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Financial Services and Markets Appendices to the Minutes of Evidence



  This paper summarises some important areas highlighted in the Better Regulation Guide as contributing to good regulatory practice. A review of the framework proposed in the draft Financial Services and Markets Bill in the light of the Better Regulation Task Force's "Principles of Good Regulation" is particularly appropriate given the recent publication by the Cabinet Office of the Better Regulation Guide—with the Prime Minister's Foreword—and the Task Force's 1997-98 Annual Report.


  The Task Force has established five key principles for good regulation: transparency, accountability, targeting, consistency and proportionality. The objective is to ensure that Regulations are necessary, fair, effective and balanced, and that they enjoy a broad degree of public confidence. In particular, Regulations should be properly targeted and clearly defined, and must balance risk, cost and practical benefit ("it is not practical for regulators to seek to exclude all risk. . . fit the remedy to the risk . . . only regulate where you need to . . . "). A copy of the Task Force's effectiveness tests is attached (not printed).

  The Better Regulation Guide, published on 10 August, requires Departments to use Regulatory Impact Assessments[24] whenever new legislation or consultation papers on regulatory proposals are published.

  The Assessments should include a clear statement of the objectives of the regulatory proposal and its likely effects, and an Assessment should demonstrate that the proposal envisaged is the most effective means of meeting the stated objectives, set out the benefits—and costs—of the proposal, and identify who will be affected (although the Guide notes that the process will not necessarily follow a set pattern). Long term economic benefits and the international dimension should also be considered, as should the danger that a particular rule could give rise to an unintended or perverse result (for example, prohibiting a product could lead consumers to switch to substitutes which pose equal—or even greater-risks). In particular, the Assessment should contain an explanation of why non-regulatory action, such as a code of conduct, would be insufficient.

  The Guide discusses drafting, consultation, implementation and achieving compliance, and it gives guidance on reviewing and monitoring. Particular points made in the Guide include:

    —  The need to avoid Regulations which cause disruption to markets and trade.

    —  Those being regulated must understand their obligations and there are important costs implications for businesses if requirements are uncertain (although the Guide also stresses the need to avoid overly prescriptive rules and to consider goal-based regulation).


    —  The importance of regulation being clear and legally certain ("be predictable, people should know where they stand").

    —  The importance of focusing on achieving compliance rather than just punishing breaches ("make sure the system . . . is designed to bring about compliance, not just to generate enforcement activity . . . Consider compliance through self assessment, i.e., give affected persons an enforceable right to challenge the businesses' compliance. . .": also see below on Enforcement more generally).

    —  The importance of regulation being properly targeted and not "scatter gun" or universal ("define the exact nature of the problem . . . and match regulation to it as closely as you can . . . Regulation should focus on the problem and minimise side effects . . .").

    —  The importance of consultation—which is a key element in accountability: adequate time for consultation should be allowed and feedback provided to consultees (in particular, Assessments should be available on request to interested parties, and should be sent automatically to those who helped in their preparation).

    —  The production of consolidated Regulations: if a new Regulation overlaps with another measure, thought should be given to introducing a combined and streamlined regulation.

    —  Transitional phasing-in periods should be considered.

    —  Regulations must continue to be relevant: thus, prior to the implementation of a Regulation, the establishment of a procedure for assessing and monitoring the efficacy of the measure should be devised. (Annex 4 of the Guide provides advice on reviewing Regulations.) As part of this process clear regulatory objectives are needed.

    —  The potential benefits of self-regulation should be considered (on this the Task Force is undertaking further work).

    —  The benefits of enhancing consumer choice and understanding through information disclosure should be considered (although the costs for businesses of disclosure should also be borne in mind).

    —  Unnecessary gold plating of international requirements should be avoided.

  In addition, Annex 3 of the Guide sets out Principles of Good Enforcement. The Government wishes the principles and procedures to be followed by all appropriate enforcement authorities. The Guide stresses that adherence to these principles should benefit business by reducing the uncertainty of firms about whether they are getting it right, by cutting the overall cost of complying with Regulations, and by assuring businesses that they are competing with one another on level terms.

  The Guide stresses, in particular, that helping business to comply in the most effective way should be a key aim. The Guide says that this cannot be achieved solely by detection and punishment of breaches, and neither should enforcement and sanctions be so strict that they effectively discourage those who are being regulated from performing legitimate activities or force them—through fear or uncertainty—to go to unnecessary lengths to comply. The sanctions regime should be proportionate, fair and effective.

  The enforcement principles set out in the Guide include:

    —  Proportionality and consistency: the cost of compliance for business should be minimised by ensuring that any action required is proportionate to the risks. The regulator/authority should carry out its duties in a fair, equitable and consistent manner and, as far as the law allows, it should take account of the circumstances of the case and the attitude of the operator when considering action. Before formal enforcement action is taken, officers should provide an opportunity to discuss the circumstances of the case and, if possible, resolve points of difference (unless immediate action is required, for example in order to protect the public).

    —  Information and advice in plain language on the rules that are being applied should be provided, and the authority should be open about how it sets about its work. It should take particular care to work with small businesses so that they can meet their legal obligations without unnecessary expense.

    —  The authority should encourage business to seek advice/information, because prevention is better than cure, and it should clearly distinguish best practice advice from legal requirements.

    —  The need for clear enforcement standards, setting out the level of service performance that the public and business can expect to receive, should be drawn up in consultation with business and other relevant interested parties, and should be published: those being regulated should know what to expect from the enforcing authorities.

24   In his Foreword the Prime Minister states that "no regulatory proposal which has an impact on businesses . . . should be considered by the Government without a thorough assessment of the risks, costs and benefits, a clear analysis of who will be affected and an explanation of why non-regulatory action would be insufficient. This requirement applies whenever Ministers or their officials are seeking to clear a new proposal for legislation. Without a prior assessment of the kind described in this Guide, clearance for such proposals will not be given". Back

25   The Guide states that where regulation is goal-based, it may help to provide certainty if details are set out of how those affected can comply, while leaving it open to them to find acceptable alternatives. Back

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