Select Committee on Regulators First Report

UK ECONOMIC REGULATORS

CHAPTER 1: SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS

Regulators' statutory remits

1.1.  We conclude that:

• Independent regulators' statutory remits should be comprised of limited, clearly set out duties and that the statutes should give a clear steer to the regulators on how those duties should be prioritised.
• Government should be careful not to offload political policy issues onto unelected regulators. (para 3.13)

1.2.  Our evidence suggested that, on the whole, the legislation is thought to be working well and the regulators and regulated industries are satisfied with its provisions. Although it is clear that the current framework is not what would now be devised were it possible to start again it serves its purpose. We do not, therefore, recommend the drafting of a tidying up bill. However, we recommend that, as the opportunity arises, further standardisation of regulators' remits should be introduced with the aim of ensuring that they are statutorily required to follow best practice. (para 3.28)

1.3.  It seems that most of the regulators are interpreting their remits both appropriately and effectively. As an exception to this general picture there is a question mark over whether Ofwat has explored the full extent of its remit and whether it has implemented that remit effectively. (para 3.35)

Working methods and value for money

1.4.  We have not heard convincing criticism of how regulators approach their commitments to trim their operations and to work as cost effectively as possible. Although the operating costs of regulators have generally increased in recent years this trend can largely be attributed to significant extensions to their remits. We recommend that all regulators' operating costs be routinely kept under scrutiny by a sessional Select Committee established in line with our recommendation in paras 1.29-1.30 and by the National Audit Office (NAO). (para 4.17)

1.5.  Regulators should commit to evaluating the impact of their work and monitoring the extent to which they are providing value for money. We recommend that regulators should jointly develop methodologies to quantify the impact they have in line with current best practice represented by the Office of Fair Trading and Competition Commission's methodologies. Whilst we recognise that this is an inexact science we believe that the process of trying to quantify value for money imposes a good discipline and encourages healthy self-evaluation. (para 4.25)

1.6.  We would encourage regulators other than the Financial Services Authority (FSA) to consider risk-based regulation more explicitly, particularly as a means of using regulatory resources more efficiently. (para 4.36)

1.7.  We encourage the FSA to continue its work in the area of principles-based regulation. We would also encourage other regulators to investigate the scope for replacing detailed rules by a move to a principles-based approach in their own areas of activity, and consumer bodies to monitor consistency. In doing so they could together help to identify the criteria for determining where, in the spectrum described by Ed Balls MP in Chapter 4, such an approach could usefully be employed, taking account of the possible consequences for regulatory uncertainty. (para 4.45)

Regulators' use of Impact Assessments (IAs)

1.8.  We agree with the recommendations of the NAO's Review of Economic Regulators' Impact Assessments (IAs) (contained in Box 1, after para 4.57). We recognise that all the regulators included within that review, and the FSA, have developed good, iterative consultation procedures. However there is room for improvement across the board in regulators' IA processes. Regulators should strengthen their cost/benefit analyses, using quantitative estimates where they can be made robustly, and should improve the presentation of their IAs with clearer sign-posting and a commitment to conciseness and clarity. All regulatory IAs should include executive summaries to make them more accessible and all should be placed in the public domain. Regulators should ensure that IAs are not used as a tool to justify policy but as a policy-making tool. (para 4.71)

1.9.  Furthermore, we recommend that where they have not done so already, regulators should be required to publish their own policy documents setting out the approach they intend to take towards completing IAs. Policy teams should be supplied with written guidance and given formal training to help them to complete IAs. (para 4.72)

1.10.  We recommend that:

• Post-implementation evaluation should be conducted with greater frequency and should always be carried out where a step change in regulatory policy has been implemented.
• Such evaluation and monitoring should generally be carried out by the regulators themselves, but on occasion an independent body (preferably the sessional Select Committee recommended in paras 1.29-1.30, or the NAO) should monitor the quality of assessments and the objectivity shown by regulators in completing them.
• Post-implementation evaluation should always be made publicly available.
• The original IA makes clear that a post-implementation evaluation will be completed in cases where it is felt that a post-implementation evaluation would add value. Meaningful evaluation is not possible without clear targets and objectives. The regulator's original IA should set such targets in anticipation of a post-implementation evaluation. (para 4.76)

The relationship between regulators and the regulated

1.11.  We recognise the dissatisfaction of many Independent Financial Advisors (IFAs) with the work of the FSA. We welcome moves by the FSA to improve relations with the large number of smaller firms that it regulates. The FSA must continue to cultivate these relationships. (para 5.15)

1.12.  Regulated industries recognise the need for regulators to receive timely and accurate information on their activities. The regulators should ensure that systems for providing such information work effectively. To enable the success of such systems, regulators should ensure that data requests are well co-ordinated and sent out in consistent form and should always be mindful of the burden that their information requests place on their regulated industries. Regulators should strive to keep this burden to the necessary minimum and should always explain and justify why data are required. (para 5.23)

1.13.  Industry needs reassurance that the time it invests in consultation is time well-spent and is meaningful in the decision-making process. Whilst recognising that, by and large, consultation procedures are working well, we urge regulators to continue to look at ways in which they might be improved. In particular, we recommend that wherever possible regulators allow for at least a 12 week consultation period in their forward planning to give industry a reasonable amount of time to respond to their papers. (para 5.34)

The protection of the consumer interest, the citizen interest, and the public interest

1.14.  Regulators should normally be expected to be charged with responsibilities which reach beyond consumers to the interests of citizens or the general public. However, their duty to act outside the areas of consumer interest may, and if possible should, be circumscribed by legislation or by social and environmental guidelines issued by ministers in accordance with legislation. The interests of citizens and the general public are for Government and Parliament, and not for the regulators, to define and promote. (para 5.50)

1.15.  Different consumer representation models operate in the regulatory state and all the regulators were vociferous in justifying their particular model. However, we believe that stand alone consumer representation bodies are more transparent and more effective. (para 5.65)

1.16.  A new landscape for consumer representation has been created by the Consumers, Estate Agents and Redress Act. We are sceptical that the proposed new arrangements will lead to improvements in consumer representation but we recognise that it is too early to judge whether our scepticism is justified. The new arrangements will need careful monitoring and this is a role that might be taken up by a sessional Select Committee (as recommended in paras 1.29-1.30). (para 5.66)

1.17.  In the energy sector, the voluntary nature of the Energy Supply Ombudsman scheme is likely to change as a result of the Consumers, Estate Agents and Redress Act and it would therefore be premature to recommend changes in this area. (para 5.73)

1.18.  We recommend that the Government commission the NAO to conduct a review of the economy, efficiency and effectiveness of the Financial Ombudsman Service (FOS). The review should include consideration of the extent to which the FOS acts as a "pseudo-regulator" and the effectiveness of the working relationships between the FOS and other bodies such as the FSA and Office of Fair Trading (OFT). (para 5.74)

Co-operation between regulators

1.19.  We think that action is necessary to improve regulators' joint working. There needs to be more structured and formal cooperation between the regulators if it is to be meaningful. We welcome the regulators' willingness to develop relationships between themselves to increase their effectiveness. (para 6.15)

1.20.  We believe that if the Joint Regulators Group (JRG) is to prove a successful forum for the sharing of best practice, it needs to be formalised. The JRG should establish a secretariat, and suitable arrangements for leadership, to ensure greater consistency of focus and a clearer direction of effort. The JRG should publish its agendas and minutes of its meetings on a tailored JRG website online to enable interested parties to have easy access to them. Additionally, the JRG should produce an Annual Report outlining the discussions it has had over the course of the year and the details of any joint work it has undertaken. (para 6.16)

1.21.  Whilst relationships between the sectoral regulators and the competition authorities seem to be broadly sound, there is clearly a need for improved communication between the various bodies over the timing and content of their investigations of particular markets. (para 6.25)

1.22.  We recommend that, where possible, utility regulators should look to bring more cases to the competition authorities and that the regulators should work to ensure that the cases most likely to establish useful precedents are brought to the Competition Commission (CC). (para 6.26)

1.23.  We recommend the following:

• Concurrency arrangements (the arrangements under which decisions are made about whether competition law is applied in particular sectors by the relevant sectoral regulator or by the OFT) should be retained.
• In some cases complainants perceive that a sectoral regulator is so deeply involved in regulating the industry as it stands that it pays insufficient attention to the importance of establishing and maintaining effective competition. Complainants should therefore be given the option of requesting the OFT rather than the sectoral regulator to take the lead in investigating complaints.
• In cases where regulators do not have concurrent powers, even though they are carrying out very similar functions to regulators which do have such powers, there is a case for giving them concurrent powers. (para 6.41)

The relationship between regulators and Government

1.24.  We recognise that there is a perception that Postcomm's independence might be compromised by its method of funding. We believe that whilst in theory the funding of Postcomm by Royal Mail (and therefore effectively by the Department for Business, Enterprise and Regulatory Reform—formerly the DTI) may compromise its independence, in practice this is not the case. Moreover, as competition increases other operators in the industry will be liable to contribute to the funding of Postcomm. (para 6.48)

1.25.  Energy is now again a public policy issue and security of supply and sustainability are ever more important considerations. In this context, Government will need to be careful to ensure that Ofgem is not sent mixed messages. Government must be explicit in the political decisions it makes and the consequent guidance it issues to regulators. (para 6.50)

1.26.  Complexity in the relationship between the Department for Transport (DfT) and the Office of Rail Regulation (ORR) is not necessarily undesirable if the system is working. The Minister, Tom Harris MP, put in a sensible plea for "a long-standing period of settling down into the current regulatory framework". We believe this would be advisable and we recognise that the early signs of a productive relationship developing are promising. (para 6.56)

1.27.  Relationships between regulators and government seem generally to be functioning well although an effective and transparent mechanism needs to be put in place for resolving potential policy conflicts so that the regulators are able to carry out their economic function without interference. (para 6.59)

1.28.  Relations between government departments on regulatory issues are in their infancy. We recommend that an inter-ministerial forum be established to require ministers to compare views and share best practice. (para 6.60)

The accountability of regulators

1.29.  We agree with the conclusion of many of our witnesses that "there is a crucial need for greater parliamentary oversight … over regulation bodies". The question of who regulates the regulators has not been answered and will not go away. There is a need for a committee to pursue cross-sector best practice and to ensure that the recommendations of this Report are implemented. As we emphasise in paragraph 2.18 we have examined only a part of the regulatory state. We have considered only regulators, and not regulation, and we have looked at only the economic regulators. There is a need for a wider, and continuing, review. No existing committee of either House is in a position to undertake such a continuing and over-arching review as Departmental Select Committees in the House of Commons are restricted to considering the regulators within their own sector. (para 6.65)

1.30.  We therefore recommend that a Joint Committee of both Houses be set up in line with the recommendations in Chapter 10 of the Constitution Committee's Report on the Regulatory State (6th Report of Session 2003-04). If it proves impossible to set up such a committee we recommend that a sessional Select Committee be set up in the House of Lords. (para 6.66)

The promotion of competition by regulators

1.31.  In most sectors, regulators have played an important role in helping to promote competition, but there are significant variations between the sectors. Whilst not all regulators have a primary statutory duty to promote competition, the duties they do have are often framed or interpreted in such a way that they point in the same direction. In a few cases, regulators lack the necessary powers under sector-specific regulation to take measures that would stimulate competition and, as discussed in Chapter 6, do not have concurrent powers with the OFT under general competition legislation. This particularly applies to the Civil Aviation Authority (CAA) which lacks both concurrent competition powers and the power to designate or de-designate airports for price control purposes. The decision about whether or not to apply price control regulation is essentially economic rather than political and there is a strong case for transferring that power from the Secretary of State to the CAA. (para 7.14)

1.32.  We recommend that the Government considers the case for transferring the power to designate or de-designate airports for price control purposes from the Secretary of State to the CAA. This matter could be addressed as part of the strategic review of the CAA that is being conducted by the Department for Transport. However, we recognise that the implementation of the EU Directive on Airports (discussed in Chapter 7) might make this impracticable. (para 7.15)

Competition in the water sector

1.33.  Whilst each of the sectors within our inquiry has distinct characteristics, we find it hard to accept that there is something specific about the nature of water itself which means that the sector can never develop effective competition. Three reasons have been advanced as to why this has not happened—the physical nature of water as a commodity; the eligibility threshold; and the access pricing rule. Whether or not the physical characteristics argument is a valid one will never be put to the test until the barriers to competition presented by the threshold and the access pricing rule have been removed. As regards the latter, since virtually everyone agrees that the rule should be changed, it is very unfortunate that an impasse has been allowed to develop over what needs to be done to make the change. Ofwat maintains that legislation is required, whereas potential entrants claim, on the basis of the Competition Appeal Tribunal's (CAT's) general comments on the access regime, that a change in Ofwat's interpretation of the legislation is all that is necessary. In their view, Ofwat is ignoring the competition authorities and failing to change its interpretation in a way that would make entry more attractive. The Government has so far done little or nothing to clarify the situation. (para 7.22)

1.34.  It seems to us unwise of Ofwat to claim that it need take no account of the general comments made by the CAT on its access regime. Ofwat should examine critically whether it could not find a more constructive approach to implementing the CAT's findings. (para 7.23)

Regulators' attempts at de-regulation

1.35.  Regulators have taken important steps to de-regulate but there is still room for progress. Alternatives to classic rule-based regulation, such as risk-based and principles-based regulation, can assist sectoral regulators in moving towards an ex-post competition authority approach and there is a case for providing regulators across the board with a duty to promote self-regulation. (para 7.32)

1.36.  It might be possible for sectoral regulators to disappear but certainly not in the immediate future. If sectoral regulators are phased out, the core, irreducible functions that they perform would have to be performed by other organisations, such as the competition authorities. If possible, it would be worth instituting measures that lead in this direction without necessarily expecting the demise of sectoral regulators to come soon. (para 7.45)

1.37.  We recommend that the sessional Select Committee proposed in paras 1.29-1.30 takes on the duty to ensure that the sectoral regulators it oversees are promoting competition and withdrawing from sectoral regulation wherever appropriate. (para 7.46)

1.38.  We recommend that, subject to any restrictions imposed by its statutory remit, the Competition Commission conduct a periodic review on whether effective competition exists in the markets overseen by sectoral regulators, with the aim of scaling back sectoral regulation to the greatest extent possible. (para 7.47)

1.39.  We endorse the OFT's proposal (in response to the joint report by the DTI and HM Treasury on concurrency) that it reports to the Joint Regulators' Group on an annual basis, providing an overall view about whether competition law is being applied consistently and pro-actively across all the sectors. The OFT could also report on the compliance of regulators with the Better Regulation Executive's (BRE's) principles of good regulation. (para 7.48)

The impact of regulators on the competitiveness of UK firms

1.40.  Economic regulators promote competition which, in turn facilitates—but does not ensure—competitiveness. The positive effect that regulators have on competitiveness is achieved indirectly because promoting the competitiveness of UK firms does not normally form part of the regulators' remit. Given the importance of the role played by the regulated sectors in supporting UK industry, we think it is vital that economic regulators fully consider the impact of their decisions on UK firms' competitiveness. (para 7.68)

1.41.  We recommend that, as legislative opportunities arise, economic regulators be statutorily required to facilitate the competitiveness of UK firms by: i) promoting competition; and ii) removing regulatory burdens from firms wherever possible. (para 7.69)

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