Speech

Scrutiny improvement and better regulation: What next for service providers, markets and consumers?

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Cutting red tape: reforming the UK’s regulatory structures.

The Rt Hon Lord Wallace of Tankerness QC

The subject of this part of the conference is ‘complying and competing’ and creating better regulation for all. This is as key a priority for the Coalition Government at UK level as it is for the Scottish Government and local government in Scotland, as indeed the previous speakers have made clear. Open, competitive markets need clear rules. And that means proportionate and effective regulation. So I want to take this opportunity to say that getting regulation right, matters. Indeed, in some emerging markets, well crafted regulations can create new market opportunities, especially where technology is concerned.

Bad regulation chokes innovation and stifles economic growth. It has become a huge problem, especially for small businesses, and as the UK Government we are determined to tackle it. In doing so, we will free up both time and money for businesses, setting them free to create the sustainable economic growth that our country needs.

My colleagues, the Chancellor and Chief Secretary to the Treasury have set out robust plans, in the Comprehensive Spending Review, to eliminate this country’s record deficit and generate long-term economic growth in every part of the UK. A smarter system of regulation, that responds to risk without restricting innovation, is an essential part of our plans. We need to regulate better, less and as a last resort. The State needs to step back and we need to achieve a culture change at every level. That means in the EU, the UK, Scotland, local communities and, importantly, amongst the businesses and individuals. We need to harness the desire of businesses and individuals to live up to expectations, as well as obliging them to do so.

Deregulation as the norm In recent years there has been an increasing rush to regulate, whenever a new problem has arisen. Ministers and Parliament come under pressure to react. This is not unique to the UK. But under the previous UK administration this rose to the equivalent of 14 new regulations per working day. Our aim is nothing less than to change that prevailing culture. It is time for a new approach. One which permits intervention only when it is really necessary. One that considers all the alternatives to regulation. And one that sees statutory regulation as the last resort, not the first option. A recent example of this new approach is the review of Health and Safety conducted for the Prime Minister by my colleague in the House of Lords, Lord Young of Graffham. His report, ‘Common Sense, Common Safety’, sets out practical recommendations for cutting the burdens on business, tackling the growing compensation culture, and promoting professional standards in regulation - without compromising public safety.1 Lord Young is clear that it is often the perception of over-regulation which can be as damaging as over-regulation itself. He says that the perception of a compensation culture results in real and costly burdens for business. And that culture feeds an over zealous interpretation of the rules which purport to eliminate all risk. Let me give you an illustration. [For many years the two minute silence on Orkney was marked by the coastguards releasing a flare…]. Whether or not this is true, the fact that people roll their eyes and perceive health and safety rules as a laughing matter is damaging. And we need a culture change to reverse this. You will know that Part I of the Health and Safety at Work Act 1973 and the HSE is reserved to the UK Parliament and Government. This helps to ensure a level playing field and single market within the wider UK economy. But the full scope of Lord Young’s report also concerns issues that are generally devolved, such as the civil justice system and education. We have accepted Lord Young’s measures in full in relation to reserved matters, and are now working to put them into practice through out the UK, working closely with Scottish Ministers and others on devolved matters.

The new regulatory framework – changing the culture in Whitehall From the beginning of September, the UK Government has adopted a ‘one in, one out’ system of control for new regulations that are not devolved. So, before a UK Government Minister can introduce a new regulation, he or she must first examine the costs to business and charities and identify a corresponding cut to existing regulations. This means we can first cap, and then start to cut, the cumulative burden of regulation. The new Reducing Regulation Cabinet Committee in the UK Government will have to scrutinise and clear any proposed new rules. And, as the name of the committee suggests, we will always look for alternatives. So any proposals will need to be backed by compelling evidence. The committee will also be given independent expert advice by the Regulatory Policy Committee, which my colleague, the Business Secretary, has asked to play a bigger role. The Regulatory Policy Committee was set up at the end of 2009 by the previous UK administration to provide external scrutiny of the policy-making process. It is the first time in the UK that an independent body has provided real-time scrutiny of proposed new regulations. Since August of this year, in particular, the Committee will now carefully consider all Impact Assessments to ensure they are credible and robust and to ensure that the case for regulation is compelling before decisions are taken. Finally, we are committed to tackling the regulatory burden that stems from the EU. As one of 27 countries around the negotiation table this is not easy. But we have agreed that as Ministers we will engage earlier in the policy process in the EU, and aim to embed the principles of smart regulation within the policies of the European Commission, Parliament and Council. We have also committed not to gold-plate EU rules: where new rules are brought in, we will act to ensure that we do not put businesses in Britain at a competitive disadvantage relative to our EU partners. Together, these measures will begin the process of changing, not just a few regulations, but the very culture of Whitehall. Clearly this task will not be completed overnight or even within a year. But we are determined to get this right – because it directly affects our future economic competitiveness.

Role of local regulation And this is just as true at the local level. The need to cut through unnecessary red tape and bureaucracy applies as much to Town Halls as it does to Whitehall and the devolved administrations in Scotland, Wales and Northern Ireland. Local authorities play a critical role in enforcing regulation in our communities in relation to devolved matters (such as environmental health) and reserved matters (such as trading standards). They are vital partners as we find new ways to combine public protection with business growth. The Local Better Regulation Office3 works across the UK to reduce the regulatory burdens on business, while maintaining or even enhancing the current levels of public and environmental protection. It combines an independent, expert perspective on local regulation with the statutory powers required to drive progress. ln September the Local Better Regulation Office launched a report that drew together the views of business on inspection, enforcement and the regulatory culture. The report, ‘From the Business End of the Telescope – Perspectives on Local Regulation and Enforcement’, is the result of the LBRO’s work with groups representing 500,000 businesses, both small and large.4 That report noted that the frequency and co-ordination of inspections can be a problem. In agriculture, for example, duplication between inspections carried out by national regulators and local authorities can mean that the same records are inspected by different officers within a short period of time. A national supermarket complained that local inspectors ignored their audit and third party accreditation systems already in place.

I hope the report’s deregulatory proposals will be an inspiration to regulators across the country. An obvious place to start is tackling the problem of a rigid, tick-box approach to regulation. Some regulators have made good progress in this area, but much remains to be done. Intrusive monitoring of compliant businesses is a waste of resources for regulators, and inhibits law-abiding companies from creating the wealth and jobs on which the rest of us rely. Over regulation creates a culture where businesses can, in a sense, lose their moral compass. They become so pre-occupied with ticking boxes and compliance with the statutory minutia that they do not have the time to make proper strategic risk assessments for themselves. The key point is to get the balance right between encouraging effective self-assessment, and checking that the self-assessment has been properly done according to recognised standards. We need to start doing things differently and move towards a genuinely risk-based regime, based on pragmatism, competence and trust. One that focuses resources on the small minority of rogue companies not playing by the rules.

That’s why I want to see co-regulatory approaches being developed between local councils and the businesses they regulate. That could mean recognising the independent audit and certification schemes that many companies already use for quality assurance – ensuring statutory inspection doesn’t duplicate this work. Co-regulation also means being more ambitious - giving industries explicit responsibility for some aspects of inspection and enforcement, perhaps through the use of professional standards. In England and Wales, for example, the statutory water companies have long been responsible for helping to ensure that consumers use appropriate water fittings in their homes. In Scotland, Scottish Water has a similar responsibility. Local innovation and collaboration are the keys to combining legitimate public protection with the freedom to generate economic growth. That’s one of the reasons we are encouraging local businesses and councils in England to set up Local Enterprise Partnerships. LEPs will have the flexibility to focus on all the issues relating to growth in an area - and the local regulatory environment is clearly one of them. They will provide the local accountability, and the sense of shared purpose, that is at the heart of the Government’s localism agenda. I believe that encouraging regulators and businesses to work in partnership to achieve joint objectives has to be the way forward.

Primary Authority Effective local regulation requires confidence and mutual trust. Businesses must be able to rely on the advice and guidance received from local authorities. For businesses that trade across the country, inconsistent regulation can be a real problem, costing time and money. The Primary Authority scheme addresses this problem by enabling a Local Authority to take on responsibility for all of a company’s branches across the UK, ensuring consistent advice on complying with legislation and consistent enforcement. This scheme boosts confidence and trust between businesses and regulators. It reduces risk, reduces the cost of compliance and reduces the cost of failure. The scheme gives companies the right to form a statutory partnership with a single local authority, which then provides robust and reliable advice for other councils to take into account when carrying out inspections or dealing with non-compliance. It is the gateway to simpler, more successful local regulation. There are now 410 partnerships covering over 29,000 premises UK-wide. The first partnership in Scotland was recently announced between Renfrewshire Council and the fashion retailer M&Co to deal with health and safety regulations. In the months ahead, the Government will be exploring how the scheme can be adapted to ease the bureaucratic burdens on small businesses, which feel the weight of unnecessary regulation more than most.

The Big Society Initiatives such as the Primary Authority scheme are an opportunity to draw new lines of responsibility between the state, the citizen and the business community. This is the Big Society in action. The management of public risk ought not to be the sole responsibility of the state. To be sustainable and effective, it has to be a shared enterprise based on agreement between Government, business and individuals. Of course, there are areas where Government must guarantee the standards and protection that the public are entitled to expect. But there will also be many areas where risks can be better managed by being shared, and where the state can stop interfering and pretending it always knows best.

The Competition Regime I would now like to turn to the Competition Regime, which plays a key role in a well performing market. Vigorous enforcement of competition law restricts and deters anti-competitive abuses, making markets more efficient and less prone to market failure. This means that we can all benefit from more innovation, lower prices, more choice and higher quality. There is wide recognition that the UK has a world class competition regime founded on rigorous analysis and transparent decision-making by expert and independent competition authorities. But we believe there is scope for improvement. At present there are difficulties in successfully prosecuting antitrust cases at reasonable cost and in reasonable time. There are also questions over whether the regime copes satisfactorily with certain anticompetitive mergers, which can be completed before they come under the scrutiny of the competition authorities. There are also issues over whether the best use is made of the resources and powers available to the competition authorities. We believe that a more focused and joined up approach is possible, delivering better outcomes for markets and the end consumer. The Competition Commission and the Office of Fair Trading are each recognised as leading competition authorities operating throughout the UK. But with two separate bodies there are inherent difficulties in allocating and directing resources. There is also inevitably some duplication of roles and functions. Businesses have expressed concerns about the costs that they accrue by having to deal with two different bodies responsible for separate phases of the processes. This is further complicated by the sectoral regulators, such as Ofcom and Ofgem, who also exercise competition powers. We are keen to address these inefficiencies and propose to bring the Competition Commission and the competition functions of the Office of Fair Trading together to form a single Competition and Markets Authority. The challenge for any reform will be to create a new authority which not only unlocks efficiency gains but is also greater than the sum of its parts. The key issue will be how to enhance further an already world class regime, to the benefit of consumers and to economic growth and productivity. It is worth noting that we propose that the OFT’s consumer enforcement powers will be taken over by trading standards, with the Citizens Advice services taking on the OFT’s consumer advocacy role. During the consultation process, we will be working out with Scottish Ministers precisely who is best placed to carry out these functions in Scotland. Some might sit well in devolved bodies. This highlights again the importance of a partnership between central, devolved and local government. We will consult on these proposals to deliver more streamlined and consistent processes in the New Year.

The Government’s approach to Europe Earlier I mentioned the Government’s commitment not to gold-plate European law and our desire to move upstream in the European policy making process. I would like to discuss our approach to the EU in more detail. We have worked hard to encourage the European Commission to involve businesses more in policy making. After strong UK partnership working with Netherlands and Denmark in particular, the Commission recently announced that it will extend the minimum consultation period for Commission proposals to from 8 to 12 weeks. And the Commission will conduct a review of the EU consultation process to make sure all those who will be affected by EU action are able to influence its development. The European Commission has further made a commitment to adjust laws after evaluating how they are working in practice, to test whether rules remain necessary and are workable. The Coalition Agreement also makes it clear that the UK Government is committed to regularly reviewing the need for regulations. The Commission has also agreed to strengthen further the impact assessment process that allows new proposals to be checked for effectiveness and need. In addition, the Commission’s internal watchdog, the Impact Assessment Board, will have more power to challenge bad ideas and inadequate analysis by Commission departments. These are tall challenges, but the UK Government is committed to working innovatively with partners across Europe to deliver culture change in Brussels. These commitments will make it much easier for businesses and their representative bodies to feed into EU policy making. They are a significant step forward in tackling some of the upstream problems of over regulation based on EU law. This will mean that proposals emerging from the EU in the future will be based on stronger evidence and designed to be as small a burden to businesses as possible. In parallel to this work in Brussels, we are also working to ensure Whitehall is engaged in Brussels as early on as possible, at a point where changes to European policy can more easily be made. Together these initiatives aim to make the most of the substantial gains the European internal market can offer British businesses.

Infrastructure / Principles of economic regulation [drawn from National Infrastructure Plan] I would now like to turn to infrastructure, and how the economic regulators influence infrastructure development. For the economy to flourish, people, goods and information must move freely. Businesses across all regions and industries need the right conditions to grow. Reliable infrastructure: energy, water, transport, digital communications and waste disposal networks and facilities, are essential to achieve this. Ensuring these networks are integrated and resilient is vital. Failure to make the right choices at the right time, or pausing investment, risks not only growth but also the UK’s international competitiveness. Over the centuries, the UK has had a great record of investing in world class infrastructure to underpin economic growth. From the earliest days, infrastructure has been built by a combination of private and public money, in ventures involving business and both national and local government. Private capital was given the incentive to invest in often cutting-edge technology by the prospect of earning proper returns. By contrast, for several decades the UK’s approach to infrastructure investment has in general been timid, uncoordinated, incremental, wasteful in its procurement and insufficiently targeted to supporting balanced and sustainable growth in the economy, both economically and environmentally. The result is that some of our infrastructure is ageing, plans are unclear and costs are too high. Economic regulation is an important enabler of infrastructure investment. A large part of required investment is in sectors with independent economic regulation, such as energy and water. While, generally, only networks, the ‘pipes and wires’, are price regulated, all investment in these regulated sectors is affected by the regulators’ strategy and approach. It is important to consider whether the existing regime remains fit to respond to the future investment challenge. Infrastructure UK was established in the Budget in June 2010 within HM Treasury. Its work looking at the existing regime of economic regulation has identified a number of issues. These issues are not common to all sectors but include the duties of regulators, the clarity of long term strategy and the dialogue between regulators. Regulators have a multitude of duties, some of which reflect wider environmental and social objectives. But it is not always clear how regulators should balance these. It is arguable that regulators have been given insufficient clarity by Government on long term strategic direction and on the balance of different objectives. This has resulted in companies being provided with limited clarity by regulators about the regulatory outputs which they are required to deliver. In addition, in some cases, regulated companies have carried out inconsistent amounts of long term business planning without it always being clear how regulators have taken these long term plans into account as part of the price setting process. Finally, we are looking at whether regulators engage between themselves sufficiently on how they achieve common objectives, such as how they approach similar aspects of pricing controls, promoting competition and addressing consumer impacts, including affordability. The UK’s infrastructure is a complex mix of reserved and devolved policy areas, and the UK Government is committed to working in partnership with the Scottish Government to take this matter forward. The Government will publish a common set of principles to underpin the design and operation of economic regulation. The aim is to bring greater clarity and coherence to the roles of regulators and government. In particular, they will reaffirm the importance of independent regulation and the importance of regulatory stability in facilitating investment while recognising government’s role in setting the longer term policy context. In addition, the UK Government is currently undertaking a detailed review of specific economic regulators, Ofgem and Ofwat in particular. Whilst Ofgem has functions throughout Great Britain in relation to gas and electricity, Ofwat of course only has functions in England and Wales in relation to water and waste water. The UK Government will report by summer next year on whether any further cross sector action is required. At the same time, my colleague the Business Secretary and his team will coordinate work across UK Departments to ensure that competition and consumer outcomes are delivered effectively (including across regulated sectors) in the context of the Government’s wider reforms of competition and consumer bodies.

Conclusion I believe this new approach is essential if we are to renew our economy and secure growth for the long term. That’s why we as a Government are committed: first to cutting through the unnecessary red tape and bureaucracy that already exists and working at EU level to achieve improvements there; secondly, to enforcing the ‘one in, one out’ system rigorously and agreeing to new rules only when they are proved necessary; thirdly, to replacing tick-box enforcement with a new partnership between local regulators and local businesses; and finally to reviewing and improving the regulatory framework for competition law and our national infrastructure. For too long regulation has been the easy option, the first option. From now on, we must all strive to make sure it becomes the last resort and is fit for purpose

Published 10 June 2013