Summer 2004

Risk, Regulation and Affluence

Christopher Haskins

Affluent societies are much more heavily regulated than poorer ones, which suggests that a regulated society is also a successful one. Regulations have been needed to make markets fair and competitive, to promote public health and safety, and to protect citizens from abuse and exploitation. Regulation has also been the most effective way of protecting the environment.

So far, so good. But regulations can also be criticised for being too bureaucratic, inflexible, disproportionate and inconsistent in their application. Although regulation has contributed to making our lives much safer than before, people don’t appear to feel any safer. Indeed they have become more risk averse and ask for more protection: both of which are unrealistic because of cost, effectiveness and appropriateness. The expense of fool-proof rail systems may push fares up so high as to drive people back to the roads, an effect that would be much more dangerous and environmentally damaging. Regulation will not be effective in dealing with the diet crisis. And it is wrong to seek to guarantee patients protection from risks taken on their behalf by doctors.

The obsession with risk-aversion has encouraged ministers, mistakenly, to introduce ineffective and inappropriate regulation. A Dangerous Dogs Act, hastily passed in the light of a small number of unpleasant incidents, had to be repealed because it was inoperable. An attempt to outlaw the sale of beef on the bone was abandoned because the public ridiculed it. (The poll tax was abandoned for the same reason). A drowning tragedy affecting children in Torbay, which culminated in the person in charge being convicted, nevertheless led to restrictive regulation which substantially reduced the scale of character forming Outward Bound” adventure activities for young people. And in response to some serious corporate misbehaviour, accountants established a range of bureaucratic, disproportionate risk assessment procedures, named after their creator, Nigel Turnbull. The great corporate villains would have little difficulty in satisfying the demands of Turnbull, but the culture of risk-aversion is particularly dangerous in business where risk taking is fundamental to success and progress.

The Daily Mail
, one of Britain’s most successful if notorious newspapers, has exploited middle class paranoia and risk-aversion to great effect. Its readers appear to have an inferiority complex about foreigners and Europeans in particular, so the Daily Mail feeds them far fetched suggestions of threats from Brussels and the migrants needed to maintain economic growth. Paradoxically, Mail readers are said to be threatened by too much regulation from the EU, whilst at the same time demanding much greater protection from the grossly exaggerated menace of migration.

Failures in policy, health and social services are followed by hysterical demands from the tabloids for scapegoats and tighter regulation, when in fact evidence most likely suggests that such failures are rarer and fewer than they were before. As a consequence doctors and social workers, who must take risks if they are to perform effectively, are afraid to do so for fear of retribution. Life saving, but risky operations are less likely to be carried out, and children in disturbed homes may be taken into care by local authorities, in case of an incident, when it may be much less risky to leave the children with their families.

American and now British lawyers have been quick to exploit consumer anxiety and desire for retribution, by encouraging them to seek compensation through the courts for real or imagined failures in public service delivery.

According to the National Audit Office as of the end of March 2003, for example, the total amount in compensation that the NHS was expecting to pay out over a number of years to settle currently known or anticipated claims for clinical negligence stood at £5.89 billion, amounting to more than 12% of total health expenditure for that year. The radio programme, Classic FM, whose audience is predominantly the well-to-do middle class, runs advertisements from lawyers offering the listeners no win, no fee” services if they feel they have a complaint against anyone. The middle classes do their children no favours by driving them to school rather than allowing them to walk or cycle, for fear of traffic and paedophiles. The mêlée of school run traffic is much more dangerous and children must be exposed to risk if they are to cope with life.

Single interest pressure groups also play an active and not necessarily constructive part in influencing people about risk. Serious failures in the past — such as BSE — have rightly raised public concerns about the safety of their food. And yet, despite the scandals, our food has never been safer. Many pressure groups, with justified concern about the environmental implication of GM crops, were quite happy to exploit the Daily Mail’s completely baseless charge about frankenstein foods”, suggesting that the real threat was food safety, rather than the environmental charge. Unfortunately Mail readers seem disinterested in the substantial risks arising from greenhouse emissions and climate change, because it is their own lifestyle which is the source of the problem. It is much easier to blame someone else if there is a risk in food, even though the main source of food illness is self inflicted by people being careless in the way they prepare, store and cook in their own homes.

One crucial aspect to our attitude towards risk is that when we feel in control of events we accept much higher levels of risk than when we are not. We seem to be much more sanguine about the substantial risk involved when driving our cars than when we are sitting in a far more secure railway carriage. We assess what might be a health factor related to mobile phones but continue to employ them because they are so useful. By contrast, we avoid GM foods because the insignificant risk involved does not offer us any apparent benefit. And we tolerate massive self-inflicted damage to ourselves from smoking and eating too much, but expect risk-free successful treatment from the NHS.

Nonetheless, although there are serious economic and psychological consequences of over regulation driven by risk-aversion, those who press for deregulation are also at fault. They fail to recognise that without regulation the environment would be in even greater difficulties than it is, employees would be severely exploited by unscrupulous employers and shoppers similarly disadvantaged by rapacious marketeers. Drink-drive and safety belt regulations have saved many lives.

And I am not convinced of the argument that over-regulation severely undermines British competitiveness. The Organisation for Economic Co-operation and Development (OECD) has pointed out that Britain is its least regulated member, yet remains down the productivity and competitive league. Surprisingly, the United States, which is considered very competitive, is a much more enthusiastic regulator of financial and consumer markets. When the Confederation of British Industry (CBI) suggests that regulations undermine our competitiveness, it should be reminded that the main reason for Britain’s relatively poor productivity is that its own members have failed to invest sufficiently in science, technology and people over a long period.

The Better Regulation Task Force applies the following five principles as a basis for good regulation: transparency; proportionality; accountability; consistency; and targeting. Transparency is in order to provide people with information and evidence which may enable them to manage problems without recourse to regulation, and to trust the people to be able to resolve most risk issues for themselves: they are more sensible than politicians and editors assume and if regulation is necessary it will only be effective if those being regulated understand and accept the need for action. Proportionality is necessary as a regulation must always be proportionate. That may include, for example, having to make tough economic assessments of the risks and benefits of proposals to make our trains safer. Regulation should never be introduced as a knee-jerk reaction to events.

Accountability is essential in ensuring effective regulation. Most regulation failures arise because accountability is complex, blurred and confusing. Consistency is fundamental if regulation is to be implemented effectively across Britain and the European Union. Targeting vulnerable groups most at risk — the poor, the young and the old — is crucial to protect those most in need rather than the majority of citizens well able to look after themselves.

Despite some justified concerns about shortcomings in self regulation related to doctors and accountants, I believe that self regulation can be much more effective than state regulation. The advantages of self regulation are that the protection of professional integrity and competence is a great motivator, the expertise is there, and self regulation can respond more speedily and more flexibly to events than the state. I would like to see farmers and communities apply self regulation in order to protect their reputation and strengthen social solidarity. Branded companies feel obliged to self regulate, because the economic consequences of failing to do so can be catastrophic — the Nestle and Coca Cola fiascos in the bottled water market are just one such example.

Small businesses argue with some justification that they lose out to larger competitors because of regulation. The latter create internal regulatory bureaucracies which the smaller companies could not afford. It is, therefore, essential that when regulation is being proposed the opinion of smaller rather than larger companies should be sought. I have seen many situations where large businesses call for regulation in order to give them advantage over their smaller competitors.

But unfortunately people are much more likely to be put at risk because of regulatory failure in small rather than large businesses. Most food safety problems arise in smaller businesses that often lack the expertise, knowledge and investment to meet the necessary standards of hygiene. Because of this regulators tend to focus their attention on smaller businesses.

Regulation can also be applied more intelligently. Most businesses and citizens want to comply with the law, but often fail to do so because they do not understand their obligations. Much more emphasis must be put on helping people to understand their obligations and to comply with them rather than punishing them for failing to comply after the event. The Food Standard Agency which offers independent and frank advice on risks in the food chain has been remarkably successful in reducing risk without necessarily resorting to regulation, by giving people the evidence and encouraging them to manage the situation for themselves.

Source: GlobeSpan Incorporated

However, although I believe that much can be done to regulate more sensibly and more effectively, I remain convinced that the more affluent we become the more regulation we demand. There is another long term reason for this. Until the middle of the nineteenth century families had to manage for themselves most of the risks of life, supported by the communities in which they lived. Since then, as Martin Woolf, the Financial Times columnist, has pointed out, the family has been progressively nationalised”. Much of this process has been laudable and effective. The state has provided families with safe water, health, education and other public services on an increasing scale. Most people would accept that the state, rather than the family, should be responsible for eliminating poverty and unnecessary risk.

But maybe this process has gone too far, as the state also has to intervene extensively because of the alarming increase in family breakdowns. Given this responsibility the state resorts to regulation as its most effective instrument. Stable families, like responsible businesses can ignore much state regulation because they are already achieving the outcomes pursued by the regulations. But as family failures escalate, so it seems must state regulation as an inadequate alternative to family self regulation and risk management.

And finally different groups in society and different countries have contradictory perceptions of regulation and risk. The middle-classes who have never been healthier or safer, want more and more regulation and assurance. The poor, disillusioned, without expectation, and living much more dangerously, have little time for regulation. The British are naturally averse to regulation: the Germans rely on regulation to get them through the day.

In whatever context, regulation is a fact of life. We should manage it and recognise that perception and effectiveness vary. Above all we should be wary of pursuing the elimination of risk when responsible risk-taking is the basis of economic, scientific and social achievement.

Lord Haskins of Skidby chaired the Better Regulation Task Force, and is a former Chairman of Northern Foods. He is now the British Government's Rural Recovery Co-ordinator.