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The main conclusions of the report, which we can take away, and that the Government have thought on—and will, I hope, think on even more—may seem to the noble Lord, Lord McIntosh, to be rather broad-brush. Under the statutory remit of the regulators, the committee has recommended further standardisation of the remits and made all sorts of good recommendations about working methods, value for money, regulators committing to evaluating the impact of their work, regulators’ use of impact assessments and—very importantly—the relationship between the regulators and the regulated. This is a particularly good recommendation. The report concludes that industry needs reassurance that the time it invests in consultation is time well spent and is meaningful in the decision-making process. A 12-week consultation period to allow industry a reasonable amount of time to respond is recommended, because these are very big issues to work with. It is an excellent suggestion by the committee to build the confidence of the industry in a body that it often sees as a hindrance, rather than a help, to the good order of the industry, to its customers and its consumers.
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On the protection of consumer, citizen and public interest, the committee recommends that the interests of citizens and the general public are for the Government and Parliament to define and promote. That is a good statement and one that should be made. It goes on to describe the consumer interest as the regulator’s duty. The most important thing that has come out of this is that the consumer interest should be able to stand aside. The noble Lord, Lord Borrie, and I know this well. We saw these things set up years ago and were worried about the fact that they were captured within some of the regulatory frameworks. Yes, they should be able to have their own representation outside: this is an excellent suggestion. As the noble Lord, Lord Borrie, pointed out, that does not mean that there would be no voice on the governing body of the regulatory body.
On co-operation between regulators, I do not like the sound of that. I like the idea of competition between regulators. The committee recommends that a joint regulators group should be formalised. No, no, no: that sounds expensive, bureaucratic and a bit of a closed shop. I do not like the sound of the cartel of regulators, but it was interesting to read it and interesting to see it. When I think about it, we have looked at some real blue skies thinking here, and I think that there has been a necessary and fundamental shift. The noble Lord, Lord McIntosh, will look back on this work and be extremely proud of it, as he is not today.
I read paragraphs 1.29 and 1.31 and reflected that some 10 years ago, when I was chairing the National Consumer Council—an enormous privilege—we did a piece of work called “Who guards the guards?”. We were worried at that time about who looked after the ombudsmen. What were they doing floating around out there? One or two of them had never been used. We discovered afterwards that the funeral ombudsman had never actually been telephoned. Therefore, with my noble friends Lord Norton and Lord MacGregor, I am keen that a Joint Committee of both Houses of Parliament should regulate the regulators and hold them to account. That is a wonderful suggestion. It is the right suggestion and I hope very much that the Minister will give it a long hard thought.
We would all agree that the dreadful performance of the Financial Services Authority should have been exposed long ago. Sadly, the days have long gone since there was “a regulator” to hold to account. The noble Lord, Lord Borrie, is a shining example of a man who would stand up and take the blame for absolutely everything that happened when he was in charge. He was a lead voice and I sense that the commission that replaced him is not vigorous enough. It is not alert enough and it is not well led. It is glaringly obvious that its members are running themselves like a committee. There is no healthy tension and no real scrutiny. Nobody is guarding those guards and many people in this country have been made wretched by the disgraceful conduct of Northern Rock and the systematic failure of the Financial Services Authority in its duty as a regulator.
The good reputations of all regulatory authorities have over recent times been gradually eroded and the
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This has been a timely and good piece of work by the best brains in your Lordships' House. Sadly, Lord Garden, who served on the committee, has been lost to us, but by great good fortune, the wisdom, experience and energy of the noble Lord, Lord McIntosh, was kidnapped. The noble Lord has been a fine Minister in this House and his brush with cancer was a worrying time for us all, but here he is today to present this report and, I hope, to carry on to do other Select Committee work.
I ask the Minister to reflect on what she has heard today. I have a whole heap of questions which I was given to ask—lots of snidey little questions and all sorts of stuff that as a good Conservative I should be saying. I have lists and lists of them, but the most important thing that we have heard today is that we want that scrutiny committee of both Houses. We must get that off the ground. This is a marvellous report and I am delighted to have been able to speak to it.
6.19 pm
The Parliamentary Under-Secretary of State, Department for Business, Enterprise and Regulatory Reform (Baroness Vadera): My Lords, I am grateful for this incredibly rich debate. We welcome the report into economic regulators. I understand that my noble friend Lord McIntosh has qualms, but I completely agree with the noble Baroness, Lady Wilcox, that he will be incredibly proud of this report in time. I am very grateful for the dedication and incisiveness of the investigation and the invaluable recommendations. As many noble Lords have noted, this surprisingly is the first cross-cutting look at economic regulation that has considered such a wide range of regulators. It is a very good time to take a step back and see whether the system that has grown up around us somewhat ad hoc is sustainable and suitable for the challenges ahead.
The UK was among the first movers in the area of economic regulation; and yet I believe that the Select Committee report is correct to say that the regime that has been built around the principles of independence, competition and certainty has stood the test of time, despite the reservations caused by recent events. It has adapted to changing circumstances, starting in the post-privatisation period, by encouraging cost efficiency and productivity, competition and consumer protection, as well as investment for future needs.
My noble friend Lord Berkeley and the noble Lord, Lord Bradshaw, commented on the importance of independence, particularly in terms of their experience in the rail sector. Independence is an absolute cornerstone of the regulatory framework. The independence of regulators to make decisions without fear or favour—I echo my noble friend’s words—is central and should continue to be enshrined in everything that we do. We recognise that the powers relating to rail regulation are controversial and this has been debated just this week.
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One of the central tenets of this area is to provide business certainty. That is essential in terms of new infrastructure and investment. Our regulators have been set up with clearly defined duties which help businesses with the certainty that they need to make long-term decisions. I would simply make one point with reference to the comment of my noble friend Lord Borrie on Ed Balls’s submission to the committee about the interesting relationship between rules-based and principles-based regulation and certainty. It is interesting that small firms take a very different view on rules-based regulation, which they find quite hard, and they often look for simple rules and guidelines to follow. We need to take account of that.
On competition, I was intrigued by the four principles put by the noble Lord, Lord Norton, particularly the third, in which he said that competition reduces the requirement for regulation and, in due course, he could envisage a situation in which it is not necessary at all. I am a very firm believer in markets and have always used them as a central tenet for solving almost every problem. Nevertheless, I do not really believe in perfect markets. I am intrigued by the notion that we can have perfect competition that does not require regulation at all.
Our approach to creating strong and independent regulators has been around the central theme of competition, in order to raise productivity. That is a fundamental objective and although, as the report points out, it is not a primary statutory duty for all regulators, the approach has been successful—as was pointed out by the report with regard to Ofwat. We believe that the RPI-minus-x model that the UK developed incentivises efficient providers and that model has been used or copied across the world—from Australia to Argentina. A lot of visitors come to talk to us about this.
I understand the surprise of my noble friend Lord Berkeley when he expressed concern about Ofwat. Noble Lords might be interested to know that since the report, Ofwat has carried out a wide-ranging review of competition in the water and sewerage industry that was published a month after the report in December. The Government have now asked Professor Martin Cave to carry out an independent review, which will report in the spring of 2009, to consider the scope of water supply, to deliver benefits and drive innovation through developing competition and contestability in all aspects of the water supply chain. In our response to the committee’s report we set out that, when it comes to allocating blame, Parliament’s intention was that the cost principle is retail minus—that was highlighted in the debate on the Water Bill in 2003. Ofwat has recommended the removal of the cost principle from legislation on the grounds that this would enable it to promote competition. We expect that Professor Cave will look at this in his review of the water sector. Consumers are the stakeholders whom we are attempting to
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I should also mention the new National Consumer Council, which brings together consumer bodies into a single, stronger unit, and our extension of the availability of redress schemes. Some noble Lords have commented sceptically on the effectiveness of this new council, and I have noted those concerns, but we believe that we will have a council that is more open, accountable and effective than its predecessor. Its creation on a statutory basis means that it will be subject to the scrutiny of the NAO and the PAC, and we will be looking at it ourselves in due course.
I understand the strength of feeling about the question of who is regulating the regulators. I completely agree with, and was struck by, the point made by the noble Lord, Lord Norton, about the importance of comparative scrutiny in ensuring that we have an effective system of regulation. We do not wish to compromise the independence of regulators in any way, and there are existing scrutiny mechanisms, including departmental Select Committees and appeals to Competition Commission tribunal judicial reviews. But I understand the strength of feeling. I know the lines in my brief. It states that, “It is obviously not for us to comment on the necessity of a new committee, which is a matter for Parliament”. Nevertheless, while I cannot be prescriptive about the form of effective scrutiny that might be put in place, I would strongly endorse and support some form of extra scrutiny for a collective and comparative look at regulators.
There was a lot of discussion about impact assessments and post-implementation reviews. I know that the noble Baroness, Lady Wilcox, is very attached to those ideas. The Select Committee correctly highlights the need for regulators to use better cost-benefit analyses in their impact assessments and to make these documents much more easily accessible. We cannot direct them to do this, because of their independence, but we fully support those recommendations and would strongly encourage regulators to follow them. A similar need was expressed for the post-implementation evaluation of policies. We now require that those are set out. When you do the impact assessment, you need to set out when you are going to do the post-implementation review. It is a key tool and we strongly support it. Noble Lords will be interested to know that my right honourable friend the Leader of another place recently wrote to the Cabinet on new measures to implement post-legislative scrutiny of Acts that received Royal Assent from 2005 onwards. This will involve all departments producing memoranda on the effectiveness and impact of legislation that has been introduced. These memoranda will be considered by the respective departmental Select Committees, which will decide whether to conduct post-legislative scrutiny on the Act. Again, although the committees do not cover the independent regulators and are limited in scope in
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I was also very struck by the comments relating to co-ordination. I fully endorse the view of the noble Baroness, Lady Wilcox, that there should not be a super-regulator in any shape or form, but I accept that there is a need for better co-ordination. We hope that the Joint Regulators’ Group—which is just a group; it is not a new super-regulator—will ensure that co-ordination is improved.
We have carefully considered the case for a central point in Whitehall to deal with economic regulatory policy in the round. I have to admit to being quite cautious. I do not wish to create a new bureaucratic unit to co-ordinate these issues just because there is no obvious home in Whitehall. We certainly do not wish to create a body that would appear to compromise the independence of regulators. Therefore, my department is considering whether the Better Regulation Executive would be a good home for this task to be taken in hand and we are currently looking at its terms of reference. I hope that it will help with the problems of ministerial co-ordination that were raised. There is an inter-ministerial panel for regulatory accountability, and I shall definitely have to take away from this debate the need to revive it and put some vigour into it.
I should also like to comment on reducing regulatory burdens on business where they are unnecessary. My noble friend Lord Berkeley mentioned the Bill that we have all been working on. I am very grateful for his comments of support, together with those of my noble friend Lord Borrie, and for the improvements that we have made to the Bill as a result. We believed it was very important to state in the Bill that some of the economic regulators should have a duty to ensure that they do not impose unnecessary regulatory burdens, given the significant impact that they have on the economy.
I turn to some of the more topical issues that have dominated the debate. Despite those issues, I do not believe that the underlying strength of the regulatory principles and system or our position as a world leader in the regulatory field is altered. Therefore, I accept the view of the noble Lord, Lord MacGregor, that mistakes do not invalidate good principles, and I do not accept my noble friend’s view that somehow the regime has been invalidated.
Clearly, we are facing a very difficult time in terms of the international financial markets, but it is important to remember that this is the single most globalised sector. Capital flows and the financial institutions are international but the regulators are national, and therefore this matter cannot be dealt with simply by national regulators. The regulation of credit rating agencies, which was mentioned, or understanding the flow of derivatives and the risks that are transferred with those derivatives, for example, are not matters that a national regulator can remotely deal with on its own.
I do indeed remember the dinner where Alan Greenspan spoke about the fact that derivatives in themselves reduce risk. I simply quote something that Alan Greenspan has often been known to say:
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That sums up the position with derivatives.
I do not think that the case of Northern Rock undermines the argument for better regulation and the proportionate approach that we have all been discussing and promoting. Mistakes, as I say, do not invalidate good principles. I have read Richard Lambert’s speech and very much accept his view that we should not have any knee-jerk reaction.
The FSA acknowledged in its report published last week that its supervision of Northern Rock was not of sufficient intensity or appropriate rigour to challenge the company’s risk management practices and understanding of the risks posed by the business model that Northern Rock chose to pursue. The FSA accepted the conclusions and recommendations on improvements and steps are now being taken to strengthen the overall supervisory process.
As for the regulatory architecture, the Treasury Select Committee endorsed the view that the UK’s tripartite framework for financial stability—with a single regulator undertaking principles-based regulation — remains right. However, there is no room for complacency and we need to clearly address issues thrown up by recent events.
Later this year, we plan to bring forward legislation to introduce a package of reforms, which are currently being consulted on. For example, we propose to give the FSA an additional power to collect information from banks at short notice. The consultation document also proposes giving the Bank of England a statutory role on financial stability. There are also other changes to the Bank of England’s governance arrangements.
This debate, as much as the report, has given me enormous food for thought and a new agenda, certainly in understanding the cross-Whitehall collective view of economic regulation. It has also given me some views on the role that my department could play. I am very grateful for all the suggestions and comments that have been made. I apologise if I have not answered all of them; those that I have not, I will do so in writing.
6.36 pm
Lord McIntosh of Haringey: My Lords, noble Lords would not thank me for detaining them at a time when they are anxious for the House to rise so that they can leave for a couple of weeks, so I will not do that. The classic job of the mover of the Motion in winding up is to defend the report and the committee’s work. I do not need to do that as there has been no attack on them. Indeed, some speakers,
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I am not and was not saying that we did not do a decent job in the circumstances that we faced. On the whole, we got the right evidence for the time and assessed and reported on it properly. That was not my complaint. Rather, my complaint was purely selfish. I would have had even more fun—because I enjoyed doing it—if I had been able to produce a report that had taken into account the events of the subsequent six months.
Let me thank, in particular, the noble Baroness, Lady Vadera, for going just a little bit beyond her brief in her support for a sessional or Joint Committee. She is quite right. Her lines to take were, of course, correct, but she showed some personal understanding of the need for this work and I am grateful to her for that. Let me also thank her for what she said about ministerial responsibility and the need for better co-ordination, because this is a cross-governmental issue. We do not want more bureaucracy in government but we want this issue to be taken with the seriousness that it deserves, which cannot be done on a piecemeal basis by departmental Select Committees.
Let me make it clear that, although I have criticised particular failures of financial regulation—I am doing no more than the FSA did itself, after all—it is not my assertion that the financial regulation system or the regulatory system is broken as a whole. I believe that there have been cracks and it is important to put those things right. My complaint was that the financial markets were at fault; that should have been seen by a lot of people much earlier than it was.
I am a great believer in anti-aphorisms; as Bernard Shaw said, if a thing is worth doing, it is worth doing badly. He was referring, I think, to amateur piano-playing. My anti-aphorism here is that a trouble shared is a trouble doubled; in other words, if you spread the risk, as the Bank of England said a year ago, you lose clarity about who is responsible and you create new risks rather than eliminate them. We have had a terrible lesson in that in the past few months. I rely on the regulatory state in this country to improve the protection that the people of this country have a right to expect against such abuse.
I have one bit of thanks; that is, to thank the noble Lords, Lord MacGregor, Lord Norton and Lord Ramsbotham, for taking the chair for a period in which I was having a heart operation. They performed the role marvellously well and I am very grateful to them.
On Question, Motion agreed to.
- House adjourned at 6.41 pm.
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