Select Committee on Constitution Sixth Report


The Regulatory State: Ensuring its Accountability


CHAPTER 1: INTRODUCTION AND SUMMARY

1.  As nationalised industries were privatised at the end of the twentieth century, industry regulators were appointed to encourage competition and to protect the consumer. Regulators are notable now not only for their number but also for their powers. These include imposing penalties, levying fines, and creating secondary legislation. Regulators have frequently been able individuals who have used their powers effectively to achieve their goals. However, their existence and the exercise of their powers have not been free of controversy. The regulatory regime is now substantial. There are significant costs of complying with regulation. The smaller the regulated body, the greater the burden. Decisions of some regulators have proved unpopular and on occasion brought them into dispute with bodies set up to represent consumer interests. Some critics query the continuing need for a state-imposed regulatory regime.

2.  The existence of regulators also raises fundamental questions of accountability. They are appointed by ministers in order to achieve certain policy objectives. Ministers are accountable to Parliament, individually and collectively. Regulators are appointed in order to be at arm's length from Government in fulfilling their functions. Though created by statute and appointed by ministers, they exist essentially as independent agents.

3.  Given this, the question arises as to how the performance of regulators is monitored to ensure that the public interest is properly served. To what extent are regulators accountable to the citizen? To what extent do they take into account the public interest, consumer interests, and the interests of the bodies they regulate, and how do they gauge such interests? To what extent are they answerable for their actions to Parliament? We therefore decided to inquire into the workings of Government-appointed regulators; the extent to which their activities are monitored by Parliament; their accessibility to the public and the regulated; and their responsibility to the citizen and those whom they regulate.

4.  Our starting point is that regulation is a means to an end, not an end in itself. Regulation can only be in the public interest where it serves a clear purpose. We question the apparent assumption that the present level of regulation, let alone an even greater extension of quasi-Governmental powers, should remain a permanent feature of our polity. We have to resist the danger of regulatory creep. Many judge that regulatory burdens are increasing, sometimes unnecessarily. This regulatory tendency has to be checked, and the best means is effective accountability. Necessary, and cost-effective, regulation can then be properly identified; unnecessary regulation can, and should, be removed.

Context

5.  Our Inquiry should be seen in the context of the very significant changes made to the machinery of Government and the institutional structures for regulatory decision-making over recent years and decades. The most important is at the heart of our study: the establishment of the independent regulators, acting at arms-length from ministers, empowered and constrained by their own statutory authority but often responsible for issues hitherto dealt with by government departments. Traditional mechanisms of accountability may therefore have to be reinforced, or reviewed and adapted, where necessary, to the new arrangements.

6.  There have also been progressive and prospective changes to the rights of the regulated in recent years, perhaps most clearly exemplified by the incorporation of the European Convention of Human Rights into UK law. This has had direct and indirect effects. Recent legislation, such as the Communications Act 2003, incorporates European Directives which pay full regard to the philosophy of appeals being made on the merits of the case, and with those appeals being heard by independent tribunals. Citizens also have higher expectations as to their rights concerning the due accountability of regulators for their decisions. We can only expect the progressive consolidation of those rights and expectations into law and judicial review procedures to continue.

7.  The issue of regulation has itself been a matter of Governmental concern. Regulatory reform has been high on the agenda, now focusing on better regulation rather than simply deregulation, and improving regulatory accountability has been an integral part of that agenda. So, for example, regulatory reform orders have been introduced, and statutory duties have been extended, with codes of practice put in place, to improve the transparency of regulators' roles, responsibilities and decision-making. The question for the Committee has therefore been how effective is regulatory accountability, mindful of the on-going changes and developments, and how can it be strengthened?

Who does what and why?

8.  We sought first to establish for what, and to whom, regulators are and should be accountable. We conclude that regulators should be accountable for cost-effective regulation which meets rational, well-defined objectives. This approach brings together the 'why' and 'how' issues of regulation. We take a wide view of the accountability of regulators to all interested parties, but note that in practice it will be exercised in different ways, appropriate to different circumstances.

9.  We then focused on the processes by which this accountability is given effect. The three key elements we identify are:

  The last two are the means through which regulators are required to answer to public bodies for their actions. In addressing change, we have sought to distinguish between reforms which have been directed at improving the design of regulation, and reforms which are aimed at improving accountability for regulatory decisions. We have not found a conflict between independence and accountability.

Conclusions

10.  Effective processes for achieving accountability are a key discipline on regulators, and are essential to maintaining both an effective regulatory framework and effective regulatory decision-making. Accountability is a control mechanism which is an integral part of the regulatory framework. Effective regulation therefore requires effective accountability. The preparation of regulatory impact assessments (RIAs) is an important discipline on regulators. Properly done it reveals whether regulators have subjected their decisions to cost-benefit analysis in order to achieve both balance and cost-effective regulation. These RIAs need to be conducted retrospectively as well as prospectively, to ensure that cost-effectiveness is constantly under review.

11.  We welcome the improvements made in recent years, but more needs to be done in order to achieve a sustainable system. In particular, the Government's approach is departmentalised and insufficiently co-ordinated. This militates against accountability. It should instead be interdepartmental and fully co-ordinated. We make fifteen recommendations in this area, aimed at ensuring that the Government maintains a consistent, focused and proactive role towards achieving cost-effective regulation, where that regulation is needed.

12.  There have been notable improvements in the transparency of, and hence in accountability for, the processes by which regulatory decisions are made; but efforts should be made to ensure that regulators improve access to the consumer, especially through consumer groups. The most urgent need for reform, however, is in respect of parliamentary scrutiny and independent review.

13.  Improving parliamentary scrutiny is essential. It is not just a question of the answerability of regulators to Parliament, but also one of the duty of Parliament to ensure that its scrutiny is effective. As with Government, Parliament lacks the mechanism for consistent and coherent scrutiny of regulation. Scrutiny at the moment is dependent on individual committees deciding that inquiry is necessary into a particular regulator or regulatory decision. It is thus both fragmented and inconsistent. There is no means of establishing a coherent overview of the regulatory regime operating within the United Kingdom. We believe there should be.

14.  We have been mindful of the need to maintain the appropriate balance between the needs of regulation in the public interest and the rights of the regulated. This is most important when considering possible reform of appeal mechanisms, on which there are contrasting views. Our view is that the power of the regulatory state needs to be matched by effective rights of appeal based on the merits of the case. The only right of appeal open to many regulated bodies is the very restricted one of judicial review. This is normally expensive, time consuming and narrow. Delays leave the regulated in a state of potentially costly uncertainty. For many, therefore, it is not a viable option. We believe that there must be a more accessible and efficient appeals mechanism.

15.  Our inquiry has been a major one, and we are indebted to all of those individuals and organisations who have submitted evidence in person or in writing.[1] The amount of evidence reflects the extent of concern about the existing regulatory state. Our overall judgement is that the increased emphasis on the accountability of regulators in recent years is to be welcomed and should be strengthened. Accountability has improved, is improving, and must continue to improve. Our Inquiry and its recommendations are directed to that end.

Recommendations

16.  The recommendations have been ordered by reference to four categories: those related to the Government's and Parliament's responsibilities for the regulatory framework as a whole, and those related to the three specific elements of accountability which control the regulators, being the duty to explain, exposure to scrutiny and the possibility of independent review.

The overall regulatory framework

(1)  Independent consumer bodies should be obliged by statute to engage in open meetings and conduct regular surveys of consumers. This has resource implications which should be met out of public funds. Following a review of the budgetary arrangements for each regulator, an appropriate formula should be agreed for calculating this provision and applied to each of these bodies. We believe that these changes will enhance both the accountability and the independence of the consumer bodies. (para 69)

(2)  We are aware that the Government is undertaking a review of consumer bodies, supported by the National Audit Office (NAO), and recommend that the review includes an examination of the relationship between regulators and the related consumer bodies in order to introduce greater clarity in the relationship, if necessary through a statutory provision common to the regulatory regime.
(para 70)

(3)  We welcome the move towards more collective board structures, rather than sole regulators, as one of the principal mechanisms for improving the quality and consistency of regulatory decision-making, and urge that this should be the norm for regulatory regimes. To ensure that there is no loss of accountability we recommend that boards designate one of their number as the public face of the regulator in order not to lose engagement with the public and to perform the role of building confidence and understanding. Normally this should be the Chairman or Chief Executive. Where appropriate open meetings should be held as a means of increasing public understanding and confidence. (para 110)

(4)  Government should explicitly accept overall responsibility and accountability for regulatory policy and the regulatory framework, while devolving responsibility under defined circumstances to independent regulators. (para 122)

(5)  Ministers should remain responsible for appointing regulators, subject to Nolan rules, to ensure proper responsibility and accountability. (para 126)

(6)  Regulatory legislation should normally be drafted in the light of consultation with regulators to achieve clearly defined objectives. The duties imposed on regulators should be consistent with the overall remit of the regulator (for example, economic regulation). They should make clear the underlying purpose of the regulator's role (such as consumer protection). (para 130)

(7)  Responsibility for environmental and social standards should normally remain with Ministers as the authority of a democratic mandate is required for decisions in these areas. (para 138)

(8)  The OECD regulatory checklist should be utilised as standard for legislation, regulatory decision-making and in establishing any new regulator. (para 142)

(9)  The recommendation of the Better Regulation Task Force (BRTF) that regulators should produce Regulatory Impact Assessments (RIAs) on all new major policies and initiatives has been accepted by the Government and should be applied throughout the system. We also endorse the Task Force's recommendations, among others, aimed at increasing the transparency and accountability of regulators, including open meetings and agreeing a management statement with the sponsor Department. (para 146)

(10)  The BRTF should review its principles of good regulation to ensure that the principles of coherence, objectivity and rationality of approach are incorporated and signalled to the wider public. (para 148)

(11)  There must be a much stronger communication of the 'whole of government' view of regulation. We recommend that the Government appoint a lead Department to be responsible for promoting effective regulation in practice, thereby co-ordinating the various roles currently played by a number of Departments, including HM Treasury, DTI, the Cabinet Office and the Office of the Prime Minister. Logically, the Cabinet Office should assume this role, possibly by expanding the remit of its RIA unit. Its responsibilities should mirror those we outline for a parliamentary committee in paragraphs 199 to 203. (para 152)

(12)  There should be consistency in applying regulatory models and requirements on a like-for-like basis. (para 153)

(13)  The move towards self-regulation should be encouraged and co-regulation should, where appropriate, be used as a preliminary to it. (para 157)

(14)  Regulators should have a statutory duty to have regard to the principles of good regulation and effective accountability. These should include self-assessment of their compliance with the same; the design of effective consultation procedures to engage interested parties; ensuring that redress and compensation procedures are clear and accessible; and incorporating the outturn of plans in their annual reports. They should also include the publication of the following:

(a)  their mission statements;

(b)  codes of practice for the conduct of their regulatory office;

(c)  codes of practice for consultation (including the duty to summarise and accept or rebut consultees' comments, with reasons);

(d)  their forward plans;

(e)  the explanations of and reasons for their decisions; and

(f)  all relevant material necessary for their production before and after RIAs. (para 169)

(15)  Regulators should adopt a structured approach to consultation designed to minimise the burdens on those consulted and to facilitate their engagement with either the principles or the detail as appropriate to the interests of those consulted. (para 173)

Exposure to scrutiny

(16)  A dedicated parliamentary committee should be established to scrutinise the regulatory state. (para 199)

(17)  This should preferably be a joint committee of both Houses and should be given the necessary resources to fulfil its task effectively. (para 200)

(18)  We recommend that select committees consider expanding their terms of reference to include a requirement routinely to consider and react to regulators' annual reports, and monitor the use of resources. These activities would be in addition to the ad hoc inquiries they undertake from time to time. (para 202)

(19)  In order that parliamentary scrutiny by select committees can be more consistent and co-ordinated, it should be focused around the annual report and the published RIAs, and with specific attention paid to a harmonised whole of government view of regulation. (para 203)

(20)  The NAO should have access consistently to all regulatory bodies, including the Financial Services Agency (FSA), with a view to monitoring their cost-effectiveness and budgetary control. (para 212)

(21)  We welcome the expansion of the role of the NAO and recommend that the annual review of Regulatory Impact Assessments by the NAO be developed. In order to maintain the strict independence of the NAO and its scrutiny role, we recommend that this should not be undertaken as an agency of the Cabinet Office. These RIAs need to be conducted retrospectively as well as in advance, to ensure that cost-effectiveness is constantly under review. (para 218)

Independent review; improving appeals

(22)  Appeals should provide an opportunity for the regulated to have their objections reviewed on the merits of the case, subject only to the condition that the appeal body should have the clear ability and power to identify and penalise appeals designed to frustrate equitable regulation. (para 230)

(23)  Simplified systems of fast track appeals against regulatory decisions and arbitration should be developed for the Competition Commission and the Competition Appeal Tribunal, and made available subject to the agreement of each of the parties concerned. (para 231)

(24)  We further recommend that a Regulatory Appeals Tribunal should be set up to cover regulatory decisions that do not fall within the jurisdiction of either the Competition Commission or the Competition Appeal Tribunal. (para 232)


1   See Volumes II and III  Back


 
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