CHAPTER 5: Factors which can Undermine
Effective Regulation and Accountability
101. The evidence analysed in chapter 4 shows
significant concerns in all three elements of accountability.
There appear to be common causes for many of these concerns.
This chapter groups these together, as a precursor to examining
improvements which could be made to achieve better accountability.
Effective accountability and regulation can be undermined by pitfalls,
poor communication to, and poor understanding by,
those to whom accountability is directed, and overall incoherence
in the design of regulatory roles and responsibilities:
Pitfalls
(a) presumption: regulators assume that they
are there to do good and therefore have a view of what is good,
which they may consider to be superior to the view of the regulated
bodies. This weakens the presumption of their due accountability.
Regulators can equally abuse their monopoly power, either by
empire-building, imposing excessive requirements for information
or regulations, or micro-management of the regulated business.
Sir Bryan Carsberg told us that "There is a natural danger
for regulators to over-regulate and try to solve all apparent
problems…".[78]
The UK mobile operators set out the arguments as they saw them:
"Oftel and others, such as Offer [Office of Electricity Regulation,
now merged into Ofgem] and Postcomm, were formed as the overseers
of the liberalisation of markets formerly controlled by state
monopolies (perhaps they should have been called 'liberators'
not regulators)".[79]
They then went on to say "A regulator was seen as a necessary
catalyst to this transition - a means to an end not an end in
itself". They accepted that Oftel had been successful but
had a caveat "Oftel scores reasonably on many of the topics
of your inquiry. It demonstrates independence from Government
and industry. It consults widely and is fairly transparent with
its processes. But, after nearly twenty years in existence, it
is no nearer withdrawing from sector specific economic regulation".
(b) conflicts of interest: such as where Government
retains ownership and regulation, as with Royal Mail and Rail,
or where the regulators' desire to demonstrate effective independence
(through demonstrably rational, disinterested regulatory decision-making)
is compromised by the desire for reappointment, leading to capture
by Government. One example of this danger might be an appeal by
the regulated company appealing to the owner rather than the
regulator for the solution to their perceived problems if they
feel under too great a pressure. Postwatch was particularly concerned
because "The role of the DTI in postal regulation is to say
the least complex. The Department appoints the commissioners of
Postcomm, the councillors of Postwatch and the chairman of the
Royal Mail group … The interests of the Royal Mail Group,
the UK postal industry and postal users are not always (if ever)
the same. It is unclear how much weight DTI gives to each interest
group when reaching its decisions; conflicts of interest inevitably
arise".[80] Postcomm
echoed that concern, noting that, because of this, the respective
roles of the Secretary of State and Postcomm had to be clearly
understood and respected.[81]
Postcomm drew our attention to one case of a proposed merger
between Royal Mail and TNT where Postcomm had to stand their ground
against the Government's shareholder interest, concluding: "In
the end it did not go ahead. I think we drew a line with a firmness
which will not be forgotten, which did not involve actual hostility".[82]
(c) paternalism: second-guessing consumer interests.
Regulators may seek to act benignly, acting in what they see
as the best interests of the regulated, without necessarily consulting
in order to determine whether they are correct in their assumptions.
(d) inconsistency over time: notable in cost-benefit
tests - involving assessments of probability - for regulatory
decisions, such as on security of supply and safety. This has
been a notable issue in both water regulation, with respect to
the setting of leakage standards following the 1996 drought, and
rail regulation following the Paddington rail disaster, in particular
relating to the Minister's promised investment in train protection
systems. So, for example, before an event a rational regulatory
decision on the level of preventative maintenance could be made,
but after the event the arguments on which accountability for
the decision were based seem very different. Sir Howard Davies
of the FSA told us that this had also been their experience in
the public debate on Equitable Life.[83]
Achieving consistency requires a sophisticated blend of leadership,
objectivity, trust, continuity, and no-blame cultures.
(e) change for change's sake: more policies and
reform are assumed to be better than less policies and continuity.
This to some extent is a variation on the theme of presumption.
Regulators may be prone to justify their existence by being over-active.
(f) misplaced dignity: unreasonably protecting
precedents or decisions which can be shown to be flawed for reasons
of maintaining the authority and dignity of regulation, rather
than promoting a learning culture which develops regulation in
the light of experience, and consistent with its underlying purpose.
(g) stereotyping: where this may lead to misinterpretation:
for example, where profit is seen pejoratively, or an adversarial
regulatory system is seen as flawed per se, rather than
as a design feature for effective regulation.
Poor communication and understanding
(a) lack of knowledge of the regulatory framework
on the part of citizens and consumers weakens their ability to
promote, or be engaged in, effective accountability. Sir Howard
Davies described the implications of this, again in the context
of Equitable Life: "…(the Parliamentary Ombudsman's
report on Equitable Life)…referred to what she saw as a mismatch
of expectations in what the public, represented by some of the
people who had complained to her, expected a prudential regulator
could achieve and what prudential regulation was designed to achieve,
and certainly it is quite difficult to explain that we are not
even aiming for a non-zero failure regime, and we do not think
it would be appropriate to aim for a non-zero failure regime because
to do so would only constrain financial institutions and make
it impossible for them to carry out the function of taking risk
that we believe is essential to financial markets…. Explaining
where you are drawing that line and where you are setting that
level of protection is probably the biggest single challenge we
face in gaining acceptance and understanding for the nature of
regulation we seek to maintain, but setting that balance is inherent
in the Act".[84]
(b) lack of confidence/skill/opportunity in accessing
regulatory information, participation processes or mechanisms
of redress; stakeholders may not have a clear understanding of
processes and how the regulator operates.
(c) lack of trust leading to a misunderstanding
of regulation.
(d) the role of accountability as a control mechanism
is misunderstood - a means rather than an end.
(e) obfuscation of the regulatory mission, whether
by design or default and particularly where this interfaces with
separation of responsibilities, such as representing consumer
interests.
Incoherence
(f) inadequate separation between the three pillars
of regulatory policy: economic, social and environmental. The
NCC identified difficulties that can arise between Government
and regulators where there is lack of clarity on respective roles.
In particular they stated that "where there are social
objectives in a sector, it can be unclear whose responsibility
it is to set them and achieve them. Tackling fuel poverty, or
extending access to financial advice, are current examples where
the regulator has an important role".[85]
(g) insufficient commitment to the 'whole of
Government' approach to regulatory design and implementation (unnecessary
duplication, overlap or proliferation of regulatory roles and
institutions; inadequate central scrutiny and/or co-ordination
of review roles; inadequate application of generic models of regulation,
except where sectoral differences are objectively justified) -
in effect - the guardianship of effective regulation through accountability
is fragmented (see also paragraph 102 below)..
(h) poor statutory design, such as excessive,
or contradictory, lists of statutory duties placed on the regulators.
(i) missing principles of good regulation: objectivity,
rationality and coherence.
(j) emphasis on internal board structures and
accountabilities rather than external accountability of the function.
102. An example of insufficient commitment is
the potential for erosion of effective accountability where regulatory
structures become increasingly complex, and become disengaged
from public understanding. Railways have presented us with a
clear example. Rail regulation and its associated institutional
structures is complex, and it seems that interested parties do
not have a clear idea of who does what, and should be held accountable
for what decisions. We can only observe the past and present
debates on rail policy and performance, and the evidence that
we have received. It underlines the danger that lack of clarity
with respect to the regulatory framework will undermine regulatory
accountability, and equally therefore, effective regulation. In
referring to the distinctions between economic opportunities and
social obligations, Sir Christopher Foster said "I hope Lord
MacGregor will not mind my saying that I think, since his time,
they have gone rather woefully wrong in relation to the railways.
Everybody seems to be doing not the job for which they were set
up but some other job". With respect to the SRA he added
"It is that kind of muddle which I honestly believe the regulators
should be protected from. They are then becoming quasi-political
figures, and I do not honestly believe that that is a sensible
job for a regulator".[86]
In particular the problem arises over transparency of trade-offs
by the regulatory body.[87]
The evidence on confusion was reinforced by two of the Rail Regulators.
Tom Winsor told us that "The distinction between the two
bodies is frequently misunderstood".[88]
He was clear however that regulators did not necessarily take
any responsibility for rail crashes.[89]
John Swift QC noted that "There has always been a difficulty
in the mind of the public, and not just of the public, in knowing
the precise difference between the strategic rail authority or
the franchising director, as it then was, and the Rail Regulator".[90]
103. The implications of these hazards or failings
is that attention has to be paid to the effectiveness of accountability
mechanisms to control the regulators, and to improving the context
and awareness in which interested parties can play their role
in achieving effective accountability. Remedies may be provided
through different means. In our remaining chapters we make various
recommendations designed to alleviate or eliminate impediments
to effective regulation and accountability.
78 Vol.II p61, reply to q4. Back
79
Vol.II p434, paras 2.3, 3.2, 3.3 Back
80
Vol.II p130, para 15 Back
81
Vol.II p238, para 10 Back
82
Q666, Vol.II p245 Back
83
Q869, Vol.II p305 Back
84
Q868, Vol.II p304 Back
85
Vol.II p362, paras 23 and 24 Back
86
Q208, Vol.II p73 Back
87
Q218, Vol.II p76 Back
88
Vol.II p211, para 4 Back
89
Vol.II p212, para 24 Back
90
Q115, Vol.II p46 Back
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