Frenetic levels of policy and regulation have dogged the UK in recent years, with companies struggling to keep up and unintended consequences emerging from many major initiatives. Herbert Smith Freehills corporate veteran James Palmer talks about how to bring rigour back to law-making and a stronger business voice to government policy.

You’ve been engaged in a number of policy issues and a consistent theme is a lack of rigour and long-term thinking in legislating. What’s the core thrust of your argument?

For understandable reasons, the people working on specific issues have got into the habit of creating rules, regulation and policy which unintentionally harm UK outcomes. This permeates all aspects of policy through public services and the private sector. It stems from a short-termism and reactive tendency in an increasingly complex and connected world. We need to do something politically difficult: return to thoughtful, grown-up responses which don’t profess to know the answer to everything but deliver better long-term outcomes.

We must be realistic about our ability to create a world where bad things don’t happen. We’ve reached a point where a business going bust is considered a bad thing – that will always be an inherent risk to the private sector. We’ve developed a culture of risk aversion and if you don’t take risk, your chances of success will be really low.

What examples would you cite of this risk aversion?

Liability-driven investment [an investment approach applied to final salary pension schemes to match assets to future liabilities] is one. It seemed obvious back in 2008 when we were all told equities are a disaster and we need to be in gilts [government bonds] and introduced rules which forced people into fixed income [bonds] to protect them from equity loss. People who moved into fixed income lost out compared to those who didn’t [because stock markets have historically outperformed low-risk assets like sovereign debt over the medium term]. That’s reducing pensions and savings for ordinary people.

What other recent policies highlight this lack of legislative rigour?

The first example is the National Security and Investment Act. This has been materially negative for foreign investment into the UK. It was rushed and is the most onerous regime around. The government has worked hard to implement the regime in a way which is more workable but it’s creating risk and uncertainty which was not there before. It was poorly thought through and sent negative signals.

The second is the Foreign Influence Registration Regime, a well-intended but daft proposal. The idea was that we make it harder for spies to operate in the UK by making them register when the consultation acknowledged they wouldn’t. Meanwhile, it assumed there was no cost for legitimate business to register. Those working on it are good people doing their best but they don’t have a culture and structure to consult properly and identify consequences. It’s about political lead. The legislation came in halfway through its Parliamentary passage with minimal consultation. As a result, you get a car crash of a proposal. We managed to get 95% of the original regime dropped but that’s a rare win, and it took some courage from peers and business groups to fight it.

“Legislation came in halfway through its Parliamentary passage with minimal consultation. As a result, you get a car crash of a proposal.”

James Palmer

Beyond lawyers, how are figures in the corporate world viewing these issues?

I was at an event recently with over 100 major companies. The issue for most was the deluge of day-to-day challenges with their own businesses with law and regulation. The volume is hugely different to when I first started engaging on policymaking 30 years’ ago. It’s too great for even the largest and most sophisticated global businesses to deal with.

Few firms have the time to think about these systemic issues but there are key individuals within those businesses which see the broader context. It’s resonating with business figures and thoughtful ministers and civil servants. They all care but the system has got into a spiral of activity and people are trying to find a way to return to proportionality and thoughtfulness.

It’s been a period of policy flux in the UK and business has struggled to make its voice heard. What makes you feel more confident now?

There is a real change. Some of that is just being faced with the realities and finding a way out. These are challenges most developed democracies are facing to one extent or another. We’re facing complexity which requires grown-up thinking and strategic goal setting [from politicians]. I see signs we now have that. Across both parties, people are seeing we have issues requiring long-term approaches.

You’ve spoken about perverse incentives for law-making or “legislative-signalling” – what are those incentives?

It’s not about lazy, evil politicians who don’t care – that’s not true. Social media is a cliché, but the speed of response required from politicians towards events is totally different. Politicians face mass media pressure, pressure we need to understand and find tools to counter. It’s about buying time and honesty.

When presented with a problem, we have reached for the immediately intuitive fix: to ban something, make someone liable, to invest in systems which stop bad things. The truth is, unless we want to become a state-run economy, you must accept things are sometimes left in the private sector and you can’t fix everything. This isn’t a libertarian campaign, it’s about honesty. The private sector has to step up as well – when things go wrong, we often leave politicians to take the flak. But it’s also easier for politicians to say they’ve done something if they simply publish a new law.

You’ve made suggestions to address these pressures on policy-making. Can you summarise those?

It’s having political leadership that recognises complex challenges require thoughtful and strategic approaches with a degree of cross-party support. Another thing is to recognise and change the incentives on policymakers. Ministers and civil servants worry about spending accountability and there’s a regime permeating government about spending. Someone is marking the homework in the Public Accounts Committee supported by the National Audit Office. We have nothing for the comparable costs of legislation which asks what a statute was trying to achieve and whether it worked.

I’ve proposed a review committee which oversees regulatory initiatives and holds people to account. Importantly, this would give praise for those who introduce something socially useful and proportionate in terms of cost. And it’s not about getting it right, it’s demonstrating you gave it some thought. It needs that bite of public accountability. It could be a joint committee of both Houses, but it can’t be just a House of Lords committee because that wouldn’t be muscular enough.

Pension funds not investing in UK equities is getting more attention, despite being a long-running problem. Is there appreciation in politics and business of the impact this has on London as a finance hub and investment in the economy?

It’s clear the allocation of UK portfolios in growth capital is significantly less than other developed countries and dramatically less than it used to be. The low level of investment in growth capital would be understandable if it was delivering returns for savers but it’s not. We have less growth capital and lower returns by driving people away from equities. It’s driven crazy outcomes harming ordinary people as well as the UK economy. If we don’t fix it, I don’t see how we turn the UK economy around.

Are there reasons to be optimistic this issue is getting more attention?

I feel encouraged. I’ve been part of a small group of people rattling on about this for a long time. But I look at the City of London Capital Markets Industry Task Force developed by the London Stock Exchange and Corporation of London, I see the new Capital Consensus Initiative, which Chatham House is sponsoring, and it becomes clear multiple outlets are addressing this issue. Is it fully embedded yet? No. But senior ministers and opposition leaders are interested.

So much of this comes back to long-term strategies. We’ve seen a recent bias towards short-term growth but the success story of the £5-£6 billion of exports in UK legal services did not come as a short-term win, it came from long hard graft for competitiveness. We need to recognise real economic strengths don’t come from five-minute decisions.

If readers in the corporate or policy world want to get involved, what should they do?

There are a range of bodies and politicians engaging with this. I urge bodies I meet to keep focusing on their challenges, many of which are regulatory proposals, but also spread the narrative of honesty about the challenges and opportunities that face us. I also advise them not to be too critical of individuals; people normally make mistakes with good motives. But we need a debate about this as a policy priority for the UK. I want to see all the major parties reaching further agreement about the nature of these challenges and we can show we’re back to long-term, strategic thinking. We won’t always get it right but that would be an incredibly exciting signal to send to the world.

For more analysis, see James Palmer’s articles in Butterworths Journal of International Banking and Financial Law here and here.

James Palmer
James Palmer
Partner, London
+44 20 7466 2327