Regulation - Overview

This note explains why regulation might be needed, introduces the various types of regulator, and summarises all the various types of regulation carried out by, or on behalf of, Government.

Martin Sandbu helpfully identifies three key reasons why regulation might be needed:- information, externalities and co-ordination.

Whether in our personal lives - driving for instance - or when spending money, information is vital. On the road, street markings and costly requirements to keep the surface at a certain standard help us predict the driving conditions and the behaviour of other drivers. Other regulations such as labelling requirements and minimum standards help us know what we are paying for. (The Mensa Ponderaria on the left underpinned Pompeii's weights and measures regulations.) And information is increasingly important in many modern economic sectors - one reason why regulation is growing and why efficient economies will continue to regulate much commercial activity.

The need to limit many externalities is also pretty obvious. Reckless driving can harm others. Similarly, there are prohibitions on how businesses can behave, including competition, environmental, health and safety, and employment legislation. (Roman procurators were responsible for drawing up regulations for the safety of their British coal and metal mines.)

Finally, co-ordination. Why require cars to drive on a specific side of the street? Because the benefits to all of co-ordinating on right or left vastly outweighs any difference in the merit of which particular rule is chosen. This is particularly relevant to Single [European] Market regulations. The FT's Philip Stephens once regaled his readers with the tale of a British complaint about a European noise limit on lawnmowers. The supposed Brussels over-reach had, it turned out, been instigated and steered through the legislative process by the British government at the behest of UK manufacturers, who were finding their lawnmowers locked out of the German market because of Berlin’s national noise rules. The new, Europe-wide, decibel ceiling put the British producers back in the game.

Regulation as a Policy Tool

It is also helpful to bear in mind that regulation is one of four policy tools available to Ministers. (Check out the Policy Making sections of the sister Civil Servant website for more detailed advice and information.) It is accordingly for Ministers to decide their policy objectives and then - if they choose to achieve their objectives via regulation - to draft appropriate legislation for approval by Parliament. This legislation sometimes itself takes the form of regulations. Alternatively it creates regulatory bodies with specific duties and specific powers.

Six Types of Regulation

It is possible to identify at least six different types of regulation, although there are some overlaps, and numerous sub-categories:

1. Laws which impose burdens
2. Laws which directly confer rights and/or provide protection
3. Self-regulation
4. Licensing bodies and Inspectorates
5. Economic regulators
6. Regulators of public sector activities

1. Laws Which Impose Burdens

The private and voluntary sectors, and in particular employers, are required to carry out a wide range of tasks on behalf of government, including collecting tax (PAYE, National Insurance & VAT, for instance), paying benefits (tax credits, maternity pay), re-claiming student loans, ensuring that employees are working legally in the UK, and collecting statistics. These sorts of regulations are quite different to those listed below, but they do impose a huge burden on employers and their cumulative effect is frequently the subject of bitter criticism and complaint.

2. Laws Which Directly Confer Rights and/or Provide Protection

‌These laws include some of the oldest regulations of all - and some of the youngest. The photo at the top of this web page is of Pompeii's Mensa Ponderaria:- the table with the town's official measures which guarantee the citizen against fraud by shopkeepers and merchants. (Pompeii was destroyed in AD79.)

The photo below left is of a marble block from Laodicea in Turkey, dating back to AD114. It is inscribed with the local water law which contains strict measures regarding the use of water which had to be channeled from the nearby Karci Mountain. There were heavy penalties, ranging from the equivalent of £10-30,000 in today's money, for those who polluted the water, or damaged the supply infrastructure. And whistle blowers were awarded 1/8th of the penalty.

Many years later, in 1310, SMEs in London were no doubt incandescent with rage when 'health and safety' zealots succeeded in promoting legislation under which tailors and pelterers were forbidden from scouring furs in the main street on penalty of no less than imprisonment. A 1357 law then established laws against leaving dung, crates and empty barrels outside the doors of London houses, and a 1371 law forbade the slaughtering of all large beasts within the city.

 

Later developments such as company law gave protection to company owners against their company's creditors, and patent law did much the same in the field of intellectual property. Coming up to date, there has been a flurry of regulation providing employment rights, including protection against unfair dismissal, sex discrimination, unreasonably low pay and excessive working time. Each extension of regulation is hotly disputed at the time, but generally becomes irreversible.

If you are a civil servant responsible for this sort of regulation, then do make sure that you consider how you will communicate with smaller firms, and how they will cope (or not) with the detail of the regulations. In other words "Think Small First".

You should also beware unintended consequences. You will never spot them all yourself, of course, which is why consultation and openness is so important. Don't hesitate to change your plans following consultation, despite inevitable media jeers of "climb down!". Click here for a more detailed discussion of this subject on the 'Civil Servant' website.

It is particularly difficult to decide where to draw the line when being encouraged to require firms to achieve higher and higher safety and environmental standards. Similar approaches unfortunately have different acronyms such as SFAIRP (So far as is reasonably practical), ALARP (As low as reasonably possible), BATNEEC (Best available technology not entailing excessive cost) and BPEO (Best practicable environmental option). And it is sometimes necessary to decide whether it is, for instance, better (or less harmful) to pollute land (by burying waste) or the atmosphere (by burning the waste.

Because pollution so easily crosses national boundaries (e.g. the Sandoz disaster) and because it would not be good if member states were encouraged to compete by lowering by endangering the health of their population, much of this sort of regulation comes from Brussels. Ministers then need to reconcile a number of possible tensions when it comes to transposing European Directives into UK law - see separate note. And it is vital that there is international agreement on what exactly is meant by, for instance, 'good' river quality. What proportion of what pollutants are allowed, and are we to measure the minimum or mean or mode or median levels over a period. For definitions, please consult your teenage relative!

And do remember that hardly anyone other than real experts ever reads the legislation that you have drafted so very carefully, nor do they retain (if they even ever read) your carefully drafted guidance material. The best regulations are therefore easy to remember and self-policing, such as the simple concept of the minimum wage. More complex regulations, such as the working time regulations with their opt-out, complex rules to cope with multiple employers, and 17 week averages, are much less likely to be effective.

The regulation of risks to health and safety is a particularly difficult and interesting area which is the subject of a separate area of this website.

3. Self-Regulation

The best form of regulation is choice, including competitive tendering. You don't need inspectors to detect inefficient, unresponsive and uncaring providers if their customers can go elsewhere. But many problems are often invisible to customers - at least until it is too late - especially if they buy the service only once or twice in a lifetime. It is sometimes possible to avoid legislation in these areas by encouraging professions and industries to regulate their own activities.

Such self-regulation ensures that the process is sensitive to the practical needs of those being regulated, and it cuts the cost to the taxpayer. Often, however, pure self-regulation does not work because "cowboys" refuse to be bound by it, and there is then a tendency for the bad to drive out the good. (The Times reported in 2017 that "Self-regulation lets bad bailiffs go on working".) It is common, in these circumstances, for at least some in an industry to prefer the regulation to be undertaken by an arm of government. Alternatively, much apparent self-regulation (e.g. of lawyers and doctors, and of financial institutions) is in fact carried out by bodies created by statute, even if those bodies are dominated by representatives of the industry which they regulate.

Indeed, good "trusted" regulation can be essential if an industry or activity is to thrive. We would not have a nuclear industry if the Nuclear Inspectorate were not regarded as effective, so that industry and its regulator have developed a sort of symbiotic relationship. Much the same applies to the Human Fertilisation and Embryology Authority. Following that thought, it is interesting that the Better Regulation Task Force recommended, in January 2003, that there should be a dedicated nanotechnology regulator:- "Government has a difficult job in ensuring that scientific research can flourish, whilst at the same time confirming to the public that research being carried out is both ethical and safe."

The British Board of Film Classification is another interesting self-regulator.

4. Licensing Bodies and Inspectorates

There is a huge number of regulatory bodies, of all shapes and sizes, doing an amazing range of jobs. Some are very large (the Health and Safety Executive, the Environment Agency) and some are very small. Most of these bodies are created as non-departmental public bodies:- click here if you want to understand the difference between the various bodies that together form the UK public sector.

The 2005 Hampton Report‌: Reducing administrative burdens: effective inspection and enforcement foreshadowed quite a shake up in this area, involving a large reduction in the number of inspectorates, and a reduction in the number of inspections endured by less risky businesses etc.

It is worth noting that the power and effectiveness of all these bodies depends very much upon their legal powers, their independence from Ministers, and the extent to which anyone (including politicians and the media) take any notice of what they say. Economic regulators (see below) are typically very powerful. Inspectorates such as the Prisons Inspectorate are at the other end of the spectrum. Stephen Tumin (1987-1995) complained endlessly but to little effect about prisons' 'grim environment', about 'damaged children picking up further criminal habits' in young offenders institutions, and - in 1992 - about 'the [deplorable] arrangements for the mother and baby unit in Holloway womens prison. But David Ramsbotham was in 1995 could still be 'shocked by [Holloway's] appalling living conditions'. And Peter Clarke - in 2017 - reported that no young offenders institutions were safe and reforms were 'a matter of urgency'. I imagine that all these reports have caused temporary embarrassment in the Home Office and Justice Department, but they certainly don't seem to have led to significant improvements within the badly under-funded Prison Service.

As noted above, the regulation of risks to health and safety is a particularly difficult and interesting area which is the subject of a separate area of this website.

5. Economic Regulators

The Government has created a number of specialised competition and economic regulators which make judgements about the future behaviour of large economic entities. The Competition and Markets Authority strives to ensure that businesses compete effectively and fairly with each other. Ofgem, Ofwat and parts of Ofcom take decisions about the extent of competition within, and prices etc set by, large utilities. The CAA sets the prices charged by large airports. And the Bank of England is almost in a category of its own as it sets the interest rates charged by financial institutions.

Ministers create these independent regulators for a number of reasons. For instance, companies within the utility sectors need "regulatory certainty" - which in effect means freedom from political short-term decision making - so as to reduce their business risk. This helps them plan their long term investments and borrow more cheaply.

(Some other governments are less concerned about the need for independent regulation and regulatory certainty, and apparently willing to live with the consequences. A nice example was the French Government's decision, in December 2005 to force Gaz de France not to pass on rising gas costs to its customers, thus reducing its quarterly profits by €250m - even though the same government had privatised GdF some months earlier and created a supposedly independent regulator. Also in December 2005, this regulator was told that it had to work alongside a new three man commission which would review the tariff-setting process. Quite what the company's shareholders or management made of this is not clear - but maybe they expected it:- the shares were originally sold to the public at a big discount to their asset-based value. GdF certainly then found it much more expensive to attract loan and share capital, thus increasing costs which in turn became an additional burden to the French economy.)

Ministers also often conclude that hard but necessary decisions are best made by independent bodies whose objectives are set by Parliament but which are then free from political control. This results in "economic" regulators often being given responsibilities which are far from purely economic. The water regulator, Ofwat, has to consider water purity. The rail regulator, ORR, is now in charge of rail safety. And the postal regulator, originally Postcomm - now Ofcom, itself defines the detail of the scope of the "universal postal service" whose protection is the regulator's overriding objective. This delegation of power to regulators inevitably creates pressure for them to become more "accountable" than they are now.

Therefore, because Ministers are anxious to ensure that they have no responsibility for the often controversial decisions made by such bodies, but are sensitive to the criticism that those regulatory bodies might become over-powerful, they are sometimes created as non-ministerial government departments so that they are directly accountable to Parliament. (Click here if you want to understand the difference between the various bodies that together form the UK public sector.) Indeed, economic regulators are themselves regulated (if that is the right word) through being accountable to Parliament, and also accountable to the courts, the public and to Government. Remember, however, that being accountable means having to explain what you have done, and why. Being accountable does not mean that you can be told what to do by those to whom you account, other than as a result of changes in the law, or losing court cases. (Click here for a more detailed discussion of regulators' accountability.)

But not all regulators are government departments. Bodies such as the Financial Services Authority, the Competition and Markets Authority and Ofcom are all outside central government, even though they have taken over many responsibilities which once fell to central government.

Those companies, such as the utilities, that have dedicated regulators are apt to wish that they were not regulated at all, or else regulated rather more lightly. But the alternatives are scarcely more attractive:-

In practice, therefore, sectoral economic regulation seems destined to survive for a good while yet.

Sectoral regulators are also often accused of "regulatory creep" or "mission drift":- continually extending the scope of their activities in a self-interested sort of way. Their defence is that they are merely responding to interventions by politicians, or mailbags full of letters from people with genuine grievances who expect "the regulator" to "do something about it". As one regulator put it:- it is hard to say that "There is indeed a problem but we are not going to do anything about it".

An introduction to competition policy (especially for economics students) is here.

6. Regulators of Public Sector Activities

A growing number of regulatory bodies oversee the performance of the public sector, and to seek to improve standards. The National Audit Office is responsible for improving the performance of central government, and other bodies oversee various aspects of, for instance, the police and prisons service. But they have recently been joined by numerous bodies, such as Ofsted, which seek to improve and/or control the education and health services. Again, Ministers generally prefer to have independent bodies taking controversial decisions about, for instance, which expensive treatments should be made available on the NHS.

Public sector employers are, of course, also subject to exactly the same burdens and regulations as their voluntary and private sector counterparts, which means that the public sector is in fact more highly regulated than any other. One set of burdens introduced in 2016 is mentioned here.

List of Regulators

A consultation document issued in March 2016 contained an apparently comprehensive list of 56 statutory regulators. The only obvious exclusion was the Competition and Markets Authority.

 

Martin Stanley