What next for regulation in post-Brexit UK?

As negotiations with the EU over the terms of Brexit stall, Daniel Hunt looks at what’s next for UK regulation. Should the UK carry on as before or embrace a new, competitive and deregulated future?

Britain’s position in the Brexit negotiations looks parlous. The rhetoric emanating from the Commission is characteristically tactless; Bernier taps his foot to the beat of the Marseillaise as he castigates his British opposite number – our chief negotiator – David Davis MP.

But is Mr Davis as vulnerable as he looks? Let us pause to consider his strategy. It is absolutely in Davis’s interest to cast Brussels as the pantomime villain. It is difficult for Europhile MPs to disrupt Brexit legislation if they are seen as being on the side of a foreign aggressor. Tony Blair’s desperate plan for a single market without free movement was designed to persuade his erstwhile colleagues to do just that.

All this seems pretty far removed from the day-to-day activities of Britain’s regulated utilities. But there is a clear relationship between Brexit and the development of UK regulatory policy.

Brexit is a watershed moment for regulatory policy because once outside of the EU – its single market and customs union – the UK will have to become more competitive and raise productivity at a faster rate than the remaining EU27.

Britain will need to offset any negative implications of transition and work extra hard for foreign direct investment (FDI), both from within and outside the EU. Britain will also need to resist the expansionist, centralised EU that Jean-Claude Junker outlined on 13 September, whose assertiveness is most able to manifest itself through trade policy.

This leaves Britain with a choice: improve productivity or get used to comparative decline in Europe. So, the Conservative minority government must drive economic growth for political purposes – “Brexit must be a success”. The Conservatives want more dynamic markets that lead to higher productivity. Utilities are universal, so they have a unique ability to enhance UK productivity. And in the UK context, they are also a magnet for sovereign wealth and a gateway to investment by sovereign funds into riskier areas of the UK economy. And regulated capital value (RCV) represents, in one model, two aspects of the British investment proposition that will be central to our success in the medium term: the strength of our legal (regulatory) system; and the stability of the UK financial sector.

Would it make sense to undermine a useful promotional tool, a gateway drug for FDI? No it wouldn’t. But that certainly does not preclude Brexit-inspired regulatory interventions that don’t fundamentally undermine the model.

In the context of a general transfer of powers to Westminster, the Conservative government will look to create competitive advantage along national lines. We have already seen the prime minister’s centralising instincts in the industrial strategy green paper – and this month the EU Withdrawal Bill, which is likely to significantly strengthen executive powers, will provide ministers with more scope for interference.

At the Department for Environment, Food and Rural Affairs (Defra), we have the archetypal reforming secretary of state in Michael Gove. His relentless campaign to raise standards at the Department of Education was well ahead of the approach that Brexit will necessitate across government departments. And that was before the current cabinet division that is driving inter-departmental competition. The need to demonstrate the policy opportunity that leaving the EU creates, means Gove is unlikely to let things remain as he found them at his new department for long.

Take water, for instance. It is affected by two main types of regulation: economic and environmental. Both are highly politicised, but one policy area, environmental regulation, has been predominantly driven by EU directives rather than UK legislation. This remains the case until Britain leaves the EU. Thus, there is medium-term potential for major environmental policy change, with an even greater likelihood of significant environmental policy change implemented through statutory instruments. But less understood and of more immediate concern are the implications for economic regulation.

A competitive framework in upstream (water capture and supply) would be a world first. But upstream competition is not the government’s objective in the context of Brexit. Upstream innovation could drive scalable and exportable products, which would meet the objectives of Defra, the Department for International Trade and the Foreign Office – and raise productivity in a sluggish sector.

The departure of Ofwat’s chief executive, Cathryn Ross, provides an opportunity for the secretary of state to influence not just legislation, but its interpretation. There is plenty of precedence for this approach.

Energy is less straightforward. The sector is likely to remain a target during this parliament, not because of Brexit but because of economic conditions, rising inflation and low wage growth.

Dieter Helm’s energy costs review is part of long-run reaction to price rises, which has ironically been caused by policy failures perpetrated by governments of both stamps. But this government is betting on British energy innovation to help give the overall economy an edge in the coming decade. Just glancing at the industrial strategy tells us all we need to know. A technology driven and automated future means cheap, secure energy. But we’re nowhere near making that a reality.

This means the government will become ever more preoccupied with gross value added as reality begins to bite. The obvious place to look is where they have direct oversight – the heavily regulated sectors – particularly as ministerial powers strengthen. The question is not if, but where and when.