The New Regulatory Environment

Latest Transitions report from BDO highlights the new regulatory landscape for businesses

Regulation affects every business and the wrong kind can hamstring much needed growth. But the right regulation can foster it. How can the pressures for change be used to ensure regulation stimulates growth? Rules or principles? Our clients tell us that regulation often hampers decision making and entrepreneurship. They feel rules have become overly complex. Too many rules can lead to red-tape regimes, shackle sound businesses and subdue entrepreneurial flair. On the other hand, regulation that is based on a requirement for ethical behaviour and principles but which is easy to operate, can encourage transparency and market growth. It is in no-one’s best interest to interfere in the operation of the market, save to do what is necessary to produce a competitive environment and protect consumers adequately. We need regulation that protects, but doesn’t prevent business progress. But regulation built on a principles-based approach does not necessarily mean ‘light touch’ regulation. Principles need to be enforced, perhaps even more so than rules. However, with so many vested interests in the regulation ‘industry’, and with competing regulators, it is critical that those with a stake in the issue make their voices heard and demand the type of regulation that will foster enterprise, whilst protecting against dishonesty and genuine conflict of interest. The Government’s view Government’s key priority is economic growth and it believes less, but more effective, regulation should be used as a means to protect and foster that growth. It has put forward what it sees as key principles for economic regulation. Regulators should be accountable and efficient. Regulation should be predictable, coherent and adaptable to changing conditions. It should be focused on what really matters. Our experience in working with our clients tells us there are three key areas of regulation that matter to them. Employment - just the job... Our clients are particularly concerned about employment rules as a disincentive to creating new jobs. Employment law is a minefield for many businesses, particularly small employers. Faced with an increasing mountain of regulation, some employers are inclined to give up. Many only face up to the devil in the detail when something goes wrong – for example when an employee sues for constructive dismissal, often on the basis of a sin the company never knew it had committed in the first place. The new Equality Act 2010 generated a storm of comment when introduced in October. Stories circulated about the banning of office banter, and the heavy hand of Europe weighing down on UK employers. But now, even the Government concedes that the cost to UK plc of simply understanding the new legislation will amount to nearly £190m. Against this backdrop, we believe the drive for growth will lead to lower barriers in employment regulation, making it simpler for employers to navigate and understand their rights and obligations. Tax policy…and the Big Society The credit crunch shook the foundations of the relationships between governments, businesses and individuals in terms of taxation policy. The Government’s need to refill the coffers – and soon – has resulted so far in broad-based tax increases affecting both businesses and individuals. UK taxation needs to be carefully managed not to discourage the commercial aspirations and appetite of UK plc, its consumers and foreign investors. The Government also has an opportunity to modernise the excessively complex UK tax system, while reducing tax rates and aligning the tax systems with its broader objectives. We believe a Big Society scenario is probable, in which regulation reduces the scope for artificial tax avoidance, enabling lower tax rates for both businesses and individuals. This would create fewer distortions and disincentives for growth than broad-based increases in corporation and income taxes. Financial Services Given the shock caused by the financial crisis and the pivotal role of financial services in the overall success or failure of the economy, it is critical that the debate on regulation focuses on the root causes of the crisis. Change that ignores the wider consequences of regulatory interventions is not the answer. The financial services industry has a more pressing need for regulation reform than other sectors. A wide range of tools are available to regulators and should be used swiftly and proportionately when financial services firms defy clearly defined rules and principles. Regulation in this sector will need to be tight for some years. There is still much thinking to be done. Many aspects of new regulation remain in the drafting and consultation stage, so before more decisions are made and further regulation is implemented, we would like to see a clear consensus based on a full understanding of the issues and their consequences. If regulators follow this approach, firms and consumers will have much more confidence in the value of regulation. In directing any reform of financial services regulation, we believe the answers to four key questions should be sought: Do the proposed solutions fix the problems? What is the role of financial services regulation? How is regulatory success measured? What are the wider consequences of new regulation? Conclusion There is much to be done in reshaping regulation. The one certainty is that there will be change. Across every sphere of regulation, simplicity should be the chief objective and a principles-based approach will be key to achieving this in most spheres of regulation. Failure to follow this path will put an unintentional but dangerous brake on growth. If you would like further information about the series of Transitions reports by BDO LLP, or the services BDO can offer, please contact Malcolm Thixton, Audit Partner, BDO LLP, Malcolm.thixton@bdo.co.uk, Tel 023 8088 1895. - Ends – Words:936