Select Committee on Constitution Sixth Report


CHAPTER 4: Evidence of Concerns - Accountability in practice

71.  Having considered accountability for what, and to whom, the next question is how that accountability is given effect in practice, and what role it can play in achieving effective outcomes from regulation. The purpose of accountability of regulators is to help secure both the effective design of the regulatory system as a whole and the effective operation of the regulatory system in its constituent parts. Effective regulation requires effective accountability. If the control mechanism of accountability fails, then effective regulation is endangered, risking arbitrary exercise of regulatory power, inequity and loss of confidence in the regulatory system. Each of the three elements of accountability has to work well in this respect, and should be critically examined in respect of the part that it plays. We have received evidence of concerns in all three areas.

72.  The Committee received evidence on a number of definitions and interpretations of accountability, and it is clear that differences here affect the judgement on how effective the accountability of regulators is, or could be. The DTI's written evidence listed the mechanisms, rather than defining accountability: "Regulators' actions are subject to the following accountability mechanisms: Appeals processes; parliamentary scrutiny; Consumer representation; and transparency".[43] The Minister's oral evidence repeated these, and added in corporate governance, notably with reference to the new board structures for independent regulators, as a further mechanism.[44]

73.  The Committee therefore considered the elements of the accountability process which make or break the achievement of effective accountability, elements which have been the subject of much concern in the evidence we have received.

74.  The elements of accountability, which were persuasively set out in Sir Derek Morris's evidence, distinguish three stages in the processes of accountability, all three of which play an essential part in achieving not only effective accountability, but any proper accountability at all:   "… I do think that there are three different and equally important levels of accountability. The first, to give it an epithet, would be transparency. People have to know what you are doing and how you have done it, and in trying to explain that and in being forced to explain there is an element of accountability … The second is more penetrating. It is not just transparency. It is actually being questioned, if you like grilled, on what you have done and how effective have you been in doing it. The decisions cannot be changed but you can be cross-questioned. There, fairly obviously, the role of the select committees is paramount . The third level is where, of course, the decisions can be changed, and that is in our case through judicial review and to the High Court".[45]

75.  The elements of accountability can be summarised as:

  • the duty to explain
  • exposure to scrutiny, and
  • the possibility of independent review.

All three have to be effective if there is to be due accountability of regulators overall, and for the regulators to be challenged where appropriate and held answerable for their actions.

The duty to explain

76.  The first element of the accountability process relates to the obligation on the regulator to provide information on its activities and, in particular, to explain the basis of decisions. This includes not only the decision itself, but also the thinking used to lead up to the decision, and the thinking as to why the particular decision (or regulatory instrument) was chosen, as compared with other alternatives available. The technical level, means used (media and fora), and extent of information provided (summaries or full texts) might vary between different interested parties, but we accept that the regulators have a general duty of accountability, characterised by openness or transparency in this regard, an obligation to provide information to all interested parties (or stakeholders), tailored to their locus in the regulatory scheme and the accountability procedures appropriate to that.

77.  The general presumption of openness might be qualified, in particular where information available to regulators concerns personal details, or commercial confidentiality is required. Past Monopolies and Mergers Commission reports have often contained large sections of excised data, which on occasion have rendered the arguments and basis for the decisions inaccessible. We have heard from Sir Derek Morris that whilst commercial confidentiality clearly still remains an issue for the Competition Commission, he hoped that future drafting of documents would be such that the essential basis of arguments for decisions would be evident. This was the Commission's declared intention: "We tended to err on the side of protecting confidentiality and I do believe there have been some reports in the past that I will not say were incoherent but were beginning to get a little difficult to understand because of those excisions, and that is a public detriment ... (but post Enterprise Act 2002) I think that means there is going to have to be more disclosure and there will be more cases in which the tension that you have described leads to some commercially sensitive material having to appear in order that the decision can be explicable".[46] Accountability in relation to regulatory excisions of published information suggests that there should be some form of independent scrutiny, with a published confirmation of the appropriateness of the excisions.

78.  A number of witnesses identified areas where progress has been made in improving accountability, especially in terms of openness. However, we have also received evidence that the regulators:

  • provide insufficient information and do not give full reasons for decisions;
  • provide too much unstructured information, which undermines the ability of interested parties to challenge them.

79.  We have received a large volume of evidence concerning financial services regulation, particularly from Independent Financial Advisers (IFAs). Most submissions claimed that the FSA's bureaucracy is excessive, and state in general terms that the FSA is high-handed and insufficiently accountable. There were complaints about the retrospective application of rules, which raises concerns about inequitable treatment and the cost of professional indemnity insurance. We note in particular the complaints about excessive consultation and consultation on non-essential issues.

80.  The evidence indicates that the burden of regulation generally is of great concern.[47] There is a clear requirement for regulators to explain their actions, so that the cost of regulation can be properly judged against the public benefits from regulation. The Electricity Association told us that: "It seems wholly inappropriate, for example, that Ofgem is under no legal duty to publish annual accounts, and that its service delivery agreement with the Treasury says nothing about the desirability of reducing the real costs of regulation."[48] The consumer watchdogs were equally concerned".[49]

81.  The UK mobile operators told us that the regulator should be "justifying why he needs sector specific economic regulation … particularly where in the mobile sector we do not come from a monopoly background".[50] Northumbrian Water's view was that "If there is concern that regulators should become more accountable, then clarifying their objectives would be a good start".[51] We were also informed that "Ofgem does not provide reliable information on its key activities where its prestige is on the line; it not infrequently self-promotes itself and spins. Consequently it is not effectively self-accountable. I recommend that when Ofgem reports the success or otherwise of its activities, the reports are reviewed by an independent external party appointed by the NAO".[52]

Exposure to scrutiny

82.  Our conclusion of a general duty to explain leads onto the second element of accountability, which is exposure to scrutiny; the requirement to answer questions and to provide the means through which that scrutiny can be made meaningful. In this sense, effective scrutiny is seen as a countervailing force to the power of the regulators, in that the process of scrutiny has the real power to improve outcomes, either in the short or longer term. It can take the form of consultation, where response is invited from stakeholders, or a process of inquiry initiated by a body other than the regulator. The latter may encompass requests for information from regulated bodies or a formal requirement to answer questions by a parliamentary committee.

83.  The avenues by which regulators can be and are scrutinised include those shown in Table 3.

TABLE 3 Avenues of scrutiny

Parliamentary scrutiny - whether by debates in either House, or by select committees of either House, or by joint committees of both Houses;

Ministerial meetings with regulators - where there might be part of a regular cycle or occasioned by specific issues as they arise. This scrutiny is accompanied by the longer term power in the hands of the Minister, which is not to reappoint the regulator;

Responses to regulators' consultation documents, including participation in fora set up by the regulators to engage interested parties in the debate, including working groups, seminars and open meetings;

Specific requests to the regulator from interested parties, whether, for example, from regulated companies, consumers or investors, and covering complaints about a regulator's activities as well as other matters;

Scrutiny by representative bodies and interest groups, for example, consumer bodies, both national (such as the National Consumer Council (NCC) and the Consumers Association (CA)) and sectoral (such as Energywatch, Postwatch or WaterVoice), as well as interest groups or NGOs, such as Friends of the Earth;

Press scrutiny;

Academic and other expert commentators, such as policy institutes;

Formal reporting occasions, such as open meetings conducted to launch the annual report of the regulator or to carry out an educative purpose to widen knowledge of the regulator's functions, mission and approach.

84.  We have received evidence that:

85.  As to the effectiveness of consultation, the Electricity Association was rather damning of Ofgem's record: "it would also be incorrect to say that Ofgem's consultations are particularly effective, either for the public or for licensees. With only rare exceptions, the procedures do not achieve what the courts have defined as the essence of consultation, namely the extending by a public authority, with an open and receptive mind, of an invitation to other parties to provide advice about its proposals at a formative stage, before its mind has set".[54]

86.  The consumer watchdogs were equally concerned. Energywatch was dissatisfied with both the consultation - "there is considerable scope for improving the Ofgem consultation process through the provision of cost-benefit analysis and consumer impact assessments"[55] - and the response that they receive - "Quite frankly, I have not always been satisfied with the responses I have had. Sometimes I have had no response".[56] Postwatch was similarly critical stating that "Postcomm does not give its views or those of other consumers adequate consideration".[57]

87.  However, we received warnings that the extent of scrutiny itself has to be subjected to a cost-benefit test. Postcomm told us that they " think it adds up to a pretty formidable stack of reporting back and information … there comes a point at which the degree of oversight and the number of bodies, if you add on the National Audit Office, the Better Regulation Task Force and so on, become self-defeating. I think it would be impertinent for us to judge whether we are at that point now or not. We have obviously complied with whatever obligations it is decided to put on us, but we feel we spend quite a lot of time explaining ourselves at the moment".[58]

Independent review

88.  Scrutiny has the power to affect regulatory outcomes. However, it is indirect, and has to be complemented by the third element of the accountability process, which is the possibility of independent review, whereby regulatory decisions may be formally overturned or varied.

89.  Independent review encompasses judicial review and a statutory appeals process. Regulators are bound by statute and must abide by any secondary legislation derived from it. They are also subject to ministerial guidance, where this is authorised by legislation. They are also bound by European Union law and, as a consequence of the Human Rights Act 1998, must exercise their powers in a manner consistent with the rights protected by the European Convention on Human Rights.

90.  Regulators must also observe the principles of administrative law and must not act irrationally: that is, they must not make a decision that no reasonable regulator could have made. Therefore, in the absence of any other remedy provided by Parliament, those who are adversely affected by a regulator's decision can, if they believe the decision infringes their rights under administrative law, apply to the Administrative Court for judicial review. Judicial review is available as a residual remedy for enforcing the legal duty of regulators.

91.  Unlike judicial review, which is always available as a residual remedy, a right of appeal exists against a regulatory decision only when Parliament has provided for this. Legislation is needed not only to create the right to appeal but also to establish the body to hear it, the nature of the process and the grounds on which an appeal may be brought.

92.  On judicial review, there is some international consensus. The OECD summed it up thus: "the availability of judicial review of administrative decisions can be seen as the ultimate guarantor of transparency and accountability and is likely to improve the effective quality of the decisions made during administrative review".[59] Clearly judicial review is seen as a feature of effective accountability although it is, by its nature, essentially negative and narrow. The availability of pursuing such action is important in regulation, given that a regulator both advances the case and makes the decision and, as Professor Prosser described it, is seen as "acting as prosecutor and jury on an issue".[60]

93.  The value of an appeals system is generally agreed. Sir Christopher Bellamy, Chairman of the Competition Appeal Tribunal, referred us to three important features of an appeals system: "First of all, the scrutiny of the appeals system or perhaps even just the existence of an appeals system should improve the quality of decision making and I have the subjective impression that that has happened. Secondly, the existence of a system and its operation should increase confidence in the system as a whole ... Thirdly, it is a safeguard against regulatory capture, regulatory inertia or regulatory timidity which with the best will in the world may creep into any regulatory system from time to time".[61]

94.  However, we have heard much evidence that traditional judicial review has not provided an effective protection, based as it is on ultra vires and a restricted definition of reasonableness. We have received evidence that whilst judicial review is seen as important in the context of challenging regulatory decisions, it has little role to play in challenging the merits of decisions.

95.  British Energy told us that: "Judicial review to us is a sledgehammer, it creates an uphill struggle on the part of the regulated body to prove that the regulator was completely unreasonable or stark raving mad, it makes it a difficult process coming from the regulated body. If one goes back to the human rights legislation, the basic principle is that there should be some sort of appeal on the merits, rather than whether it was totally unreasonable".[62] The Electricity Association concurred.[63]

96.  The consumer bodies were concerned that they had few appeal rights at all against a regulator who was overly favouring the regulated company.[64] They were particularly concerned if regulated companies should have their appeal rights improved from the current position, as this would further highlight the weakness of their own position.[65] However Postwatch did recognise that legal actions between two public bodies was not something to be encouraged.[66]

97.  Nevertheless, regulators have told us of how effective a discipline fear of judicial review is on their actions and decisions. The first telecoms regulator, Sir Bryan Carsberg, told us that: "No regulator wants to have decisions overturned through judicial review. It seemed a matter of good management and prudent behaviour to consider the danger and to take steps to avoid it".[67] Professor Stephen Littlechild, the first electricity regulator, also questioned the idea that judicial review is an ineffective remedy: "I was judicially reviewed three or four times…. I won some and I lost some. Again it was a very thorough investigation. I think what this means is that anybody potentially adversely affected has a real, practical possibility of challenging what the regulator does, and there is evidence that parties have challenged and have won".[68]

98.  We have also heard evidence that the position is changing. The development of human rights legislation is having a general impact on both the ambit of protection to aggrieved parties afforded by judicial review generally, as well as having affected the statutory position in recent legislation whereby, for example, the Communications Act 2003 incorporated a European Directive which allows appeals to an independent tribunal, and appeals on the merits of the case.[69] We have been told that this can be traced to Article 6 of the European Convention on Human Rights.[70] We have also been told that there has been a judicial reinterpretation in relation to the substance of appeals, which is being welcomed by Parliament: "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 Appeals Tribunal. The origin of that is that the Court of First Instance in Luxembourg, which hears appeals 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".[71]

99.  But we note that the evidence of concern can also be about not extending the right of appeal too far such that it could distort the public purposes of good regulation. Ofgem noted that "all of Ofgem's decisions are subject to some form of appeal… Ofgem believes that very careful consideration needs to be given to any proposal for change ...".[72] Philip Fletcher, the water regulator, was concerned that companies should not have the opportunity through more extensive appeal mechanisms to 'salami-slice' issues in decisions which were essentially an overall package.[73] The DTI told us that "it is not obvious that a change in the current system is necessary, or even desirable".[74]

100.  If there are those who are concerned that increasing the rights of the regulated to appeal decisions might create game-playing to undermine effective public regulation, we note two countervailing influences. The Competition Appeal Tribunal has told us that the right of appeal is balanced by the right of the Tribunal to be able to strike out appeals for which there is no proper case.[75] Also, we have been told that where further rights of appeal against regulators' decisions are granted to regulated companies, then consideration should also be given to extending the rights of appeal by consumers and other interested parties against the decisions of regulators, who are meant to be protecting their interests.[76] The regulated companies accept the need for a balance, as we heard from Innogy plc: "An effective appeal process is a key element in promoting regulatory accountability. Such a process should provide an important incentive to regulators to ensure good decision-making, thus reducing uncertainty and promoting greater confidence in the regulatory framework. At the same time, it should also maintain a balance between stakeholders and filter out nuisance appeals".[77]


43   Vol.II p375, para 27 Back

44   Q1087, Vol.II p390 Back

45   Q901, Vol.II p 320 Back

46   Q904, Vol.II p321 Back

47   Q826, Vol.II p287 (see also Q 851, Vol.II p291)  Back

48   Vol.II p163, para 12 Back

49   Vol.II pp148-9; Vol.II p129 Back

50   Q1177, Vol.II p439 Back

51   Vol.III p131, para 49 (see also para 50) Back

52   Vol.III p90, para 24 Back

53   Vol.II p163, para 7 Back

54   Vol.II p167, para 42 Back

55   Vol.II p149 Back

56  Q493, Vol.II p159 Back

57   Vol.II p130, paras 17-21 Back

58   Q695, Vol.II, p250 Back

59   Regulatory Policies in OECD Countries - From Interventionism to Regulatory Governance, p. 75: OECD Reviews of Regulatory Reform (Paris: OECD, 2002). Back

60   Vol.II p52 Back

61   Q1032, Vol.II p358 Back

62   Q256, Vol.II p96 Back

63   Vol.II p165, paras 26 and 29 Back

64   Vol.II p129, para 11 Back

65   Q1065, Vol.II p367 Back

66   Q395, Vol.II p133 Back

67   Q195, Vol.II p 68 Back

68   Q83, Vol.II p29 Back

69   Vol.II p418, para 5.2 Back

70   Vol.II p52 Back

71   Q121, Vol.II p46 Back

72   Vol. II pp180-181, paras 20 and 23 Back

73   Q590, Vol.II p208 Back

74   Vol.II p376, para 34 Back

75   Vol.II p352, para 25 Back

76   Vol.II p363, para 38 Back

77   Vol.III p104, para 5 Back


 
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