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Lord Dahrendorf: My Lords, your Lordships' House is often praised for the quality of the reports that it produces—rightly so. The report on the regulatory state is no exception. Even among House of Lords reports, it stands out for its systematic character, the thoroughness of its argument and the comprehensiveness of the evidence gathered. I hope that the noble Lord, Lord Norton of Louth, will not take it amiss if, as one academic to another, I suggest that his report could almost be submitted to a research assessment exercise and earn its author valuable points in the eternal quest for funds for academic research.

The two main lessons that I learnt from the report are, first, that lifting the heavy hand of government and replacing it with regulation and independent
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regulators does not necessarily free people to do their own thing without hindrance or encumbrance. Regulation can be a burden, as paragraph 80 of the report says. Secondly, whereas one knew whom to call to account and how to do it, when the state acted through an elected government, accountability is much more complex in the regulatory state. It is in that latter connection that I want to make two small points.

The first is almost tangential to the present report but would warrant a separate debate which, as chairman of the Select Committee on Delegated Powers and Regulatory Reform, I hope to initiate in due course. The report refers, notably in chapter 8 but also elsewhere, to what it calls,

There are strong recommendations designed to improve co-ordination within government. The noble Lord, Lord Norton of Louth, repeated them, as have others who have spoken. At one point, in paragraph 7, reference is made to the Government's concern with regulatory reform. The report says that it,

It also says:

Those are references to the Regulatory Reform Act 2001, an Act that is due—indeed, overdue—for review. In fact, a ministerial commitment was given to such a review in 2004. The Minister responsible, Ms Ruth Kelly, told the Select Committee on Delegated Powers and Regulatory Reform that work on the review would begin in summer 2005.

The point that I want to make today is that the Regulatory Reform Act has unfortunately failed to provide the kind of co-ordination that the Constitution Committee seeks. Regulatory reform orders, in particular, have become at times simply an alternative form of legislation for departments that failed to get a slot in the gracious Speech. They are a form of legislation that receives significantly less parliamentary scrutiny than normal Bills. It could be argued in some cases that what was intended to be less or, at any rate, better regulation has in fact become less scrutinised legislation.

There is a strong case for Parliament to have a thorough look at the Regulatory Reform Act and its consequences. If and when we undertake such an appraisal, there will be many details to consider. Two major issues that will and should preoccupy us will be, first, clearer criteria for the appropriateness of regulation as against proper legislation and, secondly, the precise role of Parliament in ensuring accountability of the instruments of the regulatory state.

My other point is, in a sense, related. It has to do with parliamentary scrutiny of the regulatory state and refers primarily to chapter 10 of the Constitution Committee report. I agree with the statement that Parliament is crucial to ensuring accountability. I also accept that, in practice, the process of scrutiny must be led by Select Committees. The report tells us that some work better
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than others, which is not surprising. It proceeds to recommend a new dedicated parliamentary committee to scrutinise the regulatory state, which would preferably be a Joint Committee of both Houses. That has been one of the main subjects of our debate this afternoon.

Despite what has been called the Government's lukewarm response to that recommendation, there is much to be said for it and even more to be said for the analysis behind it. However, it is important that Select Committees in this area—old or new—should not be separated from Parliament as a whole. Once a Select Committee becomes too expert in its field, there is a risk of what one might call unintended collusion between the scrutineers and their objects. Worse still, if, as is the case with respect to regulatory reform orders, the Select Committees of either House have the right to reject regulatory reform orders without Parliament getting into the act at all and, indeed, are the only bodies able to suggest amendments, they become a substitute for Parliament rather than an instrument of it.

Provision should therefore be made for Select Committees concerned with regulation—with the regulatory state—to turn to Parliament as a whole and allow debate reflecting the views of citizens, of the public at large. The report that we are debating was written because there is a real risk that the regulatory state, against the intentions of its inventors, becomes a less democratic state than the governmental state that it is intended to replace. I commend the report as an extremely useful antidote to that threat and hope that it will be widely recognised as such, not least by the Government.

Lord Blackwell: My Lords, like other noble Lords I welcome this excellent report and pay tribute to its author and the members of the committee. I bring to the debate a range of experience and, I should add, the associated conflict from being a director of a number of regulated businesses and a board member of a regulator. I therefore stress that my views are my own and not those of other organisations.

I strongly support the underlying analysis in the report that the role of regulators, while crucially important and unavoidable, needs to be kept strictly within bounds and within a framework of accountability in order to resist the tendency for regulatory creep of the kind to which my noble friends Lord MacGregor and Lord Northesk paid attention.

It is a mistake to assume that market imperfection, which is the normal starting point for regulation, can always be solved by active regulators trying to shape markets in a different and supposedly better way. The truth is that regulators rarely have the information, the understanding or the mechanisms to replicate market solutions. Indeed, the danger is that they end up continually expanding the scope and complexity of their interventions as they seek further interventions in order to make up for the deficiencies in the actions that they have already taken.
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While I recognise that, as the report states, there are undoubtedly some areas of monopoly or public service that cannot have a simple or even a complex market solution, the presumption should be that the best outcome for regulators, wherever possible, is to promote effective and fair competition, and to leave competitive forces to deliver consumer benefits.

The danger of over-regulation is that it becomes the enemy of innovation and entrepreneurship. For businesses in heavily regulated industries, there is a risk that meeting regulatory requirements will start to override responding to markets and customers. The independent judgment within those businesses of what is appropriate becomes subsidiary to satisfying what the regulator has prescribed. From that, there is a risk that industries converge around the lowest common denominator of meeting what is laid down by the regulators.

Competition can then become blocked by the cosiness of living within a regulatory framework. With that lack of competitive forces comes a blunting of the forces of innovation and response to customer needs.

Paradoxically, while regulation is sometimes intended to increase the responsibilities of boards and companies, it can often, if taken too far, mean that boards and management take less responsibility for their actions rather than more. Instead of making, and having to make, independent judgments about what is an appropriate balance of risks and benefits, they can simply satisfy themselves that they are meeting the prescriptions that the regulators have handed down: "If it meets the regulators' requirements, it must be all right". That is not a healthy way for such decisions to be made.

Yet, despite those dangers, there are natural tendencies for regulators to respond to the pressure for action and intervention by becoming more active and continually expanding their role and scope. One such pressure on regulators is to do something about risk. If they are to be held accountable for the consequences of risk exposure, it is always in the interests of regulators to try to impose regulations and intervene in ways that apparently reduce the risk to consumers.

However, risk reductions inevitably carry associated costs that can be easily overlooked. We are in danger of creating a tendency where the desire to remove all risk from society can mean that the only safe consumers are those who consume no goods and no services because of the costs that are imposed on providing them. We have to be careful of regulators' natural tendency to respond to pressures to grow and increase their scope of interest—the regulatory creep to which I referred earlier.

Of course, the formal regulators listed in the report are not the only source of that regulatory burden. As we know, through Parliament, thousands of new regulations are added annually which touch every aspect of our social and business life. A more general issue, beyond those touched on in the report, is the stopping or rolling back of such regulatory legislation
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by means of sunset clauses or other mechanisms that have been proposed. But that goes beyond the scope of this debate.

Returning to regulatory bodies, I agree with the report's conclusion that it is essential to provide proper counterbalances to forces that cause regulators to try to increase their scope and influence, forcing them to justify their role and ensuring that they are accountable for the power that they wield.

I therefore support a number of the recommendations in the report. In particular, I support the tendency, which I acknowledge has been a government intent, to move towards having independent boards on regulators which have a cross-section of experience and perspectives and can provide a proper challenge to the executive, hold the executive to account to justify their decisions, and in some cases provide a dose of common sense away from the specialists who are involved in that area every day of their lives.

I also endorse the recommendation that regulators should hold public meetings around a published plan where they explain their actions and are exposed to questions and scrutiny from the world at large. I also agree that it is important that there should be an obligation on regulators to provide reasoned arguments for their decisions, with scope for appeal and review by independent legal processes where that can be satisfactorily provided.

A number of noble Lords have touched on the role of Parliament. While there is clearly an important role for parliamentary scrutiny, I have some concerns about over-extending that role, and for the same reasons as it was right in the first place to remove ministerial control and intervention over regulators. It is essential that regulators do what is right based on calm, objective and factual analysis of the evidence before them. We should not have regulation, or the response to regulatory legislation, determined by the weight of public or popular opinion.

I believe that Parliament should set the legal framework. However, if parliamentary committees and Parliament itself get too involved in reviewing the way in which regulators operate, there is a risk that pressure will be put on regulators to adopt more populist rather than independent and well reasoned views. After all, parliamentary committees are made up of politicians, often with their parliamentary party in the majority, and sometimes may serve with a view to pursuing political aims and publicity. We do not ask Parliament to sit in judgment on court decisions in either criminal or civil cases for exactly the same reason. Therefore, we need to be careful that pressure of that kind does not become unduly involved in regulatory decisions which should have a similar basis of reason and law.

However, parliamentary committees should be used to scrutinise the scope, resources and budgets of regulators in order to exert pressure against the tendency towards regulatory creep which I described earlier. I believe that there should be continuing pressure on all regulators to freeze or, indeed, reduce their resources over time, while any increase in resources for regulatory
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bodies should be specifically challenged and approved by Parliament. I also believe that it would be valuable to appoint a standing regulatory review body, perhaps reporting to the kind of specialist committee that has been described, whose job would be to assist the effectiveness of regulators and report to Parliament on whether they have struck the right balance of intervention versus withdrawal from the areas of the market in which they are tasked to intervene.

If we do not provide those pressures to contain regulators, the risk is that, as other noble Lords have described, they will become ever more powerful, ever more intrusive and ever more costly impositions on the wealth-creating activities of the economy.

I believe that we need to aim for a small state, not a large state. I do not have the confidence expressed by the noble Lord, Lord Holme, that the tide in government is going in that direction. I fear that in many ways we are still heading towards a large state. Public spending is one physical manifestation of that, but at least that is out in the open so that it can be seen and reviewed, and it has its consequences in explicit taxation. The danger is that regulatory creep and the expanding role of regulators will become the uncontrolled and unacceptable frontier by which an ever larger and more powerful state destroys the very foundations of a free and independent democracy. The recommendations of this committee are a useful start in addressing that crucial issue, although I believe that a lot more work still needs to be done.

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