22 finance
Touching a regulatory nerve
At the end of March the House of Lords Select Committee on Economic Affairs reported on the audit market and auditors’ roles. The report got a lot of media coverage centred on the audit of banks and the evident lack of competition in the market. One aspect of the report that was not widely reported was their comments on regulation. They accused the FSA of a ‘dereliction of duty’ and also commented that regulation of auditing was ‘fragmented and unwieldy’. My own firm has over 30 different regulators, writes Julian Frost, audit and lead partner for BDO Reading. The time seems ripe for an examination of the way we regulate
As a practising accountant, I meet many business people who share their disappointments and frustrations with me. Many of these boil down to the impact of regulation in one way or another. They claim it hampers decision making and entrepreneurship and they believe rules have become overly complex. The net cost of regulation to the UK economy was estimated at over £10 billion in the year to June 2009. No-one doubts that regulation is necessary and in financial services both prudential regulation and consumer protection are clearly critical to economic recovery and consumer confidence. One does wonder, however, whether outside financial services there would be benefit in moving towards regulation based on principles, rather than on detailed rules. Regulation based on ethics can encourage transparency and market growth.
Many people confuse principles- based regulation with a sort of back door deregulation, or ‘light touch’ regulation. In my view this is a mistake, and in particular, enforcement of regulation based on principle needs to be more vigorous than a regime based on black-type rules. A principles-based framework is also more complicated for the regulated; companies have to take responsibility for themselves rather than just look to the regulatory framework to do it for them. They can’t fall back on a rule book and say “there’s nothing here that says I can’t”.
I find, perhaps naturally, that complaints are frequently about the complexity of taxation. It is encouraging that the recent budget is seeking to reduce the number of tax reliefs and exemptions – but there is a long way to go. There is a great opportunity for government here
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in taking advantage of the drop in general public acceptance of artificial tax schemes, to be able to increase the net take for the public purse, as for the first time people are talking about tax avoidance and tax evasion in the same sentence.
Complaints I hear most often surround employment legislation. Businesses find this to be a minefield and smaller employers, in particular, feel they are faced by an increasing mountain of regulation and are inclined to give up. Few management teams today are happy to comment authoritively on whether their businesses comply with the detailed prescription of employment legislation. Many only face up to the detail when the employee sues for constructive dismissal on the basis of a fault the company never knew it had committed in the first place. We’re yet to see the impact on business of the new Equality Act.
With implications for pay policy, internal communications, harassment and employee rights most will need to update their employment contracts and run training in order to stand a chance of compliance. I have seen few rushing to do this.
The real significance of this for the UK economy is not the cost of compliance – it is the lost employment that is simply caused by employers, and largely smaller ones, just not taking on staff because they fear that they won’t be able to slim down their workforce if required at other than a prohibitive cost.
case when we’re ranked third lowest of the OECD countries with regard to employment protection, but it is the perception of the position rather than the reality, which causes the economic distress.
THE BUSINESS MAGAZINE – THAMES VALLEY – MAY 2011 Julian Frost
The select committee’s comments on regulation have wider resonance. There is a changing paradigm as people are becoming more concerned and are choosing to take more responsibility for their future. Staff are becoming less respectful of their superiors and hierarchies are threatened. There is a decline in the engagement with the printed word. Organisational cultures and structures are changing – creative but chaotic cultures that have flat corporate structures are not ideal candidates for rules-based regulation. As the drive for efficiency increases, controls and roles that don’t add value are being stripped out. These changes all suggest that long-term solutions will succeed only if based on principles rather than rules, on simplicity rather than complexity, and on personal responsibility rather than compliance regimes.
Details: Julian Frost 0118-9254482
julian.frost@
bdo.co.uk
It is perhaps ironic that this is the
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