Excessive regulation was at the centre of the analysis presented by “Conservatism in Crisis”, the essay published by Kemi Badenoch’s leadership campaign. It has recently, and perhaps unexpectedly, started to be talked about by the Labour government.
In this post Nikesh Pandit outlines realistic policies for the Conservative Party now to present.
“Every regulation represents a restriction of liberty. Every regulation has a cost. That is why, like marriage in the Book of Common Prayer, regulation should not be enterprised unadvisedly, lightly or wantonly”. Margaret Thatcher
Conservatives generally take a sceptical view on regulation. Margaret Thatcher’s words quoted above are testament to this. However, contrary to Thatcher’s sentiments, all too often this scepticism slips into a callous slash and burn rhetoric. Kemi Badenoch understands that this is unhelpful. As she succinctly stated to the Commons European Scrutiny Committee in relation to the EU Retained Law Bill:
“It is not a bonfire of regulations. We are not arsonists. I am certainly not an arsonist; I am a Conservative.”
Both Thatcher and Badenoch’s quotes above recognise the importance of appropriate regulation. After all, regulation often plays a key role in safeguarding core Conservative principles. Detailed regulations in relation to medicines safeguard life and promote liberty. Conservation of our national landscapes is underpinned by regulation. It is regulation that seeks to ensure that our private property stored in banks and other financial institutions is appropriately protected.
As the Conservative Party looks to renewing its policy offering, this post suggests three policies for an appropriate approach to regulation. The goal of these policy suggestions is to maintain high regulatory standards, whilst promoting innovation and growth, instilling greater freedom and responsibility, and harnessing the opportunities of technology. More broadly it is hoped that these policies demonstrate credibility, competence and a commitment to serve the entire economy.
Growth partnerships
Regulatory approval and compliance are often cited as a key barrier to launch and sustain new products and services. To reduce these barriers to innovation and growth, the Conservative Party should call for legislation requiring every business-facing regulator to rapidly implement a ‘growth partnership programme’.
Modelled on the Financial Conduct Authority’s (the “FCA”) highly successful ‘regulatory sandbox’, businesses accepted onto a regulator’s growth partnership programme would benefit from a streamlined compliance regime that empowers them to test innovative products and services in the live market with real customers to determine actual market reaction and accelerate potential success and growth. The FCA express the concept thus: “a regulatory sandbox… is a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.”
In practical terms, this would mean that a business within a growth partnership programme would benefit from the following key measures, which reflect and build on the foundations of the FCA’s regulatory sandbox:
(i) Streamlined approval: to reduce the approval barrier for innovative new entrants and products, regulators would be required to apply a streamlined regulatory authorisation or registration process to a business in its growth partnership. This would enable the business to rapidly bring its innovative product or service to real customers in the market and determine whether it is attractive and profitable. In doing so, streamlined approval would also enable UK regulated firms in a growth partnership to get ahead of competition regulated in other jurisdictions making the UK an attractive destination to launch regulated products. Additionally, actual market reaction would enable the business to abandon or adjust an unattractive product without incurring the resource and financial costs to obtain full regulatory approval. In this way, the growth partnership would also facilitate a productive use of resources.
(ii) Reduced regulatory burden: new entrants and product lines are often stifled by detailed rules that experienced and well-resourced market players have the competitive edge in achieving compliance with. To assist new entrants and product lines overcome this hurdle, for businesses in the growth partnership the regulator will be permitted to waive or modify overly difficult rules subject to enhanced supervision. Where modification or waiver is not possible, for instance because of national or international legal obligations, businesses in the growth partnership should benefit from no-enforcement guarantees.
(iii) Dedicated compliance consultancy: all too often businesses do not know what the applicable regulations are, where to start to achieve compliance and face faceless disconnected regulators. To counteract this, each business in the growth partnership would have a dedicated case manager, ideally drawn from existing staff at the regulator with relevant expertise, who would assist the business with identifying applicable rules and provide guidance on regulatory compliance. The case manager would also be responsible for enhanced supervision of the business and assisting the business to navigate other applicable UK regulators so that the business is only required to be accepted on one growth partnership to accelerate the launch of its innovative product. If we are to win the innovation race, businesses and regulators must act in appropriate partnership.
The prize from growth partnerships is real. The FCA statistics show that over 90% of firms who have used their regulatory sandbox become fully authorised. More pertinent to growth, a recent independent study found that FCA sandbox firms are 50% more likely to raise funding than their peers, and on average raise 15% more in investment. Requiring all UK regulators to have a growth partnership similar to the FCA’s regulatory sandbox is a growth solution which must be seized.
Outcomes-focused regulation
The Conservative Party should also advocate a policy requiring all UK regulators to revisit the structural design of their regulatory regimes. Specifically, regulators should be required to consider whether in appropriate cases prescriptive rules should be replaced by higher-level outcomes-focused principles that are enforceable.
The foundation for this proposal is that in certain circumstances overly prescriptive rules may increase the cost of compliance with little or no customer benefit. In contrast, higher-level outcomes-focused principles may in appropriate cases generate better customer outcomes and reduce costs, whilst also fostering responsibility and innovation, as has been recognised by the FCA in a 2024 Call for Input (the “CfI”).
A key example in this regard is the Consumer Credit Act 1974, which requires lenders to provide consumers with specified information before entering into a credit agreement and at key points during the agreement. The FCA has reported that “[s]ome stakeholders argue the level of prescription can lead to consumers not engaging with the information, or act as a barrier to firms engaging effectively with customers in financial difficulty.” [CfI, p.10]
Additionally, the current requirements can make it more difficult to provide appropriate information through the digital channels that consumers frequently use to apply for and manage credit agreements. [CfI, p.10–11]
The FCA also suggests similar concerns in relation to distance marketing and e-commerce requirements derived from EU legislation, notably the EU Distance Marketing Directive and the E-Commerce Directive. This includes rules for retail investments, bank accounts, insurance, mortgages, funeral plans, and consumer credit where the customer wants to arrange a contract by phone or online. The rules impose detailed requirements mandating information that must be provided before the contract can be entered into, which may limit engagement with customers. [CfI, p.10]
In both examples, if more outcomes-focused and less prescriptive requirements were in place, this might result in better customer engagement and a more focused and efficient compliance environment for businesses. As a result, the FCA is currently considering feedback on replacing the prescriptive requirements in these areas with reliance on its recently introduced higher-level outcomes-focused Consumer Duty. [CfI, p.10–11]
Importantly, the application of higher-level principles should not be construed as introducing a light touch regime. The goal is to maintain appropriate regulatory standards whilst empowering businesses with the responsibility to deliver high-quality outcomes for customers within the context of their own business model, customer base and product offering, which in turn generates efficiency and innovation. The wider responsibility given to businesses reduces scope to exploit regulatory loopholes and hide behind a tick-box and unthinking approach to compliance. Additionally, the flexibility bestowed by higher-level principles provides a greater onus on businesses to innovate to deal with evolving harms and changing market practices and technologies. [CfI, para. 4.4]
Regulatory change, even if beneficial, generally involves further costs to businesses, notably through updating existing policies and procedures and providing relevant training to staff. Additionally, change can mean uncertainty, particularly where this involves less prescription and standardisation. Accordingly, to mitigate these concerns, following the introduction of any higher-level principles, businesses should still be permitted to rely on any prior prescriptive rules as approved guidance. Businesses could therefore continue to apply existing systems and controls for compliance until adjustment to the principles-based regime becomes viable.
Regulator-backed technology
Notwithstanding the benefits of higher-level outcomes-focussed regulation, in many cases it will be important to retain detailed prescriptive rules. This is particularly the case where it is vital to have standardisation across the industry, notably in areas of health and safety to maintain minimum standards or to allow customers to compare products. Additionally, it may be important to retain certain detailed prescriptive rules which have evolved to counteract specific harms (e.g. the mis-selling of certain investments). [CfI, para. 4.5]
To assist businesses in navigating detailed and complex rules, Conservatives should push for a regulatory landscape that actively assists and encourages businesses to use technological solutions to reduce the compliance burden.
As a first step, Conservatives should call for a requirement that all regulators produce a standardised machine-readable version of their rules and guidance. Machine-readable regulations are versions of regulatory text which can be easily understood and processed by computer systems. Through making regulations machine-readable, compliance systems can be automated. For instance, technological solutions can be used to identify applicable regulations and enable real-time compliance monitoring and reporting. This in turn can lead to greater efficiency, accuracy, and cost-effectiveness. Importantly, this step would assist small and medium-sized businesses, which often do not have the resources to translate and update regulations into machine-readable format but may have the resources to drive efficiencies by purchasing compliance solutions that leverage machine-readable regulations.
The Conservative Party should also push for regulators to open approval competitions for technology-based compliance solutions. The initial competition could be for AI-based products for anti-money laundering KYC checks (e.g. scanning of risks and assessing flags) noting the statement in the FCA CEO’s recent letter on growth to the Prime Minister that “digital identity authentication/verification could unlock huge gains”. Compliance solutions approved under such competitions could be permitted to market a no-enforcement guarantee for users. Under such a guarantee, provided the business user uses the approved compliance solution appropriately (e.g. ingests all the relevant information into the product), the regulated business could benefit from a no-enforcement guarantee for any determination or output by the approved product which might comprise a regulatory breach.
Through instilling approved technology-based compliance solutions, the UK could create a competitive market for such approved products, whilst freeing up regulated businesses to focus on their core business offering. This would enhance productivity, innovation and growth. Regulator approved technologies and the requirement for machine-readable regulation also give real meaning to backing technologies such as AI in manner that is credible. It is private enterprise that will compete and innovate to create and develop these products. Government should create the conditions and incentives to facilitate this.
Conclusion
If the Conservative Party is to regain the trust of the British people, it must advance credible policies which look to the future with positivity and cater for the entire economy. In relation to regulation, rather than burning the house down, this means rekindling a platform that focuses on appropriate regulation that simultaneously instils greater freedom and responsibility, facilitates innovation and growth and safeguards customers. The suggested policies show that this exciting marriage is possible.
Nikesh Pandit is a barrister at 4–5 Gray’s Inn Square specialising in regulatory and disciplinary law. He maintains a particular focus on financial services matters.