Hansard Society for Parliamentary Government 2001

Parliamentary Affairs (2001), 54, 1934

The Rise of the Regulatory State in Britain
BY MICHAEL MORAN
Identifying the regulatory state
Profound changes happened to the organisation of British government
in the last quarter of the twentieth century and much scholarship on
Britain is now about trying to put a convincing label on those changes.
One of the most popular recent candidates has been the regulatory
state.
1
This article interrogates the notion of the regulatory state. It
tackles denition, sketches the institutional outlines of regulation in
Britain, examines explanations for the rise of regulation as a distinct
activity. This leads naturally to a discussion of some problems of the
regulatory state. Finally, it speculates on its future.
The simplest way to understand the magnitude what has happened
to regulation in Britain is to compare it with what we had before.
Writing in 2000, an obvious, handy benchmark is provided by a
glance back to what government was like at the mid-point of the last
century. If we look at British government circa 1950, we nd the
following.
The middle of the last century marked a high-point in the tide of direct
public ownership in the economy: after the postwar Labour govern-
ments nationalisation programme many of the key industries of the old
industrial economy (steel, coal) and almost all important public utilities
(electricity, water, gas) were publicly owned.
In 1950 there still remained, as the legacy of the war economy, tight
administrative controls over production and consumption. These
included administrative controls over the allocation of raw materials to
industry and an elaborate system of rationing over the consumption of
foods, clothing and a wide range of consumer durables: rationing of
meat and butter continued until 1954 and of coal until 1958.
In 1950, government played a major role in the stabilisation of the
whole economy: it used public investment, publicly owned industries
and tax policy to try to steer the whole economy on a path of economic
growth.
In 1950 public administration, especially in the central state, was
organised as a unied, hierarchical bureaucracy. The symbol of that
was the unication of the civil service under its rst named head, Sir
Warren Fisher, in 1919.
Viewed from the vantage point of 2000, this is a picture of a society
with massive government controls over social and economic life. But
Parliamentary Affairs 20
there are two important qualications to this picture of control, and
they will be particularly relevant when we turn to the present.
In 1950 vast areas of social and economic life were largely beyond the
control of the state. To take two examples: regulatory standards
covering the production and sale of food were skeletal, and there was
hardly any regulation in the workplace covering health and safety or
protection against discrimination on grounds of gender and race.
Most of economic life was regulated, but hardly any was regulated by
the state. The most important nancial markets in the City of London,
the most prestigious professions like law and medicine, and elite insti-
tutions like the universities, were all run in effect by self-governing
corporations. Self-regulation was the dominant mode of regulation in
British economic life.
The rise of the regulatory state in Britain is about more than the
development of a number of new regulatory institutions; it involves a
wholesale transformation in the system of government just sketched.
Five components of change help us dene the regulatory state:
There has been a fundamental alteration in the balance of state respon-
sibilities. The interventionist state that developed out of the second
world war attempted to manage the whole economy (through Keynes-
ian policies) and pursued the redistribution of resources. The new
regulatory state stresses instead intervention to correct particular mar-
ket failures.
What Rhodes calls command-and-control bureaucracyof the sort
typied by the old integrated hierarchies of the civil servicehas been
modied in favour of a much more loosely coordinated set of public
agencies marked by their own distinct cultures and modes of operation,
and by an emphasis on interdependence, disaggregation, a segmented
executive, policy networks, governance and hollowing out.
2
Public ownership as a mode of economic control has been largely
displaced by a network of regulated privatised industries, mostly as a
result of the great privatisation programmes of the Conservative govern-
ments in the 1980s and 1990s.
Vast new areas of social and economic life have been colonised by law
and by regulatory agencies. The food we eat, the physical conditions
we work under, the machines and equipment we use in our home, ofce
and on the roadall are increasingly subject to legal controls, usually
administered by a specialised agency.
Self-regulation has been transformed. The most prestigious professions,
the leading nancial markets, elite institutions like the universitiesall
are now subject to statutory regulation usually administered by speciali-
sed agencies.
The rise of the regulatory state in Britain therefore refers to a series
of concurrent transformations in the system of government: the retreat
of some historically established forms of intervention, like public own-
ership; the advance of new forms of control, typied by the extension
The Regulatory State 21
of regulation over a wide range of potential risks to health and safety;
and the transformation of some institutions of public control, typied
by the changes that have come over the bureaucracy of the central state
in Britain.
The faces of the regulatory state
It will be obvious from the characterisation of the regulatory state
offered above that it amounts to no one single thing. The regulatory
state has many faces. Here four are described: the regulation of newly
privatised industries; the transformed world of self-regulation; the
social face of regulation; and the world of regulation inside the public
sector.
the regulation of privatisation. Privatisation is the most obvi-
ous cause of the regulation boom. The great privatisation programmes
of the Conservative governments in the 1980s and 1990s did two
things. First, they shifted to private ownership, usually by stock
exchange otation, most of the big industrial enterprises and public
utilities that had for a large part of the twentieth century been in public
ownership. Second, the state awarded franchises to many of the newly
privatised concerns to deliver the services that were vital to the fabric
of daily life: the most obvious examples are the franchises awarded to
the providers of rail transport. These two developments explain the rise
of regulation in the privatised sector. The newly privatised industries
were too big and too important in social and economic life to be left to
the free play of market forces, and the franchise system had to be
overseen and controlled. These considerations account for three import-
ant features of the regulatory regime in privatised industries.
First, the regulatory institutions have followed broadly the congura-
tion of the industries as they existed under public ownership. Each
episode of large scale privatisation was accompanied by the creation of
an accompanying regulator: for instance, Telecommunications (1984),
Gas Supply (1986), Water Services (1989), Electricity Supply (1989).
But as technological innovations have begun to transform the privatised
industries, and to reshape the boundaries between them, some institu-
tional change has been forced on government. Thus gas and electricity
utilities now increasingly compete in the same markets; in recognition
of this, OFGEM (a unied Ofce of Gas and Electricity Markets) was
created in 1999.
Second, a conscious decision was taken at an early stage to vest
responsibility in individual regulators who would head a regulatory
ofce. (The contrast is with the largest regulatory state on earth, the
USA, where regulatory responsibility is usually vested in a collective,
typically a group of commissioners.) This personalisation of regula-
tion has created a corps of high-prole political entrepreneurs, the
regulators, who have begun to exert an independent inuence of their
Parliamentary Affairs 22
own in setting regulatory agendasan unsurprising outcome, since
they rapidly acquire authority and expertise in their regulated area. A
study of OFTEL, the ofce of the Telecommunications regulator,
paints a picture of the Director General of Telecommunications as a
kind of monarch in his tiny kingdom: OFTEL cest moi in the title of
a key chapter.
3
Third, this new world of regulation is intensely political. Of course in
the most general sense of the word all regulation is political since it
involves acts of government. But what is striking about the regulation
of privatisation is the extent to which it has spilled over into the
partisan politics of Parliament, elections and intense media coverage.
Issues that elsewhere in the private sector are usually thought to be
properly settled by managers responding to the marketissues of
executive pay, of pricing of products, of level and direction of
investmentare in the case of the privatised industries subjects of
intense political dispute. This intensity explains why, in the run-up to
and aftermath of the 1997 general election there occurred erce political
inghting about the regulation of the biggest privatised utilities. The
new Labour government capitalised on the unpopularity of the utilities
to impose a windfall tax immediately after the election victory and
followed this with a wide-ranging review of the regulatory structure.
The fate of this review shows what a formidable group of political
operators the new regulators have become. The wide ambitions of the
review and the governments rst draft legislation were narrowed down
after bureaucratic inghting to a modest reform of the institutional
structure of gas and electricity regulation.
the transformation of self-regulation. This new face of the
regulatory state is very important and little noticed. Attachment to the
idea of self-regulation is extraordinarily powerful across wide swathes
of British society. As a consequence, it is common to hear the traditional
language of self-regulation being invoked to justify institutional
arrangements that nowadays by no stretch of the imagination resemble
traditional British self-regulation. Space only allows a sketch of three
examples of the scale of change that is taking place.
Doctors. Since 1858 the regulatory body for the medical profession has
been the General Medical Council. Although the Council was estab-
lished by statute (the Medical Act) in that year, for most of its history
it was controlled by the profession itself: doctors decided who should
sit on it, controlled its procedures and the substance of the decisions it
made. For over a century after the passage of the original legislation, it
virtually disappeared off the radar screen of government. But the last
thirty years have seen an incremental growth of public control. Succes-
sive pieces of legislation have reconstructed the membership of the
Council to lessen the dominance of the profession, have obliged it to
reform its procedures and compelled it to widen its terms of reference.
The Regulatory State 23
At the moment of writing, a series of scandals involving both hospital
doctors and general practitioners is leading to a further wholesale
reconstruction of the institutions of medical regulation.
Accountants. Until the end of the 1970s the accountancy profession
independently controlled the vital issue of the rules governing nancial
reportingthe rules, in other words, that inform investors, customers,
employees and the wider community about the nancial health of rms.
The disclosure requirements governing the reporting of company
accounts were guided only by recommendations from the Institute of
Chartered Accountants. The succeeding decade saw gradual encroach-
ment on this independent world, culminating in 1990 in the establish-
ment of an Accounting Standards Board which has statutory powers,
derived from companies law, to prescribe the way company accounts
are prepared and presented.
Financial markets. The change in the regulation of accounting is only
part of an even more fundamental transformation in the nature of self-
regulation in nancial markets. Financial markets are critical to any
modern economy but they have a special importance in the United
Kingdom: the nancial services sector is especially buoyant in Britain, a
big creator of jobs, notably in London; and the City of London is a key
part of the global nancial system, one of the big three world nancial
centres alongside New York and Tokyo. Issues of nancial regulation
are thus of momentous importance. Until the 1980s most of the big
nancial markets were run as a series of private clubs. These clubs
occasionally had some statutory backing but, even where this was the
case, they largely controlled their own affairs informally. This world of
private clubs has now disappeared, a process that began with the
passage of the Financial Services Act in 1986. The latest instalment
became effective when the Financial Services Act received royal assent
in June 2000. It provides the statutory authority for the Financial
Services Authority as the single regulator of all nancial businesses in
the United Kingdom. It not only greatly extends the legal reach of
nancial regulation but consolidates in one institution regulatory
responsibilities that were hitherto scattered across a patchwork of
institutions, ranging from the Stock Exchange to the Building Societies
Commission. Law and a single powerful regulator have now entirely
replaced the old system of informal, non-legal controls.
the rise of social regulation. The rise of the regulatory state in
Britain has followed a path observable in other jurisdictions, notably
the United States. Regulation typically begins as economic regulation: it
is concerned, in other words, with controlling the terms of entry to
particular markets and the kind of allowable competition in those
markets, typically to ensure honesty and efciency. It characteristically
takes the formas in many of the illustrations aboveof establishing
a specialised regulator for a particular sector or industry. But a second
Parliamentary Affairs 24
stage involves regulation that is much wider in its range and ambitions:
it applies across the whole economy and typically tries to protect whole
populations against social discrimination and risks. Hence the label
social, designed to distinguish this kind of regulation from the less
ambitious aim of remedying particular kinds of market failure. The
growth of social regulation in the United Kingdom is particularly
noticeable in three areas.
First, a growing body of law, partly the result of parliamentary legisla-
tion and partly the result of case law made from judgements by courts,
is concerned to protect all workers against discrimination in the work-
place on grounds of ethnicity, gender or religion. The most important
regulatory bodies enforcing and expanding this area of regulation are
the Equal Opportunities Commission (for gender issues) and the Com-
mission for Racial Equality. This eld of social legislation originates
from the legislation originally outlawing racial discrimination in the
1970s but it has progressively widened in scope over the intervening
years.
A second domain of law also covers the workplace. Its concerns are not
to combat discrimination but to regulate health and safety in the
workplace. This area of regulation has been greatly widened by the
impact of both Directives of the European Union and the case law on
health and safety at work developed by the European Court of Justice,
the supreme court of the European Union.
The third area of the new social regulation is the most ambitious of all:
it is concerned to regulate, not the hazards in enterprises, but the
hazards of enterprises. The most important areas of regulatory growth
here have involved attempts to protect the whole community against
the consequences of damage to the physical environment, typied by
the growth of regulations governing emissions and discharges from
industrial processes as varied as farming and nuclear power; and
attempts to protect consumers against the perceived risks arising from
consumption or use of goods and services marketed by rms. In this
latter connection, the most highly charged developments have arisen
over issues of the regulation of food safety. For nearly two decades
there have been periodic food scares, involving for example eggs,
chickens and beef. These scares culminated in the great crisis of
consumer condence caused by the revelations of the farming practices
that led to the disease of BSE in the cattle industry, and to fears that
the disease has jumped the species barrier, threatening a major public
health problem. That crisis prompted a review of food safety regulation
leading to the passage of the Food Standards Act in November 1999
and the establishment of a statutorily based Food Standards Agency in
April 2000. The Agency has a strikingly wide mandate: to protect
public health from risks which may arise in connection with the
consumption of food, and otherwise to protect the interests of con-
sumers in relation to food.
4
The Regulatory State 25
the regulation of government. The three faces of the regulatory
state sketched so far have been about regulation of private interests by
public authority. But the fourth turns our attention to the inside of the
state machine, where there has been a rapid growth of regulatory
activity in recent years. Public institutions in Britain have a long
tradition of regulation, as an integral part of their obligation to provide
public accountability for their activities. But the new regulatory state
inside the state has a number of novel features.
5
First, it is novel in scale. Hood and his colleagues have documented the
striking scale of resources devoted to the regulation of government: in
1995 it involved a minimum of 135 separate regulators, employing
14,000 staff and costing over 770m. to run.
6
Most striking of all, the
scale of these commitments vastly outstrips the resources given over to
regulation of the privatised utilities, even though most argument about
the burdens and benets of regulation focus on the private sector.
Second, it is novel in the degree to which it now involves the creation
of distinctive, specialised groups of regulators applying explicit codes.
Traditionally, much public sector regulation was done collegially: in
other words it was a species of self-regulation in which controls were
operated as a kind of informal by-product of colleagues working
together. Now, in domains as varied as prisons, the health service and
education, it involves increasing investment in distinct groups of special-
ised regulators.
Third, it is novel in the elaboration and pervasiveness of these new
regulatory codes and the way they represent an attempt to exercise tight
control over the behaviour of public sector employees. The most
striking example of this is the way regulation increasingly involves
setting indicators and performance targets, and then periodically audit-
ing institutions to gauge how well they are meeting those standards:
think, for example, of the spread of league tables (for hospitals or
schools) in this connection.
Fourth, it is novel in the range and ambitions of regulation covered by
the new regulatory state. Education is a good example of this expanded
range. Inspection of schools, with a specialised inspectorate, was estab-
lished as long ago as the nineteenth century, but the inspection system
was light touch, involved rare examinations and involved little or no
pressure to match prescribed standards. The reconstructed system
involving OFSTED is detailed, uses calibrated performance standards
and carries clear penalties for failure to reach these. Even more striking
is the expansion of the regulatory system into higher education through
a comprehensive system of periodic assessments of research output and
of teaching quality.
Explaining the rise of the regulatory state
The rise of the regulatory state in Britain is traceable to a mix of the
exhaustion of the old and the rise of the new. We can conveniently
Parliamentary Affairs 26
examine these forces under ve headings: the exhaustion of established
modes of intervention; the intervention of the European Union; the
audit explosion; the impact of scandal; and rise of the risk society.
the exhaustion of established modes of intervention. The
great economic and institutional reforms that came over British eco-
nomic policy in the last quarter of the twentieth century marked the
exhaustion of the interventionist state created in the Second World War
and in the postwar settlement. The credibility of the old interventionist
state was destroyed by the prolonged British economic crisis of the
1970s. The result was Thatcherismwhich in turn led to the great
privatisation programmes of the 1980s and 1990s. The Labour opposi-
tion initially opposed privatisation, but in the 1990s came to accept it;
indeed, in modest ways the Labour government elected in 1997 is
pressing ahead with continuing privatisation. Acceptance of a large
privatised sector is now part of the new consensus in British politics.
A minority of free market advocates of the original privatisation
programme held the view that privatisation needed nothing more than
mechanisms designed to ensure the functioning of freely competitive
markets. Even Professor Littlechild, who wrote the original reports that
helped establish a regulatory framework, thought of regulation as a
transitional phase, a brief period of control over former public monop-
olies until fully competitive conditions were establishedholding the
fort, in his famous phrase, until the competition arrived.
7
The belief that regulation, if needed at all, would only be necessary
for a transitional phase for the privatised industries has turned out to
be false. There are numerous reasons for this: many of the newly
privatised industries are private monopolies, and therefore cannot be
constrained by competition; many are utilities, delivering services that
are not just desirable to consumers but are actually fundamental to the
fabric of everyday life (consider, for instance, the importance of water
services delivered by privatised companies to public health); and many
engage in activities that produce what welfare economists call
externalitiessocial consequences that are an unavoidable by-product
of those activities. For such reasons, regulation of the privatised sector
is here to stay.
A good example of the way regulation has expanded in the wake of
privatisation is provided by the case of the railways. After Labours
general election victory the institutional structure of rail regulation was
reformed, reecting a move from the relatively passive administration
of franchises to a more active concern with strategic management of
the industry. A Shadow Strategic Rail Authority, which will shortly
come out of the shadows with the passage of authorising legislation,
has existed since July 1999. The expanded ambitions are reected in its
aims: to provide a focus and strategic direction for Britains railways,
to encourage investment and to manage the passenger rail franchises.
8
The Regulatory State 27
These expanded ambitions are prompted by widespread public dissatis-
faction with the operation of the privatised franchises. They are
reected also in the sharply adversarial style of the new Rail Regulator,
Tom Winsor, appointed in 1999. Speaking of the new institutional
structure (which will integrate his ofce into the new Strategic Author-
ity) he offered this verdict: Had the performance of railway companies
been satisfactory up to July 1999, continuing with (the original institu-
tions) might have been justied. But while there have been a number of
achievements, the railways customers and public funding authorities
have every right to be disappointed with several aspects of the quality
of Britains railways today.
9
the impact of the european union. Many regulatory measures
can be traced directly to our obligations as members of the European
Union. Three elds are particularly important: the expansion of regula-
tion into control of risk in the workplace; the expansion into control of
risk from the workplace, in the form of regulation to control environ-
mental hazard; and the reconstruction of formerly independent systems
of self-regulation into legally controlled hierarchies. (In the last case,
the impact of the European Union has been especially important in
reconstructing regulation in nancial markets.)
Why has the European Union had this particularly marked effect on
the domestic regulatory system? The most convincing answer has been
provided by Giandomenico Majone. The Union, he argues, is a kind of
state, but a state with special characteristics. Unlike nation states of the
sort typied by Britain it possesses neither a large bureaucracy to
implement its policies nor a large budget to use in redistributing
resources. Its most important executive agency, the Commission, can
therefore only exercise inuence and expand its domains of inuence
by working indirectly on member states. One of the most effective ways
of doing this is through regulation: in other words, the Union promul-
gates general regulations, but pushes the costsboth of money and
manpowerdown to national and sub-national levels. Majone neatly
explains how budgetary and stafng restraints prompt the Commission
to act in this way: the only way for the Commission to increase its
inuence is to expand the scope of its regulatory activities; regulatory
policy-making puts a good deal of power in the hands of the Brussels
authorities while, at the same time, giving the possibility of avoiding
tight budgetary constraints imposed by the member states.
10
the audit explosion. The phrase audit explosion was coined by
Power to describe a phenomenon that marked whole areas of British
society in the last couple of decades of the twentieth century.
11
In the
fairly recent past, audit was pictured as an esoteric and technical
activity which was concerned mostly to examine the accounts of rms.
Parliamentary Affairs 28
A satisfactory audit was taken as a certifying (whatever the reality
might be) that accounts presented a true and fair picture of the business.
The audit explosion transformed this esoteric world in two ways.
First, within business itself a series of business frauds and failures
revealed what had always been implicit in the activity of audit: that the
process was an essentially contestable way of presenting a picture of
the condition of an enterprise; and that the information it conveyed
about an enterprise, even when not contestable, did not amount to the
certicate of nancial health which it had been conventionally assumed
to convey. The result of this has been a wholesale reconstruction of the
regulation of key areas of economic life, especially in accounting,
enforcing more elaborate codes, more statutory control and more
control through formally organised regulatory bodies.
The second change signied by the audit explosion is even more
profound because more far reaching. The language and practice of audit
expanded beyond the world of nancial numbers in company balance
sheets to new social arenas: audit as a mechanism of inspection and
accountability appeared in social arenas as different as academic life
(universities), health care (medical audit of doctors), local government
(the Audit Commission) and national government (the National Audit
Ofce.) This expansion also entailed a great expansion of regulatory
powers and the creation of new regulatory bodies. In nancial reporting
there already existed an established, if contestable, language in the form
of conventional nancial numbers. In these newly colonised social
arenas, standards of verication and institutions of verication, had to
be established afresh.
The phenomenon of the audit explosion raises an obvious question:
why did it happen? The answer is in part to do with another force that
drove the rise of regulation, and this we now examine.
scandal. Many innovations in regulation in the last quarter century
have been precipitated by scandals. For instance, the regulation of the
medical profession has for a quarter of a century been continually
reformed in response to a series of scandals, some fairly minor (callous
treatment of patients), some of astonishing proportions (the failure to
detect a general practitioner engaged for many years in the systematic
murder of patients). As we have already seen, the reconstruction of
regulation in food safety marked by the establishment of the new Food
Standards Agency is a response to the BSE crisis, a major scandal arising
from revelations about farming and food safety practices. The collapse
of self-regulation in nancial services began in the 1980s with legislation
prompted by the revelation of swindles and incompetence in rms
providing investment services to the public at large.
It is not difcult to see why scandal should stimulate regulation.
Scandals mark a moment of crisis when old assumptions are ques-
tioned and old established interests are challenged by newly mobilised
The Regulatory State 29
groups. But that only raises in turn another question: why should
scandals have been so common in recent years? Our nal explanation
of the rise of the regulatory state begins to answer that question.
the risk society. The phrase risk society was popularised by the
German sociologist Ulrich Beck.
12
According to Beck, modern industrial
societies have created new kinds of risks: they are catastrophic in effect,
unknowable in advance and collective in their incidencein other
words, as individuals we can do little to safeguard against them. The
most commonly cited example is the risk posed by safety failures in the
nuclear power industry, but it is not difcult to see cases nearer home:
the BSE catastrophe obviously has these characteristics.
Whether there has indeed been an objective increase in risk is
debatable: statistics for accidents, health and life expectancy all suggest,
to the contrary, that Britons now leads safer, healthier and longer lives
than at any time in our countrys history. Nevertheless, the perception
of risk can exist independently of objective circumstances. And with
this perception goes incessant demands for ever more elaborate regula-
tion of the workplace, the home and the physical environment in the
search to maximise safety.
Problems of the regulatory state
The regulatory state rose to replace an earlier set of institutional
arrangements because those arrangements faced apparently insoluble
problems: for instance, it was widely believed that the old nationalised
industries were unable to deliver goods and services efciently, and
likewise it was common to argue that the unclear relationship that
existed between the industries and their sponsoring departments made
it difcult to ensure public accountability for decisions. But the new
regulatory state itself faces a series of difcult problems. Five are
sketched here: problems of efciency, problems of effectiveness, prob-
lems of legitimacy, problems of capture, and problems of resources.
problems of efficiency. At the heart of the regulatory state lies a
paradox: its origins lie in discontent with earlier efforts to put markets
under public control, but it is itself an enterprise which attempts to
subject markets to extensive curbs, many of them, increasingly, legal in
nature. How can the pursuit of efciency and adaptability in markets
be reconciled with the growing span of the regulatory system? Two
examples illustrate the difculty. In nancial markets, successfor
example in building the City of London as a leading world nancial
centredepended heavily in the 1950s and 1960s on running a light
touch regulatory regime. That was the essence of the old system of self-
regulation. Financial markets thrive on rapid adoption of new competi-
tive practices, and London thrived in part because other big nancial
centres, like New York, were subjected to a dense web of legal controls.
Parliamentary Affairs 30
The conventional justication for regulation of particular markets relies
on the notion of market failureon the idea that, without regulation,
participants in markets will collude and not engage in fair competitive
practices. But the complex apparatus of regulation now created for the
nancial markets goes well beyond ensuring that competition is max-
imised in markets. The second illustration, from the growing eld of
social regulation, makes the point even more sharply. Much of this
regulation is driven not by the desire to ensure that markets are fully
competitive but to protect against risk, real or imagined. The most
obvious instance is in the growing eld of regulation of food safety
standards. This is not to argue that such regulation is undesirable, only
to point out that, unlike regulation designed to correct deciencies in
competition, it involves a constant, difcult trade-off between regula-
tion and market efciency.
problems of effectiveness. Effectiveness refers not to the extent
to which regulation aids or hinders market efciency but the extent to
which it achieves its aims regardless of their economic effects. The most
obvious tendency observable in the rise of the regulatory state is an
expansion in the scale and scope of its ambitions. An ever wider range
of occupations, markets and institutions have been subjected to its
control: professions, nancial markets, institutions like universities. The
limited object of correcting market failure to ensure competition in
particular markets has expanded into much more complex and wide-
ranging aims: for instance, to impose environmental standards on whole
industries, to protect whole ethnic groups against discriminatory prac-
tices, or to protect whole communities against often unquantiable or
unknowable risks. Regulators often have to achieve these aims in the
face of actors and institutions that resist regulation because it threatens
their ability to maximise prots in markets. The increasing resort to law
poses particularly severe problems in ensuring regulatory effectiveness.
Of their nature, legal rules have to be standarised and are not easy to
change rapidly, because due process has to be observed in making and
applying the law. This creates a problem, not simply of evasion of the
law but of what is sometimes called creative compliance: the ingenious
obedience to the letter of the law which nevertheless subverts its spirit.
13
Creative compliance is particularly important in the regulation of rich
and powerful institutions which can employ considerable resources to
devise ways of avoiding the impact of rules: thus it is a particularly
common phenomenon in the efforts to impose tax regulations on big
rms or to impose legal rules in nancial markets that are dominated
by big rms operating on a global scale. Nor is the problem conned to
the regulation of markets. Attempts to regulate the public sector face
similar problems. The increasing use of performance indicators and
league tables, for instance, encourages institutions to focus their energies
disproportionately on these indicators to the neglect of other things:
The Regulatory State 31
thus schools teach with the primary object of maximising their pupils
scores in standardised national tests; hospitals put their resources into
minimising waiting times for whatever list of operations happen to be
currently listed for the purpose of performance measurement; universi-
ties shape research to ensure that staff produce the number of
publications required by Research Assessment Exercises.
problems of legitimacy and accountability. The best estab-
lished theories of what makes government in Britain legitimate and
accountable rest on two notions: majoritarianism and ministerial
responsibility. Majoritarianism is built into our adversarial party sys-
tem. It involves the presumption that, under prescribed voting rules, the
winning majority triumphs. Ministerial responsibility implies that, at a
minimum, ministers must give to Parliament an account of the actions
of government. Neither of these principles sits well with the new
regulatory state. Adversarial regulation is rarely effective regulation;
most effective regulation is consensual in character, giving to minorities
an entrenched right of veto over decisions. This has led Majone to
argue that we need instead a Madisonian system of decision-making
in regulation: in place of the presumption that majority rule obtains, we
need the presumption that the system should be one of checks and
balances ensuring that no majority can override a minority.
14
(The
American statesman James Madison argued for such an arrangement in
the American constitution.) The principle of ministerial responsibility
makes responsibility and accountability in the British system intensely
personal. But the new regulatory state is so institutionally complex, and
so often works independently of ministers, that this personal sense of
responsibility makes no sense. None of this is to deny that the regula-
tory state can be made legitimate and accountable, but its growth has
been so rapid and so recent that constitutional doctrine has failed to
keep up with institutional change.
problems of capture. The problem of capture is a particular
version of the problem of legitimacy and accountability. Most regula-
tion involves the attempt by public authority to control powerful
interestsand those interests usually have very considerable resources
of money and manpower. How can regulation be run so as to ensure
that the regulated do not capture the regulated? There are two
particular dangers. When regulators attempt to control a powerful and
complex set of institutions, they inevitably spend a great deal of time in
the company of those who control those institutions. The danger is that
regulators and regulated, precisely because they have to work with each
other, start to share the same world view. There is a particular danger,
which has been widely debated in the United States, where regulated
industries often offer lucrative alternative careers to those working
regulatory agencies. In this way, regulators and regulated often end up
Parliamentary Affairs 32
in sharing the same backgrounds and career paths. Nor is this a matter
of regulators being improperly suborned by the regulated, for a second
source of capture is entirely innocent. Most regulation involves grasping
issues and information of great complexity. Consider tasks as diverse as
the regulation of medical practice, stock markets and the pharmaceuti-
cal industry. The people who know most about regulation in these
arenas are doctors themselves, securities dealers and pharmaceutical
rms. It is natural for regulators to turn to the regulated for expert
advice and technical information. But that information is hardly likely
to be forthcoming if regulation is not conducted in a consensual,
accommodating wayand reliance on the regulated for expertise runs
the danger that they will only volunteer what they want regulators to
hear.
problems of resources. The obvious solution to the problem
described above is to supply regulators with sufcient resources to make
them independent of expertise and information from the regulated. But
the costs of doing this are formidable, not least in hiring professionally
qualied staff. The rise of the regulatory state has been accompanied by
periodic arguments about its cost to the public purse and by accusations
that there is growing up a cumbersome, onerous bureaucracy. A
common response is to minimise the visible costs by shifting them onto
the shoulders of the regulated. For instance, most of the costs of the
new systems of regulation established in schools and universities over
the last two decades are borne by the regulated institutions themselves.
While this helps solve the immediate political problem of keeping
measured public regulatory costs low, it plainly does not solve the
resource problem; it merely shifts compliance costs elsewhere.
The future of the regulatory state
The regulatory state is here to stay; indeed it will continue to grow in
scale and scope. This is because it is a response to the decay of older
methods of control, and the rise of new demands by citizens. The old
methods of control cannot be reconstructed; the new demands will not
disappear. Three features illustrate this argument.
the decay of old methods of control. This is most obvious in
a range of elitist institutions in British society, notably the leading
professions like medicine and law, the leading markets of the City of
London, and the elite universities. All these institutions were once
trusted to practise varieties of self-regulation independent of the law
and of the state. All, for a variety of reasons, have ceased to be able to
command that trust. It is inconceivable to imagine the law and the
agencies of the state that have advanced on them in recent decades will
now retreat; on the contrary, the best prediction is that state regulation,
backed by law, will grow in importance.
The Regulatory State 33
heightened awareness of risk. It should be obvious from the
preceding pages that a large amount of regulatory innovation is about
attempting to manage risk. The sources of this heightened sensitivity to
risk are complex. Plainly, as catastrophes like BSE in the beef industry
and contamination from nuclear processing show, there are objectively
serious risks against which, in a democracy, citizens are in a position to
demand protection. It is paradoxical, however, that this heightened
concern with risk seems to have developed in an epoch when the life of
Britons is safer than at any time in human history. The rise of risk as
an inuence on regulatory policy is not just a response to objective risk,
it reects some profound changes in popular perceptions.
changed popular expectations. Changes in the demands and
expectation of citizens have been particularly important in propelling
increased regulation within the public sector. If we reect for a moment
on some of the institutions which have been most subject to regulation
in recent decades, we will notice that they are institutions central to the
modern welfare state, especially the welfare state as it was constructed
during and after the Second World War. The two most obvious
examples are in education, which was shaped by the great education
act of 1944, and the National Health Service in 1948. These institutions
of the welfare state were obviously created in a particular historical
setting. When the NHS was established, for instance, basic material
goodsfood, fuel, housingwere still rationed by the state. The idea
of delivering health care to compliant patients by professional elites and
bureaucratic hierarchies did not seem at all unusual. But by the end of
the twentieth-century British society was very different. As consumers
in the marketplace, we were used to demanding high standards of
delivery and responsiveness to our wishes as customersand to going
elsewhere if not satised. In these circumstances, the pressure on
schools, hospitals and local government to deliver according to publicly
stated performance indicators became irresistible.
These forces all originate in the wider social environment of govern-
ment. But we should not forget the independent effect of the regulatory
institutions themselves in the expansion of the regulatory state. The
changes of the last two decades have created powerful interests with a
stake in the expanded world of regulation. These interests exist at both
the national and supranational levels. As a consequence of the present
governments devolution reforms, they also, increasingly exist within
the newly devolved executive systems in Scotland and Wales. We can
expect the struggles for prestige and bureaucratic turf that characterised
the old civil service machines to be replicated in the new world of the
regulatory state.
1 The most important recent studies include: G. Majone, Regulating Europe, Routledge, 1996; T.
Prosser, Law and the Regulators, Clarendon Press, 1997; M. Power, The Audit Society: Rituals of
Parliamentary Affairs 34
Verication, Oxford UP, 1997; R. Baldwin and M. Cave, Understanding Regulation: Theory, Strategy
and Practice, Oxford UP, 1999; C. Hood, C. Scott, O. James, G. Jones and T. Travers, Regulation
inside Government: Waste-Watchers, Quality Police and Sleaze-Busters, Oxford UP, 1999; C. Hall, C.
Scott and C. Hood, Telecommunications Regulation: Culture, Chaos and Interdependence inside the
Regulatory Process, Routledge, 2000; M. Clarke, Regulation: The Social Control of Business between
Law and Politics, Macmillan, 2000. The most effective way to keep abreast of the changing
institutional structure of regulatory agencies is to follow the links at the main UK government website:
http://www.open.gov.uk
2 R.A.W. Rhodes, Understanding Governance, Open UP, 1997.
3 Hall, Scott and Hood, Telecommunications Regulation, pp. 6181.
4 http://www.foodstandards.gov.uk. Accessed, 18 July 2000.
5 The phrase in quotations is from Hood, Scott, James, Jones and Travers, Regulation Inside Govern-
ment, p. 3.
6 Ibid., p. 23.
7 Professor Littlechild and his theories are discussed in Prosser, Law and the Regulators, ch. 1.
8 http:/www.sra.gov.uk Accessed, 18 July 2000.
9 Extract from his introduction to the Operational Plan of the Ofce of the Rail Regulator, 200020001,
p. 1, accessible at http://www.rail-reg.gov.uk.
10 Majone, Regulating Europe, p. 66.
11 Power, The Audit Society, pp. 114; originally coined in his, The Audit Explosion, Demos, 1994.
12 U. Beck, Risk Society: Towards a New Modernity, trans. M. Ritter, Sage, 1992.
13 The classic study of creative compliance is D. McBarnet and C. Whelan, The Elusive Spirit of the
Law: Formalism and the Struggle for Legal Control, Modern Law Review 54(6) 1991, 84773.
14 Majone, Regulating Europe, p. 286.