Theresa Villiers: Regulatory reform – and what the Government must now do to win that Brexit Bonus

31 Jan

Theresa Villiers is a former Environment Secretary, and is MP for Chipping Barnet.

Two years on from leaving the EU, it is time the Government made the most of our new-found freedoms and reshaped our approach to regulation, so that we can drive growth, economic investment and competition into every corner of the UK.

The public put their faith in the Conservatives, not only to ‘get Brexit done’ but also to improve their lives and their communities. It is completely understandable that for much of the past two years, the devastating effects of Covid have dominated Government activities and consumed bandwidth that would normally be devoted to different areas of policy and reform.

However, now that we appear to be over the worst of Omicron, and hopefully returning to something approaching normality, we must refocus back on the core issue of driving growth and investment and improving living standards across the country.

If we are to deliver the long-term economic growth that benefits all communities (and opens the way for tax cuts), we must recognise that unleashing productive investment from the financial services sector is crucial. The UK is home to some of the most innovative companies and thoughtful investors in the world. It is up to the Government to create the optimal conditions to allow our business leaders and entrepreneurs to reach their potential. That is a key means to increase prosperity and opportunity, and to raise living standards for all.

However, aspects of our regulatory system can act as a barrier to this potential wave of investment. The complexity of regulations – many of which originated from the EU – and their gold-plating by regulators, means that long term investment can end up being directed more towards very large companies that don’t need the funds than to, for example, urban regeneration in our cities.

A perfect example is Solvency II. This is an EU law designed to provide a one-size-fits-all framework for all EU insurers to bring consistency to the way they hold capital to protect policyholder benefits. The rules, which are extremely risk-averse, continue to force UK-based insurers to hold too much capital back, preventing that funding from flowing into a range of much needed projects that could deliver real change in our communities.

For example, new research by Pension Insurance Corporation describes how £20 billion of additional investment over the next decade through reform of Solvency II could be channelled into the building of new social and affordable homes, improving existing social housing stock, as well as on renewable energy projects and urban regeneration.

This could enable the Government to claim a major Brexit bonus, demonstrating to people how the UK, as a sovereign nation, can re-write an unnecessarily complex and risk-averse EU law to the benefit of communities from Barnet to Bolsover.

Solvency II is just one of many EU laws copied on to the UK statute book after Brexit which we need to assess to see whether they are still fit for purpose. But with Lord Frost’s departure from government, we need urgent clarity on who has responsibility for this vital task. With EU relations now wrapped back into the Foreign Office, no Minister appears to have the lead responsibility for post-Brexit regulatory reform since Lord Frost’s resignation.

Past experience shows that drives to remove unnecessary regulatory red tape soon run into the sand if they are not driven with determination at the most senior level in Government. As things stand, we are in great danger of missing one of the most important opportunities Brexit has given us.

In the first instance, a Secretary of State should be made responsible for the Brexit Opportunities Unit which currently resides in the Cabinet Office and is tasked with identifying our economic and political opportunities post Brexit.

Secondly, and as I and colleagues on the Taskforce on Innovation, Growth and Regulatory Reform recommended to Government in our recent report, UK regulators should have stronger duties to promote innovation, investment and competition – as well as consumer protection – pushing them to play a much more active role in supporting growth. The Prudential Regulatory Authority (PRA), which oversees insurance companies, for example, should take a more evenly balanced approach to reforming Solvency II to ensure that there is increased investment in productive assets.

Thirdly, we need to ensure MPs are properly resourced both to scrutinise regulators and hold them to account. Strengthening the select committee system to ensure more effective use of economic impact assessments and metrics will help parliamentarians ensure that regulators really are replacing the EU model with a new, more innovative and proportionate UK regulatory framework.

This would mean that our country really can start to bank that Brexit bonus. At the moment, we face the ironic situation that EU may actually overtake us on Solvency II reform if regulators continue to drag their feet, potentially making us less competitive. As we emerge from the pandemic, long-term investment in our communities across our whole United Kingdom should be at the top of our priority list, and Solvency II reform can give a big boost to our efforts to deliver this. The opportunities are there for us to seize, but we must act now.

Philip Booth: The Government needs to get tough (with itself) on competition policy

17 Dec

Philip Booth is Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham.

There is an old joke along the lines of “why is there only one monopolies’ commission?”. It is so lame, you won’t even see it in your Christmas cracker this year. However, there is an important point to it. When it comes to competition policy, the Government marks its own homework.

The UK’s Competition and Markets Authority (CMA) has immense powers, which it threatens to use with ever more vigour against tech firms. However, the biggest monopolies are in the provision of public services such as health and education.

In addition, many of the most important impediments to competition in the private sector come from the government in the form of regulations that restrict entry or load costs onto small businesses.

John Penrose MP is currently conducting a review of competition policy. Right at the top of his list should be competition in government-provided services and the way in which government itself, especially through regulation, impedes competition.

When it comes to public services, governments have to have a monopoly of some things – defence, penal systems, some aspects of policing and, it is worth adding in current times, certain genuine public health functions. However, experience in all these areas, especially recent experience in public health, demonstrates the limitations of state monopolies. As such, both Labour and Conservative governments have promoted school choice and also, with no discernible success, tried to promote competition in the provision of healthcare.

Just as governments of the left develop institutions designed to embed their reforms and make them difficult to reverse, supporters of competition and markets should do the same. This is especially so where competition relates to what we might regard as a natural right, such as that of a parent to choose a school for their child. Such a right is so fundamental to those of us who believe in a free society, that it needs protection in the wider political and institutional landscape.

Though most readers of this blog will probably not be supporters of the European Union, its policies in the areas of state aid and competition and public services did have some merit. They provided protection from the worst excesses of monopoly in some aspects of government service provision (though its effect was limited by the various legal exceptions).

There are two actions that the government should take. Firstly, CMA should be given a specific statutory duty to investigate impediments to competition arising from government action, especially in relation to government regulation. Crucially, such investigations should not have to relate to a specific market inquiry. For example, the CMA could examine the effect of land-use planning regulations on competition across a range of markets (education, childcare, retail etc) or the impact of GDPR regulations on the relative cost structure of small and large businesses. Secondly, it should have a like duty to scrutinise state monopolies.

Governments and barriers to entry

Regulation is such an effective bar to competition that it can be deliberately captured by incumbent businesses in order to frustrate market entry. Regulation may also be captured by the regulatory body itself which may discharge its functions by trying to reduce the risk of scandals within markets by writing ever-more regulation.

An uncosted side effect of regulation may well be to raise barriers to entry. Both market incumbents and their regulators are likely to have cognitive biases that lead them to favour regulatory solutions to problems within markets whilst ignoring the effects of competition.

Two examples are worth noting. The Financial Conduct Authority (FCA) has a statutory duty to promote competition and yet its very existence impedes competition. The process of authorisation for a new financial adviser can take six months or more and the FCA regulatory handbook has around 1,000 sections. This kind of regulation creates a significant advantage to incumbents and makes innovation especially difficult.

Although the FCA has a statutory duty to promote competition, its other objectives will always take precedence and the FCA is never held properly to account for its failure to promote competition.

A second example relates to occupational licensing. Currently, occupational licensing and certification covers 40 per cent of all employees. This figure has grown dramatically in recent years and is much higher than equivalent figures in, for example, Sweden and Denmark. There is widespread international evidence that occupational licensing damages consumers, reduces competition, and undermines social mobility.

However, though the CMA may examine a problem such as this as a minor aspect of a particular inquiry in relation to a specific market, the issue as a whole and its cumulative effects are ignored. The CMA therefore needs wide-ranging powers to investigate such government-imposed impediments to competition regardless of whether the investigation is related to a specific market inquiry.

Government monopolies

In addition, the CMA should have a statutory duty to investigate markets where governments are monopoly providers.

The CMA has a statutory duty to “promote competition, both within and outside the UK, for the benefit of consumers”. Its mission is to “make markets work well in the interests of consumers, businesses and the economy”. It’s role and effectiveness in dealing with the impact of monopoly on people’s lives would be much more effective if these statutory duties were expanded to explicitly include the promotion of competition in relation to government-provided services, such as healthcare and education. Though current EU provisions in these areas will remain after Brexit, they will be toothless: the government would be marking its own homework.

Much government policy in recent years has involved the promotion of competition in education. This needs to be reinforced by providing families with the protection of competition law.

To begin with, parents or those establishing free schools in the case of education, or various interested parties in the case of healthcare, should be able to take enforceable action, backed up by competition law, where one government body or a layer of government is acting in a way which subverts the government’s own policy in relation to promoting competition in public services. For example, parents should be able to take action if local authorities obstruct the development of a free school. Such actions, if successful, could come with penalties imposed on the offending body.

There should also be a general obligation on the CMA to investigate situations where the government itself is restricting competition in the provision of services (for example by providing its own service free at the point of use).

Summary

Current government and CMA competition policy looks at the splinter in the private sector’s eye whilst ignoring the beam in the state’s eye. The Government needs to have a more robust policy and enforcement regime. This will counter-balance the tendency towards monopoly, protectionism and regulation that pervades governments and will ensure that a reforming government can embed its reforms more deeply in the institutional landscape.

It can ensure that we can benefit from competition where monopoly is most deeply embedded – in areas of the economy protected by government regulation and in the provision of government services.

Roderick Crawford: Brexit is the beginning of a journey to transform Britain

20 Jul

Roderick Crawford works on conflict resolution in countries such as Yemen, South Sudan and Iraq, and on Brexit-related matters. He is a former editor of Parliamentary Brief.

Brexit means Brexit, said Theresa May.    She was right – but only in part. Under Boris Johnson, Brexit means much more than ‘getting it done’; it offers the opportunity as well as the necessity for the economic and social transformation of the UK itself, and thus of government too.

So much of what makes the UK tick was caught up in and by the EU – whether that was booming, coasting along or withering on the vine – that to simply ‘do Brexit’ is not enough. To make a success of Brexit requires the transformation of the UK: there can be no more business as normal: that was the case even before Covid-19 came along.   For that, success is needed right across economic and social policy, not just trade policy.

Post-Brexit, the UK needs to address the problem in the housing market, because it’s a key contributor to economic prosperity, social stability and individual and family wellbeing.  The house-building industry and the housing market need radical reshaping; the industry needs new entrants, new building opportunities, innovative building that delivers significant productivity gains – and all on a scale not seen for generations.

For that, we need a government that will change the current closed market into an open one – and make land available to new entrants and for new projects.  It needs to create new incentives for landlords to move from short-term tenancy agreements to three or five year leases for existing and future tenants thus changing insecure accommodation into secure homes at the stroke of a pen.

It has been suggested that York should become the seat of the Lords or Parliament while the Palace of Westminster is refurbished and long term a government hub.  For this, York needs tens of thousands of new houses and flats, along with offices and conference centres, improved infrastructure, including its own airport and better regional road and train links.

York as a permanent government hub in the North makes good sense, but it could also pull financiers and more creative and service businesses north to add value to the regional economy – including manufacturing.  That would be a serious boost to the North – and a defining moment in the remaking of the UK, not just England.

New technologies, new processes, new designs, new businesses, partnerships – and new regulatory frameworks – are key to economic transformation.  This formed the basis of the UK’s first industrial revolution and the subsequent industry-sector revolutions since then.  Whatever keeps new entrants and innovations out of business sectors ought in principle to be removed, subject to legal and moral considerations.

Government tends to consult with the same old bodies about changes to market regulation, but most of those it consults are beneficiaries of the system as it exists or are so immersed in it that they can only see the possibility of reform of the present system, they cannot see a totally new one.

Where you need new entrants, consult with those outside the sector wanting to get in or expand, not those established firms trying to keep competition out and act accordingly.  Tinkering with the regulatory frameworks isn’t enough anymore –  extensive deregulation and re-regulation are both required, and in heavy doses for some sectors.  That was a key element of Franklin D.Roosevelt’s New Deal.

The United Kingdom needs a foreign policy that both supports UK interests and which the public supports – one that brings the UK together; the current review needs to put these aims to the fore.  We should seek to play a leading global leadership role, but with limited resources that means – at the least — focus, innovation and partnership.

As a general set of principles for the UK global aims, post-Brexit, we would do well to turn for inspiration and leadership to the Atlantic Charter, drawn up in August 1941 between Roosevelt and Winston Churchill on the warships Augusta and Prince of Wales, off Argentia, Newfoundland.  Its sets out eight common principles on which they sought to base their hopes for the post-war world; it remains highly relevant today, not least because due to wartime events, the war aims of the Soviet Union and the Cold War, its full hopes were not realised.

In summary, the two nations:

  • Seek no aggrandisement, territorial or other;
  • Have no desire to see territorial changes not in accord with the freely expressed will of the peoples concerned;
  • Respect the right of all peoples to choose the form of government under which they live and to see sovereign rights and self-government restored to those forcibly deprived of them;
  • Endeavour to further the enjoyment of all states, great or small, of access, on equal terms, to the trade and the raw materials of the world which are needed for their economic prosperity;
  • To bring about the fullest co-operation between all nations in the economic field with the object of securing, for all, improved labour standards, economic advancement and social security;
  • They hope to see established a peace which will afford to all nations the means of dwelling in safety within their own boundaries, and which will afford assurance that all may live out their lives in freedom from fear and want;
  • Such a peace should enable all men and women to traverse the high seas and oceans without hindrance;
  • They believe that all the nations of the world, for realistic as well as spiritual reasons must come to the abandonment of the use of force.

Today we would want to add in a few more key principles — addressing climate change would of course be amongst them.

These principles could serve the UK well as a foundation for what it hopes for the world and its role in it; it could form the basis for future partnerships across the globe and guide its work through international bodies like the WTO or as it seeks to bring stability to the global order in a time marked by great change and challenges.

As we enter the next rounds of negotiations with the EU, it is as well to remember that any agreement we reach should support and not restrain the broader aims of national and state renewal for the UK and its freedom of action in foreign policy.  An equitable agreement at this stage would make a positive contribution to realising UK ambitions