Smarter regulation? What it means for regulators and regulated organisations?

read time: 7 mins

On 16 May, the government published a white paper setting out proposals for future legislation: Smarter regulation: Delivering a regulatory environment for innovation, investment and growth

This article reviews the white paper in detail, highlighting the series of guiding principles of smarter regulation and the effect that turnover-based fines will have on investors.

The purpose of the white paper

The white paper represents a resolute and frustrated tone of a government that is looking to change the regulatory landscape, immediately signalled as follows:

‘There is strong evidence that points to our regulatory culture as acting as a drag on our ability to generate economic activity, innovation and to attract investment. The regulatory environment is often confusing and sometimes features of it appear to exist for the benefit of the regulators, rather than the industries who they regulate, consumers or Britain as a whole’.

The list of fifty regulators in scope of the white paper include the Environment Agency, the Health and Safety Executive, Natural England and Ofwat.

Measures in the white paper, it states, will encourage ‘clearer reporting of regulators’ activity to make sure that their contributions to growth and the wider economic impact of their actions is understood’. The Environment Agency and the Health and Safety Executive are among the regulators subject to a growth duty, and earlier this year it was extended to cover Ofwat and Ofgem.

Guiding principles of smarter regulation

The paper sets out a series of guiding principles of smarter regulation that the government expects all regulators to adopt in their day-to-day decision making. These principles are described as ‘a checklist of items that should be considered before acting’.

Principle 1: clear guidance, transparency and accountability Its essential that regulators provide clear guidance in terms of what regulations apply and what steps and how to comply. Regulators must clearly and transparently communicate the reasons for their decisions and how these decisions align with the law and their statutory objectives.
Principle 2: international recognition and awareness of best practice Regulators should be outwards facing, learn from best practice and recognising approvals in other jurisdictions where appropriate.
Principle 3: avoid unnecessary risk aversion Regulators will inevitably need to balance risks when making decisions but internal culture should always challenge excessive risk aversion for the good of delivering the best outcomes. Regulators should note the UK’s science and risk-based application of the precautionary principle, as set out in the Environmental Principles Statement issued under the Environment Act 2021.
Principle 4: always act proportionately Proportionality is particularly important for small businesses who do not have dedicated regulatory teams to respond to requests.
Principle 5: be pro-innovation in regulatory approach Adopting anticipatory and agile government for emerging technology or new/disruptive business processes. This may include allowing new approaches unless they are proved harmful. 
Principle 6: collaborate and join-up with fellow regulators  
Principle 7: be collaborative and responsive when engaging with businesses  
Principle 8: permissiveness and self-certification This includes allowing for self-certification in low-risk scenarios and where there are clear industry standards, where appropriate and permitted by law. The white paper acknowledges there will be cases where self-certification is not appropriate to protect consumers and the environment, and specifically cites the water sector.
Principle 9: ensure a skilled and capable workforce  
Principle 10: understand how regulation is applied at local levels and felt by business and consumers  

Interestingly, and a little confusingly, the white paper makes no mention of the principles described in the statutory Regulators’ Code that regulators must have regard to when developing policies and operational procedures that guide their regulatory activities. There is a clear overlap between those principles and the guiding principles of smarter regulation. 

The white paper describes 23 major reforms that government aims to deliver. Paul Collins says ‘In my experience as an environmental lawyer, including for UK Government and the Environment Agency, I don’t think I’ve ever seen such an all-embracing proposed shake-up of the regulatory landscape of the type outlined in the white paper.’ 

Particularly interesting areas of reform include:

Reform 1: ministers will write to all regulators whenever there is concern that the principles of smarter regulation are not being adhered to

Legislation already exists that allows ministers to issue directions to the environmental regulators in relation to how it must exercise, or not exercise, powers in relation the carrying out of its functions. The issuing of directions can be controversial as, arguably, it amounts to an interference with the role of the independent regulator, and that can result in uncertainty and delay for business. A recent decision by a Defra Minister to issue a direction to the Environment Agency to pause determination of environmental permits for new energy from waste plants has proved controversial.  

Questions will undoubtedly be raised about to what extent ministers will seek to further influence the day-to-day decisions of regulators and how regulators are expected to respond to those concerns.

Reform 11: the launch of a Growth Duty Performance Framework has set out a series of metrics they expect regulators subject to the Growth Duty to report on alongside qualitative evidence on how they are delivering economic growth

Reform 15: the government will develop a framework to support a consistent approach to the monitoring and evaluation of regulator statutory duties, where specific evidence of problems is identified

Regulators must operate to clear and consistent legal duties and objectives. The white paper acknowledges that there has been piecemeal accumulation and layering of duties over time, resulting in a challenging set of trade-offs for regulators and business to navigate. Helpfully, the reforms reiterate the importance that it should be clear which duties are being used for specific decisions. And it would be reasonable to expect that regulatory decisions refer to those duties and how they have been complied with. 

Reform 17: the government expects regulators to publish existing internal and statutory appeal procedures in one place, ensuring that businesses have clear and accessible guidance on navigating the appeal process

The government’s view is that the existing appeal mechanisms sometimes fail to deliver timely resolutions, resulting in prolonged uncertainty for businesses. The government intends in due course to conduct an evaluation of the appeal systems across UK regulators to identify areas that could be improved. Recognising the urgency of the matter, the government will introduce immediate measures to enhance transparency and streamline the appeal process. Perhaps we’ll see the emergence of an environmental court, long talked about. 

The white paper proposes developing a dispute resolution pilot programme providing businesses with a faster and more effective means of resolving disputes with regulators.

The ‘chilling effect’ of turnover-based fines on investors

Finally, it’s worth mentioning the free-floating text in the white paper that mentions the government intends to review the potential ‘chilling effect’ that turnover-based fines can have on prospective investors who may be concerned by the risk of incurring disproportionate fines for breaches of law, and how better to set fines and civil penalties based on sentencing guidelines. 

This might come as a surprise to courts who are required to follow sentencing guidelines when setting fines and other penalties in respect of regulatory offences, especially where one of the guiding principles of those guidelines is proportionality. To illustrate the point, the word ‘proportionate’ appears 39 times in the sentencing guidelines covering corporate manslaughter, health and safety and most environmental offences.

It also might similarly come as a surprise to regulators, including the Environment Agency, who has recently updated their civil sanctions Enforcement and Sanctions Policy, to reaffirm that civil financial penalties are calculated based on the Sentencing Council’s definitive guide for the sentencing of environmental offences, which includes an assessment of turnover. This includes unlimited variable monetary penalties and penalties issued under the climate change regimes.

We’ll wait to see to what extent any of the reforms outlined in the white paper are delivered, but at this early stage, we welcome the publication of the white paper, at least to the extent that it keeps the smarter regulation agenda on the table, hopefully for the benefit of business, consumers and the environment.

For further information, contact Ian Manners or Paul Collins.

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