Examination of Witness (Questions 120
- 132)
WEDNESDAY 26 FEBRUARY 2003
MR JOHN
SWIFT QC
120. The exercise of your discretion could
be judicially reviewed in appropriate cases?
(Mr Swift) Indeed, my Lord.
121. But not in all cases. It is not enough
simply for the court or a lot of other people to take the view
that they might have reached a different decision. They have got
to go a good deal further than that, have they not?
(Mr Swift) They have got to go a good
deal further because that is the system of the common law principles
that have been developed, as your Lordship will know, essentially
since the GCHQ case in 1984, which coincided with the 1984 Telecommunications
Act, but that is pure coincidence. Since then, the courts have
still shown some reluctance to interfere with the judgement or
the reasonableness of decisions on economic criteria. Where the
decision of an administrator or the Government is in the area
which affected the liberty of a subject, the courts are inclined
to investigate with much more care and scrutiny whether the decision
is right. There is also a move by Parliament to increase the scrutiny
by the court or tribunal of the merits of the decision. The origin
for this is found in the Competition Act 1998 under which the
Office of Fair Trading and the sector-specific regulators in their
own areas are subject to an appeal broadly on the merits to a
body now known as the Competition Commission Appeal Tribunal.
The origin of that is that the Court of First Instance in Luxembourg,
which hears appears from the European Commission, has adopted
a set of procedures which is closer to an appeal on the merits
or a re-hearing than just judicial review. That is also, just
to develop that, in itself a very interesting development by the
European Court of Justice, which started off some years ago as
treating with kid gloves any complex economic assessment because
they said: these are matters for the judgement of experienced
officials, who are the Commission, they are not for us. There
has now been a significant change in that, and we saw that specifically
in the decision of the European Court of First Instance in Luxembourg
in the a case involving Airtours and First Choice, which was a
decision in June 2002. It represented a major blow for the courts
in demonstrating to the European Commission that they were prepared
to scrutinise every aspect of the reasoning used by the Commission
in arriving at a decision, and I believe that is developing now
in the United Kingdom.
122. It has been suggested to me that the
cost of an operator going to the Commission is inordinately expensive,
not only in money of course but in time. Is that a view you would
agree with?
(Mr Swift) I am not sure which Commission
you are talking about here.
123. The Competition Commission for the
re-hearing.
(Mr Swift) Yes, it is expensive. We
have the Competition Commission in its reporting role; that is
the Competition Commission being asked to investigate, say, a
merger. We have the Competition Commission in a different role,
if it is looking, for example, at the supply of banking services
to small and medium sized enterprises, on which the Competition
Commission reported last year. There, alas, the company has no
option but to submit to the jurisdiction of the Commission. It
is a reference made by the Office of Fair Trading and they pay
the bills, not just of their own advisers but they have to pay
the bills of the Competition Commission, and indeed I believe
the banks were landed with a bill in excess of £1.3 million
last year. It is always expensive to appeal and ultimately it
is a question for the firm as to whether or not it wishes to incur
the expense, but I do not believe those expenses are of an order
of magnitude different from those involved in an appeal through
the High Court or the Court of Appeal.
124. Is there anything to be said for having,
in the cases of the railways, a separate tribunal to which an
appeal against a regulator's decision could be taken where the
matter could be dealt with perhaps rather less fully and less
expensively?
(Mr Swift) I do believe that we should
rely on a Competition Appeal Tribunal to handle appeals from regulators
in general. At the moment, I could not see an advantage in going
for a railway-specific tribunal because then I would say: do we
then need an energy tribunal? do we need a communications tribunal?
do we need other tribunals? I believe that for the purposes of
simplicity one should have a very clear hierarchy. One of the
advantages of going to a general specialist tribunal is that that
tribunal does build up a great deal of experience in the broader
aspects of the relevant principles of law and economics, which
a specialist tribunal might not have, and those will be the issues
that will go before that tribunal. There are plenty of other smaller
tribunals set up within the industry in which matters where there
are disputes can be resolved. There are trades disputes committees.
Indeed, we set those up as part of the regulatory matrix back
in 1994 precisely to avoid the need to go to an expensive and
difficult form of general appeal.
Lord Lang of Monkton
125. Mr Swift, in your paper you refer to
how, when you were appointed, the individual was the regulator;
and then you describe, for reasons that seem entirely sensible,
having brought members of your office in to a decision-making
group. Do you favour the regulator being seen as a rather collective
committee-type appointment or do you favour the original approach
with one individual being held very much to account?
(Mr Swift) It is very difficult. There
is no doubt, and this is a terrible cliché, that when the
buck stops with you, you tend to think incredibly long and hard
because you know that you are going to be taking the flak and
the responsibility for that decision. I was constantly being reminded
by those excellent people I brought on to my board, "As the
law stands", they said, "Mr Swift, it is your decision.
We are simply here to advise you". I would say, "Thank
you very much". However much I tried to involve them in a
collective decision-making role, they would remind me of the statutory
position. On the other hand, the Civil Aviation Authority, which
is the grandfather of the old regulatory bodies, exists with a
Chairman and a Chief Executive and it has its own group called
the Economic Regulation Group. Recently, in 2002, under a quinquennial
review, which is mandatory under the Airports Act 1986, the Competition
Commission reviewed the charges for the British Airports Authority
and Manchester Airport, because those are the two airports which
are designated airports for the purpose of regulation. The Civil
Aviation Authority made recommendations to the Commission, the
Commission came back with a report, and the CAA went out to consultation
and came back with conclusions that are markedly different from
those of the Competition Commission. First of all, that indicates
that sensible regulators can come to quite different decisions,
based on their assessment of common facts; secondly, that you
would have reports that to any outsider would appear to be well-reasoned,
well-argued reports produced by committees. I am far from suggesting
that one needs to have an individual to secure accountability.
I have, I think, a natural concern that committees breed bureaucracy
and that, even within a committee, one is going to find the need
to have a chairman and a chief executive, and ultimately what
you are looking for is quality, effectiveness and timeliness in
decision-making. I hold no brief for decision-making by committees.
I can understand that when you have a commission, like the Competition
Commission, set up, then it is sensible to have reports produced
by panel members, but this system has been in place now since
1984. To the extent that it is narrowing the democratic deficit,
I think in part it has done so because of the credibility which
some of the individual regulators have achieved as a result of
a single-minded determination to pursue those objectives and being
seen to do so, and then they have not got lost in the warmth of
an enveloping committee.
126. To follow on, do you see merit in the
regulators in one sector being in a position to consult, formally
or informally, across other sectors? Is there sufficient commonality
of interest or is there a danger that in so doing they will blur
the their own particular sector?
(Mr Swift) No, my Lord, and I am glad
you asked the question. When I went into regulation, I was number
five. The existing four always looked a bit askance as to whether
the Rail Regulator really did merit the title of regulator. They
said, "We are utility regulators. The difference between
us and you is that we handle things that go into people's houses".
I said, "Yes, all right, but—The model for the Railways
Act is the model adopted for other privatisation sectors and we
are involved in consumer protection, just like you are".
I do not know if this is on the record or not of the time but
I was horrified at the extent to which the regulators refused
point blank to engage in discussions on due process. I said, "Do
you realise that whether you are dealing with water, electricity,
gas or telecommunications, we are in the world of global utilities,
people who operate worldwide?" You could have a US corporation
or a European corporation which has subsidiaries in gas, water,
electricity and telecommunications. It is bad enough having four
regulators, but if you have got to deal with four regulators who
do not talk to each other and have entirely different processes
for how they reach their decisions, this unnamed undertaking is
going to wonder about the effectiveness of the decision-making
within the United Kingdom and whether or not it is worth investing.
One of the then serious concerns in the mid-1990s was the lack
of transparency with regulation. A number of regulators felt themselves
constrained that they could not say anything before they took
a decision. Usually they had taken some very bad legal advice
about fettering their discretion: "We cannot say anything
in case it fetters our discretion". That would be worrying
too much about fettering of discretion. It is not a relevant factor
in talking to each other. We then developed a group. It was not
called a cartel of regulators it had a better name than that.
We met regularly about once a quarter at each other's offices,
whether in Birmingham or in London. We had an agenda, properly
co-ordinated, and we discussed the manner in which we would seek
to arrive at common procedures which would give a greater degree
of credibility to the decision-making process. There you are speaking
not just to the converted but I felt that helped in the conversion
process. Whether it goes further than that, I do not know. Certainly
in terms of due process, how we do things, how we arrive at decisions,
I believe that the regulators have now developed a much better
system of common practice and good practice which is setting a
precedent for other decision-makers within the economy generally.
Chairman
127. May I come back to the aspect of the
relationships that a regulator has? Could I clarify what is in
your paper, based also on your responses to Lord Jauncey and your
definition of accountability. There is accountability, essentially
based on your definition in terms of legal accountability through
judicial review and the Commission. There is answerability, if
you like political answerability, to Parliament. The third relationship,
as you explained in your paper, I would summarise, if I have understood
you correctly, as a duty to explain to consumers. You have input,
you listen to them, you take account, you hear what they say.
You stress quite rightly in your paper that ultimately it is your
decision, but you then have a duty to explain that decision to
them. It is that linkage I am interested in. You mentioned that
there are the consultative bodies and people who will write in
to the regulator. The thing that struck me was that you mentioned
you had your own council and you appointed people to advise, but
I notice also that— and you are not the first regulator
we have had who has been in this position—when you regulate,
you appoint the members of those bodies. I was wondering what
the justification was for that, because there is the danger that
you might face the accusation that you would then be appointing
people who were going to express the views of consumers that you
wanted to hear. Do you think there is a case actually for somebody
else appointing those bodies, so that the regulator, in your case
the Rail Regulator but other regulators, do get a more detached
and more independent view of consumers?
(Mr Swift) I can only speak from experience.
Someone has got to appoint them. We are back to the accountability
of the consultative committees. Plainly, the consultative committees
were not answerable to me. They were independent. We inherited
a terrible position because these committees, the Central and
Regional Rail Users Consultative Committees, were tucked away
in some ghastly building at the back of Duncannon Street off Trafalgar
Square—a wonderful address but terrible premises. They were
under-funded and a very poor relation within the DTI. They did
not get any money. There were no proper criteria for determining
who should get on to those bodies. It was very much a question
of: fill in on the dotted line, are you interested in, tick, rail,
gas, electricity, water, some of these, none of these? It was
an appalling process. We thought we had to take control of this.
Leave aside the democratic deficit and accountability: for goodness
sake, how can we manage to get some decent committees up and running?
We put some money into them. We got some computers brought into
the offices and built up the regional offices. I went round the
country and said, "You are the eyes and ears of the regulator.
There are so may thousands of people who are travelling on the
railways throughout this country. You have wonderful knowledge
of what is going on your lines, your branch lines, or whatever,
and we want you to find the facts and come and talk to us. At
the same time, talk to the rail operators and have them answerable
to you". I think that made a real change. Yes, we appointed
them. Actually the Chairman of the Committees is appointed by
the Secretary of State, after consultation with the regulator.
I used to go over to Marsham Street and then Great Minster House
and attend upon the Minister. It was never a Secretary of State
who took the decision. Certainly Glenda Jackson when she was Minister
did quite a lot of them. Yes, we appointed the members, but it
was done very much on objective criteria, and we had the panel
to help us, so it was made clear that these were not the regulator's
men and women; these were people selected by us because it seemed
sensible to do so, but by reference to objective criteria, which
we had approved through the Cabinet Office. It was done as objectively
as we could manage and then, after that, we would say, "You
must say what you feel about us. If you do not like what we are
doing, you must say so because otherwise you will lose credibility".
It did seem to make sense then to have the consumer committees
at least within the regulator's area of responsibility. But it
was then decided in 1998, through a decision which culminated
in the Transport Act 2000, that responsibility for consumer committees
should move from the Office of the Rail Regulator to the Strategic
Rail Authority which, as I have said on many occasions and say
now, is for this purpose Government because the Strategic Rail
Authority is the franchising director with freight added on and
with some extra statutory duties, but it remains an executive
agency of the Government.
128. You were clear in your mind that they
were appointed by objective criteria but, once in place, was there
any way of monitoring or knowing whether the committees themselves
were actually effectively the eyes and ears, in other words, broadly
representative of the problems faced by rail users?
(Mr Swift) It is difficult. I did have
a team in place. Those are some of the matters that come readily
to mind, but we read their reports, we wrote back and talked to
them if we felt there was more they could be doing. Again, one
has to be very careful. These are volunteers, people who give
up a lot of time and we are asking them to give even more time.
It is not a question of berating them but trying to encourage
them to do better and do more. As it was, I thought they were
an absolutely splendid group of people. I enjoyed their company;
I enjoyed going to their meetings throughout the country and listening
to them.
Lord Holme of Cheltenham
129. May I come back to the issue of parliamentary
accountability and answerability? You have got a very nice definition
in your paper, which really amounts to management by objectives,
that Parliament should review the objectives of the regulator,
whether statutory or developed, and see how far the regulator,
in disbursing money, is realising those objectives. It is a sort
of management by objective model really. That would be the way
that would obviously sound commonsensical. The question that occurs
to me is: I wonder what one could do to make Parliamentary select
committees rather better at being able to do that because their
tendency may be to go for quite other management techniques like
gap analysis: here is something that I think you might be doing
wrong that I would like to follow up. Since Members of Parliament,
after all, are constituency representatives, this could be driven
by almost a complaints basis: anecdotally, I have a compliant
about so and so and I want to raise it with you. On the one hand,
you have a regulator looking for someone to be answerable to and
who will take a strategic objective-driven view of what they are
doing and be able to review that with them; on the other hand,
you have Members of Parliament who may not be accustomed to that
way of operating. What can happen on the interface between the
perfect regulator and the perfect select committee to make that
a better process in terms of the reports delivered, the debates
that happen? Please do not be inhibited in telling us as parliamentarians
what they should do better. It is going to take two to make this
rather platonic system work, is it not?
(Mr Swift) I would have hoped that the
select committee would have everything which one finds within
the objectives of the Railways Act, everything from ensuring that
those who own networks have a sufficient financial basis to develop
the infrastructure. Alas, that has now gone because Network Rail,
depending on who one speaks to, whether it is the Government Statistics
Office or someone else, is either in or outside the public sector
but you would deal with everything from an analysis of the appropriate
measurement of cost of capital, and whether the regulators are
setting the cost of capital so low as to disable companies from
putting risk on to their balance sheets to a standard form of
complaint as to what people are doing and the state of the lavatories
on South-West trains going to Axminster. Each is important and
each is of relevance when one is seeking to regulate an industry
with so many constituents and so many important issues. I would
not see gap management as falling outside the hierarchy. This
is what we have to deal with every day of the week. Like GPs,
we did not know what the complaint was coming through the door,
whether it actually went to the body politic and was likely to
kill the patient or whether it was a rather severe cold and we
had to deal with it on the day with a comfort letter. That is
the essence of regulation, and so it should be. It is not dealing
just with the high-powered issues that engage the economic theoretician;
it is getting down to the real business that affects the electorate
and affects the users.
130. How would we get there?
(Mr Swift) We get there by an appropriate
learning curve. Every parliamentary committee has available to
it not just the resources and special advisers like Peter Vass—and
I am delighted to meet him again today—one can call for
consultants' reports. A parliamentary committee can get itself
up to speed extremely well. Also, the more information that is
in the public domain, the more the select committee can identify
what it wants to concentrate on, rather than going through each
and every aspect. All I am saying is that I would not have put
forward my proposal had I not thought it was deliverable. I believe
that, if one takes as the nexus the vote, which is the regulator
coming formally to this House or these Houses rather than informally
through putting a bid through the Department of Transport as far
as the Minister, might expose the regulator to some quite critical
questioning as to why the taxpayer is funding this particular
office for so much money over such a period.
131. There are three elements. There is
the vote; the review, of performance against the vote; and there
is your annual report to the Secretary of State. All those elements
are in the mix somewhere. Is there a better way of putting the
three of them together so that there is a more meaningful answerability?
(Mr Swift) Maybe this is stage two.
I would be very happy to go back and think this through in terms
of deliverability, but in terms of the nexus, the vote part, and
the report to the Secretary of State is another, to go back to
Lord Fellowes's point, that is an aspect of accountability; there
is a duty to account to the Minister but it is simply a reporting
function. It is simply telling the Secretary of State what it
has done. In my experience, that did not provide a springboard
for further debate or further action. It went on the record. Whether
it gathered dust, I do not know, but at least that report, if
I recall, is one that the Secretary of State must then lay before
Parliament. It is available to Parliament.
Chairman
132. It is laid before Parliament. May I
summarise in terms of your paper and what you said this afternoon,
and this is one of those "don't you agree?" type question,
so feel free to explain if I am summarising incorrectly. You have
explained in your paper the process, essentially how it has developed
and evolved since the first regulators were appointed. On the
whole I think the point that comes across in the paper is that
the changes that have taken place have improved the way in which
the system operates in terms of accountability and answerability.
There is also the duty to explain and on the whole probably the
process is working reasonably well. There is probably still something
of a democratic deficit, which is primarily in the area of answerability;
in other words, the Parliament itself could do somewhat more,
but on the whole the accountability through the Commission reports
works and it keeps regulators in check. Regulators, as you have
stressed, recognise that they are in a privileged position and
therefore that imposes certain responsibilities. As I say, if
there are to be any changes, if there is a gap to be filled, it
is in terms of answerability to Parliament. Would that be a fair
summary?
(Mr Swift) That is a fair summary, yes.
Could I just add that one of the questions that is put is whether
this issue is a matter simply for constitutional theorists or
whether it has practical significance. I think it does have both.
It is linked with another question, which is whether judicial
review or appeals to the Competition Commission are adequate safeguards
against poor regulation. There is no perfect safeguard against
poor regulation and that is where a poor regulator, appointed
maybe as a misjudgment by a Secretary of State but with a tenure
of five years, can seriously and adversely affect what happens
in an industry. That is a problem, but that is a potential disadvantage
to be weighed together with the other advantages that come from
independence. To that extent, one is relying on the intelligence
of the Secretary of State and his advisers to make sure they appoint
a regulator who they may wish they had not appointed, but that
may be because the regulator is doing an extremely good job and
happens to get involved in politically difficult areas and takes
decisions which are actually right but which may be political
in the extreme if carried out at that particular time. Therefore,
this is one of the great benefits of independent regulation, that
it has a time frame longer than a period of six months. It can
extend to five years or even seven years. When looking back, we
set the initial financial framework for rail, something that had
never been done since nationalisation. The other aspect is consent.
I do not want to go into international law on this. It does relate
to consent. Ultimately, you can only regulate effectively with
the consent of the people who are affected. That means stakeholders.
As a regulator, you will feel whether or not you have got your
decisions right or wrong. Essentially that is based on how a democracy
is reacting to these decisions because they are important. When
you get it wrong on due process, it can be managed. For example,
there were two new statutory duties replaced in the Railways Act
in 1993 and both arose from concern as to the lack of accountability
of regulators, in particular (a) lack of transparency and (b)
getting over-enthusiastic in terms of the restrictions they were
imposing on management. As a result of this, the Rail Regulator
had one duty, which was to enable undertakings to plan for the
future with a reasonable degree of assurance, but that went to
transparency and predictability. The other one was to impose the
minimum restrictions consistent with performance of statutory
duties. Those are aspects of good governance. It is interesting
that they have to come in through an Act of Parliament but those,
I would say, are now being translated into good practice among
all the regulators. It is this constant process, part led by Parliament,
part led by the consultees, that brings one to this particular
position. It is a dynamic process. When I speak of committees,
obviously this committee and others I have appeared before have
necessarily participated in effecting that dynamic process of
decision-making.
Chairman: Then, in terms of the appointment
of a regulator, your point is that the key is for the Secretary
of State to appoint someone with both the judgment but also, as
you stress in your paper, someone who recognises the position
is a privilege. Thank you very much indeed. I can assure you we
are not concerned purely with constitutional theory, though I
stress there is nothing wrong with constitutional theory. That
has been extremely helpful. We are most grateful to you for answering
our questions this afternoon. I reiterate how valuable the paper
that you put in has been to us.
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