The regulatory Growth Duty is hampering growth

This article was initially published in Centre Write.

In 2017, the previous Conservative government introduced the Growth Duty, the statutory requirement that regulators should “have regard to the desirability of promoting economic growth.” This sounds like a fair enough stipulation, one that should prevent regulators such as the Financial Conduct Authority (FCA), Competition and Markets Authority (CMA) and the Water Services Regulation Authority (Ofwat) from stifling the economy.

However, the Growth Duty has become a farce: a regulatory contradiction that has turned regulators — who have a natural inclination to enforce rules blindly — into arbiters of economic growth. When regulators attempt to promote economic growth as rule-enforcers, they are caught between two stools. The result is either mission creep or defensive inaction.

For politicians, on the other hand, the Growth Duty is a fig leaf used to indicate alleged efforts to fix Britain’s sclerotic economic growth all the while changing nothing.

By the time you read this piece, the House of Lords’ Industry and Regulators Committee would have concluded its call for evidence as it investigates the relationship between regulators and economic growth. So, now is as good a time as ever to acknowledge the uncomfortable truth that the Growth Duty is classic piece of regulatory theatre whose curtains need to fall.

Take for instance the FCA’s Senior Managers & Certification Regime introduced in 2016 at the height of the post-financial crisis accountability theatre. Its aim was to establish individual accountability in financial services. Last year alone, the FCA approved 5,264 senior managers. Since its inception, the Regime has grown to be a behemoth beyond recognition, burdening firms with onerous Solvency II compliance requirements, creating processing delays that hamper firms’ ability to engage with urgent emergencies and fostering a culture of over-compliance that treats accountability as a rubber-stamped regulatory overhead rather than a genuine precaution.

Proponents of this regime argue that such is the price of accountability. But who bears this cost? Primarily, it is small firms without the administrative capability or funds to navigate these compliance requirements. Compared to larger competitors with economies of scale, they are at a structural disadvantage in a way not conducive to a competitive market — that engine of economic growth.

Elsewhere, the Ofwat punitive Outcome Delivery Initiatives (ODIs) offer a perfect example of regulatory incoherence. ODIs are financial mechanisms used by Ofwat, aimed at reducing supply interruptions, protecting the environment and other improvements in the water sector. Yet, during its review of the period 2020 and 2025 — called Price Review 19 (PR19) control period — water companies faced penalties of approximately £129 million despite reducing supply interruptions by 26% — money that could have been invested in our creaking water infrastructure. Why? They did not meet the full threshold requirements despite making marked improvements.

There is a demonstrable pattern of regulators failing in their attempt to satisfy the Growth Duty while also performing their roles as enforces of ever more stringent rules, producing outcomes that contradict the growth objective.

In our current setup, the Growth Duty will always lose out to red tape. Due to their professional temperament and constitutional mandate, regulators are naturally risk-averse, operating within a political environment where the consequences of excessive over-regulations are outweighed by those of high-profile PR disasters — think, for instance, about the ongoing saga in Tunbridge Wells. Tasked with serving two masters, regulators either grind to a halt and do nothing (decisive inaction) — as seen in the FCA’s lack of oversight despite repeated red flags in the London Capital & Finance (LCF) case, causing a loss of £237 million to investors — or extend their authority beyond their technical competence (mission creep), as in the FCA and Ofwat examples mentioned earlier. Both options undermine the economic growth which regulators are encouraged to promote.

The consequences are clear. Businesses face £22.4 billion in administrative costs due to regulatory burdens — a value that understates the true damage caused by opportunity costs, delayed investments and forgone innovation. Between 2022 and 2024, businesses reported an increase in time spent on addressing compliance requirements from 6.6 to 8.0 days, a 21% increase.

The Growth Duty makes the false assumption that the reason regulations have not yielded much desired economic growth is because regulators lack the legal remit to promote growth. In reality, the institutional incentives regulators operate under are by nature, if not intent, opposed to growth.

Growth cannot be legislated. It emerges through the arena of competition, charged by entrepreneurial liberty and sustained through market discipline. When a regulator seeks to promote growth, it simply creates stasis, since the regulator — despite its perceived competence — lacks the distributive knowledge of the market. Friedrich Hayek understood this well when he argued that coordination by bureaucrats is inferior to a competitive market.

If the Growth Duty has failed, the solution is not simply to expand its remit. Rather it should be replaced with a ‘Growth Discipline’ that seeks to constrain the growth of regulatory might utilising competitive forces. This would mean mandatory sunset clauses on all new regulations with mandatory reviews, prescriptive rules being replaced by outcome-based regulation, permitting industry self-regulation where legitimate, rationalising the scope of regulation through the lens of competition law and further encouraging regulatory decision-making to be bound by statutory time standards.

Opponents of a market-oriented focus may argue that the Growth Discipline would compromise consumer protections, financial stability or environmental standards. But this argument assumes that the current structure achieves these goals efficiently, which is not true, as evidenced by catastrophic failings such as the state of water pollution.

To achieve lasting economic growth, the choice Britain faces is not one between protection and growth. Instead, it faces a choice between dynamic markets that deliver both and sclerotic ones that deliver neither. The House of Lords would do well to suggest a total repeal of the Growth Duty from the statute books. Regulators should no longer be asked to regard growth, but to justify their own existence. The Growth Duty may have been enacted with good intentions, but good intentions do not always make for sound policies.