Regulation: reversing the “risk aversion ratchet”

The government must tackle the ballooning red-tape burden facing businesses if it is to achieve its ambition for economic growth in 2025, according to Policy Exchange.

In a paper published at the end of last year by the right-wing think-tank, former Cabinet secretary Mark Sedwill highlights “a cumulative increase in the regulatory burden on both the private sector and public service, undermining innovation, productivity and delivery”.

The Rise of the Regulators argues that the UK’s regulatory framework is being driven by a “risk aversion ratchet”, which incentivises an ever-growing burden of rules and requirements. This is the product of a political culture which is increasingly safetyist, a bureaucracy in which it is remarkably easy to generate new regulations, and a complete lack of incentives to remove redundant or pernicious regulations from the rulebook.

As a result, the paper states, “the regulatory rulebook has experienced almost unchecked growth for decades, imposing increasing costs on businesses, stultifying innovation and economic activity.”

It also warns that the costs of complying are passed on to consumers in higher prices, or out of profits or investment in innovation and improvement. In addition, regulation usually favours market incumbents, whose scale enables them to meet compliance costs more successfully than smaller competitors, and they militate against diversity and competition in the marketplace.

What’s happening in regulation?

Policy Exchange studied 1200 regulations related to seven regulatory bodies: the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC), the Competition and Markets Authority, Natural England, Ofcom, the Care Quality Commission, and the Food Standards Agency.

Analysis showed swelling staff numbers, with the mean growth across the seven bodies at 84.4%, led by the financial services bodies – the FCA’s headcount . grew from 2511 in 2013-14 to 5438 in 2023-24 (a 117% increase) while the FRC posted a 256% increase over the same period.

The paper looks at how other jurisdictions, including US state governments, Germany, British Columbia and South Korea, have tackled the increasing regulatory pressures, but warns that reducing the UK burden requires more than simply streamlining the regulators or designing different organisational structures.

It describes the size of the UK regulatory state as “first and foremost a cultural artefact; it stems from a particular set of societal attitudes towards risk and entrepreneurship, and our expectations of the government”, and goes on to caution: “Without addressing these societal attitudes, the demand for regulation will continue to grow, and the supply will increase accordingly”.

Plans for the future

The paper makes a number of recommendations to government :

Re-establish a gateway condition for new regulation, requiring that, for every £1 in new regulatory costs, £2 in regulatory savings must be found.
Radically reduce the category of regulatory changes that are exempt from requiring an impact assessment.
Enable business or industry groups to submit an appeal if they believe that an impact assessment has significantly underestimated the impacts of a new piece of regulation, following implementation.
Establish a comprehensive register of regulations in the UK, accompanied by their impact assessments, which is open and publicly accessible.
Set a target for the overall reduction of regulatory restrictions with reference to the baseline, with suggestions this is set at 25%, as well as targets for each individual regulatory agency to report against.
Establish feedback loops within the regulatory bodies to help identify regulations appropriate for review, and attach a ten-year sunset clause to the mandates of any new regulators, with a review in that period by the Public Accounts Committee.
Launch a Regulatory Reform Unit (RRU) housed in the Cabinet Office and under a dedicated minister.

Edward Peck, Asset Finance Connect CEO, said: “Many in the asset and motor finance sector will recognise this dismal characterisation of the failed UK regulatory landscape.

“Last year saw our industry thrown into disarray as a result of ill-thought-out interventions by regulators who failed to understand how the sector operates or the impact of their decisions. We also witnessed a complete confusion between the regulatory requirements and judgments handed down in court.

“After the turmoil of last autumn, the trade bodies, lenders, brokers and key industry figures have come together to work for the best for business and, crucially, for customers. Throughout 2025 Asset Finance Connect will continue to host in-depth discussions in our webinars, and our European and UK conferences, to support the sector in making regulation work for everyone.”

For more information about Asset Finance Connect events in 2025, click here.