Cutting red tape: Beware “Verschlimmbesserung”
Jennie Kerr and Stu Murphy look at how efforts to trim New Zealand’s regulatory forest can achieve the intended aims and avoid unintended consequences. This article was first published in Public sector (Winter 2024).
“Verschlimmbesserung” (German, noun) – An attempted improvement that makes things worse.
The New Zealand Government’s approach to regulation seems clear: there’s too much, so let’s cut it; establish the Ministry for Regulation to oversee it all, and get it done quickly.
Beware, though: Verschlimmbesserung …
Our laws are undeniably a tangle
Like any modern democracy, New Zealand’s laws are a tangle of different regulatory regimes cutting across industries, operated by scores of regulators with different strategic priorities, and often with individual regimes overseen by multiple ministers.
In 2014, the Productivity Commission estimated that we have around 200 regulatory regimes (“Regulatory institutions and practices”, June 2014). And, of course, we’ve added a few since then.
Currently, we do have some common standards, but these aren’t consistently applied. A Regulatory Impact Analysis (RIA) must be produced for all new regulations. But as the Treasury pointed out last year in its Briefing to the Incoming Minister for Regulation, the quality of these is patchy. Similarly, the Government Regulatory Practice Initiative, or “G-Reg”, aims to share best practice and build regulatory capability, but not all regulators have subscribed to it.
The use of red tape to bind up piles of government papers, like these old US pension files, apparently dates back to 16th-century Spain (Source: Jarek Tuszyński, Wikimedia Commons)
The new Ministry for Regulation will be able to fix some of this. It says it’s on track with a new Regulatory Standards Bill to be introduced later in 2024 (LinkedIn, 1 May), and it has also announced that its first sector review will be of early childhood education (Press release from David Seymour, 5 June).
But as it gets further into its work, the Ministry will need to beware of Verschlimmbesserung – of making things worse through unintended consequences – which is especially a risk for a government in a hurry.
If the Government makes the wrong changes and then has to start again, this will create significant uncertainty, distracting businesses and organisations and discouraging investment – outcomes a government focussed on economic growth will, of course, want to avoid.
Removing the wrong regulation also risks regulatory failure, with potentially catastrophic consequences for New Zealanders relying on government to maintain minimum standards.
Take leaky buildings. Our system for regulating the construction of homes was changed dramatically in the 1990s to prescribe how new buildings should perform rather than how they should be built. Those changes are now widely seen as contributing to the leaky homes crisis.
It will be essential to understand how our regulatory systems really work
It’s not just black-letter rules that create red tape – it’s also how regulatory regimes operate in practice, including the regulatory strategy, the processes and systems, and the capability and culture of the regulators. All those aspects can create complexity and constraints that businesses and individuals must spend time, effort, and money navigating.
The new Ministry will also need to understand the sometimes complex interactions between different regulatory regimes, and how far the regimes affecting a particular sector are together achieving the intended results.
For example, there’s a lot of interaction between our consumer-law system and our building-regulation system. This was on show in 2018 when the Commerce Commission fined Steel & Tube Holdings Ltd a record $1,885,000 under the Fair Trading Act for making false and misleading representations about its steel-mesh products, which are used in construction. This is a classic example of a general regulatory system cutting across and tangling with a sector-specific one. We have a few of these regulatory overlays.
Think from the perspective of the regulated parties
Engaging directly with regulated parties is, of course, going to be key. Understanding the cumulative practical effect on regulated parties from different regulatory regimes will help the Government understand which regulations should be removed. Death by a thousand cuts is real.
The Government clearly has unnecessary overlap in mind with its plan for the financial services sector. It intends to reduce the number of regulators in the sector from three to two, by shifting functions from the Commerce Commission to the Financial Markets Authority. That should provide an opportunity to, for example, simplify licensing requirements for financial institutions.
By engaging with regulated parties in other vital sectors, the new Ministry will be better able to spot the most significant opportunities to reduce excessive compliance burdens that result from overlapping regulations aimed at similar results.
Source: Adobe Stock, drawing generated with AI
Tidy by category too, not just by sector
No doubt all our regulatory systems need a Marie Kondo, and the Government also wants the tidying done reasonably quickly. This requires thinking about known red-tape issues that cross regulatory systems and sectors.
Early efforts by the Ministry for Regulation could focus on cross-cutting issues like how to streamline reporting requirements and how to enable digital approaches to compliance. Sector and industry organisations can add a lot of value in helping to identify these cross-cutting problems.
There’s an opportunity here to have the job done right
A strong oversight function, in whatever form, can potentially help transform how we design and operate regulation in Aotearoa New Zealand. This is an exciting opportunity, albeit a complex one.
But the oversight body needs to build on work that has already been done to understand the system as a whole and recognise that it probably won’t be as simple as cutting out a few rules.
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