Why small businesses really do struggle to understand red tape

Regulations are a part of everyday life. They cover everything from the cost and quality of the things we buy, to conditions of employment and the way our homes are constructed. Yet most of the time they go unnoticed.

As a set of rules which specify the minimum standards companies and individuals should follow, regulations are put in place because they are deemed to be in the broad public interest. Yet they only work when they are followed – and this only happens when the people responsible for implementing them understand what they should be doing.

A gap in knowledge could be the difference between one firm correctly using safety equipment and another firm putting their employees and customers at risk by not even knowing such equipment exists. Part of the difficulty in complying with regulations is they can be complex and often changed. This means firms have to work hard to keep their knowledge and procedures up to date. What was required ten or 20 years ago is often no longer the case now.

Small firms often find regulation particularly challenging simply because they don’t have the capacity to devote time or money to learning about it. It doesn’t help that regulations are often considered as unnecessary “red tape”, full of rules which appear to lack common sense. Should it really be illegal, for example, for companies selling bottled water to inform potential customers that drinking it will help with rehydration?

Even the recent changes in General Data Protection Regulation (GDPR) – all those emails asking you to sign up to mailing lists – which were publicised for years before the deadline, were complex. There is still plenty of confusion about what is actually required, so unsurprisingly, many firms have struggled to meet their new obligations.

Our research on some of the smallest firms in the UK tourist sector found that many owners and managers demonstrated considerable overconfidence when it comes to regulations. Many admitted having imperfect regulatory knowledge in areas fundamental to their operations, but still continued to run their businesses anyway.

This is worrying. All firms should have a functioning knowledge of the basic rules on employment, fire safety, discrimination, and health and safety. Would you prefer to stay at a bed & breakfast run by people who didn’t they should have conducted a fire risk assessment (and subsequently developed plans and installed equipment), or at an alternative establishment which complies with such requirements?

Trade associations are often considered a key source of support for small firms, assisting with limitations firms face because they are small. During our study we found that they do indeed provide lots of helpful information on things like rules and regulations.

Understanding the rule book

Yet, surprisingly, we found that membership of trade associations doesn’t really improve what micro-firm owners and managers actually know about regulation. It just makes them think they know more.

This means they risk making poor business decisions, potential prosecution for breaking the law, and even unnecessarily risk public safety – all because of their own misunderstanding of what the law really requires. This is likely to be caused by information overload and a false sense of security created by receiving – but not necessarily reading – the detailed information provided.

We also found that firms with a positive approach towards regulation generally had greater knowledge, so perhaps a healthy attitude is an important part of learning more.

This all suggests that we need to move away from viewing rules and regulations as being meddlesome and unwelcome red tape. Instead, businesses need to consider them positively as sensible measures which protect them – and the public. Trade associations could play a key role here, given their regular communication and trusted status with member firms. But they also need to find new ways of making sure the information they provide is both understood and acted upon.

While the debate about Brexit continues in the UK, politicians should keep in mind that firms are struggling to learn about and implement rules and regulations which already exist.

If Brexit results in significant changes in what companies should be doing – even if that means cutting red tape as some politicians claim – then the smallest companies are likely going to find it hugely challenging to make sure they know what they should be doing, never mind actually doing it.

J. Robert Branston, Senior Lecturer (Associate Professor) in Business Economics, University of Bath; Marc Betton, Researcher, University of Bath, and Phil Tomlinson, Associate Professor in Business Economics, Deputy Director Centre for Governance, Regulation and Industrial Strategy (CGR&IS), University of Bath

This article was originally published on The Conversation. Read the original article.