Select Committee on Constitution Sixth Report

CHAPTER 9: improving openNess, information and communication

The qualitative characteristics for effective accountability

158.  Accountability is only useful, or effective, as a control mechanism if it influences regulatory behaviour and decisions. That is to say, consequences result from accountability, whether immediate or in due course, either by:

159.  The effectiveness of accountability depends on qualitative characteristics which apply to:

(1)  The provision of information from the accountable party, which should be, for example:

  • relevant (that is, relevant to decisions)
  • timely
  • consistent
  • material
  • comprehensive in coverage, rather than detail
  • accurate
  • promote substance over form

(2)  Good work on defining the qualitative characteristics of reported information has been carried out by the standard-setting bodies, such as the Accounting Standards Board and the Financial Reporting Council.[144]

(3)  The use of information by those scrutinising the accountable party, which are, for example:

  • sufficient knowledge of the regulator's role and responsibilities and their place in the regulatory scheme as a whole;
  • a fair basis for evaluating the information provided;
  • the opportunity and knowledge/skill to participate and to take unsatisfactory outcomes further if required.

160.  In regard to improved disciplines on regulators through the processes of accountability, we have received much support for the development of regulatory impact assessments by regulators. These improvements to accountability have been complemented by, first, a growing emphasis on the role of each regulator's annual report, and the requirement for published forward programmes about planned activities, the success or failure of which should be consistently covered in successive annual reports, and, secondly, a commitment at the centre of Government to impose institutional mechanisms for instilling the principles of good regulation into practice, setting standards for consultation, and monitoring the effectiveness of regulation. We received much evidence on the intention to achieve best practice.[145]

161.  The practical requirements for carrying out good RIAs have been extensively researched and promoted through advice and guidance by both the Cabinet Office's Regulatory Impact Unit (RIU)[146] and the National Audit Office.[147] There is clearly no shortage of information available to regulators on how to prepare RIAs properly. The requirement now is for regulators to meet the challenge and provide information through RIAs which can be used to hold them effectively to account. The experience of producing RIAs will improve them over time, and parliamentary scrutiny, complemented by the on-going monitoring work of the RIU and NAO, will play an important part in ensuring that improvement takes place.

162.  The European Commission has also recognised the key importance of RIAs in promoting better accountability and good governance. The Commission's vision was set out in its 2001 White Paper on governance.[148] This has been supported by a succession of practical documents supporting the Commission's better regulation 'package' of initiatives issued in 2002.[149] The result of this initiative is that the Commission's policies have to be supported by RIAs, developed by the appropriate responsible directorate within the Commission. Therefore there are, and will increasingly be, European comparators available to inform and challenge UK practice in this area, and thereby assist progressive improvements in RIAs and regulatory accountability. The Committee visited Brussels in October 2003 to discuss this and related issues.[150]

163.  The regulated clearly support an effective RIA process and achieving this would do much to reduce criticism and promote better understanding and acceptance of necessary regulation: "Innogy would like to see the RIA process introduced quickly and comprehensively and believes that it could be sensibly applied to some current policy areas … Scrutiny of regulators needs to include assessment of the accuracy of the RIAs".[151] The point they make about looking back to see how well the original RIA worked out in practice is an important one. Such reviews of RIAs should be part of the normal regulatory process. Equally it applies to legislation, and we can concur with the UK mobile operators when they told us "Lord Fowler, in the second reading of the Communications Bill in the House of Lords, 25 March 2003 said: '…it has often seemed to me that what is needed with much legislation is not only pre-legislative scrutiny but post-legislative scrutiny, to see how the government's plans have worked out in practice. In my experience, it is the lack of objective checks after legislation has been passed that too often runs us into trouble'. These sentiments capture succinctly the views of the UK mobile operators".[152]

164.  The British Air Transport Association (BATA)was particularly concerned that the process should be effective because "Although aviation pays for the CAA, it has little influence on the size of its budget nor on how the money is spent. The accountability of the CAA to aviation and hence to citizens, who are aviation's customers, is poor". Our concern is that an RIA has to be used in the process of empowering both citizens and the regulated, a concern which was well expressed in subsequent evidence from the BATA: "The CAA is obliged to carry out a Regulatory Impact Assessment (RIA) before bringing in new regulations but we are not consulted during the RIA process. Obviously, we believe we should be consulted but it would be even better if workshops were held early in the planning phase. This should lead to improvements in regulations and safety being implemented in a more cost effective manner". [153] British Energy summed up the need for improvement thus: "However, this must ensure that the RIA is comprehensive, an integral part of the consultation process, includes a full cost-benefit and environmental impact analysis, and is conducted in accordance with best practice as set out in the NAO's report on regulatory impact assessments published in November 2001".[154]

165.  There are on-going concerns, however, about consistency in the whole of Government view of regulation. New legislation, such as the Financial Services Act 2000, the Utilities Act 2000 and the Communications Act 2003, provided the opportunity to introduce new accountability requirements on regulators, and this is to be welcomed.

Codifying statutory duties relating to accountability

166.  In the Ofcom and Water bills, and the Utilities Act 2000, duties on accountability have been developing. A codified list might in due course be helpful as the basis for all regulatory legislation. Table 5 summarises the possibilities and the practical consequences for regulatory practice.

167.  However, there are exceptions to the right of the National Audit Office to carry out value for money studies on regulators. The most notable exception is with respect to the FSA. The Government and Parliament have, however, granted the NAO access to Ofcom, even though this is technically a public corporation. We return to this issue in Chapter 10.

168.  The evidence shows general support for incorporating requirements of best practice into legislation. Water UK told us that "We think the principles of better regulation should be statutory duties on which Ofwat should report to Parliament".[155] Ofcom concurred[156] and John Swift confirmed that a perceived lack of transparency in the early 1990s was rectified by the inclusion of appropriate further statutory duties, in this case ensuring that the regulated firm could plan for the future with a reasonable degree of assurance.[157] The Government also noted its commitment to best practice, and, although it told us that no over-arching duty to consult exists, that "the regulators have committed to the use of extensive, transparent public consultation exercises covering significant decisions on policy development (eg, on licence conditions, regulatory methodologies - including explanation of thinking before decisions are reached - and forward work programmes), charges and periodic reviews".[158] Support for the Communications Act 2003 provisions which increase the accountability of Ofcom was evident. As the UK mobile operators stated: "…Ofcom will be under an obligation to review regulation on a regular basis and remove any regulations that are unnecessarily burdensome or superfluous. If used correctly, this is potentially a very useful measure".[159]

169.  Regulators should have a statutory duty to have regard to the principles of good regulation and effective accountability. These should include self-assessment of their compliance with the same; the design of effective consultation procedures to engage interested parties; ensuring that redress and compensation procedures are clear and accessible; and incorporating the outturn of plans in their annual reports. They should also include the publication of the following:

(a)  their mission statements;

(b)  codes of practice for the conduct of their regulatory office;

(c)  codes of practice for consultation (including the duty to summarise and accept or rebut consultees' comments, with reasons);

(d)  their forward plans;

(e)  the explanations of and reasons for their decisions; and

(f)  all relevant material necessary for their production before and after RIAs.

TABLE 5 Accountability through statutory duties: duty to explain - provision of information
Statutory duties to: Practical consequences for regulators and regulatory offices
  • articulate the regulatory mission
  • exchange information based on memorandums of understanding
  • apply the principles of good regulation
  • have regard to any other regulatory best practice
  • prepare regulatory impact assessments, incorporating cost-benefit tests
  • publish all relevant information
  • prepare appropriate codes of practice
  • research customer and other interested parties' views
  • consult
  • facilitate responses to consultation
  • consider and give reasoned, and written, responses to consultation
  • give reasons for decisions
  • review regulatory impacts on a regular basis
  • publish particular document (eg, annual report/forward programme) and give information linking the two
  • subject to not prejudicing particular, or individual, commercial or private interests
1. Public relations and general education programme, plus in particular
  • memorandums of understanding
  • response to ministerial guidance (S of S to consult and have regard to C/B test)
  • publish forward work programmes

2. Develop RIA practice and codify methodologies

3. Codes of practice on:

  • administrative standards for the regulatory office (customer charter - how we discharge our functions)
  • appointments and related matters
  • consultation procedures and outcomes (or comply with Cabinet Office code)

4. Develop consultation methods and engagement with interested parties

  • hierarchical design (strategic to detail)
  • multimedia approach
  • workshops for specialists
  • public forums

5. Annual report:

  • include self-assessments of regulatory impact
  • statement of policy with respect to penalties
Note: statutory power of consumer councils to obtain information from regulatory authorities

rights to appeal (as appropriate)

specified circumstances (eg, unreasonable penalties for contravening a licence condition)

merits of the case

170.  We are conscious, however, that consultation, though necessary and desirable, can also be a burden. Consultation is a consequence not only of proposals originating with regulators in the UK. Sir Howard Davies noted in his evidence to us that "there is a wave of European Directives under way which we are required to implement … the second track has been the outcome of the various government consultations … we are not the only people at fault here".[160] Mr Jurgen Tiedje, Secretary of the European Securities Commission, told us of the extensive consultation undertaken by the European Commission. He also noted that many market participants did not fully grasp the tight deadlines to which the Commission often had to work.[161] The consequence of extensive and frequent consultation, sometimes with short deadlines, is that many regulated bodies cannot keep pace with the process. This is especially the case for small firms that are subject to a regulatory regime. Keeping abreast of consultations, and responding to them, can be demanding and time-consuming. As such, it is expensive.

171.  The Rt. Hon. John Gummer MP drew our attention particularly to the burden on Independent Financial Advisers. This arose for three reasons. First, independent advisers are small businesses[162]; second, the volume of consultation; and, thirdly, the complexity of the documents. He told us that "the difficulty we face is that small firms find it hard to be listened to even though the weight of regulation falls very heavily upon them, and even upon us who represent them". He went on to say that this is because, with FSA consultations, "in each case they are proportionate, but if you add them together they are disproportionate", and because "it really is very often made worse by the length and impenetrability of the documents".[163]

172.  We believe that regulators should have particular regard to the needs of those they are consulting. We have drawn attention in Chapter 5 to the pitfall of presumption, which encompasses excessive requirements for information. It is essential that regulators create a consistent means of consultation that enables sufficient information to be gleaned from the bodies affected by regulation while ensuring that the demands for information do not unnecessarily drain the resources of those bodies or put them in a situation where they are unable to respond. Achieving such a structured position may itself be the product of consultation but such an exercise may be beneficial in reducing future burdens on the regulated.

173.  Regulators should adopt a structured approach to consultation designed to minimise the burdens on those consulted and to facilitate their engagement with either the principles or the detail as appropriate to the interests of those consulted.

144   See in particular The Corporate Report, A Discussion Paper by the Accounting Standards Steering Committee (1975), and Statement of Principles for Financial Reporting published by the Accounting Standards Board (1999), which sets out the qualitative characteristics for information to be relevant to users.  Back

145   QQ315 (Vol.II p112), 1120 (Vol.II p398), & 1062 (Vol.II p367); see also Vol.II p420, para 9.1 Back

146   See in particular: A Quick Guide to Regulatory Impact Assessment (London: Cabinet Office, 2003), supported by its detailed guidance, Better Policy Making; A Guide to Regulatory Impact Assessment; and Regulatory Impact Assessments; 1st January to 30th June 2003, CM5981. Back

147   Better Regulation: Making Good Use of Regulatory Impact Assessments, 15 November 2001, HC329, 2001-02. Back

148   European Governance - A White Paper, 428, Final, Brussels, 2001 Back

149   See in particular: The Mandelkern Report on Better Regulation, Final Report, Brussels, 2001; Communication from the Commission on Impact Assessment, Com, 276, Final, Brussels, 2002; and Impact Assessment in the European Union, Quality and Good Regulatory Governance, European Commission, Conference Background Report, Brussels, 3 December 2003, prepared by Professor Claudio Radaelli. Back

150   See Appendix 7 for a summary of the evidence. Back

151   Vol.III p105, para 15 Back

152   Vol.II p436, para 5.7 Back

153   Vol.III pp16-17, paras 4 and 17 Back

154   Vol.II p94, para 25 Back

155   Vol.II p107, para 30 Back

156   Vol.II pp417 & 419 (paras 4.2 and 7.3) Back

157   Vol.II p41 (q7) Back

158   Vol.II p377, para 39 Back

159   Vol.II p435, para 4.3 Back

160   Vol.II, p308 Back

161   See Appendix 7 Back

162   Of which there are some 18,000 represented by the Association of Independent Financial Advisers: "IFAs are, atypically for financial institutions, primarily small businesses and the regulator has particular challenges to develop a relationship with such businesses" - written evidence of the AIFA, (paragraph 1Back

163   Q737, Vol.II pp268-269 Back

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