Photo by PeskyMonkey

How to leave EU regulations behind

Without decreasing quality or elevating costs

Artillery Row

As the civil service, the Labour party and the House of Lords attempt to stop or delay the passage of the Retained EU Law (Revocation and Reform) Bill (which would sunset all retained EU laws on 31 December 2023), now is the time to revisit the issue of UK regulations in a post-Brexit world.

Although it has been 2,428 days since the vote to leave the EU (and 776 days since the end of the transition period) there has been very little change in, or divergence from, EU rules and regulations in the UK — despite HMG making clear that regulatory reforms were one of the key benefits of leaving the EU

There does not appear to be any overarching Government strategy on how the UK regulatory model should evolve to grasp these Brexit benefits. This lack of strategy, let alone action, has raised suspicion that some elements in Government and the wider political establishment do not wish the UK to grasp any regulatory benefits, but instead agree to “dynamically align” with EU rules and regulations (doublespeak for following all current and future EU regulations).

These suspicions were further aroused by weekend reports of a secret cross-party summit in an Oxfordshire stately home to discuss ways to “improve relations with the EU”, apparently attended by such anti-Brexit luminaries as David Lammy, Peter Mandelson, David Lidington, Theresa May’s Brexit negotiator Oliver Robbins and, of course, current Cabinet Member Michael Gove (who I can only assume received Prime Ministerial approval to attend).

In his article in the Sun entitled “Remainers want to trap us in the EU’s orbit … but we need to get further and faster away from it”, Lord Hannan of Kingsclere is explicit not only that regulatory alignment is the attendees’ current aim, but that the only logical solution post-Brexit is to do the exact opposite. He argues that the UK must diverge as far and as fast as possible (this, when Hannan used to be a supporter of the UK remaining in the EU Single Market). 

UK businesses have to meet the rules and regulations of all countries they export to

The key reason Remainers give (at least publicly) for why the UK should dynamically align with EU rules and regulations is the cost to UK PLC of having to operate to two different sets of rules and regulations. The argument goes that UK businesses have to produce to EU rules and regulations in order to export to the EU, so creating our own regulatory framework will just add to business costs. This argument not only conveniently ignores the fact that less than 1 per cent of all UK businesses export to the EU, but also that UK businesses have to meet the rules and regulations of all countries they export to including our single largest trading partner, the USA.

What if I told you there was a way to square the circle? There is a way to change the UK regulatory framework, not only to drive innovation and improve productivity without increasing costs to UK PLC (including those who export to the EU) but also without aligning to EU regulations? 

The EU’s regulatory system — and hence up until now the UK’s regulatory system — is largely prescriptive or rules based. That means rules and regulations define explicitly how any task is to be undertaken. To quote Dr Christopher Decker in his paper to the Department for Business, Energy & Industrial Strategy, comparing “Goals based and rules based approaches to regulation”: prescriptive regulatory systems are “rules that are precisely drafted, highly particularistic, and prescriptive; gives regulatees advance notice as to what actions they can and cannot engage in; and provides no or limited exceptions, and limited flexibility in any specific factual context”.

The big advantage of such rules based systems is that companies have a very clear and specific set of rules to follow in order to ensure their product/service is deemed by the regulator to be compliant. 

However, the disadvantages can be considerable: 

Lack of flexibility

Because of the lack of flexibility, costs to businesses tend to be higher than if companies were able to experiment with methods and means to achieve the end goal themselves (see UK study on when laws become too complex).

Stifles innovation/technological development

Innovation/technological development tends to get stifled, as the step by step rules are so rigid that they cannot adapt to rapid change. They discourage/prevent companies from introducing new products/processes that might not meet the precise regulatory requirements (see EU AI act).

Obsolescence and regulatory gaps

Rules and regulations can rapidly become obsolete as the market/industry/technology changes, resulting in regulatory gaps (see the growing gap between emerging technology and the law).

Rule overload

The need for prescriptive rules to cover any and all eventualities (not applicable to all companies, all of the time) can lead to “rule overload”, costing companies unnecessary time and resources to comply (see the payments industry).

Simultaneously under and over inclusive

Prescriptive regulatory systems run the risk of being both under inclusive (i.e., they won’t catch some actions that are inconsistent with the regulatory objective) and at the same time over-inclusive (i.e., they will prohibit actions which do not impact the regulatory objective).

Box ticking exercises that fail to meet real regulatory objective

Over prescription runs the risk of turning regulatory compliance into mechanistic box ticking exercises, resulting in situations where companies may “technically” have complied with the regulation yet still failed to meet the larger regulatory objective (see UK finance regulation).

Companies can “game the rules”

Worse still, some companies can use this box ticking to “game the rules”. They actively seek out loopholes which allow them to be technically compliant, but act in ways which fail to meet the ultimate regulatory objective. 

“Ever expanding rule book”

Gaming the system often leads to a “cat and mouse” legal drafting culture, where regulators produce more and more rules to plug holes that have been exploited by companies, resulting in an ever expanding rule book far removed from the original regulatory end goal (see the UK tax code).

Rule breakers can escape punishment

What is more, whilst prescriptive regulatory systems do ensure greater legal certainty (tick the boxes and you are legally safe), they do not ensure that companies who have gamed the system but ticked all the boxes get punished, despite breaking the ultimate regulatory objective (see UK banks).

Higher costs

The cost of ensuring compliance within prescriptive regulatory systems can be very expensive, with smaller companies often unable to afford access to advice on how best to navigate the rules and unable to afford the staff costs to tick all the boxes (see study in Canada on costs to business).

Regulation as a barrier to entry

In prescriptive regulatory systems, regulations are often designed by regulators working in collaboration with larger companies. This has two problems. First, there is a risk that larger companies will help design regulations which benefit them at the expense of small competitors and/or new entrants or even consumers (see EU rules on vacuum cleaners).

Regulatory Capture

Second, it can lead to regulatory capture where the technical and specialist knowledge of the companies exceeds that of the regulators. Regulators may collude with big business (see the Dieselgate scandal).

Obsolescence

Last (but by no means least), prescriptive regulations typically take a long time to develop (years), increasing the risk of obsolescence.

That makes for a lot of downsides, but at least companies have a very clear and specific set of rules to follow, and the regulator is “in control”, right?

The alternative would be goal or outcome based regulation. Regulators have a very clear end goal or objective in mind, but leave the method used to achieve that outcome to companies who have the freedom to arrive at the goal using any method they see fit. 

To give an example of the difference in practice, I shall refer to this analysis by the Canadian Food Inspection Agency, which is moving to an outcome based regulations policy:

Prescriptive regulation Outcome-based regulation
Example 1 When transporting animals, the temperature in the conveyance must be maintained between 5 and 30 degrees Celsius. Animals must be transported in a manner that does not expose them to adverse weather or environmental conditions that can lead to suffering, injury or death and every animal is provided with adequate ventilation during transportation.
Example 2 Where a low temperature is required for the preservation of a meat product, the temperature in a room or area of a registered establishment where that meat product is processed, packaged, labelled or handled shall not exceed 10 degrees Celsius. The temperature and humidity in a facility where a food is manufactured, prepared, stored, packaged and labelled must be maintained at levels that are appropriate for the food and the activity being conducted.
Example 3 Equipment must be raised at least 1 metre above the ground to prevent the risk of contamination. Equipment must be installed in a manner that does not pose a risk of contamination.

 

The difference in regulatory outlook is clear. Companies are given the freedom to decide how best to meet the regulatory goal (in the above case, for food safety and animal transportation), giving them freedom to innovate.

This brings us to the most common complaint about outcome based regulation — how can companies be certain they have met the goal (or, to be more precise, won’t be punished by regulators for failing to meet it when the company itself thinks it has)? 

That can be resolved by the regulator providing non-binding guidance, indicative actions and behavioural exemplars for a particular goal — and then by precedent set by court judgements under our common law system. It is also possible for regulators to operate an outcome based regulatory system with some limited level of prescription, where it is felt such prescription is required/would be helpful to companies to achieve the required goals.

That is in effect the system used in Australia and New Zealand for food standards embodied in the Australia New Zealand Food Standards Code which “strives for performance and outcome based regulation”.

It is not only Canada that is moving towards outcome based regulatory approaches. So are the USA, Australia and New Zealand, among others. The key driver for this shift to an outcome based regulatory system is the accelerating pace of change driven by new technologies. 

In their paper on “The future of regulation”, Eggers, Turley and Kishnani, working for Deloitte, provide a framework covering the key principles for future regulation and explain why existing regulatory structures are too slow to adapt to changing societal and economic circumstances. They also cover why regulatory agencies are too risk-averse.

They quote Bakul Patel, the US Food and Drug Administration (FDA)’s associate centre director for digital health, who is very clear: “If the volume and pace of digital transformation continues to remain the way it is, the existing regulatory approach won’t work.” This is quite worrying, considering that the pace of change is increasing, not slowing.

Although their paper is intended to focus specifically on regulating emerging technologies, I think that it underestimates the transformative effect that technological change driven by industry 4.0 (robotics, AI et cetera) is having on society. Changes are becoming so all-encompassing, and cover so many sectors and industries, that in reality almost all businesses and regulations are affected. In my opinion, HMG could do a lot worse than base a new regulatory strategy on Deloitte’s toolkit

The future is adaptive, risk weighted, outcome based regulatory systems with international collaboration between like-minded countries to create global standards. 

This is the way to change the UK regulatory framework to drive innovation and improve productivity without increasing (it should in fact decrease!) costs to UK PLC. 

The EU wants the UK locked into the EU regulatory orbit

How does it address the complaint that UK companies will still have to follow EU prescriptive regulations in order to sell into the EU market? That’s simple. UK outcome based regulation will not preclude UK companies choosing to reach UK regulatory outcomes, by following EU prescriptive regulation. That will be a matter for individual UK companies to decide. The only time UK companies would not be able to follow EU prescriptive regulation, is if those EU regulations did not meet UK regulatory goals (e.g., food that is safe for consumers). I don’t think anybody is suggesting that this is the case.

Indeed, UK regulators could even include links to the relevant EU regulations (among others) in their non-binding guidance, indicative actions and behavioural exemplars for a particular goal.

To pre-empt the obvious cries from those wedded to the idea that the UK must dynamically align with the EU, “but what of the UK/EU trade agreement (TCA) level playing field provisions that prevent the UK from lowering standards?”

Moving to an outcome based regulatory system does not water down or lower UK standards, rules and regulations. It is just a different (superior) way of regulating that allows for greater and faster change and innovation. It does not preclude those UK companies who wish to follow EU rules and regulations to the letter from doing so.

There is already evidence that the EU does not perceive outcome based regulatory systems as being a lower standard to its own. After all, the EU has already signed a Veterinary Agreement with Canada, which we have seen above has an outcome based regulatory system for food safety and animal transportation; and an SPS agreement with New Zealand, which has an outcome based food standards regime in collaboration with Australia. 

The EU also has a full trade agreement (CETA) with Canada similar to the TCA with the UK. It just reached agreement with New Zealand on a full trade deal, and it is in the process of agreeing to a similar trade deal with Australia. 

That does not mean the EU won’t complain about such a UK regulatory change. It simply means that if it does,  it can’t really be because the UK is lowering standards, or because the EU does not recognise outcome based regulatory systems as equivalent (and safe). It would rather be because the EU wants the UK locked into the EU regulatory orbit and prevented from gaining any potential advantage from divergence.

There we have it. Circle squared: a way for the UK to change its regulatory system to drive innovation and productivity, lead collaboration to create global rules, and diverge from the EU — all without increasing UK corporate costs or losing access to EU markets.

Jacob Rees Mogg, you asked for ideas on how the UK can seize on Brexit opportunities — well, here is a big one. Please pass it along to Rishi Sunak with my compliments, and suggest he doesn’t listen only to advice from those who attend clandestine meetings in quiet Oxfordshire villages.

Enjoying The Critic online? It's even better in print

Try five issues of Britain’s newest magazine for £10

Subscribe
Critic magazine cover