The Competition and Markets Authority has warned over the potential impact of inadequate regulation on competition in the UK and expressed concerns that regulation can stifle competition and raise barriers to entry.

The comments come in a review by the CMA of the evidence on the impact of regulation on competition in the UK - Regulation and Competition.

The CMA has published the report in response to a request by the Chancellor in last year's Spring Statement asking it to assess how regulation affects competition in the UK business environment.

The report summarises existing evidence about the impact of regulation on competition both in terms of the academic research and the way in which regulation is designed and implemented in practice.

The report says it is "well established" that effective competition is a key mechanism for improving outcomes for consumers. It leads to lower prices and better quality for existing products and services, and it promotes innovation in new products and services.

At the same time, different forms of regulation have an important role to play in supporting competition, for example by providing the legal and economic frameworks within which competition takes place.

However, the CMA cautions that there is a concern that regulation can have the effect of stifling competition, and thereby deprive customers of the benefits, for example through raising barriers to entry..

The process of reviewing and evaluating regulatory decisions to learn from experience and to improve the quality of regulation should be a key aspect of any government intervention in the operation of markets, the report says.

" This becomes even more important as government departments and regulators at all levels increasingly have to deal with new technologies and fast-moving markets, where the consequences of regulatory decisions are inherently more uncertain."

High-level findings identified by the CMA include:

• Greater regulation is – on average – associated with less competition. For instance, countries with lower levels of product market regulation tend to have more competitive markets and enjoy higher rates of productivity and economic growth.
• There is no clear evidence in the literature on the appropriateness of the current overall balance between competition and regulation in the UK.
• .Much of the harm to competition comes from regulation that creates or raises barriers to entry. By restricting innovation and market disruption, such regulation can have significant negative effects. A large number of studies have found that barriers to entry can come in a wide range of forms, not just absolute restrictions on the number of firms in a market, but also through other aspects of product market regulation, such as excessive compliance or administrative costs, which can have the effect of making entry more difficult or less attractive.

The evidence from the research specifically points to the need to guard against regulations which serve firms with vested interests – such as incumbent firms – and which have a disproportionate impact on smaller firms, at the expense of the economy at large.

"Significant scope for poorly designed regulation that harms competition"

The evidence also indicates that where policymakers and regulators do not establish and maintain channels of communication with new entrants and firms with new technologies or different business models, there is "significant scope for poorly designed regulation that harms competition."

The CMA concludes that overall, the evidence suggests that there is sometimes insufficient analysis of the impact of regulation on competition.

It also says that the evidence makes clear that there is scope for the impact of regulation on competition to be better incorporated into the Regulatory Impact Assessment process, commenting:

" In particular, we consider that there is insufficient prominence given to the impact of proposed regulation on dynamic competition and the process of innovation in the template used by government officials to produce Regulatory Impact Assessments."

"In cases where competition is not sufficiently considered, there is a higher risk that a regulatory measure could have major unintended impacts on competition and innovation in a market."

The CMA makes a number of recommendations in the report, all of which are underpinned by the key principle that there should be an increased focus on competition and innovation.

The report says the evidence shows:

"There are potentially large impacts on innovation from regulation which creates barriers to entry and from regulation which is too rigid and focused on incumbents. It is critical that policymakers and regulators understand and take into account how regulatory measures affect new entrants and innovation."

The CMA is calling for policymakers and regulators to avoid regulation which favours, incumbents or firms with specific business models, or that disproportionately harms smaller scale businesses in a sector.

It also recommends that policymakers and regulators should also make greater effort to engage with a wider range of market and industry participants, especially smaller scale firms, so that they better understand the immediate issues facing different types of firms.

Risk only large incumbents have necessary resources to engage consistently and effectively with regulatory processes

There is evidence to suggest that the way regulation affects smaller firms is different to the way it affects large firms, and policymakers and regulators should seek to understand both before implementing regulation. The CMA says:

"Our literature review identifies the risk that only large incumbents have the necessary resources to engage consistently and effectively with regulatory processes. As a result, policymakers and regulators need to make sure that the development of regulation is not unduly influenced by this particular group of stakeholders and ends up favouring them or their specific business models."

The Authority also wants to see more participative regulation where there is a greater degree of engagement between firms and the regulator in a market, with firms making formal proposals to the regulator.

Policymakers should also consider making greater use of regulatory "sandboxes" to trial new regulatory approaches which allow businesses to trial new products, services or business models in a live, realworld environment and with real consumers, without some of the usual rules and regulations applying.

The CMA draws attention to the fact that in the UK, the Financial Conduct Authority and Ofgem, two sector regulators, are already making use of regulatory sandboxes to facilitate small, temporary trials which can help the regulator during future policy development.

The report also recommends that the Government's Regulatory Impact Assessment template should be updated to incorporate a specific "Competition and Innovation" section which requires officials to briefly summarise how the proposed regulation is expected to impact on competition and innovation.

At present, the Regulatory Impact Assessment template does not refer to the impact on competition at all.

"Sector regulators should review their approach to Regulatory Impact Assessments to ensure that their policies are up to date and in line with "best practice", the CMA says.

Click here to download the CMA's Report Regulation and Competition.