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Calibrating regulation: Light touch or firm grip?

Updated Friday, 20th March 2009

Light touch or a firm grip - David Mayle asks what's the best approach to regulating business?

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Red tape (or, to use a more modern term, "compliance").

OK, the language is already problematic.

"Best" is hopefully intended to mean "most effective", where effective is defined in deliberately broad terms to satisfy all stakeholders.

Red Tape is itself a pejorative term, suggestive of bureaucratic inefficiency and unnecessary overheads. And 'LightTouch' vs 'Firm Grip' is a response to the Red Tape school of thinking, referring not to the effectiveness of the regulation, but to the onerousness or otherwise of the mechanisms. All in all there's a lot wrapped up in the question.

It might seem pretty non-contentious to suggest that we all want effective light-touch regulation, but any form of regulation is a compromise and means that the result is likely to be found sub-optimal by one or other group ofstakeholders.

If the group that is unhappy is the regulated entity, the unspoken fear is that they will pick up their ball and go and play somewhere else; the only remedy available to the regulator is concerted international action (and, for all the noises about dealing with tax havens, don't hold your breath).

Thus, in the absence of inclusively co-ordinated international action what can we do?

How about demanding higher ethical standards from business? Another no-brainer, surely nobody would argue against it?.

Taking a lead from the professions, can we not demand a licence to operate, revocable if the requisite standards are in anyway unmet; Unethical behaviour would result in sanctions.

The actual regulation could thus be light-touch, it's just the sanctions that could be onerous (and thus the compliance' overhead' could actually be quite modest).

"if the regime is less than attractive, then tax avoiders will merely relocate Head Office to somewhere more favourable"

Maybe the 'eyebrow of the governor of the Bank of England' would have been more effective than the FSA in avoiding the current economic woes?

Access to market is something of a shibboleth. Tax avoidance is inevitably constrained by the above-mentioned fear: "if the regime is less than attractive, then the putative culprit will merely relocate Head Office to somewhere more favourable" argument.

So where the business has its HQ registered, production facilities located or CEO domiciled is increasingly not the key question. Where it attempts to sell its products & services is a territory less easily vacated and maybe we should insist on certain standards before granting access?

Protectionism, I hear you say. Maybe, but the very concept of a Free Trade Area has historically been about eliminating barriers within a zone whilst at the same time maintaining barriers around it. Most have a history of asserting certain conditions for anyone given access to the contained market - a percentage of local content, or whatever. Untrammeled globalism could be argued to be the elimination of not just the inner barriers but also the outer barriers. The question is whether this necessarily takes the 'conditions' with it.

Or am I just being hopelessly naïve?

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