25th June 2024
Imagine you are a business person faced with an irksome or onerous regulation.
The regulation means that a course of action you would like to take for your business may not be available.
What do you do?
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1. Breach
You can breach the regulation.
But if you breach the regulation then that can have adverse consequences for your business and even potentially for you.
In practice, this will depend on the nature of the regulation, the likelihood of detection and investigation, the likelihood of sanction, the seriousness of the sanction, and whether the sanction can be shrugged off as a “cost of business”.
A decision to breach a regulation can be be framed in terms of “taking a view” (this is an infamous phrase, as I set out in this 2022 post) – and obliging lawyers may use phrases like “this may upset the regulators” or “this may attract criticism”.
But whichever way it is dressed up, it is still a decision to take the risk of being found in breach of a regulation.
No sensible business would want to be found in breach of a regulation: it has knock on effects, especially if that business is seeking to attract investors, purchasers or to have good relations with companies that care about due diligence. It also risks adverse publicity.
So what else?
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2. Challenge
You can challenge the regulation in court, usually be means of an application for judicial review.
This, however, is not common – for various reasons.
First, it is often not wise to upset your regulator.
Second, you may lose in court and even find the regulation is fortified by (for you, unhelpful) judicial comments.
Third, you may win in court and find that the regulator just makes the same regulation again but with better legal advice so as to render it challenge-proof.
Fourth, you are also unlikely to get damages if you win in court and you may not even recover your legal costs. (And those who say “it is not the money, it is a matter of principle” invariably do not still say so after the first lawyers’ bill.)
In practice, commercial judicial review is often the last resort, where the commercial consequences of not challenging a regulation outweigh any other option. Or commercial judicial review can be used in a strategic way so as to they and shape the activity of your regulator.
But, in practice, few regulated companies are in a position to fund and mount a court challenge to a regulation, even if they they would like to do so.
So what else?
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3. “Compliance”
You can comply – or “comply” – with the regulation.
If you comply with a regulation then you lessen – and you hope eliminate – the risk of any sanction. You also do not need to fund any futile court challenge.
But there is compliance and there is “compliance”.
Here we nod towards a classic 1947 book by Stephen Potter: The Theory and Practice of Gamesmanship, or the Art of Winning Games without Actually Cheating:
And so, in practice, this is what most sensible regulated entities do when faced with an irksome or onerous regulation: they find a way of complying with it, either to their advantage or at least reducing the disadvantage.
It is akin to that old chestnut of a distinction between “tax avoidance” and “tax evasion”.
(The difference often being the quality of the advice.)
This is because regulation generally is not magic, and particular regulations are not spells. An undesirable activity cannot be extinguished just by typing out a law against it, any more than it can be banished by pointing a wand at it and reciting some cod-Latin.
Yes, there is often the call that “something should be done” and that there be “crackdowns” and so on.
But good and effective regulation is not easy, and not only does a regulator need to have the wit and the resources to enforce the regulation against breaches; the regulation itself needs to be crafted so as to limit creative “compliance” and also so as to avoid undesirable knock-on effects.
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There is a fourth, longer-term approach, which is to engage with your regulator so as to avoid irksome and onerous regulations in future.
This is called “regulatory capture” – and it is what will tend to happen in any regulated commercial sector over time, despite the good intentions of those who set up the regulatory regime.
But in the shorter-term, creative “compliance” is often the preferred course. And if done in a smart way, there is little or nothing that can be done.
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And now we come to football.
If you think about it, it should not be any great surprise that those that make money out of games are particularly good at gaming a system.
Just as a team can develop a style of play that benefits from whatever offside rule is in force that season, and thereby benefits more often than not from VAR, then a football club as a commercial organisation can work out how to work within a given system to its commercial advantage (or at least to minimise disadvantages).
(Yes, I am an Aston Villa fan.)
The current regulations about profit and sustainability (PSR) are based, like many regulatory regimes, on good intentions.
But if good intentions were always enough, there would be no need for regulations.
That transactions between football clubs now are carefully – somewhat artificially – structured so as to comply with this PSR regime should not be a shock. Indeed, it would be shock if this was not the case.
But it is less clear what any of this now has to do with sustainability – other than perhaps to sustain certain privileged clubs in their privileged positions.
(Yes, again I am an Aston Villa fan.)
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All because, as with football, there needs to be some rules in place in respect of how clubs operate as commercial entities.
But there is a distinction between formulating a rule and achieving the desired regulatory outcome.
From time to time, there will be breaches and perhaps challenges, but the real problem will be when the issue becomes “compliance”.
That is, of course, until the unhappy regulated entities are able to change the rules of the game.
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UTV
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The use of the phrase tax evasion in place of tax fraud has always struck me as especially middle class.
Even left wing firebrands, Jeremy Corbyn and John McDonnell used evasion in place of fraud when leading the Labour Party.
At no time in my career as a civil servant did I ever hear of someone evading or having evaded the benefit rules.
Benefit fraud is a crime and of that one is left in no doubt.
Tax evasion to my ears always sounds almost socially acceptable or at most a faux pas.
It also conjures up a vision of someone skiing downhill in a slalom with the tax laws as the posts.
I have a theory that drunk driving amongst social drinkers, middle class alcoholics, fell as much through it becoming socially unacceptable as anything else.
Not having been born into the middle class, I mostly find the euphemisms amusing.
Great piece – one thing I have often found is that when people say “it’s not about the money, it’s about the principle” – you can be sure it’s about the money!
The chairman of Aston Villa signalled these intentions, didn’t he? To give the rule-making body a chance to avoid these perfectly allowable but obviously ludicrous machinations from making them a laughing-stock. This is what happens when smart, powerful people with a sense of humour find no other way to make their points. It’s the legal equivalent, I suggest, of pointing and laughing. As uncomfortable as it may be it’s preferable to the despair of watching those rules be avoided wholesale for many years by other clubs who have suffered no penalty to date for their transgressions.
UTV
What’s with the shout-out for (the channel formerly known as) Ulster TV at the end?!
This comment is not necessarily for publication, but in case you (or your readers) are interested. I write as chair of the UK’s Institute of Regulation, the professional body established in 2021 to improve regulation and the skills of regulators. Over a third of the 100+ regulators in the UK are already members, plus academics and those who work with regulators, with members overseas too. Our website is here if you’d like to know more: http://www.ioregulation.org
The Institute wants UK regulation to be as good as possible. That means fewer regulations where possible, and better ones where they’re needed. A well-regulated system is one where people find it easy to comply with rules which have been well-designed with everyone’s benefit in mind (like the ‘rule’ to give way to the right at UK roundabouts). Fake, costly ‘compliance’ is rarely in anyone’s interest. But some rules are necessary in some markets to ensure fairness, consistency and protection, not just of consumers and service users, but legitimate businesses too, who don’t want to be undercut by disreputable cowboys.
The Institute works to help regulators use the right tool for the right job, learn from each other, and from academic theory and good practice. Gamesmanship will always exist. But most people in any population group (including businesses) usually want to play by the rules. Good, well-designed regulation should help them to do that at minimum possible cost.
I am happy to publish such a useful comment.
Good piece. Though I disagree that “ No sensible business would want to be found in breach of a regulation”. Where the cost of the breach is low and the regulation in question has little support it may be advantageous to breach this regulation. Indeed the publicity of the breach may be part of the reason for breaching the regulation in the first place.
Some ‘risqué’ advertising campaigns are designed to be ‘banned’ – and benefit from the press attention of being ‘banned’. Similarly some of the early breaches of Sunday Trading laws were designed to attract attention to the cause and mobilise shoppers on the shops’ behalf. It might take a particular kind of company to behave this way, but I don’t think it’s fair to say they are not “sensible” in their own way.
I think ‘sensible’ works quite well.
This is also of particularly relevance to the CE mark that is required to sell consumer products in the UK, and there are similar issues with chemicals, medicines and other products.
It used to be the case that we could engage with regulators, attend consultations and make representations to our MEP’s. And there are quite a lot of cases where it worked and changes were made to the rules.
It’s particularly a problem because the regulations are set by the EU to benefit the EU, which is unsurprising as the purpose of the EU is to benefit its members.
So it does mean our regulations are set by our competitors without us having any say in them! Which does not seem sustainable in the longer term.
The current (and hopefully soon to be gone) government scrapped their plan for a UK version of the CE:
markhttps://www.bbc.co.uk/news/uk-politics-66375185
It makes sense to me as British companies wouldn’t be able to sell into the EU without a CE mark.
And EU companies are now competitors because of this country’s act of leaving the EU.
When my British business sells a British made product to a British consumer, the regulations governing that product are set in the EU without the British producer or consumer having say.
I’m simply saying that I don’t think that’s sustainable.
I’m not sure I’m smart enough to know the solution! Personally, I voted Remain but whatever way we voted we need to deal with the situation that has presented itself.
When football club owners generously write off large Loan Notes I often wonder where the original funds came from and these days much prefer to keep my money and my hands firmly in my pockets !
Economic breach of contract is a very interesting subject which is often not given the importance it deserves by many universities.
Sometimes, regulations are written to be violated–within reason. For example, banks are strictly liable (at least in the US) for blocking every transaction that appears on a watch list. They don’t, because they can’t. Banking regulators will overlook a few errors as long as they’re not systematic.
A more complex example is that of automotive speed limits, at least in the United States. No cop acting in good faith would ever pull over a driver who exceeds the speed limit by 5 mph or so. Cops will do this sometimes, but it’s invariably a pretext for some other conduct which the cop doesn’t like, but appears legal on its face.