Speech by Sir David Arculus at the Lunar Society Annual Dinner 2008

It is a huge honour for me personally to be asked to speak to this distinguished gathering tonight in this magnificent hall, of both my favourite city and my home town. The city which has been magnificently rejuvenated and bears little relationship to the Birmingham of my youth. I was brought up near Acocks Green, but two of my earliest childhood memories are of events very close to this place.

The first a few years after the Second World War, being taken to view the site of the family glassworks. The site, close to where the Hyatt now stands, backing onto the canal, where the glass had been loaded onto pallets on barges, was a hole in the ground, the factory blown to smithereens by German incendiary devices. I am afraid that Arculus & Arculus, the maker of flutes and fancy glass for generations was never to recover from that blow and my father, back from five years away at the war in North Africa and Italy, was forced to earn his living in a rather less aesthetically satisfying way. In fact, as a builders merchant in Sparkhill.

The second memory was of being taken to the Bull Ring market in about 1949 which had been run by another branch of my family and seeing the various wonders on show there, at that time, fire eaters, gypsy hawkers, monkeys, but best of all I came home with a mangy mongrel puppy whom I loved dearly and whom I imaginatively named Bonzo. Certainly the architecture of the Bull Ring has significantly changed and improved since that day and the family involvement with both Birmingham and Giftware was renewed, when in 1989 I purchased the International Spring Fair from the British Jewellery and Giftware Federation. As Managing Director of the new owners EMAP I set about expanding this into easily Britain’s biggest exhibition. An expansion which in fact necessitated the building of a number of extra halls onto the NEC complex.

Sometime after, I returned for six years as Chairman of Severn Trent a few years after the privatisation of the water industry. Well, that was a fairly bumpy ride, but I note that citizens of Birmingham still enjoy the best water and the best teeth in the country, and watercourses so improved that otters can breed close to the centre of the city.

Tonight I want to talk to you about an ‘R’ word. Not the ‘R’ word that does not like to pass from a Prime Minister’s rather pursed lips and until recently dare not speak its name – Recession – but the ‘R’ word that I suspect most politicians like rather more and that is Regulation. It is something I have obviously got some personal experience of, sometimes painful, having served as Chairman of companies like Severn Trent, Biffa, and O2. However, this knowledge was more fully developed when in 2002 Tony Blair asked me to take on the chairmanship of the Government’s Better Regulation Taskforce for a four year period.

To work in the Cabinet office next door to No10 for four years was a most fascinating experience. To work with Blair, quick, charming and engaged, and always highly supportive, was a joy, even as I tried to juggle a job which was meant to take 1 and a half days a week but in fact took four, whilst also trying to maintain my business commitments. Blair, in my view was brilliant, but as they say you only have to make one mistake in life and I am afraid that like most of us he made his big time albeit with the help of George W Bush.

In every walk of life you get tensions, the difficulty is separating the creative tension from the destructive tension and of course the fight can exhaust people. I was in the great old Roman city of Leptes Magna in Northern Libya about four weeks ago, looking at the famous mosaic of the exhausted gladiator, his rival vanquished but his energy spent and his body bloodied and I think Government is perhaps rather like that. The task of getting the top job is sometimes exhausting. I was also in the US Embassy on election night and you could almost smell the desire amongst both Democrats and Republicans for freshness and new ideas.

When I left Birmingham and went off to Oxford University I started to study physics and in particular the physics of stars and I learnt that there appear to be 3 main kinds of stars.

First of all the active stars, which are produced by an enormous release of thermo nuclear energy. Tony Blair at his best had much of that brilliance about him.

Secondly, the lumps of mud and rock that are circling around the star, because they are quite close to the sun, they reflect its energy and its brilliance and they look like stars but in fact they are not, they are just lumps of mud.

And thirdly, the other main kind of star are the super nova. The super nova are exhausted stars, they still shine as if they are a star but in reality they have collapsed and all of their energy has been exhausted. They are rather like weariness masquerading as wisdom. And the question for all of us I guess is how do we produce the true stars in our organisations? How do we decide who is masquerading as a star but is not really a star? How do we personally manufacture that thermo nuclear energy others can feed upon? We must nurture the good and separate out the not so good and how do we make organisations, or in this case Governments, innovative and energetic and not stale and tired.

I suppose I really did four things in the period during which I worked for Tony Blair.

First I pointed out that what gets measured gets done so let’s measure the cost of Regulation on the economy and then try to reduce it. Second, we managed to introduce proper Governance arrangements for Regulatory Bodies, along similar lines to those demanded by Government for the Private Sector. What’s sauce for the goose must be sauce for the gander. And thirdly, we started the process hotly resisted of course of reducing the number of Regulatory Bodies

In my final year, which coincided with Britain’s EU presidency, we took the battle to Europe and persuaded the European commission to adopt the UK’s better regulation initiative. So successfully in fact that a number of MEPs subsequently started to complain that they now had nothing to do.

One of the things I have been very keen to do is to adopt a bi-partisan approach to Regulation. There is certainly no mileage in a change of course with every change of Government so I am currently involved in helping David Cameron and the Conservatives come up with an agenda for Regulation and although it may go further and be more radical, it will build on the foundations laid by first Michael Heseltine and then Tony Blair. So, if you have got views, or you want things changed, now is your chance.

The total cost of the stock of Regulation to the UK economy is of the order of 10-12% of UK GDP which is well over £100 billion per year and currently approximately 50% of the flow, as it affects business, is from Europe. So if we can bear down on both the stock or the flow the rewards are tremendous. Not just for the private sector. But also for the public sector, which is 42% of the economy and where common principles apply. And let’s not forget either the third sector, charities, which often produce cheap and effective solutions, particularly for social issues, and where form filling can be particularly tedious.

I think one of the lessons from the recent financial crisis is that good regulation is actually the underpinning of all economic activity. A lot of people claim that too much Regulation is killing their business but conversely what we have seen during the credit crunch is that bad or lack of Regulation can actually threaten the economies of entire countries. What is clear is that different sectors of the economy need different levels of Regulation. For instance banking needs very strict Regulation, as do matters involving life and death, health, food, medicine, etc. Equally, Regulation has got to be subjected to strict checks and balances or it will squeeze the life blood out of business and particularly small business. What I tried to do in my Blair years was to build a framework which acted as a filter to Regulation and the main elements of that framework are:
- Impact Assessments to ensure that the benefits of Regulation
outweigh its costs

- Simplification plans to come from all departments to weed out
redundant Regulation and;
- A full the process of consultation periods and consideration of
alternatives to Regulation before the Parliamentary process starts.

I also suggested that there should be Common Commencement dates for legislation affecting business so that business people only had to cope with changes in the law once a year. Well, in fact we have now compromised on twice a year but I think that is an improvement on what went before.

What I also observed was that we needed strong institutional counter balance to Regulatory pressures and, whilst we have made a start on that process there is considerably further to go. The Americans, who have developed strong bodies like the Office for Management of the Budget and the Office for Independent Regulatory Accountability, have quite a lot to teach us in that respect. Such a UK Body, which I would call the Independent Panel for Regulation & Risk, would have to pay particular attention to the kind of issues that impact small business. Obviously employment law bears down particularly on smaller businesses and, amongst other things, they find it very difficult to get access to Government contracts.

I do think we also need to develop particular mechanisms for holding Government departments to account for Regulation and Inspection of the Public Sector. The Public Sector accounts for no less than 42% of our economy and it has been described by some as a Soviet Tractor Factory with over tight central control procedures and a lacklustre culture. We obviously can’t treat it in quite the same way as we might treat business as far as Regulation is concerned but I think some of the lessons that we have learnt from business do have application there. For instance, we need better Governance, we need Boards that really are independent and make strong decisions close to the action. We need adequate flows of information so that people can make good decisions and monitor the performance of those who provide public services and, where possible, we need diverse models of supply so that families have some kind of choice. Look for instance at the success so far of the City Academy Movement. With all this I think should go stronger Parliamentary accountability of public sector bodies to select committees contrasted with a reduction in the power of individual Government departments to micro-manage them.

Two other big strategic initiatives I would mention. One is that of Regulatory budgeting. There are basically two kinds of costs associated with Regulation, one is the administrative burden of form filling, declaration and checking. The bit that we conventionally call ‘Red Tape’ which is about one third of the cost. The other two-thirds of the cost is concerned with the Policy burdens. The actual cost for instance of implementing a deep clean of hospital wards. We now have in place an Admin Burdens Reduction Programme which seeks to reduce the Red Tape burden over a three year period by 25%. The challenge now is whether we can expand this to the Policy Burden area. Needless to say, there is a lively debate about this with strong views on both sides. Whilst nobody ever voted for red tape a lot of people do support particular policy initiatives. My own view is that what gets measured gets done and that if we don’t actually know the cost of what we are doing we shall be in a bit of a mess. So, despite all the difficulties with measurement which the critics have pointed out, I am of the view that Regulatory Budgeting, just like Financial Budgeting, is rather a good thing.

Another major initiative we have to take is to engage harder and more effectively with the EU and with Brussels. About 50% of the flow of new Regulation on business now comes from Europe but I sometimes think we take a rather hair shirt approach to this. Where possible, we should adapt UK Legislation to fit with Brussels’ demands, rather than as now having so many overlapping laws. Where we often get to in the UK is to have, for instance, a European general duty not to trade unfairly, coupled with all kind of specific UK product regulations which have been developed over many years. The question is, do we need both, could we adapt our existing legislation or, if not, should we sweep away that which becomes unnecessary because of the over-riding European requirements.

It is fair to say I think that the UK grasped the need for better Regulation somewhat ahead of Brussels, that in itself is a great opportunity and the EU is now copying our system of impact assessments and consultation. I would also like to see a European Law Commission rather along the lines of the UK Law Commission, established to remove law which has become plainly out of date or redundant.

No speech on Regulation would be complete without a word about the Regulators – all 151 of them - helped along by various inspectorates, particularly in the Public Sector. I have actually got quite a radical idea and that is that we ought to sunset Regulatory Bodies. The life blood of business is that constant process of creation, destruction and re-birth. Why should we not try to look again at all the Regulators and see how much overlap there is between them, whether we really need quite so many, whether the law has a part to play in certain situations and whether their duties, some of which were set many years ago, are still appropriate for the modern age.

There is also a vast toolkit of possible alternatives to Regulation, in fact ministers and Governments normally prefer to regulate, firstly because it is easier for them to do so and secondly because it plays to the gallery, but with care and dedication the tool box of self regulation, co-regulation, information and education, traffic light schemes, incentives, comply or explain, quotas and permits, price caps, earned autonomy, codes of practice can be weaved together to produce outcomes which are often better and certainly far less costly for business. My own sector, the media, has a particularly good Self Regulatory mechanism led by the Advertising Standards Authority.

Now, in conclusion, what’s recently happened in the financial world demonstrates, in my view, the folly of cries for de-regulation and the great need for better and more targeted Regulation. We developed 5 principles at the Better Regulation Task Force of what we thought Regulation should all be about and I will deal with those in the context of the financial market if I may before I close.

First, Regulation needs to be proportionate, by that, I mean shouldn’t go over the top and a great example of that, I think, is the mark to market Regulation which David Tweedy of the Accounting Standards Board pioneered about four years ago. Mark to market basically said that financial instruments needed to be valued at the price they were trading at in the market. What he never thought about of course is what happens if there is no market and if that happens, as we have seen, valuations of entire institutions can spiral downwards in a quite unnecessary way.

Secondly, Regulation needs to be accountable and plainly in Financial markets the Governance and the Accountability to Regulators have not been quite good enough, not kept up with the complexity of the products that have been developed. We also need consistency and there is no doubt that Regulatory arbitrage across national boundaries can create unpredictable flows of capital. No regulatory regime or indeed nation is any longer an island.

Next, transparency – I think it is important that we both see and understand both the products that are involved and the reward structures. And there is no doubt that the prospect of a £10million bonus at the end of the year can seriously affect one’s judgement. So it’s not enough to have the Directors’ salaries published, we need to know about all the high earners and how they are incentivised.

And, finally, Regulation needs to be targeted and here I think the UK has done well. Plainly the plan to re-capitalise the banks to enable them to sort out their own bad loans was a considerably better approach than that taken by the US authorities, who proposed creating a bad bank to take bad loans off the bank’s books, and make them the Fed’s responsibility.

So, in summary, what do we need to do:

First, I would establish for the Private Sector a strong countervailing Body to Private Sector Regulation called the Independent Panel for Regulation & Risk.

Secondly, we must develop mechanisms for holding Government Departments to account for Regulation and Inspection of the Public Sector and this would probably mean strengthening the resources and powers of select committees.

Thirdly, we need to put a sunset clause on Regulators and reform and improve Regulatory Bodies.

Fourthly, I like the idea of Regulatory Budgeting, the concept of measuring the cost of Regulation so that we can perform a simple cost benefit analysis particularly lets bear down on the issues of Red Tape and overlapping laws.

And, finally we must bear down harder and more effectively on the Regulation Factory, which is Brussels.

Well, thank you very much for listening to me. I have thoroughly enjoyed being back in Birmingham and I do wish you well in your endeavours, and you Lord Mayor every success in taking the Civic and Commercial life of Britain’s Second City to the next plain.

Thank you.



Appendix

I don’t know if any of you have read Stephen Hawking’s book, ‘A Brief History of Time’. Hawking is the severely disabled physicist who has spent his life trying to produce a unified field theory of physics. What he means by this is that he wants something that will link the way very large bodies behave – the sun, the stars, the universe as explained by Einstein in his work of Relativity to the way very small bodies, atoms, electrons, sub atomic particles work and affect each other, as explained by people like Heisenberg and Max Plan, Produce a general theory that can link these two ends of the scale, the very large and the very small and you will manage to capture and explain what goes on in the middle, which is where we all life. The work that we are doing on regulation is not too dissimilar to what Hawking is trying to achieve. We are looking at very large bodies, Europe, our Government and Regulatory Organisations, and we are trying to relate what they do to what actually happens on the ground, how individuals, micro businesses, SME’s business in general, and of course Public Sector Organisation and charities are affected by their behaviour. Also like the work that Hawking is involved in it is very difficult, despite glimpses of the sunny uplands, no person and no country has yet managed to marry the two together successfully.

According to Hawking 96% of the universe is Dark Matter, which we can only speculate about the nature of because we can never see it. We know its there because it holds the whole thing together. Likewise, with Regulation, about 96% of that is Dark Matter, individuals whom we shall never see, reacting with each other according to a set of rules and producing a set of outcomes, optimistically outcomes that society as a whole regards as desirable, but all too often at a cost that is difficult to assess or justify.