Pre-Regulation: Removing the need for regulators and state regulation

1^st November 2013

ResPublica's Adam Wildman, Research Manager explains the benefit of pre-regulation

The regulation of organisations and markets is a costly affair. State regulation currently costs the UK economy somewhere in the region of £30bn every year. Employment laws, health and safety regulations and financial compliance legislation provide the bulk of these costs. But are such levels of regulation, or even regulation at all, absolutely necessary?

It is a common response to figures like these to advocate for swift deregulation and light-touch enforcement. While such calls are right in spirit, they misunderstand the basis upon which most regulation is introduced, namely, to ensure that corporate bodies and individuals act in an ethical and responsible manner. Surely, the right response to this is not whether we should have more or less regulation, but whether the right or appropriate behaviours could be encouraged within a market without the need to result to regulation. If so, given that the majority of current regulation does not focus on the root causes of irresponsible or unethical behaviour, the basis upon which UK regulatory policy rests is evidently and inherently flawed.

The end goal for any regulator should be, as counter-intuitive as this seems, to ensure that one day they are rendered entirely redundant. In that, the markets or organisations that they monitor act in such a fashion – with such high levels of good and ethical behaviour – that a standalone regulator tasked with enforcement is completely unnecessary.

But very little of our current discourse confronts this issue. Instead, most commentators focus on the more/less paradigm of regulation that takes as its starting point the belief that regulation is wholly necessary. From this presumption it is then for the legislature and executive to determine how much regulation is necessary at any given point in time (itself a difficult and probably unachievable task).

In almost every area of social science, research conclusively demonstrates that prioritising prevention strategies over dealing with the effects of any given problem is a much more effective means of tackling an underlying problem. When assessing the suitability of regulation practices for any given industry, we need to first consider seriously whether regulation is absolutely necessary. We would argue that in most cases it is not, and instead would argue for practices that comprise what we would call “pre-regulation”.

Pre-regulation describes those practices and incentives that foster responsible behaviour from individuals or corporate bodies without the need to result to external regulation. As the Parliamentary Commission on Banking Standards recently pointed out in its Final Report, real change in industry-wide behaviour can only originate from initiatives promoted by the industry itself. It is not enough for a regulator to simply impose rules of interaction or principles of ethical behaviour from afar.

So, as regulators are incapable of policing markets in a cost-effective and consistent manner, what pre-regulatory practices could be adopted to help encourage ethical and responsible behaviour?

Since its inception, ResPublica has been a leading advocate of mutuals and a proponent of introducing co-operative practices into the non-mutuals sector. Mutual practices such as employee-ownership, profit-sharing, frontline decentralisation and other participatory policies often increase staff productivity, lower absenteeism, encourage employee engagement and, through these, improve the profitability of firms. By improving worker conditions and increasing employee engagement, these measures could be considered pre-regulatory in nature. These pre-regulatory measures could, if applied comprehensively to non-mutual firms, reduce the need for expensive Government employment regulation.

Alongside these workplace measures, pre-regulation also has a part to play in the self-regulation of markets. Measures such as imposing asset locks on a businesses of public interest to prevent asset stripping, or placing shareholder representatives on boards to improve owner-worker relations, could make for a more responsible corporate culture. Increased accountability at the board level would clearly have been advantageous in the lead up to the financial crash of 2008, as would have safeguards against hostile takeovers and asset stripping prior to the unpopular sale of Cadbury’s to foreign investors.

These pre-regulatory measures could, whether employee or company focused, all be implemented by organisations without the need for further regulation.

However, that is not to say that Government does not have a role to play. Any movement by firms to adopt pre-regulatory measures would have to be accompanied by a promise from Government to drastically reduce the regulatory burden. The costs associated with moving towards a pre-regulatory regime would, initially at least, be quite sizeable. Without a meaningful reduction in the burden of regulation on businesses and individuals, a move to a more responsible, ethos-driven and largely unregulated economy could be significantly hampered.

What is needed is a model to determine how a system of incentives could be established that could initiate the transition from a regulation-heavy economy to one where regulation is almost obsolete. Over the coming months, ResPublica will be examining how a Pact or Compact could be established between Government and industry that was based on a commitment to both reduce regulation and introduce pre-regulatory measures.

A long list of scandals in the financial sector indicates the need to move away from a system subject to regulation to one focused primarily on pre-regulation. Such a move would do much to improve employer/employee relations and restore levels of trust and confidence in the economy.