Further deregulation proposed for innovative 'challenger' businesses and entrepreneurs

Among potential changes announced by new Business Minister Michael Fallon at the MADE entrepreneurial festival in Sheffield are a strengthened independent function to challenge burdensome regulations, a greater emphasis on self-regulation for peer-to-peer lenders and making it easier for small businesses to register and defend patents and trade marks.

The announcements come in response (29-page / 285KB PDF) to recommendations made by businessman Mark Littlewood, chief executive of the Institute of Economic Affairs, as part of the Government's 'Red Tape Challenge' programme of deregulation. The report considered the extent to which innovation in areas including home buying and selling, peer-to-peer lending, knowledge-based businesses and intellectual property were adversely affected by regulation.

"Challenger businesses create wealth and jobs – we should champion them at every opportunity," Fallon said. "They put new products on our shelves, innovate our service industry and create new markets using the latest technology. I don't want these pioneers falling foul of outdated regulations. I am now looking in more depth at the rules and regulations that are holding back our most forward-thinking entrepreneurs."

Underpinning the individual announcements, Fallon said that the Government planned to strengthen the role of the independent Regulatory Policy Committee (RPC), which was set up in 2009 to provide independent scrutiny of proposed regulatory measures put forward by Government. The RPC reviews evidence and analysis put forward by Government to support any proposals in order to provide a robust platform on which those measures can be taken forward. The RPC will investigate whether challenger businesses seeking to enter new markets are being "unjustifiably hampered" by regulations and will report publicly on its findings.

Peer to peer lenders are platforms which facilitate lending to individuals and businesses, rather than lending directly. As such, they are not regulated by the Financial Services Authority (FSA). Most will generally be regulated under the Consumer Credit Act as 'ancillary credit businesses' and covered by general fair trading and fraud legislation, but the lenders themselves are not protected by any regulation. As part of his review, Littlewood found an appetite from the industry for the introduction of regulation as a means of building trust in this form of lending and supporting the sustainable growth of the industry.

Both Littlewood and the Government, in its response, suggested that it was "too early" to introduce a new regulatory framework for peer-to-peer platforms, as to do so could risk "stifling innovation" in what is a fast-growing sector. Instead the Government will encourage greater membership of the different finance associations within the industry, and the growth of its own set of operating principles which include minimum capital requirements based on operating costs, segregation of participants' funds and appropriate credit assessment and anti-fraud measures.

Knowledge-based businesses reported that they had difficulty in obtaining access to traditional methods of finance as their assets - such as databases, design rights and research and development - were generally intangible. The Government plans to work with banking and accountancy experts to help improve existing guidance and raise awareness of alternative finance schemes such as Enterprise Capital Funds, the UK Innovation Investment Fund and the Business Growth Fund.

The Government also intends to make it cheaper for small businesses to apply for and defend patents, perhaps through the use of scaled fees similar to those available to 'small entities' in the US. It also proposes to explore making the system under which individuals and smaller businesses can object to the registration of new trade marks that might be confused with their own.

Littlewood's report also suggested that challenger businesses might be disproportionately affected by inflexibilities in the labour market, particularly in their "formative years". He proposed allowing these businesses to treat their staff as self-employed, putting them outside of the employment rights regime. However, the Government said it would not be taking this proposal forward as it did not believe it would be "effective at stimulating higher employment levels".