'Can't touch this': Vince's MC Hammer moment

Business Secretary Vince Cable today announced a plan to ease the burden of regulation on small businesses in a bid to boost the economy. The plans would include a three-year break for small businesses from new regulation in addition to scrapping plans for extending parents' right to request flexible working and scrapping new rights for time off to train. The government has also vowed to review some 22,000 existing government regulations on business, with ministers forced to justify maintaining any that are challenged.

Now this is all welcome stuff, but the government has managed to completely ignore the regulation factory numero uno - that is Brussels - instead opting for a "can't touch this" approach.

When it comes to business, the EU is the main driver of regulatory cost in the UK. EU regulations do come with benefits, we don't deny that. But a lot of it is unnecessary or overly burdensome.

We can argue about the counterfactual (i.e. would the regulations have existed in the UK anyway), but what becomes clear during exercises like these is the extent to which the UK (and other member states) have lost control over their own regulatory reform agendas, as a huge number of laws are now locked in at the EU level. Changing an EU law requires re-negotiation and agreement amongst 27 different member states and the regulation-obsessed bunch that is the European Parliament.

Despite the fact that scrapping or amending unnecessary EU regulations could save the UK billions of pounds each year, and generate billions more in various dynamic effects, the Coalition has chosen to look the other way.

The problem with this approach is the familiar dilemma: you can leave EU regulation alone, but EU regulation will never leave you alone. The recent extension of the Gender Equality Directive by the ECJ to ban price differentiation between men and women should serve to illustrate this point (a ruling expected to cost the UK insurance industry an additional £1 billion).

We've been looking at the cost, proportion and impact of EU regulation in greater detail than most (see here, here, here, here, here, here for example). Just a reminder of our latest report on the topic: based on 2,300 of the Government's own regulatory impact assessments we've estimated that in 2009, 59% - or £19.3 billion - of the total cost of economic regulation (introduced since 1998) in this country stems from EU legislation. Cumulatively since 1998, EU laws account for £124 billion, or 71%, of the total cost.

And here are a few graphs showing the regulatory cost stemming from the EU to the main departments dealing with business regulation:

It's hard to better illustrate why any attempt to tackle regulation that doesn't focus on the EU level simply isn't credible. We would be lying if we said that the Coalition's refusal to engage with EU regulation doesn't frustrate us. In fact, we'll soon publish a list of EU laws that the Coalition must seek to re-negotiate. So do watch this space.

" A step backwards for transparency"

The bulk of the cost of regulations in both the UK and Europe stem from the European Union, as we've showed in our extensive research on the subject. But this isn't even the end of the story.

Many key decisions on the actual substance of EU laws and regulations are being taken during an uber-opaque process called “Comitology”. As we've noted before, Comitology involves special committees consisting of Commission and national experts deciding on how EU legislation should be implemented - usually behind closed doors - after the proposal has been agreed by national governments and the European Parliament.

The Lisbon Treaty - the document, if you remember, that would lead to more transparency in Europe - is introducing new rules for the Comitology procedure, effective from 1 March 2011. The new rules were meant to improve and simplify the system, but are now universally acknowledged to have made the situation even worse (we explain why here).

Political consultant Daniel Guégen, who is one of the foremost experts on this topic, makes the slightly worrying observation that as a result of the reform, power in Brussels “is shifting from the political level to the bureaucratic level.”

Even the European Commission concurs. Mario-Paulo Tenreiro, who is responsible for institutional questions at the Secretariat General of the European Commission (exciting job), says:

I must admit that for the general public the new rules are a step back for transparency...Hundreds of thousands of decisions will be taken by these Treaty articles every year.

Apart from the complexity and opaqueness of the new rules, Euractiv reports that the reforms are also causing legal uncertainty. According to Wolfgang Heusel, director of the Academy of European Law (ERA), this means that "courts will have to have the last word" on how EU legislation should be implemented.

Does this matter? Absolutely! As much as 50% of the actual substance of all EU rules is decided during the comitology stage after the law has already been agreed by Ministers and MEPs, according to Dutch academic research. So we're not talking about fixing little details.

Are the Coalition and other governments around Europe keeping up? We fear not.

Ahead of the last General Election, Ken Clarke (then Shadow Business Minister, now Justice Secretary) managed to give an entire key note speech on regulation and how to improve it, without mentioning the EU once.

Il faut le faire, as the French say.

Setting the record straight on regulation

In case anyone has yet to see it, Open Europe has today published a new report detailing the cost and benefits of regulation introduced in the UK since 1998. Since last year's study on the same topic we have analysed an additional 320 of the Government's impact assessments, bringing the number of IAs analysed in total above 2,300.


It's not the easiest subject to traverse for those unfamiliar with the inner workings on regulation and deregulation initiatives, which is perhaps why it seems to have led to confusion in some quarters over what the report actually is.

The European Commission, for one, gave their response to our study in the Telegraph saying:

"The Open Europe study lacks rigour and is intentionally misleading. The headline figures suffer from a methodological bias. It confuses stocks and flows, it suffers from double-counting, it does not consider what repealing EU regulations would imply either in terms of foregone benefits or alternative regulatory costs."


An intriguing response. The Commission appears to have read only the first sentence of our press release and nothing of the actual report. That's a shame because:

• We presented three sets of figures, the cumulative cost of regulation, the annual cost of regulation and benefit/cost ratio of regulation. The Commission only responds to the first figure.
  

• The cumulative cost, or a cost of the 'stock' of regulation, measures the entire cost to the economy since 1998, which is £176 billion. The EU is responsible for 71%, or £124 billion of that cost. We explained that £176 billion is equivalent to 12.6% of the UK's annual GDP, and roughly equivalent to the country's budget deficit. This does not mean that the £176 billion cost of regulation occurs in one year, as we make clear, and the comparison to the budget deficit and GDP is illustrative and designed to relate a large figure to something most people are familiar with. In particular it's a useful reminder that regulatory policy deserves as much scrutiny as budgetary policy, as both have a significant impact on the economy. We can see why the Commission doesn't like that thought. We're note sure what the Commission's remark about 'double-counting' refers to.
  

• In the report, we do address the counterfactual , i.e. the costs that would have occured in absence of EU regulation. This is indeed an interesting discussion - one that the Commission would do well in seriously engaging with. We accept that many regulations - but certainly not all - would exist in national law also in the absence of the EU. However, and this is crucial, while the framework of laws may still exist at the national level, a whole range of prescriptive requirements that go with it would not. We give examples in our report.
  

• Additionally, knowing the source of regulation is vitalling important, both in terms of practically amending the law if so desired, and in terms of political accountability. Not knowing the source of the laws massively undercuts citizens' ability to hold policymakers to account. I.e. if I'm not happy with my energy bills rising as a result of regulation, who should I blame? The answer is far from straightforward.
  

• The annual cost of regulation measures the cost to business and the pulic sector arising from red tape in any given year (from existing and new regulation). We consider this to be a more useful measure than the cumulative cost as it allows us to look at trends. The Commission doesn't seem to address this figure, which is surprising. Particularly as it shows that the EU proportion of the total cost has gone down over the last three years (at 59% in 2009, compared to a 72% average), which could be a sign of the EU's 'better regulation agenda' beginning to pay off...

• But the most interesting figure is the benefit/cost ratio, showing the benefits of EU and UK regulations relative to each other. This figure is not being addressed by the Commission either. The ratio makes clear that for both EU regulations and UK regulations the benefits outweigh the costs, but UK regulations areo n average 2.5 times more cost-efficient than EU laws. This is also true in the areas where the EU and UK regulate the same parts of the economy (for example, social policy and environment legislation). This is what the Commission really should be trying to respond to if they’re concerned with relative benefits.

Additionally, a spokesman from the Department for Business said:

"The figures presented in this report are out of context as they take little or no account of the wider economic benefits that regulation can deliver. European regulation has helped open up new markets for UK business across Europe and provided important new rights and protections."

Again, we acknowledge that regulations come with benefits, and that EU laws, for example on public procurament or energy 'unbundling', can have a positive impact on the economy. The problem is that EU regulations too often are mistargeted, overly burdensome and decided at the wrong level of policy-making in the first place. That's what we're addressing.

The Department for Business added that its "Forward Programme", which details the regulations planned for next year, shows that EU regulation will only make up 31% of the total cost. The discrepency is explained by the fact that the forward programme doesn't take into account any of the existing regulations generating costs to businesses and the public sector - our estimate does.

And closer inspection of the Government's "Forward Programme" reveals that the economic impact of many of the EU regulations due to come into force next year have yet to be quantified (24 to be exact). Some are also very important, such as the proposed establishment of the EU's three new financial regulators - which could have a massive impact on the City of London. True, there are also many domestic regulations yet to be quantified but, as we have seen in previous years, a high EU proportional cost can just as easily be attributed to just a few extremely costly regulations as several put together. So, essentially, it is too early to tell until all the costs are quantified.

Interestingly, former Dutch EU Commissioner Frits Bolkstein today reaches some similar conclusions to those we spell out in our report. Writing in Belgian daily De Standaard he calls for the size of the Commission to be reduced to 12. He explains his reasoning:

"A proposal to grant independent women the right to pregnancy leave. Both in the Netherlands and Bulgaria, shouldn't we decide on that ourselves? The European Commission has apparently learned nothing from the Nos in France and the Netherlands...Under Barroso the Commission has become a presidential system. Now there are 27 Commissioners. Power is with the President and his Chief de Cabinet. The Chief of Cabinet has more power than many Commissioners. Discussions within the Commission don't mean anything any more."

"What do Commissioners want? They want to get into the picture with initiatives, smart or not...The only way to stop the stream of useless initiatives is to reduce the number of Commissioners to what is necessary to steer the EU. I think a Commission of twelve capable people is enough."

The top 100 most costly EU regulations

Open Europe has today published a list of the top 100 most costly EU regulations, detailing the annual cost of the laws, the cumulative cost of them by 2020, and the article base in the Lisbon Treaty for each regulation . We estimate that these laws will in total cost the UK economy a staggering £184 billion by 2020. To put that figure in context: for the same amount, the UK Government could abolish the country's entire budget deficit and still leave the Exchequer with some £6 bn. All cost estimates are based on the UK Government's own impact assessments so the figures are instructive.

The top four items on the list account for almost £97 billion - or 53% - of the total cost of the 100 regulations by 2020. Looking at these four laws clearly illustrates the enormous, and often overlooked, potential for the UK economy to save money by making a few key regulations less burdensome. Notably, cutting down the costs of these regulations could happen without any of the stated benefits being lost in the process.

1) The Working Time Directive, to cost the UK economy £32.8 bn by 2020: This Directive has been widely criticised for being overprescriptive, impractical and generally out of touch with reality - particularly as it applies to the NHS. Merely changing the on-call time and compensatory rest rules entailed in the WTD could save the UK's public sector millions - if not billions - of punds every year.

2) The EU's Climate Action and Renewable Energy Package, to cost the UK economy £28.2 bn by 2020: As we've argued before, the EU could find a much more cost-effective way to achieve carbon emission reduction by setting overall targets, and then allowing for individual member states to decide for themselves how best to reach them (as opposed to the current micromanaging approach). This would hurt the economy less and provide a more credible alternative to follow for countries outside Europe.

3) Energy Perfomance Certificates for buildings, a.k.a Home Information Packs, to cost the UK economy £20.2 bn by 2020. Again, this cannot possibly be described as the most cost-effective way to achieve reductions in carbon emissions from the residential sector.

4) The Temporary Agencey Workers Directive, to be implemented in 2011 and set to cost the UK economy £15.6 bn by 2020: When he was Business Secretary, John Hutton warned that this Directive could consign "literally thousands of people to benefit dependency" (this was in 2007, before Gordon Brown was outnegotiated in a horsetrading deal involving the UK's opt-out from the EU's 48 hour working week. The Government is now trying to defend the Directive).

Making these laws less burdensome or tailor them to better fit the UK is not easy - but it certainly isn't impossible. Neither is avoiding repeats of these laws. But this does require a far tougher and smarter approach to EU regulations/negotiations than that employed by the current government. See here for our ideas on what such an approach should entail (chapter 5).

An excellent place to start would be for an incoming UK government to opt out altogether from the articles in the EU treaties which give rise to EU's social legislation (articles 151 to 161 as amended by the Lisbon Treaty). With correspondng domestic reforms, this could instantly reduce much of the cost stemming from, for instance, the Working Time Directive and the Temporary Workers Directive.

At a time when every penny is needed to close a massive public deficit, surely cutting the cost of regulation should be a top priority for the next government?

Showdown over alternative investment

In HFM Week, we're today setting out our thoughts on one of this year's most contentious EU proposals: the Directive on Alternative Investment Fund Managers (i.e. stricter rules for hedge fund and private equity managers and various other more or less obscure managers with alternative investment styles). The proposal is up for discussion and amendment in the European Parliament and the Council this autumn.

It's clear that there will be a Directive, but exactly what it will look like is a completely different story. In a nutshell: The Directive will - quite literally - force more transparency on fund managers, while giving them the opportunity to market their products across the EU once they've been authorisied to do so. Within reason and market practice, these are no bad things.

However, overall, the Directive is in danger of becoming a prime example of bad business law - especially when viewed through the prism of the Commission's own 'better regulation' principles. As we argue in the article, the Directive's objectives and benefits are unclear, it is riddled with legal uncertainty, and it is inconsistent with both existing regulations and prevailing market practices. Perhaps most critically, the Directive is protectionist to its very core.

The battle will primarily take place over the Directive's protectionism and the provisions which seek to overturn how managers are stuctured and how they go about their business (which could seriously harm the industry, restrict investor choice, etc.).

In the absence of a proper Impact Assessment on the proposal from the UK Government, Open Europe will soon publish a report on the possible impact of the Directive on the industry, investors and the wider economy. Watch this space.