The Law of Rule: the regulation theory of everything
Directory of Strategy
If you are looking for good news, you won’t find it in the British economy. Yesterday’s employment data release continues a familiar trend, with the number of payrolled employees falling, vacancies falling, and wage growth slowing even further. It continues a pattern of stagnation and economic decline that this Government was elected to address, with the Prime Minister putting growth front and centre in his manifesto. Yet the growth they wanted hasn’t arrived in time to save them from a Budget in the autumn where the fiscal pressure from the Government’s spending plan is looking likely to force the Treasury to raise taxes.
But plenty of things the Government could do to increase growth and deliver higher living standards don’t come at a fiscal cost. They don’t need the Treasury to commit more spending or reduce taxes. Across all the areas the Government is relying on to successfully deliver growth, like industrial strategy, housing and energy infrastructure, there’s one common theme: regulatory reform.
In January, Keir Starmer said “deregulation is now essential”, and promised to cut through “thickets of red tape” in a bid to get investment flowing back into Britain. In March, he announced an action plan, and targeted cutting compliance costs by 25 per cent.
But that rhetoric hasn’t matched up to reality. Since then, the Government has continued creating more regulators, such as the Independent Football Regulator, a policy designed with no obvious market failure to solve and implemented four years after it was originally called for. A slew of new regulators and other public bodies are also on the way.
The Government are creating more red tape, rather than cutting it. Controversial legislation like the Employment Rights Bill, which has been delayed, is still on the legislative agenda. And deregulation is vital in areas like planning policy. Without it the Government can’t deliver its commitments to build 1.5 million new homes and new clean energy infrastructure. But the Planning and Infrastructure Bill has seen the Government give in to a few extreme voices in the environmental lobby, to the detriment of everyone else.
Instead of regulatory changes, the Government has told regulators to “regulate for growth, not just risk”. Clearly many regulators are too risk-averse: reducing risk is their job, and when you have a hammer everything looks like a nail. In extreme cases, the focus of regulators on risk is misguided and actively harmful. But the decisions about what they regulate (and how they regulate it) are ultimately for Ministers – not something they can pass the buck on to the regulators.
The regulatory ratchet
Debates about regulation often get stuck in a kind of principled debate about whether the British economy is over-regulated or under-regulated. Given we don’t have a consistent way to quantify the total economic cost of regulation, it’s hard to make a definitive case either way, and different arguments tend to reason from broader political principles or contextual factors about the economy. But whatever you think the starting point is, few people would disagree that there’s a kind of regulatory ratchet or ‘law of rule’, which works like this:
- Governments can set new regulation relatively easily, regardless of how good that regulation is.
- Bad regulation is often created, despite the independent oversight processes that currently exist.
- It’s usually politically and administratively challenging to remove bad regulation once it is on the statute book, so doing this is rarely a priority for any government.
- For any existing regulations, regulators will interpret these increasingly broadly over time.
Together, the ratchet effect these factors create drives the amount of regulation up over time. Plenty of which will be harmful regulation. Whether you believe an industry is over-regulated or under-regulated today, at some point you can bet it will be over-regulated, because the ratchet only seems to work in one direction in every industry.
Regulatory everythingism
There are plenty of good ideas in the Government's regulatory Action Plan. Particularly the plans to reduce the number of conflicting duties and roles the Government has set for regulators. The regulators have a particularly bad case of ‘Everythingism’, the approach of making every policy about every other policy until none of them work.
Ofgem not only has a primary duty to keep gas and electricity prices low, it must balance this with other duties to deliver the Government’s net zero targets and to deliver the Government’s clean energy plans. The Independent Water Commission’s report this year identified over 100 different pieces of legislation which are relevant to the regulation of water supply in England and Wales. The Financial Conduct Authority has over a dozen “have regard to” duties in the Act which governs its core responsibilities, plus other priorities and strategic steers.
But the Action Plan could go much further, and much faster than what’s currently on paper. And, if history is any guide, the Plan itself is likely to be under-delivered. Previous exercises like the “bonfire of red tape” under the Coalition Government, “one in, one out” and the “Brexit dividend” have all tended to under-deliver against their stated objectives. The regulatory ratchet effect makes it much harder to change the rules, and much easier to just keep adding new ones.
The commitment to reduce compliance costs by 25 per cent has already been watered down to a commitment to reduce administrative costs instead. Administrative costs are a narrower definition of regulatory costs, which exclude many categories of costs to businesses which would be covered by a compliance cost estimate. And, aside from a new measure, it’s hard to see evidence of any progress towards the target in the six months since that speech.
Of course, the Government will have to make new regulations over time, and they’ll come with costs. The debate isn’t as simple as more or less regulation. New policy is needed in a changing world, where technological shifts outside the control of the UK have the potential to affect consumers and businesses in unpredictable ways – be it in AI, or space, or the cutting edge of life sciences. There are better and worse ways of creating regulation and managing regulators to choose from. But policymakers need to recognise that their approaches to controlling regulation have failed – and many better ideas haven’t taken root in the system.
So what questions does the Government need to answer, and what are some of the creative ideas they should look to for the next stage of regulatory reform?
- Scrutinising new regulation
Successive governments have struggled to get a grip on the flow of new regulation into the system. The impact assessments required from government departments to support new legislation frequently show significant adverse impacts, but the regulation is still brought into force.
The second staircase rule, brought in following the Grenfell Tower fire, was estimated by the government’s own analysts to cost over £2.6 billion more than the benefits it brings – including the impact it will have by keeping people safe. The new Building Safety Regulator, which introduces more checks on high rise buildings, has significantly slowed new housebuilding, contributing to a situation where 23 of London’s 33 Boroughs didn’t start any new housing developments in the first quarter of 2025. The Terrorism (Protection of Premises) Bill, also known as “Martyn’s Law”, comes at a net negative present social value of £1.8 billion to the economy. Both approaches, and countless others, already account for the impact on safety and saving lives into that impact assessment, and it’s still disproportionate.
Both the impact assessments, and the scrutiny of the independent Regulatory Policy Committee, could be significantly enhanced and brought forward in the process of creating new legislation. Governments can always try and sell the benefits of bad regulation in creative ways – but the numbers don’t lie. This Government could still reverse their predecessor’s decision to exempt all building safety regulations from the independent scrutiny of the Regulatory Policy Committee.
While there’s a finite amount that internal checks and balances can constrain a government with a Parliamentary majority, there’s too little friction for new regulatory proposals, so the political cost of driving more through is far too low compared to economic costs which are often out of control.
- Managing the cumulative regulatory burden
Every regulation has a reason behind it. Some reasons are good ones, correcting for a genuine market failure. Some reasons are just plain bad – like stakeholders campaigning for them for deeply emotional reasons regardless of the costs, incumbents wanting them in place as protection from competitors, or lobbying by vested interests. But looking at the broader perspective, while every regulation can be rationalised in isolation, the problem is often that the total regulatory burden is too great for the economy to carry.
It bears a close resemblance to a different problem government has experience managing – the public finances. As Anthony Eden put it “everyone is always in favour of general economy and particular expenditure”. There are lots of ways to spend public money, good and bad, but even if we just spent money on the good ones we’d spend more than we can afford. The Treasury has a mixed track record of gripping the public finances, and I’ve written about why. But it at least has a set of policies and processes in place to make a start – annual budgeting cycles and regular multi-year Spending Reviews. No such process exists for regulation.
The Government could do worse than to invest the time and effort to create a world-leading regulatory budgeting process, as other think tanks have recommended in the past. This would allow them to set regulatory envelopes for different sectors, and prioritise different regulation within them – a more sophisticated way of managing the total impact than “one in, one out”, which didn’t have a standard way of managing departments who wanted to get rid of small regulations in order to bring big ones in.
It wouldn’t be easy. Among other things, the Government would need to get better data on sector-level economies than it currently has. It would also need a dynamic way of measuring the impact of regulation on an ongoing basis. Measures like administrative costs and compliance costs only cover part of the regulatory burden on the economy, and measures like the estimated annual net direct cost to business (EANDCB) used for Impact Assessments are static estimates, which aren’t tracked on an ongoing basis.
The other way to manage the total ‘stock’ of regulation on the books is to create automatic ways of making it flow back out. Many U.S. states use ‘sunset clauses’ by default for some kinds of laws, moving the presumption from it being a permanent change which needs to be repealed, to a temporary change which needs to be reintroduced by policymakers. It’s not a silver bullet, and some businesses might prefer the regulatory certainty of current legislation. But if changes are particularly punitive, it’s hard to argue that a temporary change which could automatically be lifted is less harmful than a permanent change which needs the political will to be undone in the future.
- Rebuilding regulatory capacity
Depending on how you measure it, there are over 100 bodies involved in delivering regulation, of which a subset are the independent regulators like the Competition and Markets Authority (CMA), Financial Conduct Authority (FCA) and Ofcom. Like the broader landscape of quangos and public bodies, the landscape of regulators and their responsibilities is an accident of history – you wouldn’t design them that way today.
A redesigned and rationalised landscape of regulators could build greater regulatory capacity – aligning their responsibilities more effectively, and targeting limited resources at the real bottlenecks. The Cunliffe Review has already recommended merging Ofwat, the Drinking Water Inspectorate and the Environment Agency to provide a single point of oversight for the troubled water industry.
The Centre for British Progress has recently recommended moving away from having sectoral economic regulators and splitting their policy, regulatory and delivery functions between new organisations – including giving the economic regulation aspect of all of them to the CMA.
A Regulators Bill would be a perfect opportunity to rationalise the sector, and put existing bodies on a single statutory footing – aligning the complex web of legal duties and operating models which different regulators currently have. It’s unclear why so many regulators have such large non-executive boards, often to oversee relatively small organisations, or why they are led by career civil servants rather than deep subject-matter experts.
It would also allow their relationships with central government departments to be reset. It's bizarre that the Office for Nuclear Regulation is overseen by the Department for Work and Pensions, as a way of protecting its independence from the Department for Energy Security and Net Zero. But every other regulator is overseen by the relevant policy department. Regulators are rarely held to account by anyone, including Parliament.
Even without legislation, there is plenty more that could be done to bolster the capacity of the regulators. As a network of much smaller organisations than government departments, they could share more of their back-office functions without compromising their specialism or independence in different sectors.
Across many regulators, their workforces have grown significantly without any clear improvement in their operations. The Environment Agency’s workforce has grown by 20 per cent between 2019 and 2024. Particularly for regulators where growth is funded by fees and charges on the regulated sectors, they might be avoiding Treasury scrutiny by not requiring more funding to grow. But the cost is still borne by taxpayers and businesses through a different route. Government should take a good look at how the resources the regulators have are being used, and whether they’re being effectively deployed.
- Encouraging new entrants
The biggest challenge for regulated sectors is creating an environment which is friendly to new companies, rather than just suited to large established ones. It's those new companies who will make the sector more competitive and innovative in the long run.
All regulation is challenging for new companies, particularly smaller start ups. But there are some cases where it is clearly too punitive, driving up prices for consumers in the long-run by concentrating the sector in only a few providers who have balance sheets strong enough to withstand the extreme costs of regulation.
Take nuclear, where Britain is the most expensive country in the world to build new capacity per kilowatt. Our costs are approximately six times higher than South Korea’s, and significantly more expensive than the French and Finnish methods of delivering the same reactor design. Britain regulates radiological risk under the “As Low as Reasonably Practicable” principle from health and safety law, meaning companies are required to reduce risks until further measures would be grossly disproportionate. In practice, this means continuing to require constant additional improvements to mitigate already tiny risks, where cost-benefit analysis is almost never used to challenge design change requests from the Office for Nuclear Regulation (ONR). The ONR defines grossly disproportionate as any design change where the costs outweigh the benefits by a factor of ten, meaning many changes which wouldn’t meet the Treasury’s normal cost/benefit criteria for any public infrastructure are carelessly required from private companies without thought for the implications.
Some regulators have made efforts to be much more welcoming to new companies, like the FCA’s sandbox approach for fintech companies. One of the new Government’s first acts was the creation of a new Regulatory Innovation Office (RIO), but so far there’s nothing to show for that. RIO could be a step change in how regulation is done, provided it makes its main mission shepherding innovative companies through regulatory environments. John Fingleton, head of the Nuclear Regulation Taskforce, previously argued for an “n+1 regulator”. This would work exclusively with innovative companies to bring their products to market, setting a different regime and parameters, and leaving incumbents in the existing regulatory structures. But that approach hasn’t yet been tried, even in frontier technology areas like AI, space and life sciences.
- Changing accountability
There’s nothing new under the sun, and the same goes for the ideas in this piece. Many ways of reforming regulation have been debated over the years, but little progress has been made on any of them. Who should the Government put in charge?
Last week I wrote for City AM about why this should be the top priority for the new Business Secretary, Peter Kyle. But in many ways the Department for Business and Trade (DBT) is outmanned and outgunned in Whitehall. It leads the relationship with business, except for the many industries which have a direct relationship with a different part of Whitehall, where DESNZ, MHCLG, DfT or DEFRA are essentially the lead department. When they’re the ones who need to make reforms, does the DBT have the firepower it needs?
DBT’s current Regulation Directorate was born out of a similar structure which used to exist in the Cabinet Office, before it moved over with Jacob Rees-Mogg when he became Business Secretary. Traditionally it’s the Cabinet Office which coordinates big, challenging cross-Government efforts which involve driving change through other government departments. But it’s become a huge department through inheriting many similar cross-Government functions, and is going through a process of rationalising what it does.
It might be that the Treasury is a better home for regulatory policy. It’s dysfunctional in many ways, but it does have experience dealing with the same kind of problems that are endemic in regulatory policy. For all its faults, the Treasury is the only part of government which is used to trading off different priorities. Maybe it can stem the tide and apply some rigour to regulatory policy. At present, the Treasury’s lack of responsibility for regulation beyond financial services means it often ends up supporting damaging regulation for parts of the economy if that's the political price for avoiding committing more public spending to a policy area – a common instance of “Treasury brain”.
Ultimately, at Re:State we are a public services think tank. We aren’t specialists in economic policy or individual sectors. But the dysfunctions at the heart of the Government’s regulatory policy are ones of state capacity – who oversees it, what tools they have at their disposal, and the incentives they have to use it the right way. To stop the ‘law of rule’ dictating the future of our economy, and carefully plan regulation rather than leave it to bureaucratic ratchet effects, we need a radically different approach.
We’ll be publishing more work on regulatory reform in the coming months. If you want to help, please get in touch with us at Joe [dot] Hill [at] re-state [dot] co [dot] uk.