House of Lords - Constitution

Select Committee on Constitution Sixth Report

CHAPTER 8: Improving the framework of regulation

131. It follows from the previous chapter that there should be a 'whole of Government' view of regulation, and hence of the accountability of regulators to citizens and Parliament. The OECD has articulated this perspective consistently since 1997 through its project on Regulatory Reform, both in its individual member country studies, and notably its overview studies.[124]

132. The whole of Government view is concerned with the overall, integrated design of the regulatory state, for the effective separation of regulatory roles and responsibilities, and for ensuring internal control through the discipline of the three elements of accountability. Where these prove not to be effective, then there is a need for reform. The OECD review of regulatory reform in its member states provides sound advice, for example:"at the institutional level, an essential element of the substantive appraisal of new regulations is their review by a body that is independent of the regulator proposing the regulation, ideally located at the centre of government…..to ensure a 'whole of Government' perspective is taken".[125]

133. The whole of government view can therefore be divided into two parts: macro and micro. First, the macro part which concerns the design of the regulatory framework as a whole, where that framework divides roles and responsibilities in a rational way, focused on the desired outcomes of regulation, and incorporates the necessary checks and balances of accountability within the system. Government and Parliament are responsible for the design of a good regulatory framework and incorporating it into statute, and therefore should be accountable for that. Good design will include criteria such as well-aligned incentives to efficiency and cost-effective regulatory outcomes. The disciplines of the cost-benefit test should therefore be equally applicable to all regulators.

134. Secondly, the micro part related to the regulation of particular sectors or activities. Devolved, independent regulators are responsible in many instances, for reasons of good regulatory design, for the operational implementation of regulation, within the law, and should be accountable for their decisions and any discretion that they are able to exercise. Where their performance is limited by the acts that empower them, or the design of the regulatory framework, Government and Parliament have to be accountable for that causation. The procedures of accountability need to be able to identify this co-responsibility in practice.

135. The notable feature which has arisen from the evidence is the fact that the institutions of regulation are so often matched with the type of regulatory problem to be addressed, rather than being multi-purpose regulatory bodies. Most notably, economic regulators have been given statutory powers to address the problems of the abuse of monopoly power and carry out that role independently of Ministers. The DTI emphasised that "the economic regulators have been established in different ways at different times over the past three decades. They share an essential justification to protect consumers against potential abuse of monopoly power, introducing competition where appropriate and regulating prices where necessary".[126]

136. This institutional separation allows increased focus on the problem and the application of technical judgement by a competent authority.[127] The regulator is typically an appointee or Board, working to clear statutory authority, and there should be no democratic deficit where the accountability of the regulator is effectively exercised throughout the three processes of accountability we have identified. The regulator is carrying out statutory functions delegated to him by Parliament for the regulatory purposes determined by Parliament.

137. Independence from Ministers provides for consistency of practice, undistorted by short-term political considerations. Independence has been granted by Parliament for a purpose, and must therefore be matched by due accountability.

138. 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.

139. Institutional separation of roles and responsibilities in the regulatory state is therefore seen as important to the achievements of effective accountability, and hence effective regulation. Regulatory governance and accountability run hand-in-hand, such that: "the OECD's work on governance includes a substantial emphasis on regulatory policies as a fundamental part of the work necessary in pursuit of the goals of:

transparency
accountability
legitimacy
efficiency
policy coherence"

140. But it has a word of warning: "The concept of transparency in government has rapidly become a central theme in governance literature and in public debate …. the term transparency is itself non-transparent, being understood to mean quite different things by different groups. In its largest sense, transparency can be understood in terms of the relationship between state, market and society. Transparency is an essential part of all phases of the regulatory process, as well as the management of the regulatory system".[128]

141. The work of the OECD is also valuable in that it has produced a checklist for regulatory legislation and decision-making. This is shown in Table 4.[129] It is particularly relevant to the purposes of our inquiry. The checklist is clear and covers in our view the relevant questions appropriate to a regulatory decision. It is one that we believe could, and should, stand as the template for regulatory decision-making.

TABLE 4 OECD regulatory checklist

Is the problem correctly defined?
Is Government action justified?
Is regulation the best form of Government action?
Is there a legal basis for regulation?
What is the appropriate level (or levels) of Government to take action?
Do the benefits of regulation justify the costs?
Is the distribution of effects across society transparent?
Is the regulation clear, consistent, comprehensible and accessible to users?
Have all interested parties had the opportunity to present their views?
How will compliance be achieved?

142. We recommend that the OECD regulatory checklist be utilised as standard for legislation, regulatory decision-making and in establishing any new regulator.

The Better Regulation Task Force (BRTF) role and recommendations

143. The BRTF[130] has in recent years sought to carry out an important element of the central whole of Government role envisaged by the OECD. It has promulgated five principles of good regulation:

transparency
consistency
proportionality
targeting
accountability

144. Indeed, in the course of this Inquiry it has published three reports with recommendations which seek to improve the accountability of regulators, and hence the discipline on regulators and their activities.[131] These were:

Regulators: Getting the Message Across - which includes the recommendation that Government should publish short summaries of the underlying objectives when promoting legislation.[132]
Imaginative Thinking for Better Regulation - which includes recommendations that regulatory impact assessments should consider alternatives to classic regulation (and analyse the potential for unintended consequences), and that there should be self-assessment by regulators of the quality of their regulation in their annual reports.[133]
Independent regulators - which makes various recommendations for the effective accountability of independent regulators, including statutory duties to have regard to the five principles of good regulation, and a commitment on all regulators to prepare regulatory impact assessments.[134]

145. We strongly endorse the work of the BRTF and its report on independent regulators. Some of its recommendations complement or reinforce those we have already made, such as its Recommendation 9 in favour of independent regulators having boards. We very much welcome its Recommendation 12 that all independent regulators should produce and make available for public scrutiny a Regulatory Impact Assessment (RIA) on all new major policies and/or initiatives that will impact on those they regulate. We believe RIAs, both pre- and post-regulation, are essential in the regulatory process and impose a necessary discipline on regulators. We agree with the Government in its response that the RIA process is sufficiently flexible to be appropriate for the needs of the regulators. We also concur with 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. We concur with the Task Force's recommendations and we welcome the Government's positive response to those recommendations. We are especially pleased that the Government have accepted the case for a RIA on all new major policies or initiatives. We see our task as to complement the work of the BRTF and to build on its recommendations.

146. 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.

147. We recognise from the BRTF's work the fundamental contribution which the articulation of a high level mission and core principles related to effective regulation can have on improving accountability and achieving and maintaining effective regulation. We note, however, the OECD's views, and thereby draw attention to the fact that the BRTF's five principles do not focus as well as they might on the need for clear objectives for regulation, rationality and objectivity of approach, and overall coherence of regulatory policy. It is there in the sub-texts but not as explicit as it could be.[135] It should be. This is because all three of these terms focus directly on the question of legitimacy of regulation, an aspect which the OECD clearly identifies as a fundamental goal of good regulatory governance, and hence is a prime target for the focus of accountability.

148. We recommend that the BRTF 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.

A guardian of good regulation at the heart of Government

149. The BRTF report on independent regulators referred to the proliferation of regulatory bodies, and its concern with the impression it had formed that some Government departments did not seem fully aware of which regulatory bodies fell within the ambit of their responsibility. This was not helped, in their opinion, by the fact that the Cabinet Office's own publication, Public Bodies, did not give a comprehensive coverage, but only a snapshot aimed at primarily executive non-departmental public bodies.[136] We concur with this concern because clarity about the framework of regulatory roles and responsibilities is an essential element in achieving effective accountability. However, our substantive concern relates to communication of the structure of Government's regulatory bodies to a wider audience, including citizens and Parliament, rather than to a concern that there is a fundamental failure of control by Government and its departments over regulatory bodies.

150. The information is there, but difficult to assemble from disparate sources,[137] and we are sure it is well founded through the Treasury procedures for appropriation and resource accounts, which identify all public bodies, as appropriate via their inclusion in the structure of the appropriation accounts. The Cabinet Office, however, can clearly improve its presentation of the overall framework to a wider audience. The evidence suggests one reason for this lack of a coherent view, and its effective promulgation, contrary to OECD good practice advice, is that responsibility for the whole of Government view of regulation is dispersed amongst various departments, including the Cabinet Office, the Treasury, the DTI and the Prime Minister's Office.[138]Each of these clearly has an interest, but effective co-ordination and presentation requires that a single institution should be identified as having the primary proactive responsibility for co-ordination and promulgation of the whole of Government view. The Cabinet Office is best placed to assume and carry out that role. And, as the Electricity Association has commented, Ministerial coordination can be enhanced accordingly, given that there is already a Cabinet Committee concerned with regulatory accountability.[139]

151. The lack of knowledge among Departments also masks the fact that there are different regulatory models in existence. This leads to disparate forms of regulatory control, generating some degree of inequitable treatment across the regulatory regime. A more co-ordinated view of regulation would enable these inequities to be addressed and for regulatory models to be applied in like circumstances.

152. There must be a much stronger co-ordination 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.

153. It is also important that there should be consistency in applying regulatory models and requirements on a like-for-like basis.

Other aspects

154. Two particular aspects of the overall regulatory framework emerge from the evidence related to the effectiveness of accountability in practice. First, the increasing formalisation of inter-regulatory relationships. This has taken place most notably through the preparation of memoranda of understanding (MOU), management memoranda, concordats and other such written agreements.[140]

155. We take note, however, that memoranda of understanding are not necessarily solutions of underlying problems of, say, a flawed regulatory structure. Bureaucratisation in this sense is at best a panacea, giving the impression of workability and accountability, but it rarely lasts. WaterVoice told us that: "We do not think an MoU is a proper substitute for strong powers for the CCW" (Consumer Council for Water).[141]

156. Secondly, there is the development of self-regulation. This is entirely to be welcomed in that it can minimise the bureaucracy and cost of state regulation. It can only be sustained where self-regulation is shown to be an effective substitute, or surrogate, for the state's responsibility to address the identified market or conduct failure. Co-regulation may be one way for effective regulation and accountability to be maintained.[142] Ofcom has a statutory duty to have regard to the desirability of promoting and facilitating effective self-regulation, but recognises that self-regulation has to be judged against its achievements in acting as a surrogate for the public regulation which would otherwise be in place. Ofcom told us that it "intends therefore to develop and publish a series of criteria, covering for example transparency and effective audit, which it will adopt in deciding whether to pass any activities to co-regulatory or self-regulatory bodies".[143] We concur with Ofcom that this is the appropriate approach and will allow Parliament to hold Ofcom accountable for its control of self-regulatory and co-regulatory arrangements. This model offers the opportunity for some public oversight.

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

124 See in particular Report on Regulatory Reform (Paris: OECD, 1997) and United Kingdom - Challenges at the Cutting Edge (Paris: OECD, 2002). Back

125 Regulatory Policies in OECD Countries - From Interventionism to Regulatory Governance (Paris: OECD, 2002), p. 33. Back

126 Vol.II p372, para 4. Back

127 See for example Appendix 5. Back

128 pp. 100 and 65 respectively in Regulatory Policy in OECD Countries - From Interventionism to Regulatory Governance (Paris: OECD, 2002). Back

129 Recommendation of the Council of the OECD on Improving the Quality of Government Regulation, OECD/GD (Paris: OECD, 1995). This adopted for the first time an internationally accepted set of principles on ensuring regulatory quality, and included the 10 point OECD reference checklist: OECD, Regulatory Policy in OECD Countries (Paris: OECD, 2002), p23. Back

130 The BRTF is an independent advisory group, established in 1997. Its members come from a variety of backgrounds, and are unpaid. Its terms of reference are "to advise the Government on action to ensure that regulation and its enforcement are proportionate, accountable, consistent, transparent and targeted". Officials from the Cabinet Office's Regulatory Impact Unit provide support. Back

132 BRTF, Environmental Regulation: Getting the Message Across (London: Cabinet Office, 2003). Back

133 BRTF, Imaginative Thinking for Better Regulation (London: Cabinet Office, 2003). Back

134 BRTF, Independent Regulators (London: Cabinet Office, 2003). Back

135 For example, in the headlines of the policy maker's checklist, transparency is initially described by the by-line "Regulators should be open, and keep regulations simple and user-friendly" followed in the sub-text by important references to policy objectives: BRTF, Principles of Good Regulation (London: BRTF, 2003) p5. Back