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Comments from ACCA
October 2006

Executive Summary

ACCA is a leading commentator on regulatory issues, working closely with Government, leading academics and other key stakeholders to further our knowledge and influence on this key issue.

In general we take a balanced view on regulation; recognising that in many areas regulation enables markets to function, ensures minimum standards and guarantees the health and safety of workers. Yet we remain concerned about the disproportionate burden regulation imposes on small businesses and consider that Government should regulate only when necessary and in a manner that imposes the fewest burdens whilst meeting policy goals.

Regulatory Impact Assessments (RIAs) are an integral part of good law making, yet too many are not completed with the needed rigour and quality analysis necessary. We concur with the NAO that there are examples of quality RIAs, that inform and influence the regulatory process yet these are few in number. In the NAOs view RIAs 'have not yet been a tool which has dramatically altered the regulatory landscape or the way the Government thinks about regulation.'ⁱ

This consultation represents an opportunity to unlock the potential of RIAs to improve law making and policy evaluation. We therefore, welcome the opportunity to comment on the consultation proposals and hope you find our response useful.

Our principal points are:

• The completion of a Small Firm Impact Test must remain a compulsory part of the RIA process. Small firms are too important to the economy and suffer significant disadvantages when engaging in the regulatory process.
• The summary sheet must break down the costs for all the size bands of SMEs. This is due to the disproportionate burden regulation places on all categories of SMEs.
• RIAs must have a greater degree of accountability. A failure to adequately follow the guidelines or produce credible figures must be addressed seriously. Similarly good practice must be incentivised.
• Success criteria must be revised so that they contain more measurable aims and a timeline.

We attach as an appendix a paper submitted to the NAO at their request in September 2006 on Regulatory Impact Assessment.

Responses to Specific Questions:

A. Do you agree that these would be good tests of success for Regulatory Impact Assessments?

In general the tests for success seem reasonable and ACCA accepts that they are sensible and in line with the wishes of stakeholders and with the needs of policy makers and legislators. We note however, that the success criterions detailed do not contain measurable targets or a timeframe and review mechanism for achieving them.

An example of the aspirational nature of the criteria and the lack of timeline is the third one ' for impact assessments to be the accepted basis for cross departmental discussion within Government on the impact of policy proposals .' If this was, for instance, revised to ' within two years cross-departmental policy discourse must be accompanied by an impact assessment' then it would be clear what must be done and the timeline.

It is not our wish to introduce additional bureaucracy but instead, encourage Government to adopt simple success measures that ensure the process is working successfully, from policy germination to legislation; that the process is transparent and accessible to civil society; and that impact assessment becomes the currency for policy discussions within Government. We would be pleased to work with the Cabinet Office to revise the success criteria so that they contain more measurable and achievable targets. In order to do this we believe that the NAO's work auditing RIAsⁱⁱ represent an appropriate starting point.

B. Is the revised Impact Assessment summary sheet easier to read, more transparent and more open to scrutiny and external challenge? How do you think it could be improved?

and

C. Does the proposed Summary Sheet captures the key information required to minimise regulatory burdens on the private, public and third sectors?

In answer to questions B and C, we welcome the production of a summary sheet. We think this will increase the transparency of Government, simplify and focus the work of civil servants and enable more considered policy decisions.

It is vital that the space is used efficiently and effectively. We are therefore concerned that much of the first page is used up with the Ministerial and chief economists' sign offs. In our opinion this could be done with two simple tick boxes and perhaps a box for the name. This would allow more room for information pertinent to the costs and proposed implementation method of the recommended option.

Our most serious concern about the content of the summary sheet is the question 'What is the average cost p.a. for a representative small organisation?' This seems unsatisfactory given the difficulty of defining a representative 'small organisation.' We would therefore much rather the summary includes the total annual cost estimates for, the self-employed, a micro firm, a small firm and a medium sized firm. We believe this is important because of the disproportionate burden existing regulations and new regulations place on smaller businesses.

For instance the Inland Revenue found that for firms employing 1 – 5 people the cost of administering payroll and tax regulations works out at £288 per employee yet only £5 per employee for firms employing 5000 or moreⁱⁱⁱ.. A similar study looking at the Manual Handling Operations regulations (1992) showed that small firms, fewer than fifty employees, had an annual cost of implementing the regulations of £341 per employee. The same regulations for large firms, over 250 employees, only had an annual cost of £34 per employee^iv. It is for these reasons that ministers must be aware of the burden that the proposed regulation places on all classes of businesses.

Some other areas that we think should be considered for inclusion in the summary sheet are:

• timeline of implementation
• a separation between the costs imposed on the private sector and those imposed on the voluntary sector
• details of measures to eliminate or minimise any disproportionate burden imposed by the regulation
• the cumulative impact of existing regulations in this area

D. Do you have any comments on the shortened Impact Assessment guidance and the changing requirements on number of policy options?

We concur with many of NAO's conclusions on Regulatory Impact Assessments, the current guidance on RIAs is too long and this leads to confusion. When researching RIAs copied the RIA guidance from the Cabinet Office website, this resulted in a word document of 68 pages and numerous other supporting documents. Therefore we agree that the guidance should be shortened and simplified. However, this is only a minor contributory factor that will improve the overall quality of RIAs. More must still be done.

We are less convinced with the removal of the requirement to produce three policy options for each RIA, although we can sympathise with the rationale for the proposal. At present too many RIAs contain additional policy options that are unrealistic or ill-thought out. This adds little benefit to the users or the RIA. We believe that in order for Ministers to choose the best course of action they must have access to a number of serious policy options for comparison. Limiting the need for civil servants to produce additional policy options is a regressive step, particularly when we consider the drive to encourage Government departments to regulate 'better.'

If there was appropriate incentives in place to encourage policymakers to pursue non-intervention, non-regulatory interventions or other innovative interventions to meet prescribed policy goals then we would support the removal of the three policy option requirement.

Developments within Government, such as the administrative burdens project, the Hampton review and a greater awareness within civil society of the need for better regulation, may eventually lead to a situation where we can be confident that the single option presented to the minister is the most effective measure to correct the policy problem identified. But we are not there yet.

E. Do you agree the requirement to use the Competition Assessment and the Small Firms Impact Test on a case by case basis is sufficient to ensure these impacts will be adequately assessed where relevant?

Small businesses in the UK equate to 99% of all private sector firms, contribute over 50% of turnover and over 50% of private sector employment. So by any measure the cost and benefits of any regulation on small businesses should be at the forefront of the regulators concerns. So to ensure that the needs of small firms are considered adequately the Small Firm Impact Test (SFIT) must be completed to a high level at every stage of an RIA.

It is not simply the size of the small firm sector that require the SFIT to be carried out, small firms lack the resources to engage effectively in the regulatory process to the same extent that large businesses can. The level of empathy and understanding between small business owners and civil servants is significantly lower to that of large businesses and civil servants.

We also think that the Better Regulation Executive should enforce this requirement much more vigorously than they currently do. As many RIAs contain a superficial or unsatisfactory assessment of the impact on SMEs.

F. Do you agree that including a signed declaration by the Departmental Chief Economist and/or other senior members of the Government's analytical community, will improve the quality of the analysis?

Previously we have campaigned for greater accountability of RIAs and would welcome any moves to make RIAs more accountable. However, we are confused as to what this measure will mean in practice. Will the minister or chief economist be held accountable if the figures presented are inaccurate or misleading? As in the US, will firms adversely affected by the recommended regulation yet not identified as being affected by the RIA, have grounds to seek legal redress?

Whilst we do not advocate introducing litigation to the RIA system, we feel that it needs to be made clearer what the signature means and what is the level of accountability of the signatory.

We believe that a clear process of accountability, with the Cabinet Office the final arbiter, will ensure that those putting their signature to the RIA are completely satisfied with the content of the RIA. This should improve the RIA process across Government.

The quality of ex-ante estimates should also be tested in the ex-post audits. The primary purpose of this would be to enhance the learning cycle, and therefore lead to better RIA preparation in the future.

G. The Government invites views on increased emphasis on quantification of social and environmental costs and benefits as part of the proposed new Impact Assessment, including the de-coupling of Race Equality Assessments and assessments of environmental impacts

Whilst we are in favour of the maintenance of the environmental assessments and race equality assessments, we see no reason why these can not be separated from the overall RIA process. It is also encouraging that Government wishes to further monetise these costs and benefits, ACCA would welcome the opportunity to work with Government to produce robust figures for the social and environmental costs and benefits of regulation.

In general, there needs to be a much greater emphasis placed on identifying and valuing benefits. Where benefits cannot be properly estimated, it is hard to see how Ministers can state that the costs are justified.

H. Changing the name to 'Impact Assessment'

We do not see the necessity of changing the name to Impact Assessment as it may lead to confusion between UK RIAs and European Impact Assessments and will incur cost. Although if the removal of the term 'Regulatory' inspires civil servants to pursue non-regulatory options with greater rigour then we could support the change.

I. An on-line database bringing a single point of access from the internet to Impact Assessments

The creation of a single on-line database that operates in real time is long overdue and to be commended . The database should include initial and partial RIAs, so that the amount of regulatory proposals that are substantially amended or withdrawn can become apparent.

Appendix 1: ACCA comments to NAO on RIAs, submitted September 2006

Measuring the Impact of regulations on small firms
Are Regulatory Impact Assessments (RIAs) up to the task? – A briefing paper

THE ISSUE

The measurement of the impact of a new regulation is an integral part of good law making. The process, done well, enables policymakers to analyse all the aspects of proposed regulations; assessing the costs, benefits and potential alternatives to the regulation. By knowing the impact, legislators are able to solve policy problems and meet policy goals in an optimal manner, anticipating potential difficulties and adapting their approach to avoid or ameliorate these difficulties.

In the UK the measurement of the impact of proposed regulations is conducted through Regulatory Impact Assessments (RIAs). Introduced in 1998 when the Prime Minister announced that "no proposal for regulation which has an impact on businesses, charities or voluntary bodies, should be considered by Ministers without a regulatory impact assessment being carried out. The effects on small firms would be a key part of the assessment process."

The current UK RIA mechanism is not, however, without its antecedents. In the eighties new regulations could only be considered after calculating business compliance costs and consulting with business.^v 1995 saw the introduction of risk assessments and the requirement that a Minister sign compliance cost assessments certifying that the new regulation strikes a balance between costs and benefits;^vi further strengthening the regulatory assessment process.

Yet continually we hear that one of the key issues facing business and in particularly small businesses is over regulation.^vii One reason for this is that the RIA process is not functioning optimally.^viii Flawed RIAs endanger smooth implementation of regulations, cause significant problems and costs for those regulated, and the regulators, bring disrepute to the legislative system, and may even prevent the regulation meeting the stated policy objectives.

Therefore, it is important for Government to continually monitor RIAs for their quality, ensuring that there are adequate sanctions for failure to follow the RIA guidelines. It is similarly important to constantly review the RIA guidelines to ensure that the RIAs are delivering for the regulated, the regulators and the policymakers. The following recommendations are made in that spirit.

AUTHORS RECOMMENDATIONS

1. There should be compulsory retrospective audits of Regulatory Impact Assessments (RIAs), looking at their accuracy, whether the policy achieved its goals, examining the cost the regulation imposed on small businesses and ascertaining if there were any unintended consequences of the regulations introduced. This is already recommended practice, but the fact is that reviews are rarely undertaken.
2. Independent, professional assessors, appointed by the Better Regulation Commission, should be involved in the management of each new proposed piece of legislation, integrally involved in producing the cost / benefit analysis and weighing the evidence resulting from the consultation process. This would be a vast improvement on the current system whereby departments manage their own consultation process that is, consequently, subject to confirmatory bias^ix.
3. All Government departments should include an independent challenge function for the completion of RIAs. The challenge function currently adopted by the Department of Trade and Industry (DTI) and the Department for Culture Media and Sport (DCMS) and singled out for praise in the National Audit Office's (NAO) latest report,^x reviews the completed RIA, questioning the conclusions of the RIA and the figures presented therein.
4. As recommended by the NAO, the completion of RIAs must be fully integrated into the policy making process, both informing and challenging. In order to ensure this integration RIAs must be started at the embryonic stages of policy development, they must be adequately resourced and have full access to any pertinent information and analysis.
5. Regulations often undergo significant revision during their progress through parliament. The impact these changes have on those regulated and the regulators can be significant. It is desirable that major legislative amendments, particularly Government amendments, should be complemented with a revised RIA.
6. The Cabinet Office's guidance for quantifying the cost of a regulation does not include detailed instructions for considering the cost and/or benefit of the proposed regulations for SMEs. Although a few RIAs do identify the additional costs that will be incurred by small firms.^xi Consequently ACCA believes that the current RIA guidance, and the evidence submitted to the Small Business Service, should be changed. Also the Small Business Service's (SBS) current review of the Small Firm Impact Test (SFIT) mechanism the SBS should recommend the adoption of a process where the SBS makes a judgement on the proportionate quality of this evidence and of the SFIT. The additional tests that ACCA believe should be undertaken are:
   1. Quantify the cost incurred by SMEs – break this down to include estimates for the self-employed, micro businesses (1 – 9 employees), small businesses (10 – 49 employees), and Medium-sized businesses (50 – 249). Care should be taken to ensure that the costs include time costs (including finding information), one-off costs, external costs (including advice), monitoring costs and impacts on productivity. The cost of compliance and cost of the policy both need to be considered here.
   2. Quantify sector specific costs – some regulations impact specifically on certain sectors and not on others. The dynamics and working practices of relevant sectors need to be considered with reference to the points made above.
   3. Quantify indirect costs on small businesses – this should quantify the impact of barriers created by thresholds and the cost of behavioural changes. For example a regulation may dissuade a company from taking on extra staff due to the disproportionate impact of the proposed regulation, in which case the costs of this need to be measured. Conversely a regulatory change that will indirectly encourage employment should be measured.
   4. Consider the cumulative impact of regulations on business.
7. The TUC argue in their publication 'Slaying the Red Tape Myths'^xii that the current RIAs do not adequately measure the benefits of regulations; benefits to employers, workers and society. Whilst not agreeing with much of the TUCs analysis, it is true to say that in order to be credible RIAs must produce robust costings for the benefits of each regulation. These costings must also take account the impact of less than full compliance with the regulations.
8. The NAO points out "in many cases, however, RIAs have not been used to question the need for intervention." RIAs are also failing to "identify and consider a full range of genuine options, including non-regulatory options." ^xiii Currently, many incentives exist that encourage Government departments to pursue regulatory options rather than alternative approaches or non-intervention. The Government must transform this perverse incentive structure to a system that provides rewards for departments and civil servants that choose not to regulate or to use innovative non-regulatory interventions.
9. Recent ACCA research^xiv has found that the majority of SMEs agreed that the regulatory requirements for their business are reasonable, particularly in the cases of tax filing, health and safety, payroll and environment regulations. Yet less so in the area of employment regulations. Despite this general satisfaction with the areas and aims of regulations there is significant dissatisfaction with the quantity, complexity and inequity of the regulations that apply to their businesses. This suggests that the Government, in order to maintain the high levels of sympathy with the aims of regulations, must concentrate on ensuring that the means of achieving regulatory aims are fewer in number, simpler for business and do not affect small businesses disproportionately.
10. The European Union is the instigator of many regulations that impact on SMEs. Indeed the think-tank Open Europe,^xv using the British Chamber of Commerce' RIA Barometer figures, calculated that between 1998 and July 2004 some £30.1 million of the £38.9 million business costs identified by RIAs involved the implementation of EU legislation. This underlines the need for a more robust impact assessment process at EU level, following our recommendations above. In order to achieve this there is a need for greater engagement from member states within that process.
11. The NAO, when reviewing the performance of the Small Business Service (SBS), commented that when attempting to ensure that the needs of small businesses were considered in the RIA process the SBS "had no set pattern for its interventions… [It discovered] examples based on ad-hoc contacts with other government departments and also examples of continuous collaborative working."^xviAt the outset of regulatory proposals the SBS must adopt a single approach that allows them to make a judgement as to the likely impact on small businesses and allocate resources proportionately; the allocation should be revised according to how the policy develops.
12. There remains a compelling argument for compensating small businesses for the cost of implementing regulations. Compensation can end the disproportionate cost burdens that small businesses face when implementing regulations, encourage greater compliance and advance social goals. Therefore, when a disproportionate cost for small businesses is detected a policy of compensation must be considered and either adopted or the rationale for rejection provided in the RIA.

AUTHORS

Professor Francis Chittenden , ACCA Professor of Small Business Finance, Manchester Business School

James Meyrick, Small Business Policy Adviser, ACCA

ⁱ Page 6, National Audit Office (2006) "Evaluation of Regulatory Impact Assessments 2005-06, " HC 1305 Session 2005-2006, 28 June 2006
ⁱⁱ See the reports: National Audit Office (2001) "Better Regulation: Making Good Use of Regulatory Impact Assessments," HC 329, 15 November, National Audit Office (2004), "Evaluation of Regulatory Impact Assessments Compendium Report 2003-04 ," HC 358, National Audit Office (2005) "Evaluation of Regulatory Impact Assessments Compendium Report 2004-05," HC 341 and National Audit Office (2006) "Evaluation of Regulatory Impact Assessments 2005-06," HC 1305 Session 2005-2006, 28 June 2006
ⁱⁱⁱ Collard, D. and Godwin, M. (1999) 'Compliance Costs for Employers: UK PAYE and National Insurance, 1995-96', Fiscal Studies , 20, 4, 423-449, and Collard, D., Green, S., Godwin, M. and Maskell, L. (1998) The Tax Compliance Costs for Employers of PAYE and National Insurance in 1995-96 , a report by the Centre for Fiscal Studies, University of Bath. Download The Tax Compliance Costs for Employers of PAYE and National Insurance in 1995-96 pdf (300KB).
^iv Lancaster, R., Jacobsen Maher, C. and Alder, A. (2001) Second Evaluation of the Manual Handling Operations Regulations (1992) and Guidance, HSE Contract Research Report 346/2001, HSE Books, Sudbury.
^v National Audit Office (2001) "Better Regulation: Making Good Use of Regulatory Impact Assessments," HC 329, 15 November.
^vi Ibid
^vii Small Business Research Trust (2006) "SBRT Quarterly Survey of Small Business in the UK, Volume 22 Issue 86," Quarter 1, 2006, SBRT, Knutsford.
^xi Ambler, Chittenden, Shamutkova (2003) "Do Regulators Play by the Rules? An audit of UK Regulatory Impact Assessments," British Chambers of Commerce, London
^ix Vibert F (2005), "The Itch to Regulate," European Policy Forum, London.
^xiiiNational Audit Office (2006) "Evaluation of Regulatory Impact Assessments 2005-06," HC 1305 Session 2005-2006, 28 June 2006.
^xi Ambler T, Chittenden F and Hwang C (2005) "Regulation: another form of taxation? UK Regulatory Impact Assessments in 2003/4," British Chambers of Commerce, London, 2005, p 28
^xii TUC (2006) "Slaying the Red Tape myths, debunking the employers ‘Red Tape’ claims," TUC p 8.
^xiii National Audit Office (2006) "Evaluation of Regulatory Impact Assessments 2005-06," HC 1305 Session 2005-2006, 28 June 2006.
^xiv Blackburn R. and Eadson W. (2006), "Managing regulation: SMEs and accountants’ perspectives – an interim report of ACCA research in progress," ACCA, London.
^xv Open Europe (2005), "Less regulation: 4 ways to cut the burden of EU red tape," Open Europe, London
^xvi National Audit Office (2006), "Supporting small business," Report by the Comptroller and Auditor General, HC 962 Session 2005-2006, 24 May 2006

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