less formal interactions and negotiations between regulators and the regulated.

These informal approaches include a mixture of bargaining and threats to pursue policy goals, as we saw recently after the Christchurch terror attacks when governments pushed to change the practices of digital platforms by agreeing ‘a set of collective actions’ with them. The implication was that if the agreed actions were not delivered, formal legal steps would follow. There is a clear tension here with the rule of law and competition, as large incumbent providers are able to strengthen their relationships with lawmakers and regulators to influence policy in ways that are favourable to them.

People who generally support free markets justify regulation on the basis of market failure, internalising externalities and correcting information or competence asymmetries.

In practice though, the definition of market failure has become so stretched that it is ubiquitous and the scope for government intervention is practically unlimited. In effect the term has come to mean markets failing to deliver a particular outcome that is considered to be beneficial, such as low prices or the ability to easily move between providers of a service. This is a way for politicians who are nominally in favour of free markets to try and regulate towards their objectives, while still appearing pro-market.

Regulation has been pursued at EU level as member states feared a ‘race to the bottom’ as a result of elimination of trade barriers in the single market. EU developments also provided convenient cover for national governments pursuing regulations that have not always been popular domestically. The European Commission has a vested interest in generating red tape: given the limits on its financial resources, expanding of the scope of regulatory activities is one way it can make sure its writ runs in member states.

The cost of regulation to the UK economy, including effects on competition and innovation, was estimated by the Better Regulation Task Force to be around £100 billion per year in 2005, based on work in other countries that found regulation costs between 10% and 12% of GDP. If regulation had remained at a similar relative level, this would put the annual cost today at an eyewatering £200 billion.

These kind of estimates are of limited value though, because they do not offset any benefits of regulation, such as improvements to the environment or consumer confidence. Nor do they include costs to individual freedom and the rule of law.

Formal rules are so complex and voluminous, it’s difficult for individuals to make judgments on the legal choices available to them. Regulators often have broad discretion in enforcement and rules are so wide-ranging and difficult to comply with regulators must be selective in whether and how they act on violations. Limited resources constrain what they can do, but the prospect of providing them with sufficient resources to comprehensively  enforce multitudes of rules is also unappealing in a free society.

So far, regulatory reform initiatives have focused largely on form and procedure. Much energy has been devoted to analysing principles-based versus risk-based approaches, optimal consultation, transparency practices, and costs formulations.

The much more basic question of whether a regulatory intervention is necessary or desirable in the first place is usually neglected. The Regulatory Affairs Programme will be focusing on this and looking into how existing regulations and regulators have performed in practice.

As the UK leaves the EU, there is a real opportunity, not only to evaluate our stock of regulations, but to challenge the default pro-regulation mindset that still prevails in this country.

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Victoria Hewson is Head of Regulatory Affairs and Research Associate at the Institute of Economic Affairs

Columns are the author's own opinion and do not necessarily reflect the views of CapX.