Regulatory Impact Analysis (RIA)
The OECD defines Regulatory Impact Analysis (RIA) as "a systemic approach to critically assessing the positive and negative effects of proposed and existing regulations and non-regulatory alternatives".
RIA is an empirical methodology aimed at designing targeted regulations to achieve reasonable policy aims with the minimum burden on those affected. The technique involves analytically examining potential impacts arising from government action and communicating this information to decision makers in terms of positive (benefits) or negative (costs) effects. This allows decision markers to consider the full range of benefits and costs that will be associated with the proposed regulatory change and take informed policy decision.
Need for RIA
Economic and financial regulations aim to achieve social goals, provide consumer protection and help improve economic performance by promoting competition. However, they do end up creating unintended and often unavoidable barriers to trade and could be considered as unnecessary burdens to business. Thus, whenever a new regulation in put in place or an existing regulation is reviewed, it is desirable to assess and understand the alternatives available, the costs of compliance and enforcement, potential impact of new or changed regulation and whether it would achieve the desired objectives. In essence, to ensure the welfare of the regulated some relevant questions on these lines need to be posed and answered to make any new regulation or revised regulation a success.
RIA is a tool that helps do this. RIA facilitates understanding of the impact of regulatory actions and enables integration of multiple policy objectives, improves transparency and consultation, and enhances accountability of governments and regulators. It not only brings the actions of decision-makers under public scrutiny and highlights how their decisions impact society as a whole, but also mandates greater information sharing by them.
The methods used by policymakers to reach decisions on regulation have been classified into five categories, by the OECD, viz., expert, consensus, political, benchmarking and empirical. RIA is part of the empirical approach to decision-making. RIA meets the following criteria for good policy-making, according to the OECD:
- Improve understanding of benefits and costs of regulatory action: RIA is an evidence-based approach to decision-making, and often draws on economic empirical evidence in assessing benefits and costs.
- Integrate multiple policy objectives: RIA can be used as an integrating framework to identify and compare the linkages and impacts between economic, social and environmental regulatory changes.
- Improve transparency and consultation: RIA is closely linked to processes of public consultation, which enhances the transparency of the RIA process, provides quality control for impact analysis, and improves the information provided to decision-makers.
- Improve government/regulators’ accountability: RIA can improve the involvement and accountability of decision-makers by reporting on the information used in decision-making and demonstrating how the decision impacts on society.
Regulatory Impact Assessment Statement
Each RIA exercise results in preparation of a Regulatory Impact Assessment Statement (RIAS) which is written at the end of the policy analysis and development process and is a summary of the analysis done. The various components of a RIAS are:
- Description: This section outlines the regulations, defines the problem and shows why action is necessary. All problems are detected, defined and described; each is fully analyzed to understand nature and implications and government/regulatory action is justified.
- Alternatives: Here all the options regulatory, non-regulatory and status quo are considered. These are examined in detail to demonstrate that new or revised regulations will help solve the problem. Solutions are considered based on performance requirements as alternative to prescriptive standards.
- Benefits and Costs: This section quantifies the impact of different options. Attempt is made to address direct and indirect benefits and costs and impacts on environment, government, business, workers, consumers, etc. and also look at impacts on sustainable development and balance societal and economic goals. An analysis of regulatory burden of all alternatives is done to recommend solutions which impose least costly information and administrative burden.
- Consultation: This part of the statement shows the results of consultation done with all the interested parties in coming up with a policy solution
- Compliance and enforcement explains the policy on conformity to the regulations and tools to ensure it is adhered to. It identifies and informs those responsible for specific regulatory actions. The document, in this section, sets out the compliance objectives, operational plans and budgets and also established redressal mechanisms.
RIAs are produced in many countries, although their scope, content, role and influence on policy making vary. In the United Kingdom, RIAs have been a key tool in helping improve the quality of regulation and reduce unnecessary burdens on business. RIAs have been produced by Central Government departments for many years using guidance produced by the Better Regulation Executive (BRE) in the Cabinet Office of UK. BRE, is now part of Department for Business Innovation & Skills and is responsible for the RIA process.
The European Commission introduced an impact assessment system in 2002, integrating and replacing previous single-sector type of assessments. In the European Commission perspective, RIA is a process aimed at structuring and supporting the development of policies. Its RIA framework is based on an integrated approach which analyses both benefits and costs, and addresses all significant economic, social and environmental impacts of possible new initiatives. RIA has been adopted in most OECD (Organization for Economic Co-operation and Development) countries. RIA has also been undertaken in middle-income developing countries, especially South Korea and Mexico. In South Africa, RIA was approved by the Cabinet in February 2007 and the guidelines were published in 2012.
Indian context: RIA for financial sector
Financial Sector regulators in the country do follow a consultative process while taking important policy decisions. Draft policies/regulations are generally placed in public domain by RBI, SEBI and others to seek public comments, which are suitably incorporated while taking a final decision. However, there is no RIA framework in the sense that exists in other jurisdictions.
The recent report of Financial Sector Legislative Reforms commission has, inter-alia, made suggestions on process of making regulations. In its chapter 4, the Commission recommends that regulation making process should be directly overseen by the board of the regulator. It further suggests effective public participation in regulation making process, through consultative process, recommending that the consultative document should inter-alia include an analysis of costs and benefits of the proposed regulation.
One needs to wait and watch how and when these recommendations are implemented.
Also, such a RIA needs to be carried forward to other sectors of the economy.