OECD Regulatory Enforcement and Inspections Toolkit

Criterion 2. Selectivity

Promoting compliance and enforcing rules should be left to market forces, private sector and civil society actions wherever possible: inspections and enforcement cannot be everywhere and address everything, and there are many other ways to achieve regulations’ objectives.

Key questions:

• Are alternatives to state-led regulatory enforcement genuinely considered in the Impact Assessment process?

• Do legal and institutional mechanisms exist to enable alternatives to state-led regulatory enforcement, where appropriate?

Sub-criterion 2.1. Alternatives to state-led regulatory enforcement are genuinely considered in the Impact Assessment process

As exposed in sub-criterion 1.1, it is very important that Impact Assessment procedures genuinely consider the inspection and enforcement aspects of proposed regulatory changes, and not treat it as a given. As part of this, they should not only review needs in terms of resources and possible institutional set-ups as well as methods for inspections, but also alternatives to state-led regulatory enforcement (such as market forces, private sector and civil society actions). First, the assessment should look at whether direct inspections and enforcement would be needed at all, or whether evidence suggests that compliance could be achieved by other means (high likelihood of voluntary compliance, possibility to rely on insurance mandates, civil litigation where relevant, etc.). Second, it should consider what existing structures, mechanisms etc. could be make use of to this aim. Third, if these are found to be insufficient, but direct inspection and enforcement by state authorities appears not to be the optimal option, the assessment should lay out what changes need to be made (in legislation, institutions, resources etc.) to enable the preferred solution.1

When considering whether state-led regulatory enforcement is truly required, it is important to consider the question of compliance incentives: where business incentives (profitability) are to a large extent aligned with the regulation’s objectives and contents,2 there should be relatively more scrutiny about the need for enforcement resources than when regulatory objectives will clearly impose additional costs to businesses and reduce their profitability (at least in the short- or medium-term). Another key consideration is the nature of the potential harm that the regulation aims at preventing. If the harm can be remedied at a reasonable cost (i.e. remediation is not impossible, and not far more expensive than prevention), enforcement may be relatively less needed than when harm would be very expensive to remedy (far more than prevention) and/or would be impossible to remedy (irreversible damage).

• Evidence: RIA guidelines, contents of published RIAs

Sub-criterion 2.2. Legal and institutional mechanisms exist to enable alternatives to state-led regulatory enforcement, where appropriate – and these are effectively made use of in cases where they can be effective

Alternatives to state-led regulatory enforcement are not always preferable – be they reliance on voluntary compliance (and possibly schemes designed to incentivise such compliance, including voluntary certification, “naming and shaming” etc.), mandatory insurance, “class action” (or similar mechanisms), or reliance on civil action by individual litigants (without class action), they all have strengths and weaknesses, costs and benefits, and limitations. For instance, third-party certification combined with mandatory insurance mechanisms, backstopped by mechanisms of civil litigation between insurers and insured parties, have proven to be effective in some contexts,3 but require a complex combination of legal infrastructure and robust insurance market, well-informed parties, and has real costs (in third-party certification, insurance premiums, expertise, litigation etc.). To take another example, class-action mechanisms have been shown by many studies to have limited effectiveness in changing corporate behaviours and improving compliance – but other, high profile cases suggest that they can have some effectiveness in other settings. In any case, they clearly have costs, and will often result in less-than-optimal distribution of costs and benefits – but they may be the best available option in some contexts (difficulty to assess where the risks may be, diffuse and uncertain risks, high costs for direct inspections and enforcement with uncertain benefits etc.).

What matters in all cases is to create the right structures (legal and institutional) so that these mechanisms can be made of in the cases where they offer the best combination of effectiveness and efficiency.

Alternatives to state-led inspections and enforcement are often seen as belonging mostly to two categories (that can be combined): mandatory third-party certification and/or insurance, and litigation-based approaches (“class action” in particular). Other possibilities exist, however, that can be described as “innovative” not necessarily because they would be really path breaking, but because they are still not widely known, or at least not widely used, or not seen as real alternatives to direct enforcement. Among these can be listed the following: “co-regulation” schemes involving state authorities “backstopping” regulation directly implemented by private-sector structures (with the state acting as a guarantee, with the ability to step in if needed, but not directly active), schemes empowering consumers (e.g. by increasing transparency of information on private sector operators in a given sector, with active efforts to make the information clearer and easier to access and understand4), etc. In order for such schemes to be effective, adequate resources are needed (e.g. for information), and also legal foundations (liability for private sector actors that would fail to abide by the rules, for instance). Systems that make as much use as possible of such tools, in cases where the costs of direct enforcement would seem to clearly outweigh its benefits, are likely to be more efficient and effective than others.

• Evidence: Enabling legislation e.g. for collective action, insurance mandates, liability of economic operators etc. Examples of practical use of such schemes

Notes

← 1. Whenever new regulations are introduced, it is essential to avoid this resulting in some form of more-or-less automatic creation of new enforcement powers, or (even more problematic) creation of new inspection and enforcement agency or structure. In some countries, existing legislative practices mean that new powers and responsibilities are systematically added whenever a new rule is adopted. Without prejudice to the general enforcement competence of police forces and courts, such practices should be discontinued as regards the creation of new regulatory enforcement responsibilities.

Rather, as part of the regulatory design process, drafters should consider whether state-led inspections and enforcement will be the most adequate option, whether the new regulation already is covered by existing powers and structures, and (if not) whether enforcement powers can easily and effectively be added to those of an existing structure, in a way that would avoid fragmentation and result in more coherent enforcement. Only in the negative should there be the option to create a new structure specifically tasked with enforcing this new regulation.

← 2. E.g. in the case of food safety, where businesses normally have an incentive to provide safe foods for consumers. Of course, a consumer may not always know which food has potential for adverse health effects, so the information is imperfect, and the incentive is not absolute (and there are many businesses that exhibit essentially irrational behavior), hence an alignment of incentives does not ipso facto mean that enforcement is not needed. It should be noted that food safety incidents may occur from short-term intake of hazards (e.g. acute toxicity, microbiological food poisoning) or long-term intake (e.g. chronic intake of heavy metals or other chemicals).

← 3. E.g. construction regulation in France.

← 4. E.g. food hygiene ratings such as used in Denmark, the United Kingdom etc.