UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 329 - iiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREREGULATORY REFORM COMMITTEE
THEMES
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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
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Oral Evidence
Taken before the Regulatory Reform Committee
on
Members present
Andrew Miller, in the Chair
Gordon Banks
Lorely Burt
Dr Doug Naysmith
________________
Memoranda submitted by Consumer Focus, Citizens Advice,
Trading Standards Institute, Which? and Trades Union Congress
Examination of Witnesses
Witnesses: Mr Steve Brooker, Head of the Fair Markets Team, Consumer Focus, Ms Sue Edwards, Head of Consumer Policy, Citizens Advice, Ron Gainsford, Chief Executive, Trading Standards Institute, Mr Pula Houghton, Economic Policy Manager, Which? and Ms Sarah Veale, Head of Equality and Employment Regulation Department, Trades Union Congress, gave evidence.
Q30 Chairman: Welcome everyone. We have five witnesses and we want to handle this as efficiently as we can, so please try to catch my eye if you have a particular response to one of the questions. We do not necessarily want a response from all five of you on all the questions but if you feel at the end of it that you do have something further to say we would welcome any additional comments you would like to make in writing. We would like to deal with this evidence session in around about an hour, so we want to try to do it fairly crisply. First of all, welcome to you all and thank you for the written submissions that we have had. I want to start off by looking first of all at the regulatory response to the current financial crisis and ask you whether you think that the complexity of the global markets and the global nature of the systems and the complex corporate and personal incentives in financial institutions make the financial services sector unique? And whether the regulatory response in financial services has wider implications for the regulatory reform agenda. That is a complex question to start with but would somebody like to try that? Mr Gainsford.
Mr Gainsford: I think Lord Turner's reaction to that is quite interesting because his view that the FSA felt that markets would be self-correcting, that there was a rationale behind markets that meant that the light touch regulation they had would be sufficient, has itself I guess been exposed as a fallacy, and in that context I think his emphasis on intense supervisions and the whole issue of competencies within the industry is one that is probably a proportionate response to what has happened there. I think it also translates into other fields. If you take trading standards and you take this issue of global markets then my members are involved in the supervision of global markets in a UK sense, and if you take the incidents of 2007 when we had the annus horribilis of toy safety being compromised in a significant way - the Committee may recall the headlines week after week, month after month of dangerous toys that were capable of maiming and killing and indeed did so with a number of individuals - those toys were mostly emanating from the Far East and other international markets and in that sense one is very conscious that you are in a global regulatory situation, whether it is financial markets or whether it is certain products of that sort. Then if we move on to the Internet stage when we see trading standards officers around the UK looking to work with their counterparts overseas, how do you regulate an Internet, a global market where perhaps all of us in this room are buying products from overseas and otherwise in a way that we would not have done months or a few years ago, then I think you can translate the global challenges that the FSA and the financial sector have faced into the global challenges that even humble trading officers face in their activities in looking to not only protect consumers but protect bona fide businesses. So I think there is a translation effect from financial markets into other markets and I think the important message coming from Lord Turner is around the realisation that one has to pick the right tools to deal with the right mischiefs. I liked Hector Sants' comment where he did say that principles-based regulation is good as long as those that are to comply with it have principles. I thought that was nicely put. In other words, its dependency upon a self-regulating market is not always appropriate and yet of course there is a place for co-regulation in its wider sense.
Mr Brooker: Can I add to that, perhaps? First of all we should say that the primary actors in this drama were the financial institutions, but we are here today to talk about the role of regulators so I will confine my remarks to them. I agree with Ron that Adair Turner hit the nail on the head when he said that there was a philosophy of regulation in markets of self-correcting, and the very day after Adair Turner said those remarks Consumer Focus published its rating regulators report, which looked at six regulators across the economy. The key finding of that research was that regulators relied on market forces to deliver consumer protection rather than exercise the powers that Parliament gave them to do their job; and that when regulators did intervene they relied on industry self-regulation solutions as their default first and instinctive option rather than choose ---
Q31 Chairman: You are arguing not necessarily for better regulation but better regulators.
Mr Brooker: Regulators using the tools that Parliament gave them is what I am asking for. We felt that regulators were too timid; that they did not flex their muscles enough. But I do not think their task was helped by a political climate which encouraged light touch regulation - political parties on all sides of the agenda responding to a pro-business lobby which saw all regulation as a burden rather than as a benefit. I think that was quite an intoxicating atmosphere and one that regulators must have found difficult to react to.
Mr Houghton: I would just make two short points. One is that one thing you might take away from it is a change in attitude amongst the general population towards what they expect of both the system and of the regulators within it, and we did some research recently where as much as 84 per cent of people think that a response to the banking system requires a tough interventionist approach. I agree with the point about the fallacy of efficient markets and my second point would be to take out of that that it is not sensible to take an overly ideological approach to regulation; that regulation should be about what works and it should be about what is fit for purpose and what adequately deals with the risks that are in front of us.
Q32 Chairman: Before I call on Sarah Veale, can I expand the question slightly? If we accept Mr Gainsford's observation which is reflecting the fact that we are in a completely global market now, do we need more European or international regulation and, if so, how do you see it being structured? I will leave that one in the air for the moment and then go back to it.
Ms Veale: I think the short answer to
that is yes and I would just underpin that by saying that I am not an economist
and I think further speculation from me off the top of my head would not do my
organisation very much good or educate or edify any of you. I was going to answer the second part of your
first question, which is about the read across.
I think it is early days to assess the full impact of the horrors in the
finance sector across the community at large.
People tend to forget that the huge numbers of employees in the finance
sector at a lower level than the ones who are often in the spotlight, quite
rightly, for the huge amounts of money they are taking out of the system, are
the ones who really are suffering.
People may have seen the Panorama
programme last night about the impact on pensions. I think gradually the public is now waking up
to the horrors of it all and I think that although at the moment you could
certainly safely say that the public does not have any appetite for further
deregulation I am not sure that there is coherent thought yet on what the
opposite of that would actually be in effect.
I do not think there is necessarily directly a read across and I think
regulation, as people who are far more expert than I am, of the finance sector
is very different from regulation elsewhere.
I do think that things will move quickly and I suspect that if the
public do not feel that something is being done now which will rectify all the
problems that have occurred they will start to read across into other areas and
they will not have any appetite for small business and others saying, "We have
to carry on deregulating, there is too much red tape" because they will quickly
associate their own vulnerability, which has been so much exposed recently,
with vulnerability in other areas like employment protection and health and
safety. So I am afraid that if you are a
keen, better regulator, which the
Ms Edwards: I think the problem with the way that the market has been regulated - light touch, principles-based - is that it allows firms to decide what the principle means. You can say, "This means this thing" and consumers can have a completely different view; whereas regulation which is rules-based is transparent and it is clear what behaviour or not is expected.
Mr Brooker: Could I disagree with that, if I may, or do you want to move on?
Ms Edwards: Can I actually say where my view comes from? We give advice to consumers often on very, very low incomes with very poor skills, so when our advisers try to negotiate with the credit industry or mortgage lenders actually they end up having an argument about what regulation is; and where that regulation is rules-based that argument is a lot easier to have than when it is principles-based.
Q33 Chairman: Mr Brooker disagrees with that.
Mr Brooker: I think it needs to be made clear that principles-based regulation did not cause the financial crisis. The actions of financial institutions which led to the crisis took place in a regulatory environment where the FSA had a handbook running into thousands of pages of prescriptive rules, and treating customers fairly is an extremely new initiative - it has not had time to bed down, and some say that it has been withdrawn before it has even had a chance to get started. What attracts me about principles-based regulation is that it gets senior executives within financial firms to actually think about what they need to do to deliver compliance with the overall regulatory goal of treating your customers fairly for delivering consumer protection. Lack of certainty is certainly a danger of the principles-based regulation but what happens when you do not have any kind of certainty is that compliance departments within banks and other financial institutions regulate in an unthinking way through the tick box mentality.
Mr Houghton: I think it is important to
break down problems that you are trying to solve and a lot of the problems in
the financial crisis are prudential problems; there are issues around credit
rating agencies; there are issues around accountancy; there are all sorts of
macro issues around capital requirements and that sort of thing. I think that there is an inevitability that a
lot of those issues will need to be dealt with at the European level. If you bring it down to the consumer level
and the retail level there are already numerous areas in which EU regulation does
have an impact on the
Mr Gainsford: Lord Turner made the point about there is no silver bullet and that is the point, is it not, that the great thing about the current crisis is that it has awoken consumers, employees and others to the whole issue of regulation, and consumers expect markets to be regulated; they are not too fussed about how it is regulated but they expect it to be regulated and they expect that regulated framework to operate fairly and effectively. So in that sense I think the whole issue of the co-regulated environment is the model that we have to try to keep sustaining and to work. I was at a conference last week when the whole day was spent on self-regulation as if that were the total panacea; it is not. There is a place for self-regulation, very much so a place for self-regulation, but on its own it is not the answer, so there are other mechanisms that need to be brought into play. On the European front I was struck again, if I can use the toys example because it is a specific example but that spurned a whole lot of activity by the European Commission and others just to look at the issue of whether that area was appropriately regulated, and the conclusion they drew - which involved business as well and there were representatives from the British Retail Consortium on that study - was that the regulatory framework was intact and was appropriate; what was missing was the implementation of that, and that touches on Steve Brooker's point that it is the issue about how Member States and how their mechanisms within Member States do actually apply the regulatory framework that exists. So the conclusion that I think all Member States agreed with is that there is no need to tinkle with legislation, even though some might see that as burdensome or not depending on which side of the fence you sat. The reality was that actually it needs to be applied and implemented in a constant and even-handed fashion and that is the absolute key message and it even comes through from the FSA where they are making the point that we have to put much more focus upon the competency of individuals to apply regulations within their own businesses and otherwise, rather than simply on the probity of those individuals because that has demonstrated that that is not enough, and as a practised trading standards officer I think I would entirely agree with those sentiments.
Q34 Dr Naysmith: Let us consider for a few minutes the question of risk-based regulation and whether you think it in fact works. Is it fine in theory but flawed in practice? Mr Brooker, do you want to start on that one?
Mr Brooker: I would say that risk-based regulation remains a valid approach. Put at its simplest terms, all it means is that you allocate your scarce resources to where you think the harm is most likely to occur and if that is to be successful that depends on having the right intelligence in place. I do not think the FSA had the right intelligence in place and got its risk assessment wrong. What I would not do is equate risk-based regulation with light touch regulation.
Q35 Dr Naysmith: Some people do.
Mr Brooker: Some people do. Once you have identified your risk then you decide on the firmness of your touch. On some occasions a feather light touch is the order of the day but at other times a vicelike grip is what is needed. What we see at the FSA and other regulators is too much light touch and not enough firmness in their approach.
Q36 Dr Naysmith: Is it possible to identify all risks in advance?
Mr Brooker: No, and it would not be desirable to eliminate all risk from the marketplace otherwise you dampen innovation which enables the economy to turn around.
Q37 Dr Naysmith: So you cannot rely really on risk-based analysis being enough to give you an outline of all the risks that your company might run; so you have to have something more than just risk-based. Or is that just in terms that the really important things have to be risk-based?
Mr Brooker: I think you should have a risk-based approach as the central plank of your way of regulating markets but perhaps to be accompanied by an appreciation that you can never manage away all risks.
Q38 Dr Naysmith: Does anybody disagree with that or want to agree with it strongly? If not, we will move on to something else.
Ms Veale: In principle I think it is good; I do not disagree with that. I think there is a difficulty when you are talking about the workplace though because it is not the employees on the whole - they do take risks - taking risks in the sense of applying regulation and protection; that is the employer doing it on their behalf. I think when you have the responsibility for risk assessment on behalf of other people, whether it is the public, employees or whatever it is, some organisations seem to be singularly ill-equipped to do the risk assessment sensibly and they either go for a zero risk option, which is impossible - I would agree with Steve, it is not even particularly desirable in social terms - or they get it fatally wrong. Experience in the workplace indicates that employers, although they do not like too much prescriptive regulation, if you do something like they did with the Health and Safety at Work Act and give them something that is based on principles there is a lot of panicking that goes on - they lack the confidence. There are other risk factors involved - you get the insurance companies in, you get the lawyers in and you can see the risk being parked by people who profess to know all about it; but something that the government perhaps ought to think about is what more can be done to assist employers and other people, important people like that to do risk assessments in a sensible way so that the government could then avoid having to have more prescriptive regulation. I hesitate to say after what I said before to say that that can all be applied to the financial sector. I think the principle of risk-based regulation, exactly as Steve said, was not what did for the finance sector - I think there are all sorts of other complex issues. I think it is not ideal but I think it is much more complicated and some groups are not really up to doing it effectively yet.
Q39 Dr Naysmith: Do you think it can give a false sense of security if you think that you have analysed and identified all the risks; you think you have done your job and that is it and you can forget about it?
Ms Veale: I think that is particularly the case in workplaces; again, you get that complacency and then there is an accident and you often hear the employer say, "My goodness me, I never anticipated that; how did that happen, I have done my risk assessment?" They do not see it as an active tool that has to be refreshed all the time; you cannot take a photograph and say that this is a risk free workplace for ever. It might be at that minute but things happen, events happen and so you need to be trained to be alert to risks when they arise.
Q40 Dr Naysmith: What do you think about the government's attempts to develop a coherent and intelligent approach to addressing the regulatory issues in the financial services sector? Do you think they are on the right lines or do you think that they are totally wrong?
Mr Houghton: One important point to make is that so much of the regulatory work that is happening is very much focused on, as I said before, the prudential side, so talking about capital requirements of the banks and all things that are eminently sensible. What we would caution against is meaning that that loses the focus on the consumer side. The FSA does have to balance its responsibilities for prudential with also being a conduct of business regulator, and that is a very important part of its work and there has been a certain amount of comment that part of the reason that it took its eye off the ball on the prudential side was because it was too focused on things like treating customers fairly. What we would say is that it is very important that that work continues as well and that both things are important. There are risks to the consumers - there have been lots of various bad products, various mis-selling and that sort of thing, so it is very important that work continues whilst also taking this new approach to the other types of regulation.
Ms Edwards: Obviously I also agree that risk-based regulation is the right thing but I think in the past it has always been assumed that risk-based regulation is about dealing with businesses on the margins - home credit, rogue traders - and actually it has not looked at the enormous consumer detriment from some mainstream high street firms' selling practices, products and so on. Alternatively, it has been, "Let us take the easy wins," and the OFT in the past has done that in relation to consumer credit licensing. But more recently it has taken a different view now it has the additional powers from the Consumer Credit Act and it has actually begun to take action against larger firms.
Q41 Dr Naysmith: Do you think that there might be a danger of a knee-jerk reaction taking place in the way that the media and the press everywhere is saying, "You have to do something about it", we do something and then the government does the wrong thing.
Mr Gainsford: I think there is a danger. Let us face it, it has been an enormous wakeup call for any regulator, but also for those that have suffered from the consequences of a poorly implemented or ill advised regulatory framework, so in that sense it has been quite a wakeup call. I think out of that, as I say, a goodwill emerge in the context of, if you take financial regulation, that this is not just about the financial world looking after the financial world, there are some hellish consequences that arise when it goes wrong. This is a real people issue and that will be a good thing. The danger then - and I think it is quite interesting - is how do you emerge from that with the right balance of approach? I would like to think that any regulation is risk-based, to be frank, otherwise why are we doing it at all. So there ought to be that research and science behind any proposal for regulation; I would like to think that that does happen and in my experience it often does. I think in the current climate it is quite interesting to see how regulators might queue up now to demonstrate how tough they are. For example, I was interested to see yesterday the Chief Executive of Ofgem, Alistair Buchanan, on the television and listening to him on the radio, clearly doing the rounds and using language like, "We are going to nail them." I am sure he understood what he was saying but none the less it is interesting to see that sort of language from an upfront organisation that to me, to be frank, has not been known for nailing those in their industry. Why was he doing that? We would say that there is a big issue about mis-selling of energy and so in the sense of risk we are moving towards asking the government to stop that altogether; we think it is archaic in this day and age that energy should be sold on the doorstep in this country and not in other countries. So in that sense why is he doing that? I think that is the curious bit. I would like to think - and obviously there is significant research behind their announcement yesterday - that they are looking at this in the sense that there are some mischiefs there that we have to deal with and the consumer is not getting a fair enough deal, so we are going to emerge from that as a tougher regulator. I would not want to think that they are one of those "We want to be ahead of the queue to demonstrate how hard we are." So in that sense there is that danger, I think.
Q42 Dr Naysmith: Just a final question - and there may not be a response to it - are there any lessons that we can learn from the way that other countries are responding to changing their financial regulations of which any of you are aware that you think we ought to know? It is a bit early days.
Mr Gainsford: Talking to some of my colleagues who are not directly financial regulators overseas, but we have quite a broad framework of collaboration with our equivalent in other Member States particularly, I think that they are looking towards the UK as coming up with the solutions in a regulatory sense and otherwise. I think there is that mood that we have been perhaps particularly exposed on this and therefore our regulatory answers, response to that should itself serve as indicative of the way markets should be regulated from hereon in. So I think there is that mood. That is not a very scientific answer but certainly that is the hearsay answer that I have picked up.
Q43 Gordon Banks: Some observations and some questions at the same time if you do not mind. I wonder whether the public and indeed industry and business in general has this view now because of the impact of the financial sector crisis on everyone that regulation is very important, but providing the regulation is there that I deem to protect me and not to encumber me. I come from the construction industry, which is a fairly well regulated industry, and I do not think there is anybody in the construction industry that would not think that the financial sector needs to be better regulated. The construction industry does not need to be better regulated; it needs to be less regulated. So a question and an observation. Doug has touched on a point that as a result of the impact of what is going on just now basically whether the outcome may be a more intrusive approach, not just in the financial sector but everywhere. The part he did not go into was whether there is a conflict between this and the agenda for better regulation. So if I could ask you to address those points first before I move on.
Mr Houghton: If you truly believe in better regulation and you are doing it properly and you are taking a risk-based approach, then there does not necessarily need to be a direct read across - that just because you need to be tough on the financial sector right now you need to be tough on the construction sector. As I said earlier, the danger is being too ideological about it. Whenever we look at a particular market it is all about doing a robust detriment analysis - is there a problem here? Are consumers being in some way mis-sold or treated badly? If they are then there may be a need for some form of intervention. In terms of the way in which it is done you do not necessarily need more regulation. What might be the case is that, as Ron has said, regulators just need to be tough where they need to be and where there are problems that should be their approach. I suppose that is the thing about what is the culture? One of the things that Lord Turner seemed to be very hot on was this thing about the kind of zeitgeist - is it acceptable to regulate financial firms, and the implication was that it was not. I think not being ideological about it and if there is a problem then taking the necessary steps is the way to go.
Ms Veale: I think the construction sector
is quite a good place to start although, like you, I doubt whether very many
employees would feel that they were encumbered by health and safety
regulations. But I think there is an
important point there actually, which is from what we can see are the best
models for risk assessing and preventing accidents is when you engage the
workforce with the employer together in managing the whole package of risk
regulation and enforcement of quite prescriptive regulation. I would just take this opportunity to extol,
as an example, the role of trained up safety reps in the construction industry,
mostly through trade unions. I think
there are lessons to be learned there which should be read across into society
more widely. A group which I think gets
into a terrible tangle about risk assessment, partly because of seeing things
through the prism of the frantic media sometimes, is parents because when you
are a parent you have responsibility for extremely vulnerable young citizens and
because the newspapers are lecturing you and you see horrendous reports of
accidents you very quickly get into that over protective mode of thinking, and
I think public education about what a risk is and what a sensible balance is
towards making sure that the people who are exposed to the risk take some
responsibility themselves - otherwise you get into a ridiculous, I hesitate to
use the word nanny state, but over protective approach to regulation. But in order to do that you have to devote
resource to it and public education is woeful on this. Members of the public generally struggle with
statistics and making sense out of reports from various organisations about the
impact, for example, of
Mr Gainsford: If I used the words "intense supervision" then I suspect I would be pilloried by the Better Regulatory Executive and by the Local Better Regulation Office. In my role intense supervision is not acceptable language and that is because of the world in which we live post Philip Hampton's report, which is a philosophy that we as trading standards and our colleagues in environmental health, etcetera, were buying into for many years and so that was not a great culture for us but it just confirmed the journey we are on, which, as I say, is not about intense supervision other than those that we assess require that intense supervision - whether they are rogues in overalls or rogues in suits, to be quite frank. That is the world we are in. So our efforts are on, yes, intrusiveness where there are those rogues, criminals and fraudsters whether they are targeting businesses or consumers in a way to defraud and to rob them of their well earned money. In that sense I would say that we will continue with what we will term our proportionate approach, which is about assisting businesses in many ways; trading standards officers, environmental health officers across local government will be looking at start-up businesses, helping to regenerate the economy; they want to help businesses. And in my experience businesses want the certainty of good advice knowing that they can get support; it would be wholly wrong for them to be fearful of seeking advice from their local trading standards officers, for example. That is where I take issue on some of the language that would suggest that all regulation is bad regulation when of course it is not; there is much that is of great help to businesses and the important thing is that they have access to good, supportive advice whenever that is necessarily.
Q44 Gordon Banks: Moving on from those points, as a result of the financial crisis could there be this tension between the government's aim to support business and the need to respond to the financial crisis? I think that everybody involved in regulation wants better regulation not more regulation, but do you think that there is potentially some conflict between government's objectives, industry needs at this point and the financial sector, and the objective of this better regulation?
Mr Brooker: I think there is a shared interest between government, between consumer groups and between business groups in having the right level of regulation and the right approach to regulation. Consumers are not in favour of businesses being suffocated by red tape - it costs consumers money at the end of the day and it restricts innovation.
Q45 Gordon Banks: But often consumers do not have any idea of the regulation that the business or whatever it is might be under.
Mr Brooker: No, but it is our role as consumer organisations to represent the views and interests of consumers and I think it is important for us not to jump on a bandwagon which welcomes intrusive regulation; it is incumbent upon us as consumer organisations to maintain a proportionate approach as well. In fact I spend more of my time arguing for deregulation, whether it is the liberalisation of the legal services' market or removing quantitative controls on taxis in town centres than I do arguing for more regulation. It is about having the right balance. What I would say in addition is that that should also mean that the government must not shy away from introducing new regulation that is needed to protect consumers. One issue that we are about to look at is the issue of consumer prepayments - what happens when you buy a sofa from a furniture which you pay in advance and the company goes bust before it delivers the goods? With all the corporate insolvencies going on at the moment that might be an area where the government needs to enhance consumer protection and it will be a mistake for the government to say, "Businesses are suffering right now so we will leave them entirely alone."
Ms Edwards: I think the important thing is basically that regulators need to look at what the market is doing to consumers, what the impact of the way the market works is on consumers. Some regulators have done that; other regulators have not and have yet to move in that direction. So it is about looking at the market impact on consumers and what the detriment is.
Mr Gainsford: One of the things I would say, if I can, is that I think consumers have expectations; they do not have knowledge of regulation. It is how we collectively respond to those expectations and I think that is what is emerging quite strongly. The most simple example - if I can give you a very simple example - was a report done by Steve's predecessor organisation, National Consumer Council and the National Weights and Measures Laboratory, and what that did was to try to go out with the very old fashioned weights and measures controls, said to be the cornerstone of consumer protection, and it asked people, "When you go and fill up your vehicle with fuel how do you know that the petrol pump is accurate?" The general response was, "Because Trading Standards inspect them." "Do they? How often do they inspect them?" "About every two months." If only! Not at all. In fact resources are such that they would not be looked at for a long time and in that context that was really a small example but it was indicative of what the population expected and that was a wide scale piece of research that suggested from our point of view that we do not know best, it is about consumer expectations rather than consumer knowledge.
Q46 Gordon Banks: So it is a comfort blanket of regulation being met to protect me when something goes wrong or to prevent something going wrong.
Mr Gainsford: Absolutely. When I fill up my petrol I want to make sure that I am going to get ---
Q47 Gordon Banks: I want to know I get six gallons.
Mr Gainsford: Absolutely.
Ms Veale: You are a much braver man than I am a woman because I certainly would not have had that written down in the record because all the consumers who hear about this now will suddenly realise that the Emperor has no clothes! And an inspector rushing into the local garage every two months! Just one serious point, I agree with you that there are inherent tensions in a lot of this and one thing that particularly caught my eye is that the Small Business Lobby is understandably very agitated about the activities of no win no fee high street solicitors and are now beginning to call for them to be regulated and have their activities restricted; but actually they are small businesses as well and they would argue - and I am sure that Consumer Focus would argue - that there is no state legal aid effectively for employment protection, therefore the public has an absolute right to choose a no win no fee solicitor to argue their case for them and get them some money. So if you pick away at the arguments being made by the most vociferous lobbies there are huge tensions in there that need to be unravelled.
Q48 Gordon Banks: If I can move on and talk about an issue,
again which we have touched on but to throw in some personal experience
here. It relates to prescriptive
regulation and interpretation of regulation, as I like to call it. I am deeply involved in regulations regarding
the blind cords that hang from all our blinds which end up killing at least two
children a year in the
Mr Gainsford: There is a lot there. Clackmannanshire I think was highlighted in a
report by Audit
Q49 Gordon Banks: Yes, it was.
Mr Gainsford: --- for having woefully insufficient resource.
Q50 Gordon Banks: And then that merged with
Mr Gainsford: And there is a shared
services arrangement to try to overcome that and the reality is that in
Scotland, as in other parts of GB, particularly the trading standard resources
are incredibly scarce and getting scarcer, and that reflects some of the woes
in local government funding and different priorities if local government needs
to respond, as it should, to perhaps the Baby P crisis and report, and then
resources are finite and it may well be that resources are leaked from services
like trading standards or environmental health to those other services. So there is no doubt that there is an
enormous mismatch between the requirements and expectations on trading
standards by society, by business and by consumers and their ability to
deliver. Having said that, I think we
still have something to be pleased about in the sense that the
Mr Houghton: I will make a series of points and they are in no particular order. In terms of the will, you have certainly seen the change in language from the FSA, as we have already discussed, and Ofgem as we have already discussed; so there is a prevailing change. Another important observation would be around the OFT's role with regard to competition policy; competition policy is one of the things that they have observed as potentially coming under threat.
Q51 Gordon Banks: Can I just ask does it matter what is driving that change of will? Going back to what Mr Gainsford said about why Ofgem came out and said that, does it matter what is driving that change of will or is it just the change of will that is the important thing?
Mr Houghton: I suppose it is case specific. In terms of the FSA, they are being driven by the fact that there were clear failures. I would hope that Ofgem are responding to the fact that there are genuine consumer problems. The OFT, I believe, are responding to the fact that with the HBOS and Lloyds merger they do not want to see lots of firms coming to them with the kind of failing firm defence that is not a failing firm defence. I suppose the reason why they are being driven does matter, and as long as they are being driven by appropriate reasons then I think it is fine. With sector expertise it is very important that there is a balance. One of the criticisms that might be levelled at the FSA is that the culture was too close to the industry that it was regulating. We would always say that any board of a regulator should have an appropriate mix of expertise. We are looking at the regulatory system of legal services at the moment. It is very important that there is a split of regulatory representative powers and that there is adequate representation of all sorts of different interests, not least consumer interests. The final point, if I may, in terms of regulatory approach, yes, resources are always going to be limited in any regulator and therefore I suppose it is important to get the maximum bang for your buck. Particularly looking at the financial sector two of the things that you said could be done are bigger fines that make a really big impact when there is a serious transgression and also more use of naming and shaming. That has the dual benefit of being a powerful regulatory resource as well as empowering consumers to make decisions from a position of knowledge.
Mr Brooker: Can I build on
Q52 Chairman: Before we move on it struck me that Houghton and Mr Gainsford, you both alluded to something in terms of use of resources particularly at a local level. Just as a matter of interest - and it does not directly impinge upon this inquiry - do you maintain a register across the country of where expertise is and do you have mechanisms to reach across local authority boundaries to help draw in some of that expertise when it is needed?
Mr Gainsford: There is a local government organisation called LACORS, which is a central body, which helps to coordinate these activities and that has a number of specialist groups that are designed to be sector specific in many ways; so there is that mechanism that is being set up by the local government family. We as a professional body would train into those individuals both generic and specific skills in that sense and I know my colleagues in environmental health do exactly the same as well. So it does register very closely on the radar. The important thing for trading standards, coming back to the point, I will always say that trading standards can never be just local, can never be just regional or national; it has to be all of those things, and indeed international. So the challenge is how we find a local authority based service that can actually meet the challenges of global markets and localism versus globalism do not sit very comfortably together. So in that sense we are very dependent upon central government funding, which is now drying up totally, on helping regional coordination; so we are finding within the nine English regions that trading standards are coordinating and collaborating, but that has been very much based on BERR additional funding to facilitate that, and the same with intelligence sharing and intelligence gathering based on BERR money and, in the past, OFT money, and that is all disappearing. If you look in Scotland then the regional coordination of those or national coordination of those various authorities in Scotland was based on BERR money and that is now drying up, so my colleagues in Scotland had to go to the Scottish Government and they have rescued the situation, if I can put it that way, by way of money for tobacco enforcement, which will be applied for that, but it helps them to keep that sense of collaboration. So the mechanisms are there but it would not be right for me to do other than to expose the fact that they are increasingly frail at the moment because of the fact that local government money is not being targeted into regional and national collaboration and that is, as I say, back to localism versus globalism.
Q53 Chairman: The same dilemma faced by other authorities, including the police and so on?
Mr Gainsford: Yes.
Q54 Lorely Burt: First of all, I would just like to say what a tonic it has been to have you all here this morning. We have had the regulators and they have been patting themselves on the back; we have had industry and they pat themselves on the back and say how well they are doing in meeting all the regulations. Now have the real story. I particularly feel for Ron Gainsford because you really are at the coalface of implementation. And I take Sue Edward's points very strongly as well; you are representing the ultimate people who have the biggest challenge with the implementation of a lot of regulation. I still agree with Steve that we have to go for a risk-based approach and I think you all agreed with that and I certainly believe that is the basis. But there is no point in going on a risk-based approach if you are not implementing and I do believe that implementation is absolutely the key to this. So what I want to ask you about is we are tremendously well served by the National Audit Office - and we happen to have an adviser here this morning - and they provide us with the grist for the mill for us to be able to understand what is going on. We talked about just how diminishing the resources are in the implementation of regulations. I am sure that the National Audit Office would not possibly have planted this question I am about to ask, but do you think that we should have more resources? Does the government need to collect better information to better understand the complexities of the sector and the markets that they are regulating?
Mr Gainsford: If I start on that? I could just say yes, but I think it is much more than that because in a way we have gone a long way down the road. There are mechanisms that have been introduced which are around intelligence gathering. We now have a national Consumer Direct Centre that is run by Trading Standards in partnership with the Office of Fair Trading and BERR, so that has improved things a lot. As a result of that there is a central database collecting details of complaints specifically and in trends that can then be translated into the use of enforcement resources by trading standards. We have seen the appointment of Regional Intelligence Officers; we use national intelligence mechanisms to bring that information together. So, in a sense, we have gone a long way in terms of reinforcing the infrastructure that enables us to say, "How can we best use the scarce resource we have?" The worry I have is that that could quickly evaporate as we see the pressure on the public purse and that will not be picked up by local government, absolutely not, and yet I will always say to government that there is a responsibility here for government to ensure that there is a national framework in place that allows us to serve consumers and businesses effectively. So there is a lot there. Equally, having said that, there is still a lot of scope for doing better with what we have, and that is something around collaboration between national regulators and certainly the Hampton Implementation Reviews have been quite interesting in that regard as to how national regulators can learn from one another and, indeed, to think about how they share activity and resource. In the local context how we can see national regulators working much more forcefully towards having a better central local dynamic in terms of servicing markets that we had. So a lot in place but we could do much more in terms of what we have. But all of that will be wasted, to be quite frankly, unless we see some of the real investment patterns that are now not happening changing in a significant way. So workforce futuring in trading standards and in environmental health is now at a very worrying stage and whilst I would not want to say it is broken it is clearly moving towards that, and that has to be a worry that we face; it is not something that local government itself will stand up to and it is not something, in my view, that national government can step back from. We have to find that right solution and, to be quite frank, that is not happening at the moment.
Q55 Lorely Burt: That is quite scary, is it not, really?
Mr Gainsford: It is very worrying.
Q56 Lorely Burt: Regulators can regulate to their hearts' content and some might say that we have too many regulations but unless they are actually enforced then there is no point in having them in the first place, is there?
Mr Gainsford: A lot of my members will be beholden on enforcing against rogues that I have mentioned to you - they will be very dedicated to that - but they are also equally frustrated if they cannot help start-up businesses, if they cannot help their local businesses survive and prosper. They want to be allies of those businesses and not foes in that sense. But they simply cannot - picking up the point like Clackmannanshire - they simply do not have the wherewithal to do what they would like to do in that sort of sense.
Q57 Lorely Burt: I just want to explore this for a moment longer. My magic wand solution, if you like, to a lot of the enforcement problems that I see - because I speak for business and enterprise for my own part - would be if the people on the enforcement end, on the coalface end actually had - and you talked about changing the culture of the regulator - a much more helpful advisory type of role could not those people actually have multi roles; in other words, a small business person is supposed to know a whole raft of different regulations, and is it too much to ask that one regulator should know the basic regulations which apply to that small business and advise them rather than having a whole series of regulators coming up and down the drive, taking up their time at different times of the day?
Mr Gainsford: In a sense I understand where you are coming from. Even in trading standards the regulatory canvass is so big that, to be quite frank, it is impossible for any single trading standards officer to know that regulatory canvass and that is just trading standards. There is however room for regulators to be seen to be working more closely together to assist businesses - absolutely. I come back to the point, I think that every contact between a regulator and a business should be a productive contact, it should be a productive transaction on both sides and if it is not then what is the point? But it is interesting. I was talking to Sarah Anderson recently on her report about guidance that BERR commissioned and she reflected on the retail enforcement pilot project that BERR and now the local Better Regulation Office are leading and we are supporting it because we do want to explore this. But the whole idea of this is can you have in the sense of environmental health, trading standards, fire and rescue an officer that goes in. She has spoken to small business about this and she quoted the example of a food establishment that had been visited by a fire and rescue officer wearing the "I am here to help you" across the piece. Of course, once they got past the fire doors etcetera the food establishment said, "I would like some more advice on the detail of this," but the fire office obviously was not equipped to do that. That in itself is fairly predictable. So I think there is a scope for saying, "I would like, if it were operational, to go into a business and say 'I can tell you a bit about environmental health' but I cannot give you the whole story." That has a place but equally I come back to my core point that in my many years experience what businesses want, if they are going to have those people walking through the door they want that to be a valuable, productive experience and then they do not mind actually that it is more than one walking through the door, if they have some output from it. That is the essence of it. It is a complete waste of walking through the door for no purpose but just to tick the box we have heard of before; but if that is a productive transaction with the right level of expertise that is what the business wants in terms of ensuring its minimising the costs and maximising the compliance.
Ms Veale: Can I just add to that? From the other perspective actually, the other sad thing in all of this is that it does not work terribly effectively in the current system in terms of giving enforcement of people's employment rights. One issue we estimated that last year 170,000 were not being paid the national minimum wage and that is just the people who are above radar. I think the problem is that you get the Revenue going in to look at that and they see some very obvious health and safety problem but they are not allowed to phone up the HSE and say, "By the way, when I was in that company they had a very dangerous piece of machine operating." So I entirely agree with Ron's point about the need to join everything up. The other thing I think needs to be looked at is the fact that certainly on employment protection a lot of aspects of health and safety are entirely reliant on an individual employee making a complaint. You would have to be quite brave person to get up on your own and go to an employment tribunal and even if you do, what happens at the end of that is that you get the compensation, which is good for you, but there is no attempt made to address the systemic problems that there are, especially at some of the larger companies that are producing these individual cases. So I think there is a really desperate need to look at the whole package of enforcement, rights and the rest of it to see why it is not achieving either effective regulation or helping businesses to cope with regulators and carry on making money and flourishing.
Q58 Chairman: I think we have established - and nobody has dissented from this - that there is a need to have greater cross fertilisation of ideas and operational practice as well and that obviously has very significant resource implications. So would you regard that resource issue as being the biggest obstacle standing in the way of achieving change in that respect. Is it money or is it will?
Mr Gainsford: The will is not a problem; there is a tremendous will from trading standards to support business and consumers. The will is not the issue at all. Working smarter across the piece absolutely is important and we are on a journey in doing that, but capacity is incredibly challenging, I have to say. I do not see that we have a clear vision on that at all. BERR once articulated a vision but now they do not do so. Philip Hampton said that there ought to be a consumer and trading standards agency in government; the recommendation was accepted by the government at the time and then rejected, so he had seen it. So it is how we find that greater cohesion and coherence in the models that we have that I think are the biggest challenges.
Mr Brooker: Can I add to that? I was on a leek farm two weeks ago, talking to the farm manager and the farm manager described how he was visited by the gang master's regulator one week, the national minimum wage regulator the next week, the HSE the following week and the supermarkets to whom he provided his leeks the week after. So I think there is scope to streamline and join together regulatory forces, although at the same time when it comes to trading standards I would totally back up Ron's point that they are chronically under-resourced. They are our heroes on the high street and they need to have the right financial backing to do their job properly. But when it comes to the FSA and some of our other national major regulators they are generously resourced and that is about those regulators having the right focus. It is also about those regulators having a smarter approach to the requirements. One thing we would like to see them do more is to provide consumers with the compliance histories of the firms that they supervise. So to take the Food Standards Agency, it has its scores on the doors scheme where it publishes the food hygiene special results of restaurants and that allows consumers to vote with their feet and regulators can harness consumer power to do their job for them and prevent the problems from occurring in the first place rather than to chase problems after the event. That is something that regulators across the piece can do more of.
Q59 Chairman: I would ask you finally to get out your crystal ball and look at what you think the future of the regulatory reform agenda will be like. Secondly, because it seems to have been parked in BERR somewhere for no stated reason, what are your views on regulatory budgets and whether they should still be adopted?
Ms Veale: The
Mr Houghton: We also raised concerns about the regulatory budgets as being a crude tool. For me it is symptomatic of an approach that sees regulation as this kind of thing that is out there that you need to somehow control. I have no wish to see the end of the Better Regulation Agenda; I think there are many valid things in it and I think the basic principles of how you do the better regulation are right. I would hope, and I think that possibly with what has happened with the crisis and the things we have talked about today, it would take us to a place where it is less ideological and it is more of what is the appropriate way of dealing with a particular problem that we have had in a risk-based manner on a case by case basis, and I think that is where the regulatory budget is a problem. If two things need doing and they both need doing and then you cannot do one because you are constrained by your budget then that does not feel like a very sensible approach, whereas on another occasion you might not have been able to do either of them and then you have even less regulation. So moving away from that very sterile, good more or less regulation towards genuinely better regulation at appropriate times feels like the crystal ball or want we want.
Mr Gainsford: From our point of view we
thought good idea when it was first announced, the regulatory budget; but then
quickly thought bad idea. In our
response we made reference to an open day that I think BERR had called to
discuss this and we noticed that all of the audience arrived at that meeting
and thought good idea and by the time the meeting had finished they were
thinking a very bad idea. Not quite the
result, I am sure, that was anticipated.
I think what was interesting was some comments that may have emerged
from Davidson - I cannot remember - which was around if the idea was to
prioritise what you decide to spend your regulatory budget on, but then the
problem is that three-quarters of our legislation is EU led, so is requiring
transposition and implementation, so unless you want infraction proceedings you
have to do something about it. So
actually you do not really have a lot of choice in trading standards. We estimate that over 90 per cent of legislation
we enforce is
Ms Edwards: We have no reason to disagree with the rest of the panel on regulatory budgets. On the issue of the future, we would basically like regulators, business and consumers to learn from the current crisis. It would be a disaster after the economic crisis is over and the economy is back on its feet if we went back to a very light touch regime. So the regulators still need to look at the problems in the market and how to respond to those, rather than say that most business is good and let us just focus on the margins.
Mr Brooker: I think I can understand what the government was trying to do with regulatory budget in terms of achieving a culture change but I do not think that is the right mechanism to achieve it. For me the budgetary proposal identifies the cost of regulation without identifying the benefits. That leads me on to my final point which is that there has been a lack of balance in the debate about better regulation, which needs to be corrected. Regulators have taken hits recently and rightly so, but we should always remember that they do an incredibly important job on our behalf in terms of ensuring safe products, guaranteeing access to lifelong goods and services and raising competition. There just needs to be a better balance in the debate going forward.
Chairman: Ladies and gentlemen, thank you very much for your time and if you have any further thoughts on the questions we have raised we would appreciate a note from you.