Stephen Booth is Head of the Britain in the World Project at Policy Exchange.
The looming hike in energy bills and broader inflationary pressures mean that the cost of living is understandably at the top of the political agenda.
But the next prime minister also needs a plan to address the longer-term challenges of raising productivity, boosting economic growth, and improving public services. Reforming the UK’s regulatory system should be a key plank of a supply-side policy agenda and a signal to investors that Britain is serious about enhancing its future growth prospects.
Regulation is a necessary component of a democratic society and market economy, requiring difficult trade-offs to be made between risk and insurance, in terms of tolerance for either. However, too often, the current culture around regulation, risk, and responsibility throughout the regulatory system – in government, parliament, regulators, regulated entities, and public debate – acts as a one-way ratchet towards regulatory creep and risk aversion.
For example, the length of energy supply licences issued by Ofgem grew from 160 to nearly 500 pages over a ten-year period. The cumulative effect is increasing regulatory complexity and cost at the expense of more productive activity.
This is compounded by regulated entities taking a risk averse approach to compliance, particularly in sectors where firms and regulators have an adversarial supervisory relationship, such as financial services, or where public service providers are subject to inspection.
Sir David Sloman, Chief Operating Office of NHS England, recently questioned whether the “total amount of resource that we have on the overhead in the right place, compared to the amount of total resource we’ve got on frontline clinical delivery?” He concluded that, “the number of pennies in every pound that we spend as a percentage of the total on regulation has probably gone too far.”
Those in the private sector, particularly smaller firms, would say the same. Ultimately, every pound or hour spent on regulatory compliance is one that cannot be used to improve public services or invest in innovation.
For the past few months, Policy Exchange’s Re-engineering Regulation Project has convened an advisory panel of leading professionals from the private sector and public services, chaired by Lord Sedwill, to develop the reforms needed to address these systemic and cultural challenges.
The resulting Policy Exchange report, published this week, concludes that we need to rebalance the incentives across the organs of the regulatory state to ensure that regulatory interventions are the minimum necessary to deliver public safety and confidence.
Since the 1980s and 1990s, arm’s-length regulators, each with varying degrees of independence from government, have played an increasingly significant role in the governance of the private and public sector. Delegation to such regulators can provide essential expertise in the design and implementation of regulation and increase confidence in individual operational decisions.
However, new policy challenges such as climate change, increasing the resilience of national infrastructure, and rapid technological advances means regulators are increasingly weighing political trade-offs.
These trade-offs have distributional consequences for different producers and providers and their consumers and between generations, and government cannot and should not abdicate responsibility for setting strategic priorities or making difficult political choices. There needs to be more active and transparent dialogue between ministers and regulators about the outcomes that government wishes to deliver via regulation, which would increase accountability to the public and those that are regulated.
Outside of the EU, there is an opportunity to tailor regulation to reduce burdens on smaller, entrepreneurial businesses, and improve outcomes for consumers through greater competition and innovation in new markets.
But, having “taken back control” of regulation from the EU, the powers of arm’s length regulators are set to increase.
For example, the Health and Safety Executive has an expanded role in regulating chemicals, the Food Standards Authority has greater responsibility for assessing food and animal feed safety risks, and the Financial Services and Markets Bill will give financial regulators significant power to develop rules and guidance without further legislation in Parliament.
This calls for a commensurate increase in democratic scrutiny and accountability.
There are currently over 90 regulatory bodies in the UK. The sheer number of regulators brings challenges of managing the risk of overlaps, duplication, or incompatibility or inconsistency in regulatory requirements. In England, the NHS is regulated via ten different service regulators and eight different regulators of the healthcare professions. The complexity of the institutional landscape makes the job of applying meaningful democratic accountability and scrutiny difficult.
Having fewer, more authoritative regulators would enable greater democratic accountability for regulatory performance, both regarding the protection of the public and the burdens of regulation. There should be a presumption against the creation of new regulators and government should explore opportunities to consolidate the number of regulators in any given sector, ensuring that the remit and objectives of regulators are coherent and joined-up.
There needs to be greater central oversight and coordination of regulatory policy. For example, ministers don’t know if much of existing regulation is working as intended, since departments only conduct post-implementation reviews on between 25 per cent and 40 per cent of the regulations that should be reviewed. Departments should be held accountable.
Over time, institutional responsibility for cross-government policy on regulation shifted from the centre of government to the business department. The establishment of the Brexit Opportunities Unit in the Cabinet Office has started the shift back to the centre.
But it should be merged with the Better Regulation Executive, which currently sits in the Department for Business, Energy, and Industrial Strategy. This would return strategic responsibility for regulatory reform to the centre of government, increasing cross-government oversight and accountability for private and public sector regulation.
There should be an enhanced role for parliamentary scrutiny too, informed by independent review of regulators’ performance. The National Audit Office should be empowered and resourced to conduct and publish regular audits of regulators’ performance, including industry and consumer outcomes for their sector. The publication of these independent expert assessments would mean political and public debate is informed by sound evidence.
Government and parliament should encourage and challenge regulators to adopt risk- and outcomes-based regulation, which allows for a more flexible, adaptable, and proportionate approach than detailed rules and tick-box compliance.
However, a greater focus on regulatory outcomes, rather than processes, calls for more effective dialogue between regulators and the regulated, and regulators and the beneficiaries of regulation. Feedback loops should provide regulators with crucial information about their impact on outcomes in their sector.
Meanwhile, regulators should embrace advances in data technology. A more sophisticated use of data sharing and risk-based approaches to enforcement would enable regulators to coordinate their interventions on the routinely uncompliant and take a lighter touch approach to those that can demonstrate a history of trustworthy behaviour.
Individual reforms will need to be underpinned by strong political leadership and culture change. We live in a world where, when things go wrong, society in general, including the media, are quick to look for someone to blame and, generally, the public thinks government is best placed to deal with the risks facing society.
Understandably, ministers, policymakers, regulators, and those subject to regulation have a general fear of the consequences of being blamed for failures. Indeed, new regulation often comes as a direct response to a high-profile scandal.
However, a system that seeks constantly to improve outcomes for society, and promotes efficient and effective regulation, rather than simply adding to its volume and complexity as a knee-jerk reaction to past crises, requires a more mature national debate about risk appetite and public safety.