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Baroness Noakes: My Lords, I must start by adding my congratulations to my noble friend Lord Norton of Louth and the whole of his committee. This is a
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thoughtful and thought-provoking report and, as many noble Lords have said, it was extremely well written and a joy to read. I found some of the charts in the appendices at the back of the report particularly illuminating and I am sure that they will become set reading for politics students the length and breadth of the land, not merely for those on the course taught by my noble friend.

If I have a criticism of the report, it is that it does not stand firmly enough against the regulatory state. In paragraph 4, it questions the level of regulation, but the rest of the report largely accepts the fact of the regulatory state. Paragraph 157 includes the recommendation that the move towards self-regulation should be encouraged and co-regulation should, where appropriate, be used as a preliminary to it. But I suggest that the report would have been more powerful if it had mounted a more robust challenge to the regulatory state itself. Modifying the regulatory state by self-regulation or a bit of co-regulation will never be enough to reverse the enormous expansion of regulation that we have experienced. I am not suggesting that there should be no regulation: some regulation will always be necessary. But I believe that we should be aiming for the bare minimum and should not accept it as a way of life.

I believe that the regulatory state, as we now know it, is largely an invention of this Government since 1997. It seems to be the default policy of the Government. My noble friend Lord Northesk pointed out that government and regulators have come to reflect each other. We now have fat government being mirrored by fat regulators. The Government have created several large and powerful regulators since 1997. We have the Financial Services Authority, Ofgem, Ofcom, the Food Standards Agency and, more recently, the Pensions Regulator and the Office of Fair Access. In addition, there are several statutory schemes of regulation such as those for private detectives and others under the Private Security Industry Act 2001. So we can see regulation as being part of the philosophy of new Labour. We can see that because the Government are also applying it in the public sector: we only have to look at the NHS, which is littered with regulators and inspectors. For example, the Heath and Social Care (Community Health and Standards) Act 2003 created three further big regulators: the Independent Regulator for Foundation Trusts, the Commission for Healthcare Audit and Inspection and the Commission for Social Care Inspection. It is perhaps illuminating to note that two of those bodies have chosen to change the names given to them by statute and rename themselves with names that sound somewhat less regulatory.

The Audit Commission, which started life under a Conservative government as a mere local authority auditor, now states in its strategic plan:

I have been unable to locate the statutory basis for that strategic regulation concept, which has a new Labour ring to it. It seems to have been invented by the current chairman of the Audit Commission, who was appointed by this Government.
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My noble friend Lord MacGregor reminded us that regulation is not a new phenomenon. Indeed, it was part of the way in which we conducted ourselves when we were in government. But, at that stage, regulation was largely a part of our programme of privatisation of those unwieldy and inefficient parts of the public sector that had been shielded from competition. Those regulatory schemes were designed because competition was absent and our aim was for those regulators to do themselves out of a job wherever possible. They should have been trying to achieve competition, not to be a long-term alternative to competition. But regulation under this Government has become a new part of the regular involvement of the state in business life. In some ways, it has become an alternative to nationalisation.

If we look at energy regulation, for example, that started alongside energy privatisation where no competition existed. It is very clear to anybody who pays energy bills now that there is considerable competition. But Offer and Ofgas, which looked after the electricity and gas industries respectively, did not manage to do themselves out of a job and the Government, under the Utilities Act 2000, replaced them with Ofgem. It is interesting to note that Ofgem has more staff than the Department of Energy had in the pre-privatisation days. That says something about how regulation is potentially more intrusive in the lives of citizens and of those running businesses than simple government involvement.

The creation of Ofgem has some other interesting features. Ofgem is now much more a creature of Government than the previous regulators were. The DTI can, and does, give directions on social and environmental matters which can impose the costs of meeting social objectives on the regulated industry and therefore on consumers, often in a very non-transparent way.

The promotion of competition, which was at the heart of creation of these regulators, remains one of Ofgem's duties, but in practice the Enterprise Act 2002 has transferred much of the responsibility to the Competition Commission and the Office of Fair Trading; that is, to the generic authorities responsible for those areas. Now, Ofgem to a very large extent operates as an arm of the energy policy group of the DTI, which I am sure is convenient for the DTI because it means that it is paid for by licence fees collected by Ofgem rather than by taxpayers' money.

In the Financial Services Authority we find another embodiment of the regulatory state. It is a very extensive body, as my noble friend Lord Elton pointed out. The FSA took over the functions of many self-regulatory bodies, as well as some functions that were already carried out by the state. But its statutory objectives do not include the promotion of competition which, in our view, is a major weakness. That lack of being rooted in competition leads to a tendency to over-regulate: my noble friend Lord Blackwell referred to that phenomenon.

In the FSA we can see where regulatory burdens on business and the structure of regulation overlap. The FSA's rules affect thousands of small businesses—
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independent financial advisers—who struggle under the weight of its rule book. The rule book is available online but is said to reach 9 feet if it is printed out. Many people believe that the proportionality of the FSA's regulatory regime is, at the very least, questionable. It is a very large body that has intruded itself into the activities of many businesses in a massive way.

A specific issue addressed in the report to which I would like to turn is the appointment of regulators or, more usually nowadays, the chairmen of their boards. The report says that Ministers should continue to appoint regulators. I agree with that in principle, because it should be part of ministerial responsibility, but I am concerned to ensure that appointments are made entirely on merit. In her latest report, the Commissioner for Public Appointments felt it necessary to highlight four departments which involved their Ministers in the short or long-listing stages when appointments were being considered. That, at the very least, puts a very large question mark over the independence of the resulting appointees. I do not think that the Nolan rules envisaged that.

If that is not satisfactorily dealt with in the opinion of the Commissioner for Public Appointments, I suggest that an independent appointments commission may be necessary in time. It was found to be necessary in the National Health Service, where the appointments made were regarded as being not demonstrably independent. That may be a direction of travel that is necessary for other regulators.

It may sound as if I am disagreeing with the Constitution Committee's report, but, in practice, we agree with a very large part of it. We agree, for example, that the NAO's access should extend to the FSA, that there should be legal duties to publish accounts and that those should show real reductions in the cost of regulation. We think there should be a statutory duty to have regard to the principles of good regulatory practice and that there should be better ex-post analysis of regulatory impact assessments. These matters have all been referred to by other noble Lords, particularly the noble Lord, Lord Roper, and my noble friend Lord MacGregor.

We agree that if we have to have this extensive and intrusive regulatory state, it should be accompanied by proper accountability mechanisms. I think that all noble Lords who have spoken agree on this. It is above my pay grade to say whether having a Joint Committee of both Houses is the right answer. The noble Lords, Lord Roper and Lord Dahrendorf, had particularly interesting comments on the mechanism for achieving the right degree of scrutiny.

We would add to the Constitution Committee's report a real regret that regulation has become one of the defining principles of the Government's policies. We also regret that regulatory bodies have become agents of social policy, while the role of competition has been downgraded.

As my noble friend Lord Blackwell said, we believe in a smaller state. Regulation is a back-door method of increasing the length of the arm of the state, which is why we believe it should be resisted in principle.
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3.2 p.m.

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