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The Regulatory Process: Enabling Smart Regulation
A Dialogue with Stakeholders External Advisory Committee on Smart Regulation IntroductionA. The External Advisory Committee on Smart RegulationThe 2003 Speech from the Throne identified Smart Regulation as a Federal Government priority. The world is changing and in this evolving environment, Canada needs a regulatory system that responds quickly and effectively to the challenges of rapid scientific and technological change, as well as emerging opportunities and risks in global markets. There is a need for integrated and transparent government institutions and public policy. The External Advisory Committee on Smart Regulation was established to provide the Government with an independent, external perspective and expert advice on regulatory issues spanning economic and social policy objectives. Its members have been drawn from the business, non-governmental and academic communities. Over the course of the next twelve months, the Committee will consult with politicians, government officials, business, non-governmental organizations, our international partners and other stakeholders to develop a regulatory system that will promote health and sustainability, contribute to economic growth and reduce the regulatory burden on business and other stakeholders. B. The Committee's VisionThe vision of the External Advisory Committee on Smart Regulation is for governments, citizens and businesses to work together to build a national regulatory system that enables Canadians to take advantage of new knowledge and supports Canada's participation in an international economy. This vision has three components:
The Committee believes that this vision can be achieved by having Canadian regulatory systems, at every point, adhere to the following principles:
To move from the vision to reality, an adaptable, learning and leading edge regulatory community is needed to meet the challenges of a knowledge-based society and economy. Government must ensure that it attracts, retains, and continuously develops highly skilled members of this community. C. Purpose of PaperThis paper is intended to raise issues, questions and even a few options for the next wave of regulatory reform. There are no definitive answers given here, but there are questions and ideas to stimulate discussion and advance the debate about regulatory reform and, in particular, reform of the regulatory management process. The paper begins with a short discussion of the current regulatory system and the logic behind its design. It will then discuss concerns about evaluating this system. How do we know when we've got it right? The Committee believes that performance indicators must be established for the regulatory management system and they must be used so that citizens and government officials alike will know whether the system leads to better regulation. The paper will then review some of the problems with the regulatory management process that have been identified and that point the way for changes and improvements. The system itself will then be examined, including the Government of Canada Regulatory Policy. All through the paper, questions are raised to stimulate discussion and consultation. The Committee would like to hear the views of stakeholders-businesses, other governments, non-governmental groups, not-for-profit organizations, consumers, government officials and citizens in general-about problems and solutions. The Committee would like to know more about how well the process has been working and where it has been weak. New ideas are welcome, as are thoughts that will give the Committee a better understanding of where it must go from here. 2. Where We Are NowA. Current Regulatory SystemThe federal regulatory process is governed by a number of government policies, cabinet directives and laws. These establish requirements for regulators and regulatory decision-makers, primarily in the area of the development and approval of new subordinate legislation ("regulations"). Statutes and rules other than regulations do not receive as much attention under the current regulatory system. The Committee's concerns, however, are broader than regulations made under the authority of statutes and include regulatory action by government through both primary and secondary legislation instruments. The forerunner of the current regulatory process was established in 1986 to achieve:
Consistent with the developing emphasis on subordinate regulations as the focus of the regulatory management system, the Regulatory Process Management Standards provided a framework for the development and approval of regulations. The key elements are:
Departments also provide advance notice of proposed new laws through the Reports on Planning and Priorities that are published each spring. In addition, Departmental Performance Reports published each fall identify program performance indicators and report on measured performance. B. The Logic of the SystemThe ideas behind the federal Regulatory Policy and the regulatory management process requirements were conceived and implemented at a time (early and mid-1980s) when regulation was growing at all levels. Federal and provincial cooperation on shared regulatory jurisdiction was not well developed. In various economic sectors (e.g., transport, telecommunications, financial services), significant economic regulation protected firms from competition, to the disadvantage of consumers. The "new regulation" in the social areas of consumer protection, health and safety, labour standards, and the environment was growing at a significant rate. There was no broad government policy concerning the use of regulatory intervention. Each regulatory decision was assessed solely within its own policy framework (e.g., control of drug prices, environmental protection, worker safety). The full impacts of proposed regulation were rarely examined. Regulation was an almost automatic response to problems ("there oughta be a law!"). By today's standards, consultation was limited and narrowly focused. There was no mechanism to ensure that the public saw draft regulations before they were promulgated. The logic behind the new regulatory management system was to correct these deficiencies by improving the thinking about regulation and ensuring that decision-makers understand the consequences and implications of their decisions. Generally, the idea was that better analysis and better information would improve the end result: regulatory burdens would be diminished, objectives would be achieved more effectively and efficiently, and the credibility of government regulatory action would be enhanced. Interaction with stakeholders through consultation and information exchange would improve the quality of decisions and foster compliance. In addition, regulation would not necessarily be the first response to a problem, but chosen only where it could be demonstrated that it was the best response. It was also thought that information, analysis, and analytical methodologies about impacts of regulation would be subject to public oversight and challenge. Expertise would grow and the new system would become part of the government decision-making culture. The elements, particularly the greater transparency and improved accountability for regulatory decision-making, would act as incentives for continuous improvement of the system. The regulatory management system has succeeded in a number of ways, but it has not completely lived up to expectations. It has become narrowed, with increasing focus on subordinate legislation ("regulations"), to the exclusion of other government instruments. The current regime was also designed to operate as a system. To be fully effective, the various players should be able to understand why each part of the system was there, what it was supposed to do and how it related to other parts. This understanding of how and why the machinery was designed appears to have been lost, or perhaps it was never communicated. Some of the problems with the system will be identified below. The next section, however, will examine how we can know whether the system has achieved its objectives. This will be key to ensuring that continuous improvement is realized. C. How Do We Know We're Doing It Right?The regulatory management system is, in effect, a regulatory system. It sets standards and requirements for regulators and policy developers to follow in developing, assessing and recommending regulatory actions. It identifies the type of information that decision-makers should consider and it sets out a framework for government interaction with stakeholders (e.g., advance notice, publication of proposed regulations, and consultation). Government officials, like their counterparts in industry, must develop and apply performance criteria and indicators to measure the success of their programs. Similarly, officials (and their overseers in Parliament and the public) should be able to measure the success of the regulatory management system. What is needed is an effective way to discover whether the regulatory process is achieving its own objectives (e.g., informed decision makers making timely decisions) and meeting its ultimate objective, producing better quality regulation. This ultimate objective could be viewed as regulation that is effective at meeting its own objectives with minimal regulatory burden. Ideally, the regulatory management system should produce regulation that is more efficient, better targeted, more flexible, more credible, and have better compliance and "buy in" from the public. Ultimately, assessment of the performance of regulation will provide information to judge the success of the regulatory management system itself. There are a number of possible criteria against which to judge the success of the regulatory management system. The Committee believes these are particularly important.
3. Thinking Differently About How We RegulateWhy We Need to Improve the Regulatory ProcessA number of parts of the regulatory system are working "pretty well." There has been a real change in the culture of regulation over the past twenty years and important advances have been made. Consultation is now ingrained into the process. More care is given to examining the impacts of regulation. Compliance and enforcement issues are considered more often in designing regulatory legislation and programs. There are, however, weaknesses and areas where improvement is desirable:
The Smart Regulation initiative is an opportunity to step back and think again about what Canadians want from the regulatory system. What kind of regulations do we want? What values do we want to foster? How can we ensure that regulation contributes to, and not inhibits, Canada's performance in the globalized economy? The existing system needs improvement and refinement. The Committee believes, however, that Smart Regulation means more than that and the Committee wants to see a system that is capable of continuous improvement, with the bar for what constitutes Smart Regulation rising over time as policies become better integrated into the system and experience and expertise are gained. B. Getting the Regulatory Policy RightOver the last twenty years, the Government has made several public statements about the policies and values that it expects to be respected in new regulatory legislation. Foremost among these is the Regulatory Policy, which was first issued in 1986, along with the Citizen's Code of Regulatory Fairness. The underlying theme of the Policy was "regulating smarter." The most recent version (1999) of the Government of Canada Regulatory Policy states: When regulating, regulatory authorities must ensure that:
The 1986 Citizen's Code of Regulatory Fairness sets out some government commitments to citizens. For example, Canadians are entitled to expect that federal regulation will be characterized by minimal interference with individual freedom to the degree consistent with the protection of community interests. Officials will be held accountable for their advice and actions in developing, implementing or enforcing regulation. All rules, sanctions, processes and actions of regulatory authorities will be securely founded in law. In addition, the government will encourage the public to exercise its duty to criticize ineffective or inefficient regulatory initiatives and to offer suggestions for better or "smarter" ways of solving problems and achieving the government's social and economic objectives. It takes months or even years to shape regulatory legislation and a major overall objective of the regulatory management system is to ensure that new regulation is compatible with the Regulatory Policy. The system should provide incentives for early and continuous alignment with the Policy. The essential objective is to ensure that this happens and that policy makers and decision makers "get it right."
C. Understanding the Problem and the Need for Government ActionGovernment regulation is intended to solve problems. For example, it is intended to ensure the safety and health of Canadians through food and drug standards and standards for automobile and airplane safety. It protects Canadian consumers through regulation of banking institutions. It protects the environment and health of Canadians through control of toxic substances in the environment. How problems are defined, however, has a great deal to do with how solutions are defined. Too often problems are defined in such a way that regulation is seen as the only or the primary solution. The relationship between problem identification or definition and choice of the means to deal with the problem is often strong. (see discussion below) In addition to trying to understand the problem, policy makers (and stakeholders) should be asking, "Is this a problem that government can solve effectively? Does it justify some form of government intervention?" Involvement by stakeholders at this early stage can be invaluable in assessing the nature and scope of problems. Stakeholders also have an important role to play in bringing existing or potential problems to the attention of officials. Early cooperation and intervention can prevent more burdensome intervention at a later date.
In making these choices, governments must assess risks. Risk management is a major business of modern government. Government is concerned about a range of risks, including those arising from its own activity (see, for example, the Risk Management Policy set out by Treasury Board Canada), and risks that can be reduced by government intervention. When the government deals with such diverse matters as health and safety, the environment, and corporate governance, it faces the challenge of how to identify and assess risk. In addition, it wants to know how it can improve communication of risk to stakeholders and citizens. People are often poor natural risk assessors and information can reduce demands for unnecessary regulation or move the emphasis to regulation where the greatest potential benefits in terms of risk reduction may be found. Related to risk reduction, the government must also be able to identify priorities among the possible problems and issues that it may be asked to deal with. In an environment where resources are limited and where an important objective is to reduce regulatory burden on the private sector and governments alike, the government must be able to determine where action is required and justified while protecting the health and safety of Canadians and the Canadian environment.
D. Choosing the Most Effective Way to Deal with the ProblemWhen the government concludes, with the help and advice of stakeholders, that a problem requires intervention, it has several ways to deal with it. Governments have always used a variety of policy instruments to achieve their goals. Regulation or the setting of rules backed by sanctions is common and much of the regulatory reform debate over the past twenty-five or more years has focussed on the tendency of modern states to use regulation as their main policy tool. Other tools are expenditures (subsidies, grants), taxes, information, moral suasion and public ownership. The ability of expenditures or taxes to change behaviour by changing the cost of the behaviour has long been recognized. Depending on other factors, people will tend to choose behaviour that is less costly or more rewarding. Informed people can also be persuaded to change their behaviour. In many cases, governments use all or a mix of these instruments to achieve the desired objective. Turning Canada into a largely non-smoking society, for example, has been accomplished by a combination of taxes to increase the cost of cigarettes, active anti-smoking campaigns, and regulation of tobacco products and advertising. Municipal regulation has complemented federal regulation. Similarly, people are much more likely to refuse to drink and drive due to a combination of policies: increases in sanctions under the criminal law, advertising and promotion (including advocacy by private organizations), and improved enforcement. Drinking and smoking habits have changed and society's views of appropriate smoking or drinking behaviour have changed. Not all instruments are available for all problems and a number of factors can affect the choice of policy instrument: jurisdictional power, cost, relative likelihood of compliance, need to publicly take action, complexity of system (e.g., taxes may be attractive in an efficiency sense, but can be complex to design) and the general policy climate (e.g., public ownership is now politically less desirable). Regulators must be encouraged to examine a variety of instruments and, where regulation is appropriate, design rules that are flexible and encourage innovation. Regulation continues to be attractive to government for a variety of reasons, including expectations of stakeholders (particularly in the health and safety area). Managing expectations is an important issue in encouraging instrument choice. In addition, regulation is a familiar tool to policy makers and experience with the design of more complicated instruments, such as economic instruments to protect the environment, is still limited. Regulators must be encouraged and trained to use different instruments. In practice, however, most regulatory schemes will continue to employ a range of instruments. The objective is to enrich the use of the instrument mix and, where possible, to use regulation more sparingly. There are also alternative approaches to regulation that should be considered to introduce appropriate flexibility and reduce regulatory burden. These include: different compliance dates; different enforcement approaches; different degrees of stringency based, for example, on size or location of firm; different substantive requirements for different-sized firms; performance or outcome standards; and market oriented approaches, such as trading systems for pollution permits. Firms should be encouraged to develop alternative approaches to compliance. In some cases, government can explore the self-regulatory capacities of an industry to complement or substitute for government regulation or reduce the intrusiveness of a regulatory scheme.
E. Maximizing the Benefit for SocietyThe existing regulatory management system subjects nearly all regulations (secondary legislation) to some form of impact analysis. The Regulatory Policy refers to benefits outweighing the costs to Canadians, which implies that some form of cost-benefit analysis will be done for regulatory proposals. In practice, cost-effectiveness analysis is more often used. In a cost-benefit analysis, both the costs and the benefits are expressed in monetary terms, allowing policy-makers to evaluate different regulatory options with differing attributes using a common measure. It is also helpful to measure different levels of stringency or other variables in a specific regulation (see discussion above) by measuring incremental costs and benefits. This may be particularly important since for some regulations, a small rise in stringency may produce little benefit but, at the extremes, can add significantly to costs. In the case of most impact analyses in Canada, qualitative measures may be used, particularly for benefits. In some cases this is due to a true difficulty in assigning a dollar measure or it may be due to methodological uncertainties, although methodologies are improving. It may also be due to a bias against assigning even a statistical dollar value to certain costs, such as the cost of a premature statistical death averted. Cost-effectiveness analysis provides a rigorous way to identify options that achieve the most effective use of the resources available without putting a dollar value on all the relevant costs or benefits. Both cost-benefit analysis and cost-effectiveness analysis tend to focus on economic efficiency. Decision-makers may want (or be required) to consider other issues, such as fairness and impacts on regions or particular segments of the population (e.g., the elderly, women, consumers, children). A regulatory analysis should also describe the distributional effects (which should not be confused with costs and benefits) such as how the costs and benefits are distributed among the different populations or regions. Thorough and complete impact analyses can be expensive and time-consuming. Expertise is required, as well as reliable data. The system needs to better identify those matters requiring extensive analysis and match analytical effort to the importance of regulation. In addition, it may be desirable to put in place minimal analytical requirements for certain types of non-regulatory government action; e.g., taxation measures should clearly examine effects on productivity and competitiveness, as well as compliance costs and net revenue generation.
The current requirement for impact analysis is interpreted to apply primarily to regulations and not to other legal instruments, including statutes. In practice, other instruments can have important impacts on both the public and private sector. "Grey" legislation or quasi-regulation are not regulations or statutes, but rather are policies, interpretation bulletins and directives that have the effect of imposing requirements on regulatees, although they are not in the strict sense laws. These are also not covered by the requirements for analysis. In addition, government action is being directed more and more often by international treaties that impose obligations to regulate. There is no current requirement that the potential impacts of negotiating positions be analyzed to ensure benefits to society are maximized. One serious widespread problem is that impact analysis is often not integrated into the policy-development process, but rather takes the form of an after-the-fact preparation of the Regulatory Impact Analysis Statement (RIAS), an information document discussed in the next section. In these situations, consideration of alternatives and impacts is done after the regulatory approach is decided upon and possibly even after the regulation itself has been drafted.
F. Ensuring Good Information for Decision-Makers and StakeholdersThe Regulatory Impact Analysis Statement (RIAS) is a primary means of communicating to decision-makers and stakeholders about the objectives, legal basis, and impact of regulations. The quality of RIASs, like the quality of the underlying impact analysis, is variable both within and among regulatory departments. Currently, the requirement to produce a RIAS, with the underlying analytical requirements discussed above, applies only to secondary legislation. It does not apply to proposals for new statutory legislation. However, many of the issues found in RIAS are addressed in Memoranda to Cabinet on policy and litigation initiatives. There is, as well, no requirement to prepare a RIAS for "grey or quasi" regulations ie., documents that may not have the full force of law behind them but that will influence government's expectations of citizen behavior. This latter point is becoming more and more important as the use of international standards is encouraged in order to reduce barriers to trade and enhance open markets. The RIAS may be made available to stakeholders through a departmental website, for example, and is published in the Canada Gazette prior to the enactment of regulations, as well as in the notice of their adoption. Stakeholders and others wishing to review the analysis documented in the RIAS may want more information about the underlying analysis, including documents and studies. Some of these documents can be found on the internet, but it is not yet common practice to make them available on departmental websites. The RIAS has become the focus for much of the attention regarding regulatory impact analysis. This is symptomatic of the failure to integrate analysis into policy development. In far too many cases, the concern is on how to develop information to fill in a form, the RIAS, and not on how to develop information to feed into the policy development and decision process. The challenges then are two-fold: improving and using the analysis as discussed above; and ensuring that the results of the analysis are clearly and consistently communicated to decision-makers and stakeholders.
G. Ensuring the Transparency of Rules and Decision-Making: Communication and OpennessTransparent regulation and good communication goes a long way to maintaining a legitimate and accountable system of rules. Transparency is key for accountability, credibility, openness of the market to foreign investment, effective compliance, and enhancing a civil society. It means that rules are clearly written and understandable and easily accessible. It means that persons subject to regulation understand their obligations and how the rules will be enforced. Transparency in decision-making and regulation means that stakeholders know how decisions are made, who makes them and what information they use.
Communication and consultation with stakeholders (including other governments) are iterative matters that should run through from early identification of problems to the evaluation and adjustment of regulatory programs. Its effectiveness and credibility will have profound and long-lasting effects on choices of instruments; legislative, institutional and program design; compliance and effectiveness of enforcement programs; and, ultimately, on the credibility of the regulatory program itself (as well as government as a whole). While consultation has improved considerably over the last twenty years, it is an area where stakeholders express concerns and reservations. Communication is valuable, but it also has a cost; the result for stakeholders may be "consultation fatigue", particularly for small businesses, consumer groups and other stakeholders without extensive resources. Others are concerned that consultation occurs too late in the process after decisions have been made. This is not genuine consultation or an exchange of views but rather an information session with officials telling stakeholders what is going to happen. Even where consultation occurs at a point where policy may be influenced, stakeholders may not know what happened when their views are not reflected in final policy. Were they ignored or was there a reasonable basis for government choices? Explanations and requirements to clearly articulate and communicate the reasons for decisions improve transparency and credibility.
H. How Can We Ensure Fair and Effective Administration of Regulation?When the government approves a regulation it is making a law. Compliance with a law is not discretionary, it is mandatory. We believe that the threat and reality of sanctions is essential element in securing compliance. On the other hand, enforcement actions are not the only, or even the most important, factor that determines the overall level of compliance. It is always a question of balance. The lack of resources and the search for effectiveness have driven the government to become more sophisticated about regulatory compliance. Federal regulatory programs increasingly employ a variety of techniques to promote compliance with legal requirements and departments are really trying to focus on the effectiveness of their enforcement methods to get maximum compliance. We also believe that people should be treated fairly under the law and that regulations should be enforced in an even-handed manner. We also make important distinctions between regulatory law and other forms of law, particularly criminal law. Adjudicative procedures, standards of proof, defenses, and forms of sanctions are often quite different in the realm of regulatory law. For many businesses and citizens, direct experience with government regulation is more likely to arise from administration or enforcement activities. We think the government's approach in this area could be improved. Maybe, if regulators thought more in terms of private sector concepts such as "client service", performance standards, dispute resolution, negotiated settlements, they'd have better results. Or, maybe not. After we make regulation, how do we make it work?
I. What Should We Do With the Regulation We've Got?The existing stock of regulation is not receiving the attention it deserves. The challenge facing Canada is to ensure that outdated, inflexible and ineffective regulation is eliminated while continuing to protect the health and safety of Canadians and the environment. Maintaining a modern and flexible regulatory system has been identified as an important element in fostering innovation in Canada's Innovation Strategy. The accelerated pace of scientific and technological discoveries, for example, is putting pressure on Government's need to make policy choices that favour innovation and create a climate favourable to investment in new research and technology. A goal of the Smart Regulation initiative, as well as Canada's Innovation Strategy, is to ensure that regulation is not only appropriate, but modern in its design and application. Reviews should be aimed at ensuring that regulation is achieving its objectives and that it does so in the most effective way. For example, effective and modern regulation depends heavily on design features of the legislation, including powers, penalties, range of available compliance responses, flexibility to develop new instruments, and so on. Furthermore, the success of the regulatory management system is, to a large extent, measured by the quality of the outcomes. The evaluation of regulatory programs can provide key information regarding the quality of the regulatory management system.
J. Holding Government AccountableOne of the major objectives of the External Committee on Smart Regulation is to ensure that the Federal Government is accountable for its regulatory legislation and regulatory actions. The analysis of regulatory impacts and review of regulatory performance are intended to contribute substantially to accountability. Improving performance indicators for regulatory programs and developing performance indicators for the regulatory management system will also improve accountability. There are methods in place to ensure that Government is held accountable for its actions. The Auditor General and the Commission for Environmental Sustainability, for example, play important roles in ensuring accountability. The Improved Reporting to Parliament initiative of Modern Comptrollership is intended to improve accountability by ensuring that the representatives of the people, Parliament, are kept informed of the actions of Government. These accountability systems could be strengthened, however. One approach is to improve the "contestability" of government actions. Policy development in regulation is based on a number of considerations and assumptions, all of which should be subject to review and debate. Reviews of existing programs are also based on assumptions, data and methodologies that may also be subject to debate. Part of the initial logic of the current regulatory management system was that government analysis and review would be challenged by outsiders anxious to see government regulate effectively. This expectation has not been realized, but it may be possible to create incentives that promote "contestability." Just as competitive markets are more efficient and effective at providing consumer choice, competition in ideas about regulation and solutions to problems can lead to more efficient and effective regulation and policy choice.
4. Stepping Back and Looking at the Whole SystemThe various elements of the existing regulatory regime were originally designed with an understanding that they were not simply a set of disconnected process requirements and institutional arrangements. They were recognized as parts of an integrated governance system whose performance over time would be shaped not only by how well the individual components worked on their own, but also by how they worked together. Design choices were made with an eye to sustainability and continuous improvement of the regulatory management system as a whole. This strategic approach to regulatory process design is fundamentally sound and the Committee believes that a "systems thinking" discipline should be applied when formulating any proposals for further reforms to the regulatory management regime.
5. ConclusionThe External Advisory Committee on Smart Regulation is seeking information and advice about how to improve Canada's regulatory system. The Committee believes citizen involvement and transparency are key to creating a regulatory system that reflects Canadian values and has the capacity and flexibility to deal with the rapid pace of change in the modern world. This is an opportunity for stakeholders to contribute to the creation of a truly modern and flexible system and the Committee welcomes their comments, stories, and recommendations. |
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