This profile of regulatory management approaches in the United Kingdom is one of a series of short papers on regulatory management practices in selected OECD countries, prepared for the Canadian External Advisory Committee on Smart Regulation. In addition to the individual country profiles, the series is completed by a summary document, "International Trends and Innovations in Regulatory Management based on a review of regulatory management practices in Australia, Finland, the United States, the United Kingdom and the European Union.

Prepared by The Regulatory Consulting Group Inc.
for the External Advisory Committee on Smart Regulation
Ottawa, Canada
June, 2003

REGULATORY MANAGEMENT ASSESSMENT
UNITED KINGDOM

A. INTRODUCTION

The United Kingdom, with a population of approximately 60 million, is one of Europe's most productive economies. It is one of the five permanent members on theUNSecurity Council, a founding member of NATO and the Commonwealth, and in 1973 it joined the European Union. For the present, the UK has elected to remain outside of the European Monetary Union, indicating a nation with a predisposition to cautious reform. Domestically, constitutional reform is a major issue, especially given the establishment of the Scottish Parliament, National Assembly for Wales and the Northern Ireland Assembly in 1999.

The UK, a leading trading power and financial center, is one of the four trillion-dollar economies of Western Europe. Over the past two decades the government has greatly reduced public ownership and contained the growth of social welfare programs. Agriculture is intensive, highly mechanized, and efficient by European standards, producing about 60 percent of food needs with only 1 percent of the labor force. The UK has large coal, natural gas, and oil reserves; primary energy production accounts for 10 percent of GDP, one of the highest shares of any industrial nation. Services, particularly banking, insurance, and business services, account for the largest proportion of GDP, while industry continues to decline in importance. The country's relatively solid economic performance has complicated the government's efforts to make a case for Britain to join the European Economic and Monetary Union (EMU). Critics point out that the economy is thriving outside of EMU, and that public opinion continues to show a majority of Britons opposed to the single currency.

The combination of UK's constitutional reform agenda devolving local regulatory responsibility, economic initiatives and regulatory experience makes it a significant point of interest. More specifically, the UK has been a leader in regulatory reform and is undergoing a "second wave" of reform, further making it worthy of study.

B. STRUCTURE OF GOVERNMENT
AND RULE-MAKING

1. Structure of Government

England has operated as a unified state since the 10th century. With the inclusion of Wales in 1284 and Scotland 1707, the country became known as Great Britain. The legislative union of Great Britain and Ireland was implemented in 1801. The Anglo-Irish Treaty of 1921 formalized a partition of Ireland whereby six northern Irish counties decided to remain part of the United Kingdom of Great Britain and Northern Ireland, which became the formal name of the country in 1927.

The United Kingdom is a constitutional monarchy in which executive power resides with the monarch but is exercised through Cabinet. Cabinet, comprising the Prime Minister and ministers who are elected members of the House of Commons, is responsible for the daily administration of administrative departments. The legislative branch consists of the House of Commons, which comprises 659 members elected for a Parliamentary term of a maximum of five years, and the House of Lords (Senate), comprised of 500 life peers, 92 hereditary peers, and 26 clergy. Bills can emanate from either house of Parliament, except money bills that can only be proposed in the House of Commons. The UK Parliament holds principal regulatory responsibility; however, increasingly regulation is being devolved in areas of local responsibility to the assemblies of Wales, Scotland and Ireland. Residual powers reside in the central government.

UK government administration is carried out by eighteen ministerial departments; 23 non-ministerial departments including sectoral regulators; 121 executive agencies, which operate at arm-length from the Minister; 1,035 non-departmental public bodies; and 468 local authorities. Although the UK operates as a national system with a strong centre in Westminster responsible for policy, tradition and recent constitutional reform initiatives have enabled local governments to play an important regulatory role in implementing and enforcing national regulations. Service delivery is usually the responsibility of local governments. The central government consults with local government on policy developments that affect them. This relationship is based on agreements (except for Northern Ireland, which is based in law) that specify the framework of relations and cooperation. Although there is no standard approach, recent reform initiatives, such as the three-year spending reviews, ensure some semblance of consistency and efficiency.

Given the increasing regionalization of the British state, a great deal of coordination is required. Most coordination between the UK government and the devolved administrations is carried out bilaterally. A joint ministerial Committee of Ministers is responsible for central coordination.

2. Rule-Making Process

The UK is governed by a dynamic and complex political structure that has a defining impact on the regulatory system. It does not have a single codified system of law, courts, police, or local government. There is substantial sharing of administrative and enforcement functions with lower levels of government. UK regulatory policy is rooted in the tradition of informal decision-making and respect for the rule of law. British policy culture is informal, cooperative and voluntary, which has tended to build a high degree of trust between regulators and regulated. It is characterized as decentralized, consensual, flexible, and non-litigious.

With respect to process, all subordinate regulation and virtually all bills emanate from the government-of-the-day. Policies to be included in primary legislation must be approved by the Cabinet before the bill is drafted and approved for presentation to Parliament. Extensive consultation within government and external interested parties occurs as policy is being developed. Proponent departments, which are overseen by the Cabinet Office, are responsible for ensuring that other departments with an interest are consulted at appropriate stages of the bill's preparation and that necessary collective agreement is obtained. Once the government has decided to introduce new legislation, consultation will often take place before it is introduced to Parliament. Comments from interested parties will be taken into consideration during the process of passage. Draft bills with an impact on business, charities or the voluntary sector (in practice, the vast majority) are always supported by a Regulatory Impact Assessment (RIA).

The Cabinet Office Regulatory Impact Unit (RIU) plays a leading role in the coordination of proposals for regulations that would have an impact on business, charities and voluntary organizations. The involvement of the RIU is dependent upon the extent of economic and policy implications of the proposal. The RIU is responsible for ensuring that proposals with an impact on business, charities or the voluntary sector that come to the Cabinet or Cabinet Committees for collective government agreement are - in accordance with the Prime Minister's injunction - accompanied by an RIA of adequate quality. It has no formal authority to stop proposals for regulation being sent to Cabinet Committees, except that proposals that it judges to be "significant" must, in addition to producing an RIA, agree with the RIU on a paragraph called a "Regulatory Impact Statement" to include in the Cabinet paper or letter to Ministerial colleagues. However, in other cases where proposals without RIAs or with inadequate RIAs come for collective decision, the Minister for the Cabinet Office can - and not infrequently does--withhold his consent to the measure until an adequate RIA is produced. In practice, timely and intense internal consultations usually enable the presentation of agreed RIAs before they are relayed to Cabinet for political discussion.

To become law, bills must be passed by both houses of Parliament and receive Royal Consent. Bills may be amended in either or both chambers. However, as in Canada, the Upper House can only delay the passage of bills. (It should be noted, however, that using the Parliament Act to override the objections of the House of Lords is a somewhat cumbersome procedure and may, for example, lead to the loss of amendments that were made during the Bill's first discussion. For this reason, the Government will, whenever possible, endeavour to pass bills through both Houses). Parliamentary scrutiny of subordinate legislation is concerned with the extent to which power delegated to the government complies with the provisions of the enabling statute. Regulatory Reform orders under the Regulatory Reform Act are a special form of statutory instrument. Due to wide powers delegated to ministers, special and statutory safeguards are instituted in the parliamentary scrutiny process, including thorough examination of all proposed Orders in Select Committees in each chamber.

The UK, like most Westminster countries, employs a hierarchy of legal and statutory instruments. First, primary or parliamentary legislation is passed by the UK Parliament. Until recently, no body could overturn primary legislation. Now, the European Court of Justice can require amendment of parliamentary legislation that is in conflict with EU law. Second, constitutional law is unwritten, but can be changed by ordinary primary legislation according to accepted conventions. Third, statutory instruments or secondary legislation are subject to parliamentary approval following review by the Joint Committee (of Houses) on Statutory Instruments. Fourth, other provisions having statutory effect, including those that regulate, direct, fix fees, set dates, periods and procedures, propose codes of practice, and establish a variety of licenses and approvals, may require Parliamentary approval. Fifth, local by-laws are prepared by local governments, which have a variety of regulatory powers such as those dealing with land use and planning, are usually confirmed by central departments since local governments may enforce many national regulations.

C. REGULATORY REFORM IN THE UK

1. Background

The United Kingdom has long attached great importance to effective regulation and has vigorously promoted regulatory reform in support of a more productive and effective economy. As in many industrialized countries, the UK's had suffered disappointing losses in the 1960s and 1970s. Although its standard of living was rising during this period, the UK's economic performance was slipping relative to that of other OECD countries. Attempts during this period to accelerate economic growth yielded limited successes due to balance of payments difficulties and a lack of economic competitiveness due in part to over-regulation.

Macro-economic discipline was tightened after 1976 and a new macroeconomic policy introduced in the early 1980s which concentrated on control of the money supply to combat inflation and a fiscal policy that emphasized tax reform and public expenditure control, a reduction in public sector borrowing, and reinvigorating the private sector. Introduction of the recent macroeconomic framework in 1997 focusing on central bank independence, inflation-targeting and firm fiscal rules improved economic stability.

A key element of the "first wave" of regulatory reform was "rolling back the frontiers of the state" by encouraging enhanced participation of the private sector in the economy. The 1985 White Paper, "Lifting the Burden," identified areas of over-regulation and the negative impact of government regulation on private sector competitiveness. In 1986, another White Paper, "Building Business - Not Barriers," further explored the issue of regulatory compliance costs on private sector competitiveness. As a consequence of these initiatives, a central task force was created within the Department of Employment, the "Enterprise and Deregulation Unit," to oversee and coordinate the "anti-red tape" efforts of individual line departments. In addition, a Department Deregulation Minister was appointed in each department to ensure political and bureaucratic oversight of the process.

In 1989, a Cabinet Committee on regulation was created to oversee the process of deregulation at a central political level. Such reforms were aimed at promoting greater efficiency of the private sector in creating wealth that ultimately contributed to greater fiscal stability. The importance of SME)s grew in line with the contraction of traditional industries and loss of subsequent employment. As a result, it became clear that new regulations would be needed to deal with newly created monopolies. As such, the government created several new independent regulatory agencies to manage new issues and challenges raised by transition to a market orientation. SME)s were particularly pleased with this innovation in that the extent to which they could gauge their certainty of compliance with new regulations was improved.

Other changes during this period included the establishment of executive agencies at arm's length from government to improve efficiency of delivery of public services. These efforts, combined with EU efforts to create a single market, further shaped the government's reform agenda.

In 1998, the UK Compliance Cost Assessment was replaced with the Regulatory Impact Assessment and expanded to incorporate benefits and impacts on charities and the voluntary sector. In 1999, a Ministerial Panel for Regulatory Accountability was established to call ministers to account for new regulation and their proposals for regulatory simplification. In 2000, the Small Business Service was created to safeguard small business considerations in the regulatory process as a key element of the RIA. Finally, in 2001, the Regulatory Reform Act was passed, which included the announcement of approximately 50 potential Regulatory Reform Orders.

2. "Second Wave" Regulatory Reform Initiatives

Although the UK has undergone more than twenty years of regulatory reform, the OECD reported disappointing long-term productivity growth. The government's own estimates suggest that in terms of output per worker, productivity is 42 percent higher in the US, 14 percent higher in France, and 7 percent higher in Germany. The gap has narrowed somewhat relative to other European countries as UK productivity has grown by 2.3 percent in 2000. Alongside macroeconomic pressure for reform, the government has noted that some of its public services and infrastructure still require attention, including areas such as education, health service and transport. Many challenges have a basis in past under-investment, with severe budget cuts in the 1980s being held as partly responsible for current weaknesses.

Such challenges have sparked a "second wave" of reform" for which the K has significant experience, especially with respect to the capacity to promote high quality regulation that is consistent with OECD principles. Institutions and procedures have become increasingly efficient, transparent and accountable relative to those of other countries. Whereas other countries are just embarking on major reform, the UK is "fine-tuning" its systems, including the RIA process.

For the most part, the UK is at the cutting edge of reform and faces new demands on its regulatory systems for which there are no precedents, including the growing importance of ex post evaluation of regulation and its contribution to policy goals; the management of diverse and often conflicting objectives; the management of performance standard or target-based regulation; the development of new approaches to consultation suited to the complex modern regulatory environment; the design of effective central mechanisms to drive quality, consistency and further reform; and the burdens on government itself of managing a modern regulatory environment.

The landmark White Paper, "Modernizing Government," of March 1999 established broad priorities for reform and marked a new drive to remove unnecessary regulation. The White Paper reiterated the requirement for departments to implement Regulatory Impact Assessment for policies that impose new regulatory burdens. Good regulation guides and new procedures for regulatory impact assessment were prepared as a result forming the basis of the UK's regulatory policy (discussed under "Regulatory Policy").

At the moment, the UK is attempting to simplify its public sector regulatory environment in response to its March 2003 budget commitment. A feature of this reform initiative is that departments will be required, in their annual reports, to report on regulatory compliance, including their use of non-regulatory alternatives. In addition, EU coordination is becoming increasingly significant. The government has supported the negotiation of an inter-institutional agreement on better regulation that received political agreement in June 2003.

3. Regulatory Institutions

In its effort to improve regulatory quality, the UK has implemented a two-pronged approach. First, it has established new central institutions and mechanisms to promote regulatory reform within the public administration; and, second, has designed new means of evaluating the overall regulatory regime architecture. According to the OECD, the UK has succeeded on the first element but requires improvement on the second.

The UK has learned that central oversight units are most effective if they are independent of regulators; if they work under a clear regulatory policy endorsed at the political level; if they are horizontal and staffed with experts; and if they are linked to existing centres of administrative and budgetary authority. Each minister is seen to have formal responsibility for implementation of the regulatory reform policy; this has created some challenges for ensuring consistency and maintaining a systematic and broad-based approach to reform.

(a) Executive Institutions

The UK has established key executive oversight bodies, which at the central government level promote and review regulatory reform. These are:

The Panel for Regulatory Accountability was established by the Prime Minister in 1999 to "take an overall view of the regulatory implications of the government's regulatory plans…and to ensure necessary improvements in the regulatory system and the performance of individual departments." Ministers may appear before the panel to report on and justify proposals.

The Regulatory Impact Unit (RIU) is resident within the Cabinet Office but has been in place since 1986 under various line ministries. It monitors, reports, and advocates progress on regulatory reform across the government. It also provides guidance for reviewing regulatory impact assessments on domestic and EU legislation. It manages external communication of the government's policy on regulatory reform and it moves forward practical projects to minimize the burden of regulation in the public sector. The Unit acts as secretariat for the independent Better Regulation Task Force.

The Departmental Regulatory Impact Units (DRIUs) carry out the daily work of coordinating regulatory activities and advising regulators in consultation with the central RIU. The DRIUs line management lies within departments, and they are responsible for providing advice to departments regarding consultation and RIA procedures. Involvement of the DRIUs in regulatory proposals varies by department, depending upon the expertise of the parties to the proposal.

Regulatory Reform Ministers have been appointed in each of the key regulatory departments who are charged with the responsibility for removing any regulations that are outdated or burdensome, and to ensure that the new regulations are not introduced unless they are necessary and impose the minimum cost to business. Departments report their progress to the Cabinet Office, and Reform Ministers report to the Prime Minister and may be called to account by the Panel for Regulatory Accountability.

The Small Business Service (SBS) was established in April 2000 to provide a single organization dedicated to assisting small firms and representing them within government. It has a strong institutional presence in the regulatory process and must be consulted on issues affecting SME)s.

The Treasury plays an important role in the regulatory reform process in that it controls departmental spending, which is linked to Public Service Agreements (PSAs). It has a role to play in assessing existing regulations and the quality of enforcement.

The Parliamentary Counsel Office (PCO) drafts the government's primary legislation other than that relating to Scotland. The Office is responsible for the legal quality of legislation, ensuring that it is consistent with existing legislation.

(b) Oversight Bodies

The Better Regulation Task Force (BRTF) is an independent advisory body established in 1997 to "advise the government on action which improves the effectiveness and credibility of government regulation by ensuring that it is necessary, fair and affordable, simple to understand and administer, taking particular account of the needs of small business and ordinary people." The Task Force has a strong influence on the regulatory agenda, not least with its "Principles of Good Regulation." Most of its recommendations have been implemented by the government.

Parliamentary Committees, especially the Joint Committee on Statutory Instruments, reviews draft legislation, which assists to raise legal quality. The National Audit Office (NAO) investigates a wide range of issues and has used its discretion to produce a variety of reviews, including the performance management process of the Public Service Agreements.

4. Sectoral Independent Regulators

Structural economic reforms in most OECD countries have encouraged the development of independent regulators responsible for oversight and the promotion of competition in the infrastructure sectors (e.g., telecommunications, energy, transport, water), and for prudential oversight of sensitive competitive sectors, such as financial services. Privatization and EU requirements also stimulated the creation or enhancement of independent regulatory oversight bodies. The most prominent sectoral regulators include: Financial Services Authority (FSA), Office of Telecommunications (OFTEL), Office of the Gas and Electricity Markets (OFGEM), Office of the Rail Regulator (ORR), International Rail Regulator (IRR), Civil Aviation Authority (CAA), Office of Water Services (OFWAT), and the Postal Service Commission (PSC). Most regulators were set up ad hoc and evolved according to the needs and circumstances of the sector, rather than from a priori reasoning or a common formal framework.

Each of the regulating institutions shares some common objectives, including balancing consumer interests in low prices and quality services with shareholder interest in a reasonable rate of return on investment. Regulators are independent of government and appointed for a fixed term. In some cases, boards are replacing individual regulators to de-personalize the use of authority.

An important challenge that was addressed was the relationship between sectoral regulators and the competition authority. The UK devised a solution based on concurrence mechanisms under which the regulators have the power to apply the general competition law. Responding to its 2000 White Paper, the government passed the Utilities Act, which established a framework for the further development of these regulators, including the need for multi-sectoral regulators. For example, OFGEM is the product of a merger of OFFER and OFGAS. A further White Paper in 2001 recommended the merger of telecommunications and broadcasting regulation into one entity, OFCOM.

5. Improving Coordination Between Levels of Government

Coordination of regulatory reform efforts has become increasingly important especially with the establishment of devolved regional administrations and membership in the EU.

With respect to national and local coordination, the quality of local by-laws has improved due to the improvement of confirmation procedures exercised by central departments and the increased use of "model by-laws." The central government consults with local governments as early as practicable on relevant policy developments, including the preparation and planning of new legislation. Because local governments are playing more important roles in implementing regulations, emphasis is placed on negotiating frameworks for cooperation and common obligations and commitments.

Coordination with the devolved administrations has been set out in Devolution: Memorandum of Understanding and Supplementary Agreements between the United Kingdom Government, Scottish Ministers and the Cabinet of the National Assembly for Wales (1999) and bilateral concordats. Most coordination is carried out on a bilateral basis overseen by a Joint Ministerial Committee.

With respect to coordination with the European Union, it has been estimated that 40 percent of new regulations with a significant impact on business taking effect in the UK have their origin in EU initiatives. The UK government has placed a great deal of energy into improving the quality and timely implementation of these regulations. The government's "Guide to Regulatory Impact Assessment" and "Transposition Guide: How to Implement European Directives Effectively" sets out procedural and substantive requirements and advice for policymakers, administrators and legal advisors involved in the negotiation, implementation, or presentation of EU legislation. This includes criteria for preparing RIAs and internal and external consultation procedures. A substantive part of the process of negotiations is ensuring that the UK is not unduly disadvantaged by EU regulations. The European Secretariat in the Cabinet Office is responsible for coordinating the government's EU regulatory activities.

The uneasy overlay of EU Community regulation drawn from European civil law tradition upon the UK common law system has been creating substantive challenges. The common law based system approach to detail and precision is sometimes at odds with the civil law style of EU regulations. British implementation of EU directives is often accused of "gold-plating" or over implementing EU directives. In response, the UK has indicated that this "enlargement" may be due to the British practice of writing penalties and sanctions into the law and of complementing directives with guidance to provide the regulated entitles with as much certainty as possible. In addition, the phenomenon of "double-banking," or the simultaneous existence of parallel UK and EC legislation, has led to some confusion as to the jurisprudence in force. To avoid such difficulties, the UK "Transposition Guide" requires departments to consult with the Cabinet Office Regulatory Impact Unit (RIU) whenever risks or possibilities for over-implementation arise. In addition, the new authorities afforded to ministers under the Regulatory Reform Act enable the removal of double-banking without having to proceed through parliamentary procedures for primary legislation. In the past the UK was been considered to be slow at implementing EU legislation, especially in the areas of transport and public procurement. However, this is improving as the UK was among the seven of fifteen EU countries that met the target for 98.5 percent on-time transposition of European Directives in 2002 and among the five out of fifteen that met the target in 2003.

6. Building a Strengthened Effective Competition Policy and Open Market

The UK has recognized the strong link between competition policy and economic performance. Such recognition has been apparent through multiple studies, such as the survey by Griffith for the period 1980-1992, which showed that external restructuring through market entry and exit accounted for 50 percent of UK labour productivity growth, and 90 percent of Total Factor Productivity (TFP). The EU's Single Market also demonstrated the link; for example, firms in sectors that were expected to be significantly affected by the Single Market saw a substantive rise in efficiency.

Important changes have been made to strengthen the competition policy law regulatory framework. The Competition Act 1998, which became fully effective in 2000, goes a long way to removing previously tolerated practices that were consistent with previous uncompetitive nationalized industries. The policy rests on two pillars: delivering macroeconomic stability to enable firms and individuals to invest for the long term; and implementing microeconomic reforms to remove the barriers that prevent markets from functioning effectively in five areas. These are: strengthening competition to encourage firms to innovate, reduce costs and provide better quality goods and services to the consumer; promoting enterprise and innovation to unlock the potential of new technologies and working practices; supporting entrepreneurship, risk-taking and management in all communities; improving the skills base to maximize the contribution of human capital to growth; encouraging investment to improve the UK's stock of physical capital in every sector and industry; and, working directly to improve public services productivity.

With respect to supporting an open market, the proposed Enterprise Bill is intended to ensure the provisions to the Competition Act are implemented. For example, the bill provides for a new merger regime where decisions will be taken by independent competition authorities against a competition-based test rather than the current public interest test; the introduction of criminal sanctions for those who engage in hard-core cartels; and the Office of Fair Trading (OFT) has been empowered to seek court orders for disqualification against corporate directors who engage in competition breaches.

D. REGULATORY MANAGEMENT AND PROCESSES

The United Kingdom has implemented important changes in its regulatory management regime and processes. This section examines the use of regulatory principles and regulatory impact statements, public consultation approaches, and improvements in market openness.

1. National Regulatory Policy

Principles of Good Regulation

Since 1985, various UK governments have been developing principles of good regulation to guide the preparation of new regulations that are consistent with the OECD best practices. As such, its regulatory policy is premised on the OECD's 1995 principles of "good regulation" in its Recommendation on Improving the Quality of Government Regulation of 1995. The UK policy is also based on the 1997 OECD Report on Regulatory Reform, which recommended that countries adopt at the political level broad programs of regulatory reform that establish clear objectives and frameworks for implementation.

In 2000, the UK government published its guide, "Good Policy-Making: Guide to Regulatory Impact Assessment," which set out procedural steps for government departments and agencies to follow when developing new regulation. The guide provides regulators with guidelines and requirements for implementing consultation, estimating costs and benefits to regulation and alternative options, securing compliance, and how to monitor and evaluate the regulation. A similar guide, "Guide to Better European Regulation," was prepared to assist regulators with proposals submitted to the EU Council and European Parliament. These two guides were revised and merged with the publication of "Better Policy Making: A Guide to Regulatory Impact Assessment" in January 2003. This was supplemented by a specialized guide on implementing European Directives "Transposition Guide: How to Implement European Directives Effectively."

Quality of Regulation

In April 2001, the UK enacted the Regulatory Reform Act to widen the application and scope of the Deregulation Orders under the Deregulation and Contracting-Out Act of 1994. The Regulatory Reform Act affords ministers the power to repeal and amend by secondary legislation provisions in primary legislation that impose a burden on business, charities, and the voluntary sector. It is expected that this Act will quicken the pace of eliminating unnecessary burdens and regulations through secondary legislation rather than having to work through primary legislation.

2. Regulatory Impact Analysis

Based on the findings of the 1999 White Paper on Modernizing Government, the UK published its "Policymakers Checklist" that same year as an integrated electronic tool to allow policymakers to address a range of different impact assessments. It provides screening questions to assist policymakers in identifying areas to be affected by their proposals and directs them to the appropriate impact assessment guidance.

In 1998, the Better Regulation Task Force (BRTF) developed a set of Principles of Good Regulation, which were revised in 2000 and incorporated into the government's Guide to Regulatory Impact Analysis. It established principles to be followed by regulators to ensure regulations are "necessary, fair, effective, affordable and enjoy a broad degree of public confidence." The BRTF uses 13 criteria for testing regulations, including five basic principles. These are: transparency, accountability, targeting (i.e., regulations should focus on the problem and avoid side effects), consistency, and proportionality (i.e., regulatory responses should fit the extent of the risk). The eight "Tests of Good Regulation and Pitfalls to be Avoided" are applied to state regulation and to alternatives to regulation. According to the eight tests, regulations must:

• Have broad political support;
• Be enforceable;
• Be easy to understand;
• Be balanced and avoid impetuous knee-jerk reactions;
• Avoid unintended consequences;
• Balance risks, cost and practical benefit;
• Seek to reconcile contradictory policy objectives; and,
• Identify accountability.

The tests indicate that proportionality considerations are important. However, there are unavoidable trade-offs in the criteria and their management becomes more complex as these trade-offs multiply. As the UK moves beyond guiding principles to implementing a policy with focused objectives, clear standards and criteria based on the principles to improve decision-making will be needed. This becomes increasingly important as efforts for evidence-based RIAs are launched. The UK is looked to as a leader in merging and streamlining the number of essential principles/criteria to a set of explicit standards for each principle, with specific guidance and tests to be applied to each. In addition, further elaboration will be needed to clarify trade-offs between competing principles.

RIA requirements apply to primary and secondary legislation. Specifically, according to the new policy, a RIA must be applied to new legislation or regulation that has a non-negligible effect on business, charities or the voluntary sector. RIAs must be quantified as much as possible and expressed in monetary terms. If the regulation is "significant," there must be an agreement about a regulatory impact statement with the RIU. Significance is defined in government guidance as "those proposals with costs in excess of £20 million, high topicality, or a disproportionate impact of the regulatory burden." The Scrutiny Team focuses on those RIAs with the potential for significant impact on business.

A RIA has to be available, in the form of a partial (i.e., provisional or preliminary) RIA, when collective ministerial agreement is being sought to the principle of legislation or regulation in a particular area. An expanded RIA must be provided when public consultation is being conducted. Subsequently, a full regulatory impact assessment is developed to include the results of public consultation and forms the basis of ministerial action. In order to improve accountability, the responsible Minister must sign a declaration that, having read the RIA, he/she is satisfied that the benefits justify the costs.

During the RIA process, special attention is paid to the burden placed on SME)s. If there are impacts on small business attached to a proposal, the Small Business Service must be consulted in order to ensure that SME)s have been consulted and their concerns addressed in the RIA and that alternatives to regulation have been considered.

2. Consultation and Transparency

The United Kingdom places importance on a transparent regulatory environment in order to establish a stable and accessible regime that promotes competition, trade, and investment and helps to ensure some control over the influence exerted by special interests. The UK has attempted to establish standardized approaches to making and changing regulations; consultation with special interests; plain language in drafting; publication, codification and other ways of making rules simple to find and understand; and, implementation and appeals processes that are predictable and consistent.

(a) Transparency of Procedures: Transparency in Rule-Making

Except for registration and the publication requirements for statutory instruments, the UK has no general law placing obligations on the government for the development of regulation similar to what exists in other OECD countries. One exception, however, is the Regulatory Reform Act, which authorizes ministers to amend or change existing burdensome legislation. Despite the absence of legislation, the UK has detailed formal and informal law-making requirements. There are procedures to elaborate laws and regulations that are non-statutory. Transparency is assured in most policy fields in the form of practices and guides that are issued by the government or independent regulators. For example, the guides, "Better Policy-Making: A Guide to Regulatory Impact Assessment" and "Policy Makers Checklist" set out guidance for departments and agencies for the development of regulations and policy proposals. In addition, the "Consultation Code of Practice" sets standards for consultation documents. Although regulators are not constrained by these guides and have developed other standards and practices, they are often similar to general government guides. The OECD suggests that transparency would be improved with more formalized arrangements and greater standardization.

(b) Transparency as Dialogue with Affected Groups: Public Consultation

The purpose of public consultation is to include the perspectives of business and citizens in regulatory decisions; to contribute to more effective regulations; identify more effective alternatives; lower the costs to businesses and administration; improve compliance; and to improve regulatory responses to changing business conditions. Although there are no legal requirements to consult, there are some laws that require consultation in specific cases. Consultation has been required since 1985 with the regulatory development policy was instituted, and the guides for the Deregulation Initiative were published in 1998 and 2000.

In June 1998, the government published its guide, "How to Conduct Written Consultation Exercises: An Introduction to Central Government." It sets out best practices for departments and agencies to follow when producing and issuing consultation documents and taking follow-up actions. Although it did not set out formal rules, it stated that departments and agencies must have good reasons not to follow the guide. An evaluation of the guide was conducted in 2000, which found that most departments were aware of the guide but less than half followed it; quality varied by department; central monitoring of exercises was weak; response time was inadequate; and the weighting of views was found to be unbalanced. A revised guide went into effect in January 2001, and consultation is currently taking place with the aim of a further revision to take account of criticisms and improve clarity.

As discussed, consultation is now an integral part of the RIA process that is mandatory for all departments and agencies. Policymakers and regulators are encouraged to consult informally with important interested parties early in the RIA process, paying particular attention to small business in consultation with the Small Business Service. In preparing the partial RIA, proponent ministries may "take some early soundings from those likely to be affected."

3. Appeal, Application, Compliance, Review and Enforcement of Regulations

The UK has been committed to improving its processes for application, enforcement and compliance systems. In addition, it has been implementing a system to redress regulatory abuse.

(a) Complaints and Appeals

With respect to administrative appeals, all British bodies that have significant dealings with the public must have in place well-publicized and easy to use complaints procedures. A central website provides easy and accessible information about complaint procedures, with direct links to relevant department and agencies websites. Some public bodies have their own external adjudicator.

Complaints can also be routed through the Ombudsman by a Member of Parliament. Ombudsmen functions are spread across many jurisdictions, powers and processes, making accessibility more difficult. A report published in 2000 highlighted the need to make the system more user-friendly.

A plaintiff can also launch an application for judicial review regarding an alleged abuse of discretion or against regulators impugning the validity of the regulation itself. However, it is recognized that in the absence of general administrative law, the standard of review is low, granting a high degree of deference to the decisions of government.

(b) Enforcement

The UK has a strong tradition of local government where substantive legislative authority is wielded. Different standards of enforcement exist, given that local authorities regulate directly; this indicates that the degree of harmonization is low. In addition, the responsibility for ever-increasing number of regulations being placed on local governments has generated concern over regulatory quality and local capacity to properly apply and enforce them. Consequently, the UK has developed an Enforcement Concordat involving representatives of business, the voluntary sector, the enforcement community and consumer groups. It is a non-statutory and voluntary code that describes for businesses and others what they can expect from enforcement officers, with emphasis placed on helping businesses to comply.

The Concordat sets out six principles for enforcement agencies' practices: service standards, openness and plain language, helpfulness, publicized and timely complaints procedures, proportionality in actions, and consistency. It also sets out procedures for communication of advice, requirements and actions. Adopting agencies are required to produce an annual report that outlines compliance with the Concordat. By the end of 2001, 96 percent of authorities in England and Wales, all Scottish authorities, and a majority of central government agencies had adopted the Concordat. Ministers are empowered to set out a code of good practice in enforcement if problems are encountered in the voluntary approach.

(c) Compliance

A crucial aspect in the regulatory process is the degree of compliance it generates. The OECD indicated that the UK is at the forefront of many nations in raising awareness among rule-makers about the issue. Government policy and guidance on the preparation of regulations include explicit considerations on securing compliance. Policymakers are encouraged to consider a variety of compliance factors, including taking a balanced approach between high compliance and overactive enforcement. In this regard, the British system is similar to that of the Dutch model, the "Table of Eleven" process, in identifying compliance issues ex ante.

4. Review of Existing Regulation

The UK government has begun the process of simplifying its existing stock of regulations. Its approach to the ex post review of regulations has been primarily ad hoc. Relatively infrequent use is made of sunsetting or ex ante commitments to review regulations although it identifies primary or secondary legislation for sunsetting or ex ante commitments to review on the basis of whether they confer new powers or rights on the state that may have a detrimental impact on recipients or legislation that is based on the precautionary principle (where science may now be better informed about risks). The private sector has complained that there is a "stifling" amount of regulation that is hampering their competitiveness, or ability to comply with regulations with certainty. Early results by departments have shown a low proportion of regulations that have either been simplified or sunsetted.

E. CHALLENGES FACING THE REGULATORY MANAGEMENT SYSTEM

In its assessment of the UK regulatory management system, the OECD noted the following challenges yet to be addressed.

Regulatory Impact Analysis System

1. Institutional Challenges of the RIU

The UK has learned that over-centralization of the RIA process tends result in a loss of legitimacy and support at the regulator level. To ensure ownership by the regulator and to establish quality control and consistency, responsibilities should be shared between regulators and a central control unit. Quality control is largely the responsibility of the regulator. Although there is adequate balance of responsibilities that are accepted by participating institutions,, the OECD has recommended that a challenge function at the centre of government can be an important driver for further progress; however, given the informality of the UK system, it is not clear whether such a recommendation would necessarily improve overall quality and policy effectiveness of RIAs.

2. Train the Regulators

The OECD indicated that while the UK system for training regulators is of high quality and superior to other nations, the system can be improved. Detailed guidance has been provided to regulators by the Cabinet Office, Treasury and SBS, and the RIU regularly runs seminars, formal training sessions and workshops on regulatory impact assessment. It also provides training through the Civil Service College's training courses on policymaking. Most officials involved in the RIA process have been exposed to such initiatives.

3. Consistency in Analytic Methods

The UK complies with the OECD recommendations for using a cost-benefit test for considering regulatory impacts in an effort to produce public policy that meets the criterion of being socially optimal or maximizing welfare. The UK RIA guide stresses flexibility in analytic method and resources spent on analysis. It recommends that costs and benefits be expressed in monetary terms as much practicable. This endorsement of an ad hoc approach means that there is significant variety in the quality of quantitative analyses and, in particular, to the cost-benefit tests, which are characterized by methodological heterogeneity. This makes it difficult to compare and monitor RIAs across time and across governments.

4. Data Gathering Techniques

There are no standardized approaches to data collection in the UK. The OECD recommends improvement with respect to instituting formal data collection strategies in order to improve RIA quality.

5. Targeting RIA Efforts

The National Audit Office (NAO) recommends that the term "negligible impact" be better defined to provide guidance for policymakers and those affected by regulatory action. The NAO also recommends that guidance could be specific on whether secondary legislation that implements policies already subject to a RIA requires a separate RIA, and on the circumstances in which non-legislative regulation, such as national standards, should be accompanied by a RIA.

6. Quality of RIA Submissions

The focus for implementing the RIAs ystem has been to improve the extent to which departments and agencies completed the requirement to submit a RIA for new regulations. The challenge facing the system at present is improving the quality of submissions now that compliance for submitting RIAs has been achieved. By incorporating training for RIA, including cost-benefit analysis, into regulator public service training, the OECD expects the quality of submissions to improve. It is also expected that hiring more economists trained in the area of cost-benefit analysis may improve overall quality. Most significantly, it has been suggested that compliance and quality statistics regarding RIAs be included in the departmental annual report.

7. Consultation Volume

The OECD indicated that consultations are extensive and that such volume may pose the risk that their quality may be reduced and that affected groups may be over-burdened by the system. However, it also suggested that the trust between regulator and regulated could be used to extend consultation beyond ex ante to include consultation dealing with the implementation of regulation, which may improve efficiency over the long term.

More System-Wide Challenges

1. Complexity of the UK's Regulatory Management Regime

The OECD indicated that the overall performance of the network of bodies and institutions that include not simply regulatory and competition authorities, but also the judiciary and legislative powers, is becoming an increasing concern, especially with respect to issues of transparency and accountability. The plethora of institutions and the complex web of relations and responsibilities have made the system complex to navigate and understand.

For example, the extensive informality of the UK system may make it more difficult to trace its connection to principles of good regulation, especially with respect to the increasing use of "soft law" or "quasi-regulation" (e.g., self-regulation, guidance documents). The lack of consistent procedural safeguards can potentially reduce transparency and the quality of regulation, and create uncertainty about the rights of the regulated entity in terms of complaints and redress. Although reliance on soft law can reduce transaction costs, in cases where requirements may not be easy for new entrants to identify, the costs of entry may rise. Therefore, although the system is flexible in many respects, some downsides in terms of degree of formality will have to be addressed as the economy expands and new entrants wish to penetrate local markets.

2. Maintaining the Momentum for Reform

Given that the UK has twenty plus years of regulatory reform experience, the greatest challenge will be to maintain momentum for what will likely prove to be more specific reforms. The UK government has not conducted any overall evaluation or review of regulatory reform across government, although some bodies such as the NAO have conducted sector specific reviews. Given that the UK is a leader in regulatory reform, it will have to assess its previous activities and effects in order to identify priority areas for future attention.

3. Institutional Coordination

Given that more responsibilities for regulatory authority are being devolved to local governments, including devolved administrations, the OECD has recommended instituting more mechanisms for central coordination to ensure regulations are harmonized and implemented consistently.

Coordination and follow-up on local government service delivery has traditionally taken a "silo approach" characterized by sector-by-sector, top-down direction from the departmental to local level rather than a cross-departmental standardized approach. Several recent initiatives such as the three-year Spending Review, the Enforcement Concordat, Best Value Programs, among others, have been instituted to support homogenous implementation, compliance and efficient service delivery. However, no system has been established which assesses the extent to which such mechanisms have improved consistency in local interpretations or determined the effects of national law.

In addition to local coordination, the OECD has indicated that coordination with the EU is also becoming increasingly important, especially given that an increasing volume of regulatory proposals emanate from there, particularly in the area of environmental protection. Although the UK is giving a great deal of attention to its relations with the EU, assessing proportional and subsidiary effects of EU level regulations may require greater focus in the future.

F. INNOVATIONS

1. Consultation and Transparency

In response to its evaluation of the guide, "How to Conduct Written Consultation Exercises," the government prepared a new code of practice on written consultation and the commitment to set up a register of current consultations to bring together all main written consultations occurring across government. On January 1, 2001, a new code was implemented and applies to all departments and agencies except devolved administrations, non-departmental public bodies and independent regulators.. It also introduced a set of criteria to be followed in all consultation documents for all UK departments and agencies. Finally, as a key improvement, it sets 12 weeks as the standard minimum period for consultation between the time a measure is announced or guidance issued and implementation. Consultation criteria were prepared that are similar to those identified by the OECD.

In the UK, the "notice and comment" requirements established by the WTO are not yet generalized. However, individual departments announce proposed regulations and make them available in advance. In addition, the government makes all government proposals available on its web site. The register provides a central listing of all the main consultations in progress or completed. A project is underway to add a summary of responses to the register and provide links to each consultation document. The site will also permit email notification of consultations to any individual or organization that requests it. The OECD recommended a formal notice and comment system to further strengthen transparency. The Scottish Assembly has recently built a website that allows affected parties to comment on regulatory proposals and provide feedback directly to the devolved administration on its regulatory activities.

Primary and subordinate legislation proposals are available on the government's web site managed by Her Majesty's Stationary Office. Documents are placed on the site within 24 hours of their publication in written form.

2. Alternatives to Regulation

As per RIA requirements, alternatives to regulatory instruments are considered before proceeding with regulation. The UK has a long tradition of using alternative approaches to regulation, including those based on voluntary agreements (e.g., Enforcement Concordat) and codes of practice. The range of policy instruments in use includes taxes on specific substances and products, grants and investment schemes for environmentally sound behaviour, voluntary agreements with industry, and information programs. They also include the use of advanced regulatory arrangements in which traditional command-and-control regulation is combined with alternative instruments. Alternatives to command-and-control regulation are encouraged as often as possible.

Commitment to the use of alternatives is contained in a report on the "Government's Use of Alternatives to State Regulation" published by the better Regulation Task Force in July 2000. It examined 54 schemes mapped according to the level of state underpinning, whether the scheme was compulsory or voluntary, and the nature and extent of risk. Overall, the report highlighted the extent and variety of alternatives to regulation in a number of economic sectors. Although it found the government's use of alternatives to be varied and inconsistent, the degree of experimentation was encouraging.

The most often used alternative is self-regulation - an arrangement in which an organized group regulates the behaviour of its members. Several economic sectors use this method, especially in the area of workplace safety and health, which is regulated by the tripartite Health and Safety Commission (HSC). Although the effectiveness of the approach has not been established, there is evidence that it delivers better results than traditional command-and-control approaches. For example, comparative studies of chemical and environmental regulation have found that the British approach has protected citizens as well as more formal American approach and likely at a lower cost. Some key disadvantages of the approach, however, are the need for external checks and balances, the risk of promoting restrictive behaviour that can mislead customers, and the danger of self-regulation leading to anti-competitive behaviour, especially ith respect to restricting market entry.

Alternatives to regulation have been more developed in environmental protection than in other policy areas. In the UK, the use of taxes and subsidies is prominent as incentives to promote more environmentally friendly behaviours. And example of these approaches is a climate change levy (CCL), which is a tax on the use of electricity, gas, liquefied petroleum gas and solid fuels where all revenues are recycled back to business through a cut in employers' national insurance contributions and provide additional support for energy-efficiency measures and energy saving technologies and related measures. In addition, negotiated agreements to ovide an 80 percent discount on the rate of the CCL available to energy intensive sectors that agree with challenging targets to increase energy-efficiency and reduce emissions. Entry to the UK emissions trading scheme is open to any entity responsible for emissions in the UK. The Green travel initiative removes the VAT from the purchase of adult cycle helmets. As well, increasing the income tax and free mileage rate provides incentives for employers to pay for cycle use for business trips, and special mileage rates per mile per passenger encourage car-sharing on business trips.

3. The RPI-X System of "Price Caps"

A central feature of the UK approach to regulate infrastructure markets has been the development of the "RPI-X" regulation of price levels. The "price cap" system was used first with the telecommunications sector and then expanded to other sectors.

Under the RPI-X, a firm's prices or "tariff basket" consisting of the prices of a number of different outputs, weighted according to their importance in the firm's output, are capped over a period of typically five years by a formula that allows a company's prices to rise in line with general inflation (e.g., the Retail Price Index (RPI)), but subject to an adjustment usually downward (i.e., the "X" factor) reflecting the anticipated scope for efficiency savings and likely developments in other relevant cost drivers. The RPI-X was designed to protect the consumer without the regulators taking over the investment decisions of the regulated. It introduces an incentive for the regulated to become more efficient by allowing efficiency savings greater than the value of X to be retained by the shareholders.

The system has been criticized, especially in cases where the UK imposed a heavy windfall tax on utilities in 1997 to target what was considered to be supra-normal profits. Critics claimed that the X-factor had been set systematically too low and rates of return in regulated industries were higher than average.

4. Reporting on Results of Regulatory Action and Oversight

Departments are being required, in their annual reports, to report on regulatory compliance, including their use of non-regulatory alternatives.

The Panel for Regulatory Accountability was established by the Prime Minister in 1999 to "take an overall view of the regulatory implications of the government's regulatory plans…and to ensure necessary improvements in the regulatory system and the performance of individual departments." Ministers may appear before the panel to report on and justify proposals and the Regulatory Reform Ministers report to the Panel.

The Better Regulation Task Force (BRTF) is an independent advisory body established in 1997 to "advise the government on action which improves the effectiveness and credibility of government regulation by ensuring that it is necessary, fair and affordable, simple to understand and administer, taking particular account of the needs of small business and ordinary people." The Task Force has a strong influence on the regulatory agenda and most of its recommendations have been implemented by the government.