RED TAPE, UNWINDING?

The continuous explosion of so much primary and, more importantly perhaps, secondary rules remains one (admittedly there are others) of the key reasons that small and medium sized enterprises are not the engine room of growth as the Government wishes. SMEs are my “constituents” for the purpose of these articles, as I have always considered the FTSE 500 and similar can look after themselves. The publication last week of the Beecroft Report on limited deregulation of employment law is another good reason for circulating this note, now.

So, what’s new?

 

One of the issues I want to pick up on is why, and this was and remains surprising to me and those who help me put my ideas on paper, as I noted in an article last year, trade organisations and those who otherwise represent the SME constituency seem to be either unable or unwilling to engage with us in this discussion. Hopefully they will see this note and reply. The same applies to the press, politicians and civil servants generally, although not too much was expected from them. As one cynical client has noted “Those who have the power
and influence to make changes have no real incentive to do so; those who do have the ability or interest, have neither the time, the energy or any real confidence that the system will listen to them.”

I suppose the one major movement since I wrote my initial paper about overregulation in company law several years ago (“Problems with the law – how much is too much?” written 2009 – revised in 2011), is the Government’s so called “Red Tape Challenge” noted above.
This is meant to weed out some of those secondary (but not primary) rules and regulations which those most affected believe are not necessary for the smooth running of their businesses. As I am a corporate lawyer representing many companies which fall within this
category, this is the area of the Challenge on which I have focused.

However, before we all get too excited about it , the last time I looked at the part of the Challenge which dealt with general company law, the site had received just a couple of hundred replies in nine months. If we reckon that there are (conservatively) about 2.8 million active companies in the UK that gives the Government a very poor response rate. Why the distinct lack of interest? “Too busy dealing with all the unnecessary regulation and the failure of those in influence to seriously tackle the problem”, another cynic suggested. My other core concern is that the review deals only with secondary rules and regulations – not the primary legislation from which all those rules are derived. That in itself is a major limiting factor; the review does not tackle the problem of overregulation at its source.

Having asked a selection of those affected what they thought about the Challenge, general world weariness seems best to sum up their mood. Most of those running smaller (not necessarily small) companies spend almost all of their time doing just that—
running them. They don’t have time to analyse the plethora of rules and laws which make their lives so complex in this particular area of business. Of course there are numerous other areas of complex regulation, which just increases the burden. Let’s not forget something over 97 per cent of all companies are SMEs, they make up a very large, if rather quiet, constituency.

Last year I wrote in response to the request for comments on the Red Tape Challenge: “You have listed 128 relevant regulations relating to companies. Most are extremely complex and/or technical. In order to decide whether or not some or all of them should be repealed,
the reviewer would need a detailed understanding as to why they were originally introduced and the reason they are still in force. Are you expecting people to read all 128 regulations and make their minds up?”

For example, a “popular result” might be to remove [whether or not it is on the list itself] the statutory instrument which contains the model articles of association – SI2008 No. 3229. If 500 people tell you that is a good idea would BIS act on it? As the relevant department (in
this case BIS or its predecessor) brought these regulations into force, shouldn’t they know whether or not they are still appropriate? If they aren’t still appropriate why do they need the public to help them reach that decision? If they are, why is this debate taking place at all?
The Companies Act 2006 would have been an ideal opportunity at least to start reducing the burden of red tape in this area. It appears to have had the opposite effect, at least from the regulatory point of view.

I am all for making the law easier and adopting a “common sense” attitude wherever possible in respect of company regulations. The numerous SMEs and larger companies which I advise are also completely in favour of doing so. However I am not sure we can really take a
“common sense” or even a “populist” view on the removal of some or all of these rules, however much the cabinet office wants to do so. Some of these SIs are core to the operation of company law in this country. Perhaps rather than taking the easy way out and listing them
all as it has done, BIS should at least have divided them into two groups, core rules and others. If they can’t do this why are others expected to do so, on their behalf? In the end most SME’s have neither the time nor the financial or other resources to cope with or
understand these rules therefore they just carry on their businesses and ignore them. It may not be “correct” but research shows it is the reality.”

I know those who the Government have asked to lead this debate are in the middle of their discussions with BIS at the moment; so we continue to live in hope of really useful results. We fear, however, this may have been approached in the wrong way, not only for the reasons I have just mentioned, but because, as most people know, it is very easy to add “stuff” (such
as layers of rules and bureaucracy), and very hard to remove it. Following a BBC radio discussion in which I took part last year on a similar (although rather more general) topic, the common consensus seemed to be (to paraphrase) “Yes, there are too many rules and no we don’t really know what can be done, it’s probably too late to do much”.

I’ve had another look at some of the regulations up for discussion and possible removal – for example, the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009. This amends other legislation as a result of the Companies Act 2006, for example it changes references to parts of the Companies Act 1985, to parts of the Companies Act 2006. There is only one problem for the casual reader; this regulation itself is 112 pages long. How is anyone expected to plough through this number of complex and turgid rules unless they have to? As one of my colleagues noted, “BIS do not understand the difficulty of what they have tasked the layman with.” I put it more simply – “they just don’t get it”.

I have a feeling the result of the Red Tape Challenge will be rather as follows; BIS will send out a press release to the effect that:-
“There have been very few replies to this part of the Challenge, therefore BIS assumes all is well and actually everyone is fairly okay with what is there at the moment”. Why? Because, to be fair, the Companies Act 2006 indeed did what it said on the packet: it modernised and simplified company law and created a more flexible framework in which companies could operate. But only at the level of primary legislation and even some of that is found wanting.

The SME press release perhaps should be:- “Generally and at the level of secondary legislation the reality is that not much in the garden
is rosy but we (several million SMEs) don’t have the time or the skills to work through these thousands of regulations which are imposed on us. We will leave it to those who represent us such as the Federation of Small Businesses, Institute of Family Businesses, Institute of
Directors and so on to deal with these matters for us particularly as we hear them saying all the time that something must be done about over-regulation / red tape.”

Additionally I don’t think much has changed despite the good intentions of this Government of trying to introduce fewer rules. By way of one recent example, I read an article which mentioned “The Control of Artificial Optical Radiation at Work Regulations 2010” which, again,
does what it says on the packet – it defines safe exposure to artificial light. I am interested to know how many companies will really have the time and money to delve this deeply into such very specific Health and Safety Rules. I am sure this example could be multiplied by
numerous similar examples.

It is this proliferation of hundreds of very low level, but still complex, regulations which seem to do the most harm to SMEs. Their sheer number is wearing on many owner managers. As we have said before, as so many of these regulations are ignored by those to whom they are directed, who really benefits? Again, as someone else wrote in response to the Red Tape Challenge, “We don’t need more laws. We need the right laws and those laws which we agree are important and need to be enforced.”

Eq ually , in spite of all its good intentions, I am concerned the Red Tape Challenge will be yet another example (perhaps labelled next to “Big Society”), of a high profile Government initiative which says much and delivers little. I (and I include here those many people with
whom I have discussed this note and its general themes) still believe strongly what is needed is a proper debate about the minutiae of regulation which is what this should be about; for example why are there so many company forms, are they all necessary and how can we
make them easier to complete? Yes it’s all really boring stuff but that is what a lot of this discussion is about, the boring side of running a company. The part that pushes up costs and wastes management time. There is really no point in lawyers and accountants
trying to resolve these matters on behalf of the so called “end users”. There are plenty of owner managers who would willingly take part, who could assist and give practical and helpful comments on these matters if BIS really wanted answers and more importantly found a way
to tap into all that practical knowledge.
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POSTSCRIPT

I started putting this note together in mid-April 2012 and have had many helpful comments. In mid-May the Beecroft Report on employment regulations and possible deregulation was published, although I do wonder why the report was actually dated 12th October 2011…..

In a speech on the economy in mid-May, Mr Cameron said that he would do “whatever it takes” to help the British economy adding that, “all the key things business has rightly asked for, we are delivering.”

The Beecroft Report, which was submitted before the economic situation deteriorated even further, says that radical action now needs to be focussed on helping small firms who are currently being overwhelmed by regulations.

It states: “[A] key issue is the burden that complying with a mass of different regulations places on the owner managers of very small businesses. The time taken in understanding and complying with a multitude of regulations is time that is not spent on growing and
developing the business.

“Regulators often ignore the fact that many small businesses are run by people who are very proficient at the activity that is at the heart of their business, be it painting and decorating, cooking, driving or whatever, but have very limited administrative skills. A form that a bureaucrat could complete in a few minutes may take them many times as long.”

I appreciate many of the comments made in the report. On the basis of the previous papers I have written on over-regulation, I support the idea that small businesses, that is those employing less than 10 people and in respect of new employees only, could opt out of some
or all of a specified list including unfair dismissal, flexible parental leave and equal pay audits. Potential employees would be told which areas the employer had opted out of, they could then choose whether or not to accept employment. The presumption seems to be that if by
opting out of some or all of these rules, an employer couldn’t recruit, and the recruitment policy would be altered.

Politically there is apparently only a remote chance these recommendations will ever come into effect. Once again, we have an idea which (at least for those looking for a limited amount of de-regulation in one specific area of business law), promises much and will achieve little.
That said I am pleased to see that several of the general ideas I wrote about last year in a paper called “Common sense- the dark matter of business law”, seem to have been picked up in this report. For all of us who have worked on these articles and ideas over several years I
believe it is worth continuing this discussion, so that we can share our ideas with a wider audience.

Nick Gould, Collyer Bristow LLP, 29th May 2012

For further information please contact:

Nick Gould, Partner, Corporate and Commercial – Legal, Collyer Bristow LLP
T: 020 7470 4440 E: nick.gould@collyerbristow.com

Paul Newhall, Business Development Director, Collyer Bristow LLP
T: 020 7470 4413 E: paul.newhall@collyerbristow.com