A ‘Home Nations’ for Regulation? How to Reform the UK Internal Market Act

The Scottish Parliament has  produced its report following an inquiry conducted by the Constitution, Europe, External Affairs and Culture Committee into the implications for devolution of the United Kingdom Internal Market Act 2020. This post considers concerns raised by the report and how they might be addressed.

While recognising that the Act does not formally change the distribution of legal competences created by devolution statutes, the report highlights that how those competences are exercised is now subject to the legal discipline of the Act and its potential to disapply local rules that create obstacles to trade within the UK. In a detailed analysis, the report investigates the Impact of that legal discipline on the management of regulatory diversity within the UK and on the structures of relations not just between Westminster and Holyrood but also between governments and parliaments, and between policymakers and stakeholders.

In the written evidence I submitted to the Committee I highlighted key problems in the governance architecture of the UK Internal Market including its sole focus on new regulatory barriers to trade once they entered into force rather than seeking to manage divergences at a pre-legislative stage. Elsewhere I have argued that the more collaborative model of pre-legislative intergovernmental discussions that underpin the ‘Common Frameworks’ programme offers a better alternative. But as the Committee’s report highlights this approach also needs better parliamentary oversight and engagement with stakeholders. 

The cental reform recommendation that I make, however, concerns the blunt tool of the ‘mutual recognition’ principle contained in the Act. It is this principle which allows goods and services regulated in one part of the UK to be offered on the markets of other constituent territories of the UK internal market without having to comply with the local rules applicable in those territories. What is presented as the principle of mutual recognition is in fact a principle of ‘home nation control’. That has two effects.

The first effect is to give extraterritorial effect to the rules on the production and characteristics of goods (or the authorisation of a service) that have been made by policymakers in one of the home nations of the UK. That means that in Scotland, goods and services will be available on the Scottish market either because they comply with laws applicable to Scottish producers/providers OR because they are lawfully placed on the market in another part of the UK. That does offer consumers more choice but at the risk of consumer confusion as to the regulatory standards met by the products or services they obtain.

The second related effect is regulatory competition. The impact of allowing greater diversity in the goods and services offered on a local market is that there is not just competition between the goods and services themselves but also the regulatory standards with which those goods or services comply. This could lead to a race to the bottom particularly where price and regulatory standards closely correlate (the extreme version of this is if child labour is used to make cheap clothes). But it can also lead to a race to the top where consumers choose a more premium product that is equated with meeting high regulatory standards (this could be the case with organic food),

The Committee’s report contains a strong message that regulatory diversity is consistent with the devolution settlement and the UK Internal Market Act ought not to lead to a decline in the diversity which it also sees as driving innovation and experimentation. It could be argued that the mutual recognition/home nation approach does exactly that. After all, the effect is to put goods and services on a local market even though they comply with different rules. Nonetheless, two things are worth recognising.

Firstly, even in a very integrated internal market like the EU internal market, there is no unqualified principle of mutual recognition. The presumption in favour of the country of origin can be rebutted if the local jurisdiction can show that it wants to secure a particular regulatory objective and that the way in which it protects that objective is proportionate to its effect on trade. 

Secondly, in any market – including more loosely-integrated trade between countries – there is no unrestricted market access particularly if the impact of competition would be to drive down standards and eliminate local producers or providers from the market. Regulatory competition may be tolerated but only within a wider governance, legal and constitutional framework.

The problem of the mutual recognition principle in the UK Internal Market Act is precisely that it enshrines a blunt and unqualified version of home nation control and fails to offer the sorts of governance, legal and constitutional safeguards which otherwise place limits on the reach of regulatory competition. 

My submission to the Scottish Parliament’s inquiry addresses these concerns in three main ways. 

The first is to underline the point made earlier that the UK Internal Market Act focuses its governance solutions on new rules once they have entered into force rather than looking at to reconcile regulatory autonomy/divergence with open trade – a key theme of the Scottish Parliament’s report – through strategies focused on the pre-legislative stage. Here, notification obligations, stand-stills and collaboration between governments should be pursued.

The second recommendation is more fundamental. It involves replacing a blunt and unqualified principle of homutual recognition with an ‘equivalence’ approach. It is now 20 years since I published an essay on the mutual recognition principle which argued that the better normative foundation of the principle was to be found in a collaborative search between autonomous regulators for functional equivalences between their different systems. Provided the home nation rules secure at least an equivalent level of regulatory protection to that demanded by local rules, market access should be permitted. Mutual recognition as ‘equivalence’ is practiced within EU internal market and to some degree in international trade law. It works with the regulatory autonomy of jurisdictions but prevemts unnecessary duplication of rules or application of procedures where equivalent controls have been applied in the home state. 

An equivalence approach is, of course, being pursued in the UK’s relationship with the EU in financial services. This leads to formalised equivalence decisions to permit specified services to be given market access. This is both a bureaucratic and potentially politicised system and what is being advocated here is not this type of pre-decision to grant recognition to particular services. Rather, a trader in one part of the UK ought to be able to claim market access on the basis of compliance with equivalent rules in another part of the UK. Any denial of market access ought to be formalised in an administrative decision which could then be the subject of judicial review where the issue of equivalence could ultimately be determined.

There will, nonetheless, remain instances where there is no equivalence between the standards in one jurisdiction and those in another. Under the UK Internal Market Act, there is very limited scope for a local regulator to insist upon the application of different or higher standards in pursuit of a legitimate public interest goal. So the third recommendation is to follow the approach which the Act takes to the non-discrimination principle in demanding evidence that the local rule discriminates either directly or indirectly and does so in a manner that does not reasonably protect a legitimate aim of public policy. The balance that the Act strikes in respect of claims of discriminatory treatment is broadly the right approach and, in many ways, more balanced than under EU law. But the Act would still need to be amended to extend this approach to relevant requirements that currently only fall under the mutual recognition principle, and to expressly recognise protection of the environment as a legitimate aim that can counter-balance an economic interest in market access.

Acting upon these recommendations, many of the concerns expressed in the Scottish Parliament’s report could be effectively addressed. By amending the Act in the way described, a future UK Government could pursue home nation regulation but without introducing undesirable regulatory competition or destabilisng the principles underlying devolution.

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