House of Lords - Constitution

Select Committee on Constitution Sixth Report

CHAPTER 7: Relationships with Ministers - Independence and Accountability

111. Concerns have been expressed about the design of the regulatory framework with respect to the possible tension (or conflict) between independence of regulators (whether boards or individuals) and their accountability. Independent regulators, at arms length from Ministers, may be seen to be less accountable, or perhaps even unaccountable, compared with the traditional perception of Ministers being directly accountable to Parliament for their decisions. Clare Spottiswoode told us: "You want an independent regulatory body that takes the best decisions and, because it is independent, by definition it cannot be accountable to Ministers".[98]

112. But is this a fair reflection of the relationship between independence and accountability? We think not. John Vickers, Chairman of OFT, told us that "I am not sure that I would see a tension between independence and accountability".[99] But independence has to be qualified in relation to working within, rather than independently of, Government.

113. We have received clear evidence that independence of regulators from Ministers is welcomed by Ministers and is seen as a vital ingredient for maintaining consistency, for ensuring that regulatory decisions are taken by 'competent authorities' (which accords well with current and prospective developments in the governance of the European Union), and for promoting confidence about regulation among the regulated, those investing in regulated enterprises, and the customers and citizens on whose behalf regulation is carried out. The Department of Trade and Industry told us, for example, that "the independence of economic regulators from Government - insulating decisions from short term political factors - is a fundamental contributor to regulatory certainty and prerequisite for continuing to attract private finance to regulated sectors".[100]

114. An exception is to be found in the evidence presented to us by the Rail Regulator, Tom Winsor, who clashed with Transport Secretary, Stephen Byers: "It was an extraordinary episode. I had no expectation that the Minister would ever take the steps that were taken in relation to me. If it was expected that I should be intimidated, I was not….I believe that for an independent regulator to give in to that political pressure, apart from being an irrelevant consideration as a matter of public law, or to resign would have been a very serious and adverse step for the constitutional position of regulators and the relationship between the state and the private sector in areas and in respects going far, far wider than the railway industry…. I think it is notable, and I claim no credit for this, that in the bill which is to be brought before parliament in relation to foundation hospitals, the title of the regulator is 'the independent regulator'".[101]

115. In this context, Ministers have clearly given up some freedoms, and regulators' decision-making is protected. However, whilst their decision-making may be protected, they should be no less - and need not be any the less - accountable for their decisions. They have a duty to explain, they should be exposed to scrutiny, and be subject to the full rigours of the possibility of legal challenge. We have received much evidence that these disciplines apply. We have found no conflict in principle between independence and accountability.

116. The disciplines, however, should not be entirely one-sided, or available at any price. This could be a recipe by which self-interested parties could frustrate Parliament's intention and the exercise of good regulation. Equally, there should be disciplines in place to avoid those pitfalls of regulation which may themselves undermine the exercise of effective, accountable regulation.

Public bodies and independence

117. We have received evidence that the type of public body may affect the formal relationship with Ministers and hence the perceived or actual degree of independence. The Environment Agency told us of their internal debates about whether it would be better to be a Non-Departmental Public Body (NDPB) or a Non-Ministerial Department, given that the former provides more flexibility on pay and rations but the latter more freedom in the policy arena. Baroness Young of Old Scone told us that the final decision was based on the fact that it would be too expensive to become a Non-Ministerial Department subject to Civil Service conditions of service, but in any event they felt that the environment needed a Cabinet Minister "batting on behalf of the environment, fully informed by the sort of advice and information that we can give".[102] Also she told us that whatever their status, their intention was to maintain their effective independence by being "seen as authoritative".[103]

118. The evidence suggests that whatever level of independence has been granted by Parliament, Ministers have generally sought to maintain that independence, and that that independence is secured in the substantive role of the regulatory body in question. If that role is clear, then its independence is better secured. The distinction between policy and operations is especially important. Ministers determine policy and regulators put it into effect. Where that distinction has been recognised, there appear to have been few problems. Philip Fletcher answered the question for us: "Have I ever been leant upon inappropriately by Ministers? No. I am absolutely clear about that".[104] This was echoed by other past regulators.[105]

119. Again, the processes for effective accountability play an essential role. Independence must first be explicit, and in that it is clear who has the final formal decision, but it must also be implicit, in that the independence of that final decision is, as far as possible, demonstrable. Where regulatory decisions are founded on clear, demonstrable and disinterested arguments and evidence, put into the public domain, then the assertion of regulatory capture by one or other interest group can be reasonably rebutted. It is the public accountability of regulators for those disinterested decisions which give effect to the demonstration of implicit independence as the central foundation of regulatory independence. It also demonstrates that there is no conflict between accountability and independence.[106]

120. The independence of regulators is both explicit, in the legal right to take final decisions, and implicit in the formulation of those decisions by the objective and impartial application of verifiable criteria equally to all concerned. Regulators not only have a duty to regulate responsibly, they have a duty to ensure that they are seen to be regulating responsibly. Decisions are, of course, subject to judicial review and, in many cases to appeal.

121. Our evidence suggests once again the broad range of support that underpins a regulatory framework that separates ministerial roles and responsibilities from those of independent regulators, and that this fact should be well communicated on a regular basis by Government. Water UK, for example, told us that "For Ministers and regulators frequently to reassert the independence of the regulator on economic decisions is helpful; and, after all, we had a survey of investors recently and 96 per cent of them said that they regarded the independence of the regulator as being very important, so just a frequent reassertion of it would be helpful".[107] This view was matched by the view of the water regulator.[108] Equally, the same view was expressed by both the regulator (ORR) and the regulated (ATOC) in the rail sector.[109]

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

Appointments, Nolan principles and re-appointment

123. Ministers take responsibility for appointing independent regulators in accordance with Nolan Principles. Independent regulators are accountable to Ministers for the independence and effectiveness of the regulation that they were appointed to carry out, and Ministers are jointly accountable with the regulators to Parliament for the consequences of those regulatory decisions. We disagree, therefore, with the line of argument that regulation implies that Ministers are absolved of all accountability to Parliament for the conduct of independent regulators. Both need to be held accountable with respect to the particular roles and responsibilities that they discharge in the regulatory framework as a whole.

124. It has been suggested to us that the power of reappointment by Ministers might undermine the independence of the regulators.[110] Clare Spottiswoode told us that "Choosing a career civil servant as head of a regulatory body could compromise the appearance of independence".[111] We have already identified the potential pitfall of a desire on the part of a regulator to be reappointed creating a conflict of interest by seeking favour with the Minister, where that favour implies carrying out the statutory duties of the regulator other than to the best of their ability. Tom Winsor told us that: "I think it can make you stronger if you have no expectation of reappointment".[112] Most important is that independence is protected during the period of appointment, even though John Swift pointed out to us that a misjudgement in that appointment could have serious effects during its term. It was a question of balance.[113] Nevertheless, as was pointed out to us by Sir Bryan Carsberg, in some circumstances a regulator might recognise the political realities resulting from their performance, and resign if necessary.[114] We recognise that allowance has to be made for extreme circumstances, but such rare occurrences should not be seen to undermine the general principle of independence for the term of the appointment.

125. It is sometimes but not always the case that a single term appointment would be the answer. This is because the object of our attention is effective accountability. The power of appointment is a longer-term weapon in the arsenal of accountability. The power should work well as long as both independent regulators and Ministers are held fully accountable for their respective actions. What is important is that the Nolan principles are observed in all cases. We do not support the idea of an independent appointments commission. The appointments are being made in order to carry out public policy for which Government has responsibility. It reflects part of the checks and balances within the regulatory system as a whole, and, most fundamentally, carries the clear message that Ministers retain the responsibility, through a democratically elected Government, for the overall operations of the regulatory state.

126. We recommend that Ministers should remain responsible for appointing regulators, subject to Nolan rules, to ensure proper responsibility and accountability.

Ministerial guidance and independence

127. We have heard evidence that guidance from Ministers has not sought to compromise or constrain the independent regulators, but to provide a fuller picture of the policy context with which the independent regulators work. This is consistent with the statutory and organisational structure of the framework of regulation, and reflects the independence of regulators within the state, rather than of the state. Ofgem told us that "the government has made it clear that where it wishes to introduce social and environmental measures that would have a significant financial impact on consumers, it will seek to do so through new legislation".[115] John Swift told us that independence and accountability can be reconciled through the concept of answerability.[116] Callum McCarthy set out the practical implications of the relationship in terms of "no surprises"[117], that "friction"[118] must be expected, that Ministers must present "serious" arguments,[119] and that any guidance on social and environmental matters should be focused and weighted between the various worthy duties.[120] Northumbrian Water gave evidence that regulators faced contradictions, conflicts and trade-offs, concluding that "the best that a regulator can do is to clearly identify the political questions, inform relevant stakeholders, and ensure a mechanism exists to obtain the necessary answers. When a regulator makes such decisions himself he is likely to be accused of exercising excessive discretion".[121] This view was supported by United Utilities, but who added "this guidance needs to be as unambiguous as possible, particularly when Government has conflicting objectives".[122]

128. Nevertheless, the potential for tension remains in that Ministers might from time to time seek to re-establish a role which is inimical to independent regulation, the purpose of which has statutory recognition. Clear accountability of both regulators to Ministers for their independence, and of regulators and Ministers to Parliament is the best defence against the erosion of effective, independent regulation.

129. Advisory bodies which help Ministers carry out their regulatory role more effectively also need to be more closely integrated where that is appropriate. The role of the Environment Agency in the preliminary process of drafting statutory regulation is a case in point. The Environment Agency told us that they would "like a shift in the dividing line between our role and our Government sponsor's role". They felt it was important "to be in the position where perhaps jointly, with our Government sponsors we were tasking the lawyers with the design so that we were in on the ground floor, as it were, of the design".[123] We concur that regulators should be fully involved in the preparation of regulatory legislation in order to facilitate the development of the most effective and practicable statutory framework.

130. 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).

98 Q423, Vol. II p142 Back

99 Q959, Vol. II p366 Back

100 Vol.II p373, para 9 Back

101 Q606, Vol.II p222 Back

102 Q987, Vol.II p347 Back

103 Q966, Vol.II p342 Back

104 Q587, Vol.II p207 Back

105 Q 167, Vol.II p63; Vol.II p42; Vol.II p141 Back

106 See in particular Independent Regulators (London: Better Regulation Task Force, 2003), chapter 6: "Independent but accountable and answerable: a licence to operate". Back

107 Q338, Vol.II p116 Back

108 Vol.II p200, para28 Back

109 Vol.II pp215-6, paras 57 and 62; Vol.III p9 Back