UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 329-iiiHouse of COMMONSMINUTES OF EVIDENCETAKEN BEFOREREGULATORY REFORM COMMITTEE
Themes and Trends in Regulatory Reform
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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
Lorely Burt
John Hemming
Dr Doug Naysmith
Mr Mark Prisk
Phil Wilson
________________
Memoranda submitted by the London Business School, the Federation of Small Businesses, the Institute of Directors and the Risk and Regulation Advisory Council
Examination of Witnesses
Witnesses: Mr Tim Ambler, Senior Fellow, London Business School; Mr Clive Davenport, Trade and Industry Chairman, Federation of Small Businesses; Mr Alexander Ehmann, Head of Parliamentary and Regulatory Affairs, Institute of Directors; and Mr Rick Haythornthwaite, Chairman, Risk and Regulation Advisory Council, gave evidence.
Q60 Chairman: Welcome, everyone. For the record, it would be helpful if the four witnesses would be kind enough to introduce themselves.
Mr Haythornthwaite: Good morning. I am Rick Haythornthwaite, Chairman of the Risk and Regulation Advisory Council.
Mr Ehmann: My name is Alexander Ehmann, Head of Parliamentary and Regulatory
Affairs,
Mr Davenport: Clive Davenport, Chairman of Trade and Industry for the Federation of Small Businesses.
Mr Ambler: Tim Ambler. I am an academic
at the
Chairman: Thank you very much.
Q61 John Hemming: Before I go into questions, there are various declarations of interest. I am Chairman of JHC LLP, which used to be called John Hemming Company LLP, which writes software for the security industry, including writing regulatory response software. I am also Director of OMX Holdings Plc, which owns OMX Security Services, which is a clearing operation and a regulated entity. The first question is: does the complexity of financial markets, the global nature of the financial system and the corporate and personal incentives in financial institutions make the financial services sector unique? Does the regulatory response in the financial services sector have a wider implication for the regulatory reform agenda?
Mr Haythornthwaite: I should make some declarations in the spirit of this. First, I am also Chairman of MasterCard International. I am the Chairman designate of Network Rail and I am President of a petrol company(?), so I have business interests as well of course, one of those being a financial services company. Although this is not specifically a topic that the RRAC has spent time on, our view has been that it has very specific challenges in the sector. Clearly, there are issues of complexity, there have been issues of transparency, there have been issues of misaligned incentives, two of which are particularly relevant to that sector, and the read-across is limited and we should be cautious of the read-across. The matter of incentives is applicable to any business sector. I think that the focus, for the time being, should be on resolving the issues within that sector. My belief is that, if we look through the lens that we do at the RRAC, the approach to date has been admirable. I think there has been a cold, hard look at a systemic, evidence-based level. There has been an attempt to separate fact from emotion and there have been some fairly sensible points put forward. Some of the issues that have been prevalent in that sector, in particular, the ability of a regulator to exercise real, risk-based regulation that can recognise the risk to the future rather than the risk to the past, the jury is out as to whether the solutions offered are relevant to that, and I think the proposition that more transparency is required is good, but we have yet to see the solutions, we have yet to see how principles-based regulation moving to outcome-based actually stops the regulatory creep that has been happening in the past. All of those need to be resolved in the financial sector and, in the meantime, we should be very cautious about handing some of those lessons over to other sectors.
Mr Ambler: Every sector is unique, of course, though alike in some ways and different in other ways, but this does have its own regulatory system and, therefore, it can be considered on its own. I am not sure I share the view that the response so far has been as admirable as has just been said. We have had 450 pages from the FSA, but they do not add up to very much and what they fail to recognise is that what we have witnessed is not a failure of regulation but a failure of regulators and, until they thoroughly recognise the faults, which were actually primarily in the Bank of England and only secondarily in the FSA, and address those problems of regulators as distinct from regulations, I do not think we are going to make much progress.
Mr Ehmann: The only thing I would add really is that financial services
clearly demonstrated itself to be one of the areas where the public as a whole
is less tolerant of the risk culture around regulation. For those purposes, there is a serious debate
about whether there is a two-tier approach to the degree of regulation that one
takes across the country. Are we saying
that principles-based or risk-based or lighter touch, whichever terminology we might
use, is credible in areas where the public are willing to entertain risk but in
financial services not? From an
Mr Davenport: I agree with that. I am not an economist and there is not anyone in our organisation that would put their head above the parapet as being an economist at the moment. Having said that, the problem for the small business is that, wherever we are at the moment, the problem we have is: how do we resolve it and how do we move forward? Whatever the Government is going to do, it ought to be doing it as quickly as it possibly can so that we can move forward.
Q62 Dr Naysmith: I wonder if I can just ask a supplementary question to Mr Ambler. You talked about the need for getting the regulators right. I was reading the other day about what was happening with Northern Rock when it collapsed, and the thing that was really at fault there was the corporate governance. They had ridiculous things like four or five meetings on the same day, or meetings by telephone, and there was one person there who seemed to dominate everything. Can the regulators really regulate corporate governance? That seems to be something that is very important in this area.
Mr Ambler: That is true and I entirely agree with you, that it is the bankers in the first place, and that includes the Northern Rock directors, and they are primarily culpable. That is perfectly true. However, that has always been true for thousands of years. If you are looking at what is new in terms of regulation over the last ten or 20 years, what happened in the case of Northern Rock was that the ball was dropped between the Bank of England and the FSA and, to some extent, the Treasury, and that tripartite system which started in 1997 failed not because of the system, which was actually quite sensible, but because they failed to effectively talk to each other and they passed the buck between each other. As a result, nothing happened and, as a result, we had the crash, but that was their fault, it was not the fault of the regulation.
Q63 Mr Prisk: I should just, for the record, declare that a member of my family works for the Financial Services Authority. Can I ask, in the age of Bernie Madoff, whether better regulation could have avoided the financial crisis in the view of the members of the panel, and what failures they cite, either in the regulation, to follow on Tim Ambler's earlier point, or the regulators, which they believe have been crucial in the last six months? I know certainly, Mr Ambler, that additional regulation is the last thing we need at this moment, but I would be interested to know where you feel the regulation could have perhaps stopped or avoided the financial crisis, if at all.
Mr Haythornthwaite: I think it is important to recognise that the best regulation in the world will not stop the determined and ingenious malefactor, and we cannot regulate for that. I think, from a lay observer's standpoint, if you take some of the schemes that you are talking about there, if one had a truly independent regulator that was pathologically sceptical, started to look at the governance in detail, then one can see in hindsight that there were some pretty red flags around that, but, if one looks at the history of the last few years, whether it was the group think that the securitisation and distribution of risk actually was going to have a beneficial portfolio effect as opposed to the effect it had or whether it was that you can consistently earn double-digit returns that all come out within percentage points of each other each year, if everyone is part of that system, then it will happen. Therefore, it does come back - and I agree with Mr Ambler - that in the end it is not the failure of regulation, but it is the failure of the regulator and the approach of the regulator and, one has to say, the experience and talent of the regulator, the ability to pick these things up, think unconventional thoughts and to be able to see when specific risk is in danger of becoming systemic risk.
Mr Ehmann: The only thing I would add is that one feels that, if a regulator has a very clear vision about that which it should be looking at and has that free rein which has been hinted at, it would choose to focus its energies in areas where it is important to be doing so. We hear the constant refrain from lots of members, small businesses and the like, that the money laundering regulations, for example, is a massively burdensome area, yet it seems one that the FSA and the Treasury have concentrated heavily on. On the other hand, we have had this very difficult financial situation, seemingly stimulated by regulators perhaps not being heavy-handed enough. In taking a risk-based approach, that places a lot of responsibility on the regulator concerned to make those risk judgments effectively, and our argument would be that perhaps that was not done.
Mr Davenport: Yes, I would agree with that. Just to reinforce it, I think the problem is that the risks themselves were not assessed properly and that the responses to those risks were not acted upon. That is where the problem lay, not the system, not the regulators, the regulation itself, but the system that was actually being run within the regulators. That was the problem, I think.
Q64 Mr Prisk: Just briefly before I come to Mr Ambler, on that point, if a major institution, the leader of that institution, contacts a senior political figure - and this is one of the difficulties we have in understanding - is there not the informal challenge for the regulators as to knowing what the climate is within which they can operate? It touches back on what Mr Haythornthwaite said, which is that we ignore sometimes the informal elements that are involved in this, the climate within which decisions are taken, the group think. Therefore, from the FSB's point of view, do you feel that the regulators can be challenged in isolation or should we be looking at the broader climate in which those decisions are taken?
Mr Davenport: One of the problems, and it does not matter whether it is financial services or health and safety or trading standards, is that there is always a danger of the regulators being too close to the market that they are dealing with and having the objectivity of what is happening within that market. I think there is certainly a case to be said for the regulators that are at the front line to have to refer back to a tier which is independent so that you have a detached view. If you looked certainly at the financial services and somebody stood back and compared the situation as it is or as it has been over the last, say, two or two and a half years in relationship to several other areas and you looked at it from a historic point of view, there would have been all sorts of flags starting to come up to see the problems that are arising but, because that is not the job or was not perceived to be the job of the regulator, that was not done and that is where the problem lies, I think.
Q65 Mr Prisk: In that context, Mr Ambler, if the political masters are not distinct and independent, how difficult is it for the regulators or indeed for the system to work?
Mr Ambler: I think that is what a judge would call a 'leading question'. Just two points. Firstly, I agree the FSA is not independent, nor actually are any of the regulators. I published papers before, not for the British Chambers of Commerce, calling for the regulatory system, the regulators - and I am not the only person who has done this, but lots of people have - to be answerable to Parliament in the way that the National Audit Office is and not to government. It is quite clear, if you read the 450 pages just released from the Financial Services Authority, that the audience for those 450 pages was Number 10 Downing Street, which I am sure was very impressed by them, but the general public may not have been, if they read them. My second point is that Bernie Madoff was the subject of a complaint to the SEC over a long period of years before it finally went wrong, and we know that the SEC completely failed to address the complaints it had received, and that is a classic case of my very point, that we really need to address the regulators rather than the regulation, and that level of incompetence, which to a lesser extent has also happened in the FSA, is where the focus of attention should go.
Mr Haythornthwaite: Could I just add a point to that and say that I think in that relationship with businesses there are two unhelpful reinforcing trends that one sees recurring. The first is what appears to have been a fear of having a recurring issue, which led to the restricted resources being focused on those companies that had defaulted in the past, but probably had learnt their lessons, so not enough resources being put on the potential problems of the future. The second thing comes back to the point of governance; I do not believe boards give enough attention to these risk issues, risk management is still devolved, and I think there was not enough attempt to bring issues to the attention of boards and that boards focus on risk when they see threats to their business model, they see a potential ramping up of risk, in other words, true exposure to the potential for systemic risk and where they see a threat to reputation. In the absence of that, there is a delegation to lawyers and compliance officers, and their tendency is to turn a principles-based regime into a rules-based regime which decreases the potential for that system to be able to sense the vagaries, the judgments, the shifts in culture and tone that we talk about. A regulator that is working well will be able to stand back, I think, and turn those vicious loops into virtuous loops in the future. I do believe that Lord Turner sees that, and that is why I come back to saying that the theoretical response, I think, is a good one. Turning that into practice is the challenge now.
Q66 Chairman: Turning it into practice in an international setting is quite a
challenge as well, because this is not just a
Mr Ambler: I think there is room for some new regulation and I am certainly in
favour of more transparency, but I think that should take place through the
existing frameworks of regulation, for example, the annual guidelines of the
Accounting Standards Board, which are ignored in all the 450 pages from the
FSA, but the Accounting Standards Board has some very good guidelines on
reporting. In fact, the whole
organisation of the Accounting Standards Board is ignored, so they are not
working with the people they should be working with. The accountants have developed international
frameworks and networks absolutely to your point and, of course, one can attribute
more blame globally or more to the
Mr Davenport: Yes, I agree with that entirely. Maintaining an international standard is critical but, as Tim said, the big thing is that there is an international accountancy system which is working extremely well, and it is to a large degree ignored by quite a few areas. I cannot for the life of me understand why.
Q67 Lorely Burt: I wonder if I could just broaden the whole question on risk-based regulation. We have talked about it at some length, but do you think that, just as a principle, the idea of risk-based regulation is fine in theory, but flawed in practice? If that is the case, what would we need to make it work effectively? Are there in fact risks involved in risk-based regulation itself? Perhaps I could ask Mr Haythornthwaite first because it is his bag, but I just wanted to say I am so interested in the paper that Mr Ambler put in because I have never seen anything quite so critical of regulation before, and I thoroughly enjoyed reading what you wrote.
Mr Ambler: Thank you.
Mr Haythornthwaite: In some ways it is my bag and in some ways it is not. To be honest, what we look at is the influence of risk on policy-making, as distinct from risk-based regulation, where it is more about compliance and enforcement and the use of limited resource in trying to target the areas where you think there is the greatest risk. I think as an expedient measure it is necessary, but again it comes back to execution where the two big issues are, first, people measuring risk as an extension of the past as opposed to looking to the future to see where the risks are and, secondly, in a world where there is a vacuum of political leadership in trying to create space for even sensible failure, it means that it drives a risk‑averse culture within the regulator and then, by extension, within the regulated and, as a result, risk-based regulation in the end is de facto quite rules-based and still carries the burden of that. That is the issue, so, in theory, risk-based has to be the way to go, but I have to say I do not see it operate in particularly effective fashion very often.
Q68 Lorely Burt: Mr Ambler, how are we going to make it operate effectively?
Mr Ambler: I am not sure this is a real conversation, rules-based and risk-based. As Mr Haythornthwaite was quite rightly saying, one merges into the other and all that has really happened in this discussion in the last five years is that we have got a new language, God help us. The reality does not actually change, that the directors of companies are supposed to run their companies properly, honourably and for the benefit not only of shareholders but also of the stakeholders. If you go back to the Accounting Standards Board guidelines on reporting, it has said quite clearly for over ten years that directors should report on the risks. How many directors actually do that? Very few, so why does the FSA not - this is a genius idea - actually look at the reports that are published and go back and say, "The guidelines of the Accounting Standards Board", which are not mandatory, "say you should report on risk. You have not - explain that"? It is a very simple thing to do. You do not have to get into all this sophisticated theology which I do not, frankly, understand; you just have to ask some simple questions.
Q69 Lorely Burt: It is a difference of implementation then really?
Mr Ambler: Yes.
Mr Ehmann: I would add a couple of slightly different reflections. From our point of view, when you have risk regulation, that comes with the fact that you have to accept that failure is possible. You cannot have risk without any risk of failure. I do think that is important, but I do think there is a challenge here, particularly for smaller businesses, again because the focus is very much on quite a high-level discussion, quite a high-level engagement, the type of thing that Rick was really talking about, that perhaps has been missed but is much-needed. Actually, the key thing that small businesses value is clarity, so, in some ways, there is an argument to say that very clear, linear, rules-based, though light-touch, regulation is preferable to somewhat esoteric, general perspectives. I do have some reservations there, and I think the other factor that sits with that is, when government civil servants are very much behind this or people who work in independent regulators, I am not convinced that the culture is such within those organisations that they embrace risk in the right terms to be able to regulate in this fashion.
Mr Davenport: The Companies Act talks about reasonable precautions, not the total removal of risk, and I think that total removal of risk is an almost impossible task, but the situation as far as the comparison between principles-based regulation and risk-based regulation, we would strongly come down on the risk-based regulation. It is the regulators again which need education really. Coming back to the areas that we are more comfortable with, from a small business perspective, we are looking at, as I say, trading standards and those sorts of regulators. The problem we have is that, when a regulator comes into a business, it is perceived, sometimes correctly, sometimes incorrectly, that he is there to penalise you, to create some form of penalisation for you and, therefore, you do everything you can not to tell him anything in case it could result in a penalty. Really, the feeling is that, if the regulators that came in were on our side of the table, looking at our paperwork and saying, "If you did this or this", things will be okay. Also, one of the biggest things that we find is that regulators come in and, if you ask them a question, they often cannot answer it and have no intention of answering it. There should be some fall-back, and those regulators, with modern technology, could quite easily go back to a central core which could give them the information so that the business knows where it is going. It is clear regulation that we are looking for.
Q70 Lorely Burt: It is almost like a spectrum, is it not, where you have this lovely, esoteric, risk-based idea on one end, but, when it actually gets down to translation at the sharp end, it is performed like a metamorphosis into a tick-box type mentality and risk-aversion?
Mr Davenport: The classic situation, which I am sure you saw on television recently, is the one about gravestones being pushed over. In this article there was a certain pressure and it had to be done, and what was effectively a guideline that was put out by Health and Safety had become a standard, absolute do by most of the councils. The woman who was actually in the graveyard itself was saying that the most dangerous thing all around were all the poles holding up the headstones and people were tripping over them. There is more danger with what they have done than the original thing.
Q71 Lorely Burt: There are colleagues around the table who have had this interesting challenge in their constituencies. It is completely barmy.
Mr Haythornthwaite: Could I just add to that that a lot of the work that we have done has made it quite clear that, when we talk about the relationship between the regulator and the regulated, we know that it is a far more complex relationship than that, that it is surrounded by a constellation of risk actors, all of whom are playing on the situation, some of whom to great benefit - insurers, lawyers, media, local authorities - but some of whom have a vested interest in risk-mongering, and that alters the dynamic between regulator and regulated. Part of what is required is someone - and this is where I think independence helps - who can stand back and expose that because it is very difficult for the regulator to expose it because it sounds like vested interest and it is very difficult for the regulatee to do it because it sounds like beating, so someone who could stand back and expose that. We need some leadership to actually say that zero risk-tolerance is neither desirable nor achievable and actually risk is good in some cases. That is how people learn. That is missing. That is why at the end of all this chain you have local authority officers who think it is virtuous to take the decision they have just taken. The whole context has to change, not just that single relationship, regulator and regulatee.
Mr Ambler: Chairman, if I may make a cheap comment, it sounds like the regulators need educating, and I am sure my colleagues at the London Business School would be pleased to run courses in real-world business for this new market.
Chairman: We will note that.
Q72 Dr Naysmith: This is all happening, of course, at a time when we have the regulatory reform agenda and it is proceeding and we want the sorts of things that we have already referred to, risk-based, light-touch, non-intrusive but effective regulation; that is what it is about. We are going to end up probably with more intrusive regulation. What are the implications of that, if that is what actually emerges from the current reviews, for the financial services sector, and for the regulatory reform agenda particularly as it applies to financial services?
Mr Ehmann: I think there is a difficulty with two things. One is the perception and one is the reality. The perception I would highlight because I think back in 2008 Lord Turner made quite early comments in his chairmanship saying the era of light-touch regulation is over, and I know he was using that in relation to financial services and there may well be a very strong case for saying that is the right way to go, but there is an issue actually about the outward creep of the better regulation, deregulation or lighter regulation - pick any particular explanation of improved regulatory environment you like - which gets knocked off because financial services has a knock-on effect into other areas. I think that is an area of some concern for us from a perception point of view. I also think there is a genuine risk at the moment, particularly given the economic circumstances and a number of broader interventions that seem to be emanating from the Government and from Parliament at present, that the regulatory agenda seems to sit as a slightly esoteric or strategic insight against some very tangible regulatory measures which are coming in and hitting businesses. Those two things taken together are not particularly positive outcomes for the broader better regulation agenda.
Q73 Dr Naysmith: Do you see it as being in conflict with the objectives of the better regulation agenda?
Mr Ehmann: Yes, I do. To give a specific, when we asked members last year about some of the new burdens that were coming in, including flexible working requirements, 73 per cent of IoD members were aware of those incoming regulations, but, when asked about something delivered two years earlier under the simplification plans, which was the removal of the requirement to have a fire certificate, the recognition rate was 22 per cent. Taking that as a rather clumsy tool, it is clear that incoming regulations are much more of an awareness issue for business than outgoing ones and, therefore, you have a massive problem where you have very obvious incoming regulations for business and not such a transparent view of what is being improved.
Q74 Dr Naysmith: The Government says that one of its aims, and it is an important aim, is to support business. Do you think the need to respond to the financial crisis will interfere with this?
Mr Ehmann: I think from a perception point of view it will have an effect, and there is indeed a risk on a very tangible level that, if the regulation is not well-judged, clearly it could make our financial services industry uncompetitive within the world, but I do think there is a broader agenda, as I say, about whether the balance is right and the approach is right. If the fundamental desire is to improve businesses' perception of the regulatory environment in which they have to operate, then the focus has to be upon how you change those perceptions, almost a psychological approach in many ways. At the moment I do not think that balance is quite struck.
Q75 Dr Naysmith: So you think the principles of better regulation still hold good and are still important?
Mr Ehmann: I think they still hold good, but I think they do not go far enough.
Mr Haythornthwaite: I would separate, if you look at the history of the last couple of years, those regulations that are linked to social welfare, the Treasury. You have to accept there is always going to be a tension between competitive business and that, and there is a political judgement as to where that sits. An awful lot of dancing has happened around that and very little has changed. I think elsewhere the principles are the same, that there is a level of protection that is the outcome that can be delivered in many different ways, and better regulation has always been about saying how you deliver that level of protection against a given risk with the lowest possible intrusion and, by extension, the least impact on competitiveness of businesses and, where possible, enhancing the competitiveness of businesses. I do not think that has changed. The trouble is that 'better regulation' as a term has been hijacked in the emotion, and somehow we have to move on and say this is all about risk management now, nothing has changed, it is about outcome, and we need to make sure that we deliver the protections with the lowest possible impact on competitiveness and no more. As long as we do that, as long as the right discussions are held, I do not see it is the end of the better regulation agenda. It has not really changed.
Q76 Dr Naysmith: So you are quite optimistic?
Mr Haythornthwaite: I would not say I am optimistic because I think there it is still emotionally charged and that is a dangerous time. What it needs is some deep breaths by leaders in the country to say, "Look, we understand it, but you have to understand that, if we react to the short-term emotion and then look back later, we will find we have made some big mistakes, that the trade-offs will not have been thought through thoroughly and we will not have found the most effective ways of delivering the desired protections and we will all repent at leisure".
Q77 Dr Naysmith: Mr Ambler, do you have anything to add?
Mr Ambler: Yes. I do not buy the thesis
just advanced that there is a better regulation agenda which has had any
success, and I do not even detect any difference between better and more in
this context. The view which we have
been getting increasingly concerned about over recent years is that regulation
in the
Q78 Dr Naysmith: I think that, if we go down the path of discussing the EU and EU regulations, we will be here until this afternoon.
Mr Ambler: Maybe, Dr Naysmith, but it is also central to what we are trying to do.
Q79 Dr Naysmith: I understand.
Mr Davenport: If I can add to that, again referring to the Chambers, they did a
survey in
Mr Ambler: Very small!
Q80 Chairman: Mr Ambler, you just used the phrase, I think I am quoting you correctly, that to be fair, "gold-plating is a myth". Would you just explain that?
Mr Ambler: Yes. We have all charged the Government with gold-plating and, when we looked into it, in all fairness, there is some, and there are some examples where there is serious gold-plating. For example, there was serious gold-plating on the agricultural arrangements to pay farmers back money that was due to them and, as a result of that, farmers failed to get the money, and that was entirely the fault of gold-plating here, but that is exceptional. It does happen to some extent, but very rarely. What happens much more frequently is what is called 'elaboration', which is legally the same, but two sensible paragraphs in an EU Directive on company law were translated into 90 pages when it got here, which of course nobody had time to read, and included a lot of other stuff which was claimed to be clarification and elaboration rather than gold-plating. It is a fine point, but it is an important one.
John Hemming: If I can add a little bit on that, I had an interesting experience at a European Scrutiny Committee, one of these strange things that nobody even knows we have, where we were talking about the Kinder Surprise egg and whether we should regulate to deal with it. We had so many papers and in the middle of it no evidence about what was going to happen if the rules were changed, and that is how these things go through, but then we had one of those usual debates where we note a report, which means we do not vote for it or against it and it just grinds through the process. It is not a good system; it generates rubbish.
Q81 Chairman: We have discussed regulators and their weaknesses, and I think certainly Mr Ambler has implied that regulators do not have the necessary skills and expertise to regulate effectively, but, if that was the premise of his earlier point, what is lacking? What is needed?
Mr Ambler: Realism more than anything else, and humility would come in useful
too, a recognition that the regulators were to blame, after the directors in
the first place, and a recognition that the world is not entirely
consistent. I am picking on the FSA
because they are the extreme case, but this is true of other regulators to some
extent, the fact that they need to work with other interested parties, starting
with the directors, but also with the Accounting Standards Board, with the
auditors, in order to produce better results and not imagine that these people,
who know very little about financial services, can go in and run businesses
better than the directors can. That is
an absurd starting point, but that is essentially what they are saying
now. What they are saying now is, "We
know better than companies how to run these companies". It is an absurd lack of humility that is
actually going to cause further trouble in the future. I am very gloomy about the Financial Services
Authority. I do not want to waste the
time of this Committee, but, if you look at how Venice lost its financial
services industry, which was keeping it going in the 17th and early 18th
centuries, and why for two centuries thereafter it was an empty shell, tourists
will be going down the Thames looking at these empty buildings on Canvey Island
with ivy growing up the walls and saying, "What were they for?" because the
same is going to happen if we go on down this path. What happened in
Q82 Chairman: Where regulators are engaging more closely with the regulated in, for example, the work that the LBRO are doing in reaching out and working in partnership with the regulated, and the way some of the relationships occur between the bigger companies and the relationship with say, HSE - for example, in my own constituency the chemical sector has a very close relationship with the regulators to work as a partnership - do you see that as the model to apply elsewhere, including the FSA?
Mr Ambler: I certainly think, and indeed the point has been made by my colleagues, that that is a good first stage, but it is not just with the companies themselves. As I said, it is with the accounting authorities and with auditors and with other people, and to work with people rather than to work against them. I think we all agree with that, but that is a very important point. It is certainly not what Lord Turner is saying at the moment, where he is asking us all to be very frightened of him, which perhaps we should be!
Mr Ehmann: I think there is another point. I take the same question in a slightly different direction as well, which is that I hinted earlier at the fact that the incentives and benefit system around the Civil Service and indeed independent regulators, for us, as the elephant in the room, if there is not a system which really encourages the individuals working at all levels of regulatory bodies or as part of the Government as a whole to look at the risks and better regulation opportunities that exist in every possible intervention, you are still going to end up with some quite clumsy and heavy-handed ones.
Q83 Chairman: How can governments and regulators ensure that regulations achieve their intended objectives, their desired outcomes, and how would you seek to improve the current approach?
Mr Davenport: One of the problems we have with that is that, when regulation is created, the Government enters into a consultation process with business, but, when we actually examine the businesses involved, they are all large businesses because small businesses cannot get involved; they do not have the time or the money to be able to do it. That is where I think a lot of the problems lie, and the emphasis should be much more on small businesses because small businesses represent 54 per cent of GDP. It has been said, I think, in virtually every area on the political spectrum that small businesses are going to be the people that take us out of this recession, so a little bit more thought about how Parliament engages with small businesses and how to engage with and encourage small businesses into the dialogue would be a far better thing.
Mr Ehmann: I think more openness early on on the part of government when seeking to legislate will help. I can draw a specific example. Yesterday, we had the Second Reading of the Equality Bill which, for good or bad, from our point of view, no impact assessment was presented in advance of it in relation to the detailed proposals that were eventually put forward. In a sense, there was no open debate early on about exactly what is featuring within this Bill, hence it does not have the degree of input and rigour that one would have liked from business and other stakeholders. That is really lacking. I do think, however, that post-implementation reviews are absolutely integral here. I would go further than the current system and I would say that, where post-implementation review takes place and there is proven to be a high level of discrepancy between the reality of a legislative intervention and the impact assessment which preceded the Bill, there should be a re-discussion of that in Parliament and possible retraction of that legislative intervention.
Mr Ambler: If I may say, there are not any post-implementation reviews. They have been called for and in the guidelines they should exist. I am not saying there have been none, but there have been very, very few. It is an issue which the National Audit Office might like to take a look at because it is clearly important that there should be some. There is a commitment to produce them, but whenever we try to find any, we cannot.
Q84 Chairman: Any other comments on that?
Mr Haythornthwaite: Chairman, I have a comment. One of the main reasons for establishing the RRAC was to really look hard at the culture of policy-making, and from it flows the whole question about how you improve the regulatory environment. We focus, in particular, on finding ways to re-inject reason where instinct takes over, instinct that has been put into the system through either the behaviour of the aforementioned risk-mongers or the public pressure, intolerance of failure - it does not matter what it is that has driven the process into a deterministic announcement-led policy-making process. We have focused our attention on saying, "How can we put some particular patterns of behaviour into it that forces people to stick to systemic evidence-based policy-making, engages broadly in consultation all the voices, not just the loud voices, and then ultimately communicates around the time of implementation such that it is effective?" I highlight this because we actually focused our work on outside business because the rest of society was being forgotten, and it has pretty much been forgotten in this discussion so far, but actually regulation affects the whole of society, not just business. There are lessons to be learned, in particular, with Clive Davenport's comment. There is absolutely no reason not to transplant those processes back into consultation within business where we seem to be pursuing very traditional models and we are looking for thoroughness as opposed to effectiveness. Really, they take too long and they impose far too much time on businesses. If one looks back on the work we have been doing over the past year, you will see different ways of approaching this that will perhaps provide solutions.
Q85 Chairman: The Minister for Employment Relations and Postal Affairs, Pat McFadden, made a statement on 2 April announcing that regulatory budgets will not proceed. What might now be the future of the regulatory reform agenda and what are your views on the fact that regulatory budgets are not to be adopted and on the proposed alternatives?
Mr Ehmann: From the
Mr Davenport: I would wholeheartedly agree with that. One of the things is that the percentage responses from the FSB on a very similar series of questions was within 5 per cent and yet all of these statistics are issued to government and they just seem to be ignored. That is what we find exceedingly frustrating. As far as the regulatory budgets, we were extremely disappointed by the fact that it is not going to be carried forward at the moment. We are concerned about the format of the new proposed system. It appears to us initially, although it is only initially, it is for one statement, that there is going to be no accountability and no ability to make any direct alterations. It will not have the power to require changes in the behaviour of independent regulators. To me, it is a waste of time going there, if that is the case.
Mr Haythornthwaite: In terms of regulatory budgets, even though you recall I was Chairman of the Better Regulation Commission before RRAC, and it was actually the predecessor body, the Better Regulation Task Force, which first proposed regulatory budgets, I never actually believed that they were a practical proposition. I foresee a world where we would have employed more armies of people to argue the numbers that in themselves have assertion upon assertion. I think what is still missing, as was referred to earlier by Tim Ambler, is a very committed approach to cost-benefit analysis, real cost-benefit analysis, and post-implementation reviews with some teeth. The Regulatory Policy Committee being put in place, I am concerned about it. I do not think the Government or BRE really are committed to independent challenge, as reflected in Clive's point a minute ago, but, if the Regulatory Policy Committee is going to be put in place, it should be given teeth, it should be equipped with people who are unafraid and informed enough to challenge hard, who can spend the time and have the staff work to do it, to really look at the numbers and, looking through the viewpoint of the RRAC, asking questions that go beyond business to the rest of society and making sure that actual rather than perceived risk is being accommodated, that all voices are being heard and evidence-based, systemic policy-making has prevailed throughout the process. If a body is produced with that sort of teeth and effectiveness, great, but over the last three years a lot has been said about cost-benefit analysis and I have seen very little improvement.
Mr Ambler: I agree with that. We understand why the Government has kicked regulatory budgets into the long grass and do not see any point in agonising about that. Whether it was right or wrong is not an issue. The stronger point is that I think the re-announcement of another two committees is a piece of candy floss. These are two committees to replace two committees which replaced another two committees before we had those two committees, and this has been going on for ever. The committees do not actually, with all due respect to my learned friend at the end, in our opinion, achieve very much which is substantive. I realise this is something you are not going to agree with, but, nevertheless, it is our view. The one that is replacing the Prime Minister's regulatory PRA thing, we are told, was very effective, but no minutes have ever been published, no evidence has ever been adduced as to their effectiveness and we remain sceptical. We would be quite interested to see if the replacement committee, which has been demoted from the Prime Minister's Office which indicates his extent of interest, is going to be any more public than its predecessor. I entirely agree with what Rick was saying, that we need just one, we do not need 15. This paperwork they are coming up with, there are seven separate planets on which all these activities are going on with no communication with each other. What we would quite like is to have one that worked rather than seven that do not.
Chairman: That is a very good point on which to finish. Thank you, gentlemen, for your attendance. Please feel free to send any further information to us, either stemming from questions today or things that crop up through the next few weeks in this field. Thanks very much.