Ragnar Lofstedt: Rash reform will ruin regulation

Peter Wyman was in the right place at the right time to tell the politicians to take a deep breath before launching into legislation. The President of the Institute of Chartered Accountants in England and Wales chose a speech earlier this month in Brussels to warn about the dangers of over-hasty interventions by politicians in setting specific standards in accounting.

Mr Wyman said short-term political considerations could lead to ill-considered legislation. How right he is.

Regulation in Europe is often perceived as being conducted in secrecy and made unnecessarily complex by politicians who want to achieve short-term, populist goals.

Their reaction is, to some extent, understandable because the public and the media have been crying out for action to stop certain accounting practices following the Enron and WorldCom scandals. The politicians, who want to show they are tough, are now looking at new regulations based on knee-jerk reactions instead of a more considered view.

When they respond like this, the outcry abates in most cases. Everybody is temporarily satisfied. However, this short-term gain is usually a long-term loss, as ill-thought-out measures tend to lead to inconsistent regulatory policies that don't reflect the actual risks. As a result they create unnecessary costs for the bodies being regulated, without the associated benefits for those who may be adversely affected. In the longer run, these inconsistent regulations also lead to international trade conflicts (witness the debates about genetically modified crops and hormones in beef).

In addition, they lead to a loss of trust among members of the public. For example, when the UK regulators banned beef on the bone in the wake of the BSE crisis, people saw the decision as ludicrous. The Dangerous Dogs Act, as highlighted in recent work by Professor Chris Hood (Oxford and LSE) and his team, is suffering similar problems.

The answer to the issue raised by Mr Wyman is to improve the governance process by streamlining decision making and making it more transparent. These two actions are the key to better regulation at both the national and the EU levels. They have been discussed in Brussels as well as by national advisory bodies such as the Better Regulation Unit in the Cabinet Office. But, on their own, they will not be enough to halt the passage of hastily developed regulations.

The European Policy Centre, a Brussels think-tank, says the regulatory process could be greatly improved through:

* The inclusion of more rigorous scientific and economic content in the proposed regulatory impact analyses, including expert reviews of the most important initiatives.

* The creation of an oversight unit or ombudsman in the Secretary-General's Office of the European Commission to assume overall regulatory accountability and to ensure that the regulatory process remains rigorous and transparent. (This is similar in context to the Office of Information and Regulatory Affairs in the US Office of Management and Budget, which is part of the Executive Office of the President.) In this way, the unit/ombudsman would also provide the European Parliament and the Council with periodic reports on progress towards better regulation.

Such measures, if implemented correctly, would lead to the successful dampening of hasty political measures.

Yes, regulatory reform is clearly on the rise. However, it is only by committing fully to wide-ranging and open reform that populist, knee-jerk reactions can be avoided.

Professor Ragnar Lofstedt is at the King's Centre for Risk Management, King's College London.