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5.13 pm

Lord MacGregor of Pulham Market: My Lords, it is a great pleasure to follow the noble Lord, Lord McIntosh. I begin by congratulating him on his extremely good and efficient chairmanship of our committee in what was a daunting task. He did it superbly. I also thank our clerk and our special advisers for all their assistance.

I entirely agree with the noble Lord that the regulatory state is here to stay and that there is a constant need for parliamentary supervision. I will come to something of an opposite conclusion on Northern Rock, but I agree with his general concluding point. I said that the chairman had a difficult task because we were confronted with a difficult problem. We had only one session and it was a huge task to look at overall regulation, which no one else had undertaken in the same way. It was right that we concentrated on the economic regulators.

We looked at regulation in the round and had a massive response in the evidence that we took and assimilated, although inevitably we had to skim the surface in some areas. We tried to draw out the broad principles in the key areas, and I hope and believe that we did so successfully. I think that the noble Lord, Lord McIntosh, was unfair to himself in the criticisms that he made, and I shall come to that later.

Certainly, I believe that our report, including the evidence, will be a big quarry for policy makers, regulators and academics for some time to come. The Government’s response—including, in part, in the Regulatory Enforcement and Sanctions Bill—showed that in many areas they were in agreement, and I was pleased to see that they supported many of our recommendations.

I say in parentheses—this point was referred to by the noble Lord, Lord McIntosh—that one recommendation that the Government rejected was the one in paragraph 6.60, suggesting that,

We came to that conclusion because we had three Ministers in front of us who were all responsible for regulation in their departments and they confessed that the first time they had met to discuss regulation and regulatory principles was when they were aware that they had to give evidence to our committee. The Government outlined in some detail the ways in which they believed that they required Ministers to compare views and share best practice, but I wonder whether that always works out in the way that was indicated. Some of us have past experience, as Ministers, of huge workloads, and sometimes we can focus attention on issues only when they arise, as was the case when the Ministers had to appear in front of the Select Committee. I suspect that it is more a

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thought in principle than in practice that Ministers regularly share best practice. I ask the Minister to comment on that but I still think that our recommendation stands.

In the time available, I can pick out only a few of our recommendations. I start with the one that a Select Committee should continue to be established. The Government rightly said that this was for Parliament to decide, but I think that that recommendation stands because no other departmental or Select Committee undertook the work that we did, and it was worth while. Apart from the general overviews, which will occur from time to time because, however much we seek in principle to see the regulatory estate diminished, in practice it will always be substantial and, in a complex world, possibly grow, I have identified three areas where I believe ongoing scrutiny would be valuable.

The first is in operating costs and value for money—I refer noble Lords to our recommendation in paragraph 4.17. We had a National Audit Office study, which was extremely useful, and, in particular, we took evidence from the OFT and the Competition Commission about their methodology, which struck us as being at the forefront of the best ways of doing value-for-money work. Of course, we were extremely interested in keeping operating costs down.

In a letter to all members of the committee, Ofgem drew attention to the fact that its operating costs have recently come down in real terms because it had taken the same approach to its operating costs as it had to its regulated industry’s pricing. I acknowledge that sometimes the costs will have to be higher. The noble Lord, Lord McIntosh, gave an example relating to the FSA. In the light of Northern Rock, it is certainly the case that the FSA will have to employ more highly qualified, and therefore much more highly paid, people in that area. I agree with the point made by the noble Lord, Lord Borrie, the other day in Question Time that seconding high-level staff is one way of doing it, but that could of course increase the costs. Nevertheless, it is important that value for money and operating costs are constantly scrutinised and I believe that a Select Committee would do that across the board.

The second area is impact assessments. I refer both to pre-policy work, with regard to which we made recommendations about the presentation of impact assessments and clear targets to enable post-impact work to be done more effectively, and to post-impact assessments. Here, we made perhaps the most detailed recommendations of the whole report. I recognise how much work the Government and regulators are doing in this context. However, there is a danger that this will become an area for regulatory wonks, if I may put it that way, and that insufficient parliamentary attention will be given to it, except where there is a critical contemporary issue, such as Northern Rock. Because of the pressure of work elsewhere, Members of Parliament and Members in this place do not always give sufficient attention to this matter, and therefore the importance of regulatory impact assessments gets downgraded. I believe that a Select Committee charged with reviewing progress on this front would help considerably to overcome that danger.



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The third area relates to our recommendations in paragraphs 7.32, 7.45 and 7.46 on self-regulation and withdrawing from sectoral regulation wherever appropriate. I agree that the scope for complete or even substantial removal may be limited, but I believe that this nevertheless continues to be an important area for scrutiny from outside—from Parliament in particular. I cannot see anyone else doing it, other than a Select Committee created specifically for that purpose. That is a strong reason for a committee of this sort to continue.

In paragraph 5.50 we made a recommendation about the public interest and the citizen interest. We received a lot of evidence pressuring us to involve the regulators in those areas, over and above their main rule of promoting competition, and in the social and environmental policy areas, which we were told should be devolved to the economic regulators. However, I believe that those areas are for Parliament and the Government to decide and should not be devolved to regulators. Therefore, I stress the importance of our recommendation that,

As I say, we had quite a lot of evidence pressuring us to go into that field.

Finally—perhaps this is my main message this afternoon—there is the importance that we attached to principle-based and risk-based regulation. Those are not quite the same things. Principle-based regulation has to be balanced against the danger of sometimes reducing the clarity and certainty of rules for the regulated. That point was made to us by a number of witnesses. Nevertheless, I feel that principle-based regulation has a lot of merit. In this section of our report, we commended the FSA for its approach to principle-based and risk-based regulation. We quoted the National Audit Office, which also commended the FSA in this area. The then chief executive of the FSA, John Tiner—I warn the noble Lord, Lord McIntosh, that I am going to reach a different conclusion from his—told us in oral evidence that,

Of course, that hearing and the drawing-up of our report came before the Northern Rock debacle, which I do not blame the noble Lord, Lord McIntosh, for not anticipating. There will always be more pressure for greater regulation after such a crisis. In such circumstances, the media, many Members of this House—and certainly Members of the other place—and the public will often press for greater regulation. That includes those who, in other circumstances, seek less regulation, as many did in evidence to our committee. The noble Lord is quite right that much of the evidence that we took about the FSA was in the direction of less detailed regulation and control,

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rather than the other way round. However, when a Northern Rock crisis emerges, some of those people change their tune and call for more regulation.

It is not appropriate in this debate to discuss some of the other aspects of Northern Rock, such as whether the tripartite system of institutions worked—that is for another day—or Basel 2 and that whole area, in which there needs to be greater emphasis on liquidity, not just solvency and the capital base of the financial institutions. I think that that was the point that Mervyn King was referring to in the quotation used by the noble Lord. However, the position of the FSA is relevant to this debate. I very much agree with Richard Lambert, director-general of the CBI, who, in a recent and, I thought, brilliant speech on what has happened since the credit crunch, said, “Don’t rush things”. In particular, he said:

He of course referred to the Sarbanes-Oxley situation post-Enron, which greatly damaged New York and greatly enhanced the position of London in the world financial markets.

There are three reasons why Richard Lambert was right to say that. First, let us bear in mind that it was not only the FSA that did not see the rocks ahead, if I can put it that way; investment analysts and investment managers were supporting and advocating investment in Northern Rock when it was at £12 a share. They were supported in particular in their analysis by the credit rating agencies. I want to quote what Richard Lambert said in his speech; this area merits every bit as much attention as do the regulators. He said:

There is a salutary lesson there. He continued:

I particularly agree with that, especially the comment about the need for a more transparent rating process and stronger rating methodologies. The credit agencies, on which so many financial institutions depend for banking decisions and investment, are at least equally at fault—much more so in my view.

Secondly, the primary responsibility lies with the boards and senior executives. It is striking that many shareholders have suffered—it is perhaps the shareholders who do—the impact of what happened recently. I believe that the wealth of shareholders in the five leading UK banks has shrunk by £60 billion in the past year, and we have seen what happened to Northern Rock shareholders. I think—I believe that I share the view of many—that it is pretty intolerable that the chief executive of Northern Rock should have such compensation as he leaves, having guided Northern Rock through this period, when so many others are suffering. That is not a matter for government, but it is certainly a matter for corporate governance by the financial sector and institutions generally.



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My third point is perhaps my most significant in relation to the FSA. If you read the FSA’s own highly critical report of itself—I spent a happy flight back from Spain over the weekend doing so—it is clear that the problem was caused not by a risk-based principle but because the process was not in this case properly applied. It was starkly and clearly not properly applied in a number of ways; the noble Lord, Lord McIntosh, referred to some of them. Northern Rock, for the FSA, was a high-impact firm. That means that it should have had very strong attention from within the FSA. It was one of the most potentially risky firms and required the greatest supervision but it simply did not get it. There were many examples—high turnover of top-line staff and a lack of supervision of middling staff, some of whom have left. One of the tables in the FSA report demonstrates that, of all the high-impact firms, Northern Rock got the least attention—quite disgracefully so in some instances. There was very poor supervision, which was why it was described as being at the extreme end of the spectrum of high-impact firms. I believe that our support of risk-based and principles-based regulation still stands. If anything, the Northern Rock experience does not undermine it but underlines it.

5.29 pm

Lord Borrie: My Lords, as the first speaker in this debate this afternoon who is not a member of the committee, I congratulate the committee and its chairman on the excellence and thoroughness of the report and on all the work that went into it. The Select Committee has given the economic regulators quite a favourable end-of-term report. As the chairman said this afternoon, it would have been somewhat different—somewhat more qualified—as to the Financial Services Authority if it had been published somewhat later. An editorial in the Financial Times on 27 March following the FSA’s self-flagellatory criticisms of the previous day said that we will never know whether an alert Financial Services Authority could have prevented the Northern Rock fiasco but the questions raised are about regulatory practice more than regulatory principle—what the noble Lord, Lord MacGregor, referred to as regulatory process.

Your Lordships may believe that this is a criticism of the Select Committee’s report but its favourable comments about regulators cover both principle and practice. Most regulators were said by the report to be interpreting their remit both appropriately and effectively; they gave value for money and have developed some sound consultation procedures. There were some elements of criticism about lack of co-operation between Ministers and one regulator and another, but, in the light of later events—I speak with the benefit of hindsight—the substance of the Select Committee report seems a bit sanguine if this substantial document is to go down as a major work for academics and others to rely on as to the state of regulators, their principles and practice in the year 2008.

Chapter 3 is critical of what appear to be major variations in the statutory remits of the various regulators. It says that the Office of Fair Trading does not have a statutory duty to facilitate the development

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of self-regulation. It is true: we cannot find such a word in the Fair Trading Act 1973 or the other provisions, but I know from experience that the Act, which set up the Office of Fair Trading, requires it to pursue and foster self-regulation among trade associations. Some of the earlier ones are to do with strong consumer interests such as travel and the second-hand car trade.

Although only Ofcom and Ofgem have a specific statutory duty to implement the principles of good regulatory practice, so what? Those principles were only stated and articulated in 1997 and the 10 regulators to which the Government referred as the ones examined in detail by the Select Committee now feel obliged to follow those principles. It may be that in due course Parliament will get around to tidying up and filling in statutory gaps but I am not sure that it matters a hoot that practice follows the requirements and it does not appear in specific words in a statute.

As the noble Lord, Lord MacGregor, indicated, it seems a little ironic in the light of later events that the Select Committee holds up the Financial Services Authority as a model in terms of risk-based regulation and principles-based regulation. It seems to me that recent events in no way reduce the value of those concepts for regulators generally, yet I agree with what Ed Balls said to the Select Committee: clarity and certainty are to some extent in tension, one with another, and particularly in terms of tensions with a principle-based approach. The committee is right to spell out that not only consumers but also the smaller regulated businesses in particular may lose out from the lack of certainty and predictability that follows from the absence of prescriptive rules. People do not like prescriptive rules when asked in the abstract whether they like them, but there is a risk of firms exploiting less intrusive and detailed regulation. As the consumer organisation Which? argues, the FSA needs to review the incentives it has in place for compliance and, in particular, to reconsider its traditional opposition to naming and shaming firms that have gone against it. I think that the FSA could learn something from the competition authorities about being prepared to reward whistleblowers who reveal wrongdoing within the firm of which they have knowledge.

All the regulators have a clear statutory remit to further and protect the interests of consumers. Regulated companies invariably have internal complaints procedures. There are also various ombudsmen and other redress procedures available. I understand that the financial ombudsman scheme came in for a lot of criticism from business before the Select Committee, but the Council on Tribunals was complimentary, so different views were received by the Select Committee. However, the Select Committee was evidently not convinced because it has called for a review by the National Audit Office. As far as I can see from the Government’s response, they have not accepted that, mainly for the legal reason that there is an absence of power to do so in the Financial Services and Markets Act. Fortunately an independent review is being conducted by the noble Lord, Lord Hunt of Wirral, to which the Select Committee and the Government referred, and I hope that a lot of attention is paid to whatever it says.



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There are various models for sector-specific consumer panels, and the Select Committee follows the consumer organisation Which?in its preference for stand-alone consumer panels as being more transparent and effective. At present, the Financial Services Consumer Panel is integrated with the FSA, and is not a stand-alone body, and Which?,which I am happy to follow in this, argued convincingly that even if the panel became a stand-alone body, there is still a need for adequate consumer or, at any rate, non-business representation on the FSA. I do not think that even a separate consumer panel should be any sort of argument for excluding anybody with experience of the consumer world from being a member of the authority itself. They have different functions. A consumer panel is a body of people to which requests can be made for information on what the regulator is going to do, but it is not a decision-making body, and it is desirable for consumers and other non-business people to be part of the decision-making body as well. They are not alternatives.

In recruiting its staff, the FSA must dip into the same resource pool as the regulated companies, but it has less money to play around with. The noble Lord, Lord MacGregor, kindly quoted a remark I made at Question Time the other day about how the FSA could perhaps learn from the model of the self-regulatory City Takeover Panel, which for the past 40 years has recruited by secondment from the firms it regulates.

I have perhaps said more about the Financial Services Authority than is necessary or desirable, but my noble friend the chairman of the committee—naturally, given recent events—did so as well. I hope that there is some agreement around the House today that we need a stronger, more robust Financial Services Authority, with wide-ranging board membership and a dedicated and adequately remunerated staff.

5.40 pm

Lord Norton of Louth: My Lords, I declare an interest as a member of the Select Committee on Regulators, and I pay tribute to the excellent chairmanship of the noble Lord, Lord McIntosh of Haringey. He provided a cogent overview of our recommendations and, since our report was published, there have been important developments, as he clearly delineated. Those developments reinforce the case that I shall develop.

Rather than repeat what the noble Lord, Lord McIntosh, said, I shall concentrate on one aspect of the report, reinforcing what my noble friend Lord MacGregor said. I shall focus not on specific regulators but rather on regulators as a species, and address one question posed in the report: who regulates the regulators? Not who regulates a particular regulator, but who regulates the regulators?

I begin with a statement of fact and a number of propositions, which I think are generally acceptable. The statement of fact is that, over recent decades, there has been a substantial increase in the number of regulatory bodies established by statue, and in the volume of regulation. As the Constitution Committee noted in its 2004 report on the regulatory state, the

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regulatory state is now extensive, with significant costs attached to complying with regulation.

I have four propositions. First, the need for some regulation is apparent, especially to encourage competition and to protect consumers. Secondly, where established by statute, the powers and responsibilities of the regulator need to be clearly prescribed. Thirdly, where there is scope for competition, the extent of regulation should diminish as competition is achieved and, in the fullness of time, the regulatory body should cease to exist. Fourthly, the activities of the regulators should be characterised by transparency, efficiency and accountability. It is the last of those that I shall address.

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