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Ewan Sutherland: Economic Regulation in an Independent Scotland

The Scottish Government has set a date for independence, should it win the referendum, giving the period from 19 September 2014 to 23 March 2016 for the completion of the transition to an independent country and a full member state of the European Union and the OECD.

In terms of the regulation of sectors of the Scottish economy it is a very tight schedule. Doubtless some staff would transfer from UK ministries and agencies to their Scottish counterparts, but many specialists would have to be recruited, some from other EU countries and some Scots might return from overseas. Economic development argues for office locations away from Edinburgh (e.g., Airdrie or Motherwell). All the broadcasting and telecommunications licences would have to be renewed – the Scottish Government uses the term “honoured” – in effect split in two, one for Scotland and the other for England, Northern Ireland and Wales. A considerable additional burden would fall on the Scottish Parliament from September 2014, debating new legislation and overseeing the creation of new agencies and ministries.

The simplest route would have been to convert the current UK statutes into Scottish statutes, with minor changes (e.g., to add Scottish to the names of the various regulators), and to begin finding offices and staff for the new bodies in order to be ready for the first day of independence. This could be a simple one clause bill, with a schedule of statutes and statutory instruments, most of which are transpositions of EU directives.

Instead of which the Scottish Government proposes a more arduous route, which entails new transpositions of at least some of the EU directives in order to create three new bodies:

  • National competition authority
  • Multi-sector economic regulator
  • Consumer authority

The functions of the existing UK sector regulators (i.e. OFCOM, OFGEM, and the Office of Rail Regulation) and of the Water Industry Commission for Scotland are to be put into a single body, but stripped of any competition law powers and responsibilities for consumer activities. This is sufficiently complicated that it would be easier to start from the EU directives and to transpose them afresh, rather than try to amend existing UK statutes. However, the Scottish competition authority might be a simple replication of the recently created Competition and Markets Authority (CMA).

The plan of the Scottish Government omits any comment on the Competition Appeal Tribunal (CAT), created by the Enterprise Act 2002, which hears appeals from the various economic regulators and the CMA. The Scottish Government might intend to create a Scottish CAT or it might envisage appeals being heard directly in the Court of Session. The volume of work is not enormous, with the CAT handing down 31 judgements in 2012, plus a further 9 judgements from the Court of Appeal of England and Wales. While the Scottish Government raises the issue of gambling and suggests there should be tighter regulation, no mention was made of a Scottish Gambling Commission, nor whether its activities would be split between economic regulation and consumer protection. Many online gambling services are regulated in Alderney and Gibraltar, based on a “white list” exemption.  The UK Lottery is to continue in Scotland, presumably with split franchises, one under a Scottish regulator and the Scottish courts.

Long before the day of independence the new proto-regulators would be required to set out their stalls, with draft policies and frameworks for licences and franchises, even if they proposed few changes. Best practice in OECD countries requires consultations, publication of impact assessments and the opportunity for appeals, all of which would take time. Consequently, the three or more new bodies would need to be operational many months, perhaps a year, before independence, especially where licences or franchises were involved. This would also allow them to begin attending as observers the many European Union committees which have been established to harmonise economic regulation, in which member states are obliged to participate.

That the UK system for economic regulation could be improved upon is beyond question, but trying to do so while handling such a large volume of legislation and creating entirely new institutions seems overly ambitious. Whitehall is frequently alleged to have “gold plated” EU directives, slipping things into bills and statutory instruments that were not in the originals. One option would be to invite the OECD to conduct a peer review of Scottish regulation in 2017 or 2018.

A specific effect of the new structure would be to create uncertainty in the market for broadband. The familiar white panel vans and street cabinets labelled “BT Openreach” frequently seen on UK streets are the result of a complex arrangement between BT and OFCOM under its competition law powers, which would be transferred to the new Scottish competition authority not to the regulator. Splitting the agreement along the border would require costs to be recalculated and new administrative and technical arrangements to be put in place. Given so few people admit to having read, let alone understood, the Openreach agreement, reopening it for negotiation with a competition authority against a tight deadline would be very challenging.

It is frequently stated that Scotland is compliant with EU acquis, which is disingenuous, since it is only ever tested at member state level (see, for example, EC infringement proceedings on energy and FCO report to the House of Lords). Adopting the necessary legislation to make Scotland compliant with the directives would take months, but even then it would not be compliant with the EU acquis.

The current accession and candidate countries in the Western Balkans and Turkey have been supported and monitored for several years in their migration towards compliance with regulation of economic sectors. The details are set out in the most recent report by the EC on Enlargement strategy and main challenges 2013-2014. The relevant negotiations are conducted in “chapters”, notably, 8 for competition policy, 10 for information society & media, 14 for transport, 15 for energy, and 20 for enterprise & industrial policy.In such evaluations, the EC seeks to determine whether legislation has been implemented, for example, whether regulators are independent. Ironically, this is a subject not discussed by the Scottish Government. There is also a substantial body of secondary legislation, such as EU decisions and recommendations, that can only be seen to be effective when implemented.

Similar evaluations were applied to the member states admitted in 2004, 2007 and, most recently, to Croatia. Thus were, say, the Spanish government to request the EC to conduct a technical evaluation of the compliance of Scotland, it would seem very ordinary to the other member states.

Minimally, the Scottish Government will need to prepare detailed plans and timetables for the eventuality of a yes vote.

Ewan Sutherland is a Research Associate at the University of Witwatersrand Link Centre, South Africa

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