Imaginative thinking for better regulation [2003]
Better Regulation Task Force



1. Foreword

We feel passionately that regulators should actively consider all the measures available, and choose the best one. Perhaps people don’t need to be told what to do if they’re given the right information to help them take their own decisions. Being creative is the only way to ensure that policy objectives are achieved without creating additional and unnecessary regulatory burdens: burdens which stifle the economy; hold back entrepreneurs, and can cost jobs. Regulatory failure can cost a lot of money without achieving anything. The culture of Whitehall needs to change to make sure that business and others are not unnecessarily burdened with prescriptive regulation where it is not necessary. This report is a contribution to that culture change. We want to inspire policy makers to use all the options they have at hand.

2. Introduction

Often, when faced with a new problem like a health risk or a perceived need to intervene in some market, Governments will introduce a new "rule" that requires people to behave in a particular way. Yet a more openminded look at the options may find that the policy can be delivered more efficiently and effectively in a different way, one that does not leave people feeling hemmed in by rules and regulations.
A wide range of options is available. These range from classic regulation, where people are required to behave in certain ways, to information and education campaigns where people change their behaviour of their own accord. Other methods include using economic, tax and market mechanisms; self-regulation; and coregulation.

3. Bringing about a culture change

Recommendation 2: Cabinet Office guidance states that each RIA [regulatory impact assessment] should include an analysis of alternatives and potential unintended consequences. When considering the quality of RIAs, the Cabinet Office should assess how far Departments have analysed alternatives to classic regulation, and have considered the potential for unintended consequences.

Recommendation 4: We recommend that the revised Code of Practice on consultation should also emphasise the need to encourage stakeholders to identify all possible alternative approaches to implementing policy and the unintended consequences of policy intervention. One way of achieving this is to ask consultees directly.

4. Classic regulation

Prescriptive state regulation, which we call "classic regulation" in this report, is where a law is passed to tell people what to do or what not to do. Classic regulation is the traditional way for the State to seek to change behaviour. There are advantages. Classic regulation can make it clear how people have to behave, and sometimes this can be easier for them than having to work out what to do each time. However, there are disadvantages too. Legislation has to be promoted, explained and, importantly, enforced, if it is to have an impact. People may not comply through ignorance; or they may try to avoid or break the rules if they get in the way of what they want to do. As a result, compliance may be a problem, and costly policing may be necessary.
Tip 1: When introducing classic regulation it is important to ensure that everything necessary for compliance, monitoring and enforcement is in place, that monitoring costs are minimised and enforcement is adequately resourced.
Tip 2: Classic regulation may require enforcement. It is important to identify the desired level of compliance with a regulation when doing the RIA and estimate the costs of enforcement needed to keep it at that level.
Unintended consequences:
The Government implements classic regulation because it wants people to behave in a particular way. Not surprisingly, not everyone will do so. This is one of the most obvious unintended consequence of classic regulation. A large number of factors will influence the level of compliance. The higher the costs of compliance, the greater the likelihood that people will try to avoid complying. The level of enforcement will influence the chance of being caught and therefore the level of compliance. If the fine is low, noncompliance and avoidance will be more likely – it may be cheaper to pay the fine than to comply.

5. No intervention

5.2. Market failure versus regulatory failure. One reason often given to justify Government intervention is that a particular market could be improved because it is ‘failing’. The implication is that the Government should step in to improve on the free working of the market. But the perfect market does not exist and there are many reasons why Government intervention can make the situation worse. For example, certain regulatory bodies who pass on their costs to those they regulate may have little incentive to minimise these costs (though the regulated will try to ensure they do so). Some may want to impose high standards in order to avoid blame if things go wrong. And there may be little pressure to withdraw from regulatory areas, unlike in a competitive market where rivals will constrain growth. Also, there are always incentives to do new things, so regulatory bodies often tend to expand. There is also the possibility of ‘regulatory capture’, where a regulator becomes sympathetic to the interests of those they regulate, and acts to protect their interests.
Furthermore, it is easy to underestimate the costs of regulation, which include effects on entrepreneurial behaviour and innovation, as well as the costs of the regulatory body and the compliance costs of the people being regulated.
Tip 7: Regulatory failure can be worse than market failure. Both need to be carefully considered before any intervention.
5.3 Justifying the costs. Sometimes people who feel strongly about some issue press the government to put in place some form of regulation when there is insufficient evidence of the benefits and likely costs to back up their claims. Scientific evidence is not always clear-cut and Government has to decide whether the evidence available is sufficient to justify intervention and whether some proposed intervention could in fact have a beneficial effect. The Government uses Scientific Advisory Committees to advise it.
Government also has to take into account the public perception of risk. Some people take risks willingly and would be against Government interference. Another factor is that some risks are feared more than others. Where there is a lot of uncertainty about the risks, there may be a temptation to put off a decision until there is better information, or until the experts agree. But perfect knowledge may never be achieved, while in the meantime damage may be done. On the other hand, lobbyists may argue for extreme knee-jerk responses, which would be disproportionate to the harm even according to worst-case scenarios. The Precautionary Principle says that when an activity raises threats of harm to human health or the environment, and the current state of scientific evaluation doesn’t allow the level of risk to be determined with sufficient confidence, then precautionary measures should be taken. But any such measures need to follow the five Principles of Good Regulation – this is not an alibi for excess regulation – and regulation introduced under this principle should be kept under review as knowledge develops.
5.4 Enforceability. It is not generally a good idea to bring in regulatory intervention that cannot be enforced. A limited case for this can be made where Government wants to send a signal, to bring about a culture change, for example towards sustainable development or encouraging firms to innovate. But otherwise it clogs up the statute book. Regulatory intervention may be unenforceable for technical reasons (for example, it can be difficult to enforce regulation in remote locations) or because it is inconsistent with some other existing legislation. Further, the agency responsible for enforcing needs to have the necessary resources.

6. Incentives: using sticks and carrots

6.5. Taxes as a regulatory device. Taxes are sometimes used as a regulatory instrument and not just to raise revenue. There can be two reasons. One is to make people pay for additional costs they impose on others (as with road taxes or energy taxes) and the other is that a tax can increase the price associated with undesirable behaviour (such as consuming alcohol, which can be bad for people’s health). If the tax on a raw material is raised, companies may change the production process so less of the taxed material is used. Similarly consumers will switch away from a product when it becomes more expensive.
One advantage of imposing a tax as a regulatory device is that it leaves the decision of whether to pay the additional costs or whether to change behaviour to the people affected.
Using a tax as a regulatory device has disadvantages. Some people or companies will try to avoid paying them by legal or illegal means. And some objectives cannot be achieved by applying a tax to increase the price, because people may be prepared to pay the price increase and may make no change in their behaviour. A tax may exclude poorer people from enjoying taxed products, and so can discriminate against them.

7. Information and education

Another way to influence people’s behaviour is by giving them information, or running a publicity campaign. These too can be useful alternatives to classic regulation. These techniques may be most useful where it is not essential to cover everyone immediately. The impact can be gradual and it will be hard to get to everyone. ‘Hearts and minds’ campaigns can be used where other forms of regulation would be socially unacceptable or unenforceable.
Information and education can be delivered directly by Government; or the Government can require or advise companies or individuals to provide it. Consumers need information to make good choices. An important form of consumer protection law requires information to be provided to consumers. In order for them to be able to compare similar products, such as mortgages or credit cards, the regulator may require companies to present information in a particular way. There are situations where people would prefer to know the risks and be left to make up their minds on how to react to them rather than be subjected to regulations.
Information for individuals and companies. Information and education is often used in the areas of health and lifestyle, where regulation would intrude too much on individuals’ freedom. The following is an example of consumer education, delivered by Government in partnership with business.
Since 1967 when the breathalyser was introduced, it has been a serious offence to drive with more than 80 milligrams of alcohol in 100 millilitres of blood. Over the following 30 years such enforcement techniques combined with hard-hitting advertising campaigns and the imposition of severe penalties have led to a change in attitude and behaviour. The "hearts and minds" campaign in combination with the other measures have made drinking and driving socially unacceptable leading to a substantial improvement in compliance with the drink-driving laws, and increased road safety.
As well as a duty on cigarettes there is a requirement for a health warning on each pack, to warn people about the risk to their health from smoking and this message is reinforced by a comprehensive health education programme. Classic regulation such as a ban on smoking tobacco would have been unacceptable. Legislation has been introduced banning tobacco advertising.

8. Self-regulation and co-regulation

Companies in the private sector have an incentive to ensure safety and quality (they don’t want to harm their customers). They also want to get the message across to consumers that their products and services are safe and of good quality. In these circumstances it is in the companies’ own interest to regulate their activities and there is often no need for government to regulate. Codes of practice are the most common form of self-regulation. Others include voluntary accreditation schemes, set up by industry, or the adoption of a voluntary standard. Self-regulation requires business to play by the rules. Another source of problems can be that large companies dominate their trade association and can sometimes get away with non-compliance.
8.3. Co-regulation. If self-regulation is at one end of a spectrum and classic regulation is at the other, there are points in between. In some cases voluntary codes of practice have significant Government involvement. This is known as co-regulation.