Examination of Witnesses (Questions 1
- 19)
TUESDAY 10 MARCH 2009
SIR WILLIAM
SARGENT AND
MR JITINDER
KOHLI
Q1 Chairman:
Sir William, Mr Kohli, thank you very much for coming. Welcome
to our hearing and thank you for your paper. I think it would
be worth saying at the outset that, given what is happening in
the bigger world, there will inevitably be quite a lot of comment
about what appears to be just about financial regulation and clearly
our inquiry is not about financial regulation per se; it is about
themes and trends in regulatory reform. The House had a debate
yesterday, at the request of the Department for Business and Enterprise
Select Committee, and that touched on a number of issues around
regulation and regulatory reform. It is clear that some of the
messages have not got out to the bigger world. The Shadow frontbench
spokesman told the House that the Department had claimed that
there was going to be a 25% reduction in regulations, as distinct
from admin burdens. It is a small matter of a few words I guess,
but I will leave that for you to read in Hansard. Sir William,
is it the case that risk-based regulation is fine in theory but
flawed in practice? What is required to make it work effectively?
What are the risks of risk-based regulation itself?
Sir William Sargent: The process
of understanding anything that could go wrong first of all requires
you to identify what is going to go wrong, and therefore the risk
involved and, more importantly, the consequences of that going
wrong, so when Parliament and government is seeking to put in
place protections and rights and obligations for people, and the
choice of regulation is the device that is used in order to identify
and protect people from risks, the main point of the exercise
is to identify the risks, get the evidence, identify what will
solve that risk and protect from that risk, and then go forward
from that point of view. From everything that I have done for
the last three years, and as I have gotten to know the reform
agenda even better, nothing has changed my point of view that
focusing on the risks involved (which is the point of the regulatory
exercise) is anything other than the right course of action. The
process by which you go about it goes from "excellent"
at one end through to "we could learn and do things better".
I think financial services is a very good example where understanding
what the risks were in the system, worldwide as well as in the
UK, was not clearly understood at all levels, and therefore the
regulatory approach in certain areas and the manner in which it
has been done and the skills-sets that have been used are the
lessons that we can learn from the fact of the learning what might
go wrong in respect of regulation.
Q2 Chairman:
When you say "at all levels", is that a euphemism for
any level?
Sir William Sargent: If you think
about it, if you start with the inspector at one end of the scale,
which is the people who go out on the ground, understanding what
it is they are looking for, and being trained properly in the
first place, is as important when you are focusing on what are
the risky organisations or structures that you are trying to inspect,
right through to the way the policy was put together in the first
place. Having that in your mind and having a clear understanding
of risk can only lead to doing things properly, particularly in
a world of scarce resources.
Q3 Lorely Burt:
Good morning, Sir William. I wanted to focus on how the Government
is reacting to this because there is such a lot of pressure from
the media and from the public generally, who perceive that there
are these demons at the top of the financial sector and they are
the ones who have been very naughty, and what we should do is
lock them up forever and throw away the key. Obviously there is
a need to get tough with the financial sector and design the right
regulation. You have already talked about the risk-based notion
to that and the need to maybe take a measured approach rather
than a lynch-mob type of attitude to it. Do you think that the
Government is taking a coherent and intelligent approach to what
is going on in the financial sector? Could you also just say a
word about how you perceive the difference between what is going
on in the UK and other countries who are similarly affected to
ourselves?
Sir William Sargent: First I would
observe that I am not entirely a specialist in financial services,
but I will give you our view from having understood and supported
our colleagues at the FSA and other places in doing the work,
so I will give the perspective from myself and Jitinder and our
experience of dealing within government as well as with bodies
overseas. I am very encouraged that the approach, as happened
many years ago, has been to stop and ensure that the problem is
clearly understood. Financial services is different from most
other areas being regulated because it is clearly interconnected
worldwide. I think one thing that has been shown very clearly
in this crisis is that the entire world is interconnected in a
way that was not quite realised as to the extent. You start with
the fact that you cannot just fix the point in the UK on its own.
I think that the UK—and certainly the BRE has encouraged
this and it has been supported everywhere around government—has
been trying to break down the problem into its various constituent
components. It is very easy to forget, if you look back to the
summer of 2004, that interest rates in America were at 1% and
sub-prime loans were being sold to people at a 1% interest rate,
which clearly at the time they might barely have been able to
afford, and 24 months later in the summer of 2006, which was not
that long, they have gone to 5.25%, so you have a situation where
it started from that sort of basis and then very clearly spread
out very quickly from that. When we go back and look at the issues,
it is clear that what the Government is doing, and encouraging
other governments to do (and we have seen the leadership the UK
has shown with the European Union as well as America) is to make
sure that people understand what they are doing in the first place.
Hopefully we are going to see the results of this at the summit
coming up soon. I think the Government in turn has taken the local
initiatives that it could take very quickly, and the Banking Act
was a good example and the initiatives of the FSA that it did
in those few months, stopping certain types of trading quickly
and learning very quickly from its own internal audit that it
did into Northern Rock about the skills-sets and the fact that
it was focused very much on institutions and their processes and
structures rather than overall what was going on in the business
models. I think that the FSA should be commended for having very
quickly identified that as being a flaw. That was not solely a
UK flaw because if you look at America and all the other countries,
they were adopting the same philosophy and approach, so world-wide
and not just the banking community but the economics community
felt that this was the right approach. With hindsight obviously,
we are learning that looking at the whole system as opposed to
just the individual institution is important, so I am really encouraged
that we have done the right thing in the UK and taken our time.
We are breaking down the problem into its various elements; we
have taken the actions that we can pretty straightforwardly quickly;
and then we are providing a blueprint, effectively, for the rest
of the world, which hopefully they will sign up to, but that is
a big job.
Q4 Chairman:
But in the Department taking its time in considering this, is
there not a risk that the public will expect something to happen
rather quickly, and yet you are saying that there is merit in
taking our time? We are not really getting that message across
that this is not something that can be fixed in an instant stroke
of a pen and an Act of Parliament.
Sir William Sargent: No, but if
you look at the initiatives taken, the various stimuli and the
credit being provided, I think the public can see very clearly
that the various institutions of government have actually acted
as much as they can straightaway. What I am referring to in terms
of taking time to understand is the regulatory responses, so it
has dealt with some straightforward and basic regulatory responses
but the bigger picture has to require worldwide co-ordination.
That is the bit that is taking the time. If you look at the initiatives
that have been in place so far, they have been pretty quick and
effective.
Q5 Chairman:
You have said that the public will understand, but if you look
at it from the point of view of my own constituency, if you were
somebody working at Vauxhall's and you are on short time, I do
not think you would understand that it is right for the Government
to take its time.
Sir William Sargent: Government
is not taking its time in terms of putting pieces in place. It
has already happened and in the case of the economy the stimulus
packages that have been put in place and the additional credit
that has been put into the economy, people on the shop floor would
recognise that as a pretty powerful response.
Mr Kohli: To give you an example
of something which needed to happen quickly and did happen quickly,
in the days when there was significant loss of public confidence
in Northern Rock, the Government took very quick action in order
to assure savers that their savings were safe, even if they were
above the limit of the financial compensation scheme, and that
was an example of where something needed to happen very quickly
and did happen very quickly. Against that, designing a new framework
for regulating international financial services needs to happen
as quickly as it can, but, equally, doing so without working out
what the risks are, and without focusing on the correct risks,
and without having the time to understand the international interconnectiveness
of the system would have been too fast. I think the Government
has done a relatively good job in that area at avoiding the risks.
You will remember the Better Regulation Commission brought out
a report on risk, and one of the things that report talked about
was the pressure on politicians and ministers to make knee-jerk
reactions to public crises. I think in this case what the Government
has done is it has focused on reacting to the things that needed
urgent reaction urgently, and the things that can take a little
bit more time in slightly more time. As Adair Turner has said
publicly, the outcome of this will be quite a significant change
in the way in which financial services are regulated because that
is probably what is needed.
Q6 Judy Mallaber:
I really think what you are saying makes a tremendous amount of
sense because you can see that the way that the Government has
made announcement after announcement trying to help business with
various types of scheme to try and get the money flowing again.
It is all very well making announcements, but actually working
through the logistics of making it happen, we are still not seeing
finance trickling through to companies, so I certainly think that
you are right there, and the actual complexity of financial services
does make me wonder whether financial services, in terms of trying
to regulate it, might be somewhat unique because of the fact that
it has got this global nature, because of the fact that you have
got people in the banking sector who are designing products that
even they can hardly understand in terms of their complexity,
so it is a real challenge for you. Do you think that the financial
services sector is unique? Secondly, can I ask about what implications
you think that has got for the wider regulatory agenda because
you have got companies who are saying to me, "Look, we do
not want any more regulation. We are trying to measure day-to-day
where we are. We do not want any more regulation placed on us,
thank you very much. Let us have a moratorium."
Sir William Sargent: Financial
services is unique in its interconnection between the world economy.
I think that is quite unique. Certainly during a point when the
economy is growing and there is the ability to take what we call
a "regulatory dividend", whereby you are developing
social policies, you can afford to fund them from the growth.
At a time when there is no growth, the idea of considering slowing
down, stopping, postponing, putting to one side for a limited
period of time is certainly something that is worth considering.
One of the observations that I would make is if I look back the
three years that myself and Jitinder have been in this space,
I do not believe that there is a minister or a Member of Parliament
or an official or an inspector that thinks that regulation is
a cost-free option. Regulation provides fundamental benefits and
they, as a rule, outweigh the cost, but everybody understands
the principle that there is a cost involved, and you should be
very careful about it when you are going about doing so. If I
look back, that is the single biggest mind-set change I have seen
over the past few years.
Q7 Gordon Banks:
In the light of what is going on just now, and we have talked
about it, do you think there is an inherent tension between the
Government's aim to support business and its need in that case
to support jobs, et cetera, and the need to respond to the financial
crisis? Do you think that instead of being flip sides of the same
coin they are totally different objectives in total? Do you think
one rubs against the other or do they merge together?
Sir William Sargent: I do not
think they are because if I come back to some principles, which
again I have understood better than I did a number of years ago,
regulation fundamentally provides for things improving generally:
making markets better; making things more coherent; and giving
consumers confidence in buying a product. In financial services,
people need confidence to come back into that market so therefore
regulation is going to be one of the structures and tools that
allows people to regain confidence in the system. If you start
with that principle, it is very much in the business community's
interest that the regulatory environment is coherent, effective,
and that people understand it, and so forth. One of the things
that has happened, to use the expression you used of rubbing up
against, sometimes regulations are put in place which do not necessarily
achieve the end result that everybody agreed should have been
achieved in the first place. It is not in business's interest
or employees' interests or citizens' interests, or anything like
that, because all that has happened is that time and money has
been wasted in doing something which is not getting an end result.
It is particularly important at a time when the economy is struggling
to make sure that none of that is in the system, and so the idea
of being clear about what it is that you are doing, why you are
doing it, is it being effective, is there a different way of doing
it, what is the evidence, all the better regulation principles,
are particularly critical at this time, so I would be very worried
if people felt that this is all about being good to business and
not looking after citizens. These are completely compatible principles
as far as I am concerned.
Q8 Gordon Banks:
Just on that, obviously there are a lot of people who feel that
regulation has failed in as much as the financial crisis and where
we are. Do you think that has damaged regulation as a concept
in general and that those of us involved in the regulation agenda
actually have to regain people's confidence on the effectiveness
of regulation in general? Often regulation is not tried and tested
until there is a potentially a major crisis, which can be years
and years in advance, and hopefully never occurs. Do you think
there is that lack of confidence that the public and industry
and the economy will have in regulation being able to protect
them and us as individuals?
Sir William Sargent: I do not
think so. Things fail. If you go through 50 years, there have
been aspects of the world that have failed around us, and this
is the current one. If you look, for example, at health and safety
laws, the amount of laws in the health and safety space now is
about half of the number that were in place 30 years ago. The
number of deaths, fatalities and injuries in the workplace is
down by three-quarters. I think people get the fact that they
feel pretty safe going to work these days. I do not think people
are articulating that there has been a failure in health and safety.
If you look at food standards and the way the Food Standards Agency
has gone about its business, and the laws that are in place in
the UK, small firms appreciate the regulatory environment and
the manner in which the Food Standards Agency has improved and
made it straightforward for them to comply, while at the same
time the statistics are showing that that is a very effective
regime and people feel very confident. When the Food Standards
Agency takes an initiative, it very clearly retains the confidence.
It has said a number of times in the last three or four years,
"Do not worry about this particular thing," or, "This
is safe," even though the media has been pushing something
that has been potentially slightly scaremongering. I think the
regulatory environment and those agencies that been very clearly
effective have kept that confidence. I do not perceive that any
of that has been damaged in the current financial services space,
unless someone else has a different view.
Mr Kohli: I think one theme that
you as a Committee have explored in the past with us is around
whether businesses just say that there is too much regulation.
I think there is a little bit of evidence out there from some
business surveys that businesses are more willing to be accepting
of regulation on the back of this crisis, in the sense that it
does not mean they want more than their fair share, but that kind
of knee-jerk perception/reaction which is that it is all bad rather
than we need to identify the regulations that genuinely work and
serve and do good in our society. A lot of businesses did think
that and there are some businesses who do still think that, but
I think there is some evidence that more businesses are beginning
to understand that regulation is essential in our society. That
does not get rid of the challenge, which is designing regulation
in a way that genuinely works and is no more onerous than it needs
to be in order to achieve the outcome that we want. There are
some changes as a result of this episode and, understandably,
it has been a very, very significant episode in our society and
will continue to be that.
Q9 Gordon Banks:
In some ways it could be seen as a beneficial impact on the regulatory
agenda and, you are right, it is better, not more, is it not?
Mr Kohli: Yes. Absolutely.
Q10 Gordon Banks:
That is what we need.
Mr Kohli: We are the better regulation
effort rather than the deregulation effort or the more regulation
effort. It is sometimes hard to communicate what that "better"
word means, but in some ways this is a good time to try and communicate
that.
Q11 Dr Naysmith:
Despite what you have just been saying, if more intrusive regulation
does emerge from the various current reviews that are going on
and policy initiatives and so on, what do you think the implications
are if that happens?
Sir William Sargent: I think you
need to analyse what people mean by "intrusive" in that.
If you take Lord Turner's perspective in the financial services
space, what it means is people focusing more on those institutions
that they perceive to be at greatest risk as well as those sectors
or the business models that they perceive to be the biggest risk,
and given the consequences of that going wrong, it is quite correct
that energy and effort should be put into that. If you call that
intrusive then that is perfectly sensible. If we come back to
the very first question of risk-based, you need to intrude on
people where the risks are very clear and large and not being
managed by either the citizen or by the organisation that is taking
that risk and so forth. From that point of view the word "intrusive"
does not cause me a problem. If you use it to mean intrusive where
someone turns up week after week in an organisation that has proven
for the previous three weeks that it is perfectly good and effective
and capable, or where the risk is pretty minimal in the first
place, then that would be wrong. There are occasions, and the
financial services area is one clearly, where the FSA in re-organising
itself and focusing will clearly be happier to intrude.
Mr Kohli: If I could make two
further observations. One is that in the arena of financial services
the vast majority of firms that the Financial Services Authority
regulates are small firms where the impact that they can have
in terms of the overall financial services market is extremely
limited. Your mortgage broker, the person who is selling you your
general insurance policy, your home insurance and contents, all
of those people are also regulated by the FSA. The challenge for
the FSA to which I know they are alive is ensuring that in designing
the right regulatory framework for financial services there is
not almost an element of contagion into the vast majority of firms
they regulate who, frankly, had nothing to do with this crisis.
That is a challenge for them to which they are very alive and
of which I think we need to be aware. The other thing that is
interesting—and I think this touches on a question that
one of your colleagues raised earlier—is that different
countries use different models. People would say that the SEC
in the US was a significantly more interventionalist regulator
in terms of the number of people who were working on the premises
of large financial services firms than the Financial Services
Authority in the UK. There is no evidence that either model worked
better. I would not say that the US was any better at predicting
what was going on than we were. Indeed, some would say that they
were much less good at it. What is interesting about what we are
learning from this episode is that you have to focus on the wider
picture. You have to focus on the business model within the financial
services firm rather than just checking that they are ticking
all the right boxes and doing all the things you hope they might
be doing. If they have got products that are just too complicated
for them to understand and for any regulator to ever get their
head round, then maybe those products should not exist. I think
there is some real learning there around how you design systems
that work and, if those systems that work happen to be more intrusive
for a small number of firms, that is fine.
Q12 Dr Naysmith:
The point behind my question is I think it is fair to say that
you have been associated with the idea of lighter touch regulation,
certainly parts of government have, and you have never said that
that is something that you are not in favour of. If this were
to turn out to be, in the view of the people who are being regulated,
intrusive, would that be in conflict with the aims of your organisation?
Sir William Sargent: The term
"light touch" is not a term that I would have used personally
because I come back to the principle of if you as the regulator
need to understand the risk that is being run in your sector,
so to speak, and if you conclude that you need more information,
you need to get clearer insight. If you ask in a cumbersome way
and never use the information when you get it, and therefore it
is of little use to either you or anybody else, then that is an
unnecessary and unreasonable cost. If however you need to ask
questions and get access because the risk being run is a billion
pound cost, or something like that, that is perfectly okay because
you are trying to be proportional. Let me go to an example in
terms of we have just done a review with our colleagues in the
HSE of those firms which are clearly not health and safety risks.
I think about 80% of businesses have a very low risk and therefore
the regime that you apply to them is, by definition, going to
be much lighter in terms of its design and the method by which
you are going to inspect them is going to be, if you wanted to
use the term, light touch. You are going to identify that the
risks lie in places where there are major manufacturing and chemicals
et cetera, et cetera. All the time you are coming back to where
is the risk, and where should you be focusing your energy and
your exercises. By definition, that risk (and financial services
is a good example) changes from five years to five years. What
is risky now, by the time you have delivered new methodologies,
is not. Chemicals is a much safer industry now than it was 50
years ago, for example, so you would be applying a different approach
to it than you would have previously.
Q13 Dr Naysmith:
Although it is not really related to what we are talking about,
you mentioned health and safety regulation, and one of the reasons
why we have got a 75% reduction must be that we do not have many
of those large chemical works that we used to have, they are much
more fine chemicals and we do not have mines virtually at all
any more, and our fishing fleets are much smaller than they were,
and lots of associated industries like these must have helped
to lead to a reduction in fatalities and serious injuries. I am
sure there is a good job being done as well but there are other
things happening.
Sir William Sargent: But I would
feel that those industries are safer. I suspect it is safer to
go down a mine these days than it would have been 100 years ago.
Q14 Dr Naysmith:
There are not that many of them left is my point.
Mr Kohli: To add to what William
said, if we think about the things we have done over the last
few years in the name of better regulation—some people will
have used a term like light-touch regulation, other people will
have used the term risk-based regulation, and then applied the
test on what we have done. The single biggest initiative on reducing
administrative burdens has been work by colleagues in the Department
for Business, Enterprise and Regulatory Reform in order to help
businesses understand what they need to do to comply with employment
law. You will remember one of the themes we have talked about
before is because businesses do not know what they need to do
and because we as government are not clear enough with them about
what they need to do, they quickly hire a solicitor and as a result
of that the bills rack up pretty quickly. That is the good businesses
at one end. The less good businesses just think it is all too
difficult and probably do not do very much at all and just hope
they are doing the right thing. By using web-based tools, which
make it a great deal easier for businesses to know what they need
to do to comply with the law, we reduce cost in the system. Is
that risk-based regulation? Yes, it is, because you are communicating
to the business community what the real risks are and what they
need to do to comply with the law. Is it lighter touch than it
was before? From a business perspective, yes, because you are
spending a lot less money on it than you were before. Is it light
touch regulation in the sense that you are letting people off
the hook when they do not need to be let off the hook? No. The
semantics are quite hard in this area, unfortunately, but a whole
series of different initiatives that departments have taken in
the name of better regulation have been ones about identifying
what the real outcome is, identifying what businesses need to
do in order to achieve that real outcome, and making sure that
it is easy for them to do just that. No more, no less. With a
bit of luck, we push up our compliance levels as well as pushing
down cost. I certainly think there are some examples where that
has been happening.
Q15 Gordon Banks:
Again talking about the financial sector, but please feel free
to branch into other sectors, Mr Kohli mentioned this in his last
contribution when he was talking about the FSA and how they have
to make sure that whatever is introduced does not impact disproportionately
or negatively somewhere else. In general, do you think government
and regulators really do have the necessary skills and expertise
to regulate the financial services sector effectively? A lot of
people would obviously say that as government and regulators we
do not because what has happened has happened. Are there things
lacking? Is there a shortfall in sector expertise because every
sector is so different to the next one and we cannot necessarily
all be experts in everything? Is there an issue on sector expertise?
Is there an issue on enforcement? I think it was mentioned about
a product that is so difficult to understand it should not be
on the market, but how do we get to the stage where a product
is developed, it is put onto the market and then somebody analyses
that product to say, "This is far too complex a product for
the industry let alone the consumer"? Do we really have the
ability and the aspirations to take that head on? Then do we have
the ability and the resources to enforce the action that may be
necessary to get rid of some of these products and to regulate
the sector better? I have a little bee in my bonnet about the
role of auditors. Lots of people will ask questions in our current
financial situation about what the auditors of some of the big
banks were doing. I have yet to have that question answered, to
be truthful. It is one of these recurring questions. If our auditors
cannot manage the situation adequately, what hope have we got?
Sir William Sargent: If I unpick
the questions.
Q16 Gordon Banks:
Sorry to have gone on so long.
Sir William Sargent: If I take
the theme as being do we have the right skills in the right place
to do the jobs amongst the regulators, if you look at both the
Northern Rock internal audit that was done by the FSA, and if
you look at Hector Sants, the Chief Executive at the FSA, and
his evidence a couple of weeks ago, he was very clear that having
done the Northern Rock analysis that they needed to have a change
of mix of skills, to have some people on board that they did not
have on board. In our own review of the FSA, we identified one
of the issues as being the turnover in high-grade staff. There
was turnover in that and therefore institutional memory. That
has been very clearly understood at the FSA as being something
they are in the process of enhancing and bringing more people
in from the sector and making sure that the people have the skills
and understanding for the specific product areas. It is interesting
however that people keep putting the point of pressure onto the
regulator, so to speak. You start with the fact that the businesses,
in the case of the banks, made the choices of the products themselves,
and the responsibility starts with the people in those banks and
their own governance structures and boards, and auditors are part
of that. To say that this is purely a regulator's responsibility,
a regulator cannot possibly be everywhere at all times, and that
applies no matter which part of the economy you are in. You have
to have a situation where people understand, and that is where
people are starting to look in terms of the regulatory environment
going forward, their roles and having the skills throughout the
entire system to understand the risks that they are running, and
so forth. If you go across to other regulators, whether that be
the Environment Agency or the Food Standards Agency or the Office
of Fair Trading, they are quite sector-specific and focused, and
quite often their staff are in areas like scientists at the Environment
Agency and food scientists and such at the Food Standards Agency.
I think there is quite a culture of trying to make sure that you
have expertise inside those organisations, and when they work
well you quite often find that it is the right skills set in the
right place. I come back to the fact that the principle that this
is for their boards and the select committees in Parliament and
their sponsoring departments to do, to make sure that people understand
from decade to decade that things change and that do you still
have the right skills. Financial services have shown that focusing
on the institutions when we should have been focusing potentially
on the overall structure.
Q17 Gordon Banks:
Just on that, the best people to examine the application of regulation
in some ways might not be the regulation we are talking about;
sometimes it might be the application of the regulation, and again
going back to the auditors issue, the best people to examine that
application are people who have that sector expertise. I have
been in private business and subject to audits since I was 19.
I am 53 and I have yet to ever come across someone who has audited
anything that I have been involved in in the construction industry
who has any construction industry knowledge at all. They are all
auditors/accountants. How do we attract people with sector backgrounds
into that role?
Mr Kohli: I think there is a real
challenge for regulators in terms of what we are asking regulators
to do, to become genuinely risk-based, to focus on the right risks,
to have people who are able to differentiate, to understand the
impact of their actions in relation to a particular business that
they are regulating. In order to do that well you absolutely need
people who understand the sector and understand how it feels to
be on the other side. Regulators can find that hard to do. The
Financial Services Authority is probably an extreme case in that
I was listening to the radio this morning and somebody was saying
that some of our brightest graduates ended up in financial services
because the salaries were high and lots of very bright people
ended up in financial services. For a regulator to compete in
that world was tough, although I think the FSA did its best and
did a pretty good job. That is less challenging for the Environment
Agency when it comes to having people who understand how it feels
to run a plant which is involved in emissions, although it is
still a challenge. I think quite a lot of work that is going on
is about addressing that challenge, so one of the things that
the Local Better Regulation Office is working on is around how
do you get people who work in local authorities—trading
standard officers and environmental health officers—to do
swap sessions with people in the business community. That is all
about enhancing learning. One of the things that we would have
talked to you about before is around our own skill mix. We have
created an organisation which attracts people from outside of
government because we think it is important to have people who
understand how it feels to be in the business world. Obviously
William is a key person in that, but he is not the only person
in the organisation who understands how it feels. I see that as
an on-going challenge for regulators. It is not new, it is something
we have talked about before, and something that we have worried
about for some time. I think regulators understand the challenge
and are addressing it. It could be that this is a good time for
people in the public sector to attract some pretty good people,
because the world of regulation will continue, and indeed some
of the questions that we have had earlier in the session focused
around whether the Financial Services Authority will need to have
more people, and they might do in some areas of their business,
and now might be a good time for them to attract people who really
understand the inner workings of the banking sector. That will
be true in other sectors too, but probably not quite as extreme
perhaps as it is in that sector.
Q18 Dr Naysmith:
How can government and the regulators ensure that regulations
achieve their intended objective and deliver the desired outcomes?
What do they need to do to improve their capabilities in this
area?
Sir William Sargent: If they start
from the point of view of putting their policy-making at one end
of the scale through the better regulation prism and understanding
the principles, and questioning what are we trying to do in the
first place, I am quite encouraged. If we look at our new impact
assessment approach, it has very much encouraged people from the
very beginning as one line of the policy to try and question is
this the right technique? Are we choosing the right route to go
down? Is regulation the right thing? Will it achieve the result?
Do we have the evidence to do it? I think the fact there is increasingly
a culture, particularly amongst the 18 departments that we work
with, to start by questioning the solutions that they are doing,
which is a big change. If you work that right through, the impact
assessment process, as you will have noticed, is a document that
is live right through the entire process, so as people are designing
the delivery systems quite often the business community's problems,
and citizens' problems (because this is not just a business thing;
this is to do with citizens combined as well) the problem is that
in the mechanism that they are being asked to use to abide by
the regulation that has got nothing to do with the original idea.
The original idea might have been very straightforward and simple,
and does not seem like a complicated thing, and why would we not
do it type of area, and everyone signs up to that and that is
great. The problem nine times out of ten, from where I am sitting,
comes with the complex system that was designed to deliver and
does it actually achieve a result because of the complexity, so
the fact that you are collecting a whole pile of information and
whether you do anything with the information, et cetera. Having
people's mind-set in the right place is the most effective way
of getting the right answers. In our case, for example, having
Parliament and the media using impact assessments as a key challenging
tool is one of the best ways to hold people to account to get
to the right result.
Q19 Dr Naysmith:
One of the reasons for the existence of this Committee is to get
rid of all the out-dated regulations (which we occasionally get
the chance to do when government departments bring items before
us) but we know that there are hundreds of them out there that
people think are burdensome and useless and yet we have great
difficulty in getting departments to bring forward things for
us to get rid of. Why do you think that happens if there is an
attempt to assess whether regulations are effective or not and
meeting their purpose?
Sir William Sargent: It is interesting
because the day that I started this role I thought that I would
have an avalanche. I went and spoke to the consumer groups as
well as the trade unions as well as the business groups in that
first month and said, "You guys have got shelves full of
stuff that if only it did not exist or was simplified or cut away
or done away with, or whatever it is, life would be better."
It would not be an entirely controversial statement to say that
I got virtually nothing to assist me on my journey, so to speak,
because it is very easy to criticise generically this does not
work, that does not work, and whatever, but as soon as you start
testing the thesis with individuals, first of all, you find that
actually they think the idea of regulation is a good thing in
the first place and they do not want it done away with, if you
were to say we will do away with competition law or something
like that. You very quickly get to a proper conversation and by
the end of the conversation quite often people come up with new
regulations that they would like in place. If you do a two-hour
conversation with anybody from a citizen to business that is the
cycle you go through. We found, for example, if you take the reform
orders, that most of the things can be solved long before you
ever get there because they come back to the delivery system.
It is asking why we are doing it. There is only one law but why
are we implementing it in this way? When you start analysing and
start getting into the nitty-gritty of a piece of legislation,
you think the law is perfectly okay; it is just that someone has
chosen to go away and do something in a complicated way, or that
it is not achieving anything in the first place, and then the
question is do we use spare and rare parliamentary time to do
away with something that is doing nothing, et cetera, et cetera,
so it is more complex than that, but I do not feel that people
have put forward to us many pieces of law.
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