Select Committee on Constitution Sixth Report


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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