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Consumer Focus evidence to the Regulatory Reform Select Committee inquiry on Themes and Trends in Regulatory Reform
1. Summary 1.1 Failures in financial regulation were a contributory cause of the financial crisis, but this regulatory failure was not rooted in the better regulation agenda. The principles underpinning the better regulation agenda remain valid and should not be defeated by scattergun or kneejerk reactions to recent developments. However, political commentary around the need for light touch regulation has at times unhelpfully muddied communication about what the better regulation agenda is actually intended to achieve. 1.2 It remains in the consumer and public interest to have the right amount and type of regulation but no more. Unnecessary red tape should be dispensed with, but equally Government should be careful to maintain high levels of consumer protection if it wants to rely on consumer spending to help bring the economy back on track. 1.3 A risk-based approach to regulation remains valid, but there is a need to introduce greater diversity of thinking and a fresh perspective to key issues around regulatory intervention and risk, on a cross-economy basis. One possible explanation of regulatory failure in financial services is that the FSA and industry framed the issues in the same way. 1.4 There is an opportunity to re-energise the better regulation agenda by putting the consumer interest at the heart of regulatory policy and practice. A study by Consumer Focus, Rating Regulators, highlights the likely strengths and weaknesses of regulators across the economy. Its principal finding was that regulators have a misplaced confidence in market forces to deliver consumer protection. 1.5 Our study found many examples of good practice and innovation, but these were rarely replicated from one regulator to the next. The BRE should develop a mechanism, which eventually should become self-supporting, to facilitate the sharing of best practice. 2. About Consumer Focus 2.1 Consumer Focus champions the needs of
consumers across 2.2 We take action where markets fail
consumers and ensure a fair deal for all - especially vulnerable and
disadvantaged people. We want to see consumers central to business and
government decision making, and we'll be working in Europe too, to make sure
consumers' needs are heard in
3. Current developments 3.1 Everyone is still trying to piece together the complex interplay of factors that led to the financial crisis. Mistakes by financial regulators, alongside the actions of financial institutions and others, are certainly part of the story. However, we have seen no evidence so far that the mistakes of financial regulators were rooted in the underpinning principles of the better regulation agenda[1], although some political commentary demanding 'light touch' regulation has at times unhelpfully muddied the waters. Changes to the framework of financial services regulation are no doubt needed, but change should be confined to this sector unless subsequent analysis establishes that the better regulation agenda was a contributory cause. A scattergun approach to regulation or kneejerk reactions to recent developments would raise serious concerns about the state of regulatory thinking and practice. 3.2 It remains in the consumer and public interest to have the right amount and type of regulation but no more. Consumers and business have a shared interest in maintaining an efficient and effective system of regulation as an excess of regulation can dampen innovation, unfairly protect incumbents from competition and incur costs that consumers ultimately pay for. Equally, some regulation will always be needed, for example in lifeline situations or to make markets work. It is important that the value of regulation is given proper recognition in public debate rather than, as has been portrayed in some quarters, it is seen simply as a burden on business. In this context, we are pleased that the Better Regulation Executive has started a project looking at the benefits of regulation to society, which Consumer Focus is advising.
3.3 In the context of the economic downturn it is important to minimise regulatory burdens. Therefore we support an approach which dispenses with red tape, but at the same time Government should not carelessly throw necessary regulation on the bonfire, nor should it shy away from introducing new regulation where this is necessary to protect consumers. If Government is to rely on consumer spending to help get the economy back on track, it is important to maintain a consumer protection regime able to give consumers the confidence to deal with traders who may cut corners in order to save on costs. The BERR Consumer Law Review is looking at ways to simplify the legal framework which establishes our consumer rights; these reforms would benefit both consumers and business. Evidence submitted by consumer groups to the review also highlighted gaps in redress and deficiencies with the enforcement regime that also need to be addressed. The findings of the Review were expected before the end of 2008, so decisions are overdue. 3.4 An examination of the FSA's role in the financial crisis will understandably focus in part on its regulatory style. Principles-based regulation is the centrepiece of the FSA's regulatory approach, but it would be misguided to encourage the FSA to retreat from this landmark initiative targeted at retail financial markets before it has been given a proper chance to succeed, not least because recent events were linked in the most part to a failure of prudential regulation. Whilst we look forward to the promised 'revolution in regulation' at the FSA promised by Adair Turner, we remain of the view that a principles-based regime has a better chance than writing detailed rulebooks of changing the behaviour of financial firms as it seeks to tackle the underlying cultural problems. 3.5 A risk-based approach to regulation remains a valid cornerstone of the better regulation agenda, although this should not be equated with 'light touch regulation'. The FSA was previously regarded as having quite sophisticated risk assessment systems, which suggests even the best-designed systems are not foolproof. Perhaps one explanation for why they failed is the absence of an external perspective to challenge the received wisdom. Our perception is that both industry and the FSA framed the issues in the same way - they might have disagreed on points of detail, but the way they thought about things was the same, with catastrophic results. The FSA saw its peers as other financial regulators, who of course also had the same framing of issues. 3.6 The need now is to introduce greater diversity of thinking and a fresh perspective to key issues around regulatory intervention and risk. Composition of decision-making structures is an important component of this and we have urged the FSA to ensure it appoints someone with consumer expertise to its board at the next opportunity. We note that the establishing legislation for both the Food Standards Agency and the Legal Services Board state it is desirable for their boards to be composed of individuals with a range of backgrounds, including consumer affairs. Another aspect of bringing an external perspective is engagement with the public to inform decision-making through research and other methods. In a recent study assessing six major regulators from the consumer perspective, Rating Regulators, Consumer Focus identified an improving picture in terms of consumer engagement, although performance was variable and we found the FSA carried out relatively little consumer research outside of its work on financial capability. 3.7 The need to open up regulatory systems to fresh perspectives applies across the economy, both to regulators and Government departments. The Risk and Regulatory Advisory Committee was intended to deliver some form of external challenge on systems and culture with respect to risk. Its work complements the Better Regulation Executive's role to provide some form of accountability, so that implementation of the wider better regulation agenda at working level is measured against a framework. An interesting discussion point is what arrangements should be put in place once the RRAC completes its work.
4. Re-energising the better regulation agenda 4.1 Whilst the principles that underpin the better regulation remain sound, the financial crisis provides an opportunity to re-energise the debate. Recent events illustrate it has never been more vital to put the consumer interest at the heart of the regulatory agenda. We are mindful of the last paragraph in the Committee's previous inquiry into the Better Regulation Executive and the impact of the regulatory reform agenda: "Finally, we are left in some doubt about the extent to which the citizen in general is considered in matters relating to the introduction of better regulation. That is an issue to which we may well return". We agree with this analysis and urge the Committee to put the citizen interest at the centre of this inquiry. 4.2 Consumer Focus's Rating Regulators study (copy enclosed) provides clues about the likely strengths and weaknesses of regulators across the economy. We believe the following findings are relevant to this inquiry: · Statutes - the legal framework provides regulators with a clear mandate and the tools for the job, but it can also prescribe duties that promote consumer-focused ways of working. We identified helpful duties across different pieces of legislation, including in relation to board membership, consultation and transparency. · Transformation - Ofcom was seen by its stakeholders to have made a sea-change in its level of consumer focus over the last few years due to a combination of factors, including the strategic direction of a new chief executive, an expansion of the consumer policy team and an increased investment in consumer research. This experience gives us optimism that regulators are able to develop a strong consumer focus. · Regulatory approach - we identified a strongly-held view among stakeholders that some regulators have a misplaced confidence in the ability of market mechanisms to deliver consumer protection. A related criticism was that regulators adopt self-regulatory solutions when they do choose to intervene when the chances of success of this approach are slim, rather than choosing from a mix of interventions depending on the circumstances. · Enforcement - we found evidence of the regulators being more prepared than in the past to flex their muscles by imposing tougher penalties for serious or persistent rule breaches. The regulators have previously been criticised by parliamentary committees in this respect. As part of this, we were encouraged to find the FSA has now dropped its 'we are not an enforcement-led regulator' mantra.
4.3 We were pleased to find examples of good practice and innovation among the six regulators in our study. However, returning to a theme we raised in our evidence to the Committee's earlier inquiry on better regulation, good practice in one regulator was rarely replicated elsewhere. Examples include the Food Standards Agency's approach to transparency, Ofcom's use of business process tools to ensure the consumer interest is designed-in to its activities and the FSA's approach to measuring its impact in terms of outcomes. 4.4 In its earlier inquiry, the Committee recommended that the Better Regulation Executive and Local Better Regulation Office become more actively involved in facilitating greater sharing of best practice. In its response to the Committee's report, the Government highlighted some existing initiatives that aimed to achieve this, but did not commit to a new mechanism. In light of our comments above, we consider there is a need for the BRE to develop a mechanism, which eventually should become self-supporting, to facilitate the sharing of best practice. We also think there is merit in considering the creation of a National School of Regulation to train the next generation of regulators in a similar way to which the National School of Government prepares civil servants for their role.
Consumer Focus February 2009
[1] proportionate, accountable, consistent, transparent, targeted |