The Government needs to succeed in its Red Tape Challenge — and quick

Mark Littlewood is Director General of the Institute of Economic Affairs. Follow him on Twitter.

Over the last ten months I’ve been acting as an independent adviser to the government’s Red Tape Challenge, which seeks to extinguish unnecessary, burdensome regulations that impede growth.

It’s been a long drawn-out business, but since the reshuffle the coalition has certainly upped the volume on their professed desire to cut back on the vast swathes of red tape and regulation stifling businesses and deterring enterprise.

Today, Michael Fallon, the new Tory minister for Business and Enterprise, has unveiled government plans to make life easier for so-called “challenger” businesses.

“Challenger” businesses might sound like something out of a Star Trek movie. (The government used to refer to them as “disruptive business models”, perhaps giving the unfortunate impression that such companies were like an unruly schoolchild causing mayhem for the rest of the class.)

But the sort of businesses Mr Fallon is referring to are those that emerge – often at great speed out of a clear, blue sky – and pose a fundamental challenge to the orthodox order.

If you thought online banking was an innovation, you are way behind the times. Peer-to-peer lending platforms, such as Zopa, effectively cut out the middle man by directly matching up those who want a return on their cash (and might otherwise place it in a traditional bank account) with those who want to borrow. Or if you fancy playing your own real life version of Dragon’s Den, you can visit the innovative Crowd Cube website, which features a wide range of business ideas seeking investment in return for equity.

No one can yet be certain if these new, imaginative approaches will revolutionise the way we handle our personal finances in years to come. But they might. The problem they face – along with radical new ventures in other sectors – is considerable confusion over laws and regulations written for a more, traditional old fashioned way of doing business. For example, should Zopa, or those lending money through Zopa, be considered “professional money launderers”. If so, they suddenly become subject to a wide range of anachronistic obligations drawn up to tackle a totally different problem – that of highly unscrupulous loan sharks.

Entrepreneurs often dislike regulations which impede the growth of their businesses. But they possibly dislike a lack of clarity in the rules even more. So, the government’s pledge to place greater obligations on the Regulatory Policy Committee to assist innovative challenger businesses in fighting their way through the regulatory jungle is a step in the right direction.

An area where I advised the government to go much further was in employment law liberalisation. Just last week, Vince Cable brought forward new proposals to try and cut down on the number of employment disputes which end in full blown tribunals, an expensive and drawn-out way to resolve a disagreement.

My hope was that the government might go further in this area and allow new, start-up businesses to take on a certain number of staff for a limited period of time as self-employed consultants. If you’re trying to build the next Facebook or Google – or even if your goals are a little more modest – you will need over your first few years to show considerable flexibility and imagination in the individuals you employ. Perhaps one part of your business plan proves wholly unfruitful and those working on it are no longer needed, whereas another part of the venture meets with considerable success and needs to rapidly expand with a new mix of skills and experience amongst the staff.

Making it clear and unambiguous that, say, the first dozen employees of any new company would be treated as consultants rather than employees for legal purposes would allow cutting edge entrepreneurs the flexibility they often need in pursuing high risk, high return business ideas.

The government has not embraced my idea – but has conceded that it highlights that businesses may not be aware of the range of options they have when taking on new staff and they promise to address this as part of the upcoming Employment Law Review. 

Promising bonfires of red tape in opposition is very easy. In government, ministers often lack the courage or the political will to pursue the venture with any real vigour.

On the deregulatory agenda, as with many other areas of coalition policy, the government does seem to be facing down the right road – but not moving down that road as rapidly as it might.

The Red Tape Challenge was launched by the Prime Minister in April 2011 and is systematically examining some 6,500 substantive regulations that the Government inherited with the aim of scrapping or significantly reducing as many of them as possible. It gives business and the public the chance to have their say, by theme, on the regulations that affect their everyday lives. It has also asked the public what red tape holds back Disruptive Business Models and Civil Society Organisations. The Government announced on 10 September 2012 that at least 3,000 of the regulations examined will be scrapped or reduced. More information on the Red Tape Challenge is at www.redtapechallenge.cabinetoffice.gov.uk.

The results of the Challenger Businesses theme can be found in Removing Red Tape for Challenger Businesses, which can be found here.

Mark Littlewood’s independent report can be found here.