Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England
There is an ocean of difference between the political philosophies of the governments either side of the Atlantic. But along one policy dimension the US and UK are in accord: the desire to deregulate to unshackle business. The task is immense with rule books and regulators having ballooned over the past 50 years.
Beyond that the similarities end. In the US, the drive to deregulate is an article of political faith. In the UK, it is a political necessity born of weak growth. This distinction is mirrored in the very different ways deregulation is being tackled: how best to dismantle a high-rise regulatory Tower of Babel erected brick by brick over many decades?
The instincts of the new US administration are to raze the regulatory tower to the ground and only then to build back on a needs-must (or needs-Musk) basis. By design, this scorched-earth approach delivers a system shift in culture and practice. It eliminates the deadweight costs of regulatory overshoot at the risk of undershoot.
This is in stark contrast to the UK government’s approach so far. That began with the creation of a new Regulatory Innovation Office. No one would argue with the principle of regulatory innovation. But to believe the solution to regulatory proliferation is to create a new regulatory agency is gravity-defying logic.
Late last year, Sir Keir Starmer’s government began to implore regulators to prioritise growth. But as long as these bodies have statutory mandates whose primary concern is risk, not growth, this is cheap talk.
At the end of last year, regulators were asked for voluntary sacrifices from their rule books. Incredibly, turkeys did not welcome news of Christmas. An underwhelming sequence of “Dear Santa” letters followed, with negligible likely effects on growth. Chastened, the government has recently pivoted to Soprano-style tactics with the drive-by ousting of the head of the Competition and Markets Authority.
This erratic, piecemeal approach will not deliver lasting change. A brick-by-brick dismantling of a high-rise tower cannot shift regulatory cultures and practices. The first law of thermodynamics applies to regulation as well as energy: no sooner is one regulatory brick removed than another replaces it.
Indeed, that has been the experience of the UK government so far. Amid deregulatory rhetoric, new regulatory bricks have been put in the wall, some by design (such as the employment rights bill), others in response to public clamour (such as the Oasis ticketing resale fiasco). This clamour will not abate. And as self-avowed champions of working people, ministers will not be able to resist it.
A regulatory action plan is scheduled by the UK government for March. Like its growth plan, this has all the makings of a Shakespearean tragedy: sound and fury signifying nothing — or nothing systemic to answer the case. Certainly, a strategy of selective pruning would quickly be overwhelmed by regulatory regrowth. By taking a leaf out of the American playbook, however, perhaps a systemic shift in regulatory cultures and practices is possible.
The UK does not need more than 90 distinct regulators, some overlapping, employing many thousands of people with rule books running to millions of pages. The government should commit to at least halving this number, with an equivalent budget cut. As the Treasury well knows, there is nothing like a cost constraint to change business models and cultures.
If growth is to receive equal billing in regulatory priorities, then a dual statutory mandate will be necessary. Because higher growth necessitates greater risk-taking, the new statute should also specify clearly the government’s tolerance for consumer loss. This is a societal choice that only politicians can make — and then take responsibility when losses and public clamour rise. This leaves regulators unfettered to act in line with this mandate.
And the best way of limiting consumer losses is by hardwiring strong incentives into the very top of regulated organisations. A regulatory regime centred on, and backstopped by, sanctions for chief executives (rather than for the regulator), including sacking them in the event of failure, would do so. These incentives then cascade down organisations, reducing the need for costly compliance at every level of the pyramid.
Furthermore, the work of Professor Andrew Lo at MIT has shown how artificial intelligence can be used to identify overlaps and inconsistencies in complex legal and regulatory rule books. AI could thus provide a cheap and efficient tool for streamlining the rule books and automating compliance — this could dramatically lower bureaucratic burdens.
Deregulation has been championed by every government in living memory. They have failed for the same reason they risk failing now — pursuing a brick-by-brick strategy of idiosyncratic incrementalism. The UK chancellor says she wishes to bolster UK businesses’ animal spirits, Trump-style. Adopting the US deregulatory philosophy of seeking forgiveness rather than permission offers the best chance of doing so.