Regulatory Divergence

February 21st, 2018

Since the EU referendum, it’s interesting that there still seems to be some reluctance to articulate what the benefits of leaving the EU are. Throughout the referendum, we were told that EU regulation strangles businesses yet there didn’t seem to be anyone that could set out which regulations were actually causing problems. So I was really interested to see Iain Duncan Smith on Daily Politics yesterday actually giving some examples of regulations he would like to get rid of. That’s useful, instead of talking in vague terms it’s something we can genuinely assess whether or not it will be beneficial to us. The four regulations he listed were:

You can watch him here. I wouldn’t bother with all of it as it turns into the standard bad-tempered argument after about three minutes.

I thought it might be useful to go through each of these regulations to have a think about whether we really want to get rid of them. There is the caveat that the Clinical Trials Directive is a directive rather than a regulation. The difference being that directives are based on individual countries legislating to achieve shared objectives but that’s just pedantic so I’ll let him have that. Also labelling is a concept rather than a regulation but I’m sure he had specific regulations in mind.

The Clinical Trials Directive – this was brought in to try and get all member states to harmonise the way they carry out clinical trials. That, on the face of it, sounds like a good idea. If you carry out a trial in one country then it should make it easier for that trial to be recognised in another country. Since 2003 there have been many criticisms of how the directive has worked. The bureaucracy involved is said to have reduced clinical trials by as much as 25%. That does sound like Iain might have a point; except we are in the process of getting rid of the directive and replacing it with a new Clinical Trials Regulation that reduces red tape. It’s due to be in place in 2019.  Which raises the question of whether Iain wants to get rid of the old one or the new one? Either way, I can’t imagine a situation where UK based pharmaceutical companies will want to conduct trials that are not consistent with EU regulation. Unless of course, they decide that the EU isn’t a market they want to trade in.

Mifid II – The Markets in Financial Instruments Directive (note this is also not a regulation) was created to address some of the issues raised by the 2008 financial crash. Iain raises the point that markets are being destroyed by regulation but surely financial services are the one market where it is obvious we seriously lack regulation? This directive is intended to bring in more protection for investors and make transactions transparent. That sounds pretty good on the face of it. There are concerns that these regulations will reduce payments for research and sales services which might cause stockbrokers to focus on markets outside of the EU. That could be something to be concerned about but it will happen whether we implement the directive or not. If we want to trade financial services into the EU then we will need to be Mifid II compliant. There is also nothing in the regulations that stop stockbrokers focussing on markets outside of the EU at the moment or in the future. There is a moral question here, is financial services an area we really want to deregulate? It went horribly wrong with the regulations we’ve got at the moment, having less of them doesn’t seem a great idea.

Solvency II –  Solvency II was created to harmonise EU wide insurance provision and actually replaced 14 existing EU insurance directives. That sounds like the sort of reduction in regulation that we are apparently after. The idea behind Solvency II is to reduce the risk that insurance companies, in different parts of the EU, are unable to meet claims. Supposedly this will give consumers across the EU faith in insurers as well as giving people more choice of insurance that they can buy. That sounds pretty great for consumers but UK based insurance companies have generally not been happy about it. As it requires insurers to hold more cash, in order to be able to settle claims, I can understand why they don’t like it. There has been some lobbying by the Bank of England to change the way Solvency II is implemented, and they’ve had some success, but it still looks like insurance companies are quite enthusiastic about getting out of the EU. This does seem to be a regulation that insurance companies don’t like but I’m not convinced that’s a good enough reason for me not to like it.

Labelling  – Iain made the fairly bold claim that “some labelling is now bigger than the packaging”. This claim defies science so I’m not sure what to make of it, other than to assume it’s probably nonsense. It’s tricky to figure out what directive he wants to get rid of, is it the Food information for consumers legislation or the EU’s Energy Labelling Directive? I’m not sure. Either way, the argument is that the requirement to give consumers too much information is hampering business. I sort of like information, in an age where we are battling obesity I’m not convinced by the argument that we need to reduce nutritional information for people.

The common theme, through these regulations, is that getting rid of them might make life slightly easier for businesses and that could make them more profitable. That is until they reach the point that they need to trade with the EU. Then it doesn’t really matter whether these regulations are codified in our law or not, businesses still need to be compliant with them. If they aren’t forced to be compliant by law then they will have to prove to the EU that they are compliant. That will cost businesses money.

There is the argument that these regulations shouldn’t apply to businesses that have no intention of trading with the EU. Can we really say that is the case with pharmaceuticals, financial services, insurance and food? All of them seem to be key export businesses so not really the first ones that need regulatory divergence. I’m not convinced that these are the regulations that we really benefit from removing.




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