UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 329-iHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREREGULATORY REFORM COMMITTEE
THEMES AND TRENDS IN REGULATORY REFORM
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This is an uncorrected and unpublished transcript of evidence taken in public and reported to the House
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Transcribed by the Official Shorthand Writers to the Houses of Parliament: W B Gurney & Sons LLP, Hope House, Telephone Number: 020 7233 1935 |
Oral Evidence
Taken before the Regulatory Reform Committee
on
Members present
Andrew Miller, in the Chair
Gordon Banks
Lorely Burt
John Hemming
Judy Mallaber
Dr Doug Naysmith
________________
Memorandum submitted by Better Regulation Executive
Examination of Witnesses
Witnesses: Sir William Sargent, Executive Chair, and Mr Jitinder Kohli, Chief Executive, Better Regulation Executive, gave evidence.
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 per cent 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
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
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 FSA 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 FSA 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 way 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 understand. 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
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 per cent 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 per cent 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, so 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 offices are 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 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 any pieces of law.
Q20 Dr Naysmith: You think there are adequate attempts to assess the effect of newer regulations over the last few years in terms of impact assessments?
Sir William Sargent: The simplification plan approach which, as you know, the departments publish every year, is the point at which departments have to sit down and understand the territory that they are occupying, and whether there is anything that they can do in that space. That is quite new and unique. The admin burdens logic took us into that space which then widened into, "Well, is there anything else you guys could be looking at?" If you allied that to the fact that when people are bringing out new pieces of legislation in a space, they are encouraged, and the guidance encourages them, to look at the overall space that they are in so that they do not just bring out a law in a space that already has 15 laws in it already without looking at the totality of it, that is when we begin to get into a healthier space and you can see whether you can consolidate areas.
Mr Kohli: I think we
are getting better at ensuring that when we bring new regulations forward they
are genuinely ones which are needed and have been through the proper impact
assessment process. I would not want to
say that everyone in Whitehall is doing it perfectly because I just do not
think that is true, and, indeed, the National Audit Office recently published a
report on the quality of impact assessment, which broadly gave the message that
progress was being made but we are on a journey, and I think that is a fair way
of putting it. In terms of the stock of
regulation, we have also seen a bit of a step change really in that people are
genuinely focusing on how they can ensure that regulations do not cost
businesses and others on the ground any more than they need to. That is a change in
Q21 John Hemming: I am going to start out for reasons of transparency by declaring my interests that are associated with this area. I chair a company and I am a partner in a company JHC LLP, which is a software company that provides settlement systems in the financial services sector. I am also a shareholder in an organisation called OMX Securities Ltd which is a joint venture between NASDAQ and the Swedish Stock Exchange and JHC providing settlement services, and is therefore a regulated entity under the Financial Services Act. I do not think there is any conflict of interest but for reasons of transparency I need to make that declaration of interest. Would more intrusive regulation require greater resources? Do regulators need to undertake more audit, improving their ability to collect, understand and act on evidence?
Sir William Sargent: Do you want to do it in two bits?
Q22 John Hemming: The first bit is do we need more resources for more intrusive regulation?
Sir William Sargent: Not necessarily because again it comes back to what are you using your resources for. If we take the FSA internal audit, the identification there was that some of the resources were not necessarily focused in the right place or on the right skills-set at times, so it is about who you have and where you are applying them and are you applying them in the right place. That is the first thing you have got to do before you decide that you need more resources. If you look at the credentials side of the Financial Services Authority that is something that I am certain they are currently looking at: who do they need, do they need more people. The skills-set will be different so it does not automatically follow that more resources lead us to better enforcement. The observation I would make is whether it is the right mix in the first place. That applies to any of the regulators that are out there in the world.
Q23 John Hemming: The other question is do regulators need to undertake more audit, improving their ability to collect, understand and act on evidence?
Sir William Sargent: Audit it themselves you mean?
Q24 John Hemming: Audit the people they are regulating, I presume.
Sir William Sargent: Presuming the process of regulating in the case of a certain sector, they use a lot of techniques and they analyse the risk. I think probably a better question to focus on is auditing themselves and their own processes and questioning what they do. That is probably the part of the question that personally I would focus on. Obviously they have three forms of being held to account at the moment. They have their own boards, and therefore what arrangements their boards have put in place, including the non-executives, is something that is important for them to look at and question whether they have got the right structures. They then obviously have a sponsoring department normally, which again has a role in auditing both themselves and the department. Then they have a select committee normally in the space occupying that. Then the National Audit Office is acting on behalf of Parliament, which is traditionally auditing people. Do we need more? I do not think myself or Jitinder are qualified to comment on that, unless you think different.
Mr Kohli: Again slightly going back to an answer that we gave earlier, this is about better and not more or less. Thinking that just doubling the amount of inspection or audit of regulated companies will improve regulation is just not true. You have to go in and ask the right questions in order to check whether the risks are being adequately managed in any organisation. You can go in every day of the year and ask the wrong questions every time and you will not be in a good regulation place. You could go in once every year, once every two years or once every five years and ask the right questions, and occasionally collect a bit of information to check that things are being done correctly, and that would be a better place to be. The challenge then is for the regulator to always be thinking about whether it is working. If that means more audit and more thinking constantly about how to improve the way they go about their business, to check constantly whether what they are doing is working and to constantly improve it, I think I am in favour of that. Good organisations do that anyway. I am not saying it as a criticism, but a good organisation will always be thinking about what outcome am I trying to achieve, and what are the things that I need to do to achieve those outcomes? What are the things I am currently doing and are they the same as the things I need to do, and are they genuinely working? What feedback am I getting from people? What am I hearing from people on the ground and what does that tell me about my future strategy? Any good organisation would do that and lots of regulators do that all the time. I think that constant improvement is really important. That is not the same as to say that inspecting a business every day of the year is going to make regulation better, if you are asking the wrong questions.
Sir William Sargent: If I come back to the comment made earlier about auditors. My own experience in business is that traditionally the people who audit you do not understand the business and, by definition, they cannot. If you are a specialist in these businesses it is very difficult to get auditors that are perfectly qualified to that. It comes back to the right question and the right training of those auditors. That is the area that I would go looking in, and working out whether people had the right capability, because one of your questions was do they have the capabilities, and the question there is I do not know if they have the right capabilities, although it is clear from the variety of performance that clearly in some cases they do not, and then the question is how do you build that capability. Quite often you build it by training people, selecting the right people in the first place, designing the questions, and having a risk register that is actually meaningful for that particular regulator is important.
Q25 John Hemming: The area which I think all of this misses is the other two aspects perhaps. You have got audit and checking what people are doing and asking them to fill in monthly reports. There are two other areas potentially where we need to improve regulation, and I would like your comments on this. One is transparency. That is transparency of what people are doing because if you look at how the SEC managed to fail to prevent Madoff making off with $50 billion, that is a question of transparency. The question is quis custodiet ipsos custodes? How do you know that the regulators are actually monitoring these things if you have not got transparency in the system? Do you see there is a greater requirement for transparency?
Sir William Sargent: I think in one word the answer is yes. As a citizen, certainly when I look back relatively simplistically, trying to understand the totality of what has gone wrong in financial services, transparency is one of the biggest flaws, that people did not understand. If you had your money in a Madoff account you could not go on-line and look it up and check that it actually existed and so forth. The answer is yes.
Q26 John Hemming: It is finding out what was on the other side. You have got the credit on one side but the problem for Madoff was that it was a Ponzi. Ponzi was actually more secure because at the start he actually had something; it was just there was a limit to how much return you could get. The second area that is very often missed - and I would like your comments on this - is whether we should have more regulation that prevents conflicts of interest, particularly in the financial services sector where you have the distinction between deposit-taking and investment banking, one of which is pretty well plodding but is secure, and the other one which is higher risk but has potentially higher returns. Do you think there is a role for more regulatory requirements that actually ban conflicts of interest in the same entity?
Sir William Sargent: Let me answer that by pointing back. I have been very encouraged by my conversations with Lord Turner and his speech back in January and his evidence at the Committee recently in terms of his understanding of the nature of the problem and the inter-linking of the system, both within banks as well as elsewhere. I am very encouraged that he has a clear view of issues such as you have just identified, how do you deal with conflicts, how do you deal with lack of clarity, lack of who is doing what, when, and what are the unintended consequences, for example, if you have remuneration systems that focus on short-term gains which are mis-pricing risk in the first place. I think the simplest answer, and I am slightly avoiding answering it, is by saying that I am very encouraged that Lord Turner has got himself into this space and has more capability than I have to address exactly and properly the question that you are asking.
Mr Kohli: If I may go back to the transparency question for a moment, as you know, one of the principles of better regulation is transparency. We have enshrined into law in the Legislative and Regulatory Reform Act that regulators must take account of transparency when they go about their business. It is getting greater prominence than it has done in the past. The one caveat I would make to that is that there is sometimes a risk that the state requires a very large amount of information to be given, particularly to consumers, and consumers struggle to make sense of that information, so transparency that makes too much noise in the system can do quite a lot of harm. I think there is a role for either regulators or for other intermediaries to help make sense of that information so that it genuinely works. On this account I might refer you to a report that we wrote a little while ago which we will have shown you before, which was done jointly with the National Consumer Council. It is probably the best front cover of any report we have ever published, warning: "Too much information can harm (and can fail to help consumers to make choices and can impose costs on business, despite the fact ..." and it keeps going. The title almost make the point more clearly than anything else. Whilst transparency is really, really important, and I would not for a minute give you the impression that we do not think it is absolutely fundamental, it is also important that what you do not create is so much noise that nobody can make any sense of it and they cannot do anything with the transparency, so it has to work as well.
Q27 John Hemming: A good specific example is I asked the Financial Services Authority whether they had published the tier one and tier two capital ratios for all the financial institutions that they regulate and they sort of refused and then did a little bit work on it. If we are talking about stability of financial institutions, the key measure is the Basle II capital ratios and the question as to transparency, in your view, should the FSA publish them?
Sir William Sargent: I think the thing that is emerging from the whole financial services space is the interconnectiveness of where the debt lies and so forth. I am not an expert in this so I am slightly in a space that I am not an expert in here. My understanding is that the method by which off balance sheet liabilities were placed was such that they would not be picked up by this publishing. You could have been transparent by publishing one thing but, in fact, if you go back two or three years, that would not have captured the entire financial position accurately worldwide of that particular institution. It comes back to the comment I made earlier and applies in regulation, the problem quite often lies in the design of the system how you achieve that transparency. Just publishing the tier one and tier two might not have created the level of transparency that, with hindsight, might have been useful.
John Hemming: I think we agree to disagree.
Q28 Chairman: In paragraph 2.2 of your memorandum to us, in the paragraph headed "Simplifying and modernising regulations", you set out some impressive statistics. In December 2008 the departments have now delivered over 240 simplification measures, taking the total admin burden savings to date to about £1.9 billion annually. The Government is on track to achieve its target to reduce the admin burdens faced by business, public and the third sector by £3.4 billion annually by 2010. They are very impressive statistics. It is going to be interesting to see how much of that feeds through into responses in, for example, the NAO's annual survey. In the current economic climate, and we cannot really escape from that, does the regulatory reform agenda need to adapt its focus? What are the biggest challenges to achieving the Government's objectives?
Sir William Sargent: The challenge is to carry on being good and better at regulation. The challenge always lies in working out what you want to try to achieve and the right way to go about it. That is a constant challenge, particularly in an environment where there is pressure economically to do things properly, so you start with the overall challenge in the first place that regulating properly and effectively is something that is not easy. We have the tools in place to generally assist people to do that now. I think if you come back to your observation about the figures that we have achieved, one of the things that we felt was a challenge was people understanding the progress that was being made, and so you need to bring validity to the numbers. For example, we brought together an external evaluation panel made up of a number of business groups, plus the Trades Union Congress, to verify whether they felt, together with us, that the numbers were effective. One of the challenges that we found was if you, for example, save a million and a half employers five hours a year, I would suspect, well, I know because I have not had a single letter from a single employer saying, "Thank you very much for the five hours that I have achieved this year," because, frankly, they have just gone on and done something else with their time, hopefully on productive stuff. The big challenge is to bring to people's minds the collection, in the case of the work to date, of 206 initiatives delivered, all of which add up to £50 here and £100 there and five hours there and so forth. If you think of the reverse, most of you will have heard from constituents over the years, "I do not have a problem with a single piece of legislation; I have a problem with the collection of tiny little things that add up to an overall burden." When we are trying to unpick the unnecessary cost, the same applies in reverse, that what we are achieving in the hundreds, in fact 700 initiatives which have been identified, collectively adds up to a significant enhancement, but getting that through to citizens as well as businesses is the biggest challenge, and therefore for the agenda and energy levels to remain we need that to become something that people perceive and support. That is a challenge that I have.
Mr Kohli: Thinking about the economic climate that we are now in and the impact that will have on the agenda, the first point really that I would want to make is that we absolutely need to deliver. We have made a series of promises around reducing the administrative burden by 25 per cent. I am very proud that we are on track but we are not there yet. We absolutely need to deliver and we must not allow ourselves to get distracted by the very real economic issues that the country faces. Indeed, at this time it is more important that we deliver because business needs all the support and all the help that it can get right now when it is under significant pressure. I think it is equally important that on the flow of regulation, on new regulatory ideas, that government departments and ministers think harder about whether now is the right time. Even when the benefit/cost ratio for a new regulatory proposal could be very good, actually this may not be the right time to do it because of the accumulative effect that William referred to that business is currently feeling. To give you a concrete example of that on tobacco, we made the decision that it is a right decision to ban the public display of tobacco in shops because smoking is a very real issue for our country, and therefore anything we can do to address that where the cost/benefit ratio is good is the right thing to do. We also made the decision that now is not the right time to do it, and so we are delaying implementation of that to 2011 for large shops and 2013 for small retailers, and that is sensitive to the very real economic issues that are out there at the moment. In normal economic times we might have done that faster. Indeed, I am sure we would have done that faster, so delaying implementation sensitive to the economic issues is one of the things that we are trying to do.
Q29 Chairman: My final question is to ask you perhaps to get your crystal ball out and look at what you think the future of the regulatory reform agenda will look like. When is the decision going to be taken on regulatory budgets? If the decision is not to proceed, what will happen instead?
Sir William Sargent: I think the decision is something that the Government is currently considering. We have obviously done the work and provided the material to ministers so I think that is probably a question better put to ministers from that point of view. The consultation only finished at the back end of 2008, as you know, and it is an incredibly complex concept - and we are the first people in the world to even consider how you might do that - so that at the moment is a matter for the Government to give a response on.
Mr Kohli: In terms of the future of the regulatory reform agenda, one of the things that we talked about earlier was around policy. I think it is important that the progress we have made on administrative burdens is reflected into the policy arena too in some form. It is much more difficult to do in that arena and we have got to be careful that we do not harm real social protections in our society. Another really important theme for the future is getting the message across more clearly than we have managed to do to date. While I am heartened that the National Audit Office survey seems to show a positive shift in business perceptions towards regulation, it also shows that there is a long way to go before businesses feel good about regulation. More businesses feel okay about where we are at the moment, but we have to make more progress in that arena, too. There are some ideas there that will form part of the future but, as always, we will eagerly await your report because, as you will know, last year's report helped us define a great deal of what we did over the last 12 months, and a number of ways in which we have taken forward the regulatory reform agenda respond directly to the recommendations in your report, so we are always on the look-out for ideas and this is a Committee where we are very heartened by the recommendations we receive from the Committee.
Sir William Sargent: If I can draw
it together, we felt that the agenda when we came on board a little over three
years ago was a long-term agenda. It was
not something that you just did in three years and that was it and you moved on
to the next. This is something which, if
I look in my crystal ball, I would like to feel the energy and focus was still
there five years down the line. I am
hoping for more of the same and business as usual from the point of view of the
work that we are doing. The bit that we
have not spoken about at all today, but something that is very close to my
heart, is the public sector work that we are doing. As citizens we all want more services from
the police, from nurses, from school teachers, and so forth, and it is
generally felt that somewhere around a third of their time is spent with
administrative duties. Public sector
workers are very happy with the concept of administration. You need to keep medical records and school
records and all sorts of stuff. However,
if we can take away ten per cent of their time spent and got it down to a
fifth, suddenly that is four to five hours a week of teaching, policing and
nursing which is not available at the moment.
That is a very powerful vision as far as I am concerned. That is an area which I think maybe next time
will be worth exploring and discussing.
In terms of Europe, people always say that
Chairman: Thank you very much for your time, gentlemen. I think that it has been a very constructive session.