Who watches the watchdogs? Improving the performance, independence and accountability of UK regulators
Chapter 1: Background
UK regulators in context
1.According to the National Audit Office (NAO), there are around 90 regulators in the UK.1 The UK’s regulators cover a wide range of policy areas, including but not limited to financial services, utilities, communications, transport, education, healthcare and the environment.2 Their powers, responsibilities and funding vary.
2.Regulators can be divided into statutory regulators, which are given powers by Parliament to regulate in certain ways, and non-statutory regulators, such as professional accreditation bodies. In turn, statutory regulators can be divided into those which are public bodies (for example, Ofgem3) and those that are non-governmental bodies (such as the General Medical Council, which is a registered charity).4
3.Regulators set up as public bodies can take a number of forms, including non-ministerial departments, non-departmental public bodies, executive agencies, and statutory corporations.5 Furthermore, certain public bodies that are not generally considered regulators, such as local authorities and enforcement bodies, may nonetheless deliver regulatory functions.
4.Regulators have been established in the UK for various reasons, often “in response to specific circumstances within a particular sector” or “following perceived failures in previous regulatory regimes”.6 In the case of the economic regulators7, Stuart Hudson, Partner at Brunswick and a former official at Ofgem and the Competition and Markets Authority (CMA), told us that these were established in the 1980s and 1990s “in order to prevent a newly privatised utility from exploiting market power and charging excessive prices”.8 Similarly, Citizens Advice explained that in sectors such as energy, water and broadband, consumers “have no way of rewarding or punishing” companies who face little competitive pressure to drive down their prices, which is why regulators in these sectors set price controls.9
5.Witnesses emphasised the important role regulators play in the UK’s economy and society. The Institute of Regulation stressed that “efficient and effective regulation enables businesses to thrive and innovate and public services to be well run and improve”.10 Virginia Acha, Associate Vice-President for Global Regulatory Policy at the pharmaceutical company MSD, commented that in her sector, “I cannot think of a single place in the world where you have a thriving life sciences cluster and you do not have a world-leading regulator, because there is a symbiosis.”11 The Department for Business and Trade (DBT) said that regulators play “a vital role in protecting consumers, the environment and setting the right frameworks for businesses to thrive”.12
6.Nominally, regulators operate independently of government. Stuart Hudson argued that this delegation of decisions beyond direct political control was “unusual” in a democracy, but added that the creation of independent regulators had normally happened for two reasons: to ensure long-term political and economic stability, and to guard against political lobbying of ministers by industry.13 However, concerns were raised as to how independent the UK’s regulators are in practice. We discuss this further in Chapter 3.
7.Regulators are held to account for the power they wield in various ways: by their sponsoring government department, by Parliament (including its committees), by other bodies such as the NAO, by those they regulate, and by consumers. We discuss these forms of accountability, how they are functioning, and how they could be improved in Chapter 5.
8.Some of the UK’s regulators have recently inherited additional responsibilities from EU institutions and regulatory agencies following Brexit, with implications for both their resources and how they are held accountable for this increased power.14 We do not examine this extensively in this report, but we acknowledge that this forms an important part of the context within which the UK’s regulators operate.
Recent government policy
9.The Government has recently launched a number of initiatives aimed at reviewing the UK’s regulators. In April 2022, the Cabinet Office announced the launch of a Public Bodies Review Programme, through which departments would be asked to review their public bodies (including but not limited to regulators).15 This programme is ongoing.
10.In May 2023, DBT published a policy paper, titled Smarter regulation to grow the economy. The paper outlines the Government’s agenda to ensure regulators help drive economic growth.16
11.In October 2023, DBT announced an in-depth review into all regulators with a 12-week public call for evidence, which it said would seek to ensure regulators are “working efficiently and delivering on reforms needed to help grow the economy and protect consumers”. The call for evidence closed on 17 January 2024.17 We understand that the Government plans to publish its response to the consultation in the coming months.
12.In November 2023, alongside the Autumn Statement, DBT published two consultations as part of its Smarter Regulation programme. The first consultation sought views on revised statutory guidance for the Growth Duty,18 and the Government’s intention to extend this duty to Ofgem, Ofwat and Ofcom. The consultation closed on 17 January 2024.19 The second consultation was on strengthening the economic regulation of the energy, water and telecoms sectors.20 This consultation closed on 28 January 2024.
This inquiry
13.Since its inception in 2021, this Committee has examined seven individual regulators. This has included three major inquiries into: Ofgem and Net Zero;21 water and sewage regulation (encompassing Ofwat and the Environment Agency);22 and the Office for Students (OfS).23 The Committee has also conducted shorter pieces of work into commercial insurance and reinsurance regulation (encompassing the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA)),24 and the use of liability-driven investment by pension funds (which covered The Pensions Regulator (TPR), the FCA and the PRA).25
14.In previous inquiries, certain themes and concerns arose repeatedly, including the clarity of regulators’ remits, the quality of government guidance to regulators, the independence of regulators from the Government, and how they are held to account. We therefore launched a short, cross-cutting inquiry in October 2023 to examine these matters further.
15.We held a total of nine evidence sessions between October and December 2023, with a total of 15 witnesses, including current and former regulators, business and consumer representatives, parliamentarians of both Houses, and other relevant bodies such as the NAO and the National Infrastructure Commission (NIC). We received 91 public written evidence submissions. In total, we received evidence either orally or in writing from 15 of the UK’s regulators.26
Departmental input
16.The most relevant government department for this inquiry was the Department for Business and Trade. Unfortunately, however, we were unable to secure an oral evidence session with a DBT Minister.
17.We first approached Rt Hon Kemi Badenoch MP, the Secretary of State for Business and Trade, in July 2023. The Chair wrote to the Secretary of State to invite her to give evidence to the Committee.27
18.Over the subsequent months, and despite further prompting, the Department did not commit to a date for the Secretary of State’s appearance. In November, the Committee was informed that the Secretary of State was declining to appear herself, and that the appearance before the Committee would be delegated to another departmental minister. The Chair wrote to the Secretary of State to ask her to reconsider this,28 but her position was unchanged.
19.Following this, attempts were made to secure an evidence session with another DBT minister. However, the Committee and the Department were unable to agree on a suitable date or basis for the session, in part because of the Department’s position that then ongoing consultations (those listed in paragraphs 11–12) would significantly constrain what a minister could say in public. In that context, the Committee decided to proceed with the publication of its report without holding an oral evidence session with a minister.
20.Instead of a ministerial appearance, we received as written evidence a short letter from Lord Johnson of Lainston, Minister for Investment at the Department. The letter did not address the questions in the Committee’s call for evidence in any detail, and for this reason, it does not feature extensively in this report. Instead, the letter set out the Department’s then ongoing consultations, and its position that it “cannot prejudge the findings of the [Department’s] call for evidence and each of the consultations”, as this would “risk impacting ongoing engagement with businesses and stakeholders”. The Minister said he was “keen that my department discusses the findings of these works with the Committee in due course”.29
21.We were pleased, however, to receive a separate, more detailed submission from the Department of Education, with respect to the regulators that it sponsors.30
22.We were disappointed by the Department for Business and Trade’s limited engagement with our inquiry. The Department did not provide the Committee with oral ministerial representation, despite ample notice. Its subsequent written submission was brief and, importantly, did not answer the questions in the Committee’s call for evidence in any detail. We are unconvinced by the Department’s explanation that ongoing consultations prevented it from engaging with our inquiry further.
23.Given the widespread concerns we heard about the accountability of regulators, it is all the more frustrating that the Department acted in a manner which hampered the Committee’s own attempts to hold the Government to account for its important role in this area. We intend to follow up with the Department following their response to this report.
This report
24.Chapter 2 of this report covers the duties and objectives of UK regulators, and whether they are clear and consistent. Chapter 3 discusses the extent to which the UK’s regulators are independent, while Chapter 4 discusses regulators’ resources and skills. Chapter 5 examines how regulators are held to account, including by Parliament. Chapter 6 discusses regulators’ transparency and how they engage with businesses and consumers.
1 This figure does not include local authorities, which sometimes exercise regulatory functions. See National Audit Office, Regulation overview 2019 (March 2020): https://www.nao.org.uk/wp-content/uploads/2020/03/Overview-Regulation-2019.pdf [accessed 19 December 2023]
2 A number of regulators operate in devolved policy areas. For example, the Food Standards Agency’s remit covers England, Wales and Northern Ireland, with a separate body (Food Standards Scotland) responsible for the same functions in Scotland. For the purposes of this report, however, we have focused on those regulators whose jurisdiction makes them accountable to the UK Government and the UK Parliament, rather than those which (because of their devolved remit) are accountable to the devolved administrations and legislatures.
3 Ofgem, ‘Our role and responsibilities’: https://www.ofgem.gov.uk/about-us/our-role-and-responsibilities [accessed 19 December 2023]
4 General Medical Council, ‘About us’: https://www.gmc-uk.org/about [accessed 19 December 2023]
5 To give examples, Ofwat is a non-ministerial department; the Environment Agency is a non-departmental public body; the Medicines and Healthcare products Regulatory Agency is an executive agency; and Ofcom is a statutory corporation. See HM Government, ‘Departments, agencies and public bodies’: https://www.gov.uk/government/organisations [accessed 19 December 2023]
7 According to the National Audit Office, the economic regulators are those which “promote competitive forces in industries which would otherwise be natural monopolies due to high network or infrastructure costs”. Major economic regulators include Ofgem, Ofwat, Ofcom, the Office for Road and Rail and the Civil Aviation Authority. National Audit Office, A short guide to Regulation, (September 2017): https://www.nao.org.uk/wp-content/uploads/2017/09/A-Short-Guide-to-Regulation.pdf [accessed 19 December 2023]
10 Written evidence from the Institute of Regulation (UKR0028); see also written evidence from Unchecked UK (UKR0011)
14 See paragraphs 124 and 161
15 Cabinet Office, Guidance on the undertaking of Reviews of Public Bodies (25 September 2023): https://www.gov.uk/government/publications/public-bodies-review-programme/guidance-on-the-undertaking-of-reviews-of-public-bodies [accessed 19 December 2023]
16 Department for Business and Trade, Smarter Regulation to grow the economy (10 May 2023): https://www.gov.uk/government/publications/smarter-regulation-to-grow-the-economy/smarter-regulation-to-grow-the-economy [accessed 19 December 2023]
17 The call for evidence included questions on: the complexity of the regulatory system; regulators’ skills; whether their approaches are proportionate; the governance of regulators; whether they are delivering on their objectives; and performance monitoring. Department for Business and Trade, Smarter Regulation and the regulatory landscape (23 October 2023): https://www.gov.uk/government/calls-for-evidence/smarter-regulation-and-the-regulatory-landscape [accessed 20 December 2023]
18 Regulators subject to the Growth Duty must “have regard to the desirability of promoting economic growth”. Deregulation Act 2015, Section 108
19 Department for Business and Trade, Smarter Regulation: regulating for growth (22 November 2023): https://www.gov.uk/government/consultations/smarter-regulation-regulating-for-growth [accessed 19 December 2023]
20 Department for Business and Trade, Smarter regulation: strengthening the economic regulation of the energy, water and telecoms sectors (22 November 2023): https://www.gov.uk/government/consultations/smarter-regulation-strengthening-the-economic-regulation-of-the-energy-water-and-telecoms-sectors [accessed 19 December 2023]
21 Industry and Regulators Committee, ‘Ofgem and Net Zero Inquiry’ (August 2021): https://committees.parliament.uk/work/1320/ofgem-and-net-zero/ [accesssed 5 December 2024]
22 Industry and Regulators Committee, ‘The Work of Ofwat Inquiry’ (June 2022): https://committees.parliament.uk/work/6719/the-work-of-ofwat/ [accesssed 5 December 2024]
23 Industry and Regulators Committee, ‘Office for Students Inquiry’ (April 2023): https://committees.parliament.uk/work/7347/the-work-of-the-office-for-students/ [accesssed 5 December 2024]
24 Industry and Regulators Committee, ‘Commercial insurance and reinsurance regulation inquiry’ (February 2022): https://committees.parliament.uk/work/6438/commercial-insurance-and-reinsurance-regulation/ [accesssed 5 December 2024]
25 Industry and Regulators Committee, ‘The use of LDI by pension funds, Non-inquiry session’ (November 2022): https://committees.parliament.uk/work/7025/the-use-of-ldi-by-pension-funds/ [accesssed 5 December 2024]
26 These were the Competition and Markets Authority (QQ 70-85, UKR0079); the Financial Conduct Authority (UKR0039); Ofgem (UKR0094); Ofcom (UKR0081); the Civil Aviation Authority (UKR0015); the Charity Commission (UKR0083); the Food Standards Agency (UKR0085); the Health and Safety Executive (UKR0082); the Environment Agency (UKR0025); Ofqual (UKR0062); Ofsted (UKR0038); the Information Commissioner’s Office (UKR0058); the Payment Systems Regulator (UKR0055); the Health and Care Professions Council (UKR0023); and the Care Quality Commission (UKR0030). The Committee also received written evidence from the Bank of England (UKR0073), which exercises some regulatory functions and includes the Prudential Regulatory Authority.
27 Initially, this was conceived and presented as a non-inquiry session on the wider work of the Department. However, following the launch of this inquiry, the Department was informed that the proposed session would also cover UK regulators. Letter from Lord Hollick, Chair of the Industry and Regulators Committee, to The Rt Hon Kemi Badenoch MP, Secretary of State for Business and Trade (19 July 2023): https://committees.parliament.uk/publications/41003/documents/199662/default/
28 Letter from Lord Hollick, Chair of the Industry and Regulators Committee, to The Rt Hon Kemi Badenoch MP, Secretary of State for Business and Trade (7 November 2023): https://committees.parliament.uk/publications/41996/documents/208847/default/