Regulatory State

– in the House of Lords at 11:58 am on 2nd December 2004.

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Photo of Lord Norton of Louth Lord Norton of Louth Conservative 11:58 am, 2nd December 2004

rose to move, That this House takes note of the report of the Select Committee on the Constitution, The Regulatory State: Ensuring its Accountability (6th Report, Session 2003–04, HL Paper 68).

Photo of Lord Norton of Louth Lord Norton of Louth Conservative

My Lords, I have pleasure in moving the Motion standing in my name on the Order Paper. The inquiry by the Constitution Committee into the accountability of government-appointed regulators is, as the Government have acknowledged, the first comprehensive inquiry into the subject. The inquiry drew on evidence from a wide range of bodies, including regulators, consumer bodies and those subject to regulation. The committee is grateful to all those who gave evidence, as well as to our specialist adviser, Mr Peter Vass, Director of the Centre for the Study of Regulated Industries.

Regulation is now a major feature of the British state. As nationalised industries have been put in the public sector, regulators have been introduced in order to protect the consumer and to encourage competition. As Tom Winsor, the then Rail Regulator, put it in a lecture to the Centre for the Study of Regulated Industries, companies in the private sector are regulated in the public interest. The regulation is undertaken not by government directly but for political, economic and practical reasons, independent regulators operating at arm's length from government.

As is apparent from what I have said, and as we stressed in the report, regulation is a means to an end and not an end in itself. As we say in paragraph 4:

"We question the apparent assumption that the present level of regulation, let alone an even greater extension of quasi-Governmental powers, should remain a permanent feature of our polity".

As we go on to say:

"We have to resist the danger of regulatory creep. Many judge that regulatory burdens are increasing, sometimes unnecessarily. This regulatory tendency has to be checked, and the best means is effective accountability. Necessary, and cost-effective, regulation can then be properly identified; unnecessary regulation can, and should, be removed".

Our report provides an analysis of the existing regulatory regime and makes a series of recommendations on how regulators can be rendered more accountable. Our purpose has been to look at the nature of regulation, rather than focus on particular regulators. There have been some very dynamic and innovative regulators. Our concern is not with the individuals but rather with the corpus of regulatory activity. Regulators now exercise considerable statutory powers. They impact upon the regulated bodies and, through them, on the consumer. The costs of regulation and especially regulatory compliance can be considerable.

We now have regulation on such a scale that it is possible to refer to the regulatory state or, perhaps more accurately, the regulatory sub-state as part of our constitutional arrangements. Accountability is crucial, but a fundamental question arises on the accountability of regulators. They are appointed by government and implement policy goals set for them, but they operate independently of government. To whom, then, are they accountable and how? And are the means of accountability adequate?

We identified multiple accountabilities on the part of regulators and different levels of accountability. Regulators are accountable to Ministers, the courts and Parliament as well as to consumers, consumer bodies, regulated companies and the people as a whole. We identified three key elements of accountability in terms of the duty to explain, exposure to scrutiny, and the possibility of independent review.

We believe that there is considerable scope for improvement in ensuring accountability. There are, we record, some mechanisms in place and we welcome the improvements made in recent years. There has been greater transparency, we commend the move towards boards, and we welcome the Government's acceptance of the Better Regulation Task Force's recommendation that regulators should produce regulatory impact assessments on all new major policies and initiatives.

Despite the welcome advances, we believe that far more needs to be done to increase accountability to the various bodies I mentioned and in the forms that I outlined. We make a total of 24 for improving accountability. These are listed on pages 8 to 11 of the report. In its response to the committee's report, the Government concede the importance of the issue and that regulators' independence must be accompanied by an effective framework of accountability. This, they say in paragraph 4, is,

"a fundamental requirement of regulatory certainty, providing incentives for optimal decision-making, and maintaining the credibility of the regulatory framework".

They go on to accept many of our recommendations and we are grateful to the Government for their acceptance or, in various cases, endorsement of most of our recommendations.

However, the Government have not accepted all of our recommendations, including the most significant. Essentially, we see a need for ensuring greater coherence in regulatory accountability. The OECD has in recent years placed considerable emphasis on the need for member states to manage the regulatory state as a whole and to provide an appropriate institutional framework. There is also a trend toward permitting appeals on the merits of the case. The Communications Act 2003, for example, incorporated a European directive which allowed appeals on the merits of the case. This, we were told, could be traced to Article 6 of the European Convention on Human Rights. These developments, we believe, reinforce the case we make for greater consistency.

The three principal recommendations we make in order to achieve this are the establishment of a lead government department to ensure a "whole of government" view of regulation; the appointment of a parliamentary committee to scrutinise the regulatory state; and allowing appeals by regulated bodies to be considered on the merits of the case.

The Government's response is that one size does not fit all. It is certainly true that regulatory bodies need to be crafted to deal with the particular needs of the case, but that does not mean that we should avoid creating the means for effective oversight of regulation as a particular activity.

Although the Government have responded to the specific recommendations we make, they have not really engaged with the thrust of our analysis and the intellectual basis for our recommendations. There are already various mechanisms available for calling individual regulatory bodies to account. What is missing is the means to ensure accountability of the regulatory state. What regulators do individually can be scrutinised and challenged—though the means for doing so are sometimes imperfect—but the totality of what regulators do is not subject to coherent and consistent scrutiny. The regulatory state has grown in recent years but we have not kept pace by putting in place the means to develop and discuss the principles that should underpin that development. How far are we prepared to see the regulatory state grow and what shape should it take?

The Government, in responding to our report, have looked at the regulatory state as the sum of its parts. The result is, I believe, a missed opportunity. If we are to ensure accountability of the regulatory state, we need to be clear as to the principles that should govern regulation and we need to have bodies in place that can cover the whole of the regulatory state. There needs to be a mechanism both for a "whole of government" view and a "whole of Parliament" view of regulation.

At the moment, both are lacking. Within government, responsibility for regulation is spread across several departments. Identifying a specific responsibility for regulation within government is difficult, not just for us but it appears the Government as well. When the committee invited evidence from a Minister, one was initially nominated but then it was switched to another. In the event, we heard from the Minister of State for Energy, E-Commerce and Postal Services. According to the Government's response to the report, the DTI and the Treasury provide a joint team for considering cross-cutting regulatory issues. For issues where the DTI has a significant cross-cutting and sector responsibility, according to the response,

"the DTI will co-ordinate and communicate on behalf of Government".

I have checked the current list of ministerial responsibilities. There is no Minister in the DTI with a specific responsibility for regulation. A Parliamentary Under-Secretary in the Treasury has deregulation among her long list of responsibilities—it comes at the very end. A Parliamentary Under-Secretary in the Office of the Deputy Prime Minister has regulatory reform in his list of responsibilities. When the committee's report was put down for debate, the Minister initially listed to reply was the noble Baroness, Lady Ashton, from the Department for Constitutional Affairs, but the task of responding has fallen to the noble Lord, Lord Triesman, who speaks at the Dispatch Box for the DTI. I was going to wonder where the officials in the Box came from, but there are none. I recount this to illustrate the point.

If the Government are to exercise any oversight of regulation, there needs to be a lead department with very clear responsibility for oversight and co-ordination. Otherwise, the danger is that the regulatory state will expand and do so in a misshapen fashion, neither of which is desirable, but both of which may otherwise be unavoidable.

Central to ensuring accountability to the public is the institution of Parliament. Consumer bodies may be set up to speak for consumers—though, as we identify, ensuring that they do speak for consumers is problematic—but only Parliament can speak for the people. Parliament has committees for calling particular regulators to account. The appropriate departmental Select Committee can scrutinise regulatory bodies coming under the sponsoring department. The Public Accounts Committee in the other place can cover a range of regulators, although not quite all. The Financial Services Authority and the Civil Aviation Authority are not within its remit. However, no one parliamentary body can examine the regulatory regime as such in the United Kingdom. We can examine the particular parts but we have no means of examining the whole. We recommend that a committee—ideally a Joint Committee—be established for this purpose.

In their response, the Government recognise that this is a matter for Parliament, but they add:

"The House Authorities will need to consider carefully what additional scrutiny would be achieved over and above that of the Departmental Select Committees and the NAO (where this applies)".

That sentence rather gives the game away. There is no appreciation of the need to look at regulation as a whole. If there is to be any degree of effective oversight or control over the extent and shape of regulation, then we need to have coherence in terms of accountability to both government and Parliament.

For reasons of time, I shall not develop the other themes in the report. Other Members may wish to pursue those. I wish to close by posing four questions to the Minister that derive from our report. First, following from what I have just said, who precisely within government, at ministerial level, is actually responsible for regulation and what plans are there to review the situation in respect of a lead department? If there are no plans, why not? I have already dealt with the answer given in the Government's response to the committee report and so we now need to go beyond that.

Secondly, what plans are there to ensure greater transparency in respect of the co-ordination that does take place within government? Can the Minister tell us more about the Panel for Regulatory Accountability, chaired by the Prime Minister, which is referred to in paragraph 22 of the Government's response?

Thirdly, can the Minister explain more fully than is done in the Government's response why the FSA and the Civil Aviation Authority should not come within the scope of the NAO? The Government rest their response on the fact that they are special cases, but the arguments advanced in paragraphs 52 and 53 of the response appear to be undermined by the content of paragraph 54, which states that, in respect of ex-post examination of its finances, the FSA is formally accountable to the Treasury. The Treasury can commission value-for-money reviews and has the option of appointing the NAO to conduct such a study. The CAA is a public corporation and is subject to independent external audit by auditors appointed by the Secretary of State. None of that strikes me as a compelling argument for refuting the contention that the NAO should have access to all regulatory bodies—quite the reverse.

Finally, what is the argument in principle against establishing an appeals procedure for independent regulators who operate at arm's length from government and who do not fall under the jurisdiction of the Competition Commission or the Competition Appeal Tribunal? The Government, in their response at paragraph 72, appear to rest their case on the fact that a single body would be inappropriate but they do not consider whether more than one body would be able to deliver on what is an important principle, and one that it appears is being recognised in European jurisprudence.

I believe that, by bringing the issue of the accountability of the regulatory state on to the political agenda, the committee's report enables Parliament—and the Government—to address an issue that requires to be addressed and to be addressed quickly. I look forward to the debate and to the Minister's reply. I beg to move.

Moved, That this House takes note of the report of the Select Committee on the Constitution, The Regulatory State: Ensuring its Accountability (6th Report, Session 2003–04, HL Paper 68).—(Lord Norton of Louth.)

Photo of Lord Holme of Cheltenham Lord Holme of Cheltenham Liberal Democrat

My Lords, I am delighted that time has finally been found to debate this important report—and prime time, too. At least, I think that is what it is called; on any other day of the week, it would be called "lunchtime".

It is a particular pleasure to follow the noble Lord, Lord Norton, because The Regulatory State—our penultimate report—was produced by the Constitution Committee during his chairmanship. As a member of the committee who has now had the honour to succeed him, perhaps I may say how much we all owe to his intellectual leadership as the first, and therefore the formative, chairman of this relatively new committee. The British constitution is rather like a woodland nymph—much admired but notoriously elusive and difficult to grasp. We have been lucky to have not only a hands-on chairman but a hands-on-keyboard chairman. Our reports have borne every imprint of both his scholarship and his authorial talents. The committee and the whole House are grateful to him, and personally I thank him warmly.

Turning to the report, there were originally some sceptics who wondered what regulation had to do with the constitution. I fear that they have no sense of political and social history because, over the past 50 years in this country, we have seen a massive transfer of powers, which would once have been thought to be in the sphere of government or the state, to independent regulators. In part, that is because the idea of the omnipotent state is in retreat everywhere before the forces of the market. Command and control, let alone ownership, by government is not the powerful paradigm for organising society that it once was.

Yet, even as government shrink their sphere of influence and operation—I should say parenthetically that they do not seem to do very much about shrinking the size of their operations and the numbers in the Civil Service, but at least their theoretical sphere of influence shrinks—the demand for an expression of the public interest to lay alongside the force of the market place remains and, indeed, strengthens.

At its economic purest, the public interest is to sustain competition and prevent abuse of market power. But, in a complex world, other political priorities—civil and social, environmental and ethical—inevitably intrude, and they are often fuelled (I think we should accept this in Parliament) by parliamentary demands that "something should be done". It is too easy for governments faced by demands that something should be done to set up yet another regulator.

So I do not think that our description of the sum of these historic developments as the "regulatory state" goes too far. It is clear that important constitutional issues do arise: the rights both of the citizen and of the "regulatee"; the trend to co-regulation and self-regulation; and the relationship between regulators and Ministers and their sponsoring departments.

Perhaps I may say, again in parenthesis, that one reassuring feature that we observed from the extensive evidence we took is how little evidence there is of day-to-day interference in the work of regulators by Ministers and their civil servants. Nevertheless, it is an issue which may arise, and does arise, from time to time.

There is the deeply constitutional issue of due process and the right of appeal from decisions made, as the noble Lord, Lord Norton, has already mentioned. There are issues which are perhaps less constitutional but are nevertheless important, such as whether it is better to have individual super-regulators or collective board-type regulation. As noble Lords will note, on the whole we come down in favour of the second. Above all, there is the issue of the accountability of these powerful regulators. I want to address myself particularly to the issue of accountability.

The Hansard Society Commission on Scrutiny, chaired by the noble Lord, Lord Newton, concluded—I am sure that it is right—that in our parliamentary democracy Parliament itself should be the apex of accountability. How fit for purpose are we in Parliament to ensure public accountability? After all, these regulators are almost invariably our creation and so, like Frankenstein, it might be argued that we have some responsibility for them.

As we heard in evidence, what is needed is effective parliamentary scrutiny. The front line for that is, and should be, departmental Select Committees. But we should ask ourselves: are they adequately staffed and resourced for this important role? As your Lordships will have read, we recommended that their terms of reference should be expanded to consider and react to regulators' annual reports and published RIAs.

One problem relating to Select Committee scrutiny of regulators is that often there is too much random populism—whatever issue of constituency or local personal significance comes up for a Member—and too little systematic scrutiny of the way that the regulator is doing its job. We recommended that a clear cycle should be observed by all regulators and their departmental Select Committees. We also recommended the publication of an annual report—it is hoped in a fairly common format—and then, shortly thereafter, a thorough and deep examination of performance against clear objectives within the departmental Select Committee.

It is particularly necessary to have careful scrutiny of any additional powers that are added or accreted to a regulation in the course of operation. Without that there is the danger of what is called, rather unattractively, regulatory creep. There is certainly an imminent danger that regulators will find themselves with multiple objectives and without any clear hierarchy to guide them on the priorities in decision making. As well as trying to improve the way in which the departmental Select Committees do their jobs in that respect, we need consistent access by the National Audit Office to all regulatory bodies, including the FSA. It would be good to have confirmation from the Minister that that is the Government's intention.

First, we recommend that our new Joint Committee, as the noble Lord, Lord Norton, said, should ensure that there is no duplication or overlap and that every regulator established has a clear hierarchy of objectives under which to do the job. It is not for us to say whether it will be a Joint Committee, but we believe that a Joint Committee might do the job best. It would need to be properly resourced like the departmental Select Committees.

Secondly, there should be identification and sharing of good practice around Whitehall. Thirdly, there must be a check on whether regulation is indeed in conformance not just with the Better Regulation Task Force—which has produced principles under the chairmanship of the noble Lord, Lord Haskins, which deserve to be followed—but also with the OECD checklist for regulation. We must also ensure that all appointments to regulators are made within the Nolan principles amendment that such a committee can keep an eye on RIAs and ensure that parliamentary attention is given to any add-on powers of the kind I have described.

In summary, there is a big job to be done. There may be various ways of doing it—we do not necessarily need another Select Committee—but I believe that from time to time Parliament needs systematically to take a whole-of-regulation view.

Speaking of the whole of regulation, like the noble Lord, Lord Norton, I should like to press the Minister on the Government's rather disappointing response to their own organisation—a matter which they can do something about that. They can always say to Parliament, "You decide how you want to organise yourself in terms of parliamentary committees", but I thought that their response was unduly negative. The Government should explicitly accept the overall responsibility and accountability for regulatory policy and the regulatory framework within which individual regulators work. That would be so much easier if there were some organisational expression in Whitehall so that a whole-of-government approach could be taken by the lead department—probably the Cabinet Office—which could assume the role by expanding the remit of its RIA unit. In turn, the Government could have a more holistic response to the work of the Better Regulation Task Force—which, after the noble Lord, Lord Haskins, has been so well chaired by David Arculus.

If the Government were to take the more focused and co-ordinated view of regulation that we are urging on them, they would be able to mirror better the work of the parliamentary accountability regime that we are proposing. In his reply, perhaps the Minister could say more about the Government's reasoning on that.

The object of this is to ensure that the regulatory state does not grow like Topsy; that regulators are removed when their jobs are done; that regulation is appropriate, transparent and proportionate; that Parliament remains where it should be, at the apex of accountability, ensuring that we create only bodies that are fit for the purpose; and that those purposes are necessary and achieved properly.

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Conservative

My Lords, this is an important topic of increasing relevance. It was a great pleasure to participate in what my noble friend Lord Norton rightly referred to as the first major study of the subject. Like the noble Lord, Lord Holme, I pay tribute to my noble friend for his chairmanship of the Constitution Committee during the time that I have been a member. He has marshalled, and enabled us to marshal, the arguments that have led to conclusions which I believe, in every case, were unanimous despite the many vantage points from which we all come.

With great skill, my noble friend has played a huge part in writing the report. In rereading the report over the past few days I have been struck by how well it is written. I did not write it. Both this and the previous reports were written by my noble friend, who has played such a significant part in our work. I am very happy to pay that tribute to him.

The study was massive and intensive. Therefore, perhaps it is not surprising that I shall stress some of the same points made by the two previous speakers. The need for regulation, independent from government, has been with us for a long time. Some time ago, I read a book by one of my former special advisers, Sir Christopher Foster, who also gave evidence to us—he has undertaken much academic work in this area—called Privatisation, Public Ownership and the Control of Public Monopoly. He spent a great deal of the earlier part of the book talking about how regulation, often difficult and controversial, was developed during the 19th century; for example, in response to the monopolies in rail and so on.

The subject has been with us for a very long time. It was particularly important in the 1980s and 1990s, in the Conservative governments in which I played a part, when there was great emphasis on privatisation. The spotlight was put on the importance of regulators in the formation of monopolies which were then moved into the private sector. It is not just in the economics sphere, with particular reference to former monopolies, that independent regulation and independent regulators now play a big part in our lives.

From the consumer point of view, we have the Financial Services Authority, much of whose work is carried out on behalf of consumers. On health and safety, we have not only the Health and Safety Executive, but also a huge range of regulators. The same goes for the environmental area.

The huge number of independent regulators that we have now and the importance attached to them was brought home to us by the huge amount of evidence that we received and the great deal of interest taken in the subject. All that means that regulators are undertaking tasks laid down by Parliament, but at arm's length from government. As the noble Lord, Lord Holme, indicated, in the past many of them would have been performed by government, with Ministers answerable to Parliament, often on a daily basis. That direct involvement of Parliament and Ministers has been removed in so many areas.

Therefore, this review is timely and, inevitably, had to be limited in scope. We focused mainly on regulators of an economic nature and considered them from the point of view of government and Parliament, the producers and providers of the goods and services and the consumers of them. I believe that the importance attached to our inquiry was shown by the massive response that we received. The evidence is a goldmine of information for those interested in the issue of regulation. My one disappointment is that there was very little media attention in the report, perhaps because the subject is so complex. I hope that it will be an important point of reference for all concerned and a checklist for continued development and action.

I cannot cover the whole subject, as we could not in the report. One area to which we briefly referred, but did not follow up, was regulatory creep. That area will probably justify a further study. We certainly need to monitor how regulatory creep is taking place and how much of the growth of regulatory bodies has added to the expansion of bureaucracy and has increased the number of what, effectively, are civil servants. On the part of government, particularly this Government, whenever there is concern about an issue, there has been a temptation to set up a new regulatory body, hence demonstrating action.

I was interested to note that the Secretary of State for Health is now cutting back a number of the quangos that this Government have set up as part of the current cutting-costs exercise. So there is an issue about how much control there is over the costs of regulatory bodies. Today we read in the Times—I am indebted to the noble Lord, Lord Oakeshott, for revealing this—about the premises that the regulator for the NHS foundation trusts is now taking. I do not see why that regulatory body has to be in Westminster. The Minister's answer as to why it should be there was that this is a decision for the executive chairman. In the past it would have been a decision, in terms of government, that would have been looked at by Parliament and the PAC. There is an area of regulatory creep in this case with a huge new body of expanding numbers and costs which are outwith our normal processes of accountability.

Let us remember that these regulatory bodies are financed either by the public purse directly through taxation or by the levy and charges that are statutorily imposed, which for businesses are another form of taxation that is eventually paid for by the consumers. So the running of the regulators and their costs is a legitimate cause for public and parliamentary concern. I shall have more to say about that in a moment.

Accountability was one of our key themes. I recognise that the Government have made considerable progress in many respects, which we have acknowledged in the report: the move away from a singular regulatory person to separating the role of chairman and chief executive and to having non-executive boards; the new individual appeal mechanisms which have been set up; and the involvement much more of consumers' organisations. Some of the Better Regulation Task Force's work has considerably contributed to this—a matter we pick up in our report.

This progress is demonstrated by the fact that many of our 24 recommendations have been accepted by the Government. I intend to comment briefly on only one—regulatory impact assessments. The important point here is not only all that the Government are doing in having these impact assessments before legislation is brought before the House, but also their having retrospective impact assessments over a period of years afterwards as to whether what has happened has actually met those original regulatory impact assessments.

The four areas where, however, we are still at odds and where I wish to comment specifically, are ones that have already been touched on by noble Lords before me. I want first to refer to what we described as recommendation 11, which is box 10 in the Government's response. That is the recommendation for a lead department to be responsible for promoting effective regulation in practice. We suggested logically that the Cabinet Office should assume this role.

I fully accept, as the Government pointed out in their rather lukewarm response to this recommendation, that they are right to say that these departments—and they refer to the DTI and the Treasury—should jointly take the lead in formulating economic regulatory policy and ensuring that the regulatory framework is fit for the purpose. However, I think that there is a role beyond that; to look at regulation as a whole. In that respect I was disappointed in the Government's response.

I give an example of a Bill that came before us in the previous Session, the Higher Education Bill. I, with others, was responsible for putting forward an amendment relating to OFFA, the Office for Fair Access, saying that there should be an appeal mechanism for the decisions of that body because in—I would think—rare circumstances those decisions could have major impacts on an individual university. It was only when I referred to the fact that we were making recommendations for appeal mechanisms in our report and that in another Bill, the Pensions Bill, there was an appeal mechanism for establishing the new regulator—two new regulators in two Bills—that the Government graciously gave way and the noble Baroness, Lady Ashton, accepted the recommendation. However, it should not have been necessary for this House to do that. There should be a government department that insists on appeal mechanisms every time a new regulator is set up.

I turn to our recommendation 16, which was in box 15—or perhaps it was box 16; never mind—in the Government's response. This is the recommendation to which reference has already been made about setting up a separate Select Committee in the House. The Government are right to say that this is a matter for the House authorities, but the Government can always give a steer. I have to say that here too they were decidedly lukewarm. I was going to draw attention to the same point as my noble friend Lord Norton; that is, that the House authorities will need to consider carefully what additional scrutiny would be achieved over and above that of the departmental Select Committees and the NAOs.

There was a pretty clear indication that the Government do not think that this provision is necessary. However, I should like to spend some time indicating why I think it is important. I have to say that all regulatory bodies that came before us stressed that their authority—and these are the regulators speaking—derived from the original legislation, and all of them talked about the importance of scrutiny by individual Select Committees.

Hence, it is essential that Parliament regularly scrutinises the overall regulatory climate and the developments and progress of the issues surrounding individual regulators. Various consumer and producer bodies drew this to our attention. It was equally clear from their evidence that they thought that Parliament currently deals with this in a way that is spasmodic and which does not always work well.

Those of us with long experience of Select Committees know why it is not perhaps the most effective method of parliamentary scrutiny. Parliamentary Select Committees vary in their quality, attendance and the continuity of membership. They have a lot to do. For a departmental Select Committee, the work of an individual regulator and dealing with an annual report is unlikely to have much priority. To put the matter in a different way to the noble Lord, Lord Holme: it is rarely politically sexy.

To look at the regulatory systems as a whole needs continuity, interest, expertise and an ability to take an overall view which goes way beyond individual departments. The point I was making about overall cost could never be explored on an individual departmental basis. Hence, I believe that our Joint Committee recommendation was the right way forward. The Government could give a steer in that regard; I shall be interested in the Minister's response.

I turn next to the box that refers to the fact that the NAO should have access consistently to all regulatory bodies and of course the SFA and the CAA are outwith the NAO position. I have to say that the Government's response was pretty weak. They said that,

"there are important differences between the regulatory bodies that explain why the NAO does not carry out value-for-money audits of the FSA and CAA in the same way as for the other sector regulators . . . in the case of the FSA, Parliament legislated for it in the year 2000".

Government and Parliament set up those bodies, so they are statutory to all those whose businesses and lives they can so deeply affect. Their charges are effectively a tax. I do not believe that Parliament can scrutinise effectively their cost effectiveness, value-for-money and so on, unless they have a mechanism such as that for the NAO which would enable the evidence to be thoroughly examined and the reports given to Parliament. The game, as my noble friend Lord Norton suggested, was given away in the Government's response in paragraph 54 where they said:

"With regard to the ex post examination of its finances, the FSA is formally accountable to the Treasury".

If it is accountable to the Treasury, it should also be accountable to Parliament. I therefore believe that it is important that bodies such as these should be subject to the NAO scrutiny.

The Government in their response also relied on these original statutes for the NAO. That was reminiscent of the reliance on the original statute in setting up the Parliamentary Ombudsman when there was pressure for the Parliamentary Ombudsman to be able to investigate the Government Actuary's department in the Equitable Life case. Now the Government have given way. I think that the time will come when they will have to give way on this too. They should grasp it now.

Finally, I refer to the appeal mechanism and the various recommendations we made. Here, too, I acknowledge that the Government have made considerable progress. They have introduced appeals mechanisms in setting up a number of new regulators. However, I believe that they are wrong to dismiss our recommendations here so firmly. First, our evidence showed strong demand for such a system by those who were subject to regulation without an adequate appeal system at present. We have listed those in the report. We stress too that the situation is now dynamic, with EU influence coming to bear, with the Government having their own DTI inquiries into regulation and so on. So, I believe that the demand has intensified.

Secondly, there is the inadequacy of the current checks on which the Government relied. We all know that the judicial review process is not a satisfactory substitute for a proper appeal on merit, because it cannot even entertain that sort of argument. We also know and saw from the evidence that parliamentary scrutiny does not provide an appeals mechanism. All the objections that the Government made in their responses—the scope for delay, additional cost and so on—were adequately dealt with in our report, which also dealt with the issue of frivolous complaints. We were talking about those areas of regulation where there are gaps and no adequate mechanisms at present. We did not argue for a huge new system immediately but for a,

"move towards allowing appeals based on the merits of the case", and that that should be introduced over time and accorded to all those who are subject to regulation. I am a little encouraged that, in their response, the Government, after being dismissive, concluded with this modification:

"However, as evidenced by the Government's introduction of an appeal on the merits by way of a review against code modification decisions made by Ofgem, the Government does keep the system of appeal under review".

In acknowledging all that the Government have done, I believe that they should go further with that appeals process. I encourage the Minister to move a little further in that direction in his response today.

Photo of The Earl of Northesk The Earl of Northesk Conservative

My Lords, I, too, pay tribute to my noble friend Lord Norton and the Constitution Committee for the production of this report. Its substance is both timely and illuminating.

I begin by saying that, at least in part, I come to this debate in my capacity as a member of the House's Merits of Statutory Instruments Committee, which interest, if it be such, I declare. I should also stress that my remarks represent my personal views, not those of the committee as a whole. To be fair, our work lies somewhat on the margins of the thrust of the report. Be that as it may, our experience during the past year or so is relevant, especially in the context of one of the central recommendations of the report, namely:

"A dedicated parliamentary committee should be established to scrutinise the regulatory state".

Indeed, like all noble Lords who have spoken so far, I am disappointed by the Government's lukewarm response to that.

I freely confess that I approached the work of the Merits Committee, chaired so ably by the noble Lord, Lord Hunt of Kings Heath, with a certain amount of dread. Many within Parliament, let alone among the wider public, see statutory instruments and the regulations that they encompass to all intents and purposes as muscles that envelop the flesh of statute, or as an impenetrable fog. Moreover, the unstoppable tide and growth of regulation is the stuff of nightmares.

In the event, I have found service on the committee to be far more stimulating, perhaps even rewarding, than I might have anticipated. It may be a little early to assess our usefulness and effectiveness properly. Nevertheless, there are fertile shoots, suggesting that we are beginning to have an effect in promoting better and more transparent regulation. What is important is that, with the Joint Committee on Statutory Instruments, the Delegated Powers and Regulatory Reform Committee and now the Merits Committee, the parliamentary framework for scrutinising regulation is well established and reasonably robust. The not inconsiderable niggle of the absence of power to amend defective instruments remains but, generally speaking, the framework is performing tolerably well.

In addition, its evolution over the years represents a recognisable trend, acceded to and accepted by successive governments, towards improved and more coherent oversight. Logically, therefore, a move towards a dedicated parliamentary committee specifically tasked with the scrutiny of the regulatory state is merely an extension of that trend.

There are other, more urgent reasons why that might be needed. It is important to bear in mind the Constitution Committee's definition of the regulatory state:

"Regulators are appointed in order to be at arm's length from Government in fulfilling their functions. Though created by statute and appointed by ministers, they exist essentially as independent agents".

As things stand, leaving aside the role played by ad hoc Select Committee inquiries and so on, the existing framework is confined to regulation that is subject to parliamentary proceedings and which is in the main, but not exclusively, promulgated by government departments. That fact is reflected in the text of the report, which states:

"As with Government, Parliament lacks the mechanism for consistent and coherent scrutiny of regulation".

It is also as well to remember that we are dealing with a relatively new phenomenon. As my noble friend Lord Norton argued in his lecture at University College in September, the regulatory state comprises more than the sum of its parts. Its emergence represents a major change to our constitutional arrangements. Moreover, as the report states, regulators are notable now not only for their number but for their powers. Those include imposing penalties, levying fines and creating secondary legislation—a point already emphasised by my noble friend Lord Norton.

At the same time, we need to pay due heed to the comparatively recent development of the establishment of sectoral super-regulators, such as the Financial Services Authority and Ofcom. Here, in passing, I speculate whether the FSA's new regime for financial advice, introduced yesterday, has received an appropriate level of scrutiny.

In other words, the establishment of a dedicated parliamentary committee can be justified both in the particular and the general: the particular on the basis that no specific mechanism exists to oversee that legislative competence is exercised by regulators beyond the reach of Parliament; and the general because, as the report makes abundantly clear, no mechanism exists to scrutinise the regulatory state as an integral whole. What matters is not that adequate provision should be made for post hoc scrutiny of regulatory failure—in great part, that facility already exists and is operating reasonably well—but that mechanisms are put in place to offer cohesive and coherent oversight, partly to establish best practice throughout the regulatory regime and partly to guarantee, so far as possible, meaningful accountability and transparency across its full extent.

As the noble Lord, Lord Holme, observed, the report also addresses issues of independence and accountability. Here, I do not dissent from the view of the committee that the evidence suggests that whatever level of independence has been granted by Parliament, Ministers have generally sought to maintain that independence and that it is secured in the substantive role of the regulatory body in question.

In other words, operationally, the regulatory state really stands at arm's-length from government. That may well be so but, like it or not, the regulatory state relies on the ethos of the government of the day for its very existence. To that extent, it has a vested interest in sustaining concepts of fat government. It is in terms "in hock" to the administration that gives it being. By the same token, the government of the day, in so far as they perceive regulation to be always a public good, have a vested interest in augmenting the regulatory state. In effect, the relationship is symbiotic.

As my noble friend Lord MacGregor pointed out, the growth in the number of regulatory bodies was initially driven in great part by the policy imperatives of the various privatisations of the 1980s and onwards. In the context of metamorphosing state monopolies into meaningful competition in the private sector, it was innately understood that the ultimate aim of a regulator, if it was to be deemed to have been successful, should be to regulate itself out of existence.

I recognise the report's observations about self-regulation and co-regulation. However, and notwithstanding the Government's acceptance of Recommendation 13, that view seems to carry rather less force under the current administration than previously. I was especially struck by an article by Tom Utley in last week's Daily Telegraph. He echoes the thrust of the remarks of the noble Lord, Lord Holme. He states:

"After seven years of this Government, the size of the Civil Service is now equal to the population of Sheffield . . . the bureaucracy in Whitehall alone now costs each household in the country £850 a year. Every day since 1997, 15 new regulations have come into force, with armies of regulators and inspectors appointed to see that they are obeyed . . . For every job lost in the private sector last year, two were 'created' in the public sector".

As my noble friend Lord MacGregor of Pulham Market suggested, the regulatory state represents a sizeable chunk of that bloated bureaucracy. To compound matters, nearly every measure announced in the gracious Speech envisages an even greater expansion of the hordes of regulators under whom we labour. With the best will in the world, that does not give the impression of an Administration that, whatever their rhetoric, understand neither the need to constrain bureaucracy nor the ways to deliver such constraint.

Tom Utley's conclusions may not be to the taste of some:

"Seven years on, we must all come to terms with the fact that the expansion of Britain's bureaucracy under Labour is not an unintended by-product of the party's yearning for 'social justice'. It is a deliberate policy in its own right—an end in itself . . . At the rate we are going, there will soon be enough public servants in every constituency, dependent for their livelihoods on the taxpayers' largesse, to tip the electoral balance in favour of the party of bureaucracy and big government".

I cannot help feeling that those remarks have a ring of truth, especially in the sense in which the Government, in contrast to the view of my noble friend Lord Norton of Louth, seem to perceive bureaucracy and the regulatory state as an end in itself, rather than a means to an end. It has become the mechanism of choice for micro-managing our daily lives. A more cynical mind than mine might be tempted to conclude that it is akin to a form of gerrymandering of the electoral landscape by stealth. Moreover, it feeds into the remarks that I made earlier this week about the current Administration's apparent willingness to use and manipulate the hidden wiring of the constitution for their own ends. I wonder whether Peter Hennessy, had he written his admirable book on the subject in current circumstances, might not have added a chapter to explain the constitutional role of the regulatory state.

Like the committee, I question the apparent assumption that the present level of regulation—let alone an even greater extension of quasi-governmental powers—should remain a permanent feature of our polity. Be that as it may, the regulatory state is a reality. Like it or not, it appears that, in policy, the current Administration are wedded to growing it further. That being so, it is essential that there should be a whole of government view of regulation and, hence, of the accountability of regulators to citizens and Parliament. A dedicated parliamentary committee, together with a lead department of government, are the most appropriate and sensible mechanisms to deliver that and to ensure that both the actuality and the ethos of the regulatory state are subject to effective oversight. We must ensure that the regulatory state as a whole, as well as government policy towards it, is held properly to account.

Photo of Lord Dahrendorf Lord Dahrendorf Crossbench

My Lords, your Lordships' House is often praised for the quality of the reports that it produces—rightly so. The report on the regulatory state is no exception. Even among House of Lords reports, it stands out for its systematic character, the thoroughness of its argument and the comprehensiveness of the evidence gathered. I hope that the noble Lord, Lord Norton of Louth, will not take it amiss if, as one academic to another, I suggest that his report could almost be submitted to a research assessment exercise and earn its author valuable points in the eternal quest for funds for academic research.

The two main lessons that I learnt from the report are, first, that lifting the heavy hand of government and replacing it with regulation and independent regulators does not necessarily free people to do their own thing without hindrance or encumbrance. Regulation can be a burden, as paragraph 80 of the report says. Secondly, whereas one knew whom to call to account and how to do it, when the state acted through an elected government, accountability is much more complex in the regulatory state. It is in that latter connection that I want to make two small points.

The first is almost tangential to the present report but would warrant a separate debate which, as chairman of the Select Committee on Delegated Powers and Regulatory Reform, I hope to initiate in due course. The report refers, notably in chapter 8 but also elsewhere, to what it calls,

"the 'whole of Government' view of regulation".

There are strong recommendations designed to improve co-ordination within government. The noble Lord, Lord Norton of Louth, repeated them, as have others who have spoken. At one point, in paragraph 7, reference is made to the Government's concern with regulatory reform. The report says that it,

"has been high on the agenda".

It also says:

"So, for example, regulatory reform orders have been introduced".

Those are references to the Regulatory Reform Act 2001, an Act that is due—indeed, overdue—for review. In fact, a ministerial commitment was given to such a review in 2004. The Minister responsible, Ms Ruth Kelly, told the Select Committee on Delegated Powers and Regulatory Reform that work on the review would begin in summer 2005.

The point that I want to make today is that the Regulatory Reform Act has unfortunately failed to provide the kind of co-ordination that the Constitution Committee seeks. Regulatory reform orders, in particular, have become at times simply an alternative form of legislation for departments that failed to get a slot in the gracious Speech. They are a form of legislation that receives significantly less parliamentary scrutiny than normal Bills. It could be argued in some cases that what was intended to be less or, at any rate, better regulation has in fact become less scrutinised legislation.

There is a strong case for Parliament to have a thorough look at the Regulatory Reform Act and its consequences. If and when we undertake such an appraisal, there will be many details to consider. Two major issues that will and should preoccupy us will be, first, clearer criteria for the appropriateness of regulation as against proper legislation and, secondly, the precise role of Parliament in ensuring accountability of the instruments of the regulatory state.

My other point is, in a sense, related. It has to do with parliamentary scrutiny of the regulatory state and refers primarily to chapter 10 of the Constitution Committee report. I agree with the statement that Parliament is crucial to ensuring accountability. I also accept that, in practice, the process of scrutiny must be led by Select Committees. The report tells us that some work better than others, which is not surprising. It proceeds to recommend a new dedicated parliamentary committee to scrutinise the regulatory state, which would preferably be a Joint Committee of both Houses. That has been one of the main subjects of our debate this afternoon.

Despite what has been called the Government's lukewarm response to that recommendation, there is much to be said for it and even more to be said for the analysis behind it. However, it is important that Select Committees in this area—old or new—should not be separated from Parliament as a whole. Once a Select Committee becomes too expert in its field, there is a risk of what one might call unintended collusion between the scrutineers and their objects. Worse still, if, as is the case with respect to regulatory reform orders, the Select Committees of either House have the right to reject regulatory reform orders without Parliament getting into the act at all and, indeed, are the only bodies able to suggest amendments, they become a substitute for Parliament rather than an instrument of it.

Provision should therefore be made for Select Committees concerned with regulation—with the regulatory state—to turn to Parliament as a whole and allow debate reflecting the views of citizens, of the public at large. The report that we are debating was written because there is a real risk that the regulatory state, against the intentions of its inventors, becomes a less democratic state than the governmental state that it is intended to replace. I commend the report as an extremely useful antidote to that threat and hope that it will be widely recognised as such, not least by the Government.

Photo of Lord Blackwell Lord Blackwell Conservative

My Lords, like other noble Lords I welcome this excellent report and pay tribute to its author and the members of the committee. I bring to the debate a range of experience and, I should add, the associated conflict from being a director of a number of regulated businesses and a board member of a regulator. I therefore stress that my views are my own and not those of other organisations.

I strongly support the underlying analysis in the report that the role of regulators, while crucially important and unavoidable, needs to be kept strictly within bounds and within a framework of accountability in order to resist the tendency for regulatory creep of the kind to which my noble friends Lord MacGregor and Lord Northesk paid attention.

It is a mistake to assume that market imperfection, which is the normal starting point for regulation, can always be solved by active regulators trying to shape markets in a different and supposedly better way. The truth is that regulators rarely have the information, the understanding or the mechanisms to replicate market solutions. Indeed, the danger is that they end up continually expanding the scope and complexity of their interventions as they seek further interventions in order to make up for the deficiencies in the actions that they have already taken.

While I recognise that, as the report states, there are undoubtedly some areas of monopoly or public service that cannot have a simple or even a complex market solution, the presumption should be that the best outcome for regulators, wherever possible, is to promote effective and fair competition, and to leave competitive forces to deliver consumer benefits.

The danger of over-regulation is that it becomes the enemy of innovation and entrepreneurship. For businesses in heavily regulated industries, there is a risk that meeting regulatory requirements will start to override responding to markets and customers. The independent judgment within those businesses of what is appropriate becomes subsidiary to satisfying what the regulator has prescribed. From that, there is a risk that industries converge around the lowest common denominator of meeting what is laid down by the regulators.

Competition can then become blocked by the cosiness of living within a regulatory framework. With that lack of competitive forces comes a blunting of the forces of innovation and response to customer needs.

Paradoxically, while regulation is sometimes intended to increase the responsibilities of boards and companies, it can often, if taken too far, mean that boards and management take less responsibility for their actions rather than more. Instead of making, and having to make, independent judgments about what is an appropriate balance of risks and benefits, they can simply satisfy themselves that they are meeting the prescriptions that the regulators have handed down: "If it meets the regulators' requirements, it must be all right". That is not a healthy way for such decisions to be made.

Yet, despite those dangers, there are natural tendencies for regulators to respond to the pressure for action and intervention by becoming more active and continually expanding their role and scope. One such pressure on regulators is to do something about risk. If they are to be held accountable for the consequences of risk exposure, it is always in the interests of regulators to try to impose regulations and intervene in ways that apparently reduce the risk to consumers.

However, risk reductions inevitably carry associated costs that can be easily overlooked. We are in danger of creating a tendency where the desire to remove all risk from society can mean that the only safe consumers are those who consume no goods and no services because of the costs that are imposed on providing them. We have to be careful of regulators' natural tendency to respond to pressures to grow and increase their scope of interest—the regulatory creep to which I referred earlier.

Of course, the formal regulators listed in the report are not the only source of that regulatory burden. As we know, through Parliament, thousands of new regulations are added annually which touch every aspect of our social and business life. A more general issue, beyond those touched on in the report, is the stopping or rolling back of such regulatory legislation by means of sunset clauses or other mechanisms that have been proposed. But that goes beyond the scope of this debate.

Returning to regulatory bodies, I agree with the report's conclusion that it is essential to provide proper counterbalances to forces that cause regulators to try to increase their scope and influence, forcing them to justify their role and ensuring that they are accountable for the power that they wield.

I therefore support a number of the recommendations in the report. In particular, I support the tendency, which I acknowledge has been a government intent, to move towards having independent boards on regulators which have a cross-section of experience and perspectives and can provide a proper challenge to the executive, hold the executive to account to justify their decisions, and in some cases provide a dose of common sense away from the specialists who are involved in that area every day of their lives.

I also endorse the recommendation that regulators should hold public meetings around a published plan where they explain their actions and are exposed to questions and scrutiny from the world at large. I also agree that it is important that there should be an obligation on regulators to provide reasoned arguments for their decisions, with scope for appeal and review by independent legal processes where that can be satisfactorily provided.

A number of noble Lords have touched on the role of Parliament. While there is clearly an important role for parliamentary scrutiny, I have some concerns about over-extending that role, and for the same reasons as it was right in the first place to remove ministerial control and intervention over regulators. It is essential that regulators do what is right based on calm, objective and factual analysis of the evidence before them. We should not have regulation, or the response to regulatory legislation, determined by the weight of public or popular opinion.

I believe that Parliament should set the legal framework. However, if parliamentary committees and Parliament itself get too involved in reviewing the way in which regulators operate, there is a risk that pressure will be put on regulators to adopt more populist rather than independent and well reasoned views. After all, parliamentary committees are made up of politicians, often with their parliamentary party in the majority, and sometimes may serve with a view to pursuing political aims and publicity. We do not ask Parliament to sit in judgment on court decisions in either criminal or civil cases for exactly the same reason. Therefore, we need to be careful that pressure of that kind does not become unduly involved in regulatory decisions which should have a similar basis of reason and law.

However, parliamentary committees should be used to scrutinise the scope, resources and budgets of regulators in order to exert pressure against the tendency towards regulatory creep which I described earlier. I believe that there should be continuing pressure on all regulators to freeze or, indeed, reduce their resources over time, while any increase in resources for regulatory bodies should be specifically challenged and approved by Parliament. I also believe that it would be valuable to appoint a standing regulatory review body, perhaps reporting to the kind of specialist committee that has been described, whose job would be to assist the effectiveness of regulators and report to Parliament on whether they have struck the right balance of intervention versus withdrawal from the areas of the market in which they are tasked to intervene.

If we do not provide those pressures to contain regulators, the risk is that, as other noble Lords have described, they will become ever more powerful, ever more intrusive and ever more costly impositions on the wealth-creating activities of the economy.

I believe that we need to aim for a small state, not a large state. I do not have the confidence expressed by the noble Lord, Lord Holme, that the tide in government is going in that direction. I fear that in many ways we are still heading towards a large state. Public spending is one physical manifestation of that, but at least that is out in the open so that it can be seen and reviewed, and it has its consequences in explicit taxation. The danger is that regulatory creep and the expanding role of regulators will become the uncontrolled and unacceptable frontier by which an ever larger and more powerful state destroys the very foundations of a free and independent democracy. The recommendations of this committee are a useful start in addressing that crucial issue, although I believe that a lot more work still needs to be done.

Photo of Lord Elton Lord Elton Conservative

My Lords, the report and this debate cover a huge field. Many have gone ahead of me with their sharp sickles and I come behind as the gleaner. However, I shall start by joining others in thanking my noble friend Lord Norton of Louth for leading us through what was really a very complicated inquiry in which the danger was that everything was so diffuse and diverse that we could come to no conclusion. My noble friend expertly brought us to several trenchant conclusions which have been forcefully endorsed in your Lordships' Chamber this afternoon.

It is a vast field, and I had not realised quite how vast it is until I began to look at some of the figures. For instance, the Financial Services Authority employs 3,000 people with an annual budget this year in excess of that recorded in the evidence in our book which covered the previous year of £215.1 million. The number employed by those regulators whom I was able to telephone yesterday, 11 of them, produced a payroll of 26,069 people. The volume of material that they produce is ever growing, as evidenced by my noble friend Lord Northesk. So we are looking at something which is, in a sense, a parallel state. Indeed, our report is fitly called The Regulatory State and rightly asks whether it is properly held to account. At present, the answer to that question has to be a pretty equivocal one because the conclusion is that this work has to be done and must be done better.

As I say, I come as a humble gleaner at the end of the reapers and will point to only one or two things, points in effect drawn to my attention by looking at the other activity that has overlapped with our own and which came to light only after our report was produced, in the form of the DTI report, produced in conjunction with the Treasury and published last July, Consumer Representation in Regulated Industries, and the National Audit Office comparison of Energywatch and Postwatch.

Starting with that, it is clear that a principal requirement of any regulatory system is to protect the consumer. A healthy consumer means a healthy market, while a healthy market should mean healthy producers. We have to have regulators either because markets are inefficient or monopolies exist. However, consumer interest should bind very hard on producers through the agency of the regulators. In the original statutes setting up most of these bodies, it is notable that consumer interest did not actually have priority.

The DTI report suggests that consumer representatives within regulated organisations are not actually doing as good a job as they should. It states that they,

"may become unduly reactive, responding to the regulator's agenda or work programme. There is scope for greater focus on issues which will affect consumers in the future, or which are not at present a high priority for the regulator".

If that is the tendency of government thinking, it may be necessary to start recruiting a different sort of consumer representative. I say that because these are major commercial questions that are being addressed and not the response to individual complaints en masse, which is a large part of the customary job of consumer organisations. The report goes on to say that consumer bodies should address themselves to,

"the underlying causes of market failure".

Underlying our main concerns, I have a lesser but none the less relevant concern that the nature of the representation of the consumer interest in regulatory bodies is changing, or it is the intention of the Government to change it. Looking at the intentions of government, I turn next to the frustration which both my noble friend and members of the committee felt at the difficulty of coming across any fixed point in government which has the authority to answer our concerns or to voice future intended policy. In that context it is interesting to note the announcement in paragraph 11 of the report:

"The Department for Trade and Industry (DTI) and HM Treasury (HMT) will continue to work with the consumer bodies to take forward the key findings in this report".

So they have a proactive role on the agenda. If there is no focus at present, it seems to me that that ought to be it, and that a standing committee of the two departments should be set up and be answerable within government for this area of policy. It should comprise the people who fill the Box when the Minister has to reply. For the record, since it is not evident through print, I should point out that the Box is now tenanted; it has had a fluctuating tenancy over the past hour or so. That is comforting to us but, I suspect, most of all to the Minister who is to answer the debate.

I was interested in the anxiety expressed by my noble friend Lord Blackwell about parliamentary supervision. However, I am concerned about the way, if I understood him right, he intended to meet that anxiety by seeking to avoid expert Select Committees getting into a professional cosy with the regulated bodies by setting up some third party in between. We have enough parties here already. We have invented a quasi-government and a huge quasi-Civil Service of the vast numbers I have mentioned outside Parliament. It is at arm's length; it is there to do something that the Government have to ensure is done. The Government ought to be answerable—and it is to Parliament that they should answer.

A Joint Select Committee of both Houses would reduce the number of supervisory bodies by getting both Houses to act together. I can assure my noble friend that membership of these bodies is not particularly constant. Members of the other place come and go involuntarily and we rotate voluntarily—and some of us may be rotated out of this place inconsequentially as well. So there is no danger of that kind of cosiness being bred up. I thoroughly endorse the conclusions to which my noble friend has so ably led us.

Photo of Lord Roper Lord Roper Chief Whip, Liberal Democrat Lords Chief Whip

My Lords, I follow many others in congratulating the committee on such an excellent report. As has been said, it is not only excellent in content but it is also a joy to read—which is not always true of all the reports of your Lordships' House. It is not only a good report but, together with the oral and written evidence, it is an extraordinary basic document for the study of this subject. I am particularly pleased to see that the oral and written evidence is included as a CD Rom, together with the full report. It is a particularly good and helpful idea.

As has been said, the role of regulators is one of the most difficult questions in a democratic market society. The interface between the economic and the political mechanisms is a central question of political economy. As we heard from the noble Lord, Lord Blackwell, this is a continuing debate at a serious level, and it should continue to be so. It is almost the essence of politics in our societies.

As has been said also, there is the question of the accountability of the regulators. "Who regulates the regulators?" goes back to one of the classic questions of political science. We need to examine this issue, and the committee has helped us enormously by pointing out the problems.

One question which has not been addressed—perhaps the Constitution Committee will be able to come back to it—is how the Freedom of Information Act will affect the role of the regulators. How much further information will there be? Will that ensure that they will become more answerable and more easily accountable in the future than they have been in the past? It is a point that we may wish to consider.

To have an overview of the problems of regulation set out in one place will be extraordinarily valuable. Like others, I congratulate the noble Lord, Lord Norton of Louth, not only on his role in leading his committee to produce the report, but on what he has done in developing the work of the Constitutional Committee over the past few years. It has shown the value of developing such a committee in the House. Indeed, when we consider further Select Committees as discussed in the report, this one certainly has been a useful addition to the range of committees in the House. Indeed, the report has shown the value of Parliament having an opportunity to consider this particular problem.

As others have done, I turn now to the Government's response to the document. Although one always looks at the matters with which the Government do not agree, it is important to say that the report is good because the Government have agreed with a large number of the issues in the report and have made rather positive statements about them.

But there are three points—to which reference has already been made but to which I must turn—where the Government disagree with the proposals in the various boxes. I refer, first, to one which has been referred to only in passing in the debate so far—that is, box 13 at page 14 of the Government's response. The recommendation of the committee was that regulators should have a statutory duty to have regard to the principles of good regulation and effective accountability. In response, the Government said that they did not see the general case to ensure the principles of good regulation in statute; that it ought to be looked at on a case-by-case basis.

The Government may have a point, but it seems to me that at some stage there may be a case for re-examining the committee's position that an overall responsibility should be built into a statute. We may need at some stage to consider a statute dealing with regulation in general into which something of this kind could be included. I shall return to that point at a later stage.

The second issue, which was referred to in some detail by the noble Lord, Lord MacGregor of Pulham Market, is the question of the National Audit Office's access to all of the regulators. I regret that I have not had a chance to discuss this with my noble friend Lord Sharman. He, of course, had a good deal of experience in dealing with the issue in his own report. The precedent of the problems of the National Audit Office's access to the BBC is interesting when considering the questions of the FSA and the CAA, which have been set out so well. I feel that the answers that the Government provide as to why there should not be NAO coverage—and therefore the opportunity for PAC scrutiny—of the FSA and CAA are not powerfully argued.

I turn, thirdly, to the Government's comments on boxes 18,19 and 20, the three sets of recommendations dealing with appeals. As someone who has not studied the evidence in detail, I find this a particularly difficult issue. I am not persuaded by what I have heard. No doubt I may be persuaded by the noble Lord, Lord Triesman, when he replies to the debate, but I am not yet persuaded of the Government's case for rejecting the recommendations of the committee. This is an issue to which we will need to return to examine the situation. As has been pointed out, it is interesting that in a number of recent cases the Government have accepted rights of appeal. Again, one may want to look at that matter from an overview position as well as on a case-by-case basis.

I turn finally to the recommendations in paragraphs 199 and 200 which deal with parliamentary scrutiny. Obviously the House should consider these matters; they are issues with which we have considerable difficulties. It will be for the Liaison Committee of the House ultimately to consider the balance between requirements and resources in looking at further Select Committees. Certainly, by showing the issues that need to be considered, the report itself makes a very good case for further parliamentary consideration of the issue. As with the Joint Committee on Human Rights, there is a case for this being a committee which could usefully have representation from both Houses.

However, given what one knows about the pressures on Peers and others in staffing Select Committees, I am not yet convinced—this is something that we will need to explore—whether we need a Standing Select Committee sitting permanently or whether this is something that could be reviewed, let us say, on a quadrennial basis, where a Select Committee every four years could look at the matter.

Let me give a parallel. In the legislation dealing with the discipline of the Armed Forces, there is the quadrennial Armed Forces Discipline Act. Whenever the Bill comes to the House of Commons, instead of being considered by a Standing Committee it is considered first by a Select Committee, which looks at the range of problems linked to service discipline. It is particularly useful every four years to have an overview of the set of related problems.

It may well be that the two Houses will find that there are resources for a Standing Joint Committee dealing with the question of regulators but, if that were found to be difficult, at least one alternative—which might be much better than not having a committee at all—would be to look at a solution parallel to what is done in the case of Armed Forces discipline so that every four years there could be an overview of the kind described in the report.

I am not persuaded one way or the other on this issue, but I thought it worthwhile to air the range of options that might be considered when looking at the question of further Select Committees.

In closing, I repeat my congratulations to the committee on having served this House—and not only this House, but the nation—so well by providing such a useful study of it. I give my thanks to the noble Lord, Lord Norton of Louth, for all that he has done and my good wishes to my noble friend Lord Holme of Cheltenham as he takes up the challenge of chairing this committee.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Economic Affairs

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 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:

"Strategic regulation is central to our strategy".

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.

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— 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.

Photo of Lord Triesman Lord Triesman Government Whip, Lords in Waiting (Whips) 3:02 pm, 2nd December 2004

My Lords, I thank all noble Lords who have taken part in a debate which, perhaps unsurprisingly, has been very wide-ranging. I say "unsurprisingly", because the point has been made by many noble Lords that regulation has very extensive scope, and many issues have been touched on. However, I confess that there are always matters, even in a broad scope, that turn out to be a bit surprising. I congratulate the noble Earl, Lord Northesk, on his confidence that the civil servants now in such large numbers and spread throughout the country are all natural Labour voters. I had not considered that possibility, or that their voting tendencies might not be spread among all parties.

I am very glad to have the opportunity of responding to the debate on behalf of the Government and to congratulate, as many noble Lords have, the noble Lord, Lord Norton of Louth, on his chairmanship of the Constitution Committee and its report. It is a comprehensive and valuable inquiry, by any standards, and the subject matter, as I think everyone would agree, is of the greatest importance to the economy, the business community and customers of essential services. As such, the Government welcome and agree with many of the items in the committee's report and with parts of its analysis. It is a very valuable contribution to the development of thinking on regulatory accountability.

I have also read the CRI lecture of the noble Lord, Lord Norton, Who Regulates the Regulators?, published by Bath University, and the Parliamentary Affairs paper in October, Regulating the Regulatory State. Even if the noble Lord, Lord Dahrendorf, is right that you could not submit the committee report for the research assessment exercise, as one who has had to do so in my time, I am pretty sure that the other papers most certainly can be.

The key points that have been made are that while the Government have accepted a great many of the recommendations, they have not accepted what are said to be the most significant ones. I think that I am quoting the noble Lord, Lord Norton, accurately, in referring to the recommendations which embody the intellectual thrust. The noble Lord, Lord Holme, was concerned about those same issues, as were other noble Lords, including the noble Lord, Lord MacGregor. It has been said that we need to improve accountability in a much more thorough way and that we need to deal with the other issues about how that accountability is to be expressed and how people might accumulate rights of appeal, and so on.

I want to set out the Government's response to the report in a few moments. First, I should like to put the issues of regulation and accountability in context. Part of that context is that which the noble Lord, Lord Dahrendorf, mentioned—the operation of the Regulatory Reform Act 2001 and the necessity for review. I think that we probably all agree about having a review—the only question is when. I, too, understand that it will take place in mid-2005.

On regulation, I should like to focus on the examples provided by the key sectoral regulators for utilities. These regulators were brought into being by statute in order to provide important safeguards in crucial sectors where there were natural monopolies, dominance, information asymmetry or some combination of all those elements. The dangers of predatory behaviour by incumbents—foreclosure, monopoly pricing and other consumer detriment—had to be guarded against. Whatever is said about the growth of regulation in recent years, those were the guiding principles which were plainly behind what the previous government did, and I think it as well that we acknowledge that.

At the same time, it is essential to keep it in mind that the regulated companies usually operate within the private sector. They need to attract investment, as well as to respond to the emergence of competition. The noble Lord, Lord Blackwell, made some of those very points with regard to the nature of business and the interests of business in this respect. They are not, as businesses, wholly immune from the market. It is right to emphasise that their customers are the crucial factor in this and should guide much of our thinking. I do not accept the point of the noble Lord, Lord Blackwell, that boards tend to take less responsibility in these circumstances; I do not think that passivity is one of their hallmarks. For the most part, they have been pretty rigorous.

The independence of regulators provides the certainty necessary for businesses to operate and prosper in a regulated market. That includes the key independence from political interference in their day-to-day working and their decision making.

As the committee's report mentions, regulators have been established at different times and in different ways, but they share a basic model: a sector-specific regulator charged with a responsibility to operate under a hierarchy of statutory duties to achieve a range of public policy objectives. The statutory nature of each regulator's duties, coupled with their independence from government, underpins the successful operation of the regulatory framework.

Accountability is essential for those who hold public office, and in the context of this debate, it is a necessary adjunct to the pursuit of better, more effective regulation. But the word "accountability" is open to different interpretations, as, from the excellent drafting of the report, I know the noble Lord, Lord Norton, recognises. In the most common usage, it can imply being answerable to a person or a body in some higher authority, perhaps holding powers to censure, rebuke or penalise. It can describe the way in which the functions are undertaken, the processes used and the openness with which policies are developed and decisions taken, which we usually refer to as transparency. Accountability can also mean the processes that exist to review, amend or overturn decisions, such as those vested in a higher court. It has had all those meanings in today's debate.

All those elements of accountability are relevant to the debate on the regulatory frameworks, and all have been considered by the committee in the course of its report. A key point that I will leave in your Lordships' thoughts is that any process of accountability in the case of regulators needs to ensure that the fundamental issue of the independence of the regulators is not compromised by what is proposed.

The Government have taken major steps to reform and improve regulation, including the 2001 Act. The Better Regulation Task Force, on which I was proud to serve under the chairmanship of my noble friend Lord Haskins, was set up in September 1997. It has accountability and transparency as two of its five principles of good regulation. However, I remind the House that, important as those two are, the other three are not unimportant either. There is also proportionality, consistency and targeting. The Government have reformed regulation of the electricity and gas markets, the postal services market, the telecommunications and broadcasting market, the water industry, and the financial services markets, with all five of those principles in mind. They were all major initiatives, reflecting the importance of those sectors, and the Government's desire not only for deregulation, but for better, more effective regulation. I hope that those observations will serve as an acknowledgment and appreciation of the complex task which faced the committee in dealing with this complex subject, and the importance that I and the Government attach to it.

In the response to the report, the Government have set out a number of ways in which sectoral regulators are held to account. These include parliamentary scrutiny by Select Committees. The noble Lord, Lord Holme, and others have made the point that it is absolutely right that the Select Committee should have that role. The noble Lord, Lord Roper, also made that point. There are also the appeals to the Competition Commission and the Competition Appeals Tribunal, and judicial review. Whatever the expense or difficulty, judicial review remains a route, and it is right to mention it. There are transparency arrangements, notably regulatory impact assessments; corporate governance; and consumer representation. I promise the noble Lord, Lord Elton, that I shall return to that last matter. Many of those processes have been revised and enhanced by government in the course of the work that I mentioned to review and improve the regulatory framework.

The committee made 24 recommendations in its report, in the areas of the overall regulatory framework, exposure to scrutiny, and independent review and improving appeals. The Government have accepted many of these recommendations without reservation. However, in publishing the Government's response, the committee noted that there were proposals that had not been fully accepted, and mentioned those concerning leadership within government, audit and the appeals process. The committee anticipated a more detailed explanation of the Government's position on these issues. I have been invited to provide more detail today, and I shall return to those points. The noble Lord, Lord Norton, emphasised them in the lecture published by Bath University, to which I referred and which has had wide circulation in academic and other communities. The noble Earl, Lord Northesk, also urged us to consider that set of developments.

The committee's recommendation 11 called for a much stronger communication of the "whole of Government" view of regulation. It recommended that the Government should appoint a lead department to be responsible for promoting effective regulation in practice, thereby co-ordinating the various roles currently played by a number of departments, including the Treasury, the DTI, the Cabinet Office and the office of the Prime Minister. The committee went on to recommend that the Cabinet Office would most logically assume that role, possibly by expanding the remit of the Regulatory Impact Unit.

The Government have made it plain that we agree with the importance of communicating regulatory principles and policies to the independent regulators and to a wider audience. If that needs restating today, I most certainly do so. We believe that effective communication of those principles and policies contributes to increased transparency and the reduction of regulatory uncertainty. The noble Lord, Lord MacGregor, appealed for exactly that in his comments. We recognise the value of ensuring greater consistency between regulatory policies, when that is appropriate, and of clarifying the lines of accountability between government and regulators. Consequently, we are committed to communicating effectively the "whole of Government" view of regulation, and agree with the committee that it is an objective of key importance.

The committee's report recognised that the wide number of forms which regulation takes can lead to a very broad definition of regulation. If I may say so—although perhaps it is a rather personal and injudicious comment—I have sometimes thought that the breadth of the definitions of regulation were so wide as to encompass almost everything. That includes the one provided by the Better Regulation Task Force. It was hard to think of what would not count as "regulation"—hence some of the difficulties in the task that we are considering.

Regulatory principles and policies need to be considered firmly in the context of the relevant market and policy areas. That is the starting point of the Government's response. It should be clear that detailed policy on regulation of the gas and electricity markets, for example, cannot and should not be divorced from wider responsibility for policy on energy matters generally. In the same way, detailed policy on regulation of the water industry or regulation of broadcasting needs to be considered alongside the wider policy on those issues in the relevant departments. Regulation, particularly economic regulation of individual sectors through independent regulators, requires specific knowledge of each sector. That is common ground, I suspect. That knowledge and responsibility is vested in the relevant Ministers and departments. It is crucial that responsibility and authority should not be diluted and disseminated by adding an additional layer of bureaucracy, with the attendant prospect of loss of coherence and clarity which that could entail.

I here recall two other principles of the "better regulations" mission—the principles of proportionality and targeting. The noble Lord, Lord Norton, introduced in the report and his excellent opening speech the question of regulation and regulatory creep. Almost all noble Lords have referred to that problem when the extent of regulation currently manifest has been discussed. However, significant efforts have been made through legislation to set sunset clauses, to try to claw back areas from regulation and to ensure, for example, that if new regulation is arriving in one place, there is corresponding reduction of regulatory burdens in other places. I believe that the noble Lord, Lord Elton, was appealing for exactly that. I believe—and I hope that all noble Lords would agree—that the dangers of creating new layers are dangers that we should not ignore.

As a brief aside, I remember that once, in my trade union experience, there was a recognition that the union's executive had established a very large number of committees to oversee everything. It therefore established a committee to abolish committees; that committee was retained, and we created two others to monitor its work. I have always used that as a precaution in my own thinking about future developments.

Co-ordination between different policy areas is a matter for clear allocation of responsibility for cross-cutting work, and for co-ordination of efforts to disseminate and achieve best practice. The Cabinet Office Regulatory Impact Unit has a role in promoting a better regulation agenda across government, including a focus on bearing down on the burden of regulation. We fully support that role, and the Cabinet Office advises on those matters. Of course, we need to identify and spread best practice, and to assess key policy issues which are common across a number of regulated sectors. That is the function of the Treasury and DTI, through their joint work programme on cross-cutting regulatory issues.

The joint team, drawn from both departments, ensures that policy-making across the different regulatory sectors can be joined up, and can reflect innovation and evolving best practice. Again, that takes place within the better regulation framework established by the Cabinet Office. I was asked which Minister had general responsibility; it is Ruth Kelly, as I suspect noble Lords may know, though I emphasise that the Better Regulation Task Force remains independent.

The Government believe that the Treasury and the DTI should jointly lead in formulating economic regulation policy and in ensuring that the regulatory framework is fit for purpose. That reflects their broader responsibilities; the Treasury and the DTI have a joint target to increase United Kingdom productivity, and economic regulation plays an important part in working towards that objective. The DTI will co-ordinate and communicate on behalf of government on issues where the DTI has a significant cross-cutting and sector responsibility.

These arrangements deliver the objective of co-ordination and communication. Care is taken to avoid division of authority from responsibility. There may be some interesting questions to take up in the suggestion made by the noble Lord, Lord Roper, about a quinquennial look at these matters. I have added a year to what he said; I apologise. I will think that through and perhaps come back to the noble Lord and others on another occasion. The issue of Select Committees is plainly a matter for Parliament.

The second recommendation of the committee is that the NAO should have access consistently to all regulatory bodies, including the Financial Services Authority. The Government value the vital functions discharged by the National Audit Office in monitoring value for money and financial control in spending public money. The Government believe that regulators should always ensure value for money and accountability for expenditure, which should be embedded in their processes and their thinking.

We need to recognise that there are significant differences between the regulators and the ways in which they are constituted. That has an effect on the way in which they are held accountable for their cost-effectiveness. Some sectoral regulators, such as Ofgem, Ofwat, Ofcom, and others were set up by legislation in such a way as to bring them within the scope of audit by the NAO. I do not think, with great respect to the noble Lord, Lord MacGregor, that it is a weak response to say that others are set up in different ways.

The noble Lord, Lord Norton, asked a question about this. Other bodies, such as the FSA and the Civil Aviation Authority, have different constitutions. The FSA is a private company limited by guarantee, and it is directly financed by the industry. The relevant audit requirements are those applicable under company law. It is worth noting that the FSA has no financial relationship with government or Parliament, and it is not to be regarded as acting on behalf of the Crown; it does not. That is a distinct difference from other regulators which are either non-ministerial government departments or are partly funded by public money.

There are mechanisms in place to ensure that the FSA expenditure is reasonable. The FSA has to have regard to the need to use its resources in the most efficient and economic way. It is required to consult on that and to set its pricing in advance. The FSA provides information on the costs of regulatory authorities in overseas jurisdictions in its annual report, and it holds an annual public meeting to consider that report.

The matter of ex-post examination of its finances means that the FSA is formally accountable to the Treasury. I answer the question put by one or two noble Lords; Treasury Ministers are accountable to Parliament in exercising their powers in relation to the reports that they receive. A similar position exists for the Civil Aviation Authority. I will write to any noble Lord who wants to go through the distinctions between that and the FSA. In determining and setting charges, all these bodies are accountable through mechanisms that are discernable. All of them reflect what I would describe as a targeted approach.

The committee recommended that appeals should provide an opportunity for the regulated to have their objections reviewed on the merits of the case, subject only to the condition that the appeal body should have the clear ability and power to identify and penalise appeals designed to frustrate equitable regulation. We support the aim of the recommendation, to ensure that appeals mechanisms are targeted and dealt with in a timely fashion to maximise regulatory certainty and minimise regulatory burdens.

However, there are already effective appeals mechanisms, and the Government are not convinced of the benefits of further extending a general right to appeal all decisions on the merits. The consequences seem to be that almost all decisions, particularly decisions on pricing, are likely to be appealed. We would run into problems that could be elaborated at great length, but can be put fairly simply. The processes themselves would begin to take so long that price-sensitive decisions of fundamental importance would take too long to get out into the marketplace and have a real and sensible impact in that marketplace. The decisions taken and the regulators' authority in taking decisions would be weakened, although I do take the point that has been made by the noble Lord, Lord MacGregor, about OFFA. It is occasionally possible that the nature of a decision would be of such fundamental and devastating impact if it was got wrong that it would be churlish to say the least to leave it without any sort of right of appeal.

The Government do not see the merit of a single body, a regulatory appeals tribunal, with a remit to consider appeals against the decisions of this extensive set of independent regulators. They are diverse, and there needs to be a proper and diverse response. The route of appeal, whether by judicial review or review on the merits of appeal as a way of re-hearing must be proportionate in all cases to the specific circumstances and the type of decision that the regulator is taking.

The relationship between the regulators and the relevant consumer bodies is an important point that was raised by the noble Lord, Lord Elton. I have also re-read the report that he mentioned. Some consumer bodies are very effective indeed, and the meetings that they hold are very effective, and everyone says so. Others are less so. The report indicates a number of ways in which that performance could be improved and the money spent more effectively. We have accepted that today, and it needs further work.

I have been asked specifically about the regulatory accountability body that is chaired by the Prime Minister. It is a prior hurdle for clearance before Cabinet and Cabinet committee considerations. The formation of the committee was announced in the Budget Statement of 17 March 2004 as a new measure for strengthening scrutiny of major regulatory proposals. In its forward plan it is looking at the implementation of all major regulatory proposals to ensure that there are compensating deregulatory measures so that there is no unnecessary growth in regulation. The panel for regulatory accountability assesses impact for all significant proposals to ensure that business views have been taken into account. I have already said that the Minister responsible for this area is Ruth Kelly.

The Freedom of Information Act applies to relevant regulatory bodies in the same way as government departments. It provides greater transparency, but it needs to strike a balance between the right to know and the important matters of commercial confidentiality. Not all regulators are non-ministerial government departments, and therefore not all fall within the means of the Act.

In the course of this debate, a number of points have been made, and I will go though them all and write to noble Lords if I have not addressed them specifically. I claim on behalf of the Government, perhaps contrary to the points made by the noble Baroness, Lady Noakes, that the mechanisms that have appeared for regulation started some time ago, as has been said, and they increased considerably during the period in which there was a movement from nationalised to privatised industries. The point that strikes me most forcefully is that as that process took place those who were affected by it welcomed and came to rely on the independence of the regulators from politicians and from the day to day impact of political affairs. It is hardly surprising in that light that more people wanted to see regulation conducted in that way, having seen the benefits of starting it in that way.

We consistently seek to produce by message and deed uniformity not for its own sake, but in order to make sure that people understand where they are. We seek to ensure that initiative is not stifled, and that best practice is shared. We seek to maintain relevant, appropriate and proportionate regulatory frameworks that meet the needs of individual regulated markets and most essentially their consumers. We will continue to study this report to see whether there are other areas in it that could also be elaborated or taken on as they are. In that, I express my gratitude for the report.

Photo of Lord Norton of Louth Lord Norton of Louth Conservative

My Lords, this has been an interesting and very worthwhile debate. I am grateful to all those who have spoken, especially members of the Constitution Committee for their kind comments; I thank them for their support during my chairmanship of the committee, which has been a stimulating and thoroughly enjoyable experience. I very much welcomed the comments in the debate and the breadth of support for the recommendations embodied in the committee's report. The debate demonstrates the importance of engaging in critical examination of regulation in this country. We need to stand back and look at the regulatory regime as a whole, not simply at its individual parts.

I am very grateful to the noble Lord, Lord Triesman, for his reply, and I congratulate him on having undertaken rigorous homework. I want to respond to him on one or two of his points. Co-ordination and identifying a clear lead department does not necessarily involve extra bureaucracy; it could lead to a reduction. On other points that we raised, he developed the Government's published response. Although he made a plausible case, he has not persuaded us on those points. The House will return to those matters that affect government.

As has been stressed, the report seeks action not only by the Government but also by Parliament. I welcome the support expressed in the debate for a parliamentary committee, which I hope has been heard by the relevant authorities. It is something that we need to pursue; again, I am sure that we will do so.

On Question, Motion agreed to.