Memorandum by Professor Tony Prosser,
University of Bristol
INTRODUCTION
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).
BACKGROUND: LEGAL
BASIS OF
REGULATORS
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.
BACKGROUND: DUE
PROCESS
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]
ACCOUNTABILITY
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.
CONCLUSION
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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