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
— 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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