Regulation & Innovation – FTI Consulting research shows businesses prefer a lighter touch

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Regulation is necessary for the efficient functioning of most markets, to facilitate innovation and offer protection for investors and customers. UK companies are broadly happy with current levels of regulation and are even open to more of it – but they believe that it works best when it is self-administered, according to our recent research of over 1,000 UK business leaders on trends in innovation and regulation.

Companies are largely happy with the level of regulation in their sector and in some cases are willing to see more of it but they believe that it works best when they do it themselves. Furthermore, our research also indicates that companies believe that the more removed that the regulators are from them, the less effective the regulation becomes. However, innovation is buoyant and regulation does not appear to be harming it, respondents say.

The banking and finance sector has seen one of the most significant increases in regulation for decades with the introduction of rules and protocols such as the senior managers regime, market abuse regulations the competition powers of the Financial Conduct Authority as well as the arrival of MiFId II.
Many of the regulations that companies are happy to live with appear to be driven by public concerns over the environment, privacy, transparency and remuneration.
Yet, despite the fact that nearly a third (31%) of those asked are aware that regulation has “significantly increased over the last 12 months,” more than a third (35%) believe that there should be greater regulation in this sector. After banking and finance, the next sector that is regarded as requiring more regulation is energy, with just under a quarter (24%) of respondents demanding an increase here. Just over a fifth (20%) believe that financial institutions need greater regulation, while 13% acknowledge that there has been an increase and the same percentage consider that there is too much.

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Over regulated sectors require more regulation?

The other top sectors where, according to business leaders, there should be more regulation include pharmaceuticals (18%), real estate (17%), the media (13%) and telecoms (13%). It is felt that there is too much regulation in healthcare (16%), energy (14%), agriculture (13%), financial institutions (13%), pharmaceutical (13%) and transportation (10%).
It seems, therefore, that, paradoxically, many of the sectors in which there is a perception of overregulation are also seen as those that need an increase. This might suggest that the relevant regulators and those operating within the sector do not have a clear vision of the required regulation or, if they do, they have not communicated it effectively to external audiences.

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Our research indicates that innovation is taking place throughout industries according to business leaders, with almost half witnessing it at both a business model level (46%) and a product level (45%). Just 15% claim innovation isn’t being undertaken in their industry.

 

 

This would imply that companies do not see regulation as a serious hindrance to innovation and perhaps regard it as producing a level playing field and creating an effective framework for competition. Respondents were clearly aware of the risks of unconstrained innovation. Just a quarter (25%) reported this as not an issue at all, whilst 39% saw it as a risk for employment in their sector and just over a third (38%) as a risk for customers. Furthermore, nearly a quarter (23%) believe that unconstrained innovation could carry risks for society more widely.

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Level of regulation versus its effectiveness

Just over a third of those asked (34%) believe that their industry is not subject to over regulation. However, the same proportion regard over regulation as having a risk for employment and slightly less (30%) presenting a risk for customers. The figures for under regulation are lower: just under a quarter (24%) believe that under regulation presents a threat to employment, a quarter (25%) to customers and 17% to society more widely. The proportion believing that their sector isn’t under regulated is 46%.

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The generally positive attitude to regulation is supported by the fact that the largest number of those asked (22%) expect no increase in the level of regulation for their company over the next 12 months, whilst 77% claim that regulation will increase.

 

 

 

Self-regulation preferred option

Although those asked are relatively relaxed about the level of regulation in their sector and are, apparently, even open to more of it, they have stronger views about where it comes from and who does it best. Not surprisingly, the higher up the regulatory ladder and the more removed from the industry the regulator is, the more unpopular its regulations are.
For example, over half (54%) claim the rules and protocols that are derived from industry and self-regulated bodies are impactful and helpful, while 24% believe these regulations are impactful and unhelpful. At the other end of the scale, just under a third of regulation from the EU (31%) is seen as “impactful and helpful,” while 41% see it as unhelpful.
Regulations from a UK government level are viewed by 39% as being “impactful and helpful,” and slightly less (36%) view these as “impactful and unhelpful.” Generally, 43% of regulations overall on their industry are seen as “impactful and helpful,” and a third (33%) believe that they are “impactful and unhelpful.”

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Demand for new or revised regulation appears to be driven by public opinion and subjects that have been covered extensively by the media recently. For example, as green issues continue to be of interest to consumers and politicians nearly half (43%) of those surveyed believe that regulation should change in the areas of environment, 42% in sustainability and health and safety. In addition 40% of respondents take the same view on employment and labour, privacy, transparency and remuneration. In terms of keeping regulation as it currently is, 47% believe access to the market and advertising should remain unchanged, whilst only 39% believe taxation regulation should decrease; the only area where respondents favoured a decrease as opposed to an increase in regulation.

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Current level of regulation right for innovation

Excessive regulation is not a major problem for companies, our research clearly suggests, and in some areas they’re actually content to see it increase, especially in response to issues of concern among to the public, be they relating to the environment, privacy or the behaviour of the financial services sector. Regulation is also at approximately the right level needed to promote innovation, the findings suggest.
However, with the debate around the direction of the EU set to continue even after the UK’s referendum, companies appear to be sceptical about high level, supra-national regulation, preferring to regulate themselves. Policy makers nationally and internationally should take note.

Research Methodology
This research was conducted online by FTI Consulting’s Strategy Consulting & Research team from 10th – 13th June 2016, with n=1,013 UK business leaders in SME and large organisations working in the public or private sector.

Please note that the standard convention for rounding has been applied and consequently some totals do not add up to 100%.

Dan Healy is  Managing Director of Strategy Consulting & Research EMEA at FTI Consulting UK.

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