Whither Regulation, A Statement of Purpose
The traditional debate between regulation and deregulation completely overlooks the purpose and the benefit of a carefully tailored and focused regulatory system that promotes commercial activity by protecting trust in markets. Within this framework, the purpose of business licensing, is to ensure that certain types of businesses that pose risks to (1) health, (2) safety, (3) the environment, or (4) commercial reliability (which is violated through fraudulent intent or insufficient capitalization) are registered with the city.[1] This allows certain risks to be pre-cleared, puts business types that pose such risks on notice, and/or ensures these businesses are then regularly monitored by the city thereby preventing harm and making the enforcement of rules to protect the public more manageable.[2]
Licensing protects:
· Health
· Safety
· The Environment
· Commercial Reliability
Even in the best regulatory systems flaws creep in over time, innovation changes the playing field for some industries while others atrophy, and inefficiencies develop suggesting the need for regular (preferably data driven) review of regulations. The incremental addition of evermore licensing requirements entrench certain interests who have invested in the regime, and can provide barriers to new entrants.
Flip the Presumption
Given the accumulation of harms to the city-wide business climate over time, and because the stance of regulation is necessarily adversarial to business through the application of restrictions and the requirement of information sharing, the regulatory review process must take the opposite perspective from the day to day activity of regulating. A comprehensive review must force regulators to justify each regulation anew, but also opens the door for adding regulations to industries that present similar risks of harm. The presumption is therefore against regulation and licensures absent an active public interest justification (over time jurisdictions can develop data metrics for aiding this justification, but such regimes take time and expenditure to build).
Simple review criteria used internationally for regulatory analysis include:
· Legality: Is there a basis in the parent law or higher ranking regulation to require a license? Secondarily, any such basis may also be reviewed against the next two criteria.
·Necessity: Is the license used to protect health, safety, the environment, or commercial reliability.
·Business Friendliness: (1) Can the process be further streamlined? (2) Is it overly prescriptive? (3) Is it performance and outcomes focused? (4) Is it accessible and transparent?
Finding appropriate regulatory balances between protecting the public interest and incentivizing as much positive and legitimate business activity as possible is an ongoing challenge for every jurisdiction.
Hindrances to finding this balance include other purposes, less clearly in the overall public interest, that can become intertwined with local regulation by intent or happenstance that should be resisted when possible. Some regulation is purposefully or accidentally (A) protectionist, enfranchising current businesses at the cost of raising barriers to new business models. Other regulation may be based, at least in part, on (B) community standards, at times choosing the preferences of portions of a diverse community over the preferences of others. [3] When regulatory review happens, strong voices can emerge to continue these purposes, whether or not they are in the overall best public interest.
Examples of protectionist purposes: the widespread restriction of manufacture direct car sales that is restricting Tesla from the market in many states.
Examples of community standard restrictions: blue laws generally.
Given presumed interest group push back to reducing barriers to entry, total deregulation of even individual regulated industries on the municipal level is frequently political infeasible even if it is advisable, see the national attempts and push back against deregulation of cosmetology. Instead, (i) collapsing categories, (ii) removing individual aspects of existing licenses, and (iii) closely inspecting whether business and professional licensing is duplicative may be far more feasible.
Let Requirements Drive Licensing
Borrowing an idea from computer science, which is frequently the theoretical framework driving organizational processes everywhere today, a regulatory redesign in DC should let the requirements drive the process. While licensing is looking to address four types of potential harm, there are two perspectives that cross cut those four harms: prevention versus remedy.
Two perspectives on licensure:
· Prevention
· Remedy
Ultimately, the city is looking for a balance to ensure enforcement is managed but not overbearing and unnecessarily costly. That can be done with specifically tailored laws and requirements, or broader prohibitions that provide more discretion on the part of both enforcers and industry. A mix of the two is usually preferable, though the dividing line can be difficult to find. Therefore, enforcement resources, priorities, and realities play heavily in considering what and how a municipality should regulate.
This tension is demonstrated through two conversations that war with each other when the idea of either new regulation or deregulation, partial or full, is in play. The first argument that matches the presumption of the proposed regulatory review is that business can and should be responsible and mature enough to not pose serious risk to the public, as it is not in their interest to do so, and there are court remedies if and when businesses fail to meet such requirements. The other argument is that preventing harm which we know occurs is more important than providing remedies, as sometimes an after the fact remedy is infeasible or insufficient to fully repair the harm, and therefore the government needs to step in before something bad happens.
The balance, thus, in the four types of harm that the government is seeking to address through business licensure is whether or not a post-violation remedy is “good enough”. Sometimes it is; sometimes it isn’t.
Examples where prevention is preferable: Deregulation of food safety would likely result in food borne illness and compromise the health of more vulnerable populations, leading to extreme health impacts and outsized public health harms. Deregulation of environmental waste could lead to the destruction of an ecosystem which may be permanent or could take decades to rebuild. Deregulation of anything related to the fire codes could lead to major disasters and loss of life. In each of these cases, prevention is far preferable to remedy.
Examples where remedy may be sufficient: Financial harms through economic loss or non life-threatening property damage, provided that the responsible party can be located is and not judgement proof, can be remedied through cost recovery. If a moving company steals or breaks someone’s furniture, the person can be compensated and replace their property. If a dealer sells someone a lemon, that person can be compensated for the cost and the inconvenience. In such cases, prevention has certain costs and benefits, and post-violation enforcement may be sufficient.
The balance, then, may be found in identifying businesses that regularly or easily pose a risk, preventing harm through training and monitoring when the harm too drastic to remedy, and if remedy is appropriate simply ensuring that remedies are fully available if and after the fact (through bonding requirements, insurance, etc).
Of Remedies
The prevention methodology is the default stance of municipal regulation, and therefore requires less exploration here. The remedies approach, however, offers a multi-dimensional option in regulation that is not as frequently discussed in the regulation/deregulation debate. Theoretically, remedies are available from any business or individual, but the standard deregulation argument overlooks the need/benefit of government securing the availability of remedial options. Securing remedies can be appropriate in two divergent circumstances of where commercial reliability is at risk: fraudulent activities and insolvency.
Remedies solve for:
· Fraudulent Business Activities
· Insolvency (inability to provide the product, the service, or a refund)
Indeed, many of the requirements already included in the category business regulations of DC contemplate remedies to address these possibilities.
Examples of requirements to address fraud: passport photos, agent registration, ID verification, and criminal background checks.
Examples of requirements to address insolvency: bonding requirements, insurance requirements.
Examples of overlapping requirements that address both: high licensure fees (to ward off less than serious attempts to run businesses that are prone to abuse or failure).
Indeed, many of the requirements already included in the category business regulations of DC promote ease of remedy in situations the city has presumed remedies may be frequently needed or frequently difficult to obtain due to low capitalization of businesses or business holder’s incentives or propensity to dodge judgement. Put another way, for a remedy to be successful and therefore a reasonable approach, plaintiffs have to be able to find the defendants and the defendants need to be able to pay for the harm.
Compromises & Flipping the Burden
One challenge in determining which businesses pose specialized risks and warrant separate licensing treatment, whether prevention or remedy preparation, may be an absence of verifiable data. Thus until a data collection regime to study harms is put in place, many of the decisions about risk will rely upon expert opinion (the agencies) and democratic opinion. Fear, warranted or unwarranted and self interest may oppose any efforts at deregulation, and so it may be advisable to address some anticipated concerns in advance.
While some risks will be clear cut, others may be questionable. For questionable risks, the approach could be to lessen but not fully remove specialized regulation. Reduce monetary barriers and onerous licensing activities, but retain additional data collection of deregulated business activity to enhance enforcement in the event that deregulation of the industry was premature. This places the burden of discovering and reporting harm onto the consumer, but continues to provide an interim mechanism for government agencies to engage the situation administratively before involving judicial processes. This step down of the regulatory burden could be considered the difference between: certification and registration.
Two ways to regulate and license:
· Certification
· Registration
Certification is the process by which the government checks and verifies information. Registration is simply passive data collection. One way to streamline and deregulate is to move from certification to registration for industries where harms have not been prevalent or severe recently. And because registration is a low barrier, it can be expanded to non-business financial activity to help collect data on emerging economic activity and provide basic information to aide enforcement of remedies later.
Summary
Overall, the approach to full scale regulatory review is to analyze each regulatory category and requirement to either justify it or remove it:
1. Consider whether the license protects health, safety, the environment, or commercial reliability.
2. Determine whether prevention or a remedies standard is appropriate to the risk of harm.
3. Combine license types that protect against the same harm in the same way.
4. Consider reducing the requirements from certification to registration if harm is minimal or unlikely.
5. Remove unnecessary categories that could not be justified or combined, and remove individual requirements that serve a duplicative purpose.
[1] Many references to the purpose of licensing, particularly in the context of DC, seem to leave out financial risks and fraud as one of the basis reasons. However, these are quite clearly demonstrated through bonding requirements, forms requirements, etc.
[2] This memo is prepared in consideration of business licensing, not occupational licenses, though the basic framework can be applicable given the high level of overlap in purpose and effects.
[3] Community standards built in to regulations through the democratic process are very appropriate, but those introduced through bureaucratic processes are inherently suspect. As the genesis of such standards can be hard to trace over time and community responses fluctuate, however, it is simply appropriate to have democratic bodies conduct a fresh review regularly.
