The framework for regulatory risk assessment in the Department of Trade and Industry.

URN No: 02/1681

Introduction

1. The Department of Trade and Industry's aim is to increase competitiveness and scientific excellence in order to generate higher levels of sustainable growth and productivity in a modern economy. It plays a central role in the Government's modernising agenda with front line responsibility for supporting British business and for much of the underlying framework for economic activity. DTI's activities are very diverse, covering areas such as trade policy, energy policy, industrial sponsorship, corporate and consumer affairs, and regional enterprise. The Department also has a significant role to play in service delivery through its Executive Agencies such as Companies House and the Patent Office.

2. Although the nature of the regulatory regime in DTI differs across these fields, a consistent approach to regulatory activity is adopted throughout. Broadly speaking, the Department introduces regulations for one of two purposes: to create and support competitive markets, or to provide necessary safeguards (for example to consumers, employees or creditors) that could not be guaranteed without Government intervention in the market. In deciding how to strike an appropriate balance, in each case consideration needs to be given to a range of aspects such as the benefits to competitiveness of a motivated workforce; informed consumers weighed against costs (direct costs to business, indirect cost to the economy of over-regulation etc); and whether non-regulatory solutions are more appropriate.

3. DTI also has a role to play in ensuring that international markets are open and competitive. It seeks to encourage the EU to take a liberalising approach to international trade negotiations and hopes to see this continued within the context of an internationally agreed framework of rules in the World Trade Organisation. Finally, there are areas in which the Department acts in a sponsorship capacity - seeking to ensure that regulations and policies developed by other government departments, the European Commission and other bodies reflect the competitiveness agenda. In these circumstances DTI actively intervenes on behalf of those sectors it sponsors and uses its knowledge of business to persuade, influence and inform those whose role is to manage the regulatory regime in that sector.

4. The Department of Trade and Industry aims to follow best practice at all stages of the regulatory process as outlined in the Cabinet Office document Good Policy Making: A Guide to Regulatory Impact Assessment. This ensures that regulations are necessary and effective in securing the desired benefits, that the costs and risks are justified, and that the burdens - particularly those faced by small businesses - are minimised. DTI firmly supports the five key principles of good regulation identified by the Better Regulation Task Force:

Transparency - Be open, keep it simple, be user-friendly.
Accountability - To Ministers and Parliament, to users, to the public.
Targeting - Regulation should focus on the problem, and minimise side-effects.
Consistency - Be predictable, people should know where they stand.
Proportionality - Fit the remedy to the risk, only regulate when you need to.
Risk Assessment

5. Risk assessment has a key role to play at all stages of the regulatory process. The Department's approach emphasises the need to obtain the necessary data and knowledge for making informed decisions. This includes not just decisions on the risk assessment itself, but also information on the available options and their constraints. However, whilst it is very important that decisions should be evidence-based, what comprises 'necessary data and knowledge' will vary, depending - among other things - on severity of risk.

6. One simple formula which underpins much of the Department's risk assessment philosophy is: risk = hazard x exposure. In other words the risk is the likelihood that harm will be experienced by a particular population when exposed to a hazard. Thus managing risk becomes more and more important as a market grows, leading to increased exposure to a given hazard. Or put another way: to maintain the risk at an acceptable level the hazard has to be reduced as the market (and hence the exposure) increases. This is a particularly important factor when consumer markets mature and professional products migrate to the consumer market allowing a much larger (and less sophisticated pool of consumers) access to sophisticated products.

7. Scientific advice has an increasingly important part to play in informing UK and international policy and regulatory decisions, particularly on sensitive issues involving people's health and safety, animal and plant protection and the environment. Some key principles concerning the use and presentation of scientific advice in policy published by the Chief Scientific Adviser are followed throughout the Department.

8. Other mechanisms are also used by DTI to quantify risk. For example, a research programme is commissioned by Consumer Affairs Directorate which seeks to inform government policy; but this is also disseminated so as to help industry assess safety issues and encourage innovation. And in its work on the competitiveness of particular sectors (such as chemicals), detailed analyses are undertaken which provide valuable knowledge for informing decisions, such as the number and type of companies likely to be affected by a proposal and the likely consequences of costs on competitiveness.

9. It has been recognised for many years that in certain circumstances where there is no absolute scientific certainty about the risks involved it is appropriate for regulators to adopt a precautionary approach. The Precautionary Principle is based on three criteria: that there must be a credible threat (which needs to be described and clarified); that scientific certainty is not required (but the appropriate level of scientific proof needs to be determined); and that measures taken must be cost-effective (which requires the validity of any cost benefit analysis to be tested critically).

10. The Department supports the Precautionary Principle, ie the view that it is not desirable, when considering risks which appear to be significant, to delay action until there is absolute scientific certainty. In practical terms, this means acting on estimates of the risks (and therefore the benefits of reducing those risks and the cost to society of not doing so) which are towards the upper end of any range of uncertainty.

Regulatory Options

11. DTI's starting point is that legislation should only be introduced as a last resort. Even where a problem has been identified which could be solved by government intervention, risks associated with the 'do nothing' approach are first addressed. This is because regulation may be inappropriate for a number of reasons including disproportionate cost, the unnecessary burden it might impose, or the limited effect it could have. But even if action is required, a number of alternatives are available to regulators and enforcers which may be preferable to new legislation.

12. Possible remedies might include reassessing existing legislation (which may be the root cause of the problem); advocating a voluntary scheme; introducing a code of practice which has legal effect; or encouraging self-regulation of the industry concerned. In some circumstances, however, (particularly where the UK is to continue to meet its legal obligations to the European Community or other international bodies) a legislative solution will be inevitable. In this case the Regulatory Impact Assessment (RIA) methodology plays a vital role in ensuring that the associated risks have been addressed and that the outcome is targeted and proportionate - particularly insofar as it impacts on small businesses.

13. The White Paper Modernising Government made a commitment to 'producing and delivering an integrated system of impact assessment and appraisal tools... covering impacts on business, the environment, health and the needs of particular groups in society.'. Besides the RIA, DTI therefore employs - where appropriate - other formal procedures such as environmental and health impact assessments. In addition, various sets of guidance (eg the use of scientific advice) are used as an integral part of the Department's policy-making process. Copies of all such guidance and a checklist for policymakers have now been brought together on the DTI Intranet.

Stakeholder involvement

14. Consultation among interested parties is vital at all stages of the regulatory process to ensure that all relevant risks have been identified, and where possible quantified. However, DTI is conscious that unless this process is properly planned and controlled it can become both costly and burdensome; so a proportionate approach is required. What is of overriding important is that stakeholders should be involved throughout the regulatory formulation process. This ensures that regulations are drafted which not only serve the purpose for which they were intended, but also that they are easy to understand, easy to comply-with, yet difficult to avoid.

15. The principle of thorough consultation was enshrined in the Modernising government White Paper which stated that government needed to be outward-looking and inclusive in the way policy is made, involving a wide range of people in policy development - from those who have to implement to those on the receiving end of the services. But to be truly effective the process must continue even after regulations have been introduced so that government may receive feedback on the effects of regulation in order to allow a proper evaluation process to take place.

16. DTI seeks to ensure that the legislation for which it is responsible continues to meet the five criteria of 'Good Regulation' so long as it is in force. Whilst only a small number of areas conducts regular, systematic, formal reviews of regulations much of the Department is in such close contact with stakeholders that it is constantly aware of areas in which regulation has become unnecessary, outdated, inadequate or burdensome - and conversely areas where new legislation is required. There is increasing emphasis on undertaking more structured regulatory reviews, and policy makers - together with their legal advisers - are now required to consider the scope for time-limiting or otherwise restricting the application of legislation so as to mitigate the cumulative burden on business.

17. The ongoing process of consultation is inextricably linked with the concept of risk communication. Possibly the Department's highest profile example is the annual exercise to promote fireworks safety - where government legislation combined with a vigorous publicity campaign have led to a significant reduction in injuries sustained. However, this is just one element of the Consumer Affairs publicity programme which includes the regular publication of a consumer safety newsletter.

18. Whilst it is for the regulators themselves to evaluate regulations, sponsors and other stakeholders can help to prioritise. Regular industry contacts and competitiveness analysis will highlight those regulations of greatest concern to industry - either because they are not having the desired effect, there are concerns that they are not being enforced fairly, or because the compliance costs are significantly higher than the RIA suggested. However, regulators themselves encounter difficulties in evaluating the benefit of regulations, particularly when they receive little or no feedback from stakeholders on the quantitative assessments contained in published RIAs.

Conclusion

19. DTI's overall aim is to increase competitiveness and scientific excellence in order to generate higher levels of sustainable growth and productivity in a modern economy. Whilst DTI is itself a major regulatory department, its interests lie not only in regulations for which it is directly responsible, but also in those introduced by other government departments and the EU which have an impact on the competitiveness of UK industry. Risk assessment is an important tool in taking forward the competitiveness agenda.

20. Due to the wide range of activities within the Department a large number of different approaches are adopted to enable officials and Ministers to assess risks when contemplating the introduction of regulations. They have in common that they are evidence-based and attempt to take account of the widest possible range of stakeholder opinion; but whilst many are formal and rigorous, others are more ad-hoc benefiting from very close but more informal contacts and personal knowledge of the industrial sector concerned. The results of all such risk analyses are ultimately brought together in a published Regulatory Impact Assessment.