Continued improvement of the “Better Regulation” system

The affected EU Regulation  

 All legislative proposals tabled by the EC during its next 5-year term (2024-2029).
 

The affected Danish regulation    

All Danish legislation implementing EU legislation tabled by the EC during its next 5-year term (2024-2029).
 

Affected businesses

All Danish and European companies subject to EU legislation. According to Statistics Denmark there are around 300,000 Danish companies^.[3]
 

Reasoning behind the recommendation

When preparing legislation, the EC is required to carry out impact assessments (IA) of initiatives that are likely to have significant economic, environmental or social impacts. IA is about gathering and analysing evidence to support informed policymaking, including the pros and cons of different courses of action. The EC's Regulatory Scrutiny Board (RSB)^[4]  scrutinises the quality of all draft IAs before the EC can proceed with the proposals. This has considerably improved the quality of legislation. However, despite the good intentions behind the measure, there are some shortcomings that need to be addressed:

• It is problematic that IAs are not required for all EC initiatives. Hence, there are examples of recently proposed or adopted pieces of legislation that have not been subject to IAs, but that have or will have major economic impacts on the businesses in scope. A recent example is the EC proposal for regulation on the revision of the EU’s electricity market design from March 2023. The proposal has not been subject to an IA but is expected to have a significant economic impact on the businesses in scope.  Another example is the EC’s proposal for a directive on Seasonal changes of time from 2018. It is still awaiting Council's 1st reading position among other things because of uncertainty about the impact of the proposal.
   
• Amendments made to proposals in the course of negotiations with the European Parliament and the Council may significantly alter the implications of EU legislation for citizens and businesses. However, at this stage of the EU decision making process IAs are not carried out. A recent example is the proposed Artificial Intelligence Act where the compromise text most likely will include insurance in the high-risk list without any prior IA. The directive on pay transparency provides another illustrative example. During the interinstitutional negotiations, the scope of the directive’s main provision was widened considerably (from companies with +250 employees to companies with +100 employees) without prior IA. Both the expected positive effects and the expected costs benefit from economy of scale (according to the original IA) and the directive are thus likely to create increased risk of disproportionate burdens - especially for SMEs. In fact, the significant increase in first reading agreements between the Parliament and the Council often entails amendments to the EC’s proposals that have not been subject to IAs. This adds a high degree of uncertainty for citizen, consumers, and businesses about both the effectiveness and the burdens of the proposals.
   
• IAs are in some cases strongly deficient and do not establish a causal link between the proposed rules and the desired objectives. The IA that accompanied the EC’s proposal on the Solvency II review needed further clarity on how the proposal would impact each national market. Another example is the IA accompanying the EC’s proposal establishing a framework for the recovery and resolution of insurance and reinsurance undertakings (IRRD) from 2021 which is basically based on data from before the Solvency II regulation entered into force in 2016. In addition, the Council’s general approach includes an amendment on the financing of certain elements of the proposal which has not been subject to a prior IA.
   
• The quality and the specificity of the impact assessments is vital for the process and outcome analysis of a proposal. The Commissions’ impact assessments sometimes lack usefulness or clarity in terms of analysing the costs and consequences of the proposed regulation, these quantifications should be available for the Commission. Therefore, it is suggested that the Commission always discloses as many background variables for their quantification on costs as possible. With a starting point in the SCM-model, examples on background variables could be NACE-codes, estimated FTE’s, and the personnel groups expected to undertake the regulatory activities, etc.

The EC is already “Thinking Small” and makes use of its “SME test”^[5]  when drafting legislative proposals. However, experience has shown that the Commission DGs do not use the test in the same way or do not use it at all. SMEs make up 99 % of EU’s companies and they are the backbone of the EU economy. Legislative requirements and burdens hit them proportionally harder, as they often lack economic and human resources to comply with the same requirements as large companies. Moreover, complying with difficult requirements might eat up their financial growth and prevent them from growing further. Therefore, it is of outmost importance that EC takes into the account the significance each proposed act of legislation will have on SMEs in particular. 

Consultation processes are not always following the Better Regulation principles. For example, recent stakeholder consultations on the upcoming Retail Investment Strategy (RIS) have been unsatisfactory. In May 2022, the EC launched a call for evidence on the RIS with only 4 weeks to provide stakeholder feedback. There is also a new phenomenon, which is labelled “targeted consultation” or “confidential consultation”. For example, the EC in August 2022 requested input to its confidential consultation on ‘value for money’, and the time to respond was only one week. Stakeholder consultation is an essential element of policy preparation. Good policy preparation is built on openness and participation. Unreasonably short consultations make it difficult for stakeholders to contribute in a constructive and useful way - especially for smaller companies it might be difficult to react timely and to influence legislation that affects them.   

When preparing legislation, the cumulative impact of individual rules and the coherence of the entire EU regulatory framework are frequently not taken into account, resulting in inconsistencies, overlaps and duplication between different pieces of legislation. The burden to properly interpret and apply the different provisions in conjunction is passed on to businesses and is detrimental to their competitiveness. There is also a risk of consumers being overwhelmed by repetitive or confusing information. For example, there are currently 339 different pieces of information at the precontractual stage for the sale of an Insurance Based Investment Products (IBIPs), as a result of multiple applicable EU legislative acts, e.g., PRIIPs, IDD, Solvency II, GDPR, DMD, ecommerce, SFDR. The comprehensive requirements in the numerous, new pieces of regulation on sustainability (e.g., the Corporate Sustainability Reporting Directive, the Taxonomy Regulation and the Disclosure Regulation) that have been adopted in recent years are also examples of lack of consistency and potential overlaps also in regard to other sector specific regulation. 

Deficiencies in the EU law-making process often leave companies with insufficient time to implement the changes they need to make to their processes and to train staff and with increased implementation costs. This is especially the case when the EC in the basic act is empowered to adopt either delegated acts or implementing acts (level 2); something that becomes more and more frequent. A recent example of this, is the DORA-regulation that entered into force in January 2023 and shall apply from January 2025. The businesses in scope will not be able to adapt to the new requirements of the regulation until very late, because the detailed technical standards (level 2) are to be developed over the next 18 months. Thus, businesses will be left with very little time to implement the new requirements before they apply. Another example is the Disclosure regulation that entered into force in December 2019 and should apply from March 2021. The regulation imposes extensive reporting requirements to be adopted by the EC as level 2 regulation. The adoption of the level 2 regulation was, however, delayed until April 2022 and entered into force on 1 January 2023 – i.e., almost two years after the level 1 regulation entered into force. It is unrealistic to expect the businesses to begin implementation based on draft texts without the legal certainty of the final regulatory outcome. 

The von der Leyen Commission’s ambitious agenda and corresponding large volume of legislative proposal has in some cases resulted in rushed negotiation processes, where negotiators and other relevant stakeholders have not had the necessary time to evaluate the effects of amendments, including whether the measure is proportionate, and where quick political achievements have been prioritised over the quality of the new rule. This increases the risk of low-quality legislation, which is particularly unfortunate regarding e.g., the Digital Agenda, where basic regulation is currently being established. 

Political decisions should be made by politicians and purely technical decisions by officials. Unfortunately, this is not always the case; especially in situations where decisions are controversial or because of time pressure it is sometimes assumed that level 2 or 3 measures can address level 1 shortcomings. In addition to this the increase in the delegation of powers to the EC in the basic legislative acts makes it difficult to predict the actual and administrative consequences of the proposals, as these will depend on how the enabling powers are implemented in practice. For instance, the proposed Regulation on Markets in Crypto-assets has around 20 delegations of power to the EC and the EC’s proposal establishing a framework for the recovery and resolution of insurance and reinsurance undertakings has 16 delegations of power to the EC. 

In the financial sector responsibility has in many cases been transferred to the European supervisory authorities (ESAs) for crucial technical elements at levels 2 or 3. This has led to the ESAs becoming quasi-legislators, and the role of the co-legislators in the adoption of level 2 measures lowered to either fully rejecting or accepting the text proposed by the ESAs and the EC. In addition, there are examples where the ESAs’ actions have resulted in the blurring of the roles and responsibilities between themselves and legislators, such as by drafting levels 2 and 3 measures that are not in full compliance with level 1 or go beyond the level 1 mandate. On top of this there is little transparency as to the preparatory work at the administrative level of the ESAs.

After a longer period of successive crises and a considerable use of exemptions to the Better Regulations principles – the Commission needs to return to the established principles so that it can be ensured that the legislation is proportionate and fit-for -purpose. 5 year of exemptions is not an emergency situation – it is a new situation.

Expected consequences for industry and commerce

It is expected that better regulatory quality and better impact assessments will reduce administrative burdens, simplify regulation, and contribute to regulation that delivers on its intended objectives. This will be for the benefit of both businesses and society at large.

Economic consequences

Considering that it is about all legislative proposals tabled by the EC during its term 2024-2029, the economic consequences will by their very nature be considerable.

Certain considerations

Being a small EU Member State, Denmark has a particular interest in thorough impact assessments. The larger Member States are generally taken into account.

Current Danish efforts 

It is the Danish Business Regulation Forum understanding that Danish governments in recent years have focused on ensuring simpler, better and evidence-based EU legislation while avoiding unnecessary burdens. Having said that, the Business Regulation Forum is not aware of any specific Danish initiatives at EU level in this area.

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_{[3] Statistics Denmark: https://www.dst.dk/en/Statistik/emner/erhvervsliv/erhvervslivets-struktur/firmaer-og-koncerner#}

_{[4] The Regulatory Scrutiny Board has an internal quality control function within the Commission at the early stages of preparing legislation, to make sure Commission proposals are based on clearly defined problems, on the best available evidence, are proportionate and take into account the full range of stakeholder views. Through its opinions, it gives approval for work to progress to proposals that satisfy these criteria, unless the analytical work is deemed not to be up to standard.}

_{[5] The “SME test” analyses the potential effects the legislation will have on SMEs, with the aim to improve the business environment for the smaller players in Europe}

The incoming EU-Commission should maintain and reinforce its focus on the “Better Regulation” agenda. In this respect particular attention should be paid to:
 

• Impact assessments should be performed on all EC initiatives. In exceptional cases of urgency or emergency the proposal could be put forth without, but a full impact assessment study should then be launched immediately so that interim findings and evidence can be included into the legislative process. The analytical documents currently provided in case of derogations are (whilst helpful short term) not a substitute for an impact assessment. There needs to be a strict definition of such exemptions/derogations – not just vague formulations on “severe difficulties” or the “threat of severe difficulties”.
   
• The EC should reiterate its call on the European Parliament and the Council to document the effect of their amendments in terms of anticipated impacts. Significant amendments made to EC proposals in the course of trilogue-negotiations should be followed by an updated impact assessment for the overall compromise.
   
• The EC should develop and complete a more thorough “SME test” and more detailed impact assessments that focus on SMEs and the direct and indirect impacts. It should be mandatory to include a dedicated section on SMEs in the impact assessment report. Furthermore, the EC should commit to an identical use of the test throughout all DGs.
   
• The improved “SME test” should focus on the economic consequences and potential of a legislative proposal with focus on compliance costs and innovation and on factors that are out of SMEs’ control. Moreover, the test should reflect that there are different types of SMEs and that they will not be affected alike. Finally, when preparing a legislative proposal the EC should leave sufficient time for the consultations, considering that SMEs might need more time or different type of information to reply in time and relevantly. The Fit for the Future-platforms^[6]    recommendations on this topic (which will be finished in 2023) as regards the SME-test should be taken fully into consideration.
   
• Fully implement the suggested new “Competitiveness Check” to ensure the impact assessments integrate all expected impacts of each proposal on cost and price competitiveness, international competitiveness and the capacity to innovate. This should be complemented by assessments of the cumulative effects of different policy measures as well as applying the promised approach of offsetting burdens in the same areas as others are applied so that the combined level of burdens does not rise unnecessarily.^[7]  
   
• All relevant stakeholders should have a reasonable period, in which to make informed and effective contributions to EC consultations.
   
• To ensure coherence and consistency and avoid overlaps and duplication across EU legislation, the cumulative impact on businesses of proposed and existing rules should be assessed — with thorough consumer testing, where relevant — and legislation should not be developed in silos: e.g.  the Commission needs to make sure that legal definitions of the same concepts are consistent across EU legislation and that legislation fits together. In this respect the incoming EU-Commission should priorities ensuring that the goal of the initiative on reducing reporting requirements by 25 pct., as announced by president von der Leyen in March 2023, is met. Thereby focusing on the extensive task on streamlining and simplifying the different reporting requirements that the European companies are met with. This should include assessing reporting requirements that follows level two regulation and ensuring that companies are not met with demands for double reporting or unnecessary overlap in different reports.
   
• Short implementation timelines should be avoided. It is crucial that businesses be provided with enough time to implement new legislation. There need to be separate timeframes for developing level 2 and 3 measures and for industry implementation. The industry needs to have at least a year for implementation after final Level 2 texts are published.
   
• To improve the regulatory processes, negotiations should not be rushed, and in-depth analysis should be undertaken to ensure that any new legislation is fit for purpose from the start and is in coherence with already existing definitions of concepts. The regulatory framework should be kept as stable as possible, avoiding “quick fixes” and interim solutions.
   
• Priority should be given to jointly reaching high-quality and technically sound legislation with no legal uncertainty. To this end, co-legislators need to fully play their role of brokering the political compromise. Hence, the basic legislative acts should limit the number of mandates for level 2 (delegated/ implementing acts) and level 3 measures (guidelines etc) to what is technically necessary, i.e., level 2 measures shall be limited to technical solutions and never replace decisions that should be made at the political level in the basic act. The same goes for level 3 measures.

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_{[6] See more about the Platform here: https://commission.europa.eu/law/law-making-process/evaluating-and-improving-existing-laws/refit-making-eu-law-simpler-less-…}

_{[7] Page 17 – Communication from the Commission: “Long Terms Competitiveness of the EU” - https://commission.europa.eu/system/files/2023-03/Communication_Long-term-competitiveness.pdf}

Regeringen tiltræder anbefalingen. Regeringen forfølger løbende ’bedre regulering’ dagsordenen og den principielle nødvendighed i, at de lovgivende organer i EU træffer beslutninger på et oplyst grundlag, herunder på baggrund af konsekvensvurderinger. Regeringen vil således fortsat arbejde for, at Kommissionen – som norm – udarbejder grundige konsekvensvurderinger som skal medfølge hvert enkelt EU-lovforslag ved fremlæggelse. Hertil vil regeringen have et generelt fokus på, at Kommissionen bruger den eksisterende bedre regulering-toolbox mere målrettet og bedre, end den anvendes i dag. Dette vil indebære involveringen af relevante interessenter, brugen af værktøjerne i SME-testen, konkurrencetjekket mv. Afslutningsvis vil regeringen fortsat arbejde for at begrænse brugen af delegerede retsakter fra Kommissionens side, så disse alene dækker tekniske og mindre væsentlige elementer.