The SME Test: Assessing the impact of new laws and regulations on SMEs

New laws and regulations quickly accumulate and cause administrative overload for small and medium enterprises (SMEs) because the costs of compliance are often disproportionately higher than for large enterprises.

In many countries, the number of laws and regulations adopted each year to which SMEs must comply is increasing dramatically. While this is not a bad thing, it is necessary to improve the quality of laws and regulations and the process through which they are formulated and adopted.

Well-structured laws and regulations should have a positive influence on private sector development, economic growth and employment, as well as on social and environmental outcomes.

New or recently revised laws and regulations can generate unanticipated and undesired effects. To counter this, it is important to consider the impact of new laws and regulations on SMEs before they are introduced.

Anticipating regulatory impacts – Regulatory Impact Analysis

In general terms, this is referred to as Regulatory Impact Analysis (RIA).

A RIA is a systemic approach to assessing the anticipated positive and negative effects of proposed and existing laws and regulations alongside non-legal and non-regulatory alternatives. This employs an evidence-based approach to policymaking to ensure proposed laws and regulations are efficient and effective in a changing and complex world.

Some form of RIA has been adopted by nearly all OECD members. However, the successful implementation of RIA is administratively and technically challenging.

Many developing economies have not yet established RIA mechanisms, largely because these are seen as too costly, difficult and time-consuming.

An easier to apply analysis of likely impacts on SMEs

The SME Test is a type of RIA implemented in many European countries to ensure that proposed laws and regulations do not impact disproportionately on SMEs. It involves testing the application of legislative and regulatory proposals to determine their likely impact on SMEs.

See the European Commission’s recently revised Better Regulation Guidelines (November 2021).

Key elements of the SME test are:

  • Has to be performed and reported more systematically in all impact assessment reports, where proportionate.
  • The Impact Assessment report must include the assessment of impacts on SMEs with a reference to the result of the “test” on various policy options.
  • The assessment has to be proportionate to the relevance of the initiative for SMEs.
  • Because data on SME costs can be hard to obtain, it is particularly important to plan the SME consultation process properly.
  • Where there are significant adverse impacts on SMEs anticipated, consideration should be given to different ways to minimize burdens when devising the policy options.
  • When policy options impose a disproportionate burden on SMEs compared to large enterprises, it is necessary to consider mitigating measures as well as embedding a way to monitor the impact on SMEs in the legislation or regulation.
  • SME exemptions should only be considered as a last mitigating measure.

Encouraging policymakers to think small first

The SME Test reflects the European Commission’s “Think Small First” principle. This principle:

Requires policymakers to give full consideration to SMEs at the early policy development stage. Ideally, rules impacting on business should be created from the SMEs’ point of view, or in other words, SMEs should be considered by public authorities as being their “prime customers” as far as business regulation is concerned. The principle relies on the fact that “one size does not fit all” but a lighter touch approach can also be beneficial to larger businesses. Conversely, rules and procedures designed for large companies create disproportionate, if not unbearable burdens for SMEs as they lack economies of scale.

Improving the ways laws and regulations are crafted

While the successful implementation of the SME Test requires a change of culture and attitude among public officials, it should not necessitate a substantial increase of personnel or the creation of a complex institution.

An SME Test becomes part of the normal policymaking process. Public officials should be supported to develop the skills and knowledge necessary to implement these procedures in the preparation of new laws and regulations.

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