Themes and Trends in Regulatory Reform - Regulatory Reform Committee Contents


Annex 1

THE OFT'S REGULATORY ROLE

  1.  This Appendix sets out in general terms where the OFT's functions stand in relation to the government's regulatory reform agenda. That agenda has now been put on a statutory basis by two major pieces of legislation, in which regulatory functions are defined[50] as those

    (a) imposing requirements, restrictions or conditions, or setting standards or giving guidance; and

    (b) securing compliance with, or enforcement of, requirements, restrictions, conditions, standards or guidance.

In the case of the OFT and comparable authorities, the legislation applies to regulatory functions other than those exercised under competition law.[51]

  2.  The regulatory reform agenda aims to restrict imposition of regulatory burdens, particularly on business. The two kinds of function defined above differ greatly in their potential to impose burdens. Laws and regulatory rules are the source of most costs and administrative inconvenience for business. Action to secure compliance with such requirements can, at most, only exacerbate their burdensome effect. One particular way of securing compliance with requirements—individually targeted enforcement action—has minimal scope to impose additional burdens on lawful business activity in general, since only suspected wrongdoers are affected, and action against them is subject to judicial control, specifically in relation to costs.

  3.  The detail of the following analysis will show that

    — the OFT has relatively few functions within the scope of the regulatory reform agenda;

    — these are confined to the areas of consumer enforcement, licensing and market supervision;

    — they confer powers only or mainly to take individually targeted enforcement action; and

    — the OFT has very limited scope to impose unnecessary burdens on businesses and we do not believe we do so.

FUNCTIONS FALLING OUTSIDE THE REGULATORY REFORM AGENDA

  4.  General functions. The OFT has a number of functions of a general nature, particularly under Part 1 of the Enterprise Act 2002[52]—for instance preparation of an Annual Plan, provision of information to the public and advice to Ministers, promoting good consumer practice, and responding to "super complaints". Under these general powers the OFT carries out market studies (see below), engages in research and advocacy, promotes consumer education, supports the provision of advice to consumers via Consumer Direct, and approves self-regulatory consumer codes for (voluntary) adoption by businesses. These functions, do not involve issuing or securing compliance with enforceable requirements, and raise no issue of the OFT itself imposing burdens on business.

  5.  This is true in particular of market studies. It is necessary to consider (a) the way these are carried out via information demands etc, and (b) their outcome in terms of legislation. As regards (a), the OFT does not exercise compulsory powers in carrying out market studies (except when investigating a market for the purpose of making a reference to the Competition Commission, which is a competition function—see below). As regards (b), any OFT market study, whatever its purpose, can only make recommendations, which other parts of Government (or businesses) are free to take forward or not as they choose. The carrying out of market studies therefore does not involve either making, or enforcing, requirements, and is therefore not a regulatory function.

  6.  This does not, of course, mean that the OFT has no regard to the potential repercussions of its market study recommendations. On the contrary, the impact of any legislative options identified is carefully evaluated. The OFT assumes that costs to business will be passed on to consumers, and our overall aim is to make markets work well for consumers, so we are keen to take account of any business costs that would result from our recommendations. Market studies often make recommendations to change legislation that have the ultimate effect of reducing burdens on business rather than the reverse.

  7.  Competition functions. The OFT is the UK's national competition authority. Functions under competition law are excluded from the scope of Part 4 and related legislation, including recent regulatory budgeting proposals. This exclusion is in line with the established legislative policy of ensuring the full independence of competition enforcement, embodied in the Competition Act 1998 and the Enterprise Act 2002. OFT's functions under these Acts include

    — merger control,

    — making Market Investigation References to the Competition Commission,

    — prohibition of agreements preventing, restricting or distorting competition

    — prohibition of abuse of a dominant position.

The OFT seeks to minimise unnecessary costs for business arising from its competition work since these are liable to be passed on to consumers, in conflict with its overall purpose of making markets work well for consumers. The general purpose and effect of competition enforcement is, in any case, to remove barriers to entry and operation by businesses in markets, not to impose burdens.

FUNCTIONS FALLING WITHIN THE REGULATORY REFORM AGENDA

  8.  Consumer enforcement functions. The OFT has a leading role in the consumer area comparable to its special position in competition work, although its consumer enforcement functions are shared rather more widely than its competition powers, in particular with local authority trading standards services. These functions involve securing compliance with enforceable requirements, and as such fall within the scope of regulatory reform legislation. They involve powers to

    — seek injunctive remedies under a range of measures, particularly Part 8 of the Enterprise Act,[53] for breach by traders of specified laws aimed at protecting consumers

    — prosecute traders for unfair commercial practices, under the Consumer Protection from Unfair Trading Regulations 2007

    — issue warning and prohibition orders to estate agents who have been found to have engaged in specified forms of wrongdoing or undesirable practice under the Estate Agents Act 1979

  9.  These functions do not confer any power to make rules or issue guidance that binds businesses generally, only to take proceedings before a court or tribunal against individual businesses on the basis of evidence. They thus come within the second limb of the statutory definition of regulatory functions. Furthermore they fall within the subset of those functions which have least potential to impose unnecessary burdens.

  10.  The OFT takes a strategic approach to consumer enforcement, working alongside and in cooperation with

    — local and sectoral enforcement partners with whom it has coordination arrangements and memoranda of understanding

    — other "established means" of dealing with consumer problems, including self-regulatory bodies such as the Advertising Standards Authority.[54]

  As a market-focused enforcer, committed to delivering high impact outcomes in partnership with others, our actions against individual businesses are necessarily few and highly selective, and are generally confined to cases of national importance.

  11.  Any action we take under compulsory powers in the consumer area, including requests for information, is inherently open to challenge before an independent judicial decision-maker. An award of costs against the OFT is likely where any action is found by the court to be unfounded or disproportionate.

  12.  The OFT thus cannot be considered to be a significant source of burdens on UK businesses generally in its consumer enforcement work. Nevertheless we recognise that the way in which we carry out enforcement has an impact on individual businesses. Our work in this area is subject to the Regulators' Compliance Code, and we have published a Statement of Consumer Protection Enforcement Principles to show how we seek to meet its requirements. We issue an annual Simplification Plan setting out the measures we propose to take over the financial year to keep any burdens to a minimum.

  13.  Consumer credit licensing functions. Under the Consumer Credit Act 1974 (CCA), as amended, the OFT has the function of administering the licensing system set up by the Act. That system does not give the OFT powers to impose generally applicable requirements or restrictions comparable to the rule-making functions exercised by (for instance) the Financial Services Authority in the financial services sector as a whole. It is the Secretary of State, not the OFT, who has the power to make rules—for instance Conduct of Business Regulations under s.26. Guidance issued by the OFT is for information purposes, and is not enforceable. However the CCA does confer a limited discretion to take decisions affecting businesses generally, as well as enforcement powers for use against individual consumer credit businesses.

  14.  Any person who wishes to engage in consumer credit business must obtain a licence from the OFT, via

    — application in such form, and accompanied by such particulars, as the OFT may specify,

    — payment of a fee approved by the Secretary of State and the Treasury.

  15.  The Act thus gives the OFT the power to decide how much information must be provided by any business wishing to start lending money, engaging in a hire business or credit brokerage, offering debt advice, management and collection services, or acting as credit reference agency. That is a regulatory function within the first limb of the LRRA definition. The CCA does not give the OFT the discretion unilaterally to decide the level of fees payable on application.

  16.  The OFT's approach to exercise of its credit licensing functions is designed to minimize costs and other burdens, within the constraints of the CCA as recently amended. It has been subject to a series of simplification initiatives starting with a complete redesign of documentation in 2005. Businesses in general are now required to fill in a single form, prepared and trialled with the cooperation of users, of which a shorter and simpler version is available for sole traders. Applicants are subjected to closer scrutiny only when they fall into in relatively small groups identified via an evidence-based risk model.[55] Licences are not normally time-limited, so that filling in one form and paying a fee is the full extent of the burden on 85-90% of credit businesses. Full guidance as to licensing requirements is available on and off-line, and applications can be made electronically. OFT's compliance with Hampton principles in relation to its licensing work was noted in the course of the Hampton Implementation Review.[56]

  17.  Apart from requiring information on application from intending licensees, the principal role of the OFT is to secure compliance with basic requirements of good practice towards consumers, a function falling under the second limb of the definition of set out above. The OFT considers the fitness and competence of licence applicants and licensees, and, on the basis of evidence

    — decides what additional information is needed

    — makes refusal or revocation decisions as appropriate taking into account that information

    — imposes conditions and requirements on licensees where appropriate.

The OFT also makes certain kinds of decision under the Act, on application, for instance as to the validity of individual consumer credit agreements.

  18.  Functions under the CCA that involve action targeted at individual businesses are, like OFT's general consumer enforcement powers, based on evidence. They similarly offer little scope for imposing unnecessary burdens on business generally. Lawful activity is largely unaffected, and proceedings are subject to the control of a tribunal.

  19.  Supervision of anti-money laundering compliance. The OFT is one of the group of supervisory authorities required by the Money Laundering Regulations 2007 to oversee compliance with the Regulations.[57] The OFT has the duty to monitor effectively compliance by estate agents and consumer credit lenders who are not authorised by the FSA or supervised by the HMRC, and to take necessary measures for the purpose of securing compliance. Enforcement action can include imposition of civil financial penalties and prosecution.

  20.  The Regulations give the OFT a discretion as to how monitoring and securing compliance is to occur, but the arrangements involved are required to be effective and also to be self-funding. The OFT has a power to require businesses to register, but without provision for a fitness test (whereas authorities who supervise high-value dealers must operate registration systems and satisfy themselves that applicants are fit and proper persons). The Treasury have indicated their expectation that arrangements should be risk-based and in line with the recommendations of the Hampton Review.

  21.  The OFT gave extremely thorough consideration to the issue of whether to require registration, being very conscious of the need not to impose undue burdens on business. A decision was ultimately reached in 2008, at Board level, that registration was necessary as a means of spreading the costs of the scheme fairly and ensuring that OFT could operate it effectively. Without registration, a minority of businesses would have to pay disproportionately more, and there would be a real risk of OFT not receiving the funds it needs to operate an effective system in line with its statutory obligation, in particular targeting advice at high-risk businesses.

  22.  The OFT is planning to introduce registration in July 2009. Information requirements will be kept to a minimum, and fees thereby minimised also (the OFT can levy fees only so as to cover its reasonable costs). In designing and rolling out the system, the OFT will continue to work with representatives of business via industry working groups. This is in line with the approach on which OFT's Hampton Implementation Review commented favourably in its report last year.[58]



50   Legislative and Regulatory Reform Act 2006 (LRRA) s.32(2) and Regulatory Enforcement and Sanctions Act (RESA) 2008 s.74 Back

51   Schedule 1 to the Legislative and Regulatory Reform (Regulatory Functions) Order 2007 made under s.24 of the LRRA, and RESA s.73(2) Back

52   But s.1 of the Consumer Credit Act 1974, and relevant parts of other legislation, also confer certain general functions on the OFT, particularly in relation to provision of information. Back

53   The OFT also has injunctive powers under other more specific legislation including the Unfair Terms in Consumer Contracts Regulations 1999, the Consumer Protection (Distance Selling) Regulations 2000, and the Financial Services (Distance Marketing) Regulations 2004. Back

54   Enforcers of the Consumer Protection from Unfair Trading Regulations 2007, including the OFT, are required in complying with their duty to enforce the Regulations (reg.19) to have regard to the desirability of encouraging self-regulatory control of unfair practices by other established means. Back

55   Businesses in high risk categories also need to complete a Credit Competence Plan or Credit Risk Profile along with their application form, and may be subjected to an initial visit, normally by a local authority trading standards officer acting on behalf of the OFT. Back

56   Section on data requests, pp 24ff-http://www.berr.gov.uk/files/file45359.pdf Back

57   The group also includes the HMRC, the Financial Services Authority and regulatory bodies for solicitors and accountants. The Regulations implement the EU's third Money Laundering Directive. The UK's work to ensure compliance with the Directive is led by H M Treasury, which will report in 2009 to the Financial Action Task Force. Back

58   Paragraphs 58 and 63-http://www.berr.gov.uk/files/file45359.pdf Back


 
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