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Lord Kingsland: My Lords, I am becoming more and more depressed. I shall read very carefully the Minister's reaction to all the amendments that we have tabled in order to consider what to do at Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 151 [Consultation]:

Lord Kingsland moved Amendment No. 157RA:

The noble Lord said: My Lords, this clause concerns the consultation procedure which the authority must follow when proposing to make rules. One of the requirements is the preparation of a cost benefit analysis, which must accompany the draft of the rules when it is published for consultation.

The first of our amendments, Amendment No. 157RA, would require the cost benefit analysis to include an explanation of the methodology employed in carrying it out. I assume that there cannot be any objection to giving an explanation. There will be a methodology and it would be simple enough to set that out. It would be helpful to those considering the draft rules to know what methodology was employed and therefore what factors the authority has taken into account in determining the costs and benefits of the draft rules.

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We believe that one particular benefit that the authority should consider is the increase in business activity, if any, which is expected to arise if the proposed rules are made. Rules tend to restrict the way in which a person can behave. No doubt regulators see their function in terms of controlling the behaviour of those whom they regulate. In our view it would be unfortunate if the natural tendency of regulators to control, and therefore to restrict behaviour, was not counterbalanced by a requirement at least to consider the impact of their rules and regulations on business activity.

We, on this side of the House, believe that good regulation should enhance business activity. The purpose of Amendment No. 157TA is to require, as part of the cost benefit analysis to be carried out by the authority, an analysis of any increase in business activity which is expected to arise if the proposed rules are made. We have used the words "any increase" as we recognise that there may be no increase in business activity. But the provision would require the authority to apply its mind to the issue.

Amendment No. 157SA concerns Clause 151(7), which excludes the obligation on the authority to consult on proposed rules where the authority considers that the delay involved in carrying out the consultation would be prejudicial to the interests of consumers. In these circumstances, the amendment would require the authority to publish, first, a cost benefit analysis; secondly, an explanation of the purpose of the proposed rules; and, thirdly, an explanation of the authority's reasons for believing that making the proposed rules is compatible with its general duty under Clause 2, at the same time as, or as soon as practical, after the relevant rules are made. The fact that the authority can make rules without consultation in certain circumstances should not remove the authority's obligation to deal with these particular matters in relation to the rules in question.

Amendment No. 157UA to Clause 152 addresses a rather different issue. We are concerned that many of the authority's rules will escape the discipline of the cost benefit analysis requirement because they will not be made under Clause 151 and will be "grandfathered" under transitional provisions. When he replies, perhaps the Minister will be kind enough to clarify the position on the "grandfathering" of existing rules.

Our other area of concern is that rules that have been made through the consultation process, including a cost benefit analysis, may cease to be appropriate over time. There does not appear to us to be any mechanism in the Bill for the review of such rules. The Minister will recall that the Opposition tabled a provision in Committee which would have obliged the authority to review and consult on existing rules three years after they were made. We were told that that would impose too great a burden on the authority.

Our proposed amendment to Clause 152 is a much more modest proposal. It simply requires a cost benefit analysis to be carried out as soon as practicable after the third anniversary of the making of any rule. There would be no obligation to consult, but the regulated

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community would have the comfort of knowing that the rules which govern and regulate its activities would be scrutinised in the context of a cost benefit analysis on a regular basis. We believe that every three years is a more than reasonable period for these purposes. I beg to move.

6.15 p.m.

Lord Newby: My Lords, we have considerable sympathy with the principal purpose of this clause; namely, that the authority should publish rules in draft, seek comments on them and then explain its view on the comments received. I explained in Committee the difficulty that we have with cost benefit analysis in this context. Frankly, it is almost impossible for such an analysis to be rigorous or even, in most cases, of any value whatever. Therefore, I wish briefly to comment on three of the amendments before us.

Amendment No. 157RA is an extremely small amendment. I hesitate to say that it is almost certainly otiose, but I suspect that it is. Amendment No. 157TA seems to me to exemplify the problem with cost benefit analysis in these cases. If the amendment were carried, someone would be asked to speculate--it cannot be anything more than that--on any increase in business activity that is expected to arise if the proposed rules are made. The judgment of Solomon would be nothing compared to the task of the poor character who would have to speculate on the benefits that might accrue from the passing of a rule, the main purpose of which might be to prevent certain kinds of action rather than to promote them. So we do not support this amendment.

Therefore, a fortiori, we find Amendment No. 157UA--a watered-down variant of the amendment to which I spoke in Committee--equally unacceptable. It suggests that a procedure with which we have considerable difficulty should be repeated unnecessarily. In the circumstances, we cannot support this amendment.

Lord Boardman: My Lords, the phrase "cost benefit analysis" has crept into commercial jargon in recent years to a most unfortunate extent. It is quite meaningless, unless you have a clear definition of the costs and an equally clear definition of the benefits that are to be set against them. It has been thrown about so often to justify whatever the thrower wishes to justify that it has no reasonable translation into anything meaningful. It would be very regrettable if the phrase were left in the Bill without the addition of the amendment proposed, which would ensure that the methodology used in such calculations would be clearly shown. Without such an addition, it will be a meaningless symbol.

Lord Borrie: My Lords, I found the last two speeches from the noble Lords, Lord Newby and Lord Boardman, to be extremely refreshing. The phrase "cost benefit analysis" trips off the tongue. One hears it all the time. During the Second Reading the other day of the Utilities Bill, my noble friend made a point

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that I believe would be most relevant to this debate; namely, that it is easier to establish the cost side of the matter than it is to establish the benefit side. Anyone who has an anti-regulatory philosophy like the noble Lord, Lord Kingsland, is bound to want a cost benefit analysis every week or, if possible, every month.

It is very easy to establish the pound sign as regards the costs involved, but it is much more difficult to establish the nature of the benefits. When you set the two alongside each other, you often get set out very neatly on one side the sign that the accountants can understand--the pound sign and the costs--while on the other are the benefits such as greater competition, more choice and more understanding by the public of the information that they receive. The provision of that information has a cost, but it is very difficult to put a pound sign against it.

I felt that I should make those comments because the last two speeches highlighted the matter. I listened to several of the speeches made by the noble Lord, Lord Kingsland, this afternoon, so I am perhaps feeling slightly depressed because so few other voices have been heard. I was very glad to hear the last two noble Lords speaking as they did.

Lord McIntosh of Haringey: Indeed, my Lords, and that applies to my noble friend. I bear the scars of cost benefit analysis. I used to bank with the National Westminster Bank when I was in business. My branch manager, or my business centre manager as he became, used to demand proof for all the forecasts that I made. He told me that I must do it by way of cost benefit analysis. I promptly asked, "What do you mean?"--but I shall not go into the detail of his response. It was probably while the noble Lord, Lord Boardman, was chairman of the National Westminster Bank, or soon afterwards. I, too, am glad that the duologue between myself and the noble Lord, Lord Kingsland, has been broken. Thank goodness for that!

The amendments now before us would change Clause 151, which sets out the consultation procedures that the FSA must follow when making rules. This is an extensive consultation procedure, which we have strengthened during the course of the Bill's passage through Parliament. It is only right that we should do so because the FSA must consult widely among the regulated community when making rules. Perhaps I may explain why, in the Government's view, two of the amendments are unnecessary and why the others are inappropriate.

Amendment No. 157RA would require the FSA to publish an explanation of the methodology that it uses when it publishes a cost benefit analysis. There are already safeguards on this in the consultation process. The cost benefit analysis is published alongside the draft rule. The FSA must give notice that representations about the draft rule may be made to the FSA. Moreover, the FSA must have regard to these representations and must, in general terms, publish an account of them and its response.

Let us suppose that the FSA made a rule that specified only in vague terms that the benefits outweighed the costs. I cannot imagine that it would

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take long for it to receive representations that the costs and benefits had been insufficiently justified; in other words, the incentives are already there for the FSA to explain how it arrives at the costs and benefits of any rules, with all the qualifications that have been made about the difficulties of establishing benefits.

While still on cost benefit analysis, I should point out that the Government have said on a number of occasions that we do not believe it appropriate to specify on the face of the Bill the methodology used. I said in Committee--this will teach me to make jokes--that,

    "those who conduct such analyses, such as the consultancy divisions of some major accountancy firms--

making sure that the noble Lord, Lord Sharman, was present--

    "frequently change their methodologies because a good number of them do not work ... We do not believe that we should prescribe details of that kind in a Bill which must survive for a number of years to come".--[Official Report, 27/3/00; col. 566.]

Allowing for my levity, the principle remains the same. If we were to specify that any increase in business activity be included as one of the benefits from a proposed rule, we would freeze cost benefit analysis and we would not have the flexibility of adopting the right kind of cost benefit analysis for the right purpose.

I turn to Amendment No. 157UA which requires the FSA to carry out a cost benefit analysis of rules three years after they have been made. I notice that the noble Lord, Lord Kingsland, has not specified that the methodology should be included in this three yearly review. The noble Lord, Lord Kingsland, seems to think that our objection to this amendment, or to the comparable amendment in Committee, is that it would create too great a burden. That is not our objection. Our objection is that the amendment would require a blanket approach to review each and every rule every three years. That means an awful lot of unnecessary work. Not every rule will need reviewing, and of those that do, for some three years will be too long to wait for a review, for others it will not be long enough.

As I said to the noble Lord, Lord Saatchi, in considering a similar amendment in Committee,

    "The potential to create bureaucracy is created precisely by this amendment. The amendment would place a huge strain on the authority and divert time and money away from its proper business--regulating--but it would also have knock-on effects on the regulated community and consumers. The regulated community would have to pay the costs of the review and consultation, and consumers would have to put up with the disruption involved".--[Official Report, 27/3/00; col. 566.]

That is exactly comparable to what would happen if we had a review after a statutory period rather than when it is necessary and, for example, when the consumer and practitioner panels decide that a review is necessary after they have performed their functions of considering the effectiveness of existing rules.

I turn finally to Amendment No. 157SA. This seeks to change subsection (7) of Clause 151. This subsection allows the FSA not to comply with the consultation procedures in Clause 151 when the delay involved in doing so would be prejudicial to the interests of

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consumers. This is a clever amendment because it does not dispute the need for the FSA to override procedures, but asks that it publish the information required for consultation--a cost benefit analysis, an explanation of the purpose of the proposed rules--on or as soon as practicable after making the rule.

However, Clause 151 is about the FSA's consultation procedures. The cost benefit analysis and other material are to help inform consultees about the proposed rule. It seems a little bureaucratic to ask the FSA to provide supporting material for a consultation process which has been overriden.

There are legitimate concerns about the FSA providing a justification for its rules, even for those which have to be drawn up quickly. It may in the event be able to provide the information sought by the amendment when the rule is made. However, we certainly do not favour imposing a requirement on the FSA to provide supporting material after the event. I do not know whether my response will depress or distress noble Lords, but I am afraid that none of the amendments that I have addressed will work.

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