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First Annual report from the Office for the Internal Market

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On 22 March 2023 the Office for the Internal Market published its first annual report on the operation of the internal market as well as its first periodic report on the UK internal market regime.

The reports are the first insight into how the Office for the Internal Market will undertake its general reporting duties under the United Kingdom Internal Market Act 2020, and how it assesses the functioning of the internal market alongside linked issues – including the process for exclusions from the market access principles of the  2020 Act and common frameworks. A recent SPICe blog looks at some of those issues in more detail.

This blog gives an overview of the key themes from the Office for the Internal Market’s first reports – which are laid in the UK Parliament, Scottish Parliament, Senedd Cymru and the Northern Ireland Assembly.

What is the United Kingdom Internal Market Act 2020?

The United Kingdom Internal Market Act 2020 (UKIMA) is UK wide legislation. The explanatory notes to the Act state that:

“The purpose of the United Kingdom Internal Market Act is to preserve the United Kingdom’s (UK’s) internal market as powers previously exercised at European Union (EU) level return to the UK, providing continued certainty for people and businesses that they can work and trade freely across the whole of the UK.”

SPICe published a bill briefing when the legislation was being considered at the UK Parliament.

A key element of the Act is to establish two market access principles to protect the flow of goods and services in the UK’s internal market:

  • the principle of mutual recognition
  • the principle of non-discrimination.

The Parliament’s Constitution, Europe, External Affairs and Culture Committee reported on the UK internal market in February 2022, stating:

“UKIMA creates two market access principles: the mutual recognition principle and the non-discrimination principle. All devolved policy areas are potentially impacted by the market access principles although some exemptions are provided in the Act. For example, neither of the market access principles currently applies to healthcare services, social services or transport services. Both principles can be applied to relevant requirements in respect of the sale of goods or the provision of services. These principles serve to disapply relevant requirements in one part of the UK when goods or services are lawfully provided in another part of the UK. This means that goods and services which originate elsewhere in the UK (or are imported into another part of the UK) under different regulatory conditions will have access to the Scottish market while goods and services originating in Scotland would have to comply with Scottish standards.”

What is the Office for the Internal Market reporting and why is it reporting?

The Office for the Internal Market (OIM) is part of the Competition and Markets Authority which is a non-ministerial department of the UK Government.

OIM’s functions are set out in UKIMA, but OIM states its objective is “to support the effective operation of the UK Internal Market”. It does this by providing “expert, technical and independent advice” on the UK internal market to the UK Government and the devolved administrations.

Under UKIMA OIM is required to publish an annual report and also report on the state of the UK internal market every five years. Section 35(5) of UKIMA sets out the requirement for an annual report and section 33(6) of UKIMA provides for OIM to report periodically (every five years).

The annual report 2022-23

In order to build a picture of the operation of the internal market and issues which may affect its efficacy in the future, OIM considered:

  • economic data on trade flow across the UK
  • the experience of businesses trading across the UK
  • case studies on future areas of regulatory development likely to affect the UK internal market.

Overall, OIM found that awareness of the UK Internal Market Act 2020 “including the MAPs, is low, and businesses, lawyers and parliamentarians have raised questions about how the Act would affect specific regulations.” OIM stated that it “will monitor this area as awareness and certainty about the operation of the Act as well as the volume of regulatory activity which may impact the operation of the internal market may be expected to increase over time.”

Trade flows

The annual report assessed economic data on the flow of trade between the different parts of the UK. OIM also asked businesses trading in the UK to share their experiences and looked at the knowledge and perceptions business has of the internal market and specifically the market access principles (MAPs).

On trade flows, the report highlighted the amount of intra-UK sales for Scotland, Wales and Northern Ireland amounted to £89bn in 2019. It also stated that:

“Of these three nations, Scotland traded the most with the rest of the UK in absolute terms in 2019, followed by Wales and then Northern Ireland, with these absolute differences likely driven primarily by the relative sizes of their economies.”

The report also highlighted that larger businesses and those in manufacturing were more likely to export to other parts of the UK. The report drew on evidence from the Business Insights and Conditions Survey undertaken each fortnight by the Office for National Statistics which indicated (from the inclusion of the question ‘In the last 12 months, has your business sold goods or services to customers in other UK nations?’ in three surveys between August 2022 and February 2023) that:

“around 15% of businesses trade with customers in other UK nations”

The figure was higher in particular sectors, such as manufacturing, wholesale and retail trade where it was around 20% of businesses.

Experience of intra-UK trade

OIM’s report also provided information on businesses’ experience of intra-UK trade. Businesses were again asked through the Business Insights and Conditions Survey about challenges they faced when trading across the UK. The report concludes that:

“the majority of businesses that trade within the UK do not experience challenges when selling to other UK nations. In all three waves of the BICS, more than half of businesses that sold goods and services to customers in other UK nations did not face any challenges when doing so. Of those businesses who did engage in trade with other UK nations, only a small number said they experienced challenges due to differences in rules or regulations”

OIM also conducted qualitative research with 45 businesses who trade across the UK and asked them about hypothetical scenarios which simulated intra-UK regulatory divergence (i.e., different laws across the UK). The scenarios set by OIM’s research were:

  • ‘In your business, the main good/product you manufacture contains a specific input. One UK nation bans the sale of goods/products containing this specific input.’
  • ‘One UK nation imposes new labelling requirements on the main good/product that you manufacture.’
  • ‘One UK nation bans the supply of your services in its nation unless service providers like you comply with a new and additional (regulatory) requirement.’

The outcome of that research was to show that very few businesses had experience of working across different regulatory environments and felt that “Overall, intra-UK trade was seen to be working smoothly, with the majority of participants experiencing no or few problems trading across UK borders” and that “planning and decision making was based on customer demand, supplier availability, and cost and travel distances, more than any consideration of borders within the UK and businesses did not typically seem to regard intra-UK trade as ‘trading across borders’.”

The report also stated that “The fact that intra-UK regulatory difference is a potential consequence of the UK’s withdrawal from the EU was not well understood by businesses in the research.” Adding that:

“When presented with the concept of regulatory difference between UK nations, businesses struggled to understand who benefits from that difference. Some participants recognised that political aspirations or consumer pressure might drive regulatory change. But businesses were concerned that intra-UK differences could be costly and complex and disadvantage the economy overall”.

The conclusion from OIM’s research was that:

“Broadly speaking, businesses said that they should be able to cope with intra-UK divergence in the future, but when confronted with specific scenarios they reported that it felt challenging…None of the participants in our sample had put in place specific plans to prepare for or mitigate against the potential challenges that might be created through regulatory change.”

Future areas of regulatory development

OIM also held roundtable events with lawyers, academics, policy stakeholders and trade associations which fed into the research. In part, this was to discuss areas of regulatory development which may affect, or be affected by, the UK internal market.

“The key areas that participants identified were agriculture (including agricultural subsidies, gene editing and biotech, pesticides and plant protection products, and animal transport), the environment (extended producer responsibility obligations, deposit return schemes, packaging, and waste) and food and drink (mycotoxins and HFSS foods). Other areas that were also raised included the automotive industry, the construction industry, chemicals, and cosmetics.”

The report considered in more detail five policy areas:

  • Deposit return scheme (DRS)
  • Single Use Plastic Products
  • Genetic Technology (Precision Breeding)
  • Food and drink that is high in fat, salt and sugar
  • Glue traps and snares

The report noted that “DRS is the issue on which we have received the most webform submissions via our online reporting service.” Issues raised by stakeholders online to OIM included concerns around glass being in the scope of Scotland and Wales’ DRS schemes but not likely to be caught by DRS in England and Northern Ireland and the higher producer fee in Scotland for producers who use a UK-wide label. The report reflected that “Some producers have said that they may consider withdrawing from the Scottish market, either permanently or until harmonised DRS are in place across the UK.”

In relation to single use plastics, OIM’s report stated that “There has been very little commentary from businesses and consumers on the practical impacts of the differences between bans on single-use plastic items in different nations, and the differing timescales on which they have been introduced.” The time taken for an exclusion to the market access principles of UKIMA was noted as was the call for clearer messaging on what suppliers could and could not legally sell in the time between Scottish regulations coming into force and an exclusion to the market access principles of UKIMA being effective. SPICe has previously blogged on this issue.

On precision breeding, OIM’s report noted that the interaction with several common frameworks and that, because of the market access principles in UKIMA, “if precision-bred plants and animals are lawfully produced in (or imported into) a part of the UK where it is also lawful to sell them, they can be sold in any UK nation without needing to comply with requirements imposed by regulations there.” Since OIM compiled its report, this issue has become live give that the Genetic Technology (Precision Breeding) Bill has now received Royal Assent as the Genetic Technology (Precision Breeding) Act 2023. This means that products which have been genetically modified in line with the Act may be available on the Scottish market.

Glue traps provides an interesting case study as the report notes the impact that the market access principles of UKIMA have had on the policy making process. The report notes:

“A number of governments and legislatures have noted that the MAPs influenced their decision-making around whether to ban the sale of glue traps. The former Parliamentary Under-Secretary of State at Defra noted that ‘under the UK internal market rules, it is not practical to ban the sale of glue traps in England as they could still be purchased elsewhere in the UK.’ The Scottish Government has stated that it proposes to ban the sale of rodent glue traps in Scotland ‘provided that this can be achieved under the terms of the Internal Market Act’.”

The Wildlife Management and Muirburn (Scotland) Bill was introduced in Parliament on 21 March 2023 and proposes a ban on glue traps.

The report noted that the action of governments across the UK in relation to food high in fat, sugar and salt may be an area of future divergence and that stakeholders had suggested that “restrictions may make e-commerce harder, creating costs and an administrative burden for businesses who need to direct different information to customers in different parts of the UK.”

Periodic report

OIM’s periodic report focuses on parts 1 and 3 of the UK Internal Market Act 2020 (i.e., the market access principles) on the operation and development of the internal market in the UK.

The report also covers common frameworks in so far as they interact with the market access principles and/or affect the operation and development of the internal market in the UK. In OIM’s words:

“The focus of this report is on the mechanisms which underpin the effective operation of the UK internal market; namely, the MAPs and Common Frameworks.”

The context for the report is that “Since the establishment of the regime by the Act, there has been little new regulatory difference between UK nations.” There are however two themes – uncertainty and transparency – which emerge in the report which have been identified by the Scottish Parliament, particularly through the work of the Constitution, Europe, External Affairs and Culture Committee.

The approach to evidence gathering taken by OIM was roundtable discussion with stakeholders (including, for example, business, lawyers, academics and policy professionals) as well as seeking views from the UK and devolved governments. Qualitative research was also commissioned by OIM to seek the views of business more widely.

The report highlights a “range of views across governments on the effectiveness of the MAPs” with the UK Government having “no specific concerns”; the Scottish Government believing that there “is potential for the MAPs to constrain devolved policymaking in many areas” and the Welsh Government indicating “that there has been insufficient time to assess the effectiveness of the MAPs.”

Perhaps the most telling finding from the report is that the awareness of the market access principles in UKIMA is low amongst business. The report states:

“We found that awareness of the MAPs among businesses is generally very low. By contrast, our roundtable discussions with academics, members of the policy community, and legal professionals demonstrated a greater awareness of the MAPs. When the MAPs were explained to businesses as part of our commissioned qualitative research, some saw potential for the MAPs to alleviate their concerns, while others considered that the MAPs could create ‘unfair’ trading conditions.”

The report notes that this “Low awareness of the MAPs among businesses and the absence of related case law suggests that businesses have not needed to rely on the MAPs to support intra-UK trade.” This ties to the findings of the annual report discussed above which did not identify significant challenges for businesses trading across the UK given that much of the regulation across parts of the UK remains aligned.

Similarly, awareness of common frameworks was low amongst stakeholders. The report notes that around half of common frameworks will interact with the market access principles but that “Only a small number of these have been used in practice to consider regulatory developments that are likely to interact with the MAPs or have a significant impact on the UK internal market”.

The report also indicated a lack of transparency in the frameworks process, noting that:

“Those who are aware of Common Frameworks indicated that they are unaware of the governments’ ambitions for Common Frameworks and did not know what topics were being discussed or whether there are opportunities for them to contribute to those discussions.”

This is a challenge identified by the Parliament’s Constitution, Europe, External Affairs and Culture Committee. Notably OIM called for increased transparency, encouraging “transparency both between the governments and with external stakeholders such as businesses and third sector organisations about future regulatory developments that may engage the MAPs and intersect with Common Frameworks.”

OIM stated that the four governments across the UK had indicated that they are “broadly supportive of the role that Common Frameworks can play in enabling the functioning of the UK internal market.” The report articulated OIM’s view “that stakeholder engagement can help to inform the potential effects of regulatory differences on the UK internal market and a proactive approach to engagement would provide useful insights.”

The report also noted the lack of certainty around the market access principles, stating that:

“Where stakeholders are aware of the MAPs, there is uncertainty about how they may apply in practice due to a lack of case law and the possibility of future changes following further exclusions from the MAPs.”

OIM concluded that “Awareness and certainty about the Act’s operation and the volume of regulatory activity which may engage the MAPs and Common Frameworks may increase over time.”

Sarah McKay, SPICe research