James Zuccollo, Mike Hensen and John Yeabsley

This paper considers the wider lessons from the change in the regulation of the building sector as a result of the Building Act 1991. The change saw a move from prescriptive-based regulation to performance-based regulation. The primary reason for the change was to promote innovation in building.

The paper argues that performance-based regulations are easier to understand and enforce when indicators of performance are directly observable and closely connected to what the regulator is trying to achieve. In order to do this, the paper sets out a framework for characterising performance-based regulation. The regulation must achieve a minimum standard across the following areas: (i) how to define the outcome/goal of the regulation, (ii) how to set a standard for the desired level of achievement, (iii) how to measure the delivered performance outcomes effectively and accurately against the standards set for regulation, and (iv) the regulations need to be able to cope adequately with the risk of catastrophic failure. This framework provides a useful checklist for situations in which performance regulation may be subject to high levels of uncertainty.

Regulation of complex systems requires regulators to make judgements about interactions that neither the regulators nor expert advisors understand. As it may not be feasible in the regulatory timeframe to research risk and uncertainty in these complex systems, attention must be paid to other sources of information such as precedents in other jurisdictions.

The two main issues that were not adequately addressed by the Building Act 1991 were: (1) builders had inadequate knowledge of the uncertainty they faced when building with new materials and techniques, and (2) consumers had little information about the possible risks of the techniques used to construct their home. This, the authors suggest, resulted in an underestimation of the complexity of risks and uncertainties in the new regulatory scheme, and the subsequent limitations of insurance and tort law to identify and price the main causes of weathertightness failure.

The paper advocates making a distinction between uncertainty and risk when regulating a complex area such as the building sector as they pose fundamentally different problems. In the leaky homes context, not only was there an assessable risk, but there was also uncertainty of outcomes resulting from applying performance-based regulation of the sector. The lack of effective process to manage uncertainty can be found in (i) decentralised implementation by local authorities with weak feedback loops necessary to inform the evolution of complex regulatory change, and (ii) unclear accountability for identifying and analysing performance failures. Concerning decentralised implementation, there should be a central authority that accepted responsibility for the administration of the building code. With regards to accountability, the durability of structures should be more precise (legal accountability) and greater emphasis needs to be placed upon the specification of performance standards, the stronger monitoring of building inspection practices and the tighter licensing of requirements for professionals who certify building compliance (bureaucratic accountability). Lastly, there needs to be the tightening of standards by professional associations, licensing boards and peer reputations (professional accountability).

The paper outlines three approaches which regulators could use to design ‘durable regulations’ that are more effective in identifying and preventing potential performance failures. First, the Government could provide a qualified approval rating to signal whether a building meets the performance standards described in regulation. Second, the Government could engage in explicit experimentation that limits exposure to risk. Third, the Government could induce or provide insurance schemes to cover losses as a result of regulatory failure. Government provided social insurance is advocated by the authors.