Select Committee on Constitution Minutes of Evidence

Memorandum by Professor Tony Prosser, University of Bristol


  The inquiry by the Committee is most welcome. Although, as I suggest below, I do not consider the structure and performance of the regulators to be seriously unsatisfactory, it is evident that in the UK we have lacked general principles against which to assess the structure and performance of non-ministerial regulatory bodies. Moreover there has been a substantial process of learning and development in their legal duties and procedures with the establishment of successive regulatory authorities. As a result we have very different legal models for different regulatory bodies, and the opportunity to stand back and perhaps to suggest models of best practice is very much to be applauded.

  I shall concentrate in my evidence on the legal structures and accountability of regulators as this is where my expertise lies, and shall not attempt to answer all the questions put forward. The development of the law has been highly pragmatic; we do not yet have any equivalent, for example, of the Administrative Procedure Act in US Federal law which imposes obligations such as consultation in rule-making and formal procedures in adjudication applying to agencies in general. Nor do we yet have an administrative law as developed as that of service public in France, setting out principles on matters such as access to public services which could form the basis for regulatory decisions. However, currently some equivalent principles are being developed by the UK courts (such as the development of the principle of lack of proportionality as a ground for judicial review) and also by government itself through the "Better Regulation" initiatives. These have improved the requirements for consultation and reason-giving considerably; another effect is likely however, to be greater use of challenge of regulatory decisions in the courts.

  The utility regulators established from 1984 onwards were given legal structures which were defective in various ways.[3] For example, there was no formal requirement of open consultation until after key decisions such as those on price control had, in effect, been taken. The model of vesting legal powers in a single individual Director General rather than a regulatory commission could result in over personalisation of regulatory policy, and the model of "appeal" through reference to the then Monopolies and Mergers Commission was cumbersome, and reflected a view the regulators would predominantly engage in a bi-lateral, negotiated relationship with a single dominant enterprise rather than policing a competitive market, as is now largely the case. Finally, the early assumption was that utility regulators would only have a relatively brief existence and would "wither away" with the coming of competition. In fact, their role as specialist competition authorities, also implementing certain social obligations, has ensured their continued existence even where competition has increased substantially. It is worth noting that the sector in which no specialist regulatory body was established, the bus industry, is that in which the most serious problems of anti-competitive behaviour arose and proved difficult for the general competition authorities to resolve. The role of specialist regulators seems well-established for the future.

  The environment within which the utility regulators operate has thus changed substantially, as has been recognised by conferring on them concurrent powers to enforce the Competition Act 1998. Partly as a result of the growing number of market players affected by regulatory decisions, challenge by judicial review has become more common and legal challenge is likely to increase further. The framework of general competition law has been reformed, offering new opportunities for collaboration with utility regulators, for example in appeals. Finally, the liberalisation of public utilities within the European Union has confirmed the importance both of independent regulation and the development of clearer legal rules as the basis for developing effective competition, especially in the telecommunications sector (for example in relation to interconnection and unbundling).


  It is clearly preferable that regulators are established by statute; this has a number of advantages in terms of accountability. It sets a clear definition of the powers of the regulatory body and provides a more defined basis for legal challenge; it makes clear that judicial review is available; it permits a clearer allocation of power as between the agency and, for example, consumer bodies also created by statute; and it permits full Parliamentary debate about the nature of the agency when it is being established. The major regulators have indeed been founded on this basis; the main expectations, the Panel on Takeovers and Mergers and the BBC's Board of Governors, reflect special circumstances of the areas in which they operate. The latter is indeed highly controversial and is subject to partial change in the Communications Bill.

  It is also important that some effort is made to provide a coherent set of statutory duties applying to the agency. In the case of the initial statutes establishing the utility regulators this was not achieved and the statutes contained a confused set of statutory obligations with no clear hierarchy between them. The Utilities Act 2000 adopts a much clearer approach, specifying that the primary duty is to protect the interests of consumers, wherever possible by promoting effective competition.[4] This is then accompanied by a number of secondary duties of both an economic and social nature. The best model is, however, the Financial Services Authority which, although it is formally a company limited by guarantee rather than a statutory body, is subject to greater legal control than any other regulator. In this case the legislation sets out four regulator objectives (market confidence, public awareness, consumer protection and the reduction of financial crime) and seven regulatory principles to which the Authority must have regard, such as proportionality of restrictions imposed to the resulting benefits.[5] This specification of objectives provides both a means for internal checking within the Authority itself and for outside accountability, including review by the courts. The Communications Bill also includes a more sophisticated list of statutory duties than had its predecessors.[6]

  One other aspect of the statutory structure should be referred to as it has proved controversial. This is the power for the Secretary of State to issue guidance on social and environmental matters to which certain regulatory bodies must have regard.[7] The power has been criticised as confusing accountability, threatening the independence of regulators and as importing confused multiple objectives whilst regulators should instead act to maximise competition. However, it is inevitable that utility regulators will have to deal with social issues; for example, disconnection policies, developing universal service, and making special provision for the disabled, elderly and (in some cases) those living in rural areas. To combine the setting of general guidance by a minister whilst leaving its application to an independent regulator is an appropriate division of power between elected government and expert regulator.


  To some extent it is inevitable that a regulatory body will act as prosecutor and jury on an issue; what is most important is that there is a degree of internal separation of powers where issues are particularly sensitive and that there is an appeal mechanism to an independent body with wide powers to review the original decision. Here there is considerable inconsistency between different regulators. On the first point, the Financial Services Authority represents good practice once more with, in disciplinary proceedings, a separation between investigation and recommending proceedings and the imposition of a penalty.[8] Thus the latter decision is taken by an Enforcement Committee appointed by the Authority but with only the Chairman being an Authority employee, and various procedural rights are given before a penalty can be imposed for example to have access to material relied on by the Authority.[9] A full appeal right on the merits then exists to the Financial Services and Markets Appeal Tribunal with further appeal on a point of law to the Court of Appeal. The special protections here are largely due to the requirements of Article 6 of the European Convention on Human Rights, especially as some decisions of the Authority may be equivalent to the imposition of criminal penalties.[10]

  By contrast, the original arrangement in utility regulation for "appeals" against licensing decisions which could not be agreed with the licensed enterprise are highly unsatisfactory. They involve a reference to the Competition Commission in its reporting form, should the licensed enterprise not agree to a licence modification. The reference permits the Commission to undertake a more general inquiry than one simply limited to the dispute in question, and it is not available to third parties such as competitors or consumers organisations who might wish to challenge a modification agreed between an enterprise and the regulator. In the case of the exercise of concurrent powers under the Competition Act 1998 a right of appeal on the merits to the Competition Commission Appeal Tribunal exists, and the Communications Bill, as a result of European Community law obligations, provides for a right of appeal in most telecommunications matters to the Competition Appeal Tribunal created under the enterprise Act 2002.[11] This is a much more appropriate model, particularly as appeal rights are available to third parties where a sufficient interest can be shown.

  Much of the impetus behind the development of more sophisticated appeal rights can to traced to the effect of Article 6 of the European Convention on Human rights requiring the availability of a fair hearing before an independent tribunal in the determination of civil rights and obligations; further protections have to be provided in the determination of criminal charges. Considerable care was taken under the Financial Services and Markets Act to make procedures Convention compliant and this seems to have been successful. In other cases problems may arise where regulatory bodies have the power to take enforcement action or to impose financial penalties on those required without full due process rights which include an independent element either in the initial decision or on appeal. An example would be the case of the Independent Television Commission (and currently this is not remedied in the Communications Bill). A further case would be the enforcement powers of the utility regulators (apart from telecommunications or the exercise of Competition Act powers) where penalties are not financial but rather require action to be taken or ended. The major question to be resolved will be whether judicial review, either in its common law form or in its statutory form, in these cases is sufficient to correct any lack of due process at the regulatory level or lack of appeal to an independent authority.[12].

  The safest course is to provide a full right of appeal on the merits whenever a regulatory decision may have substantial consequences for a regulated enterprise; appeal to the Competition Appeal Tribunal will be the most appropriate course in most situations; otherwise a widened appeal to the courts may be used, as already exists for appeals against financial penalties by the energy regulator or the Postal Services Commission.[13] A further possibility is to make use of the model appeal provisions set out as part of the deregulation and better regulation processes, which involve the use of a specialist tribunal and set out detailed procedural protections.[14]


  Given the fact that regulatory bodies are not headed by ministers accountable to Parliament, the question of their accountability was bound to prove controversial. However, regulators are in fact accountable in multiple ways to Parliament and to those affected by their decisions. Although the role of ministers in answering questions relating to regulatory decisions is extremely limited, such questions are unlikely to be an effective way to secure accountability, as experience with the nationalised industries showed. On the other hand, select committees have undertaken wide-ranging inquiries in which the operation of regulatory bodies has been central, for example in broadcasting, financial services and transport; the most striking example (covering a slightly different type of institution) is the very detailed scrutiny of the Bank of England's Monetary Policy Committee by the Treasury Committee of the House of Commons. The National Audit Office and Public Accounts Committee have examined aspects of the regulators' work as well as undertaking two general studies of utility regulation. The status of the utility regulators as non-ministerial government departments secures audit access for the Office, although this is more complex in relation to other regulatory bodies and, for example, the Financial Services Authority is excluded from such scrutiny.[15] The utility regulators fall within the powers of the Parliamentary Ombudsman (although his impact on their work has so far been marginal at best), whilst the Financial Services Authority is required to set up its own system for investigating complaints. The regulators, including the Financial Services Authority, will also fall within the scope of the Freedom of Information Act 2000 when it comes fully into force.

  Having said this, the procedural obligations imposed by the original legal structure adopted for utility regulation were inadequate to secure effective accountability to other interests, such as consumers. No consistent model for consumer representation was adopted, and procedural requirements were crude or non-existent. Thus when licence amendments were made (including modifications to price controls), where agreement was reached with the regulated company no publicity or consultation was needed until after the agreement, and there were no general requirements to consult, for example in deciding priorities for future work. This was largely remedied by the regulators themselves, particularly the Office of Telecommunications, which from the beginning engaged in extensive consultation through the publications of successive consultation documents. Structured consultation reached a high-point during the tenure of Don Cruickshank as Director General of Telecommunications, when the annual publication of an operating plan and work programme was adopted, both after consultation. A two-stage consultation process was adopted for the taking of important decisions such as price control, affording correspondents an opportunity to respond to other responses and so providing a chance for more effective debate on proposals. Indeed, Oftel has consulted about the nature of consultation itself. These practices have been, to varying extents, adopted by other regulators also and they are to be congratulated in going well beyond the legal requirements.

  More recently, the law has reflected to some extent this developed practice of consultation. In energy regulation, the Utilities Act 2000, as well as establishing a more independent model of consumer representation, required the publication of a forward work programme annually after public consultation, and has imposed duties to give reasons for a wide range of decisions, including revocation and modification of licences and enforcement action.[16] Further powers are also given to the consumer representation bodies to acquire information and to publish it. This legislation shows considerably more maturity than the original model in accepting that regulators make decisions for which consultation and reasons should be required by law, rather than being given as a matter of regulatory practice. This could be further strengthened by a general requirement to consult before all major regulatory decisions, and to give reasons for them.

  Indeed, a more sophisticated form of consultation is already required in the case of the Financial Services Authority. Thus when the Authority proposes to make any rules, it must first publish a draft accompanied by a cost benefit analysis and an explanation of the purpose of the proposed rules and must invite representations upon them. When the rules are published the Authority must also publish a general account of the representations received and its response to them; differences from the original draft rules must also be justified by cost benefit analysis.[17] This represents a possible model for major regulatory decisions such as licence modification. It would not in fact require more than what is already done in practice by the major regulators, but would have the advantage of imposing a clear legal requirement that this procedure be followed. Clearly it could only apply to major decisions, both to make the work of the regulator manageable and to avoid "consultation overload" through the publication of a wealth of documentation too great for digestion by those consulted. Less demanding requirements could be imposed for minor decisions and for policy decisions such as the annual forward work programme where detailed cost-benefit analysis would be less appropriate.

  The Authority is also required to establish practitioner consumer panels to represent those interests. However, the model of independent consumer representation adopted under the Utilities Act 2000 and the Postal Services Act 2000, where appointment is made by the Secretary of State, is preferable. This latter model separates more clearly the role of consumer representation from the task of the regulator, which is to balance the consumer interest against other interests, such as those of the regulated firm and of competitors.


  The transparency of regulators has generally been impressive and has revealed a wealth of information about their regulated sectors; we now know far more about them than when the enterprises were in public ownership. However, legal requirements for transparency, especially through consultation, have been slow to catch up with the practice, although the Financial Services Authority has been given a much more satisfactory set of procedural duties. This reflects a more general problem. Currently, we have very inconsistent legal requirements applying to different regulators, and these need clearing up, possible through a generic Regulatory Reform Act taking best practice from each. Should such standard procedures be adopted, the key areas needing reform are the general legal duties applying to regulators, appeals, and procedural requirements such as consultation and reasons.

3   For fuller discussions see T Prosser, Law and the Regulators (Oxford UP, 1997). Back

4   Utilities Act 2000, ss 9 and 13. Back

5   Financial Services and Markets Act 2000, s 2, and for further discussion see A Page, "Regulating the Regulator-A Lawyer's Perspective on Accountability and Control" in E Ferran and C Goodhart (eds), Regulating Financial Services and Markets in the 21st Century (Hart Publishing, 2001). Back

6   Communications Bill, clauses 3, 6-9. Back

7   This applies to the energy and postal services regulators; see the Utilities Act 2000 ss 10 and 14, and the Postal Services Act s 42; wider power for government guidance to the Rail regulator exists by virtue of the Transport Act 2000, s 224(6). Back

8   Financial Services and Markets Act 2000 s 395(2). Back

9   Financial Services and Markets Act 2000, ss 387(2), 394, 388(1). Back

10   Cf R (on the application of Fleurose) v Securities and Futures Authority and another [2001] EWCA Civ 2015. Back

11   Communications Bill, clauses [87-9]. Back

12   R (on the application of Alconbury Developments) v Secretary of State for the Environment, Transport and the Regions [2001] 2 AII ER 929 HL; Runa Begum v Tower Hamlets London Borough Council [2002] 2 AII ER 668. Back

13   Utilities Act 2000, s 59; Postal Services Act 2000, s 36. Back

14   The Deregulation (Model Appeal Provisions ) Order 1996, SI 1996/1678. Back

15   Two orders have been laid before Parliament very recently to make the NAO the auditor of further non-departmental public bodies and companies receiving public funds. Back

16   Utilities Act 2000, ss 4, 42, 87. Back

17   Financial Services and Markets Act 2000, ss 155. See also the Cabinet Office, Principles of Good Regulation (2000) and Good Policy Making (2000). Back

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