The Red Tape Conundrum: making regulation work for business

Let me start by saying how great it is to be speaking here at my old firm. As many of you know, this is where I practiced for a number of years and it is a real pleasure to be back again.

Above all, it is good to be here talking to you all today for another more profound reason.

We face an extremely uncertain and volatile economic climate:

• there is the ongoing crisis in the Eurozone which inevitably will have a major impact on our economy: half of our trade is with other countries in the European Union; our banks have lent billions of pounds to Eurozone countries facing big problems;
• our economy has flatlined with 0.2% GDP growth over the last 3 quarters to June 2011;
• confidence has nose dived following the Chancellor’s comprehensive spending review which has, in turn, hit domestic demand hard;
• last week we learnt that unemployment has surged above 2.5 million.

So it is a difficult economic environment for you to operate your businesses.

We disagree with the government’s economic strategy. It is implementing one of the biggest fiscal consolidations embarked upon by any government in the Western world at this stage in a country’s recovery in the name of deficit reduction. It is a very big gamble.

Reducing the deficit is essential but the Opposition’s view is that you have got to allow the recovery to settle in, otherwise you risk choking recovery off with the result that more people are claiming benefit, fewer people are paying income tax and fewer people are buying your goods.

However, where we do agree is in a belief that growth, which we hope will return, should be private sector driven. And here, you are obviously crucial – if you as businesses do not flourish and thrive, we as a country will not do so and growth is unlikely to return.

For this more profound reason, I very much welcome the opportunity to exchange views with you this evening because we must do all we can to help foster a sound business environment in which you can trade and do business. Regulation is of course part of the package.

I am going to talk about:

• the function of regulation;
• the principles underpinning our approach to regulation;
• what we did in government;
• what the Conservative led Coalition is doing and our response.

The function of regulation

I know the challenge regulation presents because, as an employment lawyer, providing advice to clients on how to deal with it was my bread and butter when I was here. Day in, day out, I received calls from businesses who wanted to do the right thing but didn’t know how – every fee earner in this firm still receives those calls every single working day.

Before I continue, let me be clear what I’m mean when I say “regulation”. I’m talking about the plethora of laws, rules and procedures you are required to follow when you go about doing your business activities, be they relating to health and safety, licensing or employment. It is a long list collectively referred to as “Red Tape”.

In every major election you will hear politicians of different parties promising to cut Red Tape. But I think business people are fed up of politicians whispering sweet nothings in their ears about their determination to cut Red Tape, when your practical experience often suggests otherwise. The debate over regulation is, in any event, far too crude in my view – it is more complicated than that and we should be honest, up front and say so.

Whilst some regulations may be viewed as obstructive, many are welcomed by business because good regulation underpins fair markets. For example, here at Rochman Landau many clients are small and medium sized enterprises with up to 250 employees or have a turnover of up to £25m – those clients will appreciate the benefits of a competition regime which, in part, exists to ensure that larger businesses cannot squeeze them out as a new entrant to whichever market they are seeking to break into.

People appreciate that regulation can actually create markets too, spurring economic growth and innovation. In government Labour decided that from 2016 new homes would have to be carbon-neutral. This simple measure created entire new markets in architecture, building technology, skills training, renewable energy generation, and building management. The innovation it stimulated has made UK firms in these areas world leaders.

And though regulations to safeguard workers’ rights can often be difficult to circumnavigate, doing away with them is no substitute for a properly thought out growth strategy. The Prime Minister’s director of strategy, Steve Hilton, has reportedly been floating ideas that include abolishing maternity leave – I don’t believe this is something anyone in this room would want for women in their families nor am I convinced that it will promote growth.

Despite all this I do know – after more than half a decade spent dealing with the country’s Employment Tribunals – that regulation does not always meet its purpose. Employment Tribunals were supposed to be more informal than the rest of the Civil Court system and to encourage parties to settle but my experience in practice was that this was not always the case – the way they operate seemed to lead to an inordinate amount of time spent obsessing with procedure as opposed to addressing the substantial issues of a case.

I also know that:
• government can rush to regulate without considering other ways of achieving behavourial change;
• consideration of enforcement after implantation is frequently just an afterthought; and,
• regulation often overlaps creating further complexity.

So of course we should look to reduce the regulatory burden where we can, but our priority should be to move towards smarter regulation – this goes further than simply looking at the quantity of regulation – it looks at its quality too and how it might be used more intelligently to shape markets.

Approach to smart regulation

So what underpins our approach to smart regulation?

First, we should view regulation as a last resort which we seek to implement to correct market failure, address a social inequality or safeguard people’s personal safety and security.

To illustrate this point, consider mobile telephone roaming charges whilst travelling abroad. According to some reports, mobile network operators are making profits of 200% on calls made in Europe and a staggering 400% on calls received whilst roaming.

Consequently from July this year the EU introduced regulations setting the maximum permitted charge at 32p per minute, excluding VAT, for calls made while abroad and no more than 10p per minute for calls received while roaming in EU countries. Clearly the market was not functioning correctly and we, the consumers, were being ripped off – everyone will have welcomed the EU’s intervention in this instance.

Secondly, regulation should be outcome focused and guard against unintended consequences.

In October 2004 we, in government, introduced the work place statutory dispute resolution procedures. We introduced them with the intention of reducing the number of disputes that ended up in the Employment Tribunals. The opposite in fact turned out to be the affect – both parties, the employer and employee, found themselves confronted with a very prescriptive procedure for resolving workplace disputes with heavy sanctions for failure to comply. The procedures of course evolved through case law as they were subject to interpretation, which created more uncertainty and complexity for all involved. They did not achieve what we wanted them to which was why they were repealed and replaced with a more flexible regime in April 2009.

Thirdly, regulation should be as easy to understand as possible and should do what it says on the tin. This will add to business certainty and improve perceptions of regulation which sometimes do not marry with the reality of the affect of a rule.

Part of the solution lies in drawing regulation up with the small guy in mind – the small business owner or firm that does not have the resource to employ an army of compliance and risk consultants to work out how to comply and do the right thing.

Finally, we must always ask whether the regulation is proportionate, consistent, transparent and targeted.

There is a feeling out in the country that those who want to do the right thing and ensure they comply are burdened more heavily than those who don’t care and are determined not to.

This is why it is crucial policy makers like me talk to you as we develop and scrutinise regulation, to ensure we get it right.

Labour in Government

What did we do in government? I don’t pretend we got everything right when we were in power. However, according to the World Bank, when we were gently eased out of office by the British people our economy topped Europe for ‘ease of doing business’ and the OECD found that barriers to entrepreneurship were lower here than in any other member country. This helped foster an environment from 1997 to 2010 in which 1.1 million new enterprises were created and the turnover of small and medium enterprises grew by over a third.

In our quest to put in place a better regulatory regime, in 2005 we set up the Better Regulation Executive. This was set up primarily to implement the recommendations of the Hampton Review into regulation. The BRE’s remit was to work with departments and regulators to:

• improve the design of new regulations and how they are communicated;
• simplify and modernise existing regulations; and,
• change attitudes and approaches to regulation to become more risk-based.

It had some considerable success, helping to deliver well over £3 billion a year of savings for business due to the simplifications made to regulations which followed. The Coalition has retained the BRE and now describes it as being instrumental in putting their strategy in place on reducing regulation.

We set up the Regulatory Policy Committee. We tasked the RPC with providing, for the first time in the UK, independent scrutiny of proposed regulatory measures put forward by Government. Its purpose is to challenge where proposals are not supported by robust evidence and analysis. Put simply, it produces opinions on the quality of the impact assessments produced to support regulatory proposals, covering issues from nuclear energy, equality legislation and migration limits, to the 2012 Olympic Games.

The RPC too has been continued by the Coalition and put at the centre of the new regulatory regime they are seeking to put in place.

In addition to this we introduced the Primary Authority Scheme to simplify the rules faced by businesses acting across a number of local authority areas. The scheme allows a business to agree its approach to compliance with one local authority and be assured that the advice they receive will be respected by the other local authority areas they operate in. There has been significant take up of this scheme and the government is now looking to expand it.

Finally, we set up a Cabinet sub-committee on Better Regulation which brought together ministers to scrutinise the impact on business of planned and proposed regulations. This focused the attention of government ministers on the issue. Again, the Coalition has taken this forward through the establishment of their Reducing Regulation Committee of Cabinet.

So we laid good, solid foundations upon which the new government has sought to build. Rest assured: getting regulation right was a serious concern of ours in power – that has not changed. We may not be in government but we have an important function as Her Majesty’s Official Opposition in holding the government to account and ensuring they get it right whilst their hands are on the levers.

The Conservative-led Government

I have already mentioned some of the things they are doing but what’s new? There are two flagship policies that have been introduced to great fanfare.

One In One Out

One is the introduction of the One-in, One-out rule. This means that no new primary or secondary legislation that imposes a cost on business or civil society organisations, can be brought in without the identification of existing regulations with an equivalent value that can be removed. It is part of the government’s Red Tape Challenge.

The motivation behind the policy is understandable but I fear the government risks overpromising and under delivering for a number of reasons.

First, the Government estimates that around 50% of UK legislation with a significant economic impact originates from EU legislation. Yet, regulation that is required to implement EU obligations does not fall within the scope of the One-in, One-out framework.

Second, it is quite easy for Government departments to get around the framework by massaging the figures – attributing a higher cost, say, to regulation disposed of, and a lower cost to new ones introduced. Presumably any judgement they make in assessing cost and benefit will be based on departmental impact assessments – the RPC currently tells us that 31% of central government impact assessments are not fit for purpose.

And third, the framework fails to take account of the particular circumstances of individual departments – it is applied to every department and applies over the course on a year. But take the Department for Energy & Climate Change – much of its work will surely involve a cost to business, certainly in the short term. How is a department like DeCC going to be able to operate within this framework?

We support the intention which lies behind the One In One Out framework but the government should not make promises it cannot deliver – as it is currently configured, there is a real risk that is what they are doing here.

Moratorium for micro firms

The other flagship policy, announced in the long delayed Plan for Growth published in March, was the commitment to introduce a moratorium on all new regulation of domestic origin for firms with fewer than 10 employees from 1 April 2011.

I have already mentioned just how much legislation the government estimates finds its origins in Europe – this moratorium, like the One In One Out framework, only applies to domestic law.

Business lobby groups have expressed dismay that none of the regulations that came into force last April were subject to the moratorium. In particular they have said to me that they take exception to the fact that some significant regulations for business were implemented after 1 April 2011 – additional paternity leave and pay and the abolition of the default retirement age for exmple. It is right to say that we support the these measures but, then again, we have not committed to put in place this moratorium; the government has.

There is of course the risk too that this moratorium will disincentivise businesses to grow at a time when we need businesses to expand and create jobs.

Again, over promising and under delivering calls into question your credibility. That is why I will not do it as the Shadow Business Minister with responsibility for regulation on the Opposition front bench.

Next steps

There are a number of policy developments likely this autumn.

The government has just finished consulting on reforming the way regulation is enforced. They have set out some principles but we await the detail. The consultation closed last Friday and a White Paper is due. Likewise, in tandem with this the government has been consulting on extending the benefits of the primary authority scheme I mentioned and on the future of the local better regulation office, the delivery vehicle for that scheme. The consultation on this closed last Friday too and I would expect any proposals to feature in the same White Paper.

It may be that the Government is planning to incorporate the proposals that flow from these consultations in the second instalment of their Plan for Growth expected this November.

Meanwhile, we in the Labour Party are in the process of carrying out the biggest overhaul of our policies since Tony Blair became leader in 1994 and we would welcome your input. As part of this, we are undertaking a fundamental fresh look at the role and purpose of regulation.

We must think creatively in doing so and be open minded. I think we should give serious consideration to exploring whether it would be possible to, as far as we can, put in place one Common Commencement Date for new regulation in either April or October instead of the two dates we currently have in April and October. This would potentially create more certainty and less disruption for business.


Let me finish by referring to what the Leader of the Labour Party Ed Miliband has described as the 3 principal challenges facing our country and the role you have to play.

We face a cost of living crisis. Since 2003 middle and lower income earners in this country have faced a squeeze in their living standards as their wages have stagnated and costs have risen. The causes of this are complex and are, in part, attributable to an economy that produces high-skill, high productivity sectors at one end and low-skill and low paid jobs at the other. Simultaneously, economic migration and greater labour market flexibility have increased the pressure faced by them.

At the same time we have seen the erosion of what we call the “British Promise” – the hope and belief people have that the next generation will do better than the last. Less than one in ten people now think life will be easier for their children than it was for them, and seven out of ten think it will be harder.

Moreover, there is this sense too that in different ways, including changing workplaces and working lives, our communities and the strong social institutions and common bonds that hold us together are being eroded.

To meet these challenges our economy and the way it is structured will need to change. We cannot hope to achieve this without you. You have a massive role to play:

• in helping us rebalance our economy;
• in transforming it so it creates the better quality and better paid jobs we need; and,
• above all, in ensuring we pay our way in the world and compete internationally.

You are key pillars of our communities too.

Working with you I know we can meet this challenge. Thank you for all that you do and for listening. Now I am very keen to hear what you have to say.