The creep of regulation – Shareholders next

Whatever the reason, our lives and choices are becoming ever less our own. A gigantic Trojan horse of micro-regulation by central authority is being wheeled into our citadel under the guise of benign intention, and whether its deadly consequences are being overlooked or simply indulged alters none of the threat to wider society and to business.

So far, the impact of this malign intrusion has been felt mainly in the public services and in the lives of individuals who use them. The effect on private sector companies and hence on investors has been limited so far. But for them too, danger signs can be read in the growing use of ‘micro-taxes’ – airline ticket surcharges, insurance duty, and the like. These are the counterpart of micro-regulation; fiscal principle has been submerged by expedient.

Of course decent men and women want public services such as the NHS to be better managed; want workers’ job security to be properly protected; want safer roads; want financial customers to be protected. But hands up those who also want 5,500 management job categories in the NHS; £2.2 billion to be spent in 2005 on procuring government consultants; 200 page job employment contracts for junior staff; a blizzard of road signs that distract rather than protect motorists; a rulebook for financial practitioners that runs to 23 loose-leaf volumes and 10,000 pages; corporate governance ‘codes’ that do more to frighten off able non-executive directors than to expose failing ones; teachers, doctors, policemen whose sense of vocation is being suffocated by the weight of forms to be filled. Well meant all of it, but hopes ever dashed by unintended consequences.

Rights need to be protected, healthy aspirations fed and filled, but what about when ‘rights’ conflict with each other, when aspirations collide? What happens when target-hitting and financial efficiency compromise patient needs and clinical priorities? Who adjudicates between a business that needs management flexibility to survive and the letter of an encyclopaedic employment contract? How can financial customers’ rights to protection be reconciled with the commercial motives of a giant financial institution in business to sell products?

These are impossible circles to square by reference to a single principle. Yet political (and nowadays media) pressure for ‘something to be done’ makes the appeal of micro-management virtually irresistible. Hence the flood of legislation: 33 Acts and over 1,000 statutory instruments last year alone. Instead of being a last resort, regulation has become the standard escape route for political leaders when their mailbags begin to overflow and the latest hot issue begs an instant response. Micro-regulation gets substituted for individuals’ own critical faculties as the arbiter of their day-to-day lives.

So far as the performance of the public sector is concerned, little discernible good has come of all this intrusion. According to The Economist, productivity in the NHS, which has been treated to more micro-management than any other public body, has been declining by 1% p.a. over recent years. Productivity over the whole UK economy, according to the Conference Board, slowed to less than 2% p.a. between 2000-6 at a time when efficiency and value for money have been core watchwords in official rhetoric.

At a personal level there are signs of a growing suspiciousness and an increasing recourse to litigation. Our streets now contain over 4 million CCTV cameras. Employment lawyers have never been so busy.

Investors in the private sector have suffered little, by comparison, from micro-regulation. Company profits in the UK economy are currently close to a record high as a share of national income and financial service companies in particular are riding a wave of spectacular prosperity. Relatively unscathed as they are so far, stakeholders in the UK private sector – shareholders and employees alike – must ask how long they will be allowed to enjoy the fruits of an enterprise system that relies for its success on being able to operate without undue fetter, even as the rest of society is enchained little by little by the manacles of central regulation. Financial companies and the City in particular have grown to be absolutely vital to the health of the economy.

Given its importance, one might hope that the City could run like Hong Kong within China, an enclave of mind-blowing prosperity within a much bigger, centrally organised economy. The trouble with that scenario is that Britain is a close-knit democratic society, and the social and economic distortions created by a free-wheeling culture of financial exploitation and by its mega success flow, for example via salary and living cost differentials, and property prices, straight through to the whole body of the country. On the other hand, the fiscal ‘dividend’ from the financial sector’s success takes time to be felt, if it is felt at all outside the South East.

Though the outlook for private enterprise and the financial sector in particular may be cloudy, a ray of light has begun to shine, paradoxically shed by the FSA, regulator of the financial sector itself. Under John Tiner’s able leadership the regulator has recently reaffirmed the worth of simple principles as the guiding rule of conduct for practitioners. Though Tiner has since resigned his post, this was a profoundly important switch of emphasis and policy makers at the FSA deserve support in their effort to build on his legacy and re-establish the provision of financial services on a truly professional basis. Would that this development becomes a beacon for all policy makers beguiled by the allure of micro-regulation as a painless way of dissolving political embarrassment.

In any event it will take time to change attitudes and unravel the knots of interference that already tie up some of our personal freedoms. The impetus for change will only be generated when the banal impact of encroachment by public regulation into our private lives becomes fully visible and more widely felt.

Before that happens it would be unwise to assume that private shareholders will feel none of the effects that are becoming all too apparent in other sectors of the economy. Investors might do well to consider how long it will be before the very enterprise system that has provided the financial base for the advance of micro-management is itself set upon by the forces of political expedient and economic stringency. No one can be sure how those pressures will be exerted, yet one thing is certain. As the tide is running today, it is not a matter of if, but when.