House of Commons Regulatory Reform Committee · 2009. 7. 21. · John Penrose (Conservative,...

329-II Published on 21 July 2009

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House of Commons

Regulatory Reform Committee

Themes and Trends in Regulatory Reform

Ninth Report of Session 2008–09

Volume II

Oral and written evidence

Ordered by The House of Commons to be printed 14 July 2009

The Regulatory Reform Committee

The Regulatory Reform Committee (previously the Deregulation and Regulatory Reform

Committee) is appointed to consider and report to the House on draft Legislative Reform

Orders under the Legislative and Regulatory Reform Act 2006. Its full remit is set out in

S.O. No. 141, which was approved on 4 July 2007.

Current membership

Andrew Miller (Labour, Ellesmere Port & Neston) (Chairman)

Gordon Banks (Labour, Ochil and South Perthshire)

Lorely Burt (Liberal Democrat, Solihull)

Mr Quentin Davies (Labour, Grantham and Stamford)

Mr James Gray (Conservative, North Wiltshire)

John Hemming (Liberal Democrat, Birmingham, Yardley)

Mrs Sharon Hodgson (Labour, Gateshead East & Washington West)

Mr Stewart Jackson (Conservative, Peterborough)

Judy Mallaber (Labour, Amber Valley)

Dr Doug Naysmith (Labour/Co-operative, Bristol North West)

John Penrose (Conservative, Weston-Super-Mare) (appointed on 29 June 2009)

Mr Mark Prisk (Conservative, Hertford and Stortford) (discharged on 29 June 2009)

Mr Jamie Reed (Labour, Copeland)

Mr Anthony Steen (Conservative, Totnes)

Phil Wilson (Labour, Sedgefield)

Criteria against which the Committee considers each draft legislative reform order

Paragraph (3) of Standing Order No.141 requires us to consider any draft legislative reform

order against the following criteria:

… whether the draft legislative reform order — (a) appears to make an inappropriate use of delegated legislation; (b) serves the purpose of removing or reducing a burden, or the overall burdens, resulting directly or indirectly for any person from any legislation (in respect of a draft Order under section 1 of the Act); (c) serves the purpose of securing that regulatory functions are exercised so as to comply with the regulatory principles, as set out in section 2(3) of the Act (in respect of a draft Order under section 2 of the Act); (d) secures a policy objective which could not be satisfactorily secured by non-legislative means; (e) has an effect which is proportionate to the policy objective; (f) strikes a fair balance between the public interest and the interests of any person adversely affected by it; (g) does not remove any necessary protection; (h) does not prevent any person from continuing to exercise any right or freedom which that person might reasonably expect to continue to exercise; (i) is not of constitutional significance; (j) makes the law more accessible or more easily understood (in the case of provisions restating enactments); (k) has been the subject of, and takes appropriate account of, adequate consultation; (l) gives rise to an issue under such criteria for consideration of statutory instruments laid down in paragraph (1) of Standing Order No 151 (Statutory Instruments (Joint Committee)) as are relevant; (m) appears to be incompatible with any obligation resulting from membership of the European Union.

Publications

The Reports and evidence of the Committee are published by The Stationery Office by

Order of the House. All publications of the Committee (including press notices) are on the

Internet at www.parliament.uk/regrefcom. A list of Reports of the Committee in the

present Session of Parliament is at the back of this volume.

Committee staff

The current staff of the Committee are John Whatley (Clerk), Neil Caulfield (Inquiry

Manager) and Liz Booth (Committee Assistant).

All correspondence should be addressed to the Clerk of the Regulatory Reform Committee,

Delegated Legislation Office, House of Commons, 7 Millbank, London SW1P 3JA. The

telephone number for general enquiries is 020 7219 2837; the Committee’s email address is

[email protected].

Briefing paper

Page

NAO Briefing Paper ‘How BERR and HSE are seeking to understand businesses’ interpretation of legislation Ev 1

Witnesses

Tuesday 10 March 2009

Sir William Sargent, Executive Chair and Jitinder Kohli, Chief Executive, Better Regulation Executive Ev 20


Steve Brooker, Head of the Fair Markets Team, Consumer Focus, Sue Edwards, Head of Consumer Policy, Citizens Advice, Ron Gainsford, Chief Executive, Trading Standards Institute, Pula Houghton, Economic Policy Manager, Which?, Sarah Veale, Head of Equality and Employment Regulation Department, Trades Union Congress Ev 60

Tuesday 28 April 2009

Tim Ambler, Senior Fellow, London Business School, Clive Davenport, Trade and Industry Chairman, Federation of Small Businesses, Alexander Ehmann, Head of Parliamentary and Regulatory Affairs, Institute of Directors and Rick Haythornthwaite, Chairman, Risk and Regulation Advisory Council

Ev 84

Tuesday 12 May 2009

Verena Ross, Director, Strategy and Risk, Financial Services Authority;

Stephen Haddrill, Director-General, Association of British Insurers, Professor Robin Jarvis, Head of Small Business, Association of Chartered Certified Accountants, Roger Salomone, Head of Business Context, EEF and Steve Pointer, Head of Health and Safety Policy, EEF

Ev 97

Ev 109

Tuesday 7 July 2009

Ian Lucas MP, Parliamentary Under-Secretary of State, Jitinder Kohli, Director General of Strategy and Communications, Better Regulation Executive, Philip Rycroft, Chief Executive, Better Regulation Executive all of the Department for Business, Innovation and Skills

Ev 113

List of written evidence

Page

1 Food Standards Agency Ev 126

2 Chartered Institute of Environmental Health Ev 127

3 Aldersgate Group Ev 128

4 Institute of Chartered Accountants in England and Wales Ev 134

5 Andrew Tyrtania Ev 141

6 Law Commission Ev 143

7 Business Services Association (BSA) Ev 149

8 Office of Fair Trading (OFT) Ev 152

9 Environment Agency Ev 180

10 Council for Healthcare Regulatory Excellence Ev 181

11 PricewaterhouseCoopers LLP Ev 196

12 North East Chamber of Commerce (NECC) Ev 200

13 International Centre for Financial Regulation (ICFR) Ev 201

14 British Retail Consortium Ev 204

15 Forum of Private Business (FPB) Ev 206

16 Chemical Industries Association Ev 209

17 Ofcom Ev 210

18 Competition Commission Ev 214

19 National Joint Utilities Group Ev 234

20 Network Rail Ev 235

21 Europe Economics Ev 237

22 Actal (Dutch Advisory Board on Administrative Burden) Ev 240

23 Local Better Regulation Office Ev 241

Letter from Ian Lucas MP, Minister for Business and Regulatory Reform, Department for Business, Innovation and Skills Ev 250

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Regulatory Reform Committee: Evidence Ev 1

Briefing Paper

NAO Briefing Paper for the Regulatory Reform Committee

HOW BERR AND HSE ARE SEEKING TO UNDERSTAND BUSINESSES’INTERPRETATION OF LEGISLATION

June 2009

Summary

The regulatory reform agenda seeks to ensure that regulations provide intended benefits and protectionswhile minimising unnecessary costs on business. The Government has developed a broad range of initiativesto achieve these aims, including the target to reduce administrative burdens by 25% by 2010. Three yearsinto this Programme, there is now growing recognition of the importance of business perceptions and thenegative impact of “regulatory myths”—a term commonly used to describe a false understanding ofregulations or regulatory requirements. This is leading to an increasing emphasis on understanding howbusinesses react to, and interpret, regulations. Tackling these issues has the potential to help reduce the costsof complying with regulations and improve businesses’ perceptions.

On 9 February the Regulatory Reform Select Committee asked the NAO to provide a briefing paper on“whether Government departments understand how businesses interpret regulations”. The terms ofreference are provided at Annex 1. We agreed to focus on BERR and the HSE and, in particular, theapproaches they have adopted on employment law and health and safety law. We reviewed availableresearch, including our own business survey, to identify common themes on the causes and consequences ofbusinesses’ misunderstanding.

The main findings are:

(i) Businesses are likely to incur additional costs if they misunderstand or misinterpret regulations. Whilethere may be sound economic reasons why businesses chose to use external consultants, the NAO’sresearch shows that a lack of confidence in understanding the requirements of regulations can leadbusinesses to over comply with regulations or employ external agents. The NAO survey shows thatbusinesses commonly employed external agents as they did not believe they had suYcientknowledge of regulations and thought it worth paying for the re-assurance or legal certainty thatthey were complying correctly.

(ii) Addressing regulatory myths and improving businesses’ understanding would deliver tangible benefitsfor business. Tackling these issues can help make compliance easier and reduce costs; increasebusinesses’ confidence in the need for and requirements of regulation; and, ultimately, help todeliver the regulation’s intended benefits and protections.

(iii) There are many sources of “regulatory myths” and not all are within government control. Regulatorymyths can be caused by poorly designed or implemented regulations, or a lack of co-ordinationbetween regulatory bodies. However, misperceptions may also result from external sources, suchas insurance requirements, or be perpetuated by articles in the media. As a result, businesses areoften uncertain as to which regulations apply to them or that they are fully compliant withregulations. Departments therefore face a challenge in communicating clearly the purpose andrequirements of regulations.

(iv) BERR and HSE have undertaken research to improve their understanding of businesses’interpretation of regulations. Both have commissioned independent research to better understandhow businesses are reacting to regulations. BERR and HSE view this as an important step indesigning initiatives that deliver tangible benefits for businesses.

(v) BERR and HSE have implemented projects to expose regulatory myths and improve businesses’understanding of regulations. For example, BERR have improved and expanded their employmentlaw guidance material and HSE are encouraging proportionate responses to health and safetyregulation through their sensible risk management campaign.

(vi) Departmental research shows that the initiatives have been well received by businesses that are awareof the changes, but there is a continuing need to raise awareness more broadly. Early testing by BERRand HSE has indicated that businesses are positive about the benefits of the initiatives but there is,as yet, limited awareness. Both BERR and HSE have set up communication campaigns to addressthis issue.

(vii) The BRE has begun to disseminate the lessons from the various pieces of research. Departments havecommissioned their own research into businesses’ understanding; the NAO conducts an annualsurvey of businesses; and other countries are seeking to measure businesses’ perceptions. The BREis, increasingly, seeking to draw together and disseminate information on the influences ofperceptions but, as yet, there have been few attempts to share knowledge on best practice on howto encourage a more accurate interpretation of regulations.

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Ev 2 Regulatory Reform Committee: Evidence

(viii) While there are initiatives to improve businesses’ understanding of existing regulations, there is alsoa need to give fuller consideration to these issues in the design of new regulations. NAO reports havehighlighted that the consideration of how to enforce and encourage compliance has been apersistent weakness of Impact Assessments. There is scope for departments to better consider theunintended consequences of regulations and identify the most appropriate mechanisms forcommunicating new regulatory requirements.

For the Committee’s inquiry

The paper identifies a number of issues which are relevant to the Committee’s current inquiry. Inparticular, the Committee may wish to consider:

— commending and supporting the work that BERR and HSE are doing to understand and addresshow businesses interpret regulations. There is scope to explore whether these are isolatedcampaigns or such approaches are becoming more widespread across Government;

— encouraging departments to tailor communications to improve businesses’ confidence that they aremeeting regulatory requirements. Research shows that businesses want clarity on whichregulations apply and clear information on how to comply. As far as possible, communications onregulatory requirements should be tailored to diVerent sizes and sectors of business;

— supporting the BRE’s work to draw together the research findings on perceptions of regulationsand disseminate widely the lessons on how to improve business understanding on theinterpretation of regulations; and

— encouraging a greater focus on compliance and communication issues in the design of newregulations and regulatory reform initiatives. Understanding how businesses interpret, and reactto, regulations should sit at the heart of eVective design.

Introduction

1. Regulation plays a vital role in the UK economy as it provides workers, consumers and theenvironment with essential protections and benefits. The aim of the regulatory reform agenda is ensureregulations provide these benefits without imposing unnecessary burdens. In doing so, the Governmentseeks to help businesses by making their life easier. The Better Regulation Executive (BRE) leads the agendaacross Government, and works with departments and regulators to:

— improve the design of new regulations and how they are communicated;

— simplify and modernise existing regulations; and

— change attitudes and approaches to regulation to become more risk-based.

2. The Government is seeking to help businesses and ensure that the benefits of regulatory reforminitiatives are felt on the ground. It has committed to improving its communications with stakeholders inorder to tackle the gap between the perception of regulation and the reality. Understanding how businessesperceive and interpret regulations has important implications for the design and implementation of newregulation.

3. BERR has a PSA target to deliver the conditions for business success. To measure progress in achievingthis objective, the BRE tracks the proportion of businesses that believe “most regulation is fair andproportionate”. The NAO’s annual survey of businesses provides the data to measure progress andshows that:

— there had been a small improvement in business perceptions in 2008, including the BRE’s indicatoron whether regulations are fair and proportionate;

— some 40% of businesses did not understand the purpose of regulation; and

— just over one third of businesses felt complying with regulations was straightforward or easy.

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Figure 1

BUSINESS PERCEPTIONS OF THE GOVERNMENT’S APPROACH TO REGULATING

0 10 20 30 40 50 60

It is easy to comply w ith

regulations

It is straightforw ard to

understand w hat you are

required to do to comply w ith

regulations

Most regulation is fair and

proportionate

Generally, it is clear w hat the

purpose of regulation is

Percentage (%)

2008

2007

Source: National Audit OYce surveys, 2007 and 2008

Objective and Scope of this Paper

4. The objectives of this paper are to:

— review how BERR and HSE have sought to understand businesses’ interpretation of regulationand “regulatory myths; and

— establish what they are doing to address the issues.

5. As agreed with the Committee, we have focused on employment law and health and safety regulations.The Anderson review of regulatory guidance also found that small and medium enterprises (SME’s) haveparticular diYculty understanding and complying with regulations relating to employment and healthand safety.1

6. The paper is structured as follows:

— Part 1 sets out why it is important to tackle business’ misinterpretation of regulation and addressregulatory myths—ie the implications for businesses.

— Part 2 sets out the results of BERR and HSE research into the causes of misinterpretation andregulatory myths.

— Part 3 examines how BERR and HSE are addressing these issues.

7. The House of Commons Work and Pensions Committee has also considered the interpretation ofhealth and safety legislation as part of their third report of the 2007–08 session.2 Further details on theenquiry and the Government response are set out in Appendix two.

Part 1: The Implications of Misinterpretation and Myths

Misunderstanding regulatory requirements can lead businesses to incur additional costs, through the use ofexternal consultants or over-compliance with the rules. There is also the risk that a lack of clarity overregulatory responsibilities can lead some businesses to not comply fully or not adapt their business practices.

8. When businesses do not understand what they need to do to comply with regulations, it can create aperception that regulation is complicated and challenging. Perceptions may also be influenced by regulatory“myths”—ie the false understanding of regulations or regulatory requirements. Regulatory myths can beperpetuated by the media, but business misinterpretation of regulations can also lead to their creation.

9. There is a growing body of research into businesses’ understanding of regulations which is providinga better insight of the consequences of misunderstanding and misinterpretation. We identified four commonpotential consequences:

1 The Anderson review, The Good Guidance Guide, January 2009.2 House of Commons Select Committee on Work and Pensions, The role of the HSC and HSE in Regulating Workplace Health

and Safety, (Third Report of session 2007–08, HC 837).



(i) Use of paid external guidance

10. Misunderstanding legislation or perceiving it as complicated can lead firms to use external consultantsto ensure they meet their legal requirements. Our 2009 survey showed that 71% of businesses use at least oneexternal agent to help comply with regulations. The most common reasons were that external agents hadthe knowledge to deal with regulations and that firms felt reassured from using a professional (Figure 2).BERR research has suggested that businesses in sectors where the risk of injury or ill health is relatively lowcould save up to £140 million per annum if, instead of paying third parties for basic health and safetysupport, 20% more of them turned to the HSE, local government or other government sources.3

Figure 2

MAIN REASONS WHY BUSINESSES USE EXTERNAL AGENTS

0

200

400

600

800

1000

1200

Provision of

legal

certainty /

reassurance

Lack of

internal

resources

Other / don’t

know

Easier to

outsource

It is a legal

requirement

Worth

money spent

on it

Part of

standard

service

Nu

mb

er

of

res

po

ns

es

Source: National Audit OYce survey, 2009

(ii) Over-compliance with regulations

11. The Anderson review of regulatory guidance found that small and medium sized firms (SMEs) mayover-comply with regulations due to their lack of knowledge or as a result of over cautious advice. Forexample, the report highlighted a survey which showed that 65% of those aVected by the working fromheight regulations felt the need to go beyond the scope of the regulations in order to protect themselveslegally against every eventuality (see case example below). The report also noted that the HSE considersthere is a “great deal of evidence” to indicate that businesses can over-interpret legislation, leading to extracosts in undertaking activities that are not required under legislation.4

Case Example: The Work at Height Regulations 2005

The Federation of Small Business (FSB) conducted a survey of its members in 2006 focussing on areas oflegislation where there may have been over-implementation. One of these eight identified areas is the Workat Height Regulations, which apply to all height work where there is a risk of a fall liable to cause personalinjury. The FSB found that 65% of the respondents aVected by the Directive felt the need to assess all workequipment, despite the Directive stating that inspections were only required for working platforms thatcould cause a fall from a height of more than two metres. They also found that 28% of those aVected hadat some stage employed an external person for their risk assessments, leading to extra costs.5

3 Better Regulation Executive, Improving outcomes from Health and Safety, August 2008.4 The Anderson review, The Good Guidance Guide, January 2009.5 Foreign Policy Centre & the Federation of Small Businesses, Burdened by Brussels or the UK? Improving the Implementation

of EU Directives, September 2006.



(iii) Under-compliance with regulations

12. Confusion around legal requirements can also lead to under-compliance. Research commissioned bythe Better Regulation Executive (BRE) in 2007 found that most of the small businesses they spoke to werenot complying fully with regulations, and businesses’ lack of confidence on what they needed to do preventedhigher levels of compliance.6 We found evidence of this when conducting qualitative research toaccompany our 2009 survey (below).

“I’m sort of a hundred percent sure that I’m not complying with everything I’m supposed to do.Mostly that’s ignorance . . .”

[SME] Source: NAO qualitative research 2009

(iv) Impact on business operations

13. Uncertainty can have an impact upon how a business is run or operates. For example, the Andersonreview highlighted that a third of SMEs cited uncertainty about employment regulations as a reason whythey choose not to employ anyone.7 Research undertaken by the Durham business school on behalf of theSmall Business Service in 2006 also found one of the key myths that tended to act as a deterrent to growthwas concern over the cost of regulatory compliance. This was particularly the case in terms of understandingthe regulatory requirements that apply to diVerent sizes of business.8 Some businesses have a genuine fearthat if they grow, the complexities of employment law may lead them into expensive legal cases and tribunals:

“I’m not going to go out and expand and say bring on three or four new people…..I’ve heard somehorror stories I think it would just drag me down.”


Part 2: Understanding the Causes of Misinterpretation

BERR and HSE have undertaken research to improve their understanding of businesses’ interpretation ofregulations. Bringing this research together shows that there are many sources of misunderstanding and also“myth” creation; often these are rooted in the confusion and uncertainty amongst business and are issues thatcan, and are, being addressed. However, not all of the causes are within government’s control.

14. BERR (including the Better Regulation Executive) and HSE have undertaken research intobusinesses’ perceptions of regulation and the causes of myths and misinterpretations (Appendix three setsout the background and outcomes of this research in detail). The NAO has also conducted three businesssurveys into the perceptions of regulation. We reviewed the available research to identify three commonreasons that lead to the misinterpretation of regulations and creation of regulatory myths.

(i) Uncertainty around regulatory requirements

15. The research shows that businesses do not always understand which regulations apply to them.BERR’s research into Employment Law guidance found that only 45% of respondents were confident oftheir legal requirements. Some employment regulations were perceived as a “minefield”, “grey” and“changing”.9 The situation appears to be similar in health and safety. In 2008, BRE research on“perceptions of the health and safety regime” found that very few of the organisations they spoke to feltconfident that they knew what their legal requirements were. One of the comments businesses made was that“it can be hard to work out the diVerence between legal obligations and less essential services/equipment etcoVered by consultants trying to sell their services”.10

16. A feeling of uncertainty amongst business is also reflected in our 2009 survey. 44% of businesses didnot find it straightforward to understand what they are required to do to comply with regulations and 66%feel that finding information about which regulations applied to their business is burdensome (see Figure 1for comparable 2008 and 2007 results).

“Well this is actually a major question, what [information] do I need. I find it quite diYcult to finda single straightforward list of things that are basic but extremely important”.


(ii) Unclear information and guidance

17. The research also found that there is often uncertainty and confusion amongst businesses on how tocomply with regulatory requirements:

— in the 2009 NAO survey 64% of businesses agreed that finding guidance and advice explaining howto comply was burdensome;

6 Better Regulation Executive, Vanilla Research, Perceptions of the Health and Safety Regime, March 2008.7 The Anderson review, The Good Guidance Guide, January 2009.8 Small Business Service, Durham Business School, Myths surrounding growing a business, August 2006.9 BERR, Employment Law Admin Burdens Survey, December 2008.10 Better Regulation Executive, Vanilla Research, Perceptions of the Health and Safety Regime, March 2008.



— Ipsos MORI surveyed employers on health and safety and found that 45% believed theinformation provided to them was not well tailored. The research also identified the perennialproblem that general guidance may not provide specific examples;

— Ipsos MORI also found that nearly half of employer respondents agreed that the language ofhealth and safety information is too complicated;11 and

— The Anderson review found that many SMEs cited complexity and diYculty of understandingguidance as key reasons why they consult external advisors.12

18. The research therefore shows that a lack of awareness of how to comply with regulations can lead tomisunderstandings and misinterpretations. The common issues were the ability to find easily whichregulatory requirements applied; the availability of clear and concise information and guidance; and thedesire to have tailored information.

(iii) The influence of external sources (media and consultants)

19. The media can help to shape perceptions of health and safety and of regulation and create, orperpetuate, regulatory myths. BRE research found that approximately 48,000 written articles referring tohealth and safety are published in the UK each year and that health and safety is often portrayed in a trivialway, as unnecessarily bureaucratic or overly complicated.13 HSE’s research found that “media reports areoften incomplete, in such a way that they provide a misleading impression, such as omitting the occurrenceof serious injuries contributing to a decision”.14 The research also showed that businesses perceive healthand safety to include issues broader than workplace health and safety, for which other regulators haveresponsibility.

20. Many studies show that businesses believe a “compensation culture” has developed in the UK andthat this can lead to over-compliance with regulations. Research indicates that this perception is not borneout in reality, suggesting that external influences such as the media have an influence. Nonetheless,perceptions do have an impact; HSE research has highlighted the “fear of litigation” as one cause ofdisproportionate health and safety management.15

“western culture seems to be moving towards this litigation type mentality, therefore you need apiece of paper to evidence everything”

[Large business] Source: NAO qualitative research 2009

21. The House of Commons Work and Pensions Select Committee also found that employers could beover cautious in their interpretation of legislation, therefore incurring additional costs. The Committee feltthis was partly due to “some lack of legal clarity” but also that health and safety consultants and mediainfluences could exacerbate the problem.16

22. External consultants may advise businesses to undertake activities that are unnecessary and createadditional bureaucratic activity. BRE research found that, in some cases, businesses may take action on theadvice of paid consultants that “is not required by law and which provides no or little benefit in theworkplace”.17

Part 3: Addressing Myths and Misinterpretations

BERR and HSE have begun to implement specific projects to address regulatory myths and improve businessunderstanding of complying with regulations, notably BERR’s employment law guidance programme andHSE’s sensible risk management initiative. While these initiatives have been received positively by business, thefocus and drive is now on communication, ensuring that businesses are actually aware of the changes.

23. Addressing the causes of misinterpretation has the potential to deliver tangible benefits by increasingbusinesses’ confidence in the need for and requirements of regulation; reducing reliance on costly externalconsultants; and, ultimately, helping to deliver the regulation’s intended benefits and protections. BERR andHSE are taking steps to understand and address businesses’ misinterpretations, as illustrated by theemployment law guidance programme and the sensible risk management initiative.

11 IPSOS MORI, HSE, Attitudes to Health and Safety, 2006.12 The Anderson review, The Good Guidance Guide, January 2009.13 Better Regulation Executive, Improving outcomes from Health and Safety, August 2008.14 Greenstreet Berman Ltd, HSE, Evidence based evaluation of the scale of disproportionate decisions on risk assessment and

management, 2008.15 Greenstreet Berman LTD, HSE, Evidence based evaluation of the scale of disproportionate decisions on risk assessment and

management, 2008.16 House of Commons Select Committee on Work and Pensions, The role of HSC and HSE in Regulating Workplace Health

and Safety, (Third Report of session 2007–08, HC 837).17 Better Regulation Executive, Improving outcomes from Health and Safety, August 2008.



BERR’s employment law guidance project

24. BERR set up its employment law programme in response to the concern amongst business thatemployment law was too complicated. BERR has introduced online tools and new guidance material topromote wider messages on how to eliminate costly duplication and over compliance, in order to helpbusinesses reduce compliance time and expenses. The new information and guidance can be found on thebusinesslink website—businesslink.gov.uk—which oVers free advice and support for all businesses. Anexample is provided below.

Case Example—BERR’s Employment Law Programme

Written statements of employment

All employees are entitled by law to a written statement setting out the main particulars of theiremployment. On businesslink.gov.uk there is a tool businesses can use to help them create a writtenstatement tailored for an individual employee. If filled in correctly, the tool will provide businesses with adocument covering all the employment terms and conditions legally required. There is also an examplewritten statement of employment for businesses to follow.

25. Feedback from businesses that have used the tools and guidance on businesslink.gov.uk tends to bepositive. BERR’s employment law research carried out thirty two case studies across a range of enterprisesto assess the guidance. Overall, they found that the feedback on the guidance was “very positive”, withbusinesses commenting that it was “straightforward” and written in “nice plain english”.18

26. The 2009 NAO survey shows that businesses which are aware of the employment law guidance feelthat it provides helpful background information and an improved understanding of what is required tocomply. For example, in relation to the requirements on written statements of employment:

— 77% of businesses that were aware of the guidance/tools agreed that they provided “a betterunderstanding of what is required”; and

— 83% felt that they provided “the information the business needs to comply”.

HSE Sensible Risk Management initiative

27. In 2006 the HSE launched its sensible risk management campaign to increase compliance andencourage proportionate risk management. As part of this programme of work, HSE has introduced anumber of initiatives, including the myth of the month campaign and example risk assessments.

Myth of the Month campaign

28. HSE’s myth of the month campaign aims to tackle common myths around “bureaucratic” health andsafety requirements which do not really exist. Each month, a cartoon of a myth is published on the HSEwebsite and the true facts outlined. The cartoons are in place to dispel common stories and myths thatbusinesses may have seen via sources such as the media (see example below).

July 2007

MYTH:All office equipment must be tested by a qualified electrician every year

The reality:

No. The law requires employers to assess risk and take appropriate action.

HSE’s advice is that for most office electrical equipment, visual checks for obvious signs of damage and perhaps simple tests by a competent member of staff are quite sufficient.

Source: www.hse.gov.uk

18 BERR, Employment Law Admin Burdens Survey, December 2008.



Example risk assessments

29. Example risk assessments are designed to provide lower risk and small and medium sized enterpriseswith an example of what a “good enough” risk assessment for their sector might look like. The intention isto show that risk assessment does not need to be complicated. Over 30 example assessments have now beenpublished on the HSE website, including hairdressing, warehouse, hospitality, oYce, motor vehicle repairand shops. The HSE believes that the campaign, which is a key initiative in its administrative burdensreduction programme, could reduce compliance costs by £200 million.19

30. HSE has undertaken early evaluation of example risk assessments via a web-based questionnaire ofbusinesses. The survey of 319 businesses showed that 90% of these felt the example risk assessments hadsaved them time in conducting their risk assessment, with an average time saving of 46%. 90% of users saidthat they would recommend them to others. SMEs which were shown an example risk assessment alsoresponded positively.20

Business awareness and communication

31. The impact of departmental eVorts will be minimal if businesses are not aware of new initiatives anddo not use the new tools and guidance. The research shows there is scope to improve business awareness:

— in 2008 the HSE found businesses were positive about the usefulness of example risk assessmentswhen they were shown them, but none of the businesses they spoke to had actually searched theHSE website for guidance or knew that they existed prior to the exercise;21 and

— in terms of employment law guidance and tools, there is a relatively low awareness of their sourceon the businesslink website. The NAO survey found that just 33% of respondents usedbusinesslink.gov.uk to help them comply with regulation. The employment law research alsoshowed that nearly half of all respondents were not aware of any of the businesslink.gov/BERRtools.22

32. BERR and HSE recognise the need to communicate their work with business and both haveestablished communications plans for their initiatives. HSE’s initial focus was to get example riskassessments up and running and they have now turned their attention to communicating the initiatives tosmall businesses mainly via trade associations as a direct route through to local businesses. The HSE alsocommunicate via other stakeholders and third parties such as training providers and business advice groups,and at various conferences exhibitions and open days. The Employment Law team have also usedstakeholders such as the British Chambers of Commerce and the Confederation of British Industry todisseminate their message, in addition to other methods such as direct mail/email and on-line search terms.

APPENDIX ONE

TERMS OF REFERENCE

In February 2009 the Regulatory Reform Committee asked the NAO to undertake research into whetherGovernment departments understand how businesses respond to and interpret regulations. This included:

— what is known in Government about “regulatory myths” and what is being done to ensure thatregulations are implemented as intended; and

— how departments seek to understand whether regulations are being interpreted in practice andwhat drives businesses’ perception and interpretation of regulations; and

— what action departments are taking to ensure that businesses understand and comply with therequirements of regulations.

These issues will be addressed by looking at how two departments—HSE and BERR—approach theseissues. The rationale for choosing HSE and BERR is that businesses identified health and safety andemployment law as the most “unnecessary” areas of regulation in the NAO’s 2007 survey. The NAO willalso use its 2009 business survey to address these issues in more detail.

As part of this work, the NAO will consider what is known about whether legislative requirements aretranslated by businesses, including consultants, in the manner which was intended. This will draw on existingdepartmental research and the NAO’s annual survey.

The NAO agreed to consider these issues and prepare a briefing paper for the Committee summarisingwhat action is being taken in HSE and BERR.

19 HSE, Reducing paperwork, not protection: HSE’s Third Simplification Plan and Progress Report, December 2008.20 Better Regulation Executive, Vanilla Research, Perceptions of the Health and Safety Regime, March 2008.21 Better Regulation Executive, Vanilla Research, Perceptions of the Health and Safety Regime, March 2008.22 BERR, Employment Law Admin Burdens Survey, December 2008.



APPENDIX TWO

HOUSE OF COMMONS WORK AND PENSION COMMITTEE, THIRD SPECIALREPORT OF SESSION 2007—08

The Role of the Health and Safety Commission and Health and Safety Executive in RegulatingWorkplace Health and Safety

In 2007, the Committee launched its enquiry into the operations and work of the health and safetycommission (HSE) and the Health and Safety Executive (HSE), and the proposals to merge the two bodies.As part of this enquiry the Committee considered interpretation of health and safety legislation and the useof HSE guidance provided to business on their obligations under health and safety law.

The Committee’s report was published in April 2008 and the Government responded in June. Thefollowing outlines the relevant Committee conclusions and the Government’s response:

The Committee acknowledged the challenge HSE faces in “debunking health and safety myths” andcommended the HSE for its eVorts to tackle misconceptions. They expressed disappointment in the media’sportrayal of health and safety issues.

The Government was pleased to note the Committees support.

The Committee were concerned that the test of “reasonable practicability” gives a lack of clarity and thereforecreates burdens for business.

The Government did not believe that there would be any value in further reviews of the “reasonablepracticability” test.

The Committee expressed concern about the impact of “over-zealous” health and safety advisors and that thehealth and safety consultancy profession is currently unregulated.

The Government agreed there was a case for accreditation and planned to facilitate a meeting of therelevant professional bodies to take this forward.

The Committee recommended that the Risk and Regulation Advisory Councils could have a role in addressingoverly risk-adverse behaviour and also in the development of accreditation for health and safety consultants.

The HSE looked forward to working with the RRAC to identify new ways of taking the principle of a“common sense approach to risk” forward.

The Committee suggested that more could be done by the HSE to ensure clear and understandable health andsafety advice was provided to employers.

HSE’s strategy review provided the opportunity to take stock of the lessons learnt in providing advice andsupport to SMEs.

The Committee asked the HSE to clarify its policy around charging business for guidance.

HSE has 600 titles in its range of free leaflets which provide guidance to individuals and businesses broadlyexplaining what they have to do. HSE also has 400 priced publications for duty holders on how they cancomply with the law or match best practice.

APPENDIX THREE

RESEARCH INTO BUSINESS UNDERSTANDING/PERCEPTIONS

Health and Safety Research

In response to concerns over irrational and “nannying” approach to health and safety, HSE started aresearch and consultation exercise in 2005 to better understand the issue. The exercise included a “sensiblerisk debate” which included a range of events and an open web forum, discussions with a range ofstakeholder organisations, a contracted piece of research into the scope and causes of apparentlydisproportionate health and safety decisions. They also drew upon existing research reports and the resultsof their annual MORI survey of attitudes to health and safety amongst workers, managers, chief executivesand citizens.

Drawing together the results of these strands of research led the HSE to the following broad conclusions:

— Myths and understanding—the majority of popular stories about health and safety “requirements”are based on a misunderstanding of true legal requirements, either having no basis in fact or, moreoften stemming from the over-interpretation of legal requirements by an individual.

— Excessive paperwork—many expressed concern about health and safety becoming seen aboutpaperwork and box ticking.

— Perceptions of a compensation culture—there was a fairly widely held belief in the existence of a“compensation culture”.



More recently (2007), the BRE, with support from the HSE, launched a review of health and safety forlow risk places of work, focusing in particular on smaller businesses. The aim was to find way to reduceunnecessary burden on these businesses whilst reducing injury and ill health. As part of the research, theycommissioned Vanilla Research to better understand the perceptions of the health and safety regimeamongst SME’s.

The relevant findings from the both the main review and the commissioned perceptions work cover:

— Confusion around the scope of health and safety—many firms use the term “health and safety” tocover a wide range of regulations for which HSE is not responsible.

— Growth in the influences on workplace health and safety—there is now a complex network of sourcesof health and safety support to which businesses can turn. These are often outside the control ofHSE or local authorities.

— Media influence—the tone of much of media coverage of health and safety is negative, especiallyin national press.

— Confidence in grasp of legal requirements—the perceptions study indicated that few businesses feltcompletely confident in their understanding of what was legally required of them.

Employment Law Research

In June 2008 Employment Law Guidance team within BERR commissioned ORC International, anindependent research agency, to conduct a piece of research into the departments progress against itsobjective to reduce the administrative burden on business associated with meeting key employment lawobligations. While the first section of this report focused solely on progress against the PWC baseline, thesecond section considered business behaviour and the business process of meeting regulatory requirements.

The latter half of this report therefore gave the employment law guidance team some interesting feedbackfrom business on their perceptions of regulatory requirements:

— Clarity over requirements—businesses perceive employment law as changing and open tointerpretation.

— Knowledge—respondents lack confidence in their knowledge of the legal requirements associatedwith specific information obligations.

Anderson Review Research

The independent Anderson Review was established to examine how the Government could provide morecertainty to businesses using its guidance. The review conducted focus groups with 90 small and mediumenterprises and commissioned research by Ipsos MORI in which 759 SMEs from England and Wales wereinterviewed to establish their views on the challenges presented by regulation and how well equipped theyfeel to comply.

The majority of SMEs surveyed saw complying with regulation as an important responsibility, withHealth and Safety and Employment Law being the most time consuming and costly areas. They reportedbeing better equipped to deal with Health and Safety than with Employment Law although a significantproportion did not seek guidance on compliance, an approach much more likely for the smallestorganisations.

Cross-cutting Research and Dissemination of Knowledge by the Better Regulation Executive

The Better Regulation Executive has been active in seeking to understand perceptions of regulation andwhat influences them, and has taken steps to share knowledge about this across Government. In additionto the Health and Safety and Anderson Review research (above), the BRE:

— undertakes an extensive programme of visits and meetings with business representatives whichprovides evidence about attitudes;

— has commissioned qualitative research into businesses and citizens general attitudes to regulationin 2005 from IpsosMori. This involved 20 focus groups. It found that businesses believedGovernment should treat information and advice provision as a priority, and identified some signsof over-compliance partly linked to lack of awareness especially around health and safety electricaltesting rules; and

— in March 2009, the BRE commissioned the independent research agency FreshMinds to conductresearch into the attitudes of business people and the public to regulation and its benefits. Thisinvolved qualitative interviews with 25 business people and 25 members of the public, the purposeof which was to allow researchers to get beyond people’s initial feelings about regulations to gaina deeper understanding of how regulation impacts on and is perceived by people, in particular thebenefits it delivers. The initial findings of the research were presented to a stakeholder eventincluding business representatives in May 2009, and a final report is due in the summer of 2009.



The Better Regulation Executive has also undertaken work internally to gather and synthesise the wideravailable research about business perceptions of regulation, and to fully understand the NAO survey. TheBRE has shared key products across Government via the Better Regulation Units network. Findings onperceptions have also been discussed at a Heads of Regulators meeting, in one-to-one discussions withinterested oYcials, and at an OECD workshop on Indicators of Regulatory Management Systems inApril 2009.

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Oral evidence

Taken before the Regulatory Reform Committee

on Tuesday 10 March 2009

Members present

Andrew Miller, in the Chair

Gordon Banks Judy MallaberLorely Burt Dr Doug NaysmithJohn Hemming

Submitted by the Parliamentary Under Secretary of State, Department for Business, Enterprise andRegulatory Reform (Jointly with Department for Culture Media and Sport)

1. Executive Summary

This memorandum is submitted to support the Regulatory Reform Committee’s inquiry into “Themesand Trends in Regulatory Reform”. It:

— summarises developments on the regulatory agenda since the Committee’s report “GettingResults: the Better regulation Executive and the Impact of the Regulatory Reform Agenda (HC474–1) of 17 July 2008; and

— provides the Government’s initial evidence on the specific questions in the Terms of Reference forthe new inquiry.

1.1. The UK’s regulatory reform agenda continues to be a world leader. The World Bank Doing BusinessReport 20091 puts the UK 6th out of 181 economies and second in the European Union for “ease of doingbusiness”.

1.2. The Government continues to make progress on the regulatory reform agenda:

— simplifying and modernising existing regulations;

— managing and improving the design of new regulations and how they are communicated; and,

— working with regulators and departments to change attitudes and approaches to regulation.

(details are in Section 2).

1.3. The Government has asked Lord Turner, Chairman of the FSA to make recommendations forreforming UK and international approaches to financial regulation, to ensure the future stability of the UKbanking system. The review is due to be published in March 2009.

1.4. The Government remains committed to the regulatory reform agenda and to a risk-based approachto regulation which is informed by good evidence and risk-based assessment so that regulation isproportionate and focused on the risks which matter most.

1.5. In the current economic climate, it is more important than ever that regulation is well designed sothat it delivers the desired outcomes as eYciently and eVectively as possible. The Government’s regulatoryreform programme is focused on ensuring continuous improvement in the quality of regulation and the wayregulators relate business to ensure compliance.

2. Recent Progress on Regulatory Reform

2.1 Since the Committee’s last Inquiry, progress has been made in the following areas:

Simplifying and modernising existing regulations

2.2 In December 2008, the Government reported2 that Departments have now delivered over240 simplification measures, taking the total administrative burden savings to date to about £1.9 billionannually. The Government is on track to achieve its target to reduce the administrative burdens faced bybusiness, public and the third sectors by £3.4 billion annually by 2010, as well as reducing public sector data

1 Available online at: http://www.doingbusiness.org/documents/fullreport/2009/DB09 Full Report.pdf2 Available online at: http://www.berr.gov.uk/files/file49273.pdf



burdens by 30%. BERR’s Simplification Plan Summary document,3 published in December 2008, includescase studies from the business community which illustrate the real-life impact of measures which have beenimplemented.

Two major reviews of specific areas of regulation have been completed:

Health and Safety

2.3 The Government Review “Improving Outcomes from Health and Safety”4 reported in August 2008.The review considered how the health and safety regulatory regime aVects workplaces where the overall riskof injury or ill-health is relatively low, focusing in particular on low risk smaller businesses. It suggests waysto make it easier for businesses to comply with the rules, while reducing injury and ill-health and increasingpublic confidence in the UK’s health and safety regime as a whole, and makes recommendations designed to:

— improve health and safety outcomes, primarily by improving information and advice, so makingbusinesses more aware of their obligations, and making it easier for them to know what—and whatnot—to do in all of the regulatory areas they associate with health and safety;

— save businesses in scope almost £300 million per annum in unnecessary administrative andconsultancy costs;

— increase public confidence in health and safety by further challenging inaccurate media coverageand promoting positive messages about health and safety; and,

— target overall inspection resource at workplaces where the risk of injury or ill-health is highest byencouraging further joint working between HSE and local authorities.

2.4 HSE’s Simplification Plan shows considerable progress in reducing unnecessary burdens on businesswith a strong focus on information and advice. It contains a programme to tackle myths and changes inperception of health and safety. HSE is consulting on its new Strategy which would take forward work acrossthese areas.

Planning

Killian-Pretty Review

2.5 In November 2008 Joanna Killian and David Pretty published their review5 into unnecessarybureaucracy in the planning application process. The review was jointly commissioned by the Departmentsfor Business Enterprise and Regulatory Reform (BERR) and Communities and Local Government (CLG)and sets out recommendations on how to make the planning process faster and more responsive and helpbusinesses and councils save up to £300 million a year.

2.6 The Government response to the Killian-Pretty review will be published on 25 February 2009 andproposes an ambitious, but deliverable, programme of measures to create a planning application processwhich is more proportionate, that operates more eYciently and eVectively and is more easily understood byall involved.

Planning Bill

2.7 The Planning Bill, granted Royal Assent in November 2008, will speed up the planning system andaims to save £28 million a year in administrative costs. Communities will be able to give their views earlierin the planning process, reducing costly delays. A new streamlined inquiry and decision making process willspeed up the examination of applications. Decisions on nationally significant infrastructure projects will betaken by a new Infrastructure Planning Commission (IPC). The IPC will consider applications againstNational Policy Statements which will have been scrutinised by Parliament, and will have to take a decisionwithin nine months.

Managing and improving the design of new regulations and how they are communicated

2.8 The Government has completed a consultation on whether a system of regulatory budgets could beimplemented as a mechanism to better prioritise policy proposals and manage the total costs of regulationbetter. It will make an announcement on the way forward shortly.

2.9 In July 2008, the Government published a revised Code of Practice on Consultation which came intoeVect in November 2008.6 EVective consultation can help to develop eVective solutions, identify the fullrange of aVected parties, minimise the risk of unexpected consequences, and discover better implementationmethods. About 65 public sector organisations have now signed up to the Government’s Code of Practiceon Consultation, including all central government departments.

3 Available online at: http://www.berr.gov.uk/files/file49273.pdf4 Available online at: http://www.berr.gov.uk/files/file47324.pdf5 Available online at: http://www.berr.gov.uk/whatwedo/bre/reviewing-regulation/Planning%20Review/page46 Available online at http://www.berr.gov.uk/whatwedo/bre/consultation-guidance/page44420.html



2.10 BERR ministers commissioned Sarah Anderson CBE to undertake an independent review ofGovernment guidance for businesses. The Anderson Review—“The Good Guidance Guide”7—ofguidance relating to employment and health & safety regulation published in January 2009 and makesrecommendations about how government can improve the guidance available to small businesses. The keyrecommendations are that Government should:

— provide access for SMEs to a tailored, insured advice helpline on employment and health & safetyregulations and provide free access for one year;

— take more responsibility for guidance through removing disclaimers around the accuracy ofguidance and encouraging Government inspectors to avoid fining or prosecuting SMEs that havereasonably followed Government guidance; and,

— set out a timetable for updating its most frequently used guidance to comply with the Code ofPractice on Guidance.

The Government will respond to the Anderson Review in due course.

2.11 To support the Government’s March 2008 Enterprise Strategy commitment to improve the way thatnew and existing regulation applies to firms employing fewer than 20 people, the Small Firms Impact Test(SFIT) aspect of Impact Assessment has been revised, requiring more detailed information on the impacton small businesses.

2.12 From Parliamentary Session 2008–09, Departments are required to explain the impact on andconsideration given to small business in the Explanatory Memoranda accompanying all SecondaryLegislation laid before Parliament. This change will additionally apply to Primary Legislation coming intoeVect from the Parliamentary session starting 2009–10. Departments and regulators are accountable fortheir approach to regulating small firms through a public explanation of the thinking behind the regulation.

2.13 In its report, “Delivering High Quality Impact Assessments” 20098 on the revised ImpactAssessment process, the NAO concluded that the new Impact Assessment process, introduced in April 2007,has helped to improve the standard, clarity and consistency of Impact Assessments and has resulted inincreased incidence of quantification of costs and benefits in Impact Assessments. Nonetheless, there is stilla wide variation between the best and worse Impact Assessments and in 2008, the NAO found fewer ImpactAssessments which contained costs and benefits for a range of options or summarised an implementationplan. To address these issues, the Government is reviewing the Impact Assessment template and isstrengthening the guidance and toolkit to provide more clarity to policy oYcials, analysts and economistswithin departments.

Working with regulators and departments to change attitudes and approaches to regulation

2.14 Government has recently begun its second phase of reviews of how eVectively regulators areimplementing the Hampton principles of better regulation. Five Reviews have been published to date;9 afurther 31 Hampton Implementation Reviews will be completed during the course of 2009.

Communications

2.15 The Government continues to actively engage with the business community. In communicating thework of the regulatory reform agenda, the Better Regulation Executive has begun a series of week-longregional visits to listen to business concerns, needs and ideas around regulation and to explain the progressthat is being made.

2.16 Reflecting the progress that is being made on simplification, the Government’s presentation, inDecember 2008, of the third annual set of Departmental Simplification Plans was able to focus on asubstantial set of case studies showing how improvements are benefiting real businesses.

2.17 The Government published a report “Making it Simple, Annual Review 2008”10 in January 2009 tosummarise progress on better regulation during 2008.

Perception

2.18 The World Bank Doing Business Report 200911 puts the UK 6th out of 181 economies and secondin the European Union for “ease of doing business”.

2.19 In its report “The Administrative Burdens Reduction Programme, 2008”,12 the National AuditOYce found a small but statistically significant positive shift in businesses’ perceptions about regulation.46% of businesses thought regulation was fair and proportionate, compared to 39% in 2007. 70% said thatcompleting paper work was a burden, down from 74% in 2007. The Government acknowledges that thereis still considerable work to be done to improve business perceptions of the UK’s regulatory environment.

7 Available online at: http://www.berr.gov.uk/whatwedo/bre/reviewing-regulation/The%20Anderson%20Review8 Available online at: http://www.nao.org.uk/publications/0809/high quality impact assessment.aspx9 Available online at:

http://www.berr.gov.uk/whatwedo/bre/inspection-enforcement/implementing-principles/reviewing-regulators/page44054.html

10 Available online at: http://www.berr.gov.uk/whatwedo/bre/about/page44014.html11 Available online at: http://www.doingbusiness.org/documents/fullreport/2009/DB09 Full Report.pdf12 Available online at: http://www.nao.org.uk/whats new/0708/0708944.aspx



Following up the Regulatory Reform Committee’s recommendations

2.20 Since the Regulatory Reform Committee’s last Inquiry, “Getting Results: The Better RegulationExecutive the Impact of the Regulatory Reform Agenda”, the Government has acted on the Committee’srecommendations on the following two key themes:

2.21 First the Committee recommended increased scrutiny of the results of the Administrative BurdenReduction Programme and Impact Assessments. Similar recommendations were made by the NationalAudit OYce in its report “The Administrative Burdens Reduction Programme” that the claimed savings ofthe programme should be subject to increased independent scrutiny.

2.22 In response the Government put in place an external panel to independently challenge, scrutinise andvalidate departments’ claimed savings. This External Validation Panel first sat in October 2008 to scrutinisedepartments’ claimed savings for December 2008 Simplification Plans. Following their review an estimated£1.7 billion of gross simplifications were approved, with an additional £182 million approved subject tofollow up actions. The External Validation Panel members asked government to re-review the remainingsimplifications to ensure they are credible and we have done this for all simplification measures worth morethan £10m; an additional estimated £220 million. The panel will continue to sit annually to carry out itsindependent scrutiny function.

2.23 Secondly, the Committee recommended improved communication of the successes of the regulatoryreform agenda to all stakeholders.

2.24 In response the Government has intensified its communication to business stakeholders as describedin paragraphs 2.15 to 2.17 above.

3. The Inquiry’s Themes

What are the implications of recent economic developments for the design and delivery of the regulatory reformagenda, including risk-based regulation?

3.1 The Government remains fully committed to the regulatory reform agenda and to a risk-basedapproach to regulation which is informed by good evidence and risk assessment to make sure that regulationis proportionate and focused on the risks which matter most.

How might a proportionate and targeted response to improving the regulatory framework in the wake of thefinancial crisis be made? What lessons are there for the wide regulatory reform agenda?

3.2 On 6 October 2008 the Chancellor asked Lord Turner, Chairman of the FSA, to makerecommendations for reforming UK and international approaches to financial regulation, to ensure thefuture stability of the UK banking system. The review will be published in March 2009.

3.3 The Financial Services Authority (FSA) embraces the principles of better regulation. The FinancialServices and Markets Act 2000 (FSMA) requires the FSA to have regard to the principle of proportionalitybetween burdens or restrictions imposed by its regulations and the benefits those regulations create.

3.4 The FSA regulates on the basis of “principles-based regulation”. This moves away from prescriptiverules to a higher-level articulation of what the FSA expects firms to do which has the advantage of givingon firms flexibility to decide how best to align their business objectives and processes with the regulatoryoutcomes that the FSA has specified.

How does the Government balance the need for an eVective regulatory framework—providing the necessarybenefits and protections—with the commitment to improve the conditions for business success?

3.5 The UK’s regulatory environment is recognised as being among the best in the world. The 2009 WorldBank “Doing Business” Report13 puts the UK 6th out of 181 economies for “ease of doing business” andsecond in the European Union, ahead of all major European economies.

3.6 The Government’s public commitment to delivering the conditions for business success in PublicService Agreement (PSA) 6 is to maintain the international strengths and standing the UK has as a goodplace to do business and to continue to improve our domestic markets. The regulatory reform agendasupports this by working to ensure that regulation is focused on the risks and protections that matter mostand that regulations are designed to deliver the desired outcomes eYciently.

3.7 The Better Regulation Executive is responsible for two PSA6 indicators and five of BERR’sDepartment Strategic Objectives (DSOs) and as shown in Annex A. PSA6 Indicator 5 commits BERR/BREto report publicly on the overall benefit/cost ratio of all incoming regulation. This indicator will be publishedfor the first time starting in Spring 2009. PSA6 Indicator 6 covers the public reporting of delivery towardsthe 2010 target to reduce the Administrative Burdens on business by a net 25% by May 2010.

13 Available online at: http://www.doingbusiness.org/documents/fullreport/2009/DB09 Full Report.pdf



How could the Government improve its capability to regulate in a proportionate and eVective manner?

3.8 The Government believes that to sustain continuous improvement it is necessary to continue to focuson all of the strands in its regulatory reform programme, ie:

— simplifying and modernising existing regulations;

— improving the design of new regulations and how they are communicated;

— changing attitudes and approaches to regulation to become more risk-based; and,

— to work both in a UK and EU context.

3.9 The Government sees external challenge around its approach to regulation as a powerful influenceon the policy development process. In recent years it has significantly increased the transparency of theregulatory process, for example by making impact assessments more transparent and available in an onlinelibrary, by revising the consultation process, by publishing a draft legislative programme and bystrengthening the scrutiny of laws after they have been enacted by Parliament.14 From Spring 2009, theGovernment will start to publish an annual benefit/cost ratio of its regulatory changes.

3.10 Many other nations seek UK guidance in designing their own approaches to regulatory reform. BREengages closely in understanding other countries approaches to better regulation and to share best practiseinternationally.

Is there a coherent package of regulatory measures for improving the conditions for business success; and howregulatory reform initiatives fit into wider Government support?

3.11 The key elements of the Government’s regulatory reform programme are summarised in Annex B.The programme, which addresses the existing stock of regulations, the flow of new regulations, the cultureof departments and regulators, and has both a UK and EU focus, forms a key component of PSA6—improving the conditions for business success. Government is also committed to reducing the administrativeburden on front-line public sector workers, by 30% by 2010.

3.12 Recent developments in the regulatory reform programme are highlighted in Section 2 above.

3.13 Alongside the domestic programme Government also works within the EU to improve approachesto regulation. During 2008 the European Commission completed its administrative burden reductionmeasurement and in its “Third Strategic Review on Better Regulation” of January 2009 committed toadopting proposals this year that will lead to achievement of the burden reduction target of 25% by 2012.Also in January 2009, the Commission published its new Impact Assessment Guidelines. In line with theGovernment’s submission to the Commission consultation on IA, these guidelines give greater emphasis toquantification, set out the importance of consultation (including consulting beyond the current Commissionminimum standards on controversial/sensitive issues or over a holiday period). Importantly, theCommission will now carry out IA on all significant proposals, including comitology decisions (previouslyonly initiatives in the annual work programme were subject to IA).

3.14 In line with UK requests, 2008 also saw agreement on a “Small Business Act for Europe” containingseveral better regulation elements, including the introduction of EU common commencement dates,reduction of burdens on SMEs and routinely scrutinising policies for costs and benefits on small companies.

4. Design of New Regulations

Does Government understand businesses suYciently to design eVective regulations? Is suYcient emphasis givento small businesses and competition issues?

4.1. The Government agrees that having a strong understanding of business is key to designing eVectiveand eYcient regulations that are intended to change business behaviour. The same is true for regulationsintended to influence the third sector, the public sector or citizens.

4.2. The Government’s Code of Practice on Consultation underlines the need for ongoing dialoguebetween Government and stakeholders. The formal consultation process supports this, allowing for publicscrutiny, helping solicit views from interested parties (including business) and giving those who would beaVected by a new policy the opportunity to express their thoughts before the policy is finalised.

4.3. About 65 public sector organisations have now signed up to the Government’s Code of Practice onConsultation, including all central government departments.15

4.4. The Government has strategic engagement with business at many levels including with representativeorganisations such as the Confederation of British Industry (CBI), British Chambers of Commerce (BCC),Institute of Directors (IoD), and the Federation of Small Business (FSB), the Forum of Private Businessand other sector trade associations.

4.5. The BRE’s move to the Department for Business, Enterprise and Regulatory Reform has increasedits synergy with Ministers and policy oYcials specifically responsible for small business and competitionissues. Also, over 30% of BRE staV have private sector business experience.

14 Available online at http://www.lawcom.gov.uk/docs/lc302 government response.pdf15 Available online at: http://www.berr.gov.uk/whatwedo/bre/consultation-guidance/page44420.html



4.6. The BRE engages with businesses including the use of media, website, events and stakeholder groups.BRE is currently piloting a series of week-long visits to each region of the country, where staV talk tobusinesses and their representative organisations, presenting to audiences, carrying out Q&A sessions,hearing from business what regulatory issues are causing them the most trouble and identifying themesand trends from across the visits to help identify areas for further action. Businesses are also encouragedsuggest ways Government can simplify regulations through the better regulation website atwww.betterregulation.gov.uk.

4.7. More widely, BERR encourages its policy oYcials to spend time in business through its “week inbusiness” programme where staV are encouraged to spend week-long placements in businessesorganisations.

Is there suYcient consideration of how regulations will be implemented, including an appropriate focus oncompliance and enforcement issues?

4.8. Implementation, including compliance and enforcement issues, are a crucial part of eVectivepolicy making.

4.9. The Government’s simplification programme is encouraging departments and regulators to payincreasing attention to the ease with which businesses can comply with regulations:

— The Government has committed to make information and tools to help business comply withregulations more readily available and more easily and cheaply accessible and a code of practiceon guidance has been developed to help departments develop better guidance to business.

— Businesslink oVers e-mail updates on changes to regulation. Businesses who register receive anemail, prior to each Common Commencement Date, to advise them about forthcoming changesto regulations.

— Departments and regulators are developing tools to help businesses comply more easily withregulations, for example:

— BERR’s Employment law Guidance Programme has produced and promoted free-to-use andlegally-compliant on line tools, proforma letters and agreement forms. These are accessible viathe Businesslink website (Businesslink.gov.uk) saving businesses around £400 million a year;and

— HSE has developed easy-to-follow examples of how to assess risk in the workplace for 18 typesof businesses including convenience stores, estate agents, dry cleaners and hairdressing salons,saving businesses about £180 million a year.

4.10. Following the Hampton Review the Government has encouraged regulators to support businesseswith improved advice on how to comply with regulations. The Regulators’ Compliance Code sets out thatregulators should consider the impact of their work on economic progress.

4.11. The Local Better Regulation OYce (LBRO) works closely with local authorities, relevantstakeholders and policy oYcials to improve the quality and consistency of local authority regulatoryservices.

4.12. The Regulatory Enforcement and Sanctions Act, 2008 gave LBRO a number of statutory powersincluding the power to advise central government. This could include advising and making proposals toMinisters about the law they set for local authorities to enforce if, for example, LBRO found that there arediYculties with the implementation of specific legislation at a local level.

4.13. The NAO’s recent report on Impact Assessments reports an improvement in the consideration ofenforcement issues in impact assessments, though notes that there is still scope for further improvement.

Annex A

Department Strategic Objectives (DSOs) and Public Service Agreements (PSAs)

BRE PSA and Indicators of Success

PSA6: Deliver the conditions for business success in the UK

— Indicator 5—Benefit/Cost Ratio—including a commitment to publicly publish a benefit/cost ratiofor all new government regulation, annually, starting in April 2009.

— Indicator 6—Admin Burden Reductions—where government publishes annual SimplificationPlans each December to report on delivery plans and progress to-date.

BRE DSO and Indicators of Success

DSO 2: Ensure that all Government Departments and agencies deliver better regulation for the private, publicand the third sector

— Administrative burdens reduction across 19 departments; a 25% reduction for the majority ofdepartments by 2010. Includes BERR target to deliver 25% reduction in measured admin burdensby 2010.



— Proportion of businesses (and voluntary sector organisations) who believe that “most regulationis fair and proportionate” in five policy areas—employment law, tax law, health and safety,planning law and company law.

— Flow of regulation: total benefit/cost ratio of regulations coming forward over time.

— Performance of local authority regulatory services: measured with national perception indicator.

— Overall performance in the World Bank “Doing business” survey and OECD surveys of the policyenvironment.

— Proportion of bureaucracy and red-tape which the public sector front line believes to beunnecessary.

— Reduction in data stream requirements from central government to the public sector front line by2010. Includes 30% cross-Government target to reduce burdens on front line public sector staV.



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20 February 2009



Witnesses: Sir William Sargent, Executive Chair, and Mr Jitinder Kohli, Chief Executive, Better RegulationExecutive, gave evidence.

Q1 Chairman: Sir William, Mr Kohli, thank youvery much for coming. Welcome to our hearing andthank you for your paper. I think it would be worthsaying at the outset that, given what is happening inthe bigger world, there will inevitably be quite a lotof comment about what appears to be just aboutfinancial regulation and clearly our inquiry is notabout financial regulation per se; it is about themesand trends in regulatory reform. The House had adebate yesterday, at the request of the Departmentfor Business and Enterprise Select Committee, andthat touched on a number of issues aroundregulation and regulatory reform. It is clear thatsome of the messages have not got out to the biggerworld. The Shadow frontbench spokesman told theHouse that the Department had claimed that therewas going to be a 25% reduction in regulations, asdistinct from admin burdens. It is a small matter ofa few words I guess, but I will leave that for you toread in Hansard. Sir William, is it the case that risk-based regulation is fine in theory but flawed inpractice? What is required to make it workeVectively? What are the risks of risk-basedregulation itself?Sir William Sargent: The process of understandinganything that could go wrong first of all requires youto identify what is going to go wrong, and thereforethe risk involved and, more importantly, theconsequences of that going wrong, so whenParliament and government is seeking to put in placeprotections and rights and obligations for people,and the choice of regulation is the device that is usedin order to identify and protect people from risks, themain point of the exercise is to identify the risks, getthe evidence, identify what will solve that risk andprotect from that risk, and then go forward fromthat point of view. From everything that I have donefor the last three years, and as I have gotten to knowthe reform agenda even better, nothing has changedmy point of view that focusing on the risks involved(which is the point of the regulatory exercise) isanything other than the right course of action. Theprocess by which you go about it goes from“excellent” at one end through to “we could learnand do things better”. I think financial services is avery good example where understanding what therisks were in the system, worldwide as well as in theUK, was not clearly understood at all levels, andtherefore the regulatory approach in certain areasand the manner in which it has been done and theskills-sets that have been used are the lessons that wecan learn from the fact of the learning what might gowrong in respect of regulation.

Q2 Chairman: When you say “at all levels”, is that aeuphemism for any level?Sir William Sargent: If you think about it, if youstart with the inspector at one end of the scale, whichis the people who go out on the ground,understanding what it is they are looking for, andbeing trained properly in the first place, is asimportant when you are focusing on what are therisky organisations or structures that you are tryingto inspect, right through to the way the policy was

put together in the first place. Having that in yourmind and having a clear understanding of risk canonly lead to doing things properly, particularly in aworld of scarce resources.

Q3 Lorely Burt: Good morning, Sir William. Iwanted to focus on how the Government is reactingto this because there is such a lot of pressure from themedia and from the public generally, who perceivethat there are these demons at the top of the financialsector and they are the ones who have been verynaughty, and what we should do is lock them upforever and throw away the key. Obviously there is aneed to get tough with the financial sector and designthe right regulation. You have already talked aboutthe risk-based notion to that and the need to maybetake a measured approach rather than a lynch-mobtype of attitude to it. Do you think that theGovernment is taking a coherent and intelligentapproach to what is going on in the financial sector?Could you also just say a word about how youperceive the diVerence between what is going on inthe UK and other countries who are similarlyaVected to ourselves?Sir William Sargent: First I would observe that I amnot entirely a specialist in financial services, but I willgive you our view from having understood andsupported our colleagues at the FSA and otherplaces in doing the work, so I will give theperspective from myself and Jitinder and ourexperience of dealing within government as well aswith bodies overseas. I am very encouraged that theapproach, as happened many years ago, has been tostop and ensure that the problem is clearlyunderstood. Financial services is diVerent from mostother areas being regulated because it is clearlyinterconnected worldwide. I think one thing that hasbeen shown very clearly in this crisis is that the entireworld is interconnected in a way that was not quiterealised as to the extent. You start with the fact thatyou cannot just fix the point in the UK on its own. Ithink that the UK—and certainly the BRE hasencouraged this and it has been supportedeverywhere around government—has been trying tobreak down the problem into its various constituentcomponents. It is very easy to forget, if you lookback to the summer of 2004, that interest rates inAmerica were at 1% and sub-prime loans were beingsold to people at a 1% interest rate, which clearly atthe time they might barely have been able to aVord,and 24 months later in the summer of 2006, whichwas not that long, they have gone to 5.25%, so youhave a situation where it started from that sort ofbasis and then very clearly spread out very quicklyfrom that. When we go back and look at the issues,it is clear that what the Government is doing, andencouraging other governments to do (and we haveseen the leadership the UK has shown with theEuropean Union as well as America) is to make surethat people understand what they are doing in thefirst place. Hopefully we are going to see the resultsof this at the summit coming up soon. I think theGovernment in turn has taken the local initiativesthat it could take very quickly, and the Banking Act



10 March 2009 Sir William Sargent and Mr Jitinder Kohli

was a good example and the initiatives of the FSAthat it did in those few months, stopping certaintypes of trading quickly and learning very quicklyfrom its own internal audit that it did into NorthernRock about the skills-sets and the fact that it wasfocused very much on institutions and theirprocesses and structures rather than overall whatwas going on in the business models. I think that theFSA should be commended for having very quicklyidentified that as being a flaw. That was not solely aUK flaw because if you look at America and all theother countries, they were adopting the samephilosophy and approach, so world-wide and notjust the banking community but the economicscommunity felt that this was the right approach.With hindsight obviously, we are learning thatlooking at the whole system as opposed to just theindividual institution is important, so I am reallyencouraged that we have done the right thing in theUK and taken our time. We are breaking down theproblem into its various elements; we have taken theactions that we can pretty straightforwardly quickly;and then we are providing a blueprint, eVectively, forthe rest of the world, which hopefully they will signup to, but that is a big job.

Q4 Chairman: But in the Department taking its timein considering this, is there not a risk that the publicwill expect something to happen rather quickly, andyet you are saying that there is merit in taking ourtime? We are not really getting that message acrossthat this is not something that can be fixed in aninstant stroke of a pen and an Act of Parliament.Sir William Sargent: No, but if you look at theinitiatives taken, the various stimuli and the creditbeing provided, I think the public can see very clearlythat the various institutions of government haveactually acted as much as they can straightaway.What I am referring to in terms of taking time tounderstand is the regulatory responses, so it hasdealt with some straightforward and basicregulatory responses but the bigger picture has torequire worldwide co-ordination. That is the bit thatis taking the time. If you look at the initiatives thathave been in place so far, they have been pretty quickand eVective.

Q5 Chairman: You have said that the public willunderstand, but if you look at it from the point ofview of my own constituency, if you were somebodyworking at Vauxhall’s and you are on short time, Ido not think you would understand that it is right forthe Government to take its time.Sir William Sargent: Government is not taking itstime in terms of putting pieces in place. It has alreadyhappened and in the case of the economy thestimulus packages that have been put in place andthe additional credit that has been put into theeconomy, people on the shop floor would recognisethat as a pretty powerful response.Mr Kohli: To give you an example of somethingwhich needed to happen quickly and did happenquickly, in the days when there was significant loss ofpublic confidence in Northern Rock, theGovernment took very quick action in order to

assure savers that their savings were safe, even if theywere above the limit of the financial compensationscheme, and that was an example of wheresomething needed to happen very quickly and didhappen very quickly. Against that, designing a newframework for regulating international financialservices needs to happen as quickly as it can, but,equally, doing so without working out what the risksare, and without focusing on the correct risks, andwithout having the time to understand theinternational interconnectiveness of the systemwould have been too fast. I think the Governmenthas done a relatively good job in that area atavoiding the risks. You will remember the BetterRegulation Commission brought out a report onrisk, and one of the things that report talked aboutwas the pressure on politicians and ministers tomake knee-jerk reactions to public crises. I think inthis case what the Government has done is it hasfocused on reacting to the things that needed urgentreaction urgently, and the things that can take a littlebit more time in slightly more time. As Adair Turnerhas said publicly, the outcome of this will be quite asignificant change in the way in which financialservices are regulated because that is probably whatis needed.

Q6 Judy Mallaber: I really think what you are sayingmakes a tremendous amount of sense because youcan see that the way that the Government has madeannouncement after announcement trying to helpbusiness with various types of scheme to try and getthe money flowing again. It is all very well makingannouncements, but actually working through thelogistics of making it happen, we are still not seeingfinance trickling through to companies, so I certainlythink that you are right there, and the actualcomplexity of financial services does make mewonder whether financial services, in terms of tryingto regulate it, might be somewhat unique because ofthe fact that it has got this global nature, because ofthe fact that you have got people in the bankingsector who are designing products that even they canhardly understand in terms of their complexity, so itis a real challenge for you. Do you think that thefinancial services sector is unique? Secondly, can Iask about what implications you think that has gotfor the wider regulatory agenda because you havegot companies who are saying to me, “Look, we donot want any more regulation. We are trying tomeasure day-to-day where we are. We do not wantany more regulation placed on us, thank you verymuch. Let us have a moratorium.”Sir William Sargent: Financial services is unique inits interconnection between the world economy. Ithink that is quite unique. Certainly during a pointwhen the economy is growing and there is the abilityto take what we call a “regulatory dividend”,whereby you are developing social policies, you canaVord to fund them from the growth. At a time whenthere is no growth, the idea of considering slowingdown, stopping, postponing, putting to one side fora limited period of time is certainly something thatis worth considering. One of the observations that Iwould make is if I look back the three years that




myself and Jitinder have been in this space, I do notbelieve that there is a minister or a Member ofParliament or an oYcial or an inspector that thinksthat regulation is a cost-free option. Regulationprovides fundamental benefits and they, as a rule,outweigh the cost, but everybody understands theprinciple that there is a cost involved, and youshould be very careful about it when you are goingabout doing so. If I look back, that is the singlebiggest mind-set change I have seen over the pastfew years.

Q7 Gordon Banks: In the light of what is going onjust now, and we have talked about it, do you thinkthere is an inherent tension between theGovernment’s aim to support business and its needin that case to support jobs, et cetera, and the needto respond to the financial crisis? Do you think thatinstead of being flip sides of the same coin they aretotally diVerent objectives in total? Do you think onerubs against the other or do they merge together?Sir William Sargent: I do not think they are becauseif I come back to some principles, which again I haveunderstood better than I did a number of years ago,regulation fundamentally provides for thingsimproving generally: making markets better;making things more coherent; and giving consumersconfidence in buying a product. In financial services,people need confidence to come back into thatmarket so therefore regulation is going to be one ofthe structures and tools that allows people to regainconfidence in the system. If you start with thatprinciple, it is very much in the businesscommunity’s interest that the regulatoryenvironment is coherent, eVective, and that peopleunderstand it, and so forth. One of the things thathas happened, to use the expression you used ofrubbing up against, sometimes regulations are put inplace which do not necessarily achieve the end resultthat everybody agreed should have been achieved inthe first place. It is not in business’s interest oremployees’ interests or citizens’ interests, oranything like that, because all that has happened isthat time and money has been wasted in doingsomething which is not getting an end result. It isparticularly important at a time when the economyis struggling to make sure that none of that is in thesystem, and so the idea of being clear about what itis that you are doing, why you are doing it, is it beingeVective, is there a diVerent way of doing it, what isthe evidence, all the better regulation principles, areparticularly critical at this time, so I would be veryworried if people felt that this is all about being goodto business and not looking after citizens. These arecompletely compatible principles as far as I amconcerned.

Q8 Gordon Banks: Just on that, obviously there area lot of people who feel that regulation has failed inas much as the financial crisis and where we are. Doyou think that has damaged regulation as a conceptin general and that those of us involved in theregulation agenda actually have to regain people’sconfidence on the eVectiveness of regulation ingeneral? Often regulation is not tried and tested until

there is a potentially a major crisis, which can beyears and years in advance, and hopefully neveroccurs. Do you think there is that lack of confidencethat the public and industry and the economy willhave in regulation being able to protect them and usas individuals?Sir William Sargent: I do not think so. Things fail. Ifyou go through 50 years, there have been aspects ofthe world that have failed around us, and this is thecurrent one. If you look, for example, at health andsafety laws, the amount of laws in the health andsafety space now is about half of the number thatwere in place 30 years ago. The number of deaths,fatalities and injuries in the workplace is down bythree-quarters. I think people get the fact that theyfeel pretty safe going to work these days. I do notthink people are articulating that there has been afailure in health and safety. If you look at foodstandards and the way the Food Standards Agencyhas gone about its business, and the laws that are inplace in the UK, small firms appreciate theregulatory environment and the manner in which theFood Standards Agency has improved and made itstraightforward for them to comply, while at thesame time the statistics are showing that that is avery eVective regime and people feel very confident.When the Food Standards Agency takes aninitiative, it very clearly retains the confidence. It hassaid a number of times in the last three or four years,“Do not worry about this particular thing,” or,“This is safe,” even though the media has beenpushing something that has been potentially slightlyscaremongering. I think the regulatory environmentand those agencies that been very clearly eVectivehave kept that confidence. I do not perceive that anyof that has been damaged in the current financialservices space, unless someone else has a diVerentview.Mr Kohli: I think one theme that you as a Committeehave explored in the past with us is around whetherbusinesses just say that there is too much regulation.I think there is a little bit of evidence out there fromsome business surveys that businesses are morewilling to be accepting of regulation on the back ofthis crisis, in the sense that it does not mean theywant more than their fair share, but that kind ofknee-jerk perception/reaction which is that it is allbad rather than we need to identify the regulationsthat genuinely work and serve and do good in oursociety. A lot of businesses did think that and thereare some businesses who do still think that, but Ithink there is some evidence that more businesses arebeginning to understand that regulation is essentialin our society. That does not get rid of the challenge,which is designing regulation in a way that genuinelyworks and is no more onerous than it needs to be inorder to achieve the outcome that we want. There aresome changes as a result of this episode and,understandably, it has been a very, very significantepisode in our society and will continue to be that.

Q9 Gordon Banks: In some ways it could be seen asa beneficial impact on the regulatory agenda and,you are right, it is better, not more, is it not?




Mr Kohli: Yes. Absolutely.

Q10 Gordon Banks: That is what we need.Mr Kohli: We are the better regulation eVort ratherthan the deregulation eVort or the more regulationeVort. It is sometimes hard to communicate whatthat “better” word means, but in some ways this is agood time to try and communicate that.

Q11 Dr Naysmith: Despite what you have just beensaying, if more intrusive regulation does emergefrom the various current reviews that are going onand policy initiatives and so on, what do you thinkthe implications are if that happens?Sir William Sargent: I think you need to analysewhat people mean by “intrusive” in that. If you takeLord Turner’s perspective in the financial servicesspace, what it means is people focusing more onthose institutions that they perceive to be at greatestrisk as well as those sectors or the business modelsthat they perceive to be the biggest risk, and giventhe consequences of that going wrong, it is quitecorrect that energy and eVort should be put into that.If you call that intrusive then that is perfectlysensible. If we come back to the very first question ofrisk-based, you need to intrude on people where therisks are very clear and large and not being managedby either the citizen or by the organisation that istaking that risk and so forth. From that point of viewthe word “intrusive” does not cause me a problem.If you use it to mean intrusive where someone turnsup week after week in an organisation that hasproven for the previous three weeks that it isperfectly good and eVective and capable, or wherethe risk is pretty minimal in the first place, then thatwould be wrong. There are occasions, and thefinancial services area is one clearly, where the FSAin re-organising itself and focusing will clearly behappier to intrude.Mr Kohli: If I could make two further observations.One is that in the arena of financial services the vastmajority of firms that the Financial ServicesAuthority regulates are small firms where the impactthat they can have in terms of the overall financialservices market is extremely limited. Your mortgagebroker, the person who is selling you your generalinsurance policy, your home insurance and contents,all of those people are also regulated by the FSA.The challenge for the FSA to which I know they arealive is ensuring that in designing the rightregulatory framework for financial services there isnot almost an element of contagion into the vastmajority of firms they regulate who, frankly, hadnothing to do with this crisis. That is a challenge forthem to which they are very alive and of which Ithink we need to be aware. The other thing that isinteresting—and I think this touches on a questionthat one of your colleagues raised earlier—is thatdiVerent countries use diVerent models. Peoplewould say that the SEC in the US was a significantlymore interventionalist regulator in terms of thenumber of people who were working on the premisesof large financial services firms than the FinancialServices Authority in the UK. There is no evidencethat either model worked better. I would not say that

the US was any better at predicting what was goingon than we were. Indeed, some would say that theywere much less good at it. What is interesting aboutwhat we are learning from this episode is that youhave to focus on the wider picture. You have to focuson the business model within the financial servicesfirm rather than just checking that they are tickingall the right boxes and doing all the things you hopethey might be doing. If they have got products thatare just too complicated for them to understand andfor any regulator to ever get their head round, thenmaybe those products should not exist. I think thereis some real learning there around how you designsystems that work and, if those systems that workhappen to be more intrusive for a small number offirms, that is fine.

Q12 Dr Naysmith: The point behind my question isI think it is fair to say that you have been associatedwith the idea of lighter touch regulation, certainlyparts of government have, and you have never saidthat that is something that you are not in favour of.If this were to turn out to be, in the view of the peoplewho are being regulated, intrusive, would that be inconflict with the aims of your organisation?Sir William Sargent: The term “light touch” is not aterm that I would have used personally because Icome back to the principle of if you as the regulatorneed to understand the risk that is being run in yoursector, so to speak, and if you conclude that you needmore information, you need to get clearer insight. Ifyou ask in a cumbersome way and never use theinformation when you get it, and therefore it is oflittle use to either you or anybody else, then that is anunnecessary and unreasonable cost. If however youneed to ask questions and get access because the riskbeing run is a billion pound cost, or something likethat, that is perfectly okay because you are trying tobe proportional. Let me go to an example in terms ofwe have just done a review with our colleagues in theHSE of those firms which are clearly not health andsafety risks. I think about 80% of businesses have avery low risk and therefore the regime that you applyto them is, by definition, going to be much lighter interms of its design and the method by which you aregoing to inspect them is going to be, if you wantedto use the term, light touch. You are going to identifythat the risks lie in places where there are majormanufacturing and chemicals et cetera, et cetera. Allthe time you are coming back to where is the risk,and where should you be focusing your energy andyour exercises. By definition, that risk (and financialservices is a good example) changes from five yearsto five years. What is risky now, by the time you havedelivered new methodologies, is not. Chemicals is amuch safer industry now than it was 50 years ago,for example, so you would be applying a diVerentapproach to it than you would have previously.

Q13 Dr Naysmith: Although it is not really related towhat we are talking about, you mentioned healthand safety regulation, and one of the reasons why wehave got a 75% reduction must be that we do nothave many of those large chemical works that weused to have, they are much more fine chemicals and




we do not have mines virtually at all any more, andour fishing fleets are much smaller than they were,and lots of associated industries like these must havehelped to lead to a reduction in fatalities and seriousinjuries. I am sure there is a good job being done aswell but there are other things happening.Sir William Sargent: But I would feel that thoseindustries are safer. I suspect it is safer to go down amine these days than it would have been 100 yearsago.

Q14 Dr Naysmith: There are not that many of themleft is my point.Mr Kohli: To add to what William said, if we thinkabout the things we have done over the last few yearsin the name of better regulation—some people willhave used a term like light-touch regulation, otherpeople will have used the term risk-based regulation,and then applied the test on what we have done. Thesingle biggest initiative on reducing administrativeburdens has been work by colleagues in theDepartment for Business, Enterprise andRegulatory Reform in order to help businessesunderstand what they need to do to comply withemployment law. You will remember one of thethemes we have talked about before is becausebusinesses do not know what they need to do andbecause we as government are not clear enough withthem about what they need to do, they quickly hire asolicitor and as a result of that the bills rack up prettyquickly. That is the good businesses at one end. Theless good businesses just think it is all too diYcultand probably do not do very much at all and justhope they are doing the right thing. By using web-based tools, which make it a great deal easier forbusinesses to know what they need to do to complywith the law, we reduce cost in the system. Is thatrisk-based regulation? Yes, it is, because you arecommunicating to the business community what thereal risks are and what they need to do to complywith the law. Is it lighter touch than it was before?From a business perspective, yes, because you arespending a lot less money on it than you were before.Is it light touch regulation in the sense that you areletting people oV the hook when they do not need tobe let oV the hook? No. The semantics are quite hardin this area, unfortunately, but a whole series ofdiVerent initiatives that departments have taken inthe name of better regulation have been ones aboutidentifying what the real outcome is, identifyingwhat businesses need to do in order to achieve thatreal outcome, and making sure that it is easy forthem to do just that. No more, no less. With a bit ofluck, we push up our compliance levels as well aspushing down cost. I certainly think there are someexamples where that has been happening.

Q15 Gordon Banks: Again talking about thefinancial sector, but please feel free to branch intoother sectors, Mr Kohli mentioned this in his lastcontribution when he was talking about the FSAand how they have to make sure that whatever isintroduced does not impact disproportionately ornegatively somewhere else. In general, do you thinkgovernment and regulators really do have the

necessary skills and expertise to regulate thefinancial services sector eVectively? A lot of peoplewould obviously say that as government andregulators we do not because what has happened hashappened. Are there things lacking? Is there ashortfall in sector expertise because every sector is sodiVerent to the next one and we cannot necessarilyall be experts in everything? Is there an issue onsector expertise? Is there an issue on enforcement? Ithink it was mentioned about a product that is sodiYcult to understand it should not be on themarket, but how do we get to the stage where aproduct is developed, it is put onto the market andthen somebody analyses that product to say, “This isfar too complex a product for the industry let alonethe consumer”? Do we really have the ability and theaspirations to take that head on? Then do we havethe ability and the resources to enforce the actionthat may be necessary to get rid of some of theseproducts and to regulate the sector better? I have alittle bee in my bonnet about the role of auditors.Lots of people will ask questions in our currentfinancial situation about what the auditors of someof the big banks were doing. I have yet to have thatquestion answered, to be truthful. It is one of theserecurring questions. If our auditors cannot managethe situation adequately, what hope have we got?Sir William Sargent: If I unpick the questions.

Q16 Gordon Banks: Sorry to have gone on so long.Sir William Sargent: If I take the theme as being dowe have the right skills in the right place to do thejobs amongst the regulators, if you look at both theNorthern Rock internal audit that was done by theFSA, and if you look at Hector Sants, the ChiefExecutive at the FSA, and his evidence a couple ofweeks ago, he was very clear that having done theNorthern Rock analysis that they needed to have achange of mix of skills, to have some people onboard that they did not have on board. In our ownreview of the FSA, we identified one of the issues asbeing the turnover in high-grade staV. There wasturnover in that and therefore institutional memory.That has been very clearly understood at the FSA asbeing something they are in the process of enhancingand bringing more people in from the sector andmaking sure that the people have the skills andunderstanding for the specific product areas. It isinteresting however that people keep putting thepoint of pressure onto the regulator, so to speak. Youstart with the fact that the businesses, in the case ofthe banks, made the choices of the productsthemselves, and the responsibility starts with thepeople in those banks and their own governancestructures and boards, and auditors are part of that.To say that this is purely a regulator’s responsibility,a regulator cannot possibly be everywhere at alltimes, and that applies no matter which part of theeconomy you are in. You have to have a situationwhere people understand, and that is where peopleare starting to look in terms of the regulatoryenvironment going forward, their roles and havingthe skills throughout the entire system to understandthe risks that they are running, and so forth. If yougo across to other regulators, whether that be the




Environment Agency or the Food StandardsAgency or the OYce of Fair Trading, they are quitesector-specific and focused, and quite often theirstaV are in areas like scientists at the EnvironmentAgency and food scientists and such at the FoodStandards Agency. I think there is quite a culture oftrying to make sure that you have expertise insidethose organisations, and when they work well youquite often find that it is the right skills set in the rightplace. I come back to the fact that the principle thatthis is for their boards and the select committees inParliament and their sponsoring departments to do,to make sure that people understand from decade todecade that things change and that do you still havethe right skills. Financial services have shown thatfocusing on the institutions when we should havebeen focusing potentially on the overall structure.

Q17 Gordon Banks: Just on that, the best people toexamine the application of regulation in some waysmight not be the regulation we are talking about;sometimes it might be the application of theregulation, and again going back to the auditorsissue, the best people to examine that application arepeople who have that sector expertise. I have been inprivate business and subject to audits since I was 19.I am 53 and I have yet to ever come across someonewho has audited anything that I have been involvedin in the construction industry who has anyconstruction industry knowledge at all. They are allauditors/accountants. How do we attract peoplewith sector backgrounds into that role?Mr Kohli: I think there is a real challenge forregulators in terms of what we are asking regulatorsto do, to become genuinely risk-based, to focus onthe right risks, to have people who are able todiVerentiate, to understand the impact of theiractions in relation to a particular business that theyare regulating. In order to do that well youabsolutely need people who understand the sectorand understand how it feels to be on the other side.Regulators can find that hard to do. The FinancialServices Authority is probably an extreme case inthat I was listening to the radio this morning andsomebody was saying that some of our brightestgraduates ended up in financial services because thesalaries were high and lots of very bright peopleended up in financial services. For a regulator tocompete in that world was tough, although I thinkthe FSA did its best and did a pretty good job. Thatis less challenging for the Environment Agency whenit comes to having people who understand how itfeels to run a plant which is involved in emissions,although it is still a challenge. I think quite a lot ofwork that is going on is about addressing thatchallenge, so one of the things that the Local BetterRegulation OYce is working on is around how doyou get people who work in local authorities—trading standard oYcers and environmental healthoYcers—to do swap sessions with people in thebusiness community. That is all about enhancinglearning. One of the things that we would havetalked to you about before is around our own skillmix. We have created an organisation which attractspeople from outside of government because we think

it is important to have people who understand howit feels to be in the business world. ObviouslyWilliam is a key person in that, but he is not the onlyperson in the organisation who understands how itfeels. I see that as an on-going challenge forregulators. It is not new, it is something we havetalked about before, and something that we haveworried about for some time. I think regulatorsunderstand the challenge and are addressing it. Itcould be that this is a good time for people in thepublic sector to attract some pretty good people,because the world of regulation will continue, andindeed some of the questions that we have hadearlier in the session focused around whether theFinancial Services Authority will need to have morepeople, and they might do in some areas of theirbusiness, and now might be a good time for them toattract people who really understand the innerworkings of the banking sector. That will be true inother sectors too, but probably not quite as extremeperhaps as it is in that sector.

Q18 Dr Naysmith: How can government and theregulators ensure that regulations achieve theirintended objective and deliver the desired outcomes?What do they need to do to improve theircapabilities in this area?Sir William Sargent: If they start from the point ofview of putting their policy-making at one end of thescale through the better regulation prism andunderstanding the principles, and questioning whatare we trying to do in the first place, I am quiteencouraged. If we look at our new impactassessment approach, it has very much encouragedpeople from the very beginning as one line of thepolicy to try and question is this the right technique?Are we choosing the right route to go down? Isregulation the right thing? Will it achieve the result?Do we have the evidence to do it? I think the factthere is increasingly a culture, particularly amongstthe 18 departments that we work with, to start byquestioning the solutions that they are doing, whichis a big change. If you work that right through, theimpact assessment process, as you will have noticed,is a document that is live right through the entireprocess, so as people are designing the deliverysystems quite often the business community’sproblems, and citizens’ problems (because this is notjust a business thing; this is to do with citizenscombined as well) the problem is that in themechanism that they are being asked to use to abideby the regulation that has got nothing to do with theoriginal idea. The original idea might have been verystraightforward and simple, and does not seem likea complicated thing, and why would we not do ittype of area, and everyone signs up to that and thatis great. The problem nine times out of ten, fromwhere I am sitting, comes with the complex systemthat was designed to deliver and does it actuallyachieve a result because of the complexity, so the factthat you are collecting a whole pile of informationand whether you do anything with the information,et cetera. Having people’s mind-set in the right placeis the most eVective way of getting the right answers.In our case, for example, having Parliament and the




media using impact assessments as a key challengingtool is one of the best ways to hold people to accountto get to the right result.

Q19 Dr Naysmith: One of the reasons for theexistence of this Committee is to get rid of all the out-dated regulations (which we occasionally get thechance to do when government departments bringitems before us) but we know that there are hundredsof them out there that people think are burdensomeand useless and yet we have great diYculty in gettingdepartments to bring forward things for us to get ridof. Why do you think that happens if there is anattempt to assess whether regulations are eVective ornot and meeting their purpose?Sir William Sargent: It is interesting because the daythat I started this role I thought that I would have anavalanche. I went and spoke to the consumer groupsas well as the trade unions as well as the businessgroups in that first month and said, “You guys havegot shelves full of stuV that if only it did not exist orwas simplified or cut away or done away with, orwhatever it is, life would be better.” It would not bean entirely controversial statement to say that I gotvirtually nothing to assist me on my journey, so tospeak, because it is very easy to criticise genericallythis does not work, that does not work, andwhatever, but as soon as you start testing the thesiswith individuals, first of all, you find that actuallythey think the idea of regulation is a good thing inthe first place and they do not want it done awaywith, if you were to say we will do away withcompetition law or something like that. You veryquickly get to a proper conversation and by the endof the conversation quite often people come up withnew regulations that they would like in place. If youdo a two-hour conversation with anybody from acitizen to business that is the cycle you go through.We found, for example, if you take the reformorders, that most of the things can be solved longbefore you ever get there because they come back tothe delivery system. It is asking why we are doing it.There is only one law but why are we implementingit in this way? When you start analysing and startgetting into the nitty-gritty of a piece of legislation,you think the law is perfectly okay; it is just thatsomeone has chosen to go away and do something ina complicated way, or that it is not achievinganything in the first place, and then the question isdo we use spare and rare parliamentary time to doaway with something that is doing nothing, et cetera,et cetera, so it is more complex than that, but I do notfeel that people have put forward to us many piecesof law.

Q20 Dr Naysmith: You think there are adequateattempts to assess the eVect of newer regulationsover the last few years in terms of impactassessments?Sir William Sargent: The simplification planapproach which, as you know, the departmentspublish every year, is the point at which departmentshave to sit down and understand the territory thatthey are occupying, and whether there is anythingthat they can do in that space. That is quite new and

unique. The admin burdens logic took us into thatspace which then widened into, “Well, is thereanything else you guys could be looking at?” If youallied that to the fact that when people are bringingout new pieces of legislation in a space, they areencouraged, and the guidance encourages them, tolook at the overall space that they are in so that theydo not just bring out a law in a space that already has15 laws in it already without looking at the totalityof it, that is when we begin to get into a healthierspace and you can see whether you can consolidateareas.Mr Kohli: I think we are getting better at ensuringthat when we bring new regulations forward they aregenuinely ones which are needed and have beenthrough the proper impact assessment process. Iwould not want to say that everyone in Whitehall isdoing it perfectly because I just do not think that istrue, and, indeed, the National Audit OYce recentlypublished a report on the quality of impactassessment, which broadly gave the message thatprogress was being made but we are on a journey,and I think that is a fair way of putting it. In termsof the stock of regulation, we have also seen a bit ofa step change really in that people are genuinelyfocusing on how they can ensure that regulations donot cost businesses and others on the ground anymore than they need to. That is a change inWhitehall. A few years ago people just did not havethe incentives to think about those kinds ofquestions in the way that the simplificationapproach and the admin targets have led to. Isuppose one criticism you might make—and I ambeing devil’s advocate on purpose in this—is that byasking departments to focus on admin burdens andin giving them a target, whilst also at the same timesaying worry about policy and look at what youcould do in that area but not giving them a target (itis much harder to give them a target on policy andwe have not found the methodology to achieve it,but nevertheless say that you could) maybe we haveencouraged people to look really hard in the adminbasket because there is a target and look in the policybasket slightly in passing. There is a question therefor the future which is can we get people to focus asmuch on policy as they have on admin? What I didnot mean to say, or what I did not mean tocommunicate, and if I have done then I have failed,is that we are not focusing on policy. We are focusingon policy more now than we were five years ago. Weare also focusing significantly more on admin thanwe are on policy now. Maybe the world would be abetter place if we were more balanced in that. I thinkthat is a fair next step of the journey for us.

Q21 John Hemming: I am going to start out forreasons of transparency by declaring my intereststhat are associated with this area. I chair a companyand I am a partner in a company JHC plc, which isa software company that provides settlementsystems in the financial services sector. I am also ashareholder in an organisation called OMXSecurities LLP which is a joint venture betweenNASDAQ and the Swedish Stock Exchange andJHC providing settlement services, and is therefore a




regulated entity under the Financial Services Act. Ido not think there is any conflict of interest but forreasons of transparency I need to make thatdeclaration of interest. Would more intrusiveregulation require greater resources? Do regulatorsneed to undertake more audit, improving theirability to collect, understand and act on evidence?Sir William Sargent: Do you want to do it in twobits?

Q22 John Hemming: The first bit is do we need moreresources for more intrusive regulation?Sir William Sargent: Not necessarily because againit comes back to what are you using your resourcesfor. If we take the FSA internal audit, theidentification there was that some of the resourceswere not necessarily focused in the right place or onthe right skills-set at times, so it is about who youhave and where you are applying them and are youapplying them in the right place. That is the firstthing you have got to do before you decide that youneed more resources. If you look at the credentialsside of the Financial Services Authority that issomething that I am certain they are currentlylooking at: who do they need, do they need morepeople. The skills-set will be diVerent so it does notautomatically follow that more resources lead us tobetter enforcement. The observation I would makeis whether it is the right mix in the first place. Thatapplies to any of the regulators that are out there inthe world.

Q23 John Hemming: The other question is doregulators need to undertake more audit, improvingtheir ability to collect, understand and act onevidence?Sir William Sargent: Audit it themselves you mean?

Q24 John Hemming: Audit the people they areregulating, I presume.Sir William Sargent: Presuming the process ofregulating in the case of a certain sector, they use alot of techniques and they analyse the risk. I thinkprobably a better question to focus on is auditingthemselves and their own processes and questioningwhat they do. That is probably the part of thequestion that personally I would focus on.Obviously they have three forms of being held toaccount at the moment. They have their own boards,and therefore what arrangements their boards haveput in place, including the non-executives, issomething that is important for them to look at andquestion whether they have got the right structures.They then obviously have a sponsoring departmentnormally, which again has a role in auditing boththemselves and the department. Then they have aselect committee normally in the space occupyingthat. Then the National Audit OYce is acting onbehalf of Parliament, which is traditionally auditingpeople. Do we need more? I do not think myself orJitinder are qualified to comment on that, unless youthink diVerent.Mr Kohli: Again slightly going back to an answerthat we gave earlier, this is about better and not moreor less. Thinking that just doubling the amount of

inspection or audit of regulated companies willimprove regulation is just not true. You have to goin and ask the right questions in order to checkwhether the risks are being adequately managed inany organisation. You can go in every day of the yearand ask the wrong questions every time and you willnot be in a good regulation place. You could go inonce every year, once every two years or once everyfive years and ask the right questions, andoccasionally collect a bit of information to checkthat things are being done correctly, and that wouldbe a better place to be. The challenge then is for theregulator to always be thinking about whether it isworking. If that means more audit and morethinking constantly about how to improve the waythey go about their business, to check constantlywhether what they are doing is working and toconstantly improve it, I think I am in favour of that.Good organisations do that anyway. I am not sayingit as a criticism, but a good organisation will alwaysbe thinking about what outcome am I trying toachieve, and what are the things that I need to do toachieve those outcomes? What are the things I amcurrently doing and are they the same as the things Ineed to do, and are they genuinely working? Whatfeedback am I getting from people? What am Ihearing from people on the ground and what doesthat tell me about my future strategy? Any goodorganisation would do that and lots of regulators dothat all the time. I think that constant improvementis really important. That is not the same as to saythat inspecting a business every day of the year isgoing to make regulation better, if you are asking thewrong questions.Sir William Sargent: If I come back to the commentmade earlier about auditors. My own experience inbusiness is that traditionally the people who audityou do not understand the business and, bydefinition, they cannot. If you are a specialist in thesebusinesses it is very diYcult to get auditors that areperfectly qualified to do that. It comes back to theright question and the right training of thoseauditors. That is the area that I would go looking in,and working out whether people had the rightcapability, because one of your questions was dothey have the capabilities, and the question there is Ido not know if they have the right capabilities,although it is clear from the variety of performancethat clearly in some cases they do not, and then thequestion is how do you build that capability. Quiteoften you build it by training people, selecting theright people in the first place, designing thequestions, and having a risk register that is actuallymeaningful for that particular regulator isimportant.

Q25 John Hemming: The area which I think all ofthis misses is the other two aspects perhaps. Youhave got audit and checking what people are doingand asking them to fill in monthly reports. There aretwo other areas potentially where we need toimprove regulation, and I would like your commentson this. One is transparency. That is transparency ofwhat people are doing because if you look at how theSEC managed to fail to prevent MadoV making oV




with $50 billion, that is a question of transparency.The question is quis custodiet ipsos custodes? How doyou know that the regulators are actuallymonitoring these things if you have not gottransparency in the system? Do you see there is agreater requirement for transparency?Sir William Sargent: I think in one word the answeris yes. As a citizen, certainly when I look backrelatively simplistically, trying to understand thetotality of what has gone wrong in financial services,transparency is one of the biggest flaws, that peopledid not understand. If you had your money in aMadoV account you could not go on-line and lookit up and check that it actually existed and so forth.The answer is yes.

Q26 John Hemming: It is finding out what was on theother side. You have got the credit on one side butthe problem for MadoV was that it was a Ponzi.Ponzi was actually more secure because at the starthe actually had something; it was just there was alimit to how much return you could get. The secondarea that is very often missed—and I would like yourcomments on this—is whether we should have moreregulation that prevents conflicts of interest,particularly in the financial services sector where youhave the distinction between deposit-taking andinvestment banking, one of which is pretty wellplodding but is secure, and the other one which ishigher risk but has potentially higher returns. Doyou think there is a role for more regulatoryrequirements that actually ban conflicts of interest inthe same entity?Sir William Sargent: Let me answer that by pointingback. I have been very encouraged by myconversations with Lord Turner and his speech backin January and his evidence at the Committeerecently in terms of his understanding of the natureof the problem and the inter-linking of the system,both within banks as well as elsewhere. I am veryencouraged that he has a clear view of issues such asyou have just identified, how do you deal withconflicts, how do you deal with lack of clarity, lackof who is doing what, when, and what are theunintended consequences, for example, if you haveremuneration systems that focus on short-term gainswhich are mis-pricing risk in the first place. I thinkthe simplest answer, and I am slightly avoidinganswering it, is by saying that I am very encouragedthat Lord Turner has got himself into this space andhas more capability than I have to address exactlyand properly the question that you are asking.Mr Kohli: If I may go back to the transparencyquestion for a moment, as you know, one of theprinciples of better regulation is transparency. Wehave enshrined into law in the Legislative andRegulatory Reform Act that regulators must takeaccount of transparency when they go about theirbusiness. It is getting greater prominence than it hasdone in the past. The one caveat I would make tothat is that there is sometimes a risk that the staterequires a very large amount of information to begiven, particularly to consumers, and consumersstruggle to make sense of that information, sotransparency that makes too much noise in the

system can do quite a lot of harm. I think there is arole for either regulators or for other intermediariesto help make sense of that information so that itgenuinely works. On this account I might refer youto a report that we wrote a little while ago which wewill have shown you before, which was done jointlywith the National Consumer Council. It is probablythe best front cover of any report we have everpublished, warning: “Too much information canharm (and can fail to help consumers to makechoices and can impose costs on business, despite thefact . . . ”) and it keeps going. The title almost makethe point more clearly than anything else. Whilsttransparency is really, really important, and I wouldnot for a minute give you the impression that we donot think it is absolutely fundamental, it is alsoimportant that what you do not create is so muchnoise that nobody can make any sense of it and theycannot do anything with the transparency, so it hasto work as well.

Q27 John Hemming: A good specific example is Iasked the Financial Services Authority whether theyhad published the tier one and tier two capital ratiosfor all the financial institutions that they regulateand they sort of refused and then did a little bit workon it. If we are talking about stability of financialinstitutions, the key measure is the Basle II capitalratios and the question as to transparency, in yourview, should the FSA publish them?Sir William Sargent: I think the thing that isemerging from the whole financial services space isthe interconnectiveness of where the debt lies and soforth. I am not an expert in this so I am slightly in aspace that I am not an expert in here. Myunderstanding is that the method by which oVbalance sheet liabilities were placed was such thatthey would not be picked up by this publishing. Youcould have been transparent by publishing one thingbut, in fact, if you go back two or three years, thatwould not have captured the entire financial positionaccurately worldwide of that particular institution.It comes back to the comment I made earlier andapplies in regulation, the problem quite often lies inthe design of the system how you achieve thattransparency. Just publishing the tier one and tiertwo might not have created the level of transparencythat, with hindsight, might have been useful.John Hemming: I think we agree to disagree.

Q28 Chairman: In paragraph 2.2 of yourmemorandum to us, in the paragraph headed“Simplifying and modernising regulations”, you setout some impressive statistics. In December 2008 thedepartments have now delivered over 240simplification measures, taking the total adminburden savings to date to about £1.9 billionannually. The Government is on track to achieve itstarget to reduce the admin burdens faced bybusiness, public and the third sector by £3.4 billionannually by 2010. They are very impressive statistics.It is going to be interesting to see how much of thatfeeds through into responses in, for example, theNAO’s annual survey. In the current economicclimate, and we cannot really escape from that, does




the regulatory reform agenda need to adapt itsfocus? What are the biggest challenges to achievingthe Government’s objectives?Sir William Sargent: The challenge is to carry onbeing good and better at regulation. The challengealways lies in working out what you want to try toachieve and the right way to go about it. That is aconstant challenge, particularly in an environmentwhere there is pressure economically to do thingsproperly, so you start with the overall challenge inthe first place that regulating properly and eVectivelyis something that is not easy. We have the tools inplace to generally assist people to do that now. Ithink if you come back to your observation aboutthe figures that we have achieved, one of the thingsthat we felt was a challenge was peopleunderstanding the progress that was being made,and so you need to bring validity to the numbers.For example, we brought together an externalvalidation panel made up of a number of businessgroups, plus the Trades Union Congress, to verifywhether they felt, together with us, that the numberswere eVective. One of the challenges that we foundwas if you, for example, save a million and a halfemployers five hours a year, I would suspect, well, Iknow because I have not had a single letter from asingle employer saying, “Thank you very much forthe five hours that I have achieved this year,”because, frankly, they have just gone on and donesomething else with their time, hopefully onproductive stuV. The big challenge is to bring topeople’s minds the collection, in the case of the workto date, of 240! initiatives delivered, all of whichadd up to £50 here and £100 there and five hoursthere and so forth. If you think of the reverse, mostof you will have heard from constituents over theyears, “I do not have a problem with a single pieceof legislation; I have a problem with the collection oftiny little things that add up to an overall burden.”When we are trying to unpick the unnecessary cost,the same applies in reverse, that what we areachieving in the hundreds, in fact 500! initiativeswhich have been identified, collectively adds up to asignificant enhancement, but getting that through tocitizens as well as businesses is the biggest challenge,and therefore for the agenda and energy levels toremain we need that to become something thatpeople perceive and support. That is a challenge thatI have.Mr Kohli: Thinking about the economic climate thatwe are now in and the impact that will have on theagenda, the first point really that I would want tomake is that we absolutely need to deliver. We havemade a series of promises around reducing theadministrative burden by 25%. I am very proud thatwe are on track but we are not there yet. Weabsolutely need to deliver and we must not allowourselves to get distracted by the very real economicissues that the country faces. Indeed, at this time itis more important that we deliver because businessneeds all the support and all the help that it can getright now when it is under significant pressure. Ithink it is equally important that on the flow ofregulation, on new regulatory ideas, thatgovernment departments and ministers think harder

about whether now is the right time. Even when thebenefit/cost ratio for a new regulatory proposalcould be very good, actually this may not be the righttime to do it because of the cumulative eVect thatWilliam referred to that business is currently feeling.To give you a concrete example of that on tobacco,we made the decision that it is a right decision to banthe public display of tobacco in shops becausesmoking is a very real issue for our country, andtherefore anything we can do to address that wherethe cost/benefit ratio is good is the right thing to do.We also made the decision that now is not the righttime to do it, and so we are delaying implementationof that to 2011 for large shops and 2013 for smallretailers, and that is sensitive to the very realeconomic issues that are out there at the moment. Innormal economic times we might have done thatfaster. Indeed, I am sure we would have done thatfaster, so delaying implementation sensitive to theeconomic issues is one of the things that we aretrying to do.

Q29 Chairman: My final question is to ask youperhaps to get your crystal ball out and look at whatyou think the future of the regulatory reform agendawill look like. When is the decision going to be takenon regulatory budgets? If the decision is not toproceed, what will happen instead?Sir William Sargent: I think the decision issomething that the Government is currentlyconsidering. We have obviously done the work andprovided the material to ministers so I think that isprobably a question better put to ministers from thatpoint of view. The consultation only finished at theback end of 2008, as you know, and it is an incrediblycomplex concept—and we are the first people in theworld to even consider how you might do that—sothat at the moment is a matter for the Governmentto give a response on.Mr Kohli: In terms of the future of the regulatoryreform agenda, one of the things that we talkedabout earlier was around policy. I think it isimportant that the progress we have made onadministrative burdens is reflected into the policyarena too in some form. It is much more diYcult todo in that arena and we have got to be careful thatwe do not harm real social protections in our society.Another really important theme for the future isgetting the message across more clearly than we havemanaged to do to date. While I am heartened thatthe National Audit OYce survey seems to show apositive shift in business perceptions towardsregulation, it also shows that there is a long way togo before businesses feel good about regulation.More businesses feel okay about where we are at themoment, but we have to make more progress in thatarena, too. There are some ideas there that will formpart of the future but, as always, we will eagerlyawait your report because, as you will know, lastyear’s report helped us define a great deal of what wedid over the last 12 months, and a number of ways inwhich we have taken forward the regulatory reformagenda respond directly to the recommendations inyour report, so we are always on the look-out for




ideas and this is a Committee where we are veryheartened by the recommendations we receive fromthe Committee.Sir William Sargent: If I can draw it together, we feltthat the agenda when we came on board a little overthree years ago was a long-term agenda. It was notsomething that you just did in three years and thatwas it and you moved on to the next. This issomething which, if I look in my crystal ball, I wouldlike to feel the energy and focus was still there fiveyears down the line. I am hoping for more of thesame and business as usual from the point of view ofthe work that we are doing. The bit that we have notspoken about at all today, but something that is veryclose to my heart, is the public sector work that weare doing. As citizens we all want more services fromthe police, from nurses, from school teachers, and soforth, and it is generally felt that somewhere arounda third of their time is spent with administrativeduties. Public sector workers are very happy with theconcept of administration. You need to keep medicalrecords and school records and all sorts of stuV.However, if we can take away 10% of their time spentand got it down to a fifth, suddenly that is four to fivehours a week of teaching, policing and nursingwhich is not available at the moment. That is a verypowerful vision as far as I am concerned. That is anarea which I think maybe next time will be worthexploring and discussing. In terms of Europe, peoplealways say that Europe is coming up with lots oflegislation. In spaces where you can originateregulation across the entire European economy,because it is our key trading partner, it is a positive

and useful thing. We have been very active in thesepast three years—again something we have notspoken about much about today—in engagingEurope and persuading them to adopt thetechniques that we are doing here. For example, inMarch 2007, the Commission and the member statestook on the 25% admin target as well. Withhindsight, I feel that has been a very culturallypowerful driver of change and the fact that we nowhave it embedded in Europe at Commission level isimportant. On impact assessments they are on thatjourney. They are obviously not where we are interms of the UK, but in terms of the challengefunctions, they have begun that journey. In terms ofhow we engage, if you look at a lot of the process thatpeople are negotiating at the moment in Europe, itis the techniques that we have laid done down at theBRE, together with departments. I feel that when Ilook out five years, ideally the energy levels will bethe same as they are at the moment and the focus willbe as strong as it is at the moment. The public sectorwork that we are doing is delivering significantlymore time on the ground, so to speak, and in Europeit is an incredibly eVective place consulting withpeople, identifying the issues, and identifying thethings that genuinely cost across the economy. Weare already seeing that. The recent exemption ofmicro firms from accounting requirements wouldnot have been possible two years ago. That is verymuch something that we have pushed very hard, sothat is part of the vision for going forward.Chairman: Thank you very much for your time,gentlemen. I think that it has been a veryconstructive session.




Members present


Gordon Banks Dr Doug NaysmithLorely Burt

Memorandum submitted by Consumer Focus

1. Summary

1.1 Failures in financial regulation were a contributory cause of the financial crisis, but this regulatoryfailure was not rooted in the better regulation agenda. The principles underpinning the better regulationagenda remain valid and should not be defeated by scattergun or kneejerk reactions to recent developments.However, political commentary around the need for light touch regulation has at times unhelpfully muddiedcommunication about what the better regulation agenda is actually intended to achieve.

1.2 It remains in the consumer and public interest to have the right amount and type of regulation butno more. Unnecessary red tape should be dispensed with, but equally Government should be careful tomaintain high levels of consumer protection if it wants to rely on consumer spending to help bring theeconomy back on track.

1.3 A risk-based approach to regulation remains valid, but there is a need to introduce greater diversityof thinking and a fresh perspective to key issues around regulatory intervention and risk, on a cross-economybasis. One possible explanation of regulatory failure in financial services is that the FSA and industry framedthe issues in the same way.

1.4 There is an opportunity to re-energise the better regulation agenda by putting the consumer interestat the heart of regulatory policy and practice. A study by Consumer Focus, Rating Regulators, highlightsthe likely strengths and weaknesses of regulators across the economy. Its principal finding was thatregulators have a misplaced confidence in market forces to deliver consumer protection.

1.5 Our study found many examples of good practice and innovation, but these were rarely replicatedfrom one regulator to the next. The BRE should develop a mechanism, which eventually should become self-supporting, to facilitate the sharing of best practice.

2. About Consumer Focus

2.1 Consumer Focus champions the needs of consumers across England, Wales, Scotland and, for postalservices, Northern Ireland. We operate across the whole of the economy, persuading businesses and publicservices to put consumers at the heart of what they do.

2.2 We take action where markets fail consumers and ensure a fair deal for all—especially vulnerable anddisadvantaged people. We want to see consumers central to business and government decision making, andwe’ll be working in Europe too, to make sure consumers’ needs are heard in Brussels. We don’t just drawattention to problems—we use a strong evidence base and work with a range of organisations to championcreative solutions that improve consumers’ lives.

3. Current Developments

3.1 Everyone is still trying to piece together the complex interplay of factors that led to the financial crisis.Mistakes by financial regulators, alongside the actions of financial institutions and others, are certainly partof the story. However, we have seen no evidence so far that the mistakes of financial regulators were rootedin the underpinning principles of the better regulation agenda,1 although some political commentarydemanding “light touch” regulation has at times unhelpfully muddied the waters. Changes to the frameworkof financial services regulation are no doubt needed, but change should be confined to this sector unlesssubsequent analysis establishes that the better regulation agenda was a contributory cause. A scattergunapproach to regulation or kneejerk reactions to recent developments would raise serious concerns about thestate of regulatory thinking and practice.

3.2 It remains in the consumer and public interest to have the right amount and type of regulation butno more. Consumers and business have a shared interest in maintaining an eYcient and eVective system ofregulation as an excess of regulation can dampen innovation, unfairly protect incumbents from competitionand incur costs that consumers ultimately pay for. Equally, some regulation will always be needed, forexample in lifeline situations or to make markets work. It is important that the value of regulation is givenproper recognition in public debate rather than, as has been portrayed in some quarters, it is seen simply as aburden on business. In this context, we are pleased that the Better Regulation Executive has started a projectlooking at the benefits of regulation to society, which Consumer Focus is advising.

1 proportionate, accountable, consistent, transparent, targeted.



3.3 In the context of the economic downturn it is important to minimise regulatory burdens. Thereforewe support an approach which dispenses with red tape, but at the same time Government should notcarelessly throw necessary regulation on the bonfire, nor should it shy away from introducing new regulationwhere this is necessary to protect consumers. If Government is to rely on consumer spending to help get theeconomy back on track, it is important to maintain a consumer protection regime able to give consumersthe confidence to deal with traders who may cut corners in order to save on costs. The BERR ConsumerLaw Review is looking at ways to simplify the legal framework which establishes our consumer rights; thesereforms would benefit both consumers and business. Evidence submitted by consumer groups to the reviewalso highlighted gaps in redress and deficiencies with the enforcement regime that also need to be addressed.The findings of the Review were expected before the end of 2008, so decisions are overdue.

3.4 An examination of the FSA’s role in the financial crisis will understandably focus in part on itsregulatory style. Principles-based regulation is the centrepiece of the FSA’s regulatory approach, but itwould be misguided to encourage the FSA to retreat from this landmark initiative targeted at retail financialmarkets before it has been given a proper chance to succeed, not least because recent events were linked inthe most part to a failure of prudential regulation. Whilst we look forward to the promised “revolution inregulation” at the FSA promised by Adair Turner, we remain of the view that a principles-based regime hasa better chance than writing detailed rulebooks of changing the behaviour of financial firms as it seeks totackle the underlying cultural problems.

3.5 A risk-based approach to regulation remains a valid cornerstone of the better regulation agenda,although this should not be equated with “light touch regulation”. The FSA was previously regarded ashaving quite sophisticated risk assessment systems, which suggests even the best-designed systems are notfoolproof. Perhaps one explanation for why they failed is the absence of an external perspective to challengethe received wisdom. Our perception is that both industry and the FSA framed the issues in the same way—they might have disagreed on points of detail, but the way they thought about things was the same, withcatastrophic results. The FSA saw its peers as other financial regulators, who of course also had the sameframing of issues.

3.6 The need now is to introduce greater diversity of thinking and a fresh perspective to key issues aroundregulatory intervention and risk. Composition of decision-making structures is an important component ofthis and we have urged the FSA to ensure it appoints someone with consumer expertise to its board at thenext opportunity. We note that the establishing legislation for both the Food Standards Agency and theLegal Services Board state it is desirable for their boards to be composed of individuals with a range ofbackgrounds, including consumer aVairs. Another aspect of bringing an external perspective is engagementwith the public to inform decision-making through research and other methods. In a recent study assessingsix major regulators from the consumer perspective, Rating Regulators, Consumer Focus identified animproving picture in terms of consumer engagement, although performance was variable and we found theFSA carried out relatively little consumer research outside of its work on financial capability.

3.7 The need to open up regulatory systems to fresh perspectives applies across the economy, both toregulators and Government departments. The Risk and Regulatory Advisory Committee was intended todeliver some form of external challenge on systems and culture with respect to risk. Its work complementsthe Better Regulation Executive’s role to provide some form of accountability, so that implementation ofthe wider better regulation agenda at working level is measured against a framework. An interestingdiscussion point is what arrangements should be put in place once the RRAC completes its work.

4. Re-energising the Better Regulation Agenda

4.1 Whilst the principles that underpin the better regulation remain sound, the financial crisis providesan opportunity to re-energise the debate. Recent events illustrate it has never been more vital to put theconsumer interest at the heart of the regulatory agenda. We are mindful of the last paragraph in theCommittee’s previous inquiry into the Better Regulation Executive and the impact of the regulatory reformagenda: “Finally, we are left in some doubt about the extent to which the citizen in general is considered inmatters relating to the introduction of better regulation. That is an issue to which we may well return”. Weagree with this analysis and urge the Committee to put the citizen interest at the centre of this inquiry.

4.2 Consumer Focus’s Rating Regulators study (copy enclosed) provides clues about the likely strengthsand weaknesses of regulators across the economy. We believe the following findings are relevant to thisinquiry:

— Statutes—the legal framework provides regulators with a clear mandate and the tools for the job,but it can also prescribe duties that promote consumer-focused ways of working. We identifiedhelpful duties across diVerent pieces of legislation, including in relation to board membership,consultation and transparency.

— Transformation—Ofcom was seen by its stakeholders to have made a sea-change in its level ofconsumer focus over the last few years due to a combination of factors, including the strategicdirection of a new chief executive, an expansion of the consumer policy team and an increasedinvestment in consumer research. This experience gives us optimism that regulators are able todevelop a strong consumer focus.



— Regulatory approach—we identified a strongly-held view among stakeholders that some regulatorshave a misplaced confidence in the ability of market mechanisms to deliver consumer protection.A related criticism was that regulators adopt self-regulatory solutions when they do choose tointervene when the chances of success of this approach are slim, rather than choosing from a mixof interventions depending on the circumstances.

— Enforcement—we found evidence of the regulators being more prepared than in the past to flextheir muscles by imposing tougher penalties for serious or persistent rule breaches. The regulatorshave previously been criticised by parliamentary committees in this respect. As part of this, we wereencouraged to find the FSA has now dropped its “we are not an enforcement-led regulator”mantra.

4.3 We were pleased to find examples of good practice and innovation among the six regulators in ourstudy. However, returning to a theme we raised in our evidence to the Committee’s earlier inquiry on betterregulation, good practice in one regulator was rarely replicated elsewhere. Examples include the FoodStandards Agency’s approach to transparency, Ofcom’s use of business process tools to ensure the consumerinterest is designed-in to its activities and the FSA’s approach to measuring its impact in terms of outcomes.

4.4 In its earlier inquiry, the Committee recommended that the Better Regulation Executive and LocalBetter Regulation OYce become more actively involved in facilitating greater sharing of best practice. In itsresponse to the Committee’s report, the Government highlighted some existing initiatives that aimed toachieve this, but did not commit to a new mechanism. In light of our comments above, we consider there isa need for the BRE to develop a mechanism, which eventually should become self-supporting, to facilitatethe sharing of best practice. We also think there is merit in considering the creation of a National Schoolof Regulation to train the next generation of regulators in a similar way to which the National School ofGovernment prepares civil servants for their role.

February 2009

Memorandum submitted by Citizens Advice

1. Introduction

1.1. Citizens Advice is the national body for Citizens Advice Bureaux (CABx) in England, Wales andNorthern Ireland. The CAB service is the largest independent network of free advice centres in Europe, with430 main bureaux in England, Wales and Northern Ireland. Bureaux provide advice from over 3,300 outlets,including bureaux in the high street, community centres, health settings, courts and prisons. All CitizensAdvice Bureaux are registered charities. CAB clients are often disadvantaged and many are on low incomesor benefits, or are disadvantaged in some way. For example, research by MORI for Citizens Advice England& Wales found that CAB users tend to be in social grades DE and unemployed, or living in social housing.2

1.2. The CAB service aims are to provide the advice people need for the problems they face, and toimprove the policies and practices that aVect people’s lives.

1.3. In 2007–08 Citizens Advice in England & Wales helped 1.9 million people to deal with more than5.5 million issues, including:

— 1.7 million debt issues, including mortgage arrears and credit problems, and 115,000 financialproducts and services issues.

— 476,000 employment issues.

— 399,000 housing issues.

— 130,000 consumer goods and services issues, 95,000 utilities and communications issues and38,000 travel, transport and holiday issues.

— 274,000 legal issues.

1.4. Citizens Advice welcomes this timely opportunity to submit evidence to the Regulatory ReformCommittee’s inquiry on Themes and Trends in Regulatory Reform. In our policy and advice work, we seethe impact of diVerent regulators’ methods of regulation and the eVectiveness of these methods. Theregulators we have most experience of include:

— the OYce of Fair Trading (OFT);

— the Financial Services Authority (FSA);

— Trading Standards;

— Ofgem;

— Ofcom;

— Phonepayplus;

2 Financial Overcommitment, research study conducted for Citizens Advice by MORI, July 2003.



— Ofwat;

— The Gangmasters Licensing Authority (GLA);

— The Employment Agency Standards Inspectorate;

— The Ministry of Justice’s Claims Management Regulation;

— The Solicitors Regulatory Authority; and

— HMRC’s enforcement of the National Minimum Wage.

1.5. Citizens Advice is, therefore, able to oVer a unique perspective on how consumers and employees inparticular are aVected by regulation and how the consumer experience in one area may vary widely fromanother. Based on this experience, Citizens Advice believes that regulation to date, whether principles-basedor rules-based, has not understood and protected consumers and employees suYciently.

1.6. This submission will cover the following areas:

— Regulation and the current economic climate.

— DiVerent models of regulation and how these work in practice.

— What elements contribute to eVective regulation.

— The design of regulations.

2. The Current Economic Climate and Regulation

2.1. The consequences of the current crisis in global financial markets are now being seen by CitizensAdvice Bureaux. Between April 2008 and January 2009 the number of enquiries relating to unemploymentand diYculties meeting basic living expenses has risen sharply. In this period:

— Enquiries about redundancy increased by 153%.

— Enquiries about jobseekers allowance, the benefit for people who have lost their job and are nowseeking work, increased by 138%.

— Enquiries about mortgage and secured loan arrears increased by 49%.

— Enquiries about council tax debts increased by 23%.

2.2. Much has been said about the link between the causes of the current economic downturn toregulatory failures in the financial services sector. Citizens Advice does not have the expertise to commenton this directly but we believe this link raises a key point that should be a starting point for any current debateabout regulation, namely that there can be significant negative consequences resulting from regulatoryfailure.

2.3. While this seems fairly obvious now, it is not at all clear that the “pre-credit crunch” discourse onregulation was suYciently concerned with what outcomes regulation should be trying to achieve or indeedthe consequences of failing to meet these objectives. A summary of this (in respect of financial servicesregulation) is given by Lord Turner in recent evidence to the Treasury Committee. The uncorrected transcriptquotes Lord Turner as stating how the Financial Services Authority had carried out “competent executionof a style of regulation and a philosophy of regulation which was, in retrospect, mistaken”.3

2.4. Furthermore, Lord Turner then described this style of regulation as arising from “a politicalphilosophy where all the pressure on the FSA was not to say: ‘Are you looking more closely at these businessmodels?’ but to say: ‘Why are you being so heavy and intrusive? Can you not make your regulation a bitmore light touch?’”. From our perspective as an advice charity that is intimately concerned with the day today problems that consumers actually face, we would argue that this is not only true of regulation of financialmarkets by the FSA but could be applied to the prevailing discourse on regulation more generally.

2.5. We have got very used to hearing phrases such as “light touch”, “regulatory burden” and “red tape”as the touchstones for debates about regulation. But the underlying concern of this philosophy—to letbusiness get on with it—seemed increasingly at odds with our experience of consumers suVering often severedetriment from bad practice across a broad spectrum of goods and services markets. It is important to notethat it is not just small “rogue” traders that are responsible for this consumer detriment. Many, if not most,of the problems CAB clients face are with high street brands and household names. CAB evidence showsagain and again how unfair and detrimental practices can become common, even ingrained, whereregulatory standards do not exist, are weak or are poorly enforced by regulators. For example:

A Norfolk CAB reported that a woman had contacted Trading Standards about a plumber she had foundin Yellow Pages. They insisted she pay £500 as cash for a job they priced at £1,175 before they did the workand then failed to turn up as promised. As the cesspit was blocked she had to find another trader to do thejob. The trader oVered a part refund then failed to deliver. Trading Standards explained that whilst theycould act to stop the unfair practice for future consumers, they could not enforce the promised repayment.

3 Uncorrected oral evidence taken before Treasury Committee on 25 February 2009. See response to question Q2144.



A Surrey CAB reported that a woman had paid a trader up front for removals. He failed to turn up to dothe job and she had been unable to get her money returned. It would appear he had gone into liquidation,and she could not trace him. The bureau was concerned that, in addition to regulation, consumers neededto be warned about such cases whenever enforcers became aware of them.

A CAB client in Gloucestershire was told she had won gym membership but was told there would be amaintenance fee. Verbally the gym said she could cancel the direct debit for payments and given a cut oVdate. She did cancel but found the credit provider whose agreement she found she had signed threatened todamage her credit record if she didn’t pay up. The local Trading Standards were already aware of this gymbut had not acted, presumably whilst a proportionate level of cases are built up.

2.6. For instance, the CAB service sees a continual stream of problems arising from bad practice in themobile phones market. The following case highlights problems with mobile phone retailers, who we believeare not subject to eVective regulation, despite this being a significant consumer market.

A CAB in North London saw a 48 year old man who said that when his mobile phone contractwas due for renewal he was contacted with oVer of new upgrade by a mobile phone retailer. Thesalesperson said they were from the retailer that he normally dealt with, so he thought nothing ofit. He was oVered new phones and accepted. However, when the phones arrived the man saw theywere from entirely diVerent retailer. He realised that this is not how his normal upgrades are dealtwith and decided to reject the phones but found that there were details on how to do this. He saidthat he contacted the phone retailer several times and spoke with diVerent advisers who werereluctant to provide him with the information he required to return the goods. It wasapproximately two weeks before he managed to obtain a return address from the retailer and thatwas only after his service provider intervened, advising him that they had experienced problemswith this retailer. The service provider advised him that he was within his time limit for returningthe goods and should not therefore be liable for the contractual charges. Finally the retailerprovided a return address for the goods and the man returned them by recorded delivery. But hewas billed continuously since this time at £31 per month. The client had paid one bill of £90 becausehe was told that this would end the matter. Instead the retailer passed the matter to debt collectorsand he was been warned that he was locked into an 18 month contract.

2.7. Another example comes from the banking sector where we continue to see cases of banks exercisingtheir right of set oV in a way that can cause extreme hardship to lower income households. The right of setoV is an ancient banking practice where a bank will take money from a customer’s current account to meetpayments of other credit contracts that the consumer has with the bank. As the following cases show, thiscan mean that the bank takes income that is needed for essential living expenses.

A CAB in Essex saw a lone parent in receipt of income support, child benefit and child tax credit,all of which were paid into her bank account. The woman had a credit card debt with the bankand, with the help of the CAB, had arranged to pay a token oVer of £1 per month as this was themost she could aVord. The bank sent her a payment book and the client was making the £1 permonth payments. Despite this, the bank informed the client that they were going to exercise theirright to set-oV around £127 from her current account against her credit card debt. This left herseriously short of day to day funds to live on.

A CAB in Greater Manchester saw a 25 year old man who had two accounts with the same bank—a current account that was overdrawn and a “cash card” account which was used solely for receiptof housing benefit and payment of his rent. But as the housing benefit was deposited into the cashcard account, the Bank took the funds to pay oV the overdraft leaving him unable to pay his rent.Only when the CAB intervened did the bank reverse the transaction.

2.8. The point here is that both regulatory guidance from the OYce of Fair Trading (the Debt CollectionGuidance) and industry self regulation (through the Banking Code) put nominal controls on the practice ofset oV. But firms do not necessarily comply with the standards, to the detriment of often vulnerableconsumers.

2.9. With this background of uncontrolled consumer detriment in mind, our immediate concern is thatthe current economic conditions will produce many more examples of bad practice.

2.10. Firstly, consumers facing uncertain futures or actual financial hardship may be particularlyvulnerable to unfair practices and scams. Unfortunately CAB evidence highlights numerous cases of tradersseeking to take advantage of these vulnerabilities in a variety of ways.

A CAB in Surrey saw a 40 year old man who was looking for work. A few weeks earlier he hadapplied for a job as a chef with a catering firm via the job centre. He was expected to go for a “trialday” as part of their two week program of trial days. He worked the trial day but was unsuccessfuland did not receive any remuneration for his eVorts. The same job was then advertised again inJobcentre Plus with the same procedure of a “trial day” set up. The man pointed out that the firmcould be securing up to four weeks work from possible candidates for free. He was then oVeredanother “interview”—ie practice work day with another company in the following week whichwould also involve him working potentially for nothing. The man was worried that this could bea scam.



A CAB in Hertfordshire saw a 38 year old man who had debt problems. He had approached a debtmanagement company about getting an individual voluntary arrangement (IVA) to deal with hisdebts. The firm advised that he needed to oVer £300 per month if his five creditors were to agreeto an IVA. He told the firm that he could not aVord this, but they told him to pay for a couple ofmonths then he could renegotiate downwards. He managed to pay for two months but thendefaulted for several months. The IVA provider then told him that if he paid for two more monthsthey would renegotiate. The man’s new partner agreed to pay £600 for him. But once the firm hadreceived the money they wrote to the man to say that they would no longer represent him and werekeeping the £600 in respect of their admin charges.

A CAB in Northumberland reported that a man had seen an advert in his local paper from acompany who claimed that they could wipe out any loans or credit cards if he signed the agreementbefore 6 April 2007 because there is a good chance that the agreement was made incorrectly andtherefore unenforceable. The client contacted the company and he explained that he had taken outa bank loan in February 2007 for £20,000 to buy a car with. The client then received a letter fromthe company saying that if he signed the paperwork they would charge him £295 for checking hisagreement through and if they could not get the loan wiped out, they would refund £245, keeping£50 for admin charges. The CAB commented that in the present economic climate, this was a verytempting oVer, especially for vulnerable people who were trying to make ends meet in a time wheremoney is very scarce. The CAB felt that the client could end up paying the money only to find thatthe loan was enforceable.

2.11. Secondly, as falling incomes and prices put the squeeze on both consumers and businesses, there isa danger that “good” firms that are properly concerned with the way they treat their customers will beundercut by less scrupulous rivals. In other words there is a danger that good business practices will beundercut by bad practices.

2.12. One example of this comes from the bailiV industry, where a number of bailiV firms have agreedwith Citizens Advice in calling for independent regulation of private bailiVs. In part this is because the bailiVsector has long been associated with some very bad practices, which more enlightened firms would like tosee cleaned up. But in addition, it is argued that intense competition between bailiV firms for the enforcementbusiness of large creditors (such as local authority council tax debt) can give incentives to firms to maximisethe possible revenue from the cases they receive. As these cases may often involve low income and vulnerablehouseholds in severe financial diYculties, the potential for bad enforcement practices is clear.

A CAB in the West Midlands reported that they were helping a disabled 47 year old man with8 dependant children (all under the age of 10), with an outstanding magistrates court fine whichhad been sent to the bailiVs for enforcement. The CAB had alerted the bailiVs several times that theclient should be recognised as “vulnerable” under the National Standards for Enforcement Agents.However, the bailiVs had ignored these approaches, refused to accept a new payment plan and hadthreatened to force entry into the client’s home. Furthermore, whenever the CAB had tried to makecontact with the relevant bailiV, the phone has either been engaged or switched oV. The client feltextremely distressed by his treatment by the bailiVs, particularly as he had made every eVort torepay the debt to the best of his ability.

A Sussex CAB reported that a man who was unable to work due to illness, left his home locallyand went to live with his parents for six months whilst he recovered. On his return home, he founda bailiff’s distress warrant for non-payment of council tax taped to his door. As the client was nowable to work and repay the bailiVs, he oVered them an initial payment of £500 in a week’s time, asecond payment of £500 the following month and the balance in April. However, the bailiV hespoke to insisted on full immediate payment. The bailiV also alleged he could legally break intothe house to levy goods. Although this was incorrect, when the client complained to the bailiVcompany, they backed up what their bailiV had told the client. The client subsequently complainedto the local authority who said that they would not take back the case from the bailiVs, and thatalthough the client could make a complaint about the intimidation from the bailiVs, they wouldtake no action on it.

2.13. Another example is the sale and rent back sector (SARB). This is a type of transaction wherehomeowners, usually facing mortgage possession action or other severe debt problems, sell their home at adiscount to market value to a firm that allows them to remain in occupation as a tenant. As this was anunregulated sector, any firm could set themselves up as a SARB provider with little on no safeguards forconsumers. Perhaps as a result, as the number of people seeking advice about mortgage arrears began togrow from around 2005 onwards, bureaux also began to see cases of homeowners who had suVered severedetriment as a result of entering into SARB agreements. Around this time we spoke to several firms in thesector who were keen to establish a framework of regulation, either voluntary or statutory, that would createstandards and help consumers to distinguish legitimate traders from the rogues.

A CAB in Yorkshire reported that a retired couple in receipt of pension credit and disability livingallowance had sold their home, in which they had lived for many years, to a sale and rent backcompany to release funds to repay their numerous credit debts and were renting it back. The clientswere paid £53,000 for the property, although it was probably worth about £90,000. They were alsopromised a further unspecified amount in ten years time. The income from the sale did not clear



the debts in full, and the clients were still struggling to repay these from their disability livingallowance. Their financial situation was exacerbated because the clients were not entitled tohousing benefit for five years, because they had owned the house they were renting. The CABcommented that the clients had sold their house in desperation, thinking their debts would becleared and they could have a happy retirement. The company had taken advantage of elderlypeople who did not realise the implications of selling their property and the impact this would haveon benefit income.

A CAB in Tyne and Wear reported that a man had got into financial diYculties after his partnerleft him and he was oV work sick. He therefore decided to sell his home and rent it back to acompany oVering such arrangements. The client had maintained his rental payments of £650 permonth, and was therefore extremely shocked to receive a letter from a mortgage company to tellhim that they were seeking possession of his home as the landlord had failed to pay the mortgage.The client, who had lived in the house for over 30 years, tried to contact the landlord, but to noavail. The CAB had to advise the client that there was no regulation of sale and rent back schemesand that his rights as a tenant would not prevail over those of the mortgage lender.

2.14. These two examples demonstrate that eVective regulation requires a swift and eVective responsefrom government to evidence of problems in the market. As a result of concerns raised by Citizens Adviceand others about the SARB sector, the government announced in the 2008 Budget report that the OFTwould carry out a market study of the SARB sector. This was duly done by the OFT with impressive urgency,with the resulting report published in October 2008 recommending that the government bring the SARBsector under regulation by the FSA. In February this year both HM Treasury and the FSA issuedconsultations on the detail of how regulation might be brought forward. Indeed the FSA are proposing tointroduce an interim regulatory framework in July 2009. This strikes us as an eYcient and timely responseto an area of severe consumer detriment.

2.15. In contrast, progress on bailiV regulation has been extremely slow. The Ministry of Justice (thenDepartment for Constitutional AVairs) announced its intention to regulate bailiVs in the 2003 White Paper,EVective enforcement. However these plans were then put on hold before being revived during the passingof the Tribunal, Courts and Enforcement Act 2007. Widespread concern over provisions in that Act thatwould give bailiVs wider forced entry powers lead to the Ministry of Justice (MoJ) announcing in March2007 that these powers would not be commenced until “those bailiVs who are not Crown employees arelicensed by an independent regulator”. MoJ had launched a consultation on the detail of bailiV regulationin January 2007 but did not publish a response confirming its intention to proceed with this until March2008. Since then there has been no further publicly visible progress towards bailiV regulation. Six years onfrom EVective enforcement, regulation of a sector that has repeatedly thrown up cases of severe consumerdetriment looks very remote despite always unanimous agreement on the need for this from stakeholdersand MoJ itself.

2.16. We believe that the contrast between these two examples is instructive. EVective regulationultimately rests on the commitment of ministers to take action to safeguard the interests of consumers whereevidence of detriment arisies in areas under their departmental brief. The key question would therefore seemto be why the Government’s response to two diVerent but pressing problems should be so diVerent.

2.17. Finally, where regulators are funded through licence fees or levies on the firms they regulate, fallingbusiness turnover and reducing licence applications are likely to mean fewer resources to deal with badpractices. Perhaps an example of this is the oversight of consumer credit markets by the OYce of FairTrading. Concern over bad practice in consumer credit markets lead to parliament passing the ConsumerCredit Act 2006. This updated previous legislation and granted the OFT new powers and sanctions to dealwith problems in the market. However the problem of monitoring the way firms actually comply withregulatory guidance remains.

2.18. The OFT is funded to regulate consumer credit by a levy on consumer credit licence holders. Weunderstand that an immediate eVect of the current recession is a reduction in applications for consumercredit licences and we are concerned that this might well eVect the ability of the OFT to carry out itsregulatory functions eVectively. In addition we would question whether the levy provided the OFT withsuYcient resources even before the economic downturn began to bit. For instance, we understand that thelevy raised from the five biggest banks amounts to only around £3,000 per year. While we fully support theneed for regulation to be eYcient and economic, these considerations should not undermine the need foreVectiveness.

3. Different Methods of Regulation

3.1. There are three broad methods of regulation designed to protect consumers and employees:

— Principles-based regulation.

— Prescriptive or rules-based regulation.

— A regulatory regime that does little other than badge firms.



3.2. Firstly, principles-based regulation is where there are high-level and quite general requirements onfirms to behave in a certain way. This can be backed up by guidance, which may or may not be binding.In theory, the principles-based regulation may encourage firms to focus on delivering better outcomes forconsumers. Examples of principles-based regulation include:

— The FSA’s Treating Customers Fairly initiative.

— The Advertising Standards Authority code on advertising which follows the idea of legal, decent,honest and truthful.

— The proposed method for the FSA to regulate retail banking from the end of 2009.

3.3. However, in practice, the benefits depend on how the high-level principles are translated into theeveryday practices of firms. For example, how easy is it for consumers or their advisers to both understandthe application of such principles and hold firms to account where they fail to adhere to them?

3.4. For example, under the FSA’s proposals to regulate retail banking, the detailed rules contained inthe self-regulatory Banking Code will be replaced with high level principles, backed up with voluntaryguidance. The content of the current Banking Code and associated guidance for subscribers is vital forvulnerable consumers because of its specific and detailed provisions which set out what customers can expectin certain situations. This provides customers and their advisers with clarity about what is and is notpermitted under the regulatory regime, thereby enabling them to assert their rights where they are infringedin any way. Removing this level of detail will have negative consequences, with consumers and their advisersunsure and unclear about whether firms are complying with high-level principles. It will also lead toconflicting interpretations of what it means to treat customers fairly since the onus is on the firm to interprethigh-level principles, and any interpretation is likely to vary from firm to firm.

3.5. Under the Banking Code subscribers must comply both with the Code itself and the Guidance thatunderpins them if they wish to avoid enforcement action by the Banking Code Standards Board (BCSB).These arrangements provide transparency to: (i) banks who know to a fairly detailed level exactly what isexpected of them to achieve compliance; and (ii) consumers and CAB advisers who similarly know whatthey can expect from banks and building societies, and therefore where they can challenge banks about theirfailure to comply with certain undertakings.

3.6. The FSA’s move to high-level principles-based regulation will remove this level of detail. The FSAproposes that to accompany its high-level principles for regulation of retail banking “industry may wish todevelop voluntary industry guidance, suggesting ways to comply with these requirements, which wouldpreserve valuable elements of the current Codes and relevant material.” We do not think that such voluntaryindustry guidance as currently constituted would fulfil the same valuable function as that provided by theBanking Code guidance. This is because while the BCSB will enforce against its guidance, this does notappear to be the case for the FSA.

3.7. Secondly, prescriptive or rules-based regulation sets out detailed rules that firms should follow. Webelieve that in many cases, regulators need to be prescriptive in telling firms what behaviour is acceptable,and what is not. In some sectors, this needs to drill down to specific practices. The OFT’s Debt CollectionGuidance is an eVective example of this. However, we believe that if prescriptive regulation is to addressconsumer detriment eVectively, it must be accompanied by swift and eVective enforcement. For example,the national minimum wage rules are clear, and the regulator has eVective enforcement powers, but thereare insuYcient resources to ensure universal compliance.

3.8. Finally, some regulation may operate as little more than a badging scheme, with little in the way ofeither high level principles or prescriptive rules. An example of this is the regulation of wheel clamping firmsby the Security Industry Authority (SIA). Currently the SIA seems to do little more than issue licences onthe basis of criminal record and other basic checks on applicants. Licensed firms are only required to dothings: firstly, not to clamp, block or tow away vehicles with a valid disabled badge or those which are amarked emergency service vehicle, and secondly to provide a receipt which must include the location wherethe vehicle was clamped or towed, their own name and signature, their licence number and the date. Thereare no requirements in relation to the amount of fees which can be charged or the manner in which wheelclampers carry out their duties. Citizens Advice believes that this form of regulation is inadequate to tackleconsumer detriment.

4. Effective and Proportionate Regulation

4.1. The points we have raised in the previous section highlight an inevitable and obvious tension betweenensuring good standards of business practice across markets and the costs that this would entail for firms.We are conscious of the need for regulation to be proportionate and not to place any unnecessary burdenon business, not least because these costs tend to get passed on to consumers in one way or another. But webelieve that the “light touch” discourse that prevailed in the recent past tended to go too far in prioritisingthese concerns.

4.2. The inescapable fact is that good practice does have a short-term cost attached to it. But we believethat right-thinking firms will want to ensure that their customers feel they are being treated fairly, as this isa vital indicator of the long running health of the market they are trading in. Here the current economic



turmoil illustrates exactly how this long-term health can be undermined. We believe that more businessescould now go under, because some aspects of regulation were perhaps too light touch, resulting in poor andunsustainable business practices being allowed to flourish.

4.3. Citizens Advice believes that, for business as a whole to succeed, underhand business practices mustbe curtailed and businesses that persist in using them should be prevented from trading. We believe that thisis unlikely to happen in a regulatory environment that values a “light touch” above all else. Some of thepersistent problems faced by CAB clients would seem to confirm this point. Firms should pay a price toenter into markets for consumer goods and services and that price is a commitment to best practice and theregulatory framework needed to ensure this.

4.4. Our view is that regulation should be driven by outcomes and should link to consumer detriment.As such, the objectives behind regulation should:

— reflect the damage and detriment caused;

— have deterrent value; including asset recovery and financial sanctions when a business has gainedfinancially as a result of failure to comply with regulation;

— allow for individuals aVected by the poor business practices to obtain redress; and

— reward and encourage good practice.

4.5. If the above serves as a high-level critique of calls for deregulation, the next step is for us to suggestsome of the key features that we believe regulatory systems need to work properly in consumer facingmarkets.

5. Regulators must Focus on Outcomes

5.1. There is probably near universal agreement that regulatory regimes need to be proportionate andrisk-based. However by themselves these phrases may not mean very much. In the past regulators havetended to concentrate on processes and outputs such as producing rules and guidance rather than on theeVect these have on the business practices that consumers encounter.

5.2. Citizens Advice believes that regulators should be more focused on the outcomes of their regulatoryframeworks. This means having eVective ongoing strategies to deal with (or, better still, prevent) bothspecific problems and general areas of consumer detriment in a timely and eVective manner.

6. Regulators must Empower Consumers

6.1. From a consumer advocacy perspective, Citizens Advice believes that regulatory frameworks needto properly anticipate the sort of problems consumers are likely to face. Regulators need to make sure theyactively develop and regularly update their understanding of consumers’ problems. This means having aclear strategy to gather evidence of consumer experience and then using this experience to review theeVectiveness of regulatory frameworks. Where there are insuYcient enforcement sanctions available to aregulator, they should be able to work in conjunction with any other regulator that does have the requiredpowers to eVectively address the detriment. We think this may be starting to happen with the OFT’scompliance partnerships work. However, to date we believe that regulators have a patchy track record ofachieving this, both in terms of the timeliness of reviews and the extent of engagement with actual consumerproblems.

6.2. But beyond this it means giving consumers clear and concrete signals about the way they can expectto be treated by firms, the way regulators expect firms to behave towards them and what they should do ifthey feel these standards have not been met. Making this work for consumers means regulators should beconsistently thinking about the following issues:

— Are rules and guidance easily accessible for consumers, in plain language and are they talkingabout the problems consumers face?

— How do regulators ensure that consumers understand the requirements that regulatoryframeworks place on firms—does information about standards flow from regulator to firm toconsumer to regulator in an even flow?

— Do regulators encourage consumers to give feedback when they think a firm has not followed rulesor guidance? How do regulators do this?

— How well do regulators communicate the outcomes of consumer feedback or complaints aboutfirms?

— Are regulators providing suYcient information about their investigations to consumers in a timelyand eVective way? Doing so would alert consumers to any potential pitfalls when dealing with abusiness and ensure that consumers are able to engage with and contribute to a regulator’sinvestigation.



7. The Need to get Firms to do More to Demonstrate Compliance

7.1. We believe that ensuring compliance with rules, guidance and practice standards is one of the mostsignificant weaknesses with the regulation of consumer facing markets. Policy makers can produce fantasticregulatory frameworks that will be completely ineVective to deal with substantial non compliance. Howevereven well resourced regulators may find it diYcult to monitor the entire range of firms they regulate at anyone time. While this can be in part remedied by developing risk based regulation models, such models mayinvolve unfortunate trade oVs between competing sources of possible consumer detriment. Worse still, riskbased models may incentivise regulators to concentrate on the “low hanging fruit”, for instance byprioritising action against small local traders rather than large firms because it is easier to get a result.

7.2. We believe regulators need to do more to encourage firms to demonstrate how they will adapt rules,guidance and standards to their business practices. More specifically we believe that regulators need to domore to ensure that firms communicate this to consumers. If firms are suYciently transparent about howtheir practices comply with regulatory standards, then every consumer and consumer adviser can helpregulators to monitor compliance.

8. Joint Regulatory Action

8.1. Activities that require regulatory attention do not always fall neatly into the regime of one regulator.For example the same salesman may sell a package of products which are regulated by diVerent regulators. .For example, the sale of legal services may include the sale of a linked credit agreement. When rogue tradersact fraudulently, for example in scam lotteries, they can potentially cross the remits of several regulators. Toensure that all regulatory angles are addressed, we would like to see more eVective joint working betweenregulators so that:

— Regulators discuss who can do what to tackle the problem fully.

— Regulatory action can be taken by more than one regulator against the same oVender at the sametime and in a proportionate fashion, saving the need for two separate investigations.

— Where there are self-regulatory paths that tackle the problem identified and deliver a real sanction,these are also considered as well. For example, under the Consumer, Estate Agents and RedressAct there are legal requirements for estate agents, fuel companies, and postal companies to belongto an ADR provision and some providers are achieving this through trade association membershipwhere a code of practice includes a CEAR approved ADR provider. Barring membership followingfailure to maintain the behaviour required under the code would eVectively mean that trader couldnot continue to trade.

— Detriment to those aVected can be reflected using all the available powers or sanctions.

8.2. A good example of how Government can ensure more eVective joint regulatory action can be seenthrough its current eVorts, led by BERR, to ensure that the various workplace rights enforcement bodieswork together more eVectively.

9. Resourcing Enforcement Action

9.1. Enforcement action needs to be properly resourced. However, not all types of regulation appear toreceive suYcient (or indeed any) income to resource enforcement. Economic regulators such as OFGEM,OFCOM and FSA are funded through a levy from all the businesses in the sector. Other regulators, such asthe OFT, .charge a licence fee. However, as we have highlighted earlier in our submission, the OFT onlycharges a small licence fee, even for large multi-national companies. It is unclear whether this fee covers morethan just the administrative cost of issuing the licence.

9.2. Under the Consumer Protection from Unfair Trading Regulations (CPRs), a wide range ofbusinesses not connected with a licensing regime are also regulated by the OFT. As there is no requirementfor a licence to trade, the mechanism to charge for policing the business is not available.

9.3. Trading Standards and Environmental Health Departments have historically had little or no accessto business funding for the regulation they deliver. Both are expected to carry out functions across manypieces of legislation from the money provided by their local authority employers. Whilst the Governmenthelps fund local authorities, most of their income is raised through local taxation. Consequently, ifregulators do not have the resources to take action, consumer detriment will continue unchecked. As such,we believe that it is important to build in automatic redress for consumers, so that there is a greater incentivefor firms to abide by the rules.

9.4. In this respect, the RES Act’s provisions for Principle Authorities to charge businesses for inspectionare welcome.

10. Available Regulatory Sanctions

10.1. We believe that regulators enforcing compliance need the most appropriate enforcement tools andsanctions to do their job well. The Regulatory, Enforcement & Sanctions Act 2008 provides a range of toolsfor regulators and enforcers. The idea is that the tool chosen reflects the seriousness of the breach ofregulation or legislation. Much the same approach has been taken to the transposition of the EU Unfair



Commercial Practices Directive into UK legislation. The UK Government retained the criminal sanctionsof the original legislation that the new law replaced for use in the worst cases. Civil sanctions of undertakingsand injunctions are also available where these would be more appropriate. These are quicker and cheaper,but need a backstop threat of the heftier criminal sanction to ensure compliance with the law.

10.2. Economic regulators such as OFGEM and OFCOM have licence conditions to ensure that utilitycompanies act fairly in their dealings with consumers. Where these licence conditions are breached, theregulator can take action against that business. Commonly, the relevant EU Directives for consumerprotection have included economic regulators as enforcers, as well as Trading Standards and the OFT.OFGEM could therefore use either the Distance Selling Regulations or the licence condition on sales totackle poor tele-selling. Having this option allows the regulator to choose the most appropriate sanction.

11. Design of New Regulation

11.1. From what we have previously outlined, it would be easy to argue that the mindset behindregulation to date, together with the current economic climate, shows that the Government and regulatorshave not understood business well enough. What we would argue, however, is that the Government andregulators need to better understand consumers and employees more eVectively and ensure that businessworks for them, through improved protections for example.

11.2. For example, employment regulations (ie those governing the workplace rights of workers) cansometimes be unduly complex and, in many cases, little if any thought appears to have been given to howsuch undue complexity will impact on compliance and enforcement. One notable example is the not-yet-implemented provisions in sections 3 to 10 of the Work & Families Act 2006, under which up to six monthsof statutory maternity leave (and pay) can be transferred from the mother to the father. Although not yetimplemented, the Government has said it aims to implement these provisions by the end of this Parliament(along with increasing statutory maternity leave from the current 9 months, to 12 months).

11.3. The Regulations governing these provisions will be extremely complicated, given that in the vastmajority of cases the process will involve not one but two employers (both the mother’s and the father’s),who will need to liaise to ensure, for example, that the mother has returned to work before the father beginshis leave. At the time these provisions were proposed, in 2005, we noted that this complexity will “intensifythe already significant compliance challenge for employers—and especially for small employers in low-profitability sectors of the economy” (in Hard labour: making maternity and paternity rights at work a realityfor all, Citizens Advice, November 2005). Workers will only be able to enforce these rights by bringing anemployment tribunal claim, but of course the time surrounding childbirth is a very challenging time and, aswe noted in Hard labour, pregnant women, new and lone parents are very unlikely to bring an employmenttribunal claim. In contrast, the Government established a whole new compliance and enforcement regimeto go with the National Minimum Wage in 1999, with the NMW being proactively enforced by HMRC.

March 2009

Memorandum submitted by the Trading Standards Institute

The committee will consider how aspects of the regulatory reform agenda are evolving; possible improvementsto the design of new regulations; and whether reform initiatives are currently achieving intended benefits

Foreword

Trading standards and the Trading Standards Institute have always considered themselves to bechampions of good regulation; we support Regulatory Reform where it is focussed on delivering pragmaticand productive solutions to shared better regulation objectives that work in the best interests of bothbusinesses and consumers. We want trading standards to be a world-class profession and public service andsustain our view, shared by Sir Philip Hampton for a Trading Standards champion in Whitehall.

Trading standards and TSI are advocates of good regulation because of trading standards familiarity withthe crucial and fundamental role of consumer and business confidence being abridged in sustainingeconomic progression.

Trading Standards is a bridge between consumers and business; we want to ensure that public services andcapacity is not burdened disproportionately, is recognised as part of the solution and not a burden and atthe same time it is critically important that business is freed up to survive and prosper. We are all in thebusiness of wealth and health creation and restoration, whether as regulator, business or consumer.

Nonetheless the Government must remain conscious that the “law of unintended consequences”sometimes rules; Regulatory Reform could have the opposite eVect and increase burdens upon businessesand regulators as has been seen in the past under the Deregulation and Contracting Out Act 1994 and theGovernment’s subsequent eVorts to legally codify good regulatory practice in 1997. Regulatory Reformcould adversely aVect the consumer and the implication still stands that where there is too much emphasis



on businesses accruing burdens “from necessary enforcement of consumer legislation”, there is a “lack ofrecognition of the need to protect consumers and provide benefit for them which in turn drives a strongprosperous economic environment”.4

It follows that if value is not given to the concept that consumer confidence regenerates markets, thenbusinesses will have more to worry about than the burdens of regulation. The balance between businessburdens and consumers is a preoccupation for BERR, Trading Standards and many others. Fundamentallyit might be argued that any burden is always on the consumer, not the business, because it is the consumerwho pays in the end.

If overall benefit, is in the Government’s sights, rather than the reduction and removal of “burden”, thenthis clear outcome-focus will produce eYciency and will enable a responsive approach to the economicclimate, improving the conditions for business success and economic progression whilst providingconsumers with the necessary benefits and protections.

1. (i) What are the implications of recent economic developments (for example, the economic downturn; creditcrunch and problems with the financial sector) for the design and delivery of the regulatory reform agenda,including risk-based regulation?

Regulation of the financial sector necessarily translates across to the wider regulatory spectrum but whatwe do see is perhaps a little more balance being introduced into the discussion between light-touch regulationand appropriate/proportionate legislation. In a sense from our point of view, we have always felt thatregulation should be risk-based and we have always wanted a discussion on the Regulatory Agenda. Withthe financial crisis there are undoubtedly parallels that need to be drawn and lesson learned in relation toareas where good regulation exists and is beneficial both to consumers and business.

In our experience, business likes certainty and it likes to be the beneficiary of good compliance advice.When Philip Hampton suggested that there should not be inspection without justification; we agree. Wealways think there should be productive transactions between the regulator and business, but we do not wantto see business, especially small and medium business, robbed of their opportunity to benefit from goodcompliance advice or the opportunity to share concerns and possible solutions with the regulator.

Hampton recommended the organisation of a Consumer and Trading Standards Agency (CTSA),recognising that trading standards services needed support. In “Modern Markets: Confident Consumers”5

the strengths of trading standards services were identified as the operation at local level, and the proximityof the service to the issues of real concern to consumers and business. It noted the pressures faced by tradingstandards services and responded in recognising that the challenge “is to find ways of combining theadvantages of local presence with the need for co-operation and consistency”.6 They envisaged that theCTSA would bring about that co-ordination at the local level.

A positive Hampton measure, encouraging compliance by business, is the “incentives” proposal, whichhas lead to a number of awards supported and jointly badged by the Trading Standards Institute; FoodChampion Award; Innovator in Animal Welfare Award; and Fair Trading Award, which this year, will bealigned with BERRs “Know Your Rights” campaign. The “Know Your Rights” message will also bereinforced during our National Consumer Week.

Within the trading standards service there are the Local Authority Approved Trader schemes that giveconsumers the certainty of Trading Standards approved Traders who guarantee to provide a reliable andquality service and sets a standards benchmark for tradespersons. Not only does this show commitment bybusinesses to trade fairly and honestly but also a commitment from trading standards to support business.

Of benefit to the consumer—trading standards operates the Young Consumers of the Year Award andPlaysafe project, competitions run by TSI that are designed to educate young people and generate awarenessof their responsibilities as well as their rights; the Local Hero’s Award, a nationally recognised award schemeadministered by the Trading Standards Institute to celebrate outstanding local contributions to consumerprotection and the protection of individuals. These competitions are designed to interest the public, acrossall age ranges, in consumer aVairs and to raise awareness of consumer issues.

(ii) How does the Government balance the need for an eVective regulatory framework, providing the necessarybenefits and protections, with the commitment to improve the conditions for business success?

We feel that government should be focused upon outcomes for consumers; they are responsible formarkets working well backed up by a robust and where necessary light touch to regulation. Good regulationneeds to be streamlined for good business and enforcement to ensure the swift and eVective action againstrogue businesses that harm the collective of consumers and businesses. The framework needs to be joinedup through partnership working and more eVort should be placed upon “joined up” government as isexpected of local authorities.

4 TSI Call for Evidence—Consumer Law Review July 20085 Modern markets: confident consumers, The Government’s Consumer White Paper, 1999, pp 52–556 Modern markets: confident consumers, The Government’s Consumer White Paper, 1999, pp 52–55



Comprehensive area assessment is the way in which local government’s eVectiveness is to be measured indelivering local people’s priorities through local partnerships. The expectation is to bring forth a “new eraof public sector partnership working”.7 The Comprehensive Area Agreement framework, developed fromthe White Paper “Strong and Prosperous Communities”, aims to improve the co-ordination and targetingof inspection and assessment. The Government are working towards “a truly joint assessment”8 hence theinspectorates have been working with stakeholders to determine the final CAA framework. TradingStandards applauds this approach and anticipates this as the way in which the Government can balance acommitment to improve the conditions for business success and provide the necessary benefits andprotections within an eVective regulatory framework.

One of the most challenging aspects of the regulatory framework is in trying to apply it to some issuesthat cause consumer harm, but that don’t easily fit within existing legislation. Recent examples include:

— Mobile phone cash-back deals.

— Ticket sales and resales.

— Misleading broadband speeds.

The implementation of the Unfair Commercial Practices Directive through the Consumer ProtectionRegulations and Business Protection Regulations create a more flexible framework and provide more scopefor dealing with “deliberate wrong-doing”.

The regulatory framework itself does not restrict the eVectiveness of enforcement on the Internet. TheeVectiveness of enforcement on the internet is challenged by the very diVerent market place that exists onthe internet, with low start up costs and barriers, and correspondingly large number of small businesses. Veryfew of these businesses seek advice on the legal obligations as the OFTs Market Study of Internet Shoppingidentified. This could be addressed through increased enforcement activity being directed to this mediumbut to do so would be at the cost of other TSS responsibilities.

It should be recognised that much eVort is going into developing intelligence-led working methods inorder to ensure that trading standards services are able to target their resources at the areas causing mostharm. However, intelligence—led working methods cost and take time to develop and implement. There isa clear need to support the development of intelligence-led working practices at a local level, to link withthe regional and national developments.

(iii) How might a proportionate and targeted response to improving the regulatory framework in the wake ofthe financial crisis be made? What lessons are there for the wide regulatory reform agenda?

Proportionality and responsiveness are elements that trading standards and regulatory services have longbeen charged with. Successive reviews and initiatives have targeted these services to tackle concerns thathave been raised through businesses. The disappointment is that these principles well tested andimplemented have not been utilised by other regulators across government. Regulatory reform from ourperspective has progressed well over the last five years, delivering lighter touch regulation, a move toprinciples based legislation and reinforcing the sanctions regime to tackle abuses in the marketplace. Itwould seem the same measures were not applied to the financial industry.

The Better Regulation Executive’s consultation document calling for a response to “A Bill for BetterRegulation” covered Hampton and the proposed reform/repeal of the Regulatory Reform Act 2001.9 Itaimed to accelerate the Better Regulation Agenda by facilitating a more eYcient implementation ofmeasures to remove unnecessary burdens on business. The backbone of this was the Hampton Review andthe Better Regulation Task Force “Less is More” report both of which mapped out a radical agenda forbetter regulation that the Government fully accepted. Underpinning the Bill were the values of theGovernment’s Regulatory Reform Agenda based on Hampton—“to create a new radical risk-basedapproach to inspection that shifts resources away from routine inspection for businesses in safer areas witha proven track record, towards businesses in higher risk areas and rogue traders. It will enable the mergingof inspectorates and cut down on repeat requests for information from inspectors who could be pooling theirresources”.10

The November 2006 BRE document “Implementing Hampton from enforcement to compliance”—evaluated to date the recommendations implemented. It noted that one of the aims of Hampton, the mergingof inspectorates and pooling of resources had been carried out successfully , through the Retail EnforcementPilot, which co-ordinated local authority inspectors covering trading standards, environmental health, foodsafety, health and safety, fire services, licensing so that a more risk-based approach was taken.40,000 businesses in the two pilot areas of Bexley and Warwickshire by the end of 2006 had seen a 33%reduction in routine inspections. During 2007–08, 45 local authorities were tested under the RetailEnforcement Pilot and if successful, the pilot will be further rolled-out.

7 http://www.audit-commission.gov.uk/caa/8 http://www.audit-commission.gov.uk/caa/background.asp9 A Bill for Better Regulation: Consultation Document, Better Regulation Executive (BRE), July 200510 Cabinet OYce press release, Transforming the Regulatory Landscape—Launch of the Better Regulation Bill Consultation,

July 2005



Recommendation 12 of the Hampton Review proposed an extension to the Code of Good Practice forinspection and enforcement. Greater weight was placed on risk-assessment than the long-standingEnforcement Concordat and an extension was suggested to incorporate not only local but nationalregulators too. On BREs consideration of implementing the Hampton principles through a furtherdeveloped version of the Enforcement Concordat, the question was posed—should the EnforcementConcordat be put on a statutory basis?

TSI regarded the Enforcement Concordat a good example of eVective voluntary cooperation and bestpractice and supported the Government’s decision, in 1997, to eVect and support, best practice andproportionality by way of introducing the Concordat. Trading standards services had already developedrelationships that had created a culture of modern regulation; the Enforcement Concordat materialised fromthis. In this respect TSI saw that there would be no added value in the statutory enshrinement of theConcordat but valued the plan to update and develop it. With this TSI recommended the revival of eVortsby central government to secure wide-scale signing up of trading standards and local authorities followedby transparent implementation.

Initially the Cabinet OYce’s robust eVorts to support the Concordat picked up great momentum but thisdeclined and deteriorated once DTI small business service assumed responsibility. At present theEnforcement Concordat has not yet been updated but is due to be brought in line with the updated statutoryCode of Practice for Regulators which came into force under the Legislative and Regulatory Reform Codeof Practice (Appointed Day) Order 2007. As a product of the Regulatory Reform Agenda, and an improvedculture, emphasising proportionality and flexibility in regulation and enforcement, the code should facilitateand encourage economic progress.

(iv) How could the Government improve its “capability” to regulate in a proportionate and eVective manner?

The building blocks have been put into place through piloting of diVering systems in the regulatoryservices arena. These pilot projects need to be sustained, rather than left to wither and die. Specificallysupport to trading standards can be achieved through continuing to support regional and national co-ordination and partnerships. It is time for a new and special relationship to be established with the OFT.We need to be partners in helping to establish the green shoots of economic recovery and in deliveringmarkets that really do work well for consumers. UK consumers want a new level of protection and, ifconfidence is to return, we must together be a catalyst for that new confidence. The country needs a newcoherence in the central/local dynamic.

The challenge to all is immense if trading standards professionals are to realise in full their undoubtedpotential to help ensure that the UK’s competition and consumer framework are amongst the best in theworld. The challenge is a local and a global one and transcends normal boundaries because consumertransactions no longer confirm to conventional boundaries. Scams originating from around the globe andtargeted at UK average and vulnerable consumers (Think Jessica campaign) together with the rapidlygrowing dependence on on-line shopping demonstrates the point. With UK on-line retailing now beingnearly 20% of the market we can expect to see a growth to between 30–50% in the next five years. The OFTmarket study on Internet Shopping reported that retail sales in 2006 were £10.9 billion, forecast to nearlytriple to £29.1 billion by 2011. Research from the Centre for Economics and Business Research was quotedpredicting that online sales could comprise 40% of all retail sales by 2020, at a value of equivalent to£162 billion. How will this be regulated? We need to ensure trading standards deliver a world-class publicservice, we champion good regulation but it is critically important that business is freed up to survive andthat the burden on the public purse is relieved.

The Federation of Small Businesses (FSB) released a report from a survey carried out in 2008 on theimpact of crimes against business, the focus of which was on the increase of fraud and online crime aVectingsmall businesses. The report “FSB Inhibiting Enterprise—Fraud and Online Crime Against SmallBusinesses” stated that “a significant 54% of businesses have been a victim of fraud or online crime in thelast 12 months….1/3 of businesses currently do not report fraud or online crime to the police or banks, 23%believe that it would not achieve anything.”11

(v) Whether there is a coherent package of regulatory measures for improving the conditions for businesssuccess; and how regulatory reform initiatives fit into wider Government support

We sometimes think that Government feels that business will always want principle based legislationrather than more prescribed legislation. Indeed business itself will often say this but actually we are notalways sure this is the best tool in assisting business to comply with regulatory requirements.

In our experience business likes the idea of principle—based legislation but in practise, want the certaintyof prescribed legislation. EU and International enforcement collaboration has to achieve new heights toachieve acceptable levels of compliance activity underpinning legitimate UK on-line commerce. TSI is anadvocate of co-regulation and wants to see a balanced approach to statutory and self-regulation in the UKand EU. The IMRG Isis model is an example of industry self-regulation, which TSI supports, but it requiresglobalisation in contributing to a global and fair e commerce market. Modern UK, EU and global marketsrequire an innovative and principles based co-regulatory approach.

11 FSB Inhibiting Enterprise—Fraud and Online Crime Against Small Businesses, February 2009.



TSI is an advocate of a proportionate matrix between principles based legislation and prescriptive law.We demonstrated this in our TSI and wider Trading Standards approach to Unfair Commercial PractisesDirective transposition. Equally we have seen business bemused by such an approach when the DTI, as itthen was, transposed the EU Personal Protective Equipment Directive into UK law by way of the “copying-out” approach. The Initiative illustrated that the UK business community and judiciary remains some wayfrom being entirely comfortable with law based on principles and subject then to interpretive application bythe sector itself as well as by those seeking a consistent level of application and compliance. The ConsumerProtection Regulations are perhaps a hybrid of principles and prescriptive based legislation and that modelmay provide a helpful indicator to forward direction when suYcient passage has been allowed to permitassessment.

The Davidson Review contributed to the Regulatory Reform Agenda by looking at over-implementationof EU legislation. The stock of EU sourced legislation (up to the November 2006 report) was examined touncover the possibility of reducing unnecessary regulatory burdens or simplifying the system. LordDavidson concluded that there is a benefit to maintaining regulatory standards in the UK which exceedminimum requirements of European legislation. TSI supports this statement and reflects that it is not correctto presume that over-implementation results in unnecessary burden and that in relation to consumerprotection, the consumer perspective is completely ignored. The European Directive on Unfair CommercialPractices is a maximum harmonisation Directive that creates a civil regime for the control of commercialpractises aVecting consumers. If the UK were to adopt the Directive and repeal all legislation, potentiallyaVected consumers would suddenly be exposed to commercial practices that have been illegal for up to fortyyears. This would have the unfortunate consequence that the Police and Criminal Evidence Act, theRegulation of Investigatory Practices Act and the Proceeds of Crime Act would have no application in suchcases, leaving the rogue traders with much greater scope to increase their ill-gotten profits.

Lord Davidson’s recommendation 5, relating to the Consumer Sales Directive, was that DTI (as it wasthen) should implement a simplified system of consumer remedies by the end of 2009. Has that happenedto date, or is there a delay due to European Commission’s review of the Consumer Acquis and its labouredimplementation? Lord Davidson was convinced that implementing his reforms “would ensure the UK hasone of the most robust systems in the EU for implementing European legislation in the least burdensomeway possible while maintaining the necessary regulatory protections”.12 The implementation of UnfairCommercial Practices Regulation is a reasonably good example of the UK implementing principle-basedlegislation but with a degree of prescription that possibly strikes the right balance.

Design of New Regulations

2. (i) Does Government understand business suYciently to design eVective regulations? Is suYcient emphasisgiven to small businesses and competition issues?

We don’t believe that there is suYcient understanding of business within government to eVectively designregulations. Equally we question the level of understanding of consumers objectives in Government. Wehave seen a reluctance in the past to focus on consumers, focusing instead solely upon businesses. Wemaintain that burdens on businesses translate into burdens (and higher prices) for consumers. To divorcethe two is wrong. We have been a strong advocate for business knowledge into the enforcement communitythrough “swap days” and the education of businesses on the rights of consumers through our businesstraining Fair Trading Award.

The newly formed Local Better Regulation OYce commissioned a survey with the aim of examining howbusinesses and consumers perceived the local authority enforcement of regulations. The Ipsos MORIsurveyed specifically the areas of trading standards, environmental health, licensing and fire safety duringthe period of mid-June to mid-July 2008. The results inform that the weakest aspect of local authorityregulatory services is the lack of business understanding, although the service and relationship is seen asimportant by businesses in the majority. The question of whether the Government understands businessessuYciently to design eVective regulations with suYcient emphasis given to small businesses and competitionissues, the conclusion drawn is that there is still some way to go. Inconsistency and uncertainty are and havebecome an issue; the knock-on eVect is an increasing burden of regulation on businesses. Similar findingswere also identified in the Anderson Review,13 where Small and Medium Enterprises (SMEs) were foundto be deterred from using Government guidance due to poor accessibility, lack of clarity and inconsistency/uncertainty. Sarah Anderson lists a number of recommendations including the broadening of inspectors’skills and knowledge in order to provide best placed advice and guidance, centred on the needs andexperiences of business. Again the culture of regulatory compliance must evolve, in the Anderson review thisis suggested through provision of sector-specific advice.

The Anderson Review published this year, January 2009, confirms that “the impact of uncertainty is highfor business, government and citizens…more than 2/3of SMEs express concern that the cost of regulationis disproportionate to the size of their business…”.14 Therefore regulation costs at a time when it shouldnot, when such burdens can significantly impact on the survival of a business. It is critically important that

12 Davidson Review: Implementation of EU legislation, Final Report, November 2006, p 3.13 The Good Guidance Guide—taking the uncertainty out of regulation, Sarah Anderson, January 200914 The Good Guidance Guide—taking the uncertainty out of regulation, Sarah Anderson, January 2009



business is freed—up, because despite everything, we are in the business of health and wealth creation andrestoration. Future monitoring of business and consumer satisfaction of trading standards services will beseen through national performance indicators, an indices of performance will be produced by this survey byBERR. NI182 will measure whether businesses think they have been treated fairly and helpfully.

(ii) Is there suYcient consideration of how regulations will be implemented, including an appropriate focus oncompliance and enforcement issues?

The most recent round of Capability Reviews have been completed and those reviews demonstrate thatsome parts of Government are better than others on the issue of making legislation. From our perspectivewe like to see Comprehensive Regulatory Impact Assessments which serve to indicate the cost of any newresponsibility given to Local Authorities and innovation around compliance and enforcement incentives, egenforcement through regional and national trading standards groups and a focus on autonomy forcompliant businesses.

Good regulation badly implemented equals bad regulation. InsuYcient attention is often placed upon theburdens placed upon the enforcement community to implement new legislation. More attention in this areawill reduce the burden on business through a better flow of information using partners and through acomprehensive competency and training programme.

There is also the issue that “Guidance” does not always happen. Some parts of Government are better atproducing these, but eVort placed upon good guidance benefits both enforcement and business alike.

March 2009

Memorandum submitted by Which?

1. Introduction

1.1 Which? is an independent, not-for-profit consumer organisation with around 700,000 members andis the largest consumer organisation in Europe. Which? is independent of Government and industry, and isfunded through the sale of Which? consumer magazines, and books.

1.2 Thank you for the opportunity to respond to this consultation document. We welcome the decisionof the Committee to conduct this investigation. It is important that at this time of significant upheaval inmany of our most essential markets that we give careful consideration to the impact that these events willhave on our economy and society in the future.

2. Key Points: Summary

2.1 We have set out our views on the specific questions asked in the terms of reference in the body of thisdocument however, as requested, we provide a short summary as follows:

2.2 General

— It is our view that an overly simplistic, or overly negative approach, to regulation is unhelpful andis based on a misconception of what regulation is and why it exists.

— Whilst regulation is often perceived of as activity that restricts behaviour or prevents certainactivities, in reality it should be seen as setting the enabling framework that supports the eYcientallocation of resources in society.

— Regulation is a wide ranging concept and describes a variety of diVerent activities. Not all of theseare of direct relevance, or concern to consumers or consumer organisations. We are primarilyinterested in the laws and regulations that support well-functioning markets.

— A well functioning market will be one in which responsible businesses compete profitably whilstproviding goods and services to their customers in a safe, fair and transparent manner.

— In some cases, such as health and education, achieving this can mean the state itself is the primarysupplier. In others, particular features or failures will mean that some form of additional targetedintervention is necessary.

— Even the most open markets will operate against a backdrop of common protections such ascompetition or contract law.

2.3 Implications of economic downturn

— There is growing acceptance that many of the assumptions that free market economics are basedon are partial. In particular, the long held view that markets are eYcient and that consumers arerational, self-interested actors.



— A key conclusion that we draw is that it is not sensible, or indeed safe, to take an overly ideologicalapproach to regulation, specifically that the driving objective should be for it to be minimised asan aspiration.

— There is likely to be a new consensus that regulation should be fit for purpose and shouldadequately deal with specific problems or risks.

— A second area of concern relates to competition law. In particular, that ignoring competition lawin the face of recessionary forces could be damaging to the economy in the long-run.

2.4 Targeted response to the regulatory framework

— It is necessary to be clear about when regulation is appropriate. Decisions on whether to regulateand what form it should take should be based on understanding the problem, including robustdetriment analysis and an assessment of the alternatives and possible unintended consequences.

— We have identified a number of circumstances in which regulatory intervention may beappropriate, including: monopolies; anti-competitive conducts; information imbalances; and poorquality or mis-selling.

— Because the costs of regulation are likely to be passed on to consumers, and because statutoryregulation is likely to be the most expensive and least flexible way of regulating, we will oftensupport alternative approaches such as self-regulation before recommending statutory regulation.

— One key concern that we have is that too much regulatory analysis makes estimates of the costsbut does not do justice to the benefits.

— One important point to note about the nature of regulation is that much consumer facingregulation is actually codified good practice and that a lot of regulation is in reality not additionalcost to business.

— It is also important to recognise good practice and the benefits of removing regulations where theyare not necessary.

3. General Comments

3.1 Regulation can be an emotive subject. It frequently has negative connotations and is often perceivedas simply an attack on business and something to be avoided at all costs. We would accept that to someextent the need to regulate represents a failure. However, it is also our view that taking an overly simplistic, oran overly negative approach, to regulation is unhelpful and is based on a misconception of what regulation isand why it exists.

3.2 Regulation has been defined as sustained and focused control exercised by a public agency overactivities that are valued by a community. In this way, regulation can be thought of as all types of deliberatestate influence over economic or social behaviour. Regulation can comprise specific sets of commands (acommon perception of regulation) as well as many wider modes of influence such as economic incentives,contractual powers, advice, education and information provision.

3.3 In considering regulation therefore, it is important to bear in mind that whilst regulation is oftenperceived of as an activity that restricts behaviour or prevents certain activities, in reality regulation shouldbe seen as setting the enabling framework that supports the eYcient allocation of resources in society.Judgments about the need for regulation should be seen similarly and should be judged on a case by casebasis.

3.4 As we have outlined above, regulation is a very wide ranging concept and is in fact a catch all for awhole variety of diVerent activities. Not all of these are of direct relevance, or concern to consumers orconsumer organisations. For example, an analysis of the British Chambers of Commerce’s burdensbarometer (which lists the key regulations aVecting UK business) shows that, of the 77 regulations listed,less than 10 relate directly to consumers. The regulatory issues that would appear to generate the bulk ofbusiness costs relate largely to employment law, and as such are not primarily consumer issues. As such, itis important that we draw attention to the aspects of regulation that are of primary concern toconsumer’s lives.

3.5 The economic and social structures that exist in modern society comprise a complex interlinkingpackage of mechanisms for delivering a very wide variety of goods and services to its citizens. The primaryparticipants in these structures are the producers and consumers of these goods and services and the state.In many circumstances, markets are considered to be the most eYcient tools for bringing producers andconsumers together and allowing the optimal allocation of resources.

3.6 This is a view that we share. An eVective market will be one in which responsible businesses competeprofitably whilst providing goods and services to their customers in a safe, fair and transparent manner.

3.7 Whilst we support such markets as a useful means of allocating resources in society, we also recognisethat it is rarely suYcient for markets to operate outside of a system of behavioural or moral norms. Forthis reason, even the most open markets will operate against a backdrop of common protections such as



competition law, contract law or protection from unfair commercial practices. However, this is not alwayssuYcient and it is the role of the state to correct market failures or promote the wider public interest wherethe market is not able to deliver socially optimal outcomes.

3.8 In some cases, such as health and education, this can mean the state itself is the primary supplier. Inothers, particular features or failures will mean that some form of targeted intervention is necessary.However, whatever their specific nature, these regulatory tools should be seen as the bedrock that allowshealthy competition, in which good businesses thrive and bad businesses are driven out.

Questions

1. What are the implications of recent economic developments (for example, the economic downturn; creditcrunch and problems within the financial sector) for the design and delivery of the regulatory reform agenda,including risk-based regulation?

4.1 In order to give a considered answer to this question, we believe it is important to consider theeconomic downturn and the financial crisis separately. The economic downturn has had, and is likely tohave, wide ranging implications for the way in which our economy, and indeed our society, is managed. Incontrast, the problems in the financial sector are likely to have a much more narrow impact on the way inwhich we approach the regulation of the financial services sector.

Consumer views on the economy

4.2 By way of background, Which? has recently conducted some consumer research to ascertain whatconsumer’s views are about both the downturn and the financial crisis. Some of the key findings are asfollows:

4.3 Firstly, there appears to be a mood amongst consumers that it is the job of the Government to takeaction to change the economic climate. 49% of people believe that the Government are best placed to takeaction to change the economic climate for the better.

4.4 Secondly, there appears to be a sense that many of the required reforms will require Government todo this using fairly interventionist measures. Specifically:

— 84% of people believe that the banking system needs to be reformed to avoid a repeat of therecent crisis;

— 83% believe there should be a legal maximum rate of interest that can be charged on credit cardsand loans;

— 77% of people believe that banks shouldn’t be allowed to lend home buyers more money than theirhouse is worth (ie 100%! mortgages).

4.5 More widely, there has been a serious breakdown in trust between consumers and the banking sector.One particularly striking observation is that 37% of people do not trust banks to act in the best interests ofthe economy.

Limitations of free markets

4.6 The economic downturn is currently at the forefront of the political agenda and it is as yet extremelyuncertain what the final impact will be. However, there are a number of observations that can be made atthis stage. One particularly important issue that appears to have arisen is the dangers that can arise if anoverly ideological approach is taken to the regulation of markets, particularly financial markets. Theprevailing sentiment in terms of regulation of the financial sector was one that assumed that financialinstitutions are to an extent self-regulating and would behave in a manner that maintains their own stability.The evidence from the crisis however, would suggest that this view is not entirely correct.

4.7 Financial institutions have shown themselves unable to manage the risks on their own balance sheets,let alone behave in a manner that preserves the stability of the whole system and the economy. Recentcomments from Alan Greenspan, the former Chairman of the Federal Reserve, illustrate the newlyprevailing sentiment that this view that financial markets can self-regulate has now proven itself to be flawed.In testimony to the House of Representatives Committee on Oversight and Government Reform he isquoted as saying “Those of us who have looked to the self-interest of lending institutions to protectshareholder’s equity (myself especially) are in a state of shocked disbelief.”

4.8 An analysis of the reasons for this market failure is the subject of considerable contemporary debateand this will continue over the comings months. However, some indication of where the key flaws lie wereset out in a recent speech by the Executive Director for Financial Stability at the Bank of England, AndrewHaldane. In particular, he highlighted misaligned incentives and moral hazard. Explaining this, he reportedconversations he had had with senior bankers that revealed that there “was absolutely no incentive for



individuals or teams to run severe stress tests and show these to management. First, because if there were sucha severe shock, they would very likely lose their bonus and possibly their jobs. Second, because in that event theauthorities would have to step-in anyway to save a bank and others suVering a similar plight.”15

4.9 Recent comments from the Chairman of the Financial Services Authority (FSA), Lord Turner ofEcchinswell, suggest that the way in which that regulator will operate in the future will change significantly,away from “light” touch regulation towards a more interventionist approach. In evidence to the TreasurySelect Committee, he is quoted as saying: “All the pressure on the FSA was not to say why aren’t you lookingat these business models, but why are you being so heavy and intrusive, can’t you make your regulation a bitmore light touch” … “I think (the FSA’s actions were) a competent execution of a style of regulation and aphilosophy in regulation which was, in retrospect, mistaken”.

4.10 In addition to these comments on the failures of financial markets to self-regulate, there also seemsto be a growing understanding that many of the wider assumptions that free market economics are basedon are partial. In particular, there is an increased questioning of the view that markets are eYcient and thatconsumers are rational, self-interested actors. The impact of this can be seen in some of the work that theOFT have done recently on consumer remedies in which they highlight the impact that behaviouralcharacteristics have on the eVectiveness of remedies.16

4.11 In practical terms, the specific changes that will come out of this will vary, and will depend on thespecific market that is being addressed. However, a key conclusion that we believe should be drawn is thatit is not sensible, or indeed safe, to take an overly ideological approach to regulation, specifically that thedriving objective should be for it to be minimised as an aspiration. Instead, there is likely to be a newconsensus that regulation should be fit for purpose and should adequately deal with the specific problemsthat can be observed as well as the risks that can be found in any given system.

Competition Law

4.12 A second area of concern relates to the implications of the ongoing recession for competition law.One of the most high-profile outcomes of the recent crisis was the merger of the two large high street banks,Lloyds TSB and HBoS. In order to do this, concerns about the implications that the merger would have oncompetition in the sector were over-ruled. The OFT conducted a stage one merger analysis. It was their viewthat the merger did qualify for referral to the competition commission for further scrutiny and that therewere no remedies available at that stage that would appear to address their concerns. We also raised ourconcerns about the potential for a significant weakening of competition for mortgages and current accountsas a result of the merger.

4.13 We understand that the merger was allowed for reasons of public interest on the basis of financialstability but we also note the recent comments by the Chief Executive of the OYce of Fair Trading, JohnFingleton, in which he warned about the dangers of protecting ineYcient businesses. Whilst he alsoacknowledged that intervention to rescue the financial system from systemic collapse can be crucial, he didhighlight the problems of extending a similar approach too widely:17

“Recession is potentially hostile towards competition policy: the less visible and less immediatecosts of restricting competition can look more attractive to policy-makers faced with a range ofunpalatable options. Policies to relax competition in the US in the 1930s and in Japan in the 1990sarguably added to the duration of recession in both countries. Learning from history and therobust economic evidence linking competition to productivity growth, we need to ensure thattoday’s solutions do not inadvertently become tomorrow’s problems.”

4.14 In this context it is worth noting the importance that the Treasury itself places on the ability of astrong competition framework to raise economic productivity. In November 2007, the Treasury set out insome detail exactly how much benefit competition can bring. They highlighted the fact that between2000 and 2006–07, the competition authorities generated direct consumer savings of at least £870 million.They also highlighted further work by the OFT which suggests that competition enforcement action alsohas a significant deterrent eVect producing additional benefits to consumers that may be at least a futher£600 million per year.18

15 Speech by Andrew Haldane, Executive Director for Financial Stability at the Bank of England, “Why banks failed the stresstest”, 13 February 2009.

16 OFT, “Assessing the eVectivness of potential remedies in consumer markets”, April 2008.17 Speech by John Fingleton, Chief Executive of the OYce of Fair Trading, “Competition Policy in Troubled Times”,

20 January 2009.18 Treasury, “Productivity in the UK 7: Securing long-term prosperity”, November 2007.



2. How does the Government balance the need for an eVective regulatory framework—providing the necessarybenefits and protections—with the commitment to improve the conditions for business success?

3. How might a proportionate and targeted response to improving the regulatory framework in the wake of thefinancial crisis be made? What lessons are there for the wide regulatory reform agenda?

Why do we need consumer facing regulation?

5.1 The relationship between business and the consumer is frequently an uneven one. To some extent thishas always been the case but in some senses, with the advent of the large corporation in the late 19th andearly 20th century and the industrialised economy more generally, the imbalances have become moreprofound. This change in the institutional nature of a business, alongside changes in the role of the state,both fed on and drove rapid technological and social developments through the 20th century. Products andservices, and the tools used by producers and sellers to reach the consumer, have become more sophisticatedat the same time as consumers are increasingly expected to take responsibility for more complex purchasingdecisions (such as pensions) that have significant consequences.

5.2 These developments have increased both the amount of information and, in some cases, the selectiveor “asymmetrical” way information is given to, or used by, consumers. In particular the greater complexityof the consumer society has meant that many individuals are ever further away from having “perfect”information. These information deficiencies and asymmetries mean consumers have greater uncertainty andface increased risk in their purchases. In other markets, consumers can also be vulnerable to exploitation,bad practice, poor quality products and mis-selling.

5.3 In light of these concerns, regulation, in all of its diVerent forms, has an important role to play inprotecting consumers, by correcting market failures and ensuring balance in the relationship betweenbusiness and the consumer. It should be remembered that ultimately consumers drive markets andregulation is not about Government attacking business but it is about setting the framework for wellfunctioning markets in which good businesses can thrive and bad businesses are driven out.

When is it appropriate to regulate?

5.4 It is necessary to be very clear about when regulation is appropriate and, if it is, what form it shouldtake. It also means recognising good practice and the benefits of removing regulations where they are notnecessary. We have previously set out a number of circumstances in which some form of regulatoryintervention may be appropriate. These are as follows:

— Exceptional market conditions and macro economic considerations prevail, such as a failure ofcompetition, monopolies or natural monopolies and incomplete markets. This includescircumstances in which there are universal service obligations or price controls. An example of anatural monopoly would be the water industry.

— A few suppliers dominate the market or make anti-competitive conducts (either tacitly or in moreserious cases by agreement) which reduce competition and consumer choice—this includesinformation gaps, lack of tariV transparency and barriers to switching. In more extreme cases itcould include direct price fixing or predatory pricing.

— There are pronounced information imbalances, knowledge or skills between those who provideservices and consumers, which in turn means that it is diYcult for consumers to make an informedchoice. Many areas of retail financial services highlight these problems.

— There is significant detriment/harm or potential detriment/harm for consumers as a result ofincompetence, poor quality or mis-selling. Numerous financial services products, such asendowments or payment protection insurance (PPI), are examples of this.

— Goods or Services have a significant impact on people’s lives and markets won’t deliver—possiblybecause of “free riders” (eg defence or security services) or because of moral hazard (eg healthservices).

— Competition alone will not deliver essential services to a socially desirable level or delivers them inan unbalanced way. Examples of this range widely but could include private pensions or postalservices to remote rural areas. Fuel poverty.

5.5 A good estimate of the scale of the problems facing the UK consumer has been provided by the OYceof Fair Trading (OFT) in their recent report into consumer detriment. The OFT define consumer detrimentas a measure of the financial losses suVered by consumers as as a result of unsatisfactory purchases of goodsand services. They published a report in April 2008 that calculated the overall cost to UK consumers ofrevealed detriment in the prior 12 months was £6.6 billion.19

19 OFT, “Consumer Detriment: Assessing the frequency and impact of consumer problems with goods and services”, April 2008 Itshould be noted that this estimate does not attempt to put a figure on hidden detriment (ie detriment that consumers areunaware of) and so the true detriment figures is in reality likely to be much higher. A financial loss figure such as this alsodoes not incorporate the psychological eVects such as stress, anger or frustration.



4. How could the Government improve its capability to regulate in a proportionate and eVective manner?

6.1 In representing the consumer interest across a huge range of diVerent markets, we are frequently calledupon to propose or comment on ways of remedying consumer problems and this often involves some formof regulatory solution, albeit in some cases this could be something as simple as basic information provision.In light of the fact that most regulatory cost is likely to ultimately be borne by consumers as a result of costpass through, there is no value in imposing regulations that cost more than the benefits they produce. Sucha circumstance would be a clear example of regulatory failure.

6.2 We have discussed above the circumstances in which we believe that targeted intervention can bejustified above. We also have a series of observations about how to judge whether regulation is proportionateand what constitutes eVective regulation.

Should we regulate?

6.3 If any of the conditions that might justify an intervention exist then our approach will be to conducta detriment analysis to determine whether the problem identified is significant enough to merit intervention.This analysis will comprise an analysis of the costs of not regulating in terms of the detriment or potentialdetriment (ie the benefits of regulation). This can then be compared against the costs of regulation todetermine the appropriate response.

6.4 One key concern that we have is that too much regulatory analysis makes estimates of the costs butdoes not do suYcient justice to the questions of benefits.

6.5 A recent example of this can be seen in the consultation document issued by BERR in 2008 thatlooked at reform of consumer law. Whilst we supported many of the aims of this piece of work to streamlineexisting provisions, we were concerned by the emphasis that was placed on costs as against benefits. Forexample, the document stated that consumer law imposes costs of £1.25 billion per year. However, there isno comment on whether this is high or low relative to other regimes or other countries. There is also noevidence given about what the benefits of this regime are in terms of potential detriment and consumerprotection. A similar problem exists in its statements on consumer credit legislation. This is estimated toimpose a cost on the credit industry of about £250 million a year but again there is no attempt to quantifythe benefits.

6.6 Quantifying the benefits of regulation is diYcult but work has been done in this area and oneparticularly useful contribution was made in an Oxera study commissioned by the FSA in 2006.20 This pieceof work gives a methodological approach to identifying the dimensions along which financial servicesregulation delivers benefits by improving outcomes in the market. Having identified what should bemeasured, the framework is extended to discuss how the types of benefit can be measured.

6.7 Two recent examples of interventions that we have called for in which we have made an estimate ofthe benefits of regulation should help illustrate this point.

6.8 In 2006, we started campaigning against the level of unauthorised overdraft charges. It was ourobservation that the level of charges (up to £38 per incident) were too high and therefore constitute a breachof the Unfair Terms in Consumer Contract Regulations (UTCCR). In order to make the case, we providedan estimate of detriment of £4.7 billion annually, which was based on the average amount of each chargeand the reported incidence of charges.

6.9 In 2007 we issued a super-complaint to the OFT about the way in which credit card companiescalculate interest charges. We calculated that the top 20 credit card providers use 12 diVerent methods toapply interest charges to their customers’ accounts, making at least £400 million a year in the process. Weestimated consumer detriment on the basis of diVerent user scenarios established by our market research.Our analysis benchmarked issuers’ interest calculation methods against the cheapest method oVered by oneof the top 20 credit card issuers.

What does good regulation look like?

6.10 As described, our decision as to what form a regulatory intervention should take will necessarily bebased on a detriment analysis and an assessment of the benefits and weaknesses (including unintendedconsequences) of implementing diVerent solutions.

6.11 The purpose of any intervention is to provide a framework whereby the relationship betweenbusinesses and consumers can be brought into balance. This will usually be done by seeking to alter theprevailing behavioural or moral norms. This can be done through rules and much consumer protection lawtakes this form. However, it can also be done through measures that either give businesses incentives to actor empower consumers to drive change through their own actions. In some cases, rules might be necessarybut central to our approach is a conviction that good regulation will ideally focus on providing incentivesfor firms to compete more intensely.

20 Oxera, “The Benefits of Regulation”, FSA 2006.



6.12 As stated, statutory regulation can take a variety of forms ranging from simple disclosurerequirements to a comprehensive licensing system and any recommendation will need to give carefulconsideration to what is the most appropriate form. A judgment about this will depend on the nature of themarket, the results of any detriment analysis and an assessment of the alternative approaches.

6.13 From our perspective, a primary consideration is to base our views on the purpose of interventionson the consumer principles which are:

— Access;

— Choice;

— Consumer influence and representation;

— Quality;

— Information and education;

— Redress;

— Safety; and

— Value for money.

6.14 The relative importance of each of these will vary according to the individual circumstances at handbut examples of the ways in which we could apply these principles include recommending the establishmentof a compulsory Ombudsman scheme as a way of providing consumer redress or using information remediesto encourage consumer choice or increases in switching.

6.15 One important concern that we have is that there is a significant amount of regulation in existencethat does not have clearly defined objectives. This can often lead to problems later on in determining whetheror not regulation has been successful. In order to improve this, an area of work that would benefit from morestudy would be to look at how to set criteria for benchmarking the quality of laws and assessing theeVectiveness and value of existing and new laws. This should have a focus on outcomes and post remedyappraisal.

Self-Regulation

6.16 Because the costs of regulation are likely to be passed on to consumers, and because statutoryregulation is likely to be the most expensive and least flexible way of regulating, we will often support lightertouch forms of intervention such as self-regulation before recommending statutory regulation. TheAdvertising Standards Authority and their Codes of Practice are an example of a long-standing self-regulatory approach that we have supported. However, there are occasions when we conclude that all otherapproaches have failed and/or the detriment is so high that only statutory regulation is likely to comprise aworkable solution.

Public Service Regulation

6.17 In addition to consideration of markets, it is also important to note that regulation is frequentlynecessary in many public services and delivery by relevant professions, local and central government andother agencies. In broad terms, the aims of regulation in these situations will be the same—ie to prevent orremedy consumer harm. However the exact way in which regulation is approached can diVer in somerespects.

Principles Based Regulation

6.18 In terms of the nature of regulation, as well as determining the broad type of regulation, and levelof state involvement, there are also important debates to consider about the style of regulation that is tobe used.

6.19 One very influential change in regulatory practice in recent years has centred on a shift in emphasisfrom regulation based on prescriptive rules towards an approach that is centred more on setting regulatoryprinciples or desired outcomes and then allowing firms discretion about exactly how they meet theseobjectives. Two recent and high profile examples of this new approach are the Financial Services Authority’sTreating Customers Fairly (TCF) initiative and the EU initiated Unfair Commercial Practices Directive,which has recently been implemented in the UK through the Consumer Protection Regulations.

6.20 Which? has taken a cautious approach to principles based regulation. We acknowledge thatfocussing on outcomes is important, however we do have some reservations. We are concerned about thelack of clarity that this sort of approach oVers both for firms and for consumers. This has become evidentin the case of TCF where only 13% of firms met a recent deadline for having management informationsystems in place to test whether they are treating their customers fairly. We are also concerned that in practicea lack of clarity will mean that many interpretations will only become clear through court proceedings andthat there will therefore be an over-reliance on case law that then becomes a de facto rule.

6.21 There may be a feeling amongst some firms that principles based regulation can lead to highercompliance costs because it will lead to firms being risk averse and therefore overcompensating.



Information Provision

6.23 One particularly important area to consider in the context of consumer facing regulation isinformation provision. It is our view that information provision needs to be looked at from a balancedperspective. There is little doubt that many consumer problems relate to information asymmetries. As aresult of this there is definitely a place for using information based remedies to address these problems.However, it must be done carefully. Too much information, and/or information presented in a poor way, canactually do more harm than good and we would certainly be in favour of less information where appropriate.However, more important, and the real objective here, should be to ensure that the information that isprovided is the right information in the best format. Examples of using information in a good way wouldinclude: summary boxes for credit cards, traYc light labelling for nutrition labelling and scores on the doorsfor hygiene ratings for food businesses.

Regulation as good Practice

6.24 One important point to note about the nature of regulation is that much consumer facing regulationis actually codified good practice and that a lot of regulation is in reality not additional cost to business.This was the conclusion of a major study done in 2006 by Deloitte for the FSA and the Financial ServicesPractitioners Panel. This study looked at three sectors (corporate finance, institutional fund managementand retail investment and pensions advice) and drew a number of conclusions about the nature of theregulation in those sectors. In particular, it noted that “much of what regulation requires is good businesspractice”.21

6.25 The Deloitte study particularly highlighted the importance of examining incremental cost not totalcost—ie the costs of regulation that are over and above what would have been done by the firm in the normalcourse of business.22

6.26 In an extension of this point, the study found that whilst the costs of implementing a regulatorychange can often be material, once they are embedded in firms behaviour then the incremental costs aregenerally seen as quite limited. One implication of this is that once a firm has incurred the cost ofimplementing a process to comply with a regulatory rule, it typically forms the view that the process is onethat, in part, forms a useful function and would be maintained even if the rule that drove the change was tobe removed.

6.27 A separate study done for the FSA at the same time by Real Assurance Risk Management suggeststhat for many businesses, it is changes to requirements that are the problem rather than the requirementsthemselves. (page 7—point 2.10).23

Deregulation where necessary

6.28 We have already made the point that taking an ideological approach to regulation, especially if it iscentred on a blanket approach to removing regulation, can be risky. However, there are certainly instancesin which removing regulation rather than adding regulation can be beneficial. A recent example of where wehave acted to seek deregulation as a solution to a market failure is in the case of our recent supercomplainton Scottish Legal Services. In this, we have argued that existing structures that place strict controls on howlegal professionals in Scotland are allowed to practice and how consumers can access legal representationcan hinder market innovation, restricts consumer choice and may lead to higher prices. This now appearsto be well on the way to a more open and competitive sector.

EU

6.29 In addition to the work that the UK Government have done on regulation, it is also important totake into consideration the importance of the EU Institutions in any consideration of regulation. Inparticular, this is because of the volume of domestic legislation that is originated in the EU. In the consumerpolicy sphere recent high profile directives include the Unfair Commercial Practices Directive, the ConsumerCredit Directive and the Markets in Financial Instruments Directive. All of these will have a significantimpact on the regulatory framework that aVects UK consumers.

6.30 Whilst many EU directives can have a beneficial impact by providing additional protections, thereis also risk. This is particularly evident in cases where a maximum harmonisation approach is adopted thatcan in turn lead to a reduction in existing domestic protection. In broad terms, we would prefer to see EUregulations follow a minimum harmonisation approach but at a high level. This would allow the UKconsumers to benefit from the single market but for additional protections to be adopted where appropriate.

21 Deloitte, “Cost of Regulation Report”, Study done for the FSA 2006.22 ibid.23 Real Assurance Risk Management, “Estimation of FSA Administrative Burdens”, Study done for the FSA 2006.



5. Whether there is a coherent package of regulatory measures for improving the conditions for businesssuccess; and how regulatory reform initiatives fit into wider Government support

6. Does Government understand businesses suYciently to design eVective regulations? Is suYcient emphasisgiven to small businesses and competition issues?

7.1 We have already explored a series of issues that relate to these questions and to a large extent, it is notthe role of a consumer organisation to articulate the requirements of the business community. However, wewould like to re-iterate the importance that we would place on the benefits to both consumers and businessesof genuinely competitive markets that are often only possible when supported by a strong competitionenforcement regime and ancillary regulatory frameworks.

7.2 We would also like to highlight the importance that we place in the current environment of improvingthe trust that consumers have in the businesses they deal with for the eYcient operation of markets in thefuture. This is particularly true in relation to the financial services sector.

Behavioural Economics

7.3 In addition to the need to understand businesses in order to design eVective regulations, we wouldlike to accentuate the importance of understanding consumers to achieve the same objective.

7.4 A key area of importance has been a notable shift in much economic theory towards regulatoryapproaches that take account of observations of actual consumer behaviour as opposed to theoreticalmodels based on “rational” self-interested consumers. This has manifested itself in a number of ways, suchas the recent interest in concepts such as “libertarian paternalism” or “nudging”. This involves encouragingpeople to make choices by leading their decision making whilst ensuring that no options are closed oV. Agood example of a system based on this approach would be the current proposals for a National PensionsSavings Scheme (Personal Accounts), based on an opt out rather than an opt in mechanism. It is anticipatedthat this will dramatically increase the number of participants whilst ensuring that people are not actuallyforced to do anything against their will.

7.5 We have watched developments in this area with interest and have supported some specific initiativessuch as the proposals for Personal Accounts. Going forward, we will continue to take behavioural factorsinto account in our policy making, not least because it has long been our observation that consumerbehaviour does not always match predictions based on theoretical models.

7. Is there suYcient consideration of how regulations will be implemented, including an appropriate focus oncompliance and enforcement issues?

Importance of focus on outcomes

8.1 Which? continues to support the move to principles-based regulation, but only if that can be provento deliver better consumer outcomes. There should be an emphasis on solving the problems that initiatedthe need for regulations rather than just seeing them as a tick box exercise. Regulators (or legislators) shouldactively review the eVectiveness or success of regulations and not be afraid to make further changes ifdetriment remains.

8.2 We believe that regulators should take a risk-based approach. Proper cost-benefit analysis should beconducted and rules should stay in place where there is a significant likelihood of consumer detriment orwhere the removal of rules could reduce clarity about what consumers can expect from the firm. Anyindustry guidance on how to interpret what principles mean should be drafted in consultation with consumergroups and should include appropriate protection for consumers.

8.3 Market testing of regulations before implementation is also key to ensuring that they are eVective,targeted and relevant to the problem at hand.

8.4 We also believe that there is a considerable risk in removing the prescription of regulations withoutmore robust enforcement being in place to provide a deterrent against firms exploiting less intrusiveregulation. The regulator cannot simply create principles and regulations and hope that firms comply withthem—it needs to put incentives in place to ensure compliance.

Naming and Shaming

8.5 Over recent years there has been an increased focus amongst regulators on the link between regulationand transparency with a considerable body of evidence to support the view that disclosure of informationabout company performance can act as a useful regulatory tool. Whilst this is the case, there is a diVerence ofopinion amongst diVerent regulators about the exact importance of disclosure and “naming and shaming” inpractice.

8.6 At one end, the Advertising Standards Authority uses this approach as its primary sanction bypublishing weekly adjudications of the cases it looks at on its website. At the other end, we are currentlylobbying the Financial Services Authority to make much more use of naming and shaming in its dealings



with regulated firms. It has long used a defence of commercial confidentiality to resist publishing more data.However there are encouraging signs of a shift in approach in its current consultation on transparency as aregulatory tool in which it is indicating that it may in future publish more information on complaints.

March 2009

Memorandum submitted by the Trades Union Congress

Themes and Trends in Regulatory Reform

1. Introduction

1.1 The TUC represents 59 aYliated unions with a total of nearly 6.5 million members. Members of TUCaYliated unions are employed in a wide variety of industries, sectors and occupations. The TUC welcomesthe commitment of the Government to better regulation. Trade unions are essentially organisations thatregulate relations between employees and employers, largely on a voluntary basis. We believe that while itis essential to have in place a floor of statutory employment protection measures, as far as possible statutoryregulation should be kept out of employment relations.

1.2 The TUC welcomes the opportunity to submit evidence to this inquiry. Our submission focuses onthe workplace, as that is where we operate. Nonetheless our members are also consumers, tax payers andusers of the NHS and local authority services, so we have a general interest in how regulation is applied,how it evolves and why it is there. We have been represented on the Government’s former Better RegulationCommission and are represented on the Risk and Regulation Advisory Council. We engage regularly withthe Better Regulation Executive.

1.3 The TUC believes that the debate about employment regulation should take into account the positiveadvantages of employment rights. Employment rights help labour markets to operate more eVectively bycreating security, reducing poverty, inequality and social exclusion, and promoting the long-term trustrelationships that are essential if the UK is to succeed in internationally competitive markets.

1.4 In this submission we respond in turn to each of the points put to us in the letter of invitation fromthe Committee’s Inquiry Manager.


2.1 What are the implications of recent economic developments (for example, the economic downturn; creditcrunch and problems with the financial sector) for the design and delivery of the regulatory reform agenda,including risk based regulation?

2.2 It is plain that regulatory reform will be one element of the new global financial settlement. This is asgood as certain when even Alan Greenspan can say, in February 2009:

“I still believe that self regulation is an essential tool for market eVectiveness—a first line ofdefense. But, it is clear that the levels of complexity to which market practitioners, at the heightof their euphoria, carried risk management techniques and risk-product design were too much foreven the most sophisticated market players to handle properly and prudently. Accordingly, Isee no alternative to a set of heightened federal regulatory rules for banks and otherfinancial institutions.” (Alan Greenspan, speech to the Economic Club of New York, 17 February2009, downloaded from http://online.wsj.com/public/resources/documents/EconClub.PDF on23 February 2009.)

2.3 At this stage, we are still fighting the recession day-by-day, and there has not been enough time todesign the policies that will be needed in the coming decades to guard against financial instability setting oVanother recession. Nonetheless, it is already possible, in a broad-brush fashion, to identify some of the likelyfeatures of the new settlement:

— Much more attention being paid to oV-balance sheet risks,

— Tougher rules on disclosure/more transparency, and

— Regulations to deal with rating agencies’ conflicts of interests.

2.4 In whatever way we choose to respond, de-regulation seems unlikely to be the keynote. There is a verystrong chance that we are at a turning point, when revulsion at the eVects of banking de-regulation will leadto general acceptance of a shift in the balance between regulation and flexibility.

2.5 That is in the future. Today the debate is still conditioned by the assumptions of the past. Every daythe Government faces calls to freeze the national minimum wage or delay the introduction of new maternityand equality rights or the agency workers’ directive, all justified because they will save jobs.



2.6 In fact, employment standards and employment levels are not linked in any simple way. If we look atwhat has happened to employment rates since the last recession we get the following picture:

LFS data, men and women of working age, seasonally adjusted

2.7 The National Minimum Wage Act 1998, the 1998 Employment Rights Act (which introduced therights to paid leave, to lunch breaks and to union recognition) and the 1999 Employment Relations Act(which introduced enhanced maternity leave rights, new rights for part-time workers and new rules on unionregulation) did nothing to impair the UK’s strong employment performance. The employment rate has,remarkably, remained between 74% and 75% since the second half of 1999.

2.8 The Employment Act 1990 (which outlawed secondary action and made it easier for employers todismiss striking workers) and the Trade Union and Labour Relations Act 1992 (which abolished the WagesCouncils) did nothing to stop the collapse of employment.

2.9 A supporter of these Acts will argue that this pattern of employment is caused by the business cycle,not the legislation. And they will be right—by far the most important determinant of employment is the levelof demand in the economy. And, by the same measure, weakening workers’ employment rights will donothing to save jobs.

2.10 Indeed, in the case of the 850 temporary workers at Oxford, dismissed by BMW Mini in February,early implementation of the agency workers directive might have saved their jobs. Across the country,workers employed by multi-national companies fear that the fact that it is easier to make staV redundantin the UK will leave them exposed to a higher risk of unemployment than their opposite numbers on theContinent.

2.11 International comparisons send the same message. A 1999 OECD review of the evidence on the eVectof employment protection legislation (EPL) on employment found that “EPL strictness has little or no eVecton overall employment”. EPL was broken down into diVerent dimensions, including the regulation ofregular employment, temporary employment and collective dismissals. None of these aspects ofemployment regulation “indicate a significant impact on unemployment,” the report concluded.(Employment Outlook, OECD, June 1999, chapter 2.)

2.12 A later US study, using data for 20 countries, found that “there is no simple bivariate relationshipbetween standard measures of labor market institutions and unemployment rates across countries.” (LaborMarket Institutions and Unemployment, Dean Baker, Andrew Glyn, David Howell & John Schmitt, Centerfor Economic Policy Analysis, 2002, Working Paper 2002–17.)

2.13 How does the Government balance the need for an eVective regulatory framework—providing thenecessary benefits and protections—with the commitment to improve the conditions for business success?

2.14 The TUC is very pleased that the Committee has recognised that a balance has to be struck. Somereports and briefings only discuss regulations with regard to economic or business eYciency—but thisapproach makes it harder to justify any regulation. Work safety, employment protection, environmentalhealth and other regulations were created because these are valuable ends in themselves and excluding thebenefits of regulation is unbalanced. As Robert Solow commented in his Keynes lecture:



2.15 “Every one of these regulations or restrictions was intended to promote a desirable social purpose.Some may do so ineVectively or ineYciently. That is worth knowing; but the fact remains that wholesaleelimination of these ‘rigidities’ is neither desirable nor feasible.” (R Solow, “What is Labour-MarketFlexibility? What is it Good For?”, Proceedings of the British Academy, December 1998, p 200.)

2.16 It is also important to recognise that a well-designed regulatory framework can create businessadvantages. The minimum wage, for instance, has led to an increase in productivity for many firms; manyfirms have responded to the need to spend more on their wage bill by investing in training and IT, and theLow Pay Commission has noted an improvement in recruitment, retention and motivation in the low payingsectors. (See for instance Building on Success, 4th report, LPC, 2003, p 231.)

2.17 How might a proportionate and targeted response to improving the regulatory framework in the wake ofthe financial crisis be made? What lessons are there for the wide regulatory reform agenda?

2.18 Please see our response to the first question. The TUC is currently developing policy on howregulation in the finance sector could be improved. There is a consensus now that the current light touchregime was an important factor in the development of the crisis. TUC policy will focus on:

— Regulating the bundling together of diVerent financial products, either by prohibiting the sale ofbundled products unless each has been evaluated individually by the issuer, or requiringconsiderably greater collateral for the sale of bundled products;

— SIVs and other oV-balance sheet vehicles should be brought on balance sheet with the same capitaland other regulatory requirements as on-balance sheet investments and with full transparency;

— Regulation should be consistent and tight across the whole of the financial system including theshadow banking system to ensure that the interests of beneficiaries, consumers, investors andworkers and the wider economic system are protected eVectively.

— To address the use of excessive leverage, the Government must restrict the preferential taxtreatment of debt to investment in organic growth. It should not be available for companyacquisitions. Rules should be drawn up to restrict tightly the use of leverage by financialinstitutions such as banks.

— Credit rating agencies must be restructured so that they are not dependent for their revenues onthe organisations whose products they are rating.

— Current incentive structures must be fundamentally altered, so that remuneration packagesencourage prudent, long-term investment strategies from bankers, credit agencies, institutionalinvestors and also company directors. Remuneration packages in the financial sector must bealigned with long-term stability and the needs of the real economy. The incentive proportion of payshould be cut back to no more than 10% of total remuneration. Golden handshakes and parachutesshould be banned. Incentive-related elements of pay should be linked to a range of performanceindicators, including social and environmental performance and should be linked to long-termperformance only.

— The role of mark-to-market pricing in accounting systems and the regulatory system should beexamined, and alternative proposals put forward for debate.

— Short-selling should be prohibited or tightly controlled.

— Trading on futures markets for commodities should be restricted to those who have an interestlinked to real economy activity, namely, producers, traders and major consumers.

— New financial products should be examined by regulators for their impact on the financial systemand the real economy before they are allowed to be traded.

— Mechanisms to facilitate investments in the real economy through a straightforward, transparentand single-purpose intermediary system should be developed as a matter of urgency to allowinvestors to channel money to where it is needed without taking on the risk of the currentfinancial system.

— It is essential that an international financial regulatory system is established to undertakeregulatory oversight of the international financial system.

— The interests of employees in the financial sector must be protected, and a condition ofGovernment assistance for the banks should be that no compulsory redundancies areimplemented.

— Appropriate banking models for the future, including issues of size the separation of retail andinvestment banking should be examined.

2.19 How could the Government improve its capability to regulate in a proportionate and eVective manner?

2.20 The TUC commends the report of the former Better Regulation Commission, “Risk, Responsibilityand Regulation”, which was published in September 2006. This report made the important link betweenrisk, responsibility and regulation. In particular it recommended the establishment of a Fast Assessment ofRegulatory Options (FARO) panel to examine calls for government intervention when incidents, accidents



and other issues were leading to a clamour for more regulation. This panel would be independent andpolitically neutral. With some tweaking to the remit set out in the BRC Report it would also be able tocontinue with the work recently done by the short term successor body to the BRC, the Risk and RegulationAdvisory Council, whose Chair is to give evidence to this Committee at a future hearing.

2.21 Whether there is a coherent package of regulatory measures for improving the conditions for businesssuccess; and how regulatory reform initiatives fit into wider Government support.

2.22 The BRE has been working in this area. The TUC is by no means convinced that it is possible ordesirable to have on the statute book a package of regulatory measures for improving the conditions ofbusiness success. The BRE has been concerned about employment and other regulation imposing a“burden” on business and the main thrust of initiatives to date have been to reduce the amount of regulationas far as possible without removing vital employee and public protection. The TUC is not aware of anyparticular regulatory measures for improving conditions for business success other than ensuring thatregulation is fit for purpose and that useful practical guidance is readily available. Clearly the currenteconomic crisis has shifted the focus onto issues such as the availability of credit, particularly for smallbusiness.


3.1 Does the Government understand businesses suYciently to design eVective regulations? Is suYcientemphasis given to small businesses and competition issues?

3.2 This question presupposes that the design of regulation is only important in as much as it aVects smallbusinesses. Whilst they are an important constituency there is a far wider regulated constituency—indeedsociety as a whole is regulated, as is much of how we live our lives. Assuming that the Committee is on thisoccasion only interested in the design of regulation in terms of how it aVects small business we make thefollowing points in that context.

3.3 The range of regulation aVecting business is, of course, far wider than employment and health andsafety legislation. Business is also aVected by financial regulation, taxation, planning regulation,environmental regulation and whatever regulation applies to what it is that they are making, selling, orproviding, eg, food safety regulation. The TUC understands that the impact on small businesses should beone of the assessments made before introducing or amending regulation but that consideration should nottake precedence over the prime consideration, which must be to ensure that the intended protection isprovided eVectively. Good regulation is regulation that has a clear objective and is as easy as possible tocomply with and to enforce. We commend bodies such as the HSE that keep regulation under review andprovide clear and helpful guidance on it. In many cases it is not the regulation that is a problem but the “riskactors”, such as insurance brokers, “consultants” and lawyers who make their living out of exaggeratingand complicating the compliance measures needed. We have supported the work being done by the Risk andRegulation Advisory Council on health and safety and small organisations, which has explored in somedepth the issues that cause problems and has encouraged the main players to work together to improve riskassessment and compliance.

3.4 The Government appears to us to think of small businesses before many other importantconstituencies when it comes to regulating. Our concern is that the Government thinks of the impact onsmall businesses without paying suYcient attention to the benefits of having the regulation. It of courseeasier to measure the administrative burden that to quantify the benefits but that is not an argument for notmeasuring the benefits. The TUC welcomes the recent initiative by the BRE to improve the measurementof benefits. The objections of small businesses to regulation is often based on a disliking of the substance asmuch as a disliking of the process of applying the regulations. If the Government did more to explain thebenefits to small businesses it might make regulation more palatable to them. The TUC wants to seebusinesses flourish but believes that good and clearly explained regulation can actually help them to growand prosper.

3.5 Is there suYcient consideration of how regulations will be implemented, including an appropriate focus oncompliance and enforcement issues?

3.6 The expertise of the TUC is in employment and health and safety regulation. The Government hasdone a great deal to protect workers by improving the regulation of the employment relationship and byintroducing important new basic rights. However, the existing system, which is now based primarily onindividual rights, has serious weaknesses, and is often not enforced, or only enforced as far as each individualcomplainant is concerned.

3.7 The decline in collective bargaining, which is a very eVective means of regulating the employmentrelationship, has contributed to the creation of a system which relies on individual workers to instigatelitigation. This has two particular consequences: it does not address systemic workplace problems and itoften relies entirely on an individual worker being prepared to take their employer to court. The current masslitigation on equal pay is a good example of the painstakingly slow application of legislation in an attemptto change workplace systems that fundamentally fail to reflect the original purpose of the law.



3.8 The TUC is currently considering what changes are needed to help to ensure that workers’ rights arenot violated and that there are higher levels of compliance with employment legislation. At the same time,we acknowledge that the majority of employers treat their workers well and abide by the law. The solutionmay be to set up a system that recognises that where there is eVective voluntary regulation, often throughan agreement with a recognised union, a diVerent approach could be used, whereas for the employers whowilfully ignore the law, or don’t bother to understand and apply it, a more interventionist and proactivesystem is needed.

3.9 We support the case for better regulation, though we reject the argument that employment legislationis a “burden on business”. In the 2004 Budget, the then Chancellor asked Philip Hampton to conduct areview of regulatory inspection and enforcement. The focus of the review was whether there was the scopefor reducing administrative burdens by promoting more eYcient approaches to regulatory inspection andenforcement, without compromising regulatory standards or outcomes. The TUC, in general, welcomed theapproach adopted in the final report published in 2005, which sought to draw a distinction between the“policy costs” of regulation and the “administrative costs”.

3.10 Employers have to accept responsibility for treating their employees fairly; the Government has toaccept their responsibility for devising regulation that is fit for purpose, clear, and user friendly for bothemployees and employers. Unfortunately, the endless squeals of pain from “burdened” employers is toooften a proxy for not really accepting that working people should and do have basic rights, for example, totake paid time oV when they have a baby and return to their job afterwards. Employers do not live in amoney making bubble—they are part of society, they benefit from all the systems that support theirinfrastructure, including the well being of their workforce, and they should be prepared to accept a share ofthe social responsibility that this entails. Good employers do all this and flourish. Bad ones don’t and thenblame red tape or the “litigation culture” when they are eventually caught out.

3.11 The Government also has a clear duty to ensure that its legislation is properly enforced. There is agrowing consensus that the current enforcement system is not working well. Poor enforcement allows“cowboy employers” to undercut responsible employers. It also enables “rogue” employers to pass on someof their costs to the taxpayer in general through increased spending on benefits, the NHS and otherpublic services.

3.12 While the majority of the workforce continue to be employed in standard employment relations,since the 1990s there has been a growth in casualised forms of employment, including agency work andfreelancing. Such workers often benefit from limited employment protection and are reluctant to complainabout mistreatment for fear of the employment consequences. Using LFS statistics, the TUC estimates thatat least 170,000 workers still do not received the National Minimum Wage in full. According to the LabourForce Survey more than a million people do not get their legal minimum of four weeks paid holiday,including bank holidays. Recent case studies gathered by the TUC’s Commission on Vulnerable Employeeshave uncovered a range of unlawful practices by employers, including employers and employment agenciesemploying people cash in hand below the minimum wage, taking unreasonable deductions from workers onthe minimum wage to pay for accommodation’, making illegal deductions from individuals on the minimumwage for transport, food and utility bills, so that in some cases workers end up paying for the privilege ofworking for their employer and refusing pregnant employees paid time oV for ante natal care.

3.13 To deal with those employers who do not comply with the law the TUC has a number of proposalsfor improvement in enforcement. The existing enforcement agencies must be better resourced to ensureworkers’ rights are not violated and that employers comply with their legal duties. They need to be accessibleto workers and their representatives and to increase awareness amongst employers of their legal duties. Theyneed increased capacity to undertake proactive and preventive enforcement activities, in addition toresponding to complaints by individuals or their representatives.

3.14 In addition, there is a need for greater co-ordination between existing enforcement agencies basedon better targeted and shared intelligence. Enforcement agencies must be equipped with a toolkit of eVectivesanctions which act as a deterrent against, and appropriately penalise, unlawful activities.

3.15 As the Employment Tribunals will still have a major role in handling individual rights breaches weare anxious to improve the operation of the Employment Tribunal system in two vital respects. Firstly,Employment Tribunals should have power to enforce their own awards rather than applicants having to relyon the County Courts. Enforcement of awards via the tribunal system would be less intimidating, swifterand less expensive for claimants.

3.16 Secondly, enforcement through Employment Tribunals is dependent upon claims by individualworkers. Many individuals are reluctant to take such steps, for fear of victimisation or dismissal. There isalso no provision for unions to bring representative actions on behalf of groups of workers, even in equalpay cases which clearly have a collective dimension. New procedures should be developed to permit unionsto bring representative actions in multiple claimant cases to employment tribunals. We welcome the interestshown in this proposal by the Government and the support given by the Equality and Human RightsCommission.

3.17 Finally, we acknowledge that there are plenty of good employers around who very rarely end upbeing reported to the enforcement agencies or in an Employment Tribunal, so consideration needs to begiven to other means of regulating employment practices. For a start the government should harness and



enhance the role of trade unions in enforcing employment rights and promoting safe and healthy workingenvironments. It is of great regret to the TUC that the Government has rarely loudly championed the roleof unions in working with employers to deliver safe, compliant and productive workplaces. One example isthe consistent refusal to reinstate the former duty of ACAS to promote collective bargaining. Nobody issuggesting that union recognition should be forced on employers and employees who genuinely don’t wantit but as a means of delivering better standards it should be on oVer as a positive route to better delivery ofemployment relations. It has been instructive recently to see public support for union rights for groups suchas the police. In a democratic society people understand the need for democracy in the workplace too.

Conclusion

4.1 The TUC is grateful for the opportunity to submit evidence and looks forward to meeting theCommittee on 29 March.

March 2009

Witnesses: Mr Steve Brooker, Head of the Fair Markets Team, Consumer Focus, Ms Sue Edwards, Headof Consumer Policy, Citizens Advice, Ron Gainsford, Chief Executive, Trading Standards Institute, Mr PulaHoughton, Economic Policy Manager, Which? and Ms Sarah Veale, Head of Equality and EmploymentRegulation Department, Trades Union Congress, gave evidence.

Q30 Chairman: Welcome everyone. We have fivewitnesses and we want to handle this as eYciently aswe can, so please try to catch my eye if you have aparticular response to one of the questions. We donot necessarily want a response from all five of youon all the questions but if you feel at the end of it thatyou do have something further to say we wouldwelcome any additional comments you would like tomake in writing. We would like to deal with thisevidence session in around about an hour, so wewant to try to do it fairly crisply. First of all, welcometo you all and thank you for the written submissionsthat we have had. I want to start oV by looking firstof all at the regulatory response to the currentfinancial crisis and ask you whether you think thatthe complexity of the global markets and the globalnature of the systems and the complex corporate andpersonal incentives in financial institutions make thefinancial services sector unique? And whether theregulatory response in financial services has widerimplications for the regulatory reform agenda. Thatis a complex question to start with but wouldsomebody like to try that? Mr Gainsford.Mr Gainsford: I think Lord Turner’s reaction to thatis quite interesting because his view that the FSA feltthat markets would be self-correcting, that there wasa rationale behind markets that meant that the lighttouch regulation they had would be suYcient, hasitself I guess been exposed as a fallacy, and in thatcontext I think his emphasis on intense supervisionsand the whole issue of competencies within theindustry is one that is probably a proportionateresponse to what has happened there. I think it alsotranslates into other fields. If you take tradingstandards and you take this issue of global marketsthen my members are involved in the supervision ofglobal markets in a UK sense, and if you take theincidents of 2007 when we had the annus horribilisof toy safety being compromised in a significantway—the Committee may recall the headlines weekafter week, month after month of dangerous toysthat were capable of maiming and killing and indeeddid so with a number of individuals—those toyswere mostly emanating from the Far East and otherinternational markets and in that sense one is very

conscious that you are in a global regulatorysituation, whether it is financial markets or whetherit is certain products of that sort. Then if we move onto the Internet stage when we see trading standardsoYcers around the UK looking to work with theircounterparts overseas, how do you regulate anInternet, a global market where perhaps all of us inthis room are buying products from overseas andotherwise in a way that we would not have donemonths or a few years ago, then I think you cantranslate the global challenges that the FSA and thefinancial sector have faced into the global challengesthat even humble trading standards oYcers face intheir activities in looking to not only protectconsumers but protect bona fide businesses. So Ithink there is a translation eVect from financialmarkets into other markets and I think theimportant message coming from Lord Turner isaround the realisation that one has to pick the righttools to deal with the right mischiefs. I liked HectorSants’ comment where he did say that principles-based regulation is good as long as those that are tocomply with it have principles. I thought that wasnicely put. In other words, its dependency upon aself-regulating market is not always appropriate andyet of course there is a place for co-regulation in itswider sense.Mr Brooker: Can I add to that, perhaps? First of allwe should say that the primary actors in this dramawere the financial institutions, but we are here todayto talk about the role of regulators so I will confinemy remarks to them. I agree with Ron that AdairTurner hit the nail on the head when he said thatthere was a philosophy of regulation that marketswere self-correcting, and the very day after AdairTurner said those remarks Consumer Focuspublished its Rating Regulators report, whichlooked at six regulators across the economy. The keyfinding of that research was that regulators relied onmarket forces to deliver consumer protection ratherthan exercise the powers that Parliament gave themto do their job; and that when regulators didintervene they relied on industry self-regulationsolutions as their default first and instinctive optionrather than choose—



24 March 2009 Mr Steve Brooker, Ms Sue Edwards, Ron Gainsford, Mr Pula Houghton and Ms Sarah Veale

Q31 Chairman: You are arguing not necessarily forbetter regulation but better regulators.Mr Brooker: Regulators using the tools thatParliament gave them is what I am asking for. We feltthat regulators were too timid; that they did not flextheir muscles enough. But I do not think their taskwas helped by a political climate which encouragedlight touch regulation—political parties on all sidesof the agenda responding to a pro-business lobbywhich saw all regulation as a burden rather than asa benefit. I think that was quite an intoxicatingatmosphere and one that regulators must havefound diYcult to react to.Mr Houghton: I would just make two short points.One is that one thing you might take away from it isa change in attitude amongst the general populationtowards what they expect of both the system and ofthe regulators within it, and we did some researchrecently where as much as 84% of people think thata response to the banking system requires a toughinterventionist approach. I agree with the pointabout the fallacy of eYcient markets and my secondpoint would be to take out of that that it is notsensible to take an overly ideological approach toregulation; that regulation should be about whatworks and it should be about what is fit for purposeand what adequately deals with the risks that are infront of us.

Q32 Chairman: Before I call on Sarah Veale, can Iexpand the question slightly? If we accept MrGainsford’s observation which is reflecting the factthat we are in a completely global market now, do weneed more European or international regulationand, if so, how do you see it being structured? I willleave that one in the air for the moment and then goback to it.Ms Veale: I think the short answer to that is yes andI would just underpin that by saying that I am not aneconomist and I think further speculation from meoV the top of my head would not do my organisationvery much good or educate or edify any of you. I wasgoing to answer the second part of your firstquestion, which is about the read across. I think it isearly days to assess the full impact of the horrors inthe finance sector across the community at large.People tend to forget that the huge numbers ofemployees in the finance sector at a lower level thanthe ones who are often in the spotlight, quite rightly,for the huge amounts of money they are taking outof the system, are the ones who really are suVering.People may have seen the Panorama programme lastnight about the impact on pensions. I thinkgradually the public is now waking up to the horrorsof it all and I think that although at the moment youcould certainly safely say that the public does nothave any appetite for further deregulation I am notsure that there is coherent thought yet on what theopposite of that would actually be in eVect. I do notthink there is necessarily directly a read across and Ithink regulation, as people who are far more expertthan I am, of the finance sector is very diVerent fromregulation elsewhere. I do think that things willmove quickly and I suspect that if the public do notfeel that something is being done now which will

rectify all the problems that have occurred they willstart to read across into other areas and they will nothave any appetite for small business and otherssaying, “We have to carry on deregulating, there istoo much red tape” because they will quicklyassociate their own vulnerability, which has been somuch exposed recently, with vulnerability in otherareas like employment protection and health andsafety. So I am afraid that if you are a keen, betterregulator, which the TUC is actually very much so,some of the damage of this will be that you will notbe able to have a sensible discussion about betterregulation elsewhere because of this spectre of whathappened when you let the markets regulatethemselves and the massive impact that is seepingthrough society now which I do not think that anyof us can quite yet have a full grip on—it is trulyhorrendous. Apart from all other things I think it hasillustrated to the public the central importance of thefinance sector and how it touches absolutelyeverything in society. If that sounds a bit apocalypticI am sorry, but I think we are in very early days andthose are just some early thoughts that we havedeveloped in our written submission to you.Ms Edwards: I think the problem with the way thatthe market has been regulated—light touch,principles-based—is that it allows firms to decidewhat the principle means. You can say, “This meansthis thing” and consumers can have a completelydiVerent view; whereas regulation which is rules-based is transparent and it is clear what behaviour ornot is expected.Mr Brooker: Could I disagree with that, if I may, ordo you want to move on?Ms Edwards: Can I actually say where my viewcomes from? We give advice to consumers often onvery, very low incomes with very poor skills, so whenour advisers try to negotiate with the credit industryor mortgage lenders actually they end up having anargument about what regulation is; and where thatregulation is rules-based that argument is a lot easierto have than when it is principles-based.

Q33 Chairman: Mr Brooker disagrees with that.Mr Brooker: I think it needs to be made clear thatprinciples-based regulation did not cause thefinancial crisis. The actions of financial institutionswhich led to the crisis took place in a regulatoryenvironment where the FSA had a handbookrunning into thousands of pages of prescriptiverules, and treating customers fairly is an extremelynew initiative—it has not had time to bed down, andsome say that it has been withdrawn before it haseven had a chance to get started. What attracts meabout principles-based regulation is that it getssenior executives within financial firms to actuallythink about what they need to do to delivercompliance with the overall regulatory goal oftreating your customers fairly for deliveringconsumer protection. Lack of certainty is certainly adanger of principles-based regulation but whathappens when everything is certain is thatcompliance departments within banks and otherfinancial institutions regulate in an unthinking waythrough the tick box mentality.




Mr Houghton: I think it is important to break downproblems that you are trying to solve and a lot of theproblems in the financial crisis are prudentialproblems; there are issues around credit ratingagencies; there are issues around accountancy; thereare all sorts of macro issues around capitalrequirements and that sort of thing. I think that thereis an inevitability that a lot of those issues will needto be dealt with at the European level. If you bring itdown to the consumer level and the retail level thereare already numerous areas in which EU regulationdoes have an impact on the UK consumer. In termsof this particular crisis the one that stands out in mymind as probably having the most potential impacton consumers was the issue around depositorprotection, particularly in the context of theIcelandic banks. So I think that there is aninevitability about more harmonisation in manyareas. I think where sometimes we do have a concernabout some of the EU regulation is when it is donein a maximum harmonisation approach, which canactually lead to a reduction of protection for UKconsumers as opposed to an additional benefit.Mr Gainsford: Lord Turner made the point aboutthere is no silver bullet and that is the point, is it not,that the great thing about the current crisis is that ithas awoken consumers, employees and others to thewhole issue of regulation, and consumers expectmarkets to be regulated; they are not too fussedabout how it is regulated but they expect it to beregulated and they expect that regulated frameworkto operate fairly and eVectively. So in that sense Ithink the whole issue of the co-regulatedenvironment is the model that we have to try to keepsustaining and to work. I was at a conference lastweek when the whole day was spent on self-regulation as if that were the total panacea; it is not.There is a place for self-regulation, very much so aplace for self-regulation, but on its own it is not theanswer, so there are other mechanisms that need tobe brought into play. On the European front I wasstruck again, if I can use the toys example because itis a specific example but that spurned a whole lot ofactivity by the European Commission and othersjust to look at the issue of whether that area wasappropriately regulated, and the conclusion theydrew—which involved business as well and therewere representatives from the British RetailConsortium on that study—was that the regulatoryframework was intact and was appropriate; whatwas missing was the implementation of that, andthat touches on Steve Brooker’s point that it is theissue about how Member States and how theirmechanisms within Member States do actuallyapply the regulatory framework that exists. So theconclusion that I think all Member States agreedwith is that there is no need to tinker with legislation,even though some might see that as burdensome ornot depending on which side of the fence you sat.The reality was that actually it needs to be appliedand implemented in a constant and even-handedfashion and that is the absolute key message and iteven comes through from the FSA where they aremaking the point that we have to put much morefocus upon the competency of individuals to apply

regulations within their own businesses andotherwise, rather than simply on the probity of thoseindividuals because that has demonstrated that thatis not enough, and as a practised trading standardsoYcer I think I would entirely agree with thosesentiments.

Q34 Dr Naysmith: Let us consider for a few minutesthe question of risk-based regulation and whetheryou think it in fact works. Is it fine in theory butflawed in practice? Mr Brooker, do you want to starton that one?Mr Brooker: I would say that risk-based regulationremains a valid approach. Put at its simplest terms,all it means is that you allocate your scarce resourcesto where you think the harm is most likely to occurand if that is to be successful that depends on havingthe right intelligence in place. I do not think the FSAhad the right intelligence in place and got its riskassessment wrong. What I would not do is equaterisk-based regulation with light touch regulation.

Q35 Dr Naysmith: Some people do.Mr Brooker: Some people do. Once you haveidentified your risk then you decide on the firmnessof your touch. On some occasions a feather lighttouch is the order of the day but at other times avicelike grip is what is needed. What we see at theFSA and other regulators is too much light touchand not enough firmness in their approach.

Q36 Dr Naysmith: Is it possible to identify all risksin advance?Mr Brooker: No, and it would not be desirable toeliminate all risk from the marketplace otherwiseyou dampen innovation which enables the economyto turn around.

Q37 Dr Naysmith: So you cannot rely really on risk-based analysis being enough to give you an outlineof all the risks that your company might run; so youhave to have something more than just risk-based.Or is that just in terms that the really importantthings have to be risk-based?Mr Brooker: I think you should have a risk-basedapproach as the central plank of your way ofregulating markets but perhaps to be accompaniedby an appreciation that you can never manage awayall risks.

Q38 Dr Naysmith: Does anybody disagree with thator want to agree with it strongly? If not, we will moveon to something else.Ms Veale: In principle I think it is good; I do notdisagree with that. I think there is a diYculty whenyou are talking about the workplace though becauseit is not the employees on the whole taking risks inthe sense of applying regulation and protection; thatis the employer doing it on their behalf. I think whenyou have the responsibility for risk assessment onbehalf of other people, whether it is the public,employees or whatever it is, some organisationsseem to be singularly ill-equipped to do the riskassessment sensibly and they either go for a zero riskoption, which is impossible—I would agree with




Steve, it is not even particularly desirable in socialterms—or they get it fatally wrong. Experience in theworkplace indicates that employers, although theydo not like too much prescriptive regulation, if youdo something like they did with the Health andSafety at Work Act and give them something that isbased on principles there is a lot of panicking thatgoes on—they lack the confidence. There are otherrisk factors involved—you get the insurancecompanies in, you get the lawyers in and you can seethe risk being parked by people who profess to knowall about it; but something that the governmentperhaps ought to think about is what more can bedone to assist employers and other people,important people like that to do risk assessments ina sensible way so that the government could thenavoid having to have more prescriptive regulation. Ihesitate to say after what I said before to say thatthat can all be applied to the financial sector. I thinkthe principle of risk-based regulation, exactly asSteve said, was not what did for the finance sector—I think there are all sorts of other complex issues. Ithink it is not ideal but I think it is much morecomplicated and some groups are not really up todoing it eVectively yet.

Q39 Dr Naysmith: Do you think it can give a falsesense of security if you think that you have analysedand identified all the risks; you think you have doneyour job and that is it and you can forget about it?Ms Veale: I think that is particularly the case inworkplaces; again, you get that complacency andthen there is an accident and you often hear theemployer say, “My goodness me, I never anticipatedthat; how did that happen, I have done my riskassessment?” They do not see it as an active tool thathas to be refreshed all the time; you cannot take aphotograph and say that this is a risk free workplacefor ever. It might be at that minute but thingshappen, events happen and so you need to be trainedto be alert to risks when they arise.

Q40 Dr Naysmith: What do you think about thegovernment’s attempts to develop a coherent andintelligent approach to addressing the regulatoryissues in the financial services sector? Do you thinkthey are on the right lines or do you think that theyare totally wrong?Mr Houghton: One important point to make is thatso much of the regulatory work that is happening isvery much focused on, as I said before, theprudential side, so talking about capitalrequirements of the banks and all things that areeminently sensible. What we would caution againstis meaning that that loses the focus on the consumerside. The FSA does have to balance itsresponsibilities for prudential with also being aconduct of business regulator, and that is a veryimportant part of its work and there has been acertain amount of comment that part of the reasonthat it took its eye oV the ball on the prudential sidewas because it was too focused on things like treatingcustomers fairly. What we would say is that it is veryimportant that that work continues as well and thatboth things are important. There are risks to the

consumers—there have been lots of various badproducts, various mis-selling and that sort of thing,so it is very important that work continues whilstalso taking this new approach to the other types ofregulation.Ms Edwards: Obviously I also agree that risk-basedregulation is the right thing but I think in the past ithas always been assumed that risk-based regulationis about dealing with businesses on the margins—home credit, rogue traders—and actually it has notlooked at the enormous consumer detriment fromsome mainstream high street firms’ selling practices,products and so on. Alternatively, it has been, “Letus take the easy wins,” and the OFT in the past hasdone that in relation to consumer credit licensing.But more recently it has taken a diVerent view now ithas the additional powers from the Consumer CreditAct and it has actually begun to take action againstlarger firms.

Q41 Dr Naysmith: Do you think that there might bea danger of a knee-jerk reaction taking place in theway that the media and the press everywhere issaying, “You have to do something about it”, we dosomething and then the government does thewrong thing.Mr Gainsford: I think there is a danger. Let us faceit, it has been an enormous wakeup call for anyregulator, but also for those that have suVered fromthe consequences of a poorly implemented or illadvised regulatory framework, so in that sense it hasbeen quite a wakeup call. I think out of that, as I say,good will emerge in the context of, if you takefinancial regulation, that this is not just about thefinancial world looking after the financial world,there are some hellish consequences that arise whenit goes wrong. This is a real people issue and that willbe a good thing. The danger then—and I think it isquite interesting—is how do you emerge from thatwith the right balance of approach? I would like tothink that any regulation is risk-based, to be frank,otherwise why are we doing it at all. So there oughtto be that research and science behind any proposalfor regulation; I would like to think that that doeshappen and in my experience it often does. I think inthe current climate it is quite interesting to see howregulators might queue up now to demonstrate howtough they are. For example, I was interested to seeyesterday the Chief Executive of Ofgem, AlistairBuchanan, on the television and listening to him onthe radio, clearly doing the rounds and usinglanguage like, “We are going to nail them.” I am surehe understood what he was saying but none the lessit is interesting to see that sort of language from anupfront organisation that to me, to be frank, has notbeen known for nailing those in their industry. Whywas he doing that? We would say that there is a bigissue about mis-selling of energy and so in the senseof risk we are moving towards asking thegovernment to stop that altogether; we think it isarchaic in this day and age that energy should be soldon the doorstep in this country and not in othercountries. So in that sense why is he doing that? Ithink that is the curious bit. I would like to think—and obviously there is significant research behind




their announcement yesterday—that they arelooking at this in the sense that there are somemischiefs there that we have to deal with and theconsumer is not getting a fair enough deal, so we aregoing to emerge from that as a tougher regulator. Iwould not want to think that they are one of those“We want to be ahead of the queue to demonstratehow hard we are.” So in that sense there is thatdanger, I think.

Q42 Dr Naysmith: Just a final question—and theremay not be a response to it—are there any lessonsthat we can learn from the way that other countriesare responding to changing their financialregulations of which any of you are aware that youthink we ought to know? It is a bit early days.Mr Gainsford: Talking to some of my colleagues whoare not directly financial regulators overseas, but wehave quite a broad framework of collaboration withour equivalent in other Member States particularly,I think that they are looking towards the UK ascoming up with the solutions in a regulatory senseand otherwise. I think there is that mood that wehave been perhaps particularly exposed on this andtherefore our regulatory answers, response to thatshould itself serve as indicative of the way marketsshould be regulated from hereon in. So I think thereis that mood. That is not a very scientific answer butcertainly that is the hearsay answer that I havepicked up.

Q43 Gordon Banks: Some observations and somequestions at the same time if you do not mind. Iwonder whether the public and indeed industry andbusiness in general has this view now because of theimpact of the financial sector crisis on everyone thatregulation is very important, but providing theregulation is there that I deem to protect me and notto encumber me. I come from the constructionindustry, which is a fairly well regulated industry,and I do not think there is anybody in theconstruction industry that would not think that thefinancial sector needs to be better regulated, but theythink that the construction industry does not need tobe better regulated; it needs to be less regulated. Soa question and an observation. Doug has touched ona point that as a result of the impact of what is goingon just now basically whether the outcome may bea more intrusive approach, not just in the financialsector but everywhere. The part he did not go intowas whether there is a conflict between this and theagenda for better regulation. So if I could ask you toaddress those points first before I move on.Mr Houghton: If you truly believe in betterregulation and you are doing it properly and you aretaking a risk-based approach, then there does notnecessarily need to be a direct read across—that justbecause you need to be tough on the financial sectorright now you need to be tough on the constructionsector. As I said earlier, the danger is being tooideological about it. Whenever we look at aparticular market it is all about doing a robustdetriment analysis—is there a problem here? Areconsumers being in some way mis-sold or treatedbadly? If they are then there may be a need for some

form of intervention. In terms of the way in which itis done you do not necessarily need more regulation.What might be the case is that, as Ron has said,regulators just need to be tough where they need tobe and where there are problems that should be theirapproach. I suppose that is the thing about what isthe culture? One of the things that Lord Turnerseemed to be very hot on was this thing about thekind of zeitgeist—is it acceptable to regulatefinancial firms, and the implication was that it wasnot. I think not being ideological about it and if thereis a problem then taking the necessary steps is theway to go.Ms Veale: I think the construction sector is quite agood place to start although, like you, I doubtwhether very many employees would feel that theywere encumbered by health and safety regulations.But I think there is an important point there actually,which is from what we can see are the best models forrisk assessing and preventing accidents is when youengage the workforce with the employer together inmanaging the whole package of risk regulation andenforcement of quite prescriptive regulation. I wouldjust take this opportunity to extol, as an example, therole of trained up safety reps in the constructionindustry, mostly through trade unions. I think thereare lessons to be learned there which should be readacross into society more widely. A group which Ithink gets into a terrible tangle about riskassessment, partly because of seeing things throughthe prism of the frantic media sometimes, is parentsbecause when you are a parent you haveresponsibility for extremely vulnerable youngcitizens and because the newspapers are lecturingyou and you see horrendous reports of accidents youvery quickly get into that over protective mode ofthinking, and I think public education about what arisk is and what a sensible balance is towards makingsure that the people who are exposed to the risk takesome responsibility themselves—otherwise you getinto a ridiculous, I hesitate to use the word nannystate, but over protective approach to regulation.But in order to do that you have to devote resourceto it and public education is woeful on this.Members of the public generally struggle withstatistics and making sense out of reports fromvarious organisations about the impact, forexample, of MMR jabs and the inability to actuallyassess what the real risk is and then thisinappropriate high risk behaviour unwittingly. So itis a massive issue and, again, while I am speaking Iwould commend the work of the Risk andRegulation Advisory Council, of which the TUCand Consumer Focus is part, which has done somevery exciting and innovative work on riskassessment and how that marries into regulation andhow proper risk assessment can help governments toregulate appropriately and to bring other parties inon the regulatory process.Mr Gainsford: If I used the words “intensesupervision” then I suspect I would be pilloried bythe Better Regulatory Executive and by the LocalBetter Regulation OYce. In my role intensesupervision is not acceptable language and that isbecause of the world in which we live post Philip




Hampton’s report, which is a philosophy that we astrading standards and our colleagues inenvironmental health, etcetera, were buying into formany years and so that was not a great culture for usbut it just confirmed the journey we are on, which, asI say, is not about intense supervision other thanthose that we assess require that intensesupervision—whether they are rogues in overalls orrogues in suits, to be quite frank. That is the worldwe are in. So our eVorts are on, yes, intrusivenesswhere there are those rogues, criminals andfraudsters whether they are targeting businesses orconsumers in a way to defraud and to rob them oftheir well earned money. In that sense I would saythat we will continue with what we will term ourproportionate approach, which is about assistingbusinesses in many ways; trading standards oYcers,environmental health oYcers across localgovernment will be looking at start-up businesses,helping to regenerate the economy; they want to helpbusinesses. And in my experience businesses wantthe certainty of good advice knowing that they canget support; it would be wholly wrong for them to befearful of seeking advice from their local tradingstandards oYcers, for example. That is where I takeissue on some of the language that would suggestthat all regulation is bad regulation when of courseit is not; there is much that is of great help tobusinesses and the important thing is that they haveaccess to good, supportive advice whenever that isnecessarily.

Q44 Gordon Banks: Moving on from those points, asa result of the financial crisis could there be thistension between the government’s aim to supportbusiness and the need to respond to the financialcrisis? I think that everybody involved in regulationwants better regulation not more regulation, but doyou think that there is potentially some conflictbetween government’s objectives, industry needs atthis point and the financial sector, and the objectiveof this better regulation?Mr Brooker: I think there is a shared interestbetween government, between consumer groups andbetween business groups in having the right level ofregulation and the right approach to regulation.Consumers are not in favour of businesses beingsuVocated by red tape—it costs consumers money atthe end of the day and it restricts innovation.

Q45 Gordon Banks: But often consumers do nothave any idea of the regulation that the business orwhatever it is might be under.Mr Brooker: No, but it is our role as consumerorganisations to represent the views and interests ofconsumers and I think it is important for us not tojump on a bandwagon which welcomes intrusiveregulation; it is incumbent upon us as consumerorganisations to maintain a proportionate approachas well. In fact I spend more of my time arguing forderegulation, whether it is the liberalisation of thelegal services’ market or removing quantity controlson taxis in town centres than I do arguing for moreregulation. It is about having the right balance.

What I would say in addition is that that should alsomean that the government must not shy away fromintroducing new regulation that is needed to protectconsumers. One issue that we are about to look at isthe issue of consumer prepayments—what happenswhen you buy a sofa from a furniture store whichyou pay for in advance and the company goes bustbefore it delivers the goods? With all the corporateinsolvencies going on at the moment that might bean area where the government needs to enhanceconsumer protection and it will be a mistake for thegovernment to say, “Businesses are suVering rightnow so we will leave them entirely alone.”Ms Edwards: I think the important thing is basicallythat regulators need to look at what the market isdoing to consumers, what the impact of the way themarket works is on consumers. Some regulatorshave done that; other regulators have not and haveyet to move in that direction. So it is about lookingat the market impact on consumers and what thedetriment is.Mr Gainsford: One of the things I would say, if I can,is that I think consumers have expectations; they donot have knowledge of regulation. It is how wecollectively respond to those expectations and Ithink that is what is emerging quite strongly. Themost simple example—if I can give you a very simpleexample—was a report done by Steve’s predecessororganisation, National Consumer Council and theNational Weights and Measures Laboratory, andwhat that did was to try to go out with the very oldfashioned weights and measures controls, said to bethe cornerstone of consumer protection, and it askedpeople, “When you go and fill up your vehicle withfuel how do you know that the petrol pump isaccurate?” The general response was, “BecauseTrading Standards inspect them.” “Do they? Howoften do they inspect them?” “About every twomonths.” If only! Not at all. In fact resources aresuch that they would not be looked at for a long timeand in that context that was really a small examplebut it was indicative of what the population expectedand that was a wide scale piece of research thatsuggested from our point of view that we do notknow best, it is about consumer expectations ratherthan consumer knowledge.

Q46 Gordon Banks: So it is a comfort blanket ofregulation being met to protect me when somethinggoes wrong or to prevent something going wrong.Mr Gainsford: Absolutely. When I fill up my petrol Iwant to make sure that I am going to get my full andaccurate measure.

Q47 Gordon Banks: I want to know I get six gallons.Mr Gainsford: Absolutely. Or litres of course.Ms Veale: You are a much braver man than I am awoman because I certainly would not have had thatwritten down in the record because all the consumerswho hear about this now will suddenly realise thatthe Emperor has no clothes! And no inspectorrushing into the local garage every two months! Justone serious point, I agree with you that there areinherent tensions in a lot of this and one thing that




particularly caught my eye is that the Small BusinessLobby is understandably very agitated about theactivities of no win no fee high street solicitors andare now beginning to call for them to be regulatedand have their activities restricted; but actually theyare small businesses as well and they would argue—and I am sure that Consumer Focus would argue—that there is no state legal aid eVectively foremployment protection, therefore the public has anabsolute right to choose a no win no fee solicitor toargue their case for them and get them some money.So if you pick away at the arguments being made bythe most vociferous lobbies there are huge tensionsin there that need to be unravelled.

Q48 Gordon Banks: If I can move on and talk aboutan issue, again which we have touched on but tothrow in some personal experience here. It relates toprescriptive regulation and interpretation ofregulation, as I like to call it. I am deeply involved inregulations regarding the blind cords that hang fromall our blinds which end up killing at least twochildren a year in the UK. There is a regulation thatsays that where danger of strangulation exists oroccurs, something must be done to prevent thestrangulation. It is an interpretation as to whether arisk occurs; somebody has to interpret whether thatrisk occurs, and that is clearly the installer or themanufacturer. Whether they interpret that the riskdoes not exist and does not do anything about it, aswe were saying, you were saying earlier on, that iswhere that risk occurs at that minute of that daybecause there may not be children in this house butthis house may be sold, the blinds may stay andchildren may come into this house and thereforethere is an inherent risk in the product. I thinkconsumer expectations and interpretations in thisarea diVer to that which the industry may hold andmay deliver. I suppose that takes us on to thequestions of whether government and regulatorshave the skills and abilities to be able to regulateeVectively. And after this current crisis do you seethat there is anything lacking in capacity,enforcement resources or will of enforcement. I willgive you an example in trading standards. A fatalaccident inquiry of the last little girl who died in myconstituency, which is still ongoing but it is beingheard in public, the trading standards impactmanager had never inspected any blindmanufacturer at all—never, ever—so they had nothelped the blind industry determine whether therewas a risk or not. So is there a problem withenforcement of resources? We have heard basicallythat there was a fatal accident inquiry. What alsointerests me most—and it kind of links into the lastone—is sector expertise, knowing the sector in whichyou are involved in trying to regulate. If I can giveyou an example. I have been involved in theconstruction industry for 30-odd years and I have tobe faced with an auditor who knew my industry.Auditors come and they have auditors dealing withthe auditing process but they do not know myindustry. I think that is a failing in that area. I amsorry; I have thrown a lot at you.

Mr Gainsford: There is a lot there.Clackmannanshire I think was highlighted in areport by Audit Scotland in 2002—

Q49 Gordon Banks: Yes, it was.Mr Gainsford: —for having woefully insuYcientresource.

Q50 Gordon Banks: And then that merged withStirling.Mr Gainsford: And there is a shared servicesarrangement to try to overcome that and the realityis that in Scotland, as in other parts of GB,particularly the trading standard resources areincredibly scarce and getting scarcer, and thatreflects some of the woes in local governmentfunding and diVerent priorities if local governmentneeds to respond, as it should, to perhaps the BabyP crisis and report, and then resources are finite andit may well be that resources are leaked from serviceslike trading standards or environmental health tothose other services. So there is no doubt that thereis an enormous mismatch between the requirementsand expectations on trading standards by society, bybusiness and by consumers and their ability todeliver. Having said that, I think we still havesomething to be pleased about in the sense that theUK has this one-stop shop trading standards servicethat is not replicated anywhere else in Europe or theworld, and that is of enormous value to business andconsumers. Then you come to your sector specifictype issue. I think what is happening there—and Iabsolutely take your point—is that in my role oftrading standards you have an incredibly broadcanvass so how do you try to understand businessand the industries with which you are dealing? Inthat context there is quite a lot of eVort to try to findsector specific expertise. The diYculty, in localgovernment terms, is how you share that amongstthe world of local government. So in that context Ithink there is some way to go. But we are seeing thatby way of the development of the home authority,primary authority scheme through the Local BetterRegulation OYce. Tomorrow there is a launch for aninitiative called Trading Places by the Local BetterRegulation OYce at the CBI, which is aroundregulators moving into various industries andbusiness sectors to better understand. I think that isincredibly important. Equally, I would say, it wouldbe quite helpful for business to understandregulators as well, to develop from that “them andus” mentality. So, yes, a big issue around capacity; Iwill not dwell on that now because that will take avery long time. And, yes, I think any professionalwould want to understand the business that they aretrying to regulate.Mr Houghton: I will make a series of points and theyare in no particular order. In terms of the will, youhave certainly seen the change in language from theFSA, as we have already discussed, and Ofgem as wehave already discussed; so there is a prevailingchange. Another important observation would bearound the OFT’s role with regard to competition




policy; competition policy is one of the things thatthey have observed as potentially coming underthreat.

Q51 Gordon Banks: Can I just ask does it matterwhat is driving that change of will? Going back towhat Mr Gainsford said about why Ofgem came outand said that, does it matter what is driving thatchange of will or is it just the change of will that isthe important thing?Mr Houghton: I suppose it is case specific. In termsof the FSA, they are being driven by the fact thatthere were clear failures. I would hope that Ofgemare responding to the fact that there are genuineconsumer problems. The OFT, I believe, areresponding to the fact that with the HBOS andLloyds merger they do not want to see lots of firmscoming to them with the kind of failing firm defencethat is not a failing firm defence. I suppose the reasonwhy they are being driven does matter, and as longas they are being driven by appropriate reasons thenI think it is fine. With sector expertise it is veryimportant that there is a balance. One of thecriticisms that might be levelled at the FSA is thatthe culture was too close to the industry that it wasregulating. We would always say that any board of aregulator should have an appropriate mix ofexpertise. We are looking at the regulatory system oflegal services at the moment. It is very importantthat there is a split of regulatory representativepowers and that there is adequate representation ofall sorts of diVerent interests, not least consumerinterests. The final point, if I may, in terms ofregulatory approach, yes, resources are always goingto be limited in any regulator and therefore I supposeit is important to get the maximum bang for yourbuck. Particularly looking at the financial sector twoof the things that you said could be done are biggerfines that make a really big impact when there is aserious transgression and also more use of namingand shaming. That has the dual benefit of being apowerful regulatory resource as well as empoweringconsumers to make decisions from a position ofknowledge.Mr Brooker: Can I build on Pula’s point about thebalance of perspectives that go into the intelligencethat the regulators receive and then they act upon it?The FSA does not have any consumer expertise onits board and so it is diYcult for us to haveconfidence that the FSA actually understands whatconsumers are experiencing out there in the marketplace. One of the reasons why the FSA’s ConsumerPanel Chair resigned was because he felt that he didnot have enough resources in terms of staV resourceto support his panel. When we looked at the FSA aspart of our Rating Regulators study we found verylittle formal consumer research. All those thingspointed to one conclusion: that the FSA was tooclose to the industry that it was supervising. When itcame to the financial crisis, what we would observeis that the industry and the regulator framed theissues in the same way because there was no externalindependent challenge; so the philosophy that AdairTurner articulated, that markets were self-correcting, became a self fulfilling prophecy in a way.

I think if there had been more balanced perspectivesat the FSA we might have seen a slightly diVerentstory.

Q52 Chairman: Before we move on it struck me thatHoughton and Mr Gainsford, you both alluded tosomething in terms of use of resources particularly ata local level. Just as a matter of interest—and it doesnot directly impinge upon this inquiry—do youmaintain a register across the country of whereexpertise is and do you have mechanisms to reachacross local authority boundaries to help draw insome of that expertise when it is needed?Mr Gainsford: There is a local governmentorganisation called LACORS, which is a centralbody, which helps to coordinate these activities andthat has a number of specialist groups that aredesigned to be sector specific in many ways; so thereis that mechanism that is being set up by the localgovernment family. We as a professional body wouldtrain into those individuals both generic and specificskills in that sense and I know my colleagues inenvironmental health do exactly the same as well. Soit does register very closely on the radar. Theimportant thing for trading standards, coming backto the point, I will always say that trading standardscan never be just local, can never be just regional ornational; it has to be all of those things, and indeedinternational. So the challenge is how we find a localauthority based service that can actually meet thechallenges of global markets and localism versusglobalism do not sit very comfortably together. So inthat sense we are very dependent upon centralgovernment funding, which is now drying up totally,on helping regional coordination; so we are findingwithin the nine English regions that tradingstandards are coordinating and collaborating, butthat has been very much based on BERR additionalfunding to facilitate that, and the same withintelligence sharing and intelligence gathering basedon BERR money and, in the past, OFT money, andthat is all disappearing. If you look in Scotland thenthe regional coordination of those or nationalcoordination of those various authorities inScotland was based on BERR money and that isnow drying up, so my colleagues in Scotland had togo to the Scottish Government and they haverescued the situation, if I can put it that way, by wayof money for tobacco enforcement, which will beapplied for that, but it helps them to keep that senseof collaboration. So the mechanisms are there but itwould not be right for me to do other than to exposethe fact that they are increasingly frail at the momentbecause of the fact that local government money isnot being targeted into regional and nationalcollaboration and that is, as I say, back to localismversus globalism.

Q53 Chairman: The same dilemma faced by otherauthorities, including the police and so on?Mr Gainsford: Yes.

Q54 Lorely Burt: First of all, I would just like to saywhat a tonic it has been to have you all here thismorning. We have had the regulators and they have




been patting themselves on the back; we have hadindustry and they pat themselves on the back andsay how well they are doing in meeting all theregulations. Now have the real story. I particularlyfeel for Ron Gainsford because you really are at thecoalface of implementation. And I take SueEdward’s points very strongly as well; you arerepresenting the ultimate people who have thebiggest challenge with the implementation of a lot ofregulation. I still agree with Steve that we have to gofor a risk-based approach and I think you all agreedwith that and I certainly believe that is the basis. Butthere is no point in going on a risk-based approachif you are not implementing and I do believe thatimplementation is absolutely the key to this. So whatI want to ask you about is we are tremendously wellserved by the National Audit OYce—and wehappen to have an adviser here this morning—andthey provide us with the grist for the mill for us to beable to understand what is going on. We talkedabout just how diminishing the resources are in theimplementation of regulations. I am sure that theNational Audit OYce would not possibly haveplanted this question I am about to ask, but do youthink that we should have more resources? Does thegovernment need to collect better information tobetter understand the complexities of the sector andthe markets that they are regulating?Mr Gainsford: If I start on that? I could just say yes,but I think it is much more than that because in away we have gone a long way down the road. Thereare mechanisms that have been introduced which arearound intelligence gathering. We now have nationalConsumer Direct Centres that are run by TradingStandards in partnership with the OYce of FairTrading and BERR, so that has improved things alot. As a result of that there is a central databasecollecting details of complaints specifically and intrends that can then be translated into the use ofenforcement resources by trading standards. Wehave seen the appointment of Regional IntelligenceOYcers; we use national intelligence mechanisms tobring that information together. So, in a sense, wehave gone a long way in terms of reinforcing theinfrastructure that enables us to say, “How can webest use the scarce resource we have?” The worry Ihave is that that could quickly evaporate as we seethe pressure on the public purse and that will not bepicked up by local government, absolutely not, andyet I will always say to government that there is aresponsibility here for government to ensure thatthere is a national framework in place that allows usto serve consumers and businesses eVectively. Sothere is a lot there. Equally, having said that, there isstill a lot of scope for doing better with what we have,and that is something around collaboration betweennational regulators and certainly the HamptonImplementation Reviews have been quite interestingin that regard as to how national regulators can learnfrom one another and, indeed, to think about howthey share activity and resource. In the local contexthow we can see national regulators working muchmore forcefully towards having a better central localdynamic in terms of servicing markets that we had.So a lot in place but we could do much more in terms

of what we have. But all of that will be wasted, to bequite frank, unless we see some of the real investmentpatterns that are now not happening changing in asignificant way. So workforce futuring in tradingstandards and in environmental health is now at avery worrying stage and whilst I would not want tosay it is broken it is clearly moving towards that, andthat has to be a worry that we face; it is notsomething that local government itself will stand upto and it is not something, in my view, that nationalgovernment can step back from. We have to find thatright solution and, to be quite frank, that is nothappening at the moment.

Q55 Lorely Burt: That is quite scary, is it not, really?Mr Gainsford: It is very worrying.

Q56 Lorely Burt: Regulators can regulate to theirhearts’ content and some might say that we have toomany regulations but unless they are actuallyenforced then there is no point in having them in thefirst place, is there?Mr Gainsford: A lot of my members will be beholdenon enforcing against rogues that I have mentioned toyou—they will be very dedicated to that—but theyare also equally frustrated if they cannot help start-up businesses, if they cannot help their localbusinesses survive and prosper. They want to beallies of those businesses and not foes in that sense.But they simply cannot—picking up the point likeClackmannanshire—they simply do not have thewherewithal to do what they would like to do in thatsort of sense.

Q57 Lorely Burt: I just want to explore this for amoment longer. My magic wand solution, if you like,to a lot of the enforcement problems that I see—because I speak for business and enterprise for myown part—would be if the people on theenforcement end, on the coalface end actually had—and you talked about changing the culture of theregulator—a much more helpful advisory type ofrole could not those people actually have multi roles;in other words, a small business person is supposedto know a whole raft of diVerent regulations, and isit too much to ask that one regulator should knowthe basic regulations which apply to that smallbusiness and advise them rather than having a wholeseries of regulators coming up and down the drive,taking up their time at diVerent times of the day?Mr Gainsford: In a sense I understand where you arecoming from. Even in trading standards theregulatory canvass is so big that, to be quite frank, itis impossible for any single trading standards oYcerto know that regulatory canvass and that is justtrading standards. There is however room forregulators to be seen to be working more closelytogether to assist businesses—absolutely. I comeback to the point, I think that every contact betweena regulator and a business should be a productivecontact, it should be a productive transaction onboth sides and if it is not then what is the point? Butit is interesting. I was talking to Sarah Andersonrecently on her report about guidance that BERRcommissioned and she reflected on the retail




enforcement pilot project that BERR and now thelocal Better Regulation OYce are leading and we aresupporting it because we do want to explore this. Butthe whole idea of this is can you have in the sense ofenvironmental health, trading standards, fire andrescue, an oYcer that goes in and is suYciently well-versed to be of real help to the business. She hasspoken to small business about this and she quotedthe example of a food establishment that had beenvisited by a fire and rescue oYcer wearing the “I amhere to help you” across the piece. Of course, oncethey got past the fire doors etcetera the foodestablishment said, “I would like some more adviceon the detail of this,” but the fire oYcer obviouslywas not equipped to do that. That in itself is fairlypredictable. So I think there is a scope for saying, “Iwould like, if it were operational, to go into abusiness and say ‘I can tell you a bit aboutenvironmental health’ but I cannot give you thewhole story.” That has a place but equally I comeback to my core point that in my many yearsexperience what businesses want, if they are going tohave those people walking through the door theywant that to be a valuable, productive experienceand then they do not mind actually that it is morethan one walking through the door, if they havesome output from it. That is the essence of it. It is acomplete waste of walking through the door for nopurpose but just to tick the box we have heard ofbefore; but if that is a productive transaction withthe right level of expertise that is what the businesswants in terms of ensuring its minimising the costsand maximising the compliance.Ms Veale: Can I just add to that? From the otherperspective actually, the other sad thing in all of thisis that it does not work terribly eVectively in thecurrent system in terms of giving enforcement ofpeople’s employment rights. We estimated that lastyear 170,000 were not being paid the nationalminimum wage and that is just the people who areabove radar. I think the problem is that you get theRevenue going in to look at that and they see somevery obvious health and safety problem but they arenot allowed to phone up the HSE and say, “By theway, when I was in that company they had a verydangerous piece of machinery operating.” So Ientirely agree with Ron’s point about the need tojoin everything up. The other thing I think needs tobe looked at is the fact that certainly on employmentprotection a lot of aspects of health and safety areentirely reliant on an individual employee making acomplaint. You would have to be quite a braveperson to get up on your own and go to anemployment tribunal and even if you do, whathappens at the end of that is that you get thecompensation, which is good for you, but there is noattempt made to address the systemic problems thatthere are, especially at some of the larger companiesthat are producing these individual cases. So I thinkthere is a really desperate need to look at the wholepackage of enforcement, rights and the rest of it tosee why it is not achieving either eVective regulationor helping businesses to cope with regulators andcarry on making money and flourishing.

Q58 Chairman: I think we have established—andnobody has dissented from this—that there is a needto have greater cross fertilisation of ideas andoperational practice as well and that obviously hasvery significant resource implications. So would youregard that resource issue as being the biggestobstacle standing in the way of achieving change inthat respect. Is it money or is it will?Mr Gainsford: The will is not a problem; there is atremendous will from trading standards to supportbusiness and consumers. The will is not the issue atall. Working smarter across the piece absolutely isimportant and we are on a journey in doing that, butcapacity is incredibly challenging, I have to say. I donot see that we have a clear vision on that at all.BERR once articulated a vision but now they do notdo so. Philip Hampton said that there ought to be aconsumer and trading standards agency ingovernment; the recommendation was accepted bythe government at the time and then rejected, so hehad seen it. So it is how we find that greater cohesionand coherence in the models that we have that Ithink are the biggest challenges.Mr Brooker: Can I add to that? I was on a leek farmtwo weeks ago, talking to the farm manager and thefarm manager described how he was visited by thegangmaster’s regulator one week, the nationalminimum wage regulator the next week, the HSE thefollowing week and the supermarkets to whom heprovided his leeks the week after. So I think there isscope to streamline and join together regulatoryforces, although at the same time when it comes totrading standards I would totally back up Ron’spoint that they are chronically under-resourced.They are our heroes on the high street and they needto have the right financial backing to do their jobproperly. But when it comes to the FSA and some ofour other national major regulators they aregenerously resourced and that is about thoseregulators having the right focus. It is also aboutthose regulators having a smarter approach toenforcement. One thing we would like to see them domore is to provide consumers with the compliancehistories of the firms that they supervise. So to takethe Food Standards Agency, it has its scores on thedoors scheme where it publishes the food hygieneinspection results of restaurants and that allowsconsumers to vote with their feet and regulators canharness consumer power to do their job for them andprevent the problems from occurring in the firstplace rather than to chase problems after the event.That is something that regulators across the piececan do more of.

Q59 Chairman: I would ask you finally to get outyour crystal ball and look at what you think thefuture of the regulatory reform agenda will be like.Secondly, because it seems to have been parked inBERR somewhere for no stated reason, what areyour views on regulatory budgets and whether theyshould still be adopted?Ms Veale: The TUC is on record as having been verycritical of the proposal for regulatory budgets indepartments, for a whole range of reasons; and thatis on the TUC website if people are interested in




looking at it. Frankly, it was not the right way toproceed at all. It is a crude instrument that has beenuniversally applied to a whole range of totallydiVerent departments and the concept of applying aregulatory budget to a process that is governedultimately by a politician just seems to me to be anabsolute non-runner. I think the intention wasabsolutely right but the whole thing has to berethought, I would suggest. In terms of where we aregoing, I do not think the better regulation agendawill go away; I think it is very good but now I thinkthat any government would be concerned aboutbeing a good regulator and there are plenty oflessons to be learned from all the variouscommissions and task forces that have looked intothis and I very much hope that there is acontinuation of some form of independent bodycomprising various people who have expertise—regulators, consumers, trade unions and all the restof it—to keep the government gingered up, to keepon looking at these issues and to ensure that thegovernment—and there is to be an election in at leasta year’s time and who knows who will win theelection, but whatever party does—I would imaginethat they would keep a pretty keen eye on the wholeregulatory process, and given the volatility of thingsat the moment it is inevitable that there is going tobe a lot of thinking about it, so it is hard to predictbut something diVerent, I suspect, is going toemerge.Mr Houghton: We also raised concerns about theregulatory budgets as being a crude tool. For me itis symptomatic of an approach that sees regulationas this kind of thing that is out there that you needto somehow control. I have no wish to see the end ofthe Better Regulation Agenda; I think there aremany valid things in it and I think the basicprinciples of how you do the better regulation areright. I would hope, and I think that possibly withwhat has happened with the crisis and the things wehave talked about today, it would take us to a placewhere it is less ideological and it is more of what isthe appropriate way of dealing with a particularproblem that we have had in a risk-based manner ona case by case basis, and I think that is where theregulatory budget is a problem. If two things needdoing and they both need doing and then you cannotdo one because you are constrained by your budgetthen that does not feel like a very sensible approach,whereas on another occasion you might not havebeen able to do either of them and then you haveeven less regulation. So moving away from that verysterile, good more or less regulation towardsgenuinely better regulation at appropriate times feelslike the crystal ball or want we want.Mr Gainsford: From our point of view we thoughtgood idea when it was first announced, theregulatory budget; but then quickly thought badidea. In our response we made reference to an openday that I think BERR had called to discuss this andwe noticed that all of the audience arrived at thatmeeting and thought good idea and by the time themeeting had finished they were thinking a very badidea. Not quite the result, I am sure, that wasanticipated. I think what was interesting was some

comments that may have emerged from Davidson—I cannot remember—which was around if the ideawas to prioritise what you decide to spend yourregulatory budget on, but then the problem is thatthree-quarters of our legislation is EU led, so isrequiring transposition and implementation, sounless you want infraction proceedings you have todo something about it. So actually you do not reallyhave a lot of choice in trading standards. Weestimate that over 90% of legislation we enforce isBrussels sourced now, so in that context it just flewin the face of reality, it seems to us. As I say, goodidea but actually do not do it because it will notwork. Then I think it has a real danger of forcingoYcials and ministers to take their eye oV the ballabout what regulation is really meant to be about,which is a benefit to those that are being regulatedand those that have a dependency upon thatregulation. That is our view on that. As far as thefuture is concerned, a lot of what we are doing isright; there is no doubt about it. I think in that sensethe review of regulatory impacts, having amechanism for ensuring that we are risk assessingour regulation, ensuring that we do not imposeunnecessary burdens on businesses is absolutelyright. So in that sense I would like that to continueregardless of some of the recent peaks. I do think itis important that somewhere along the line messagesare sent to society, to consumers and to businessesand employers that actually it is not just about lighttouch, removing burdens, removing regulation; thisis about responsibilities being shared andconsequences being shared in a way that benefits usall. So I think that the current peak will have thatimpact. What we would like to see, to be honest withyou, we would love Lord Mandelson to change histitle to the Secretary for Business and Consumers.We do not understand why—and it is something todo with the fact that we had a very fine agenda in thiscountry—modern markets, confident consumers—that works for any business; in other words, giveyour consumers the right product, give them theright service at the right price with the right back upand they will respond in a positive way to what youare oVering and any good business would do thesame. So we do not understand why in France theequivalent of Lord Mandelson would announcehimself—and I have seen him do it—as the Secretaryof State for Consumers and then say, “By the way, Ido cover business as well”, and in this country it isthe Secretary of State for Business. I think both gotogether and I think it is not helpful if there is sucha focus on reducing burdens without the equivalentfocus on consumer/employee protection.Ms Edwards: We have no reason to disagree with therest of the panel on regulatory budgets. On the issueof the future, we would basically like regulators,business and consumers to learn from the currentcrisis. It would be a disaster after the economic crisisis over and the economy is back on its feet if we wentback to a very light touch regime. So the regulatorsstill need to look at the problems in the market andhow to respond to those, rather than say that mostbusiness is good and let us just focus on the margins.




Mr Brooker: I think I can understand what thegovernment was trying to do with regulatorybudgets in terms of achieving a culture change butI do not think that is the right mechanism toachieve it. For me the budgetary proposal identifiesthe cost of regulation without identifying thebenefits. That leads me on to my final point whichis that there has been a lack of balance in the debateabout better regulation, which needs to becorrected. Regulators have taken kicks recently and

Supplementary memorandum submitted by the Trading Standards Institute

REGULATORY REFORM COMMITTEE INQUIRY: THEMES AND TRENDS INREGULATORY REFORM

Question 1

The future role of principles-based regulation?

We are pleased that there is a clear emphasis from Europe, where much of new legislation is coming from,towards consumer protection and we commend the work on the revision to the Timeshare Directive and theimplementation of the Unfair Commercial Practices Directive.

A move towards principle-based legislation is welcome to help prevent both some of the problems of thepast and also the creative nature of criminals to find and exploit loopholes in detailed legislation. We needclear, simple legislation that is easy for business to understand and comply with, coupled with the flexibilityof defined principles that protect the collective interest of consumers and legitimate businesses.

There is an important cautionary aside for principles-based regulation to have the desired eVect, that theconditions have to be right. “Robust” regulation may be needed in certain sectors such as the financialservice sector where Lord Turner articulated the need for “intense supervision”. Law and regulation shouldcapture the public mood and in that sense TSI supports principles-based regulation in the sense that intheory it aims to address the mischiefs in an appropriate and explanatory, flexible way.

It is just as important to remember that Business needs certainty for survival and in order to thrive in themarket place but not if consumer protection is compromised.

This, and the basis of law in the UK (articulated in the Davidson report) calls us to express these concernsnotwithstanding our broader policy support for principles-based regulation.

Principles-based legislation needs Government guidance, as it is imperative in any legislation that tosecure certainty it is important for Government to issue timely and appropriate guidance. That in itselfcauses the concern that guidance becomes law and leads to the potential for challenge to the attitudes of thejudiciary. At a time when Government is keen to minimise burdens on the judicial system, there is perhapsmore likelihood of greater challenge to principles-based legislation.

Question 2

What is your opinion of the establishment of a FARO Fast Assessment of Regulatory Options Panel?

We are not convinced of the necessity or additionality that will be given by such a panel. We would agreewith the Government that there is already a wide-range of existing policy-making mechanisms to providethe requisite level of objective scrutiny. We have already seen the materialisation of many advisory groupsand committees: the Better Regulation Task Force, the Better Regulation Commission, the Regulatory RiskAdvisory Council; and we would ask is this really the right time for another addition to an already busycanvas?

Question 3

What is your view of the Government’s decision not to proceed with regulatory budgets?

An appropriate decision due to the complexity of the proposal although attractive in principle.

We fear that it would have built bureaucracy rather than reduce it, remove focus away from the net benefitthat legislation can bring, and constrain the regulatory machine from putting in place regulation to protectthe economy, good business and consumers.

We have not seen an evidence base that there is a collection of unnecessary legislation constantlyemanating from all government departments and agencies. Equally it would have been useful to have carriedout a desktop exercise to demonstrate the likely eVects that regulatory budgets would have upon thelegislation enacted over the last few years.

rightly so, but we should always remember thatthey do an incredibly important job on our behalfin terms of ensuring safe products, guaranteeingaccess to lifelong goods and services and raisingcompetition. There just needs to be a better balancein the debate going forward.Chairman: Ladies and gentlemen, thank you verymuch for your time and if you have any furtherthoughts on the questions we have raised we wouldappreciate a note from you.



Broad-brush policy is unnecessary and where evidence exists of over—burdensome measures hinderingnew business opportunities, they should be dealt with specifically.

We estimate that over 80% of legislation emanates from Brussels and that has to be implemented; we havenever been clear as to how Regulatory Budgets would sit within this process. There is the concern that thenation would be deprived of those occasions when national legislation is required, where regulatory budgetswould be looked to instead.

We see that there are great advantages in joined-up government and collaboration but do not see howregulatory budgets would have assisted this process.

3.1 What is your view of the proposed alternatives to regulatory budgets?

One of the proposed alternatives to regulatory budgets is a “Forward Regulatory Programme”—takingthe pressures on business into account with regard to the EU better regulation agenda and new Europeanregulation, enabling business to plan ahead. TSI does not oppose the idea but would expect regulators andconsumers to be taken into account also. It is equally important that consumers and regulators anticipatebeing embraced in such a forward thinking regulatory programme. It is fundamental to the issue that anylegislation has to be implemented by Trading Standards and others in the regulatory field.

The programme to include a new external Regulatory Policy Committee—which will advise Governmenton whether it is accurately assessing the costs and benefits of regulation, TSI would not resist in principle.However, we would like to see what the proposed costs and benefits of the committee would be and what itwill replace. How productive will it be in accurately assessing costs and benefits of regulation?

The fundamental issue for TSI is that Government ought to have as much regard to the impact oflegislation on consumers as it does on business. Whilst we support better regulation initiatives, we want tosee every part of Government under an obligation to scrutinise proposed legislation and regulation toidentify consumer public benefit.

Supplementary memorandum submitted by Which?

RE: ADDITIONAL QUESTIONS FROM THE REGULATORY REFORM COMMITTEEINQUIRY

Thank you for this opportunity to set out our views on the additional issues laid out in your letter of22 April 2009. We endeavour below, to answer the questions in the order that they are set out in the letterby breaking down the three main questions into their component questions.

Question 1

What are your organisation’s views on the future role of principles-based regulation?

Which? has some reservations about moving towards a high-level principles approach, not least becauseprinciples-based legislation is, as yet, largely unproven. This is not to deny that the principles-basedapproach does not have any positive aspects.

The current system relies on a balance between an ex-ante and ex-post approach to regulation—in otherwords regulation is currently both pro-active and reactive to circumstances. This balance is in partdetermined by the prevailing legal traditions with laws and regulations, which are—as a rule—“tightly”drafted. This means a highly specific approach to regulating the behaviour of actors. However this has led,in some cases, to regulation sometimes being over prescriptive, becoming a “box-ticking” or process basedexercise. Legislators and regulators cannot predict all the circumstances which may arise in the future andtherefore by definition only a limited range of activities are going to be regulated ex-ante.

In contrast, a principles-based approach would shift the balance much more decisively towards regulationin the UK being ex-ante as this approach brings a stronger element of “future-proofing” to regulatoryactivity. This is the main advantage. The existence of a principles-based approach, will in theory at least,pre-empt a whole raft of behaviours that would not be captured by the current approach to regulation. Thus,it potentially delivers additional protection for consumers, which under the current system would have hadto wait for action through the established processes.

Should it in future be combined with specific rules to avoid uncertainty?

However, we believe there are problems with the principles-based approach. These revolve around theambiguity of them and the uncertainty that creates:

— While a principles-based approach may reduce uncertainty by creating some level of assurance overfuture protection from non-preempted dangers, correspondingly it increases uncertainty too. Thisis because broad principles can be ill-defined, leaving actors with little understanding of whichspecific behaviours are actually prohibited. The proposal in the above question—for any principleto be accompanied by specific rules, such as a set of minimum standards—would seem to be asensible precaution against this uncertainty.



— Indeed, in the absence of accompanying rules courts will begin to define the principles and establisha set of more detailed rules anyway. Therefore to ensure that there is less opportunity for judges tomake unintended interpretations—and overcome some of the slowness of using case law toestablish these rules—combining specific rules with the principle is a sensible idea.

— Once rules and court interpretations become involved—and therefore limits begin to put on thefuture application of principles—it begins to move principles based regulation back towards themore tightly drawn traditional kind and therefore it would seem more sensible to pre-empt this withaccompanying rules in the first place.

— The second problem is the ambiguity of principles may lead to weakness in the enforcement of theprinciples as they are too uncertain and enforcement therefore becomes costly. With vagueprinciples up for definition through court decisions there is an incentive for many more regulatorydecisions to be challenged by those subject to them. This in turn potentially creates a disincentivedynamic on the behalf of regulators to make decisions, weakening regulation and thus consumerprotection.

— We believe therefore that principles-based regulation will only be eVective if companies who fail tolive up to regulatory standards suVer damage to their reputation and bottom line including namingand shaming and tough enforcement action towards transgressors.

This uncertainty and ambiguity described above has some worrying implications for self regulation,potentially making it more impotent than it already can be on occasion. Self regulatory organisations willhave to work within the parameters of the legally enshrined principles. This means they will have to havesome role in interpreting them, which could be very contentious among those subject to the self regulatoryscheme. Without the guidance of accompanying rules in conjunction with the lack of formal sanction thatof a classic regulatory framework self regulatory schemes could become very diYcult to run eVectively.

Some of the problems outlined above re principles-based regulations have been demonstrated in practicethrough the FSA and their move to principles-based regulations. The uncertainty produced by principles-based regulation has manifested itself in the “Treating Customers Fairly“ initiative. These have not yetproven to lead to better outcomes for consumers or indeed engendered much enthusiasm from industry.24

What is your view of that [outcomes-focused regulation] and what it…means in practice?

Outcomes-focused regulation is the inevitable consequence of principles-based regulation. If regulatingthe processes of firms is to be reduced through the use of principles, then an outcomes-focused approach isa sensible idea. Indeed it could be argued it is a sensible idea in any case. It should be an uncontroversialidea to say that in the final analysis, any regulation should be judged on how eVective it is at producingdesired outcomes. In the case of consumers these are outcomes in terms of safety, quality and price. In otherwords, a regulation should be judged by how it contributes to improving the position of the consumer re thedesired outcomes rather than on the process per se. The process may be regulated in the belief that a properand functioning process will lead to better outcomes.

Translating an outcomes-focused approach into practice is a much more diYcult task. For example:

— The lack of clarity for both consumers and companies means that getting a measure of outcomescan be very diYcult and can potentially lead to reduced service quality for consumers.

— The lack of focus on any aspect of process could mean that those consumers experiencing a poorservice or making a complaint are dealt with in a poorer fashion than when the company wasaccountable for the processes it employed under the old system.

At the market level outcomes-focused regulations could mean a more holistic approach to regulation istaken, at least to the extent that when deciding on whether to regulate a more rigorous test may be appliedwith more attention paid to how a particular measure might or is working in practice.

Question2

What is your opinion of the suggestion made by the Risk and Regulation Advisory Council…to establish aFARO (Fast Assessment of Regulatory Options) Panel?

Which? agrees that it is important to avoid knee jerk reactions to new regulatory challenges and thatFARO is an interesting idea in terms of a reformed institutional framework to make sure any policyresponses are considered and eVective. Which? believes that there is a need for greater coherence,transparency and a more thoughtful discourse around regulation and specific regulatory action and wouldwelcome any steps moving us towards those goals.

The creation of a mechanism that will institutionalise stakeholder consultation on regulations andregulatory responses could potentially be a step in the right direction in these areas but it is not yet clearwhether FARO is that step and we would like to emphasise that no final judgement can be made until we

24 Only 13% of firms sampled by the FSA met the March 2008 deadline to have appropriate management information in placeto test whether they are treating their customers fairly. Source: FSA (2008). “Treating Customers Fairly: June ProgressUpdate”, pub: Financial Services Authority: London.



see the full details in terms of the proposed internal structure and processes and indeed those who will sit onit. A thorough test of the measure will also require some evaluation of its performance. At this stage Which?would emphasise some areas to consider. These are:

— What level of accountability will there be? There may be a danger that FARO is a new body andwe would want assurance that the accountability of those involved in evaluating the desirabilityof regulatory responses will become further removed from parliamentary accountability.

— If FARO—essentially a committee of experts—is to be established then transparency in their workmust be paramount, enabling observers to understand and question the rigour of their processesand debate their conclusions based on the fullest possible information. This will form another keypart of their accountability as a body.

— Which parties would be involved in any consultation around a potential regulatory response? Theconsultation process—discussed in the Risk and Regulation Advisory Council report—must bebalanced, taking evidence from all sides of the issue.

Would such a panel have a role in the response to the current economic crisis?

Certainly any institutionalised stakeholder consultation in the development of regulatory responses to thecurrent set of economic problems would be welcomed by us. The current economic situation is serious andthe policy response needs to be well thought through as the range of areas requiring responses is wide andthey will require much detailed work and well developed measures as the future implications for them arelikely to be long-standing. Therefore any attempt to make the process of policy development with regardsto the current economic crisis more thorough would be a sensible idea.

We would reiterate, however, the concerns laid out above with FARO or a similar body being used inregulatory policy development. Any policy response to the crisis should ideally have been developed througha meticulous consultation process support and be durable over a long period of time and therefore shouldnot be confined to creation by just “experts” but face the crucible of public debate and a range ofperspectives.

Question 3

What is your view of the Government’s decision…not to proceed with regulatory budgets and of the proposedalternatives?

Which? very much welcomes the decision not to continue with the idea of regulatory budgets. They werenot an eVective measure for instigating in government a rigorous system for identifying market deficiencies,forward planning for regulatory solutions and analysing their eVectiveness. The aims of greatertransparency and planning in regulatory policy could be achieved in other ways without losing sight of theidea that regulation should be used when necessary and in a proportionate manner and that limits on its useas a tool, should not decided on an a priori basis.

Although their eVectiveness in practice is yet to be tested Which? does not see any fundamental reason todisagree in principle with the alternative proposals set out by the government in the statement of 2 April.25

We believe that alternatives which approach regulation in a more pragmatic and less rigid way can beconsidered steps in the right direction. What has been announced so far with regards to the alternativeproposals appears to be a move towards taking such an approach.

Do you believe that the NEC sub-committee should confine itself to considering business viewpoints or takeopinions of other sectors into account?

Which? believes that the better regulation sub-committee of the NEC must listen to the viewpoints of allinterested parties and not just to the views of business and their representative organisations. To only canvassthe views of one section of opinion on the issues around a regulation would be to make a mistake. Takingevidence from business interest groups only is to risk dangerously biasing the committee’s perspective on andconclusions about, particular regulations as “burdens” and not on the eVects of a regulation in the aggregate.Understanding that regulation needs to be seen from a holistic perspective and not a narrow “burdens”one—on those immediately aVected by the regulation— is an important insight that should be at the heartof all consideration on regulation.

May 2009

25 Written statement by Rt Hon Pat McFadden MP; Minister of State for Employment Relations and Postal AVairs,pub: 2 April 2009.



Supplementary memorandum submitted by the Trades Union Congress


Thank you for your letter of 22 April. Our answers to your additional questions are set out below.

1. The TUC is broadly in favour of principles-based regulation. In order for regulation to work eVectively,those being regulated need to make an active contribution to delivery and should be given suYcientflexibility to do things their own way in complying with the principles of regulation. For this to work andfor the intended protection to be provided regulators need to be confident in the processes being used bythose who they regulate and those on whose behalf the regulation exists.

Fair process is not as important as fair outcome to us but neither is it a negligible issue. Individuals andgroups with a substantial interest in the outcomes of regulation need to be confident that their interests havebeen properly taken into account. This will only happen if fair and transparent processes exist. Fair andtransparent processes will develop best if there is clear advice and guidance available.

The TUC regrets that in some areas consultants and advisors are making a living out of providingunnecessary extra advice and making those being regulated feel that compliance is complex and diYcultwhereas often it is largely a matter of common sense and engagement with those who are being protectedby the regulation.

We do not see that outcomes-focussed regulation is an alternative to principles-based regulation; ideallythe two should work together. If the principles are understood and proper guidance and support is availablethe outcomes should generally be good. Of course there will always be areas where this fails and that is whythe TUC is insistent that underpinning legislation should provide redress and, where appropriate, penalties.The issue of enforcement is also key to us.

2. The question wrongly ascribes the proposal for a FARO to the RRAC. In fact the proposal was madeby the Better Regulation Commission in their Report “Risk, Responsibility and Regulation—whose risk isit anyway?” published in September 2006. Since then the RRAC has developed thinking and practice onrisk and regulation and in its final report, shortly to be published, makes a number of related proposals aboutrisk and society. The TUC fully supports the proposals in the RRAC report and believes that they couldhave a role in the current economic crisis, though we would add that the regulatory problem in this particulararea has for a large part resulted from the inactivity rather than the over-activity of the FSA.

3. The TUC welcomes the decision not to proceed with the proposal for regulatory budgets. We canprovide a copy of our response to the consultation on this if it would be helpful.

We wonder whether the question may be confusing the NEC sub-committee with the proposedRegulatory Policy Committee? Both were announced in the same statement but the latter is the one that willbe based in BERR and will work with the BRE. In any case the TUC would certainly not want to see eithercommittee confine themselves to considering business viewpoints. Much regulation impacts on the publicrather than on business, and on public services delivery. The TUC supports initiatives to achieve betterregulation and has been directly involved in the original Better Regulation Task Force, and both itssuccessors. Our big concern about the Government’s approach to better regulation is that it has alloweditself to be reactive to the business lobby, rather than proactive. The BRTF, BRC and RRAC, which haveall included a wide range of interests, have been the exceptions to this and have been innovative and strategic.

May 2009



Tuesday 28 April 2009

Members present


Lorely Burt Mr Mark PriskJohn Hemming Phil WilsonDr Doug Naysmith

Memorandum submitted by Tim Ambler and Francis Chittenden1

We are pleased to respond to your invitation to submit evidence on the progress of regulatory reform. Thathas two components: improving the impact assessment process, notably to screen out unnecessaryregulations, and secondly to repeal or simplify existing regulation. We have, as invited, provided briefanswers to your specific questions as the second section of this paper but first we provide an overviewbecause we considered the questions (a) do not really challenge overall performance and (b) ignore themassively important EU dimension.

Overview

Our evidence is based on seven years of examining UK, and latterly EU, Impact Assessments. Our nextreport is due out in April and the previous ones are noted below.2 While both contribute to the networkof laws with which UK businesses have to comply, we have found that the processes for creating and/orreforming regulations are very diVerent from each other and also from the utopian claims made, by bothEU and UK executive, for their regulatory systems. What is claimed to be open and transparent is concealedbehind a blizzard of paper and delay so that both EU and UK oYcials and ministers are, in practice, freeto regulate with little regard for accountability.

In the last decade, regulation has become a major UK industry. Tens of thousands are employed not inbusiness to grow GDP but, in eVect, to reduce it. Regulation is frequently ineVective, notably in financialservices where it may even have made the UK crisis worse.3 The original purpose of Impact Assessments,namely challenging the need for regulation and the serious consideration of alternatives, has not been met.The National Audit OYce has reached similar conclusions.4

The eVectiveness of both the UK and the EU Impact Assessment systems are undermined by their lackof synchronisation. It is not enough to publish the first UK impact assessments for consultation or to sendEU legislation to the EU Legislative Scrutiny Committee of the House of Commons, after the EU hasfinalised the regulations.

New regulation, as measured by IAs, declined in 2007–08 to 264 after three years which topped 300 perannum. About 130 regulations per annum were generated in the first four years of this government. In termsof the number of regulations, the EU accounted for only 18% and the reduction for the previous EU levelof about one third is the primary reason for the overall decline in numbers in 2007–8. In terms of the financialburden on business, however, the EU is responsible for much the greater part. The financial cost shown bythe IAs is only part of the burden; keeping track of changing legislation through the forest of legislative paperis a major burden in itself.

At the same time, some improvements are being led by the BRE, such as two-page summaries of IAs andthe IA Library. These are welcome and we acknowledge that regulation is not solely a financial or economicmatter: social and environmental factors deserve consideration. We should also acknowledge that the WorldBank considers that the UK is relatively lightly regulated compared to the EU as a whole. Our own figuresbroadly agree: the low cost of setting up a business in the UK is a key factor. At the same time, that is notan argument for abandoning any competitive advantage the UK may have.

1 Senior Fellow and Professor at London and Manchester Business Schools respectively.2 Tim Ambler, Francis Chittenden, and Stefano Iancich, The British Regulatory System, British Chambers of Commerce,

March 2008.Tim Ambler, Francis Chittenden, and Deming Xiao, The Burden of Regulation: Who is watching out for us? BritishChambers of Commerce, April 2007.Tim Ambler, Francis Chittenden and Kapil Ahuja, Regulators: Box Tickers or Burdens Busters? British Chambers ofCommerce, April 2006Tim Ambler, Francis Chittenden, and Chanyeon Hwang, Regulation: another form of taxation, British Chambers ofCommerce, March 2005.Tim Ambler, Francis Chittenden and Mikhail Obodovski, Are regulators raising their game? UK regulatory impactassessments in 2002–03, British Chambers of Commerce, March 2004.Tim Ambler, Francis Chittenden and Monika Shamutkova, Do the regulators play by the rules? An audit of UK regulatoryimpact assessments, British Chambers of Commerce, January 2003.

3 Tim Ambler, The Financial Crisis: Is regulation cause or cure? Adam Smith Institute, November 2008.4 National Audit OYce, Evaluation of Regulatory Impact Assessments 2006-07, Report by the Comptroller and Auditor

General, HC 606 Session 2006–07, 11 July 2007.



The comparison of EU and UK impact assessments leads to a simple conclusion: the EU very rarelyemploys IAs, and even more rarely quantifies them but, when it does so, the system works very well.Conversely, the UK goes through the motions with all directives and regulations but so superficially that thesystem does not work.

It is curious, with hindsight, how much attention has been given to perfecting the UK domestic system,in theory, with so little regard to the EU which has been the source of the heaviest burdens on business. TheUK strongly supports the EU in achieving the single market and a single market requires a single set ofregulations. Every time Whitehall puts forward business regulation not required by EU law, we are not onlyburdening British business relative to the rest of the EU (and the world) but we are giving the lie to our owndemands for a single market.

We will recommend that

1. no new business regulations, which are within EU competence, should be introduced by the UKgovernment;

2. all existing UK business regulations not required by EU law are repealed en bloc; and

3. EU business legislation which has not been through due process, ie had a proper IA procedure, berejected by the UK Parliament. This recommendation would need to be examined by lawyers butwe have been given to understand that Parliament does have that right. In any case, it would beembarrassing for Brussels to have to explain why they were not following their own procedures.

Brief Answers to the Specific Questions (Your questions in italics)


What are the implications of recent economic developments (for example, the economic downturn; creditcrunch and problems within the financial sector) for the design and delivery of the regulatory reform agenda,including risk-based regulation?

Regulations should be designed for the long term, good economic conditions as well as bad ones. We arenot aware of any specific changes in regulatory thinking in relation to economic conditions, nor do we thinkthere should be.


The government appears not to join up their regulatory thinking with the need for improving theconditions for business. There is just a general unsupported claim that the former will lead to the latter whilstsimultaneously recognising that regulation, beyond the minimum necessary for orderly markets, burdensbusiness, competitiveness and is bad for GDP. The current business climate ought to reinforce the latterconsideration. In the case of financial services, regulation has provided little or no protection and may haveworsened the crisis. The problem is an excess of theoretical regulation leading to a lack of practicalintervention, ie regulators are not doing their jobs because they are confused by the quantum of regulation.Regulation gives only the illusion of control if intervention is not eVective. More regulation is unlikely tobring more than marginal benefit and may well confuse the situation further. For example, the Bank ofEngland eVectively regulated banks, albeit informally, before the introduction of the FSA, and the excessivenumber, in the view of some, of new regulations over the last 10 years. See Adam Smith Institute briefingpaper: “The Financial Crisis: Is regulation cure or cause?”


The main planks of the deregulation (reform) agenda, namely are ineVective: admin burdens reduction,regulatory budgets and repeal/simplification. Some genuine wins have been achieved on admin burdens butit is largely cosmetic with the changes not recognised by business. Regulatory budgets appear to be on hold.Progress on repeal/simplification is glacial. The main lessons for the reform agenda are (1) that theimportance of Brussels as the main regulator should be recognised and UK systems designed to deal withthat instead of pretending the UK is totally independent; (2) that the IA process should be substantive andnot merely box ticking (there is some evidence of early improvement in the UK, but none from Brussels);and (3) that a more radical approach should be taken to simplifying and/or repealing inherited regulation—see our main paper.


Leave business regulation to the EU, with UK negotiated exemptions.



Whether there is a coherent package of regulatory measures for improving the conditions for business success;and how regulatory reform initiatives fit into wider Government support.

Government interventions in business, however well intentioned, generally do more harm than good.Emergencies such as rescuing failing banks are indeed necessary but the strategy should be to avoid suchthings being required, ie by the regulators, who are supposed to be maintaining orderly markets, doing whatthey are paid to do. The general strategy should be to assist the EU moving to a genuine single market, withonly the necessary EU regulations for that purpose, and otherwise (1) refraining from UK only businessregulation5 and (2) repealing all UK business regulation5 not required by EU law.



In brief, no, no and no. The BRE guidelines require departmental IAs to give specific attention to SMEsbut they rarely do so. Most Departments appear to have a poor understanding of the economics of smallfirms and as a consequence they do not appreciate why most business regulations create substantially highercosts for SMEs.


We thought the Hampton Report6 was very good and set out the compliance and enforcement issueswell. We agree with covering those issues in a general way, as Hampton did, rather than separateconsideration regulation by regulation.

February 2009

Memorandum submitted by the Federation of Small Businesses

Introduction

1. The Federation of Small Businesses (FSB) welcomes the opportunity to respond to the RegulatoryReform Committee Inquiry into Themes and Trends in Regulatory Reform.

2. The Federation of Small Businesses is the UK’s leading non-party political lobbying group for UKsmall businesses existing to promote and protect the interests of all who own and/or manage their ownbusinesses. With over 215,000 members, the FSB is also the largest organisation representing smallbusinesses in the UK.

3. The FSB is supportive of the principles driving the better regulation agenda and agree with the linkbetween regulatory burdens and its impact on business growth/costs. The FSB’s own research demonstratesthat legislation is disproportionately burdensome to micro businesses and is perceived as a serious barrierto growth.7

4. Anecdotal evidence from FSB members and recent research indicates that both practically andperceptually the Regulatory Reform Agenda has not delivered for small businesses and many consider thatRegulation will increase.8

Small Businesses and Regulation

5. The FSB and its members fully understand the need for some regulation not only to protect themselvesand employees but also because it can make good business sense; an example would be the nationalminimum wage which is now viewed to have created a fair playing field for all businesses.

6. The key issue is the cumulative impact of regulation on small businesses and the burden of theadministration, especially in terms of the amount of paperwork but also the frequency with which it mustbe completed. In 2007 an FSB report found that on average an extra 7 hours per week was spent by smallbusinesses filling in forms and reporting to regulators.9 Members said that they would spend this extra timeproductively increasing training and other investment opportunities; this would clearly be of benefit to theeconomy. In 2005 we found that 67% of respondents to our survey “Inspector at the door”10 reported thatthere were moderately serious to very serious costs involved in form-filling and providing information toregulators. Anecdotally small businesses are also concerned with the speed with which these forms arechanged, as this leads to a greater burden in terms of re-education.

5 ie in an area with EU competence6 16 March 2005, HM Treasury.7 “Better Regulation … is it better for Business?” p 8 written for the FSB by Professor Robert Baldwin, 20078 “Reducing the Cost of Complying with Regulations: The Delivery of the Administrative Burdens Reduction Programme”

National Audit OYce, p 33 20079 What would you do with an extra 7 hours, FSB, 200710 Inspector at the Door, FSB, 2005



7. A YOUGOV survey in 2006 found that 47% of small firms found excessive legislation to be a challengeto their growth. This concern was second only to a lack of money for investment.11 And in 2007 BERRfound that 60% of small businesses found regulation to be a barrier to growth.12

Recent Developments

8. Whilst there has not yet been any research into how small businesses feel they are being aVected byregulation in the context of the current economic environment, certain assertions can be made.

9. Our figures strongly suggest that small businesses find regulation to be an increased burden on theirwork and suggest that the fear of regulation will often be a barrier to the growth of the businesses in so faras they will be reluctant to take on more staV.

10. The FSB’s employment survey published in October 2007 showed that the business community is“deterred from creating employment opportunities by the threat of legislation” with over a third citing thecomplexity of employment legislation and the overall burden of red tape as key factors.13

11. The findings of the FSB’s health and safety survey in June 2007 were even more emphatic, with 72%of businesses stating that they found that health and safety administrative requirements had become morebureaucratic. The volume of health and safety legislation was also cited as a deterrent to businessesemploying more people.14

12. This fear can only be increased when the economy is in diYculty and therefore the need to speed upregulatory reform and create a cohesive, cross-departmental approach is even greater. This will also be thecase in the wake of the financial crisis as businesses struggle to regain a footing in the market and build theirbusinesses.

13. The FSB has called upon the Government to impose a moratorium on new regulations that willnegatively aVect small businesses such as extending flexible working for parents of children up until the ageof 16 and increasing staV holidays. This is a time when small businesses should be given as much supportas possible. It is essential that the Government commits to a combined approach of halting thecommencement of new regulations with adverse eVects on small businesses and speeds up and improves theregulatory reform agenda.

The Extent to which the Government has Developed a Coherent, Regulatory Reform Strategythat Considers the Specific Needs of Small Businesses

14. The key problem with the existing regulatory framework, despite recent reform legislation, is thatthere is still too much; it can be complicated and often overlaps regulations that already exist elsewhere.Members have reported that a great deal of equality and discrimination regulations overlaps. The balancetherefore is achieved through simplifying regulations and cutting back on the many unnecessary regulations.Business success will be achieved through ensuring that only those businesses that intentionally andcontinually break the law are aVected; whilst those small businesses that are so essential to the economy aregiven the freedom that they need to prosper.

15. Anecdotal evidence from FSB members suggest that few are experiencing any easing of their currentregulatory burden. The perception is that any reduction in one area is simply replaced by further regulationin other areas. This is backed up by the NAO report into Reducing the Cost of Complying with Regulations,which demonstrates that businesses lack confidence in the Government’s ability to succeed in reducingregulatory burdens on business and deliver real benefits for business. They cite that 75% of businessesconsider that regulation will in fact increase.15

16. When assessing how burdensome some regulations are, especially considering administration, FSBmembers named Health and Safety as one of the most problematic with 60% claiming that the Managementof H&S at Work Regulations are quite or very burdensome.16 These findings have been backed up by theannual BERR small business survey in 2007 which stated that 60% found regulation to be a burden.17 Ina survey of members in 2007, the FSB found that many were concerned about the cost of complying withsuch regulations, both financially and in terms of time.18 Clearly despite the regulatory reform agenda, theburden is still too great, but also created by external factors such as court rulings and insurers.

17. The current regulatory reform strategy does not have the appearance of a cohesive strategy forimproving the conditions for business success. There is a concern that these measures are often looked at andthen implemented on an ad hoc basis that can be confusing and lacks a systematic and thorough approach.Regulatory reform is an essential part of government support of small businesses and must be one of thepriorities alongside encouraging credit.

11 SMEs in the UK Seizing the Growth Challenge, p13 200612 The Annual Survey of Small Businesses Opinions 2006–07, BERR13 Employment Law—Key Facts—FSB, 200714 Whatever Happened To Common Sense —FSB, 200715 “Reducing the Cost of Complying with Regulations: The Delivery of the Administrative Burdens Reduction Programme”

National Audit OYce, 200716 Whatever Happened to Common Sense?—FSB 200717 The Annual Survey of Small Businesses Opinions 2006–07, BERR18 Whatever Happened to Common Sense?—FSB 2007



18. Overall the Government has failed to completely understand the specific needs of the small businesscommunity and therefore has not been able to design regulations that are aVective for their business success.The Anderson review, published in 2009, does provide a great deal of positive guidance which should beused as an important step forward. In particular the FSB is supportive of the review’s recommendation thatdisclaimers of responsibility on advice provided by Government on regulations needs to be removed as theycreate uncertainty for Small Businesses.

Implementation and Enforcement

19. The FSB does not believe that the Government has achieved the implementation of regulations in aproportionate and eVective manner. The key issue is the lack of a cohesive strategy across Whitehall. Whilstsome departments are very aware of the need for regulatory reform and are active in trying to reduce burdensand simplify legislation, some appear to be unaware of the impact that they are having on small businessesand many propose legislation that actively works against it.

20. The NAO recommends that all Government departments need to work more directly with businessesto understand their concerns. Furthermore, they suggest that the BRE needs to do more across departmentsto ensure consistent delivery of its objectives.19

21. Anecdotally members have also told us that they feel as though many Government departments arefailing to do thorough enough Impact Assessments on new regulations. IAs are an extremely important toolfor allowing small businesses to be consulted and are a way of letting Government know what the aVectsof new regulations will be before they are implemented. It is important that IAs are used eVectively by alldepartments.

22. Due to a lack of forward thinking it is often felt that the practicalities of implementing regulationsare not considered properly by Government. For example our members feel that they lack the resources tobe able to handle all of the necessary paperwork for health and safety regulations where as much larger firmsdon’t have such restraints and are able to spread the cost over a much larger work force.

Common Commencement

23. We are very supportive of the Government’s policy of introducing Common Commencement datesas a way to simplify the introduction of regulations but also to allow businesses to be more aware of newdevelopments. We would, however argue that again there needs to be a more cohesive approach acrossGovernment so that all departments sign up to CCDs.

Conclusion and Recommendations

24. In conclusion, the FSB welcomes the Government’s strategy and its principles to improve theregulatory environment for the business community. However, evidence to date demonstrates that there isstill some way to go as far as small businesses are concerned.

25. We consider that further work is required to change business perception about the impact of the betterregulation agenda and to gain a greater understanding of business concerns.

Recommendations

— The Government should ensure that it takes small and micro businesses into account during thelegislative process and tailors legislation and associated guidance to their needs. All legislativethinking should start small and work its way up.

— More needs to be done in terms of measuring and improving the perception of regulatory changesamong the small business community. More frequent audits could provide a clearer assessment ofprogress.

— The Impact Assessment process for any new legislation should be a robust one which specificallyanalyses and quantifies the potential impact and costs of new legislation on small businesses.

— Constant review of the aVects of legislation to ensure that no businesses type isdisproportionately aVected.

— Greater advise to highlight regulation and how it should be implemented on regular occasions notjust when it commences to ensure that all businesses are up to date.

— Ensure all departments are aware of the aVect that their legislative programmes can have on smallbusinesses and commit to regulatory reform across the board.

19 “Reducing the Cost of Complying with Regulations: The Delivery of the Administrative Burdens Reduction Programme”National Audit OYce, p9 2007



— Approach new legislation and regulatory reform with a clear idea of what success will look like,what is hoped it will achieve.

March 2009

Memorandum submitted by the Institute of Directors

Thank you for giving the Institute of Directors (IoD) the opportunity to respond to the new inquiry onthe Themes and Trends in Regulatory Reform, which was announced on 9 February 2009. This paperpresents our response to your call for evidence. Issues surrounding Better Regulation are of considerableinterest to the business community in general and to the IoD in particular. We are therefore pleased toparticipate in the consultation and present our response for your consideration.

About the IoD

Founded by Royal Charter in 1903, the IoD is an independent, non-party political organisation of50,000 individual members. Its aim is to serve, support, represent and set standards for directors to enablethem to fulfil their leadership responsibilities in creating wealth for the benefit of business and society as awhole. The membership is drawn from right across the business spectrum. 84% of FTSE 100 companies haveIoD members on their boards, but the majority of members, some 70%, comprise directors of small andmedium-sized enterprises, ranging from long-established businesses to start-up companies.

IoD Response: Key Points

— There are serious challenges to the present agenda of regulatory reform and Better Regulationremains in a fragile state of development. Most notably, clumsy reportage and cheap point-scoringagainst banks and financial institutions run the risk of misrepresenting our present regulatoryculture and the reforms within it. The failure of a specific regulatory body and sector (FSA andFinancial Services) is a serious issue and requires meaningful action, but government andparliament must remain firm on the need for a lighter regulatory environment overall.

— Economic conditions have worsened significantly over the last year and these conditionscompound the need for a radical regime of regulatory improvement. This will enable businesses tosurvive through and grow out of the current recession.

— Government policy is fragmented. Certain departments and ministries understand the impact ofregulation and the damage it can cause to business, whereas others are considerably lesssympathetic. In recent months the Institute has witnessed more and more business regulation beingdrafted by departments with no economic credentials and as such poorer interventions haveemanated from government.

— The current Better Regulation agenda alone will not be able to address the necessary improvementin business perceptions. As such, measures including regulatory budgets and a wider regulatorymoratorium are necessary (not optional) additions to the Government’s armoury if it wishes todeliver tangible improvement.

Current Developments:

Economic Developments: The Institute recognises that regulatory and supervisory weaknesses contributedto the current economic downturn, credit crunch and problems with the financial sector. As such, the IoDhas become a strong advocate of regulatory improvement in this sector.

Despite the consensus for regulatory change in the financial sector, the IoD have been deeply concernedat the “read-across” that some commentators, regulatory chiefs and others have made from a failure in onearea (finance) to a critique of light-touch, risk-based or better regulation principles across the widerregulatory horizon.

For example, Lord Turner’s comments on 16 October 2008 emphasised that the era of light-touchregulation was over.20 The Institute is sure that the new FSA Chairman’s comments were solely focussedon the area of regulatory failure ie the banking industry, but there remain risks that the rhetoric ofclampdowns and protections feed into wider regulatory discourse at a time where a need for lighter businessregulation is all the greater.

20 http://business.timesonline.co.uk/tol/business/industry sectors/banking and finance/article4959789.ece



Balance of Protections and Coherent Regulatory Measures

The Institute believes that the present legislative programme of this Government would at the best ofeconomic times been problematic for business, let alone during the unprecedented financial diYculties ofthe last 6–12 months. Commenting on a range of measures being debated in the Houses of Parliament ordue for imminent implementation the Institute recently commented in the media on the cumulative impactof these interventions, which were estimated to have business costs of over £1 billion.21

Moreover, present government proposals lack significant policy coherence, particularly in the regulatoryfield. An example of such disconnect is embodied by the comments of equality ministers in relation to theimminent Equalities Bill, who have mooted the possible use of public procurement processes to implementgender pay audits.

While the Government Equalities OYce has recently distanced itself from these earlier policy proposals(in part due to the IoD’s engagement) this rhetoric ran completely counter to BERR eVorts at increasingsmall and medium-sized business participation in public procurement processes. The BERR sponsoredGlover Review, which ran concurrently with the drafting of the Equalities Bill paints a system whereby twointerconnected elements of government, not only fail to engage, but also appear to be ideologically opposedto each other.

One reason for such incoherence of policy is that government departments still answer to separatestakeholders, objectives, personal interests and historical relationships. While departments such as BERRand the Treasury understand the impact of regulatory burdens on business, other departments have morethan made up for any commensurate improvement/reduction in the amount of unwieldy interventionspouring onto the statute book.

The risk is all the greater because these non-economic departments have land-grabbed policy areas thatin recent years had belonged to BERR and the Treasury. Examples include the Government Equalities OYceand the impact of an Equality Bill on employment law; proposals from the Department for Communitiesand Local Government on extending time oV entitlements for public duties which again impact uponemployers duties. It would appear that at the very moment that BERR and others have understood theviews, challenges and diYculties of business other departments have seized regulation of business as a policydriver for their own ends.


Government Understanding of Business

As has already been mentioned, many of the non-economic departments directly regulating business, havelittle understanding and engagement with their audience. It follows that because the interventions(impacting business) are often infrequent and the civil servants dealing with them temporary, business rarelyseeks long standing relationships with these elements of Whitehall.

Such minimal levels engagement is now proving to be unsustainable and as such it is critical that BERRand others clamp down on this regulatory creep by other departments.

The Institute have previously commented to this Committee on the challenges facing the BetterRegulation agenda. In particular the Institute have made representations that focusing exclusively onempirical and largely policy-focused objectives rather than the business perceptions will not deliver therequired improvements.

Evidence collected by the Institute in November 2008 illustrated that despite government claims ofsuccess, only 3% of business leaders thought regulation had become less demanding over the past year.Moreover, 52% of business leaders felt that regulation had become more demanding over the same period,with 17% stating that the increased burden was severe.

The methods currently deployed under the umbrella of Better Regulation are clearly unable to achievethe perception change necessary within the timescales of the Government. Even with the increasedcommunication eVorts proposed by the Institute during this Committee’s previous inquiry into the BetterRegulation agenda, the likely outcome in 2010 is relative dissatisfaction amongst all stakeholders. This doesnot undermine the reasons or principles of such fundamental regulatory reform, but does underline the needfor further activity and to this end the IoD propose two key areas that it would welcome as additions to thepresent agenda. These are set out below:

Regulatory Improvements:

Regulatory Budgets: The Institute were enthusiastic at the Government’s proposed introduction ofregulatory budgets. The IoD believes these are a necessary tool for stemming the flow of regulation as wellas tackling the stock. This was necessary as business perceptions are seemingly more flavoured by the flowof regulations than the stock.

21 http://press.iod.com/newsdetails.aspx?ref%375&m%2&mi%62&ms%



However, the IoD are concerned at the silence that has followed the Government’s consultation (albeitwe still await the Government’s formal response) on the subject as this is a central component of a moremeaningful regulatory improvement agenda.

Regulatory Moratorium: Despite some short-lived overtures on this proposition by Lord Mandelson theInstitute has heard too little about a roll-back or freeze on existing regulatory commitments. Admittedly,the Government Equalities OYce recently clarified that it was no longer looking at the use of mandatory orprocurement led gender pay audits, but aside from this single measure no wider proposals have emerged.

The IoD would strongly encourage the Government to review imminent regulatory burdens and put themthrough a two-tier system of review. The first stage of such a review should focus on whether suchinterventions are in fact necessary in these challenging economic conditions. If the given regulations passsuch a test, then there should be a serious analysis of whether postponement of the measure can becomfortably achieved as a means of diminishing government pressure on private enterprise.

Thank you once again for inviting the Institute of Directors to participate in this consultation. We hopeyou find our comments useful and we would be happy to contribute oral evidence on this subject should thisaid the Committee’s deliberations.

February 2009

Memorandum submitted by the Risk and Regulation Advisory Council

1. The Risk and Regulation Advisory Council (RRAC) is pleased to respond to the Committee’s requestfor a memorandum on the subject of their inquiry. We note that members of the Council have also beenasked to give oral evidence to the Committee on this matter and will also be pleased to do so.

Work of the RRAC

2. At the broadest level the very existence of the RRAC demonstrates an important aspect of theevolution of regulatory reform in the UK. The Committee will be aware that it was the 2008 “Public RiskReport” of the Better Regulation Commission (Public Risk: the Next Frontier for Better Regulation) whichrecommended the establishment of a Risk and Regulation Advisory Council. The RRAC was set up toaddress issues first set out in the 2006 BRC “Risk Report” (Risk, Responsibility and Regulation—Whose riskis it anyway?).

3. The RRAC was established in January 2008 with a remit to:

— work with Ministers and senior civil servants to develop a better understanding of public risk, andhow best to respond to it, through a series of workshops which consider both good and poorpractice;

— work with external stakeholders to help foster a more considered approach to public risk and policymaking; and

— be available to Ministers who may seek advice on particular issues from time.

4. The RRAC’s approach has been deliberately innovative and experimental, set as it is within a limitedtime frame, with our current mandate due to end in April 2009. Our programme of forum events, academicand operational research has yielded valuable insights into the complex landscape of public risks and theirperception. Our aim in relation to regulatory reform has been to move upstream from trying to improve thestock of existing regulation, to improve the process which creates (or often need not create) new regulation,with a greater awareness of the wider impacts of regulation on a complex system. It is notable that the UKcurrently leads the field in this area, with other OECD countries showing a high level of interest in our work,though this leadership may be lost unless a suitable successor to the RRAC is established before long.

5. The processes, approach and lessons from our work are currently being codified so as to form aresource for policy makers and others. This summary of the RRAC’s work will be helpful to the Committeeas a demonstration of our views on what should be a central aspect of improving the nature of regulationin the future. We will pass copies to the Committee as soon as they are available, towards the end of ourwork programme. In the time given to respond to your inquiry, we here give you some brief additionalcomments based on our work and experience to date in relation to your terms of reference and issues youhave raised.

Broader Focus than Just Business

6. In accordance with our remit, the RRAC’s work has considered the interdependencies of risk andregulation throughout British society, not purely in the sphere of regulations which aVect business. We wouldstress that if regulatory reform is to play a really meaningful role, it must (and your inquiry should therefore)broaden the scope of consideration to include all sectors of society, rather than business alone. Our responsehere reflects our belief that a holistic view of the benefits and impacts of regulation is crucial to ensuringappropriate legislation and other regulatory activity. It is important that all stakeholder voices are heard andconsidered, not just the loudest or most recent.



7. While “regulation” is typically seen to be the preserve of central government, we have identifieddiVerent “risk actor” groups including insurers, standards setters, the media and the legal professions, whichhave both direct and indirect eVects on the way public risks are perceived and handled by government andothers, whether or not there is any classic “regulation” on the issue. Equally, each of these groupings is likelyto be aVected in diVerent ways by the activities of the Government and others, and can be expected to reactin particular ways which may also have an impact on the underlying outcome of any intervention.

Lessons from the Financial Crisis

8. The recent economic downturn only reinforces the need to understand the full risk landscape and thedynamics of the system before knowing where to intervene to best eVect. We should be careful not to jumpto introduce new regulation without proper understanding of its likely eVects, including unintended eVects,on all parts of the system. But it is foolish to believe that there is an attainable “perfect system”. Even withall the information and evidence required, there are human limitations to a regulatory system. This does notindicate that a regulatory system based purely on defined targets and check lists is desirable: suitablyqualified people with sound judgement, and the space to exercise it, are needed as a vital part of an eVectiveregulatory system. They also help to provide the necessary balance with other government commitmentsand priorities. But we should also recognise and be prepared for the fact that failures will sometimes occurand do not necessarily mean that the system is inappropriate.

9. Lessons to be drawn more widely from the failure of the regulatory system to prevent the financial crisisinclude the key understanding that the system should be designed to focus on assuring overall outcomes,rather than lower level outputs which will be more straightforward to measure. This again reinforces theneed for qualified human judgement-based regulation, supported but not controlled by a requirement fortransparent information. Government needs to learn to be systemic and not reductionist in its thinking anddevelop processes which enable people to recognise uncertainty and provide full information, withoutpretending there is a perfect answer. An understandable striving for accuracy should not be allowed to setnarrow parameters which prevent consideration of the whole risk landscape.

10. The government can improve its capability to regulate in a proportionate and eVective manner byrecognising that there is currently a high degree of unhelpful institutional pressure and short-termisminvolved in regulation which makes it harder for reasoned, long-term judgement to take precedence overintuitive quick reactions. Trust from the public and the regulated is needed and can only be gained by takingthe long-term view, allowing regulatory intervention only when appropriate indicators show it to benecessary.

February 2009

Witnesses: Mr Tim Ambler, Senior Fellow, London Business School, Mr Clive Davenport, Trade andIndustry Chairman, Federation of Small Businesses, Mr Alexander Ehmann, Head of Parliamentary andRegulatory AVairs, Institute of Directors and Mr Rick Haythornthwaite, Chairman, Risk and RegulationAdvisory Council, gave evidence.

Q60 Chairman: Welcome, everyone. For the record,it would be helpful if the four witnesses would bekind enough to introduce themselves.Mr Haythornthwaite: Good morning. I am RickHaythornthwaite, Chairman of the Risk andRegulation Advisory Council.Mr Ehmann: My name is Alexander Ehmann, Headof Parliamentary and Regulatory AVairs, Instituteof Directors.Mr Davenport: Clive Davenport, Chairman of Tradeand Industry for the Federation of Small Businesses.Mr Ambler: Tim Ambler. I am an academic at theLondon Business School and I have been asked toclarify our relationship with the British Chambers ofCommerce. Professor Chittenden and I write reportson regulation at least once a year, but they are ourreports and our words published by the BritishChambers of Commerce who, I believe, usuallyagree with what we say, but not necessarily.Chairman: Thank you very much.

Q61 John Hemming: Before I go into questions,there are various declarations of interest. I amChairman of JHC LLP, which used to be called John

Hemming Company LLP, which writes software forthe security industry, including writing regulatoryresponse software. I am also Director of OMXHoldings Plc, which owns OMX Security Services,which is a clearing operation and a regulated entity.The first question is: does the complexity of financialmarkets, the global nature of the financial systemand the corporate and personal incentives infinancial institutions make the financial servicessector unique? Does the regulatory response in thefinancial services sector have a wider implication forthe regulatory reform agenda?Mr Haythornthwaite: I should make somedeclarations in the spirit of this. First, I am alsoChairman of MasterCard International. I am theChairman designate of Network Rail and I amPresident of PSA Energy, so I have business interestsas well of course, one of those being a financialservices company. Although this is not specifically atopic that the RRAC has spent time on, our view hasbeen that it has very specific challenges in the sector.Clearly, there are issues of complexity, there havebeen issues of transparency, there have been issues ofmisaligned incentives, two of which are particularly



28 April 2009 Mr Tim Ambler, Mr Clive Davenport, Mr Alexander Ehmann and Mr Rick Haythornthwaite

relevant to that sector, and the read-across is limitedand we should be cautious of the read-across. Thematter of incentives is applicable to any businesssector. I think that the focus, for the time being,should be on resolving the issues within that sector.My belief is that, if we look through the lens that wedo at the RRAC, the approach to date has beenadmirable. I think there has been a cold, hard look ata systemic, evidence-based level. There has been anattempt to separate fact from emotion and therehave been some fairly sensible points put forward.Some of the issues that have been prevalent in thatsector, in particular, the ability of a regulator toexercise real, risk-based regulation that canrecognise the risk to the future rather than the risk tothe past, the jury is out as to whether the solutionsoVered are relevant to that, and I think theproposition that more transparency is required isgood, but we have yet to see the solutions, we haveyet to see how principles-based regulation moving tooutcome-based actually stops the regulatory creepthat has been happening in the past. All of thoseneed to be resolved in the financial sector and, in themeantime, we should be very cautious abouthanding some of those lessons over to other sectors.Mr Ambler: Every sector is unique, of course,though alike in some ways and diVerent in otherways. The financial sector does have its ownregulatory system and, therefore, it can beconsidered on its own. I am not sure I share the viewthat the response so far has been as admirable as hasjust been said. We have had 450 pages from the FSA,but they do not add up to very much. What they failto recognise is that we have not witnessed a failureof regulation but a failure of regulators. Until theythoroughly recognise their faults, which wereactually primarily in the Bank of England and onlysecondarily in the FSA, and address those problemsof regulators as distinct from regulations, I do notthink we are going to make much progress.Mr Ehmann: The only thing I would add really isthat financial services clearly demonstrated itself tobe one of the areas where the public as a whole is lesstolerant of the risk culture around regulation. Forthose purposes, there is a serious debate aboutwhether there is a two-tier approach to the degree ofregulation that one takes across the country. Are wesaying that principles-based or risk-based or lightertouch, whichever terminology we might use, iscredible in areas where the public are willing toentertain risk but in financial services not? From anInstitute of Directors’ point of view, we do not havea distinct view on that, but clearly, as has beencommented by Tim, I think there is a very real riskthat, by looking at this example, we blame theregulation rather than the regulatory framework.Mr Davenport: I agree with that. I am not aneconomist and there is not anyone in ourorganisation that would put their head above theparapet as being an economist at the moment.Having said that, the problem for the small businessis that, wherever we are at the moment, the problemwe have is: how do we resolve it and how do we moveforward? Whatever the Government is going to do,it ought to be doing it as quickly as it possibly can sothat we can move forward.

Q62 Dr Naysmith: I wonder if I can just ask asupplementary question to Mr Ambler. You talkedabout the need for getting the regulators right. I wasreading the other day about what was happeningwith Northern Rock when it collapsed, and the thingthat was really at fault there was the corporategovernance. They had ridiculous things like four orfive meetings on the same day, or meetings bytelephone, and there was one person there whoseemed to dominate everything. Can the regulatorsreally regulate corporate governance? That seems tobe something that is very important in this area.Mr Ambler: I entirely agree with you that it is thebankers in the first place, and that includes theNorthern Rock directors that are primarilyculpable. However, that has always been true forthousands of years. If you are looking at what is newin terms of regulation over the last ten or 20 years,what happened in the case of Northern Rock wasthat the ball was dropped between the Bank ofEngland and the FSA and, to some extent, theTreasury. The tripartite system which started in 1997failed not because of the system, which was actuallyquite sensible, but because they failed to eVectivelytalk to each other and they passed the buck betweeneach other. As a result, nothing happened and, as aresult, we had the crash, but that was their fault, itwas not the fault of the regulation.

Q63 Mr Prisk: I should just, for the record, declarethat a member of my family works for the FinancialServices Authority. Can I ask, in the age of BernieMadoV, whether better regulation could haveavoided the financial crisis in the view of themembers of the panel, and what failures they cite,either in the regulation, to follow on Tim Ambler’searlier point, or the regulators, which they believehave been crucial in the last six months? I knowcertainly, Mr Ambler, that additional regulation isthe last thing we need at this moment, but I wouldbe interested to know where you feel the regulationcould have perhaps stopped or avoided the financialcrisis, if at all.Mr Haythornthwaite: I think it is important torecognise that the best regulation in the world willnot stop the determined and ingenious malefactor,and we cannot regulate for that. I think, from a layobserver’s standpoint, if you take some of theschemes that you are talking about there, if one hada truly independent regulator that waspathologically sceptical, started to look at thegovernance in detail, then one can see in hindsightthat there were some pretty red flags around that,but, if one looks at the history of the last few years,whether it was the group think that the securitisationand distribution of risk actually was going to have abeneficial portfolio eVect as opposed to the eVect ithad or whether it was that you can consistently earndouble-digit returns that all come out withinpercentage points of each other each year, ifeveryone is part of that system, then it will happen.Therefore, it does come back—and I agree with MrAmbler—that in the end it is not the failure ofregulation, but it is the failure of the regulator andthe approach of the regulator and, one has to say, the




experience and talent of the regulator, the ability topick these things up, think unconventional thoughtsand to be able to see when specific risk is in dangerof becoming systemic risk.Mr Ehmann: The only thing I would add is that onefeels that, if a regulator has a very clear vision aboutthat which it should be looking at and has that freerein which has been hinted at, it would choose tofocus its energies in areas where it is important to bedoing so. We hear the constant refrain from lots ofmembers, small businesses and the like, that themoney laundering regulations, for example, is amassively burdensome area, yet it seems one that theFSA and the Treasury have concentrated heavily on.On the other hand, we have had this very diYcultfinancial situation, seemingly stimulated byregulators perhaps not being heavy-handed enough.In taking a risk-based approach, that places a lot ofresponsibility on the regulator concerned to makethose risk judgments eVectively, and our argumentwould be that perhaps that was not done.Mr Davenport: Yes, I would agree with that. Just toreinforce it, I think the problem is that the risksthemselves were not assessed properly and that theresponses to those risks were not acted upon. That iswhere the problem lay, not the system, not theregulators, the regulation itself, but the system thatwas actually being run within the regulators. Thatwas the problem, I think.

Q64 Mr Prisk: Just briefly before I come to MrAmbler, on that point, if a major institution, theleader of that institution, contacts a senior politicalfigure—and this is one of the diYculties we have inunderstanding—is there not the informal challengefor the regulators as to knowing what the climate iswithin which they can operate? It touches back onwhat Mr Haythornthwaite said, which is that weignore sometimes the informal elements that areinvolved in this, the climate within which decisionsare taken, the group think. Therefore, from theFSB’s point of view, do you feel that the regulatorscan be challenged in isolation or should we belooking at the broader climate in which thosedecisions are taken?Mr Davenport: One of the problems, and it does notmatter whether it is financial services or health andsafety or trading standards, is that there is always adanger of the regulators being too close to themarket that they are dealing with and having theobjectivity of what is happening within that market.I think there is certainly a case to be said for theregulators that are at the front line to have to referback to a tier which is independent so that you havea detached view. If you looked certainly at thefinancial services and somebody stood back andcompared the situation as it is or as it has been overthe last, say, two or two and a half years inrelationship to several other areas and you looked atit from a historic point of view, there would havebeen all sorts of flags starting to come up to see theproblems that are arising but, because that is not thejob or was not perceived to be the job of theregulator, that was not done and that is where theproblem lies, I think.

Q65 Mr Prisk: In that context, Mr Ambler, if thepolitical masters are not distinct and independent,how diYcult is it for the regulators or indeed for thesystem to work?Mr Ambler: I think that is what a judge would call a“leading question”. Just two points. Firstly, I agreethe FSA is not independent, nor actually are any ofthe regulators. I published papers before, not for theBritish Chambers of Commerce, calling forregulators to be answerable to Parliament in the waythat the National Audit OYce is and not togovernment. I am not the only person who has donethis. It is quite clear, if you read the 450 pages justreleased from the Financial Services Authority, thatthe audience for those 450 pages was Number 10Downing Street, which I am sure was very impressedby them, but the general public may not have been,if they read them. My second point is that BernieMadoV was the subject of a complaint to the SECover a long period of years before his business finallycollapsed. The SEC completely failed to address thecomplaints it had received. That is a classic case ofmy very point, that we really need to address theregulators rather than the regulation. That level ofSEC incompetence, which to a lesser extent has alsohappened in the FSA, is where the focus of attentionshould go.Mr Haythornthwaite: Could I just add a point to thatand say that I think in that relationship withbusinesses there are two unhelpful reinforcing trendsthat one sees recurring. The first is what appears tohave been a fear of having a recurring issue, whichled to the restricted resources being focused on thosecompanies that had defaulted in the past, butprobably had learnt their lessons, so not enoughresources being put on the potential problems of thefuture. The second thing comes back to the point ofgovernance; I do not believe boards give enoughattention to these risk issues, risk management is stilldevolved, and I think there was not enough attemptto bring issues to the attention of boards and thatboards focus on risk when they see threats to theirbusiness model, they see a potential ramping up ofrisk, in other words, true exposure to the potentialfor systemic risk and where they see a threat toreputation. In the absence of that, there is adelegation to lawyers and compliance oYcers, andtheir tendency is to turn a principles-based regimeinto a rules-based regime which decreases thepotential for that system to be able to sense thevagaries, the judgments, the shifts in culture andtone that we talk about. A regulator that is workingwell will be able to stand back, I think, and turnthose vicious loops into virtuous loops in the future.I do believe that Lord Turner sees that, and that iswhy I come back to saying that the theoreticalresponse, I think, is a good one. Turning that intopractice is the challenge now.

Q66 Chairman: Turning it into practice in aninternational setting is quite a challenge as well,because this is not just a UK problem. Do you notsee any place for new regulation on a European or an




international front, or do you see the solutionsentirely in getting the regulators to work moreclosely and better together?Mr Ambler: I think there is room for some newregulation and I am certainly in favour of moretransparency, but I think that should take placethrough the existing frameworks of regulation. Forexample, the annual guidelines of the AccountingStandards Board are ignored in all the 450 pagesfrom the FSA, but the Accounting Standards Boardhas some very good guidelines on reporting. In fact,the whole organisation of the Accounting StandardsBoard is ignored, so the FSA are not working withthe people they should be working with. Theaccountants have developed internationalframeworks and networks absolutely to your pointand, of course, one can attribute more blameglobally or more to the UK. The proportion ofblame is a contentious issue, but never mind how itsplits down. I absolutely agree with you, Chairman,that the international dimension is terriblyimportant, but we should use the existing contactsand frameworks rather than create a whole newbureaucracy on top of what we already have.Mr Davenport: Yes, I agree with that entirely.Maintaining an international standard is criticalbut, as Tim said, the big thing is that there is aninternational accountancy system which is workingextremely well, and it is to a large degree ignored byquite a few areas. I cannot for the life of meunderstand why.

Q67 Lorely Burt: I wonder if I could just broaden thewhole question on risk-based regulation. We havetalked about it at some length, but do you think that,just as a principle, the idea of risk-based regulationis fine in theory, but flawed in practice? If that is thecase, what would we need to make it workeVectively? Are there in fact risks involved in risk-based regulation itself? Perhaps I could ask MrHaythornthwaite first because it is his bag, but I justwanted to say I am so interested in the paper that MrAmbler put in because I have never seen anythingquite so critical of regulation before, and Ithoroughly enjoyed reading what you wrote.Mr Ambler: Thank you.Mr Haythornthwaite: In some ways it is my bag andin some ways it is not. To be honest, what we look atis the influence of risk on policy-making, as distinctfrom risk-based regulation, where it is more aboutcompliance and enforcement and the use of limitedresource in trying to target the areas where you thinkthere is the greatest risk. I think as an expedientmeasure it is necessary, but again it comes back toexecution where the two big issues are, first, peoplemeasuring risk as an extension of the past asopposed to looking to the future to see where therisks are and, secondly, in a world where there is avacuum of political leadership in trying to createspace for even sensible failure, it means that it drivesa risk-averse culture within the regulator and then,by extension, within the regulated and, as a result,risk-based regulation in the end is de facto quiterules-based and still carries the burden of that. That

is the issue, so, in theory, risk-based has to be the wayto go, but I have to say I do not see it operate inparticularly eVective fashion very often.

Q68 Lorely Burt: Mr Ambler, how are we going tomake it operate eVectively?Mr Ambler: I am not sure rules-based versus risk-based is a real conversation.. As MrHaythornthwaite was quite rightly saying, onemerges into the other. All that has really happened inthis discussion in the last five years is that we have anew language. The reality does not actually change,namely that the directors of companies are supposedto run their companies properly, honourably and forthe benefit not only of shareholders but also of thestakeholders. If you go back to the AccountingStandards Board guidelines on reporting, it has saidquite clearly for over ten years that directors shouldreport on the risks. How many boards actually dothat? Very few. So why does the FSA not—this is agenius idea—actually look at the reports that arepublished and go back and say, “The guidelines ofthe Accounting Standards Board”, which are notmandatory, “say you should report on risk. Youhave not—explain that”? It is a very simple thing todo. You do not have to get into all this sophisticated,rules and risks, theology which I do not, frankly,understand. You just have to ask some simplequestions.

Q69 Lorely Burt: It is a diVerence of implementationthen really?Mr Ambler: Yes.Mr Ehmann: I would add a couple of slightlydiVerent reflections. From our point of view, whenyou have risk regulation, that comes with the factthat you have to accept that failure is possible. Youcannot have risk without any risk of failure. I dothink that is important, but I do think there is achallenge here, particularly for smaller businesses,again because the focus is very much on quite a high-level discussion, quite a high-level engagement, thetype of thing that Rick was really talking about, thatperhaps has been missed but is much-needed.Actually, the key thing that small businesses value isclarity, so, in some ways, there is an argument to saythat very clear, linear, rules-based, though light-touch, regulation is preferable to somewhat esoteric,general perspectives. I do have some reservationsthere, and I think the other factor that sits with thatis, when government civil servants are very muchbehind this or people who work in independentregulators, I am not convinced that the culture issuch within those organisations that they embracerisk in the right terms to be able to regulate in thisfashion.Mr Davenport: The Companies Act talks aboutreasonable precautions, not the total removal ofrisk, and I think that total removal of risk is analmost impossible task, but the situation as far as thecomparison between principles-based regulationand risk-based regulation, we would strongly comedown on the risk-based regulation. It is theregulators again which need education really.Coming back to the areas that we are more




comfortable with, from a small business perspective,we are looking at, as I say, trading standards andthose sorts of regulators. The problem we have isthat, when a regulator comes into a business, it isperceived, sometimes correctly, sometimesincorrectly, that he is there to penalise you, to createsome form of penalisation for you and, therefore,you do everything you can not to tell him anythingin case it could result in a penalty. Really, the feelingis that, if the regulators that came in were on our sideof the table, looking at our paperwork and saying,“If you did this or this”, things will be okay. Also,one of the biggest things that we find is thatregulators come in and, if you ask them a question,they often cannot answer it and have no intention ofanswering it. There should be some fall-back, andthose regulators, with modern technology, couldquite easily go back to a central core which couldgive them the information so that the businessknows where it is going. It is clear regulation that weare looking for.

Q70 Lorely Burt: It is almost like a spectrum, is itnot, where you have this lovely, esoteric, risk-basedidea on one end, but, when it actually gets down totranslation at the sharp end, it is performed like ametamorphosis into a tick-box type mentality andrisk-aversion?Mr Davenport: The classic situation, which I am sureyou saw on television recently, is the one aboutgravestones being pushed over. In this article therewas a certain pressure and it had to be done, andwhat was eVectively a guideline that was put out byHealth and Safety had become a standard, absolutedo by most of the councils. The woman who wasactually in the graveyard itself was saying that themost dangerous thing all around were all the polesholding up the headstones and people were trippingover them. There is more danger with what they havedone than the original thing.

Q71 Lorely Burt: There are colleagues around thetable who have had this interesting challenge in theirconstituencies. It is completely barmy.Mr Haythornthwaite: Could I just add to that that alot of the work that we have done has made it quiteclear that, when we talk about the relationshipbetween the regulator and the regulated, we knowthat it is a far more complex relationship than that,that it is surrounded by a constellation of risk actors,all of whom are playing on the situation, some ofwhom to great benefit—insurers, lawyers, media,local authorities—but some of whom have a vestedinterest in risk-mongering, and that alters thedynamic between regulator and regulated. Part ofwhat is required is someone—and this is where Ithink independence helps—who can stand back andexpose that because it is very diYcult for theregulator to expose it because it sounds like vestedinterest and it is very diYcult for the regulatee to doit because it sounds like bleating, so someone whocould stand back and expose that. We need someleadership to actually say that zero risk-tolerance isneither desirable nor achievable and actually risk isgood in some cases. That is how people learn. That

is missing. That is why at the end of all this chain youhave local authority oYcers who think it is virtuousto take the decision they have just taken. The wholecontext has to change, not just that singlerelationship, regulator and regulatee.Mr Ambler: Chairman, if I may make a cheapcomment, it sounds like the regulators neededucating, and I am sure my colleagues at theLondon Business School would be pleased to runcourses in real-world business for this new market.Chairman: We will note that.

Q72 Dr Naysmith: This is all happening, of course,at a time when we have the regulatory reform agendaand it is proceeding and we want the sorts of thingsthat we have already referred to, risk-based, light-touch, non-intrusive but eVective regulation; that iswhat it is about. We are going to end up probablywith more intrusive regulation. What are theimplications of that, if that is what actually emergesfrom the current reviews, for the financial servicessector, and for the regulatory reform agendaparticularly as it applies to financial services?Mr Ehmann: I think there is a diYculty with twothings. One is the perception and one is the reality.The perception I would highlight because I thinkback in 2008 Lord Turner made quite earlycomments in his chairmanship saying the era oflight-touch regulation is over, and I know he wasusing that in relation to financial services and theremay well be a very strong case for saying that is theright way to go, but there is an issue actually aboutthe outward creep of the better regulation,deregulation or lighter regulation—pick anyparticular explanation of improved regulatoryenvironment you like—which gets knocked oVbecause financial services has a knock-on eVect intoother areas. I think that is an area of some concernfor us from a perception point of view. I also thinkthere is a genuine risk at the moment, particularlygiven the economic circumstances and a number ofbroader interventions that seem to be emanatingfrom the Government and from Parliament atpresent, that the regulatory agenda seems to sit as aslightly esoteric or strategic insight against somevery tangible regulatory measures which are comingin and hitting businesses. Those two things takentogether are not particularly positive outcomes forthe broader better regulation agenda.

Q73 Dr Naysmith: Do you see it as being in conflictwith the objectives of the better regulation agenda?Mr Ehmann: Yes, I do. To give a specific, when weasked members last year about some of the newburdens that were coming in, including flexibleworking requirements, 73% of IoD members wereaware of those incoming regulations, but, whenasked about something delivered two years earlierunder the simplification plans, which was theremoval of the requirement to have a fire certificate,the recognition rate was 22%. Taking that as a ratherclumsy tool, it is clear that incoming regulations aremuch more of an awareness issue for business thanoutgoing ones and, therefore, you have a massive




problem where you have very obvious incomingregulations for business and not such a transparentview of what is being improved.

Q74 Dr Naysmith: The Government says that one ofits aims, and it is an important aim, is to supportbusiness. Do you think the need to respond to thefinancial crisis will interfere with this?Mr Ehmann: I think from a perception point of viewit will have an eVect, and there is indeed a risk on avery tangible level that, if the regulation is not well-judged, clearly it could make our financial servicesindustry uncompetitive within the world, but I dothink there is a broader agenda, as I say, aboutwhether the balance is right and the approach isright. If the fundamental desire is to improvebusinesses’ perception of the regulatoryenvironment in which they have to operate, then thefocus has to be upon how you change thoseperceptions, almost a psychological approach inmany ways. At the moment I do not think thatbalance is quite struck.

Q75 Dr Naysmith: So you think the principles ofbetter regulation still hold good and are stillimportant?Mr Ehmann: I think they still hold good, but I thinkthey do not go far enough.Mr Haythornthwaite: I would separate, if you lookat the history of the last couple of years, thoseregulations that are linked to social welfare, theTreasury. You have to accept there is always going tobe a tension between competitive business and that,and there is a political judgement as to where thatsits. An awful lot of dancing has happened aroundthat and very little has changed. I think elsewhere theprinciples are the same, that there is a level ofprotection that is the outcome that can be deliveredin many diVerent ways, and better regulation hasalways been about saying how you deliver that levelof protection against a given risk with the lowestpossible intrusion and, by extension, the least impacton competitiveness of businesses and, wherepossible, enhancing the competitiveness ofbusinesses. I do not think that has changed. Thetrouble is that “better regulation” as a term has beenhijacked in the emotion, and somehow we have tomove on and say this is all about risk managementnow, nothing has changed, it is about outcome, andwe need to make sure that we deliver the protectionswith the lowest possible impact on competitivenessand no more. As long as we do that, as long as theright discussions are held, I do not see it is the end ofthe better regulation agenda. It has not reallychanged.

Q76 Dr Naysmith: So you are quite optimistic?Mr Haythornthwaite: I would not say I amoptimistic because I think there it is still emotionallycharged and that is a dangerous time. What it needsis some deep breaths by leaders in the country to say,“Look, we understand it, but you have tounderstand that, if we react to the short-termemotion and then look back later, we will find wehave made some big mistakes, that the trade-oVs will

not have been thought through thoroughly and wewill not have found the most eVective ways ofdelivering the desired protections and we will allrepent at leisure”.

Q77 Dr Naysmith: Mr Ambler, do you haveanything to add?Mr Ambler: Yes. I do not buy the thesis justadvanced that there is a better regulation agendawhich has had some success. I do not even detect anydiVerence between “better” and “more” in thiscontext. Regulation in the UK and in the EUappears to exist, or the processes for it appear toexist, on separate planets. There is virtually no link-up between EU legislation, the process, and theimpact assessment process in the UK. We have apaper coming out next month on this subject, if anyof you would be interested. It is extraordinary to methat, after we have been in the Common Market for35 years, this situation still exists. We can produce,and have produced, chapter and verse on this. Totake a very specific example, the UK has beenpushing, quite rightly, for the single market, whichwas why we joined the EU in the first place. If youthink about it, a single market needs a single set ofregulations. That is what a single market is.Therefore, in areas within EU competence—and Iam not talking about things like tax and so on, whichare outside EU competence—you either needregulation for the EU as a whole or you do not needregulation at all. That is a pretty simple and obviousthought, but does it appear in the channels ofWhitehall? No, it does not, and there is a verycomplex set of systems designed to avoid thatquestion. Certainly, when a minister signs oV animpact assessment saying that, in his or her opinion,this regulation is necessary, the idea that it isnecessary for us and why is it not also necessary forthe rest of the EU is ignored. The only reference tothe EU on the Impact Assessment form is whether itis actually additional to an EU Directive; in otherwords, it is gold-plated? Gold-plating is a bit of amyth, in all fairness, so that issue is dealt with, butthe bigger issue of why we need the regulation whenFrance, Germany, Italy, Spain, Poland andLithuania appear not to need it, is not asked.

Q78 Dr Naysmith: I think that, if we go down thepath of discussing the EU and EU regulations, wewill be here until this afternoon.Mr Ambler: Maybe, Dr Naysmith, but it is alsocentral to what we are trying to do.

Q79 Dr Naysmith: I understand.Mr Davenport: If I can add to that, again referring tothe Chambers, they did a survey in Scotland talkingabout regulatory costs, and last year regulatory costsin Scotland went up £600 million to £4.2 billion,which is a 17% increase. Whichever way you look atit, regulations are costing more. That is a 17%increase to all businesses, not only small businesses,although the burden on small businesses becomeslarger because of their size, but it shows that it makesthe country less and less competitive the more and




more that regulation which is not necessary isapplied, and regulations coming from EU this yearwere 1,243.Mr Ambler: Very small!

Q80 Chairman: Mr Ambler, you just used thephrase, I think I am quoting you correctly, that to befair, “gold-plating is a myth”. Would you justexplain that?Mr Ambler: Yes. We have all charged theGovernment with gold-plating and there are someexamples where there is serious gold-plating. Forexample, the agricultural arrangements to payfarmers their EU dues were gold-plated. As a resultof that, farmers failed to get the money, and that wasentirely the fault of gold-plating here, but that isexceptional. Gold-plating does happen to someextent, but rarely. What happens much morefrequently is what is called “elaboration”. Forexample two sensible paragraphs in an EU Directiveon company law were translated into 90 pages in theUK which of course nobody had time to read.Whitehall included a lot of other stuV which wasclaimed to be clarification and elaboration ratherthan gold-plating. It is a fine point, but it is animportant one.John Hemming: If I can add a little bit on that, I hadan interesting experience at a European ScrutinyCommittee, one of these strange things that nobodyeven knows we have, where we were talking aboutthe Kinder Surprise egg and whether we shouldregulate to deal with it. We had so many papers andin the middle of it no evidence about what was goingto happen if the rules were changed, and that is howthese things go through, but then we had one ofthose usual debates where we note a report, whichmeans we do not vote for it or against it and it justgrinds through the process. It is not a good system;it generates rubbish.

Q81 Chairman: We have discussed regulators andtheir weaknesses, and I think certainly Mr Amblerhas implied that regulators do not have the necessaryskills and expertise to regulate eVectively, but, if thatwas the premise of his earlier point, what is lacking?What is needed?Mr Ambler: Realism more than anything else, andhumility would come in useful too, a recognitionthat the regulators were to blame, after the directorsin the first place, and a recognition that the world isnot entirely consistent. I am picking on the FSAbecause they are the extreme case of incompetencebut this is true of other regulators to some extent.The FSA needs to work with other interested parties,starting with the directors, but also with theAccounting Standards Board, and with the auditors,in order to produce better results. The FSA shouldnot imagine that their people, who know very littleabout financial services, can run businesses betterthan the directors can. That is an absurd startingpoint, but that is essentially what they are sayingnow. What they are saying now is, “We know betterthan companies how to run these companies”. It isan absurd lack of humility that is actually going tocause further trouble in the future. I am very gloomy

about the Financial Services Authority. I do notwant to waste the time of this Committee, but, if youlook at how Venice lost its financial services industry,which kept it going in the 17th and early 18thcenturies, and why for two centuries thereafter it wasan empty shell. Two centuries from now the omensare bad. Tourists will be going down the Thameslooking at empty buildings on Canvey Island withivy growing up the walls and saying, “What werethey for?” What happened in Venice then—and Ihave drawn this to the Chancellor’s attention, but hewas not very interested—is happening in Londonnow.

Q82 Chairman: Where regulators are engaging moreclosely with the regulated in, for example, the workthat the LBRO are doing in reaching out andworking in partnership with the regulated, and theway some of the relationships occur between thebigger companies and the relationship with say,HSE—for example, in my own constituency thechemical sector has a very close relationship with theregulators to work as a partnership—do you see thatas the model to apply elsewhere, including the FSA?Mr Ambler: I certainly think, and indeed the pointhas been made by my colleagues, that that is a goodfirst stage, but it is not just with the companiesthemselves. As I said, it is with the accountingauthorities and with auditors and with other people,and to work with people rather than to work againstthem. I think we all agree with that, but that is a veryimportant point. It is certainly not what Lord Turneris saying at the moment, where he is asking us all tobe very frightened of him, which perhaps weshould be!Mr Ehmann: I think there is another point. I take thesame question in a slightly diVerent direction as well,which is that I hinted earlier at the fact that theincentives and benefit system around the CivilService and indeed independent regulators, for us, asthe elephant in the room, if there is not a systemwhich really encourages the individuals working atall levels of regulatory bodies or as part of theGovernment as a whole to look at the risks andbetter regulation opportunities that exist in everypossible intervention, you are still going to end upwith some quite clumsy and heavy-handed ones.

Q83 Chairman: How can governments andregulators ensure that regulations achieve theirintended objectives, their desired outcomes, andhow would you seek to improve the currentapproach?Mr Davenport: One of the problems we have withthat is that, when regulation is created, theGovernment enters into a consultation process withbusiness, but, when we actually examine thebusinesses involved, they are all large businessesbecause small businesses cannot get involved; theydo not have the time or the money to be able to doit. That is where I think a lot of the problems lie, andthe emphasis should be much more on smallbusinesses because small businesses represent 54% ofGDP. It has been said, I think, in virtually every areaon the political spectrum that small businesses are




going to be the people that take us out of thisrecession, so a little bit more thought about howParliament engages with small businesses and howto engage with and encourage small businesses intothe dialogue would be a far better thing.Mr Ehmann: I think more openness early on on thepart of government when seeking to legislate willhelp. I can draw a specific example. Yesterday, wehad the Second Reading of the Equality Bill which,for good or bad, from our point of view, no impactassessment was presented in advance of it in relationto the detailed proposals that were eventually putforward. In a sense, there was no open debate earlyon about exactly what is featuring within this Bill,hence it does not have the degree of input and rigourthat one would have liked from business and otherstakeholders. That is really lacking. I do think,however, that post-implementation reviews areabsolutely integral here. I would go further than thecurrent system and I would say that, where post-implementation review takes place and there isproven to be a high level of discrepancy between thereality of a legislative intervention and the impactassessment which preceded the Bill, there should bea re-discussion of that in Parliament and possibleretraction of that legislative intervention.Mr Ambler: If I may say, there are not any post-implementation reviews. They have been called forand in the guidelines they should exist. I am notsaying there have been none, but there have beenvery, very few. It is an issue which the National AuditOYce might like to take a look at because it is clearlyimportant that the regulations be evaluated. There isa commitment to produce them, but whenever we tryto find any, we cannot.

Q84 Chairman: Any other comments on that?Mr Haythornthwaite: Chairman, I have a comment.One of the main reasons for establishing the RRACwas to really look hard at the culture of policy-making, and from it flows the whole question abouthow you improve the regulatory environment. Wefocus, in particular, on finding ways to re-injectreason where instinct takes over, instinct that hasbeen put into the system through either thebehaviour of the aforementioned risk-mongers orthe public pressure, intolerance of failure—it doesnot matter what it is that has driven the process intoa deterministic announcement-led policy-makingprocess. We have focused our attention on saying,“How can we put some particular patterns ofbehaviour into it that forces people to stick tosystemic evidence-based policy-making, engagesbroadly in consultation all the voices, not just theloud voices, and then ultimately communicatesaround the time of implementation such that it iseVective?” I highlight this because we actuallyfocused our work on outside business because therest of society was being forgotten, and it has prettymuch been forgotten in this discussion so far, butactually regulation aVects the whole of society, notjust business. There are lessons to be learned, inparticular, with Clive Davenport’s comment. Thereis absolutely no reason not to transplant thoseprocesses back into consultation within business

where we seem to be pursuing very traditionalmodels and we are looking for thoroughness asopposed to eVectiveness. Really, they take too longand they impose far too much time on businesses. Ifone looks back on the work we have been doing overthe past year, you will see diVerent ways ofapproaching this that will perhaps provide solutions.

Q85 Chairman: The Minister for EmploymentRelations and Postal AVairs, Pat McFadden, madea statement on 2 April announcing that regulatorybudgets will not proceed. What might now be thefuture of the regulatory reform agenda and what areyour views on the fact that regulatory budgets arenot to be adopted and on the proposed alternatives?Mr Ehmann: From the Institute of Directors’ pointof view, we are disappointed that budgets were nottaken forward. That is a strong disappointmentbecause we felt that the current measures that werein place around better regulation, includingsimplification plans and other activities, were notdelivering, as I said earlier, the satisfactory change inperception amongst business that we are looking for.Just to quickly quote, in 2007, when we asked peopleabout whether regulation had become broadlyworse, better or was about the same, 4% said worse,and in 2008 52% said worse, so the situation was,and is indeed, worsening. That is a general reflectionon regulatory budgets. I think it was an opportunitymissed. The Government’s proposals, which diVerfrom regulatory budgets, have not been fully fleshedout enough for us to have a real judgment aboutwhether or not they will in fact be successful. If weare to look at it in terms of what the Institute ofDirectors would have liked to have seen as adirection of travel, I have already mentioned that theculture and benefits and career progression elementsaround the Civil Service would be something wewould very much welcome some work on. I think tounderstand the link between communicatingeVectively with business about regulation and thecommensurate change in opinion is quite essential.As an example, I would look at the BRE’s portal fortaking in simplification suggestions. That, for us, hasnot been utilised enough, not publicised enough. Away of doing that, a very simple measure, would beperhaps to include some reference to that on thebottom of administrative forms that theGovernment puts out, basically linking the point ofburden with the point at which you can report it. Atthe moment, there is so much of a gap between thosethings that the likelihood of business reporting suchis very lean. As a result, I think the Government ischallenged in terms of shifting perceptions becausein the business environment, from my experience,peer communication of success on these things isactually worth much more than government-ledliterature or edict, so I would really encourage thatand, for our part, from the Institute we will besubmitting some 270 regulatory suggestions to theBetter Regulation Executive later this month, so weare playing our part. The last point I would make isthat, in terms of the External Regulatory PolicyCommittee which has been suggested by theGovernment as part of their proposals, not having




seen the detail, we are very much encouraged thatthat must not omit small- and medium-sizedbusiness interests, as we have seen some othercommittees over the past do.Mr Davenport: I would wholeheartedly agree withthat. One of the things is that the percentageresponses from the FSB on a very similar series ofquestions was within 5% and yet all of these statisticsare issued to government and they just seem to beignored. That is what we find exceedinglyfrustrating. As far as the regulatory budgets, we wereextremely disappointed by the fact that it is notgoing to be carried forward at the moment. We areconcerned about the format of the new proposedsystem. It appears to us initially, although it is onlyinitially, it is for one statement, that there is going tobe no accountability and no ability to make anydirect alterations. It will not have the power torequire changes in the behaviour of independentregulators. To me, it is a waste of time going there, ifthat is the case.Mr Haythornthwaite: In terms of regulatorybudgets, even though you recall I was Chairman ofthe Better Regulation Commission before RRAC,and it was actually the predecessor body, the BetterRegulation Task Force, which first proposedregulatory budgets, I never actually believed thatthey were a practical proposition. I foresee a worldwhere we would have employed more armies ofpeople to argue the numbers that in themselves haveassertion upon assertion. I think what is still missing,as was referred to earlier by Tim Ambler, is a verycommitted approach to cost-benefit analysis, realcost-benefit analysis, and post-implementationreviews with some teeth. The Regulatory PolicyCommittee being put in place, I am concerned aboutit. I do not think the Government or BRE really arecommitted to independent challenge, as reflected inClive’s point a minute ago, but, if the RegulatoryPolicy Committee is going to be put in place, itshould be given teeth, it should be equipped withpeople who are unafraid and informed enough tochallenge hard, who can spend the time and have thestaV work to do it, to really look at the numbers and,

looking through the viewpoint of the RRAC, askingquestions that go beyond business to the rest ofsociety and making sure that actual rather thanperceived risk is being accommodated, that all voicesare being heard and evidence-based, systemic policy-making has prevailed throughout the process. If abody is produced with that sort of teeth andeVectiveness, great, but over the last three years a lothas been said about cost-benefit analysis and I haveseen very little improvement.Mr Ambler: I agree with that. We understand whythe Government has kicked regulatory budgets intothe long grass and do not see any point in agonisingabout that. Whether it was right or wrong is not anissue. The stronger point is that I think the re-announcement of another two committees is a pieceof candy floss. These are two committees to replacetwo committees which replaced another twocommittees before we had those two committees,and this has been going on for ever. The committeesdo not actually, with all due respect to RickHaythornthwaite achieve much which issubstantive. I realise this is something you are notgoing to agree with, but, nevertheless, it is our view.The Prime Minister’s regulatory PRA committee,we are told, was very eVective, but no minutes haveever been published, no evidence has ever beenadduced as to their eVectiveness and we remainsceptical. We would be quite interested to see if thereplacement committee, which has been demotedfrom the Prime Minister’s OYce and that indicatesthe extent of his interest, is going to be any morepublic than its predecessor. I entirely agree with whatRick Haythornthwaite was saying, namely that weneed just one, not 15. There are seven separateplanets churning paperwork with nocommunication with each other and zero impact. Weneed one that works rather than seven that do not.Chairman: That is a very good point on which tofinish. Thank you, gentlemen, for your attendance.Please feel free to send any further information to us,either stemming from questions today or things thatcrop up through the next few weeks in this field.Thanks very much.



Tuesday 12 May 2009

Members present


Gordon Banks Judy MallaberLorely Burt

Memorandum submitted by the Financial Services Authority

1. This memorandum is submitted to the Committee as part of its “Themes and Trends in RegulatoryReform” inquiry. It covers:

— the role and remit of the FSA;

— the origins of the financial crisis;

— the required regulatory response to the crisis; and

— our regulatory philosophy.

2. The second and third topics are covered in detail in The Turner Review issued on 18 March by LordTurner, the FSA Chairman, in response to a request by the Chancellor of the Exchequer to conduct a reviewof banking regulation.

A. Role and Remit of the FSA

3. The Financial Services Authority (FSA) is an independent non-governmental body, given statutorypowers by the Financial Services and Markets Act 2000 (FSMA). FSMA gives us four statutory objectives:market confidence; public awareness; consumer protection; and the reduction of financial crime. These aresupported by a set of principles of good regulation which we must have regard to when discharging ourfunctions.

B. Origins of the Financial Crisis

4. Over the last 18 months, and with increasing intensity over the last six months, the global financialsystem has suVered its greatest crisis in over 70 years. The origins of the crisis can be explained by a numberof factors. They include:

— Growth of significant global imbalances over the last decade: Large current account surplusesaccumulated in the oil-exporting countries, China, Japan and some other east Asian developingnations, while fiscal and current account deficits grew in the US, UK and some members of theEurozone.

— Increasing complexity of the securitised credit model: Lower risk-free interest rates produced anintense search for higher yield at low risk. This demand was met by an increase in volume andcomplexity of the securitised model of credit intermediation.

— Rapid extension of credit and falling credit standards: Between 2000 and 2007, credit extension inthe US, the UK and some other countries grew quickly. This credit extension was partly drivenby the rapid development of securitisation, with an increasing proportion of UK mortgages creditpackaged and sold as residential mortgage-backed securities, thus not appearing on the originatorbank’s balance sheet. In addition, lending on balance sheet grew rapidly, as banks competed formarket share, often funding their rapid growth with easily available wholesale funding. This rapidexpansion of credit was accompanied by declining credit standards both in the household andcorporate markets.

— Property price booms: The rapid extension of mortgage credit and of commercial real estate loansdeveloped into a boom where rising property prices drove the demand and supply of mortgagecredit, resulting in even higher property prices. Continuously rising prices convinced bothborrowers and lenders that high loan-to-income ratios or high loan-to-value were acceptable giventhe potential for future capital appreciation. The widespread extension of credit on terms thatcould only be justified on the assumption of future house price appreciation was particularlysymptomatic of the US sub-prime market.

— Increasing leverage in the banking and shadow banking system: The increasing scale and size ofsecuritised markets and their mounting complexity were accompanied by a significant escalationin the leverage of banks, investment banks and oV-balance sheet vehicles, and the growing role ofhedge funds. Large positions in securitised credit and related derivatives were increasingly held bybanks, near banks, and shadow banks, rather than passed through to traditional, hold-to-maturityinvestors. Hence, the new model of securitised credit intermediation was not one of “originate anddistribute”. Rather, credit intermediation meant passing through multiple trading books in banks,leading to a proliferation of relationships within the financial sector. This “acquire and arbitrage”



model resulted in the majority of incurred losses falling not on investors outside the bankingsystem, but on banks and investment banks themselves involved in risky maturity transformationactivities. The explosion of claims within the financial system resulted in financial sector balancesheets becoming of greater consequence for the economy, with financial sector assets and liabilitiesin the UK and the US growing far more rapidly as a proportion of gross domestic product thanthose of corporates and households.

— Underestimation of bank and market liquidity risk: The growth of the securitised credit market andbank leverage and the multiplicity of inter-bank claims were also accompanied by changingpatterns of maturity transformation and in many cases by serious underestimation of bank andmarket liquidity risk. Maturity transformation—holding longer term assets than liabilities—wasincreasingly performed not only by banks, but also investment banks, oV-balance sheet vehiclesand, in the US, by mutual funds. This made the financial system overall increasingly reliant onliquidity through marketability—the ability to meet liabilities through the rapid sale of anincreasingly wide range and much increased value of long-term credit instruments. When the crisisstruck, the assumption that the markets for these instruments would remain liquid was provenwrong as concerns spread about the quality of such instruments.These interrelated eVects and relationships resulted in a self-reinforcing cycle of irrationalexuberance in pricing of both credit and volatility risk. Credit spreads on a range of securities andloans fell steadily from 2002 to 2006 to reach very low levels relative to historical norms. Inaddition, the price charged for the absorption of volatility risk fell, since volatility itself appearedto have declined to very low levels.

C. The FSA Response to the Current Economic Crisis

5. In order to address these issues, the FSA has been involved in three key areas:

— the Turner Review;

— engagement with international authorities and regulators through the EU, G20 and FinancialStability Forum; and

— the Banking Act 2009.

The Turner Review

6. In response to the Chancellor of the Exchequer’s invitation to Lord Turner to conduct a review ofbanking regulation, we published the Turner Review on 18 March and which we attach as Appendix A. Atthe same time we published a more detailed FSA Discussion Paper which sets out our initial thinking onhow the issues addressed in The Turner Review can be translated into practical policy proposals.

7. The Turner Review outlines the fundamental changes required in the approach to regulating banks.Specifically it covers the following issues: capital, liquidity, accounting, “shadow banking”, remuneration,credit rating agencies, derivatives trading, cross-border banking and EU supervision and regulation.

8. The Review also sets the direction and defines the changes we believe are required in internationalregulation, and which we will be proposing in the EU and internationally.

— Capital: The crisis has revealed the importance of focusing on the implications of bank capitalstructure for the behaviour of banks and the implications of that behaviour for the whole economy.Important issues for the international capital framework include the level of capital that we expectbanks to hold, the quality of capital and whether risk-based capital needs to be supplemented bya non risk-sensitive measure (such as a leverage ratio). In addition to this, any new system shouldinclude an overt counter-cyclical element of capital requirements to ensure institutions build up abuVer in good times which they can draw on in downturns. These views will feed into the BaselCommittee on Banking Supervision and the Financial Stability Forum’s consideration of newapproaches to the regulation of the capital adequacy of banks. In addition, more capital will berequired against trading books and the taking of market risk.

— Liquidity: New approaches to the management and regulation of liquidity are equally important.The lack of a defined international standard has reflected the extreme complexity of liquidity risk.As such, the regulation of liquidity should be restored to a position of central importance. Thisshould focus on individual guidance, stress-testing and cross-system analytical trends—notthrough a quantitative ratio regime. In December 2008, we issued a Consultation Paper proposinga tighter surveillance regime for liquidity along these lines.

— Accounting: The current system of reflecting the “facts” of the situation as at the balance sheet datesadds to systemic pro-cyclicality. It is important that the counter-cyclical approach to bank capitalis reflected in a significant way in published account figures, such as by anticipating future lossesbefore they are evident in trading book values or loan repayment problems.

— Hedge funds and shadow banking: Regulators and central banks in their performance of the macro-prudential analysis role need to gather much more extensive information on hedge fund or otheractivities outside the banking sector. They also need to consider the implications of thisinformation for overall macro-prudential risks. OV balance sheet vehicles which create substantive



economic risk, either to an individual bank, or to total system stability, must be treated as onbalance sheet for regulatory purposes. Regulators should also be given the power to applyappropriate prudential regulation to hedge funds or any other category of investment intermediary,if their activities have become bank-like in nature or of systemic importance.

— Executive remuneration: Remuneration structures played a contributory role in the origins of thecrisis by helping to create incentives for harmful risk-taking. We will need to include a strong focuson the risk consequences of remuneration policies within our overall risk assessment of firms, andwe will enforce a set of principles which will better align remuneration policies with appropriaterisk management. On 26 February, we published a draft Code of Practice which sets out theseprinciples and issued a Consultation Paper on 18 March 2009.

— Credit ratings agencies: The embedding, by institutions, of ratings based rules in operatingprocedures and the increase in the role of securitised credit increased the dangers of pro-cyclicalitywithin the system. In addition, ratings for structured credit proved far less robust predictors offuture developments. The resulting instability of ratings not only produced a pro-cyclical eVect butalso undermined confidence in the future stability of credit ratings. Questions were also raisedregarding the governance of rating agencies and issues relating to conflict of interest. Regulationcan and should address these issues, both through registration and supervision of rating agencies,and clearer understanding on the purpose of ratings and the requirements for institutions to holdsecurities of a specific rating. We continue to support the new European registration regime forcredit ratings agencies (CRAs) and we will prepare for subsequent implementation. Given theglobal nature of capital markets, it is important that the European legislation is matched byagreement of compatible global standards, and the FSA is working through IOSCO to achieve this.

— Derivatives trading and counterparty risk: The size and complexity of the derivatives market, andthe fact that most of it is almost entirely traded in an over-the-counter fashion, creates a dangerthat the failure of one party could produce market disruption. The FSA strongly supports theobjective of achieving central counterparty clearing arrangements for credit default swaps (CDS)trades. We will work with our international regulatory counterparts, market participants andinfrastructure providers to make trading and operational arrangements for over-the-counter(OTC) derivatives, including CDS, more robust.

— Cross-border banks: The financial crisis has revealed major fault lines in existing approaches to theregulation and supervision of cross-border financial institutions. The FSA’s past approach placedsignificant reliance on the home country regulator. The failure of Lehmans highlighted thatnational legal entities and national bankruptcy laws have a major impact on the relative positionof diVerent creditors, and the decision to allow Lehmans to fail clearly had huge global economicimplications. In light of this, we support a further strengthening of co-operation betweenregulators (eg through colleges of regulators for all major cross-border banks). However, this is notthe basis for a fully integrated approach to the supervision of cross-border groups. Supervisionneeds to be done on a national basis, however, host regulators should be able to ring-fence, wherenecessary, more local capital and liquidity in the local branches, which would improve the positionof local creditors and result in higher levels of capital and more liquid balance sheets.

— EU supervision and regulation: The underlying framework for banking regulation in the EuropeanUnion has been shown to be inadequate and unsustainable for the future. This was highlightedparticularly in the case of Landsbanki which, as Iceland is a member of the European EconomicArea, could operate in the UK as a branch over which the FSA had only limited powers. TheTurner Review sets out the arguments for both a “less Europe” and “more Europe” approach, andhighlights that the EU must now consider the appropriate way forward. The FSA Discussion Paperproposes for debate; the creation of a new European Union institutional regulatory structure,which would replace the Lamfalussy committees; and the reinforcement of host countrysupervisory powers over liquidity and the right of the host country supervisors to demandsubsidiarisation and, in the extreme, impose capital requirements.

Engagement with international regulators and authorities

9. Some changes to the international regulatory and supervisory framework have already been made andfurther work is in train. However, final conclusions as to the scope of the fundamental reforms that areclearly needed have yet to be reached. Work is currently under way to this end within the G20, the FinancialStability Forum (FSF) and the three main global regulatory standard setting bodies—the Basel Committeeon Banking Supervision (BCBS), the International Organisation of Securities Commissions (IOSCO) andthe International Association of Insurance Supervisors (IAIS). In addition, similar work is in train invarious fora within the EU. This has included the recent publication of the de Larosiere Group’s report tostrengthen European supervisory arrangements covering all financial sectors.



Banking Act 2009

10. The FSA has worked closely with the Treasury and the Bank of England in the development of, andconsultation on, the Banking Act 2009. This legislation forms a significant milestone in the work of theTripartite Authorities to strengthen financial stability and depositor protection.

11. The Act’s powers provide a framework for the successful resolution of failing banks, diVerentiatingbetween the roles of the Tripartite Authorities. These powers are intended to be used as a last resort andtherefore there is a high standard to be met before they can be exercised. The resolution tools themselvescomprise a transfer of all or part of the failing bank to a private sector purchaser or to a bridge bank (ownedby the Bank of England), or transfer of the failing bank to temporary public ownership. The FSA hasresponsibility for determining when the powers should be exercised in relation to a failing bank, whilstresponsibility for choosing the particular resolution tool lies with the Bank of England or, in the case oftemporary public ownership, HM Treasury. To ensure a co-ordinated approach, there is an obligation onthe Authority taking these decisions to consult with the other Tripartite Authorities.

12. In circumstances where a successful resolution of a failing bank is judged not to be possible, the Actprovides for a bank insolvency procedure. This procedure places an obligation on the insolvency practitionerto work with the Financial Services Compensation Scheme to ensure fast compensation in relation to eligibledeposits. The Act contains further provisions in connection with the Financial Services CompensationScheme, the purpose of which is to allow the Scheme to operate more eYciently and to clarify fundingarrangements. The FSA will collect information on behalf of the Financial Services Compensation Schemeto enable it to perform its functions. In parallel to the changes made under the Banking Act, the FSA hasmade further changes to compensation arrangements, including increasing the level of compensationavailable to claimants.

13. The Act also addresses the oversight of certain systems for payments between financial institutions.The FSA is working with the Bank of England to establish a cooperation protocol to ensure clarity of theirrelationship in respect of the supervision of these payment systems and the payment systems, alreadysupervised by the FSA, which are embedded in recognised bodies.

14. The FSA continues to work closely with the other Tripartite Authorities to ensure that the necessaryoperational framework is in place to enable eVective action to be taken under the new legislation. The FSAis also involved in discussions at European level on the development of legislation to provide a suitableframework for the resolution of failing banks where there are international implications to be considered.

D. Regulatory Philosophy

15. Historically, our regulatory philosophy has been defined by the strapline of “more principles-basedregulation”. This has often been misunderstood. Principles-based regulation means, wherever possible,moving away from prescriptive rules to a higher-level articulation of what we expect firms to do. This hasthe major advantage of placing on firms’ explicit responsibility to decide how best to align their businessobjectives and processes with the regulatory outcomes we have specified. The focus of our philosophy,however, is not only on our principles, but also on judging the consequences of the actions of the firms andthe individuals we supervise. Given this philosophy, a better strapline would be “outcomes-focusedregulation”.

16. In our view, the global financial crisis and the problems in specific firms have demonstrated more thanever the need to adhere rigorously to this regulatory philosophy. We will therefore take into 2009–10 a clearcommitment to embed fully outcomes-focused regulation in our supervisory processes, continuing to work,of course, in a proportionate and risk-based way.

17. As part of our work on our Better Regulation agenda, we are required to ascertain whether there hasbeen a failure in the functioning of the market that has given rise to the problem before we can consider theintroduction of new regulations. This is a requirement under FSMA. Only where we can establish that therehas been a failure in the market can we begin to consider the need for regulatory intervention. If this test ispassed we proceed to look at the various options to address the problem and investigate the costs andbenefits of each. This analysis of costs and benefits would help our assessment of whether we wouldintroduce new regulations.

18. In relation to our work on supervision, we have already embarked on a programme of change toimprove our supervision of firms. The key feature of this programme is greater supervisory resource of ahigher quality. We are on course to hire, by the end of 2009, 280 extra specialist and supervisory staV whichwill represent a 30% increase in our supervisory capacity. To ensure these individuals are properly equippedto do this job we have introduced a new Training & Competence scheme which also involves a regulatorytesting regime for existing supervisors.

19. In the future we will seek to make judgements on the judgements of firms’ senior management andtake actions if in our view their actions will lead to risks to our statutory objectives. This is a fundamentalchange. It is moving from regulation based only on observable facts to regulation based on judgementsabout the future. This more intrusive and direct style of supervision we call “the intensive SupervisoryModel”.



20. As part of this we are moving from focusing on systems and processes to focusing on key businessoutcomes and risks, and on the sustainability of business models and strategies. This shift implies a greaterwillingness on our part to vary capital and liquidity requirements or to intervene more directly if we perceivethat specific business strategies are creating undue risk to the bank itself or to the wider system. To do thiswe must have a clear understanding of business models on both an individual and sectoral basis.

21. This is supported by our more proactive approach to enforcement—our “credible deterrence”philosophy. Since we set out this philosophy, last year, we have demonstrated by our actions that we will useall our powers, including criminal prosecutions, to deliver our mandate.

22. EVective risk assessment of a firm requires industry knowledge and for that assessment to be set in amacro-prudential context. This was not done in the past, but will be done in the future. We will work closelywith the Bank of England to bring both regulatory and macroeconomic perspectives to this work.

March 2009

Witness: Ms Verena Ross, Director, Strategy and Risk, Financial Services Authority, gave evidence.

Q86 Chairman: Good morning. Ms Ross, first of all,thank you for agreeing to come and give evidencetoday. Obviously as part of our inquiry somethoughts from the FSA are welcome. You may haveseen some of the previous evidence sessions. We arefollowing a similar theme of questions. First of all,could better regulation have avoided the financialcrisis, at least in part? What principle failures ofregulation or regulators have come to light in yourinvestigations since the problems have started?Ms Ross: Thank you very much, Chairman. Goodmorning. I think it is very important to look at thecrisis in quite a broad way. It is clearly a global crisiswhich had some of its origins in quite fundamentalmacro imbalances in the global economic systemand so on, so it is clear that to my mind there werethings which were building up in the broader macro-economy and through financial innovation andother things over the last 10–15 years whicheventually led to a situation which then exploded,probably in a way that no-one quite imagined wouldever happen. That does not mean that there are notthings that we can learn from the way the build upof these various diVerent aspects developed. We arecertainly keen to make sure that both globally anddomestically we learn the lessons from that. We arelooking very closely at how we can make sure that wehave a proper understanding of the type ofdevelopments and causality of diVerent parts of thefinancial system working together, and working veryclosely not only domestically with the Bank ofEngland and the Treasury but also internationallywith other regulators, other central banks and so on,in getting better at looking at the macro picture andhaving mechanisms which allow us both to do thatanalysis and also to decide what we need to do interms of actions to try to prevent such a scenariooccurring again.

Q87 Chairman: The failures on the part of the FSAwere that you did not have the tools in place tomeasure what was going on.Ms Ross: No. There were quite specific issues whichwe have been very open about in terms of how weconducted our supervision on the ground, and wehave obviously published the internal audit reporton Northern Rock and taken some action as a result.I was trying to put it into the bigger picture. Basicallythere are lessons to be learned for the FSA

specifically about how it conducts supervision; forexample, the kind of capabilities of the staV, the typeof way in which we do supervision, the ability to looknot just at the micro, individual institutions when wesupervise but to look at the broader business modelof the individual sectors of the financial servicesindustry, and then to work with our colleagues, bothdomestically and internationally, to put that picturetogether and make sure that we then have the righttools, such as better capital requirements, lookingmore closely at liquidity and things like that, whichall were outlined in the Turner Report, in terms ofour policy responses.

Q88 Chairman: What risks are there in risk-basedregulation? Are risk-based regulation and principles-based regulation fine in theory but flawed inpractice?Ms Ross: I do believe that, ultimately, you have totake a risk-based approach to regulation because inany regulator your resources are ultimately limitedto some degree. You need to focus the eVort on thethings that you think present the most risk. Havingsaid that, clearly the crisis has told us that maybe wedid look at the risks from a slightly narrower angle,and looked specifically at institution-specific issuesand not enough at the broader picture. I think it hasalso shown that, although risk-based regulation tomy mind remains an important tenet of how you doregulation, you need to be sure that your riskappetite is properly adjusted to what is going on. Forexample, clearly the view has changed as to what isan acceptable failure in financial services and what isnot an acceptable failure. Those are the kinds ofthings which clearly need to be debated in the publicdomain and amongst regulators. We need to decidewith the public in terms of where that risk appetiteis. Risk-based regulation certainly will continue. Wealso believe that making sure that we focus the rulesvery clearly on the outcomes that we want toachieve—which was part of our principles-basedregulation outcome, focused regulation—issomething which remains very, very important. Wehave, however, said that some of the assumptions wehave made and other people have made that marketsultimately adjust themselves—it is going back to amarket mean that senior management of the firmsknow best how to run their business and so on—were hardly questioned, and part of what we are now



12 May 2009 Ms Verena Ross

doing is being much more intrusive in our regulationin terms of saying that we need to make judgmentcalls on the types of judgments firms’ seniormanagement take and we need to make sure there isproper governance in place to take those types ofjudgments in the firms concerned.

Q89 Chairman: In summary, carrying on with a risk-based approach but making sure that the underlyingprinciples stand up to more rigorous scrutiny.Ms Ross: That is right.

Q90 Chairman: Are there any particular actions thatyou are thinking of in that respect?Ms Ross: We are, for example, spending and havebeen spending a lot of time looking at the position ofcertainly our highest impact banks. Not surprisingly,a lot of our focus has been on that recently, but wehave also at the same time, for example, said that wewould focus more on testing some of the outcomesin the consumer protection area. We are generallytrying to make sure that where we are clear aboutwhat the outcomes are we want to achieve –first weneed to articulate those, obviously—we then are ableto test that and check whether that is happening onthe ground.

Q91 Gordon Banks: Principles-based regulationnever got the chance to prove itself properly. I aminterested, following on from the Chairman’squestions and your answers, in how outcomes-basedregulations diVer. Where you have talked about risk-based regulation and principles-based regulation,you have joined them together.Ms Ross: Yes.

Q92 Gordon Banks: How do we do that practically?How do we take the risk and the principles, mergethem together and deliver a system that not onlyprevents what happened recently from happeningbut also may well deliver improved standards and animproved ability to regulate and to monitor. I am alittle bit confused as to how they can be mergedtogether.Ms Ross: It is quite subtle that you have diVerenttypes of aspects of how you can describe regulation.As part of our statutory responsibilities we haveprinciples of good regulation which we have tofollow when we do regulation and supervision.Those also talk about proportionality and aboutbeing conscious of impact on innovation,competition and things like that. Already in thestatutory framework it is recognised that when youtake decisions about what to intervene in, where tofocus, you have a whole range of diVerent objectivesto meet, and it is always a fine judgment call of whereyou focus your attention. I think that will be acontinuing challenge for any regulator, whether thatis financial services or anywhere else. To my mindwhat is particularly important in financial services isthat we do revise, given the lessons we have learned,exactly what are the outcomes we want to achieve.We want to achieve a more stable banking system.How do we do that? We try to make sure that ourcapital regime works better than it did, we focus

more on liquidity supervision, we focus more on ourday-to-day supervisory attention at the high impactfirms (for example, we strengthen our supervisoryresource vis-a-vis that), so it does all come togetherultimately. That might make it a bit confusing, Iappreciate, but it is very hard to pull it entirely apart.

Q93 Gordon Banks: Do you think outcomes-basedregulation can be restrictive? Do you think theindustry might think that is restrictive?Ms Ross: I think industry does in a way like the factthat we describe what we want to achieve and thenwe leave a bit of flexibility around how to get there,because that is what outcomes-based regulation andultimately principles-based regulation is about. Onthe other hand, that clearly means that there is anissue of how do we then judge whether the rightoutcome has been achieved, and there have beendebates about that, and in terms of how far aregulator then second-guesses what is happening.One of our purposes is to be very clear aboutdescribing the outcome and then, also, through, forexample, putting out examples of good and badpractice, putting out descriptions of what we areexpecting to see, talking to firms in road shows andso on, what the expectations are, trying to be as clearas possible so that it does not feel like 20:20 hindsightwhen we then go in and say, “No, that hasn’t quiteworked right.”

Q94 Lorely Burt: In the future, how are you going toidentify major risk areas? How do you think yourenforcement approach is going to change to ensurethat these areas are properly overseen? Also you talkin your memorandum about the “intensivesupervisory model” and “credible deterrence”strategies. Do you have the resources to implementthem? And more importantly for me personally,what are they?Ms Ross: There are a lot of diVerent aspects to thatquestion. Obviously when I talk about taking risk-based approach to regulation, we have a wholediVerent range of diVerent tools that we can deployin terms of how we regulate. We can make policies,we can then do individual supervision of firms, wecan use enforcement tools. In all contexts, we needto choose quite carefully how we deploy those andhow we can be most eVective and eYcient aboutemploying those diVerent tools. As you rightly say,as part of the lessons learned out of the crisis, wehave been very clear that we feel we need to up oursupervisory game. We need to make sure that we dohave the right people, we do have the people whohave the knowledge and expertise to stand up tosenior management in big firms, first of all to fullyunderstand what that firm is doing and then to beable to put it into a broader context of the broadersector, so you can see whether there is an outlier oranything like that, but also so we are able properlyto challenge and have discussions at that senior level.That is all about making sure we are as focused andclear about what we expect and have the right peopleto deliver that. But obviously there will always bepeople who, despite our best eVorts, will not followthe rules, will decide to do things which are clearly




against the regulatory principles and outcomes thatwe have described. In those cases, we do need to havethat enforcement tool at our hand. We are very keenand have over the recent past taken great eVort inmaking sure we take that very seriously, so we havetaken, for example, more criminal prosecutions thanwe have ever taken before, we are generally makingsure that we use our enforcement tools as eVectivelyas we can.

Q95 Lorely Burt: These two wonderful terms, the“intensive supervisory model” and the “credibledeterrence” presumably you have covered that,have you?Ms Ross: In what I was just saying, yes. Theintensive supervisory model is the fact that we willhave more supervisors on the ground focusingparticularly on our highest risk institutions and thatwe have more specialist resource flowing into it. Wehave put in place a training and competence schemefor the regulators to make sure that we have the bestpeople and a consistency in how we go about it.

Q96 Chairman: In simple terms during the recentpast, you have not had the right number of highquality people on the ground capable of challengingthe perceived wisdom inside some of the biggerinstitutions.Ms Ross: The fact is, to my mind, that that is anongoing challenge and always has been a challenge.Even if you go back three years or something, youwill hear us talking in similar terms about the needto have the right people who can make the rightjudgments. Certainly one of the lessons learned outof the Northern Rock report was that in relation tothe biggest institution, the highest impactinstitutions, we did not have enough people on theground dealing with those institutions on a day-to-day basis, yes.

Q97 Lorely Burt: Is not the best way of ensuringgood behaviour maximising the certainty of beingcaught? If you have the people there, then they areable to see just what is going on.Ms Ross: Absolutely. The likelihood of detection isa big part in any deterrence strategy. Having saidthat, we do supervise 30,000 firms, and there is alimit as to how many people you can have on theground constantly checking to a degree where youwill be able to detect every single shortfall. It willhave to have a risk-based approach and we try to dothat through data collection as well as on-sitesupervision and the supervisory approach.

Q98 Judy Mallaber: You have mentioned 30,000institutions and also wanting to be concerned aboutthe riskiest. In what proportion of those institutionswould you seek to use this intensive supervisorymodel? How do you choose? Do you choose thebiggest? How do you assess which is the riskiest ifyou have not been supervising them enough to knowwhich are the ones which have the risk?Ms Ross: That is a very fair question. The way we tryto make this judgment is we look at impact andprobability. Impact is basically how important is the

firm in the context of the wider market. For example,for a bank, how many deposits does it have? For anasset manager, how many assets are undermanagement? That is how we measure the impact.Then we also look at the probability. Is there aparticular risky sector? Is this firm very close to itscapital requirements or not? We try to gather thatdata for all 30,000 firms as far as we can, but we thenconcentrate our supervisory resource on the“relationship-managed” firm population. I mighthave to come back to you on the exact figure. I thinkit is about 800 or so, 71 of which are what we callhigh impact firms, so on 71 firms is really where therecommendations of the Northern Rock report havefocused, as saying that for the top 71 firms we doneed to have at least two supervisors whollyresponsible for that firm at all times.

Q99 Judy Mallaber: Should you have been able tospot which institutions were going to get into troubleor were the circumstances so out of the control andexpectation that you would never have spotted themeven with this system?Ms Ross: We have been very open in our report onthe Northern Rock incident. We think we could havebeen done more to spot the issue. The question iswhether, even if we had spotted it, we could havedone much to prevent the ultimate outcome, becausewhat happened was such a liquidity crisis which wasglobally generated that, even if we had tried to shiftthat one institution which maybe we should havespotted as a bit of an outlier earlier, it would havebeen very hard probably to get it into a positionwithin the timeframe that was there to prevent thecrisis completely. There are some mistakes but it fitsinto the global picture. Whether we could havefundamentally changed the course of the crisis isvery unlikely. It is a global crisis. Ultimately it has hitnot just UK banks but banks around the world.

Q100 Judy Mallaber: In your evidence you havetalked about the increasing complexity of the sector.Does increased supervision of sectors like hedgefunds succeed only in the transference of risk towhere it is invisible? How will financial regulationdeal with that?Ms Ross: That is an ongoing challenge, certainly forfinancial regulation, but I suspect for regulationgenerally. Within the scope—which, after all, we arestatutorily given by Parliament—how do you makesure that you spot the issues that are coming up andthe risks that are coming up, and how do you alsomake sure that you keep an eye on what might justbe outside your statutory perimeter but has afundamental impact on what you are responsiblefor? We do regulate hedge fund managers alreadyand we are thinking about what more informationwe can gather about the activities of hedge funds tomake sure that we do spot where risks might bearising, but it is a general challenge because it is notjust in relation to hedge funds, it is eVectively inrelation to any activity that is not done in the “core”entity that we supervise and how we can monitorthose relationships with these things which are just




outside the perimeter of our scope and make surethat we understand what the risks are to the coresystem.

Q101 Judy Mallaber: If you put greater pressure onthose sectors, is it your assessment that they will thencome and transfer into new vehicles? What is goingto be the eVect of having more intensive regulation,if that is what you are aiming to do, on overallproductivity? Will firms come back and say, “You’restopping us making any money,” and is this going tobe even more disastrous?Ms Ross: To your first question, there is always therisk that by focusing more intensive supervision ona certain sector you do create the incentive to lookfor other opportunities to deliver profit and return inanother way. That is where our overall better and,hopefully, more comprehensive work with the Bankof England and others on getting the broader pictureof what is influencing the macro picture of how thefinancial services sector works as a whole, is veryimportant. Moving on to your second question interms of what it would mean for sector productivity:certainly the banking sector—let us be precise,because there are other parts of the financial servicesindustry which have been less impacted by thecrisis—is going to look very diVerent going forward,and no-one quite knows yet what that new normultimately will look like. We need to find a regulatoryregime which still allows the sector to conduct itsbusiness, but look carefully at where are the risksthat are arising and dealing with those in aregulatory way. But we want to do that in aproportionate way. It is really important that we donot just regulate any sector out of existence. It is veryimportant that we are clear about what the risks areand why we are intervening.

Q102 Chairman: Without naming names—becauseobviously it would have market implications—areyour 100 target high impact companies in aparticular sub-sector or are they right across allfinancial services? Are they judgments you havearrived at because of people-based weaknesses or inthe structure of the business sector?Ms Ross: They are all across the business, but theway in which we determine whether something ishigh impact is based on the impact, so it is notnecessarily that they have bad management or theyare particularly risky for other reasons. That is thekind of probability judgment which then overlaysthat impact judgment. The core to determining whatare our most important firms which we will spend asignificant time on is the impact. We then overlaythat for all firms with the probability judgment: Isthat firm particularly likely to cause us problems ornot and for what reasons?

Q103 Chairman: How will the UK regulatoryinstitutions fit into proposals for European andinternational regulation of the financial sector? Howcan the “underlap” of responsibilities that has beenpointed to as a source of some of the currentproblems be avoided?

Ms Ross: We very firmly sit in the internationalglobal and European financial market andregulatory regime. Financial markets are such aninternational business, therefore we cannot sit herein isolation regulating what is the UK industry andhave no regard to what is going on outside. First ofall, EU legislation and regulation directly feedthrough as to how regulation happens here, and sowe are very firmly and actively engaged in workingwith our European counterparts to make sure thatthe kind of lessons we have learned from the crisisalso get translated into what is coming out of Europein terms of future regulation. In terms ofinternational, a lot of the issues which we have facedhave been issues of complex, cross-border,international firms, the regulation of which weclearly need to improve. We need to work moreclosely with our fellow regulators around the world,through things like supervisory colleges where youget the relevant regulators together, to make surethat we all work in the same direction and we workwith them as well to try to work any contingencyplans and how you deal with a crisis that couldhappen.

Q104 Chairman: Have you learned lessons fromsome of your sister organisations in other countries?Ms Ross: Yes, we have. We continuously learnlessons, I would say, because we work very closelywith them. The fact is that no regulatory regime hasnecessarily come out of this looking wonderfularound the globe. Most regulatory regimes havefaced one problem or other. But we are looking at,for example, some of the ways in which otherregulators have looked at regulating capitalrequirements for banks, which varies a bit acrossdiVerent countries, and we are learning some of thelessons from that. We are also looking at how certainsectors are looked at, how you do the more macro-prudential, systemic-wide assessment. We areworking very actively with other regulators andlearning lessons from them.

Q105 Chairman: Does the complexity and globalnature of the financial system make the sectorunique? Or are there lessons that other regulatorsneed to think about from what has happened, giventhe global nature of the economy?Ms Ross: I would say there are certain aspects to thefinancial services industry which you might callunique or which at least have certain characteristicswhich I think make it particularly relevant; that isthe fact of how financial services link into the macro-economy. I think that is something which this crisishas exemplified. There are probably moretransmission mechanisms from certainly thebanking system into what then happens to lending inthe wider economy and, therefore, what that meansfor GDP growth and so on, so there is a kind ofdirect link into the macro-economy which maybemakes financial services a slightly special thing tolook after. Having said that—and I spend quite a lotof time talking to some of my fellow regulators here




domestically of other sectors—I think thefundamental principles of how to do regulation,some of the underlying principles, are not thatdiVerent. Looking at where you focus yourresource—how do you make sure you deal properlywith the highest risk and highest impact institutionsbut at the same time still regulate the large chunk ofsmaller institutions and so on—is something whichnot only financial services regulation faces butregulation generally.

Q106 Gordon Banks: You were saying to mycolleague about working with the business. Do yousee the FSA has any master plan? You said you didnot know how the banking sector is going to comeout. Does the FSA have a vision or a view of whatit would like to see at the end of the day, other thanstability and accountability?

Memorandum submitted by the Association of British Insurers

RESPONSE TO REGULATORY REFORM COMMITTEE INQUIRY: THEMES AND TRENDS INREGULATORY REFORM

The Association of British Insurers (ABI) is the voice of the insurance and investment industry. Itsmembers constitute over 90% of the insurance market in the UK and 20% across the EU. They control assetsequivalent to a quarter of the UK’s capital. Through the ABI their voice is heard in Government and inpublic debate on insurance, savings and investment matters.

General Comments

The ABI welcomes the opportunity to respond to the Committee’s inquiry.

Key points outlined in this submission include:

— The importance of preserving the ability to accept and manage risk, and in some cases better risk-sharing with the state.

— More consistent international prudential regulation and a new balance between the diVerent typesof regulation to reduce costs for consumers.

— Open reporting to investors to enhance governance, combined with a clear separation of rolesbetween accounting and prudential supervision.

Insurance companies in the UK and Europe have not been in the front line of the crisis. Generally, theyentered it well capitalised and well placed to weather the storm and remain so. In the UK, radical FSAreform of prudential standards in insurance after 2001 have improved the position of firms and moved theindustry closer to a “market consistent” framework for managing capital, for example, in the introductionof “realistic reporting” for with profits funds. That said, insurers are profoundly aVected by the crisis. Theprofitability of some products has reduced and they could be aVected by regulatory reform—there is aparadox that robust regulation may increase the cost of, or reduce the availability of some products.

The crisis aVecting the banking sector has uncovered serious weaknesses in some banks and in regulation.Failures have occurred in risk management, Board oversight, regulation reporting and the market’sresponse. Insurance has not suVered from the same problems and the same substantive changes to itsregulatory system are not required. Liabilities are more intensively backed by capital and many liabilitiesare far more long term. However, in an integrated financial system, changes in the banking sector will aVectinsurance and it is right that the lessons learned should be applied across the system where that isappropriate.

Risk-based regulation

1. A failure of risk in banking should not lead regulators to eliminate risk at all costs from the institutionsthey supervise. Insurance oVers a means of managing long term risks eVectively, backed by strong capitalrequirements, supervision of risk management, controls within the firm, and robust disclosure. Risk isinescapable and risk-taking is inherent to all life and economic activity. We must ensure that the financialsystem in general and insurers in particular are able to absorb and manage risk on behalf of society at large.

Ms Ross: We do not have the kind of blueprint whichsays, “This is what an ideal bank should look like.”We do have, and have outlined in the Turner Reviewto quite a large extent, the type of characteristics thathopefully would characterise a more stable but stillinnovative and properly working banking sectorgoing forward. Things like having counter-cyclicalratios, to make sure that you balance against thecycle. You build up capital in the upturn andhopefully can absorb then the losses in thedownturn.

Q107 Gordon Banks: Principles as opposed to ablueprint.Ms Ross: Yes, that is right.Gordon Banks: Thank you.Chairman: Thank you very much for yourcomments. If anything else comes to mind, we wouldbe grateful if you would drop us a note. We aregrateful to you for your contribution.



If they cannot, consumers will suVer, with fewer opportunities to manage their risks and higher prices forrisk management products. The alternatives to insurance-based risk management are also not attractive.Either the state must assume, on a permanent basis, a much more substantial set of risks and liabilities; orindividuals must shoulder a greater proportion and scale of risk alone.

2. Going forward, we need to consider whether there are new relationships with government that couldenable more risk to be covered. For example, the industry could oVer long term care products more easilyif government could give assurances about a positive and sustained tax treatment; long term annuity andprotection products could work better if presently unforeseen changes on longevity were carried bygovernment.

Innovation and Competition

3. The commitment to competition has been undermined by the crisis. A closed market with very basicproducts that does not respond to customer needs, in which there is little diVerentiation, is a recipe forstagnation. There must be a capacity to innovate and flexibility to fulfil the wide range of customers’ needs.Only through this process of innovation will the industry deliver choice “value-added” products to underpinfuture growth of markets and profitability. Innovation should not mean just re-badging of products. Norshould it mean over-complication of products and consumer confusion. Innovation should allow newproducts in savings and protection, to address changing longevity and the near for care late in life; it shouldallow more flexibility in savings; and it should ensure that traditional products such as motor insuranceevolve as the structure of demand and technology changes.

4. An innovative and competitive industry does more for consumers than regulation ever can. Regulationalways has a key role to play—from protecting consumers all the way to protecting financial systems, butit needs to work symbiotically with the market.

The UK Tripartite Framework

5. The ABI continues to support the UK regulatory arrangements (the Tripartite Authorities) butbelieves that improvements need to be made to ensure better co-ordination between the FSA, the Bank ofEngland and HM Treasury.

6. There have clearly been failures in the supervision of individual banks and the FSA needs to rectifythese—in particular there is a need for improvement in the regulation of liquidity requirements and a needto ensure better risk management. Recent events have made a strong case to rethink reserving policy andthe proposal for an “economic cycle reserve” has already gained currency in the Financial Stability Forum.In general, the authorities should be wary about a “read across” to insurance.

7. The FSA should remain responsible for the supervision of individual firms (including banks) and theBank of England should have a statutory remit to achieve financial stability. Only if these arrangements donot work is there a case to consider more radical alternatives. Wherever the line is drawn between the twothere will be a need for HM Treasury’s capabilities to be expanded in this area. It needs more close andcontinued involvement with its counterparties on all aspects of financial services, financial regulation andfinancial stability.

8. Proposals for a twin-peaks approach to regulation need careful thought. Prudential and businessconduct regulation cannot be entirely separated. Some conduct decisions have large prudential eVects. Andthere is a risk of costs being driven up by competition between regulators.

Industry Initiative

9. Much regulation designed to help and protect consumers has made it diYcult, if not impossible forthem to purchase the financial services they need on a reasonable and cost eVective basis, as flagged by theabove remarks on conduct of business rules. Regulation has narrowed markets and led to damagingpractices. That said, there have been occasions, from pensions and endowments to the treatment of claimsin critical illness, where the insurance industry has fallen short in its treatment of customers.

10. Going forward the ABI is committed to a variety of initiatives—some, such as customer impact areindustry led—others led by the regulator. Making sure that the mixture of principles and rules, backed bysanction delivers high quality customer outcomes remains the role of the regulator. Doing this in a way thatminimises uncertainty about what the minimum standards are in respect of consumers is also the role of theregulator. Beyond this, however, industry initiatives have potential to deliver better outcomes for consumers.Beyond these, a properly functioning market can do so much more as firms compete on brand, service,and price.

Ombudsman Requirements

11. All consumer initiatives, industry or regulator led, are aVected by the requirements by the FinancialOmbudsman Service (FOS). It can cause providers to withdraw from the market—particularly for thosecustomers with more modest incomes. This leaves those consumers with a restricted choice of very basic



products or without any product at all. In consequence, markets are being stifled and consumer needs arenot met because of the actual or perceived regulatory risk that exists in the UK regime around the role ofthe FOS. To help address some of these concerns the FSA has introduced the idea of “principles-based”regulation. It is potentially very helpful, but in execution this has resulted in considerable uncertainty whentaken together with FOS requirements. It is time to build a new “regulatory settlement” based on greatercertainty in the regulatory framework. This requires that the FOS retreats from a broader and oftenretrospective policy role and focuses more on arbitration in specific cases, so as to deliver quicker andcheaper dispute resolution.

Wholesale Markets and Governance

12. A great deal has been said defensively by various groups—senior management, hedge funds,traditional investors, regulators and now Government, as to why they are not to blame for the recent crisis.This debate will continue but there is already much talk of a move towards more restrictions on marketsand firms eg—narrowing the role of commercial banks, returning to functional regulation between types ofinstitution, geographical regulation to restrict cross border activities; and product controls, for example toprevent insurance companies operating financial product divisions.

13. All this is understandable but wrong. There can be no return to a financial services sector of 20 yearsago. That would simply create instability and a mass of new opportunities for regulatory arbitrage. Newregulation should be carefully focused to address specific issues. In general the best solutions lie in improvingtransparency (as opposed to having reams more disclosure). This would include products such as CFDs andshort selling. In both cases it is possible to take significant positions on firms without others in the marketknowing. If oV exchange trading is to remain valid for risk transfer and as a means to force eYciency onexchange, then it needs to be monitored to make sure it does not distort on exchange prices.

14. A number of major institutional actors—such as pension fund trustees and sovereign wealth fundsneed to be embedded into the corporate governance framework better, and in some cases need to showwillingness to become involved in dialogue with the boards of companies in which they invest about riskmanagement and long term plans for the business. Insurance companies have a stronger record than othergroups in corporate governance, though recent events will clearly give rise to a review of what needs to beimproved. There is much to be said for finding ways in which the owners of businesses can get better sightof, and better control over, the executives running those businesses. The reason why the eVort needs to gointo improving and enhancing governance is that because in a market economy it is the owners of firms whoin the end need to provide governance, not government or regulators.

February 2009

Memorandum submitted by the Association of Certified Chartered Accountants

Summary

The financial crisis was a product of poor governance rather than poor regulation. If anything, it shouldteach us that regulation is no substitute for sound commercial practice and trust. Although the state of theeconomy might make regulation more appealing, it has not made it more useful. Regulatory reform canremain relevant if structured around real improvements in the business environment, rather than arbitraryoutputs such as administrative “savings”.

The government needs to explore the potential of regulatory reform to complement fiscal policy byreducing burdens on business. But reform itself may benefit from some measure of business support.Improving SMEs’ ability to cope with new requirements could make regulation more eVective and lessonerous.

Calls for a “balanced” approach to regulation may reflect a false dilemma of increased burdens forbusiness v. increased levels of public risk. Instead we should focus on achieving the best possible publicbenefit for the resources consumed by regulation. This hinges on a better appreciation of risk, betterregulators, guidance and communication, and better co-ordination with Europe. But it also depends on adeeper understanding of business. Some improvement is possible if the Impact Assessment process can bestrengthened through improved methodologies and better access to grassroots information.

Introduction

1.1 ACCA is the largest and fastest-growing international professional accountancy body with131,500 members and 362,000 students in 170 countries, whom we support through a network of 80 staVedoYces and centres around the world. ACCA has its headquarters in London and 54,000 of our membersand over 60,000 of our students are UK-based.



1.2 The expertise of our senior members and in-house technical experts allows ACCA to provideinformed opinion on a range of financial, regulatory, public sector and business areas, including: taxation(business and personal); small business; pensions; education; and corporate governance and corporate socialresponsibility.

Evidence

2. Regulating in diYcult times

2.1 ACCA is concerned that a poor economic outlook can create the conditions for a surge in newregulation. Regulation is a form of taxation—a use of private resources to achieve government objectives.1

It will become more attractive to policymakers as the government’s fiscal options become constrained bythe deteriorating state of public finances. It may also become more acceptable to the public as it becomesmore risk-averse and increasingly looks to government for solutions.2

But the case for regulation outside financial services has not changed. Trust in the wider UK businesscommunity has not been compromised.3 The financial crisis has not exposed a world where workplaceinjuries, employer misconduct or lapses in food standards are more frequent or damaging than previouslythought. The nature of the underlying risks has not changed, nor has our understanding thereof improvedin any way. The risk of non-compliance rising among struggling businesses has been highlighted,4 but werethis to materialise, it would justify stronger enforcement, not additional burdens on compliant businesses.

ACCA’s SME Committee has warned that regulatory reform could become less relevant in the currenteconomic climate if pursued in terms of outputs such as regulatory savings.5 Insofar as there is a linkbetween regulation and productivity, it will become weaker in a recession. Regulatory “savings” achievedby cutting red tape are less likely to translate to increased output or profit. Crucially, time saved byentrepreneurs, a key component of these savings, is less likely to be invested in the business as risk-aversionrises and the productivity of additional work is reduced.6

If evaluated against wider outcomes, however, the case for regulatory reform is stronger than ever.Perceptions of regulation can influence the rate of business start-ups and employment decisions, which willbe central to halting the rise in unemployment.7 Additionally, reduced regulatory burdens could contributeto higher rates of business survival by reducing distraction among SME owner-managers.8 Finally, thecompetitive impact of regulation could become more acute in the current adverse credit environment,9 asany regulation requiring high levels of investment is more likely to raise barriers to entry. The ensuingconcentration cannot later be reversed by simply removing the regulations that created it.10

2.2 Learning from the financial crisis

The circumstances and regulation of financial services are unique in many ways, and thus any parallelsdrawn between financial regulation and the wider regulatory agenda must be treated with caution. ACCA’sview is that the financial crisis was caused primarily by a failure of governance, and only facilitated by theinadequacy of regulation or oversight.11 Nevertheless, we agree that some of the lessons from the recentfinancial crisis could be adapted for the benefit of the wider regulatory agenda.

Businesses cannot deal with risk they do not understand. Even when risk is actively addressed by thebusiness, high profitability can paralyse its control mechanisms. Therefore those who take ownership of riskneed to be both able and inclined to override income generators. Finally, the regulatory system mustrecognise that the relationship between a business and its customers should be characterised by trust.Regulation must aim to support, but not supplant, this trust.12

The credit crisis has also underscored three important themes in compliance behaviour: that compliancedoes not equal the absence of risk; that the way businesses choose to comply can vary, and finally; that theirchoices can have unexpected, even negative, consequences.

1 R A Posner, “Taxation by Regulation” Bell Journal of Economics 2(1): 22-50 Spring 1971.2 Edelman Trust Barometer 2009. Fieldwork took place from 5 November to 14 December 2008.3 Ibid.4 A recent survey by the National Accident Helpline reported employees’ belief that the recession has reduced attention to

health and safety since the recession hit. The latest data from the Health and Safety Executive (Q2 2008) suggest the numberof incidents has been falling, against seasonal trends.

5 ACCA, “Better regulation: what it really means” February 2009.6 RThurik, “Allocation andproductivity of time in newventures of female andmale entrepreneurs.”Small Business Economics,

December 2008.7 “The Good Guidance Guide: Taking the uncertainty out of regulation.” BERR, January 2008. For the eVect of perceived

administrative burdens on action taken to start a new business see Grilo, I & Thurik, R. “Determinants of entrepreneurialengagement levels in Europe and the US.” Industrial and Corporate Change. 17:6, October 2008.

8 C Decker, T Keyworth, and G Yarrow, “Identification of regulatory impacts on scale economies in compliance costs.” InBERR Occasional Paper no. 3, “Impact of regulation on productivity” September 2008.

9 ACCA, “SME Credit Update Q4 2008” January 2008.10 BERR “Impact assessment of regulatory budgets consultation” August 200811 ACCA, “Climbing out of the Credit Crunch” September 2008.12 Ibid. On the trade-oV between regulation and trust, see R Reeves and E Smith, “Papering Over the Cracks? Rules, Regulation

and Real Trust”, The Work Foundation, January 2006.



2.3 Beyond a “balanced approach” to regulation

Part of the renewed appetite for regulation stems from a belief that the process of consultation and theregulatory reform agenda are skewed toward the interests of business.13 However, independent surveyevidence cites regulation as a bigger obstacle to succeeding in business than any private sector factors,especially competition. This should, in our view, constitute at least a red flag. By this measure, small andmicro enterprises may very well be over-regulated.14

But it is pointless to consider regulation and regulatory reform as a zero-sum-game in which a supportivebusiness environment must come at the price of placing the public at risk. We also appreciate thatbenchmarks of “over-regulation” might be too simplistic as regulation can have strong enabling eVects forbusinesses.15

Rather than ask whether the government’s approach to regulation is balanced, it would be moreappropriate to consider whether regulation is oVering the best possible public value for the private resourcesit consumes, and whether it is using these without jeopardising long-term economic competitiveness andgrowth. We have argued in consultation that scrutinising this value-for-money relationship should be therole of the Better Regulation Executive.16

We believe that much of the infrastructure for good regulation is already in place. At the strategic levelthe UK’s regulatory reform programme is world-class. In practice, however, there is much room forimprovement.

2.4 Achieving value for money in regulation

A value-for-money approach to regulation must first of all be guided by an appreciation of the risks facedby the public and businesses. A risk-based approach not only identifies and ranks the areas where regulationcan make a diVerence but also highlights its potential benefits.17

An ongoing process of impact assessment (IA) must shape proposed regulations from inception—assessing both their eVectiveness and the costs they impose on business, and examining how alternativemeasures might perform. Internal and external scrutiny of IAs has been shown to motivate high-qualityassessment.18

Recognising that regulation is a form of taxation, Government needs to treat it accordingly: accountingregularly for the full burden that it will impose and the benefits it anticipates. To reduce uncertainty andfacilitate adaptation, government should publish its regulatory plans in the medium-term, taking care to setthe total regulatory burden at a level, defined by explicit commitments, that does not compromisemacroeconomic goals such as growth and competitiveness.

In this context, “better regulation” is independent of, and complementary to, deregulation just asachieving value for money in public spending is independent of, and complementary to, fiscal discipline.

Finally, a balanced approach acknowledges that only part of the eVectiveness and impact of regulationresults from the characteristics of regulations themselves. The rest is determined by perceptions amongbusinesses and the public,19 as well as businesses’ internal resources and compliance behaviours.20

Regulators need to maintain a solid understanding of these factors and monitor how they are changing.

2.5 Priorities for better regulation

Better understanding of risk—We strongly support the basic concept behind the establishment of the Riskand Regulation Advisory Council (RRAC): that a better understanding of public risk by all parties can bothreduce the burden and improve the outcomes of regulation.21 We are, at this time, unsure of the influenceand ambition of the RRAC. We hope, however, that past the scheduled end of its mandate in April theRRAC agenda will be internalised by government departments and regulators.

Better regulators—We share the Regulatory Reform Committee’s concern that regulatory reform is notas embedded or valued a part of the civil service career path as it ought to be.22 The lack of regulatory reformcapabilities is likely exacerbated by the dearth of public sector financial expertise recently highlighted by thePublic Accounts Committee.23 As the reform agenda becomes more ambitious, these skills gaps will becomeincreasingly problematic and the resulting reliance on a small number of better regulation “champions” maybe close to exhausting its usefulness.24

13 BERR “Regulatory Budgets Consultation Event—7 October 2008: Executive Summary” December 2008.14 IFF Research, “The Annual Survey of Small Businesses’ Opinions 2006–07 (ASBS 2006/07)” BERR, February 2008.15 See for instance M Hart, J Kitching, R Blackburn, D Smallbone, N Wilson, R Athayde, “The impact of regulation on small

business performance”, BERR, April 2008.16 ACCA “Regulatory Budgets: A Consultation Document—Comments from ACCA” November 200817 Ibid.18 NAO, “ Delivering High Quality Impact Assessments” January 2009.19 Better Regulation Commission, “Public Risk—The Next Frontier for Better Regulation” January 2008.20 Hart et al, op cit.21 Better Regulation Commission, op cit.22 Commons Regulatory Reform Committee, “Getting Results: the Better Regulation Agenda and the Impact of the Better

Regulation Executive” July 2008.23 Commons Public Accounts Committee, “Managing financial resources to deliver better public services” September 2008.24 On the adequacy of BRE resources in this area, see NAO, “The Administrative Burdens Reduction Programme 2008”

October 2008



Better guidance and enforcement—Across the public sector there is a need to foster an account-management mentality, whereby regulated parties are treated as customers and authorities can keep trackof their dealings with individual businesses. Examples of good practice, including Companies House andHMRC, should be emulated as widely as possible.25 Taken together, the regional better regulation agendaand the recent independent review of guidance led by Sarah Anderson CBE set out a vision of enforcementat the local level using inspectors trained as sector generalists. We have supported this move and hope thatit signals a long-overdue shift to using established intermediaries with a high penetration rate to improvecompliance behaviour. We believe that this will yield superior results to the current reliance on Business Linkand www.businesslink.gov.uk regardless of perceptions and performance.

Co-ordination with Europe—Impact Assessments (IAs) are prescribed by both the UK and EU regulatoryregimes, and yet there is little integration between the two processes at the domestic and European level.26

In the UK, guidance on both Impact Assessment and the transposition of EU Directives treats the UK andEC impact assessments as entirely separate documents.27 With more than half of all regulatory burdensoriginating from Brussels,28 better integration of UK and European practice in regulation design andimpact assessment is a promising, but largely unexplored, option for regulatory reform.

Better communication—Perceptions can be as important as facts in shaping the business environment,29

and so communicating progress in regulatory reform is crucial if businesses are to reap its benefits. But thismust focus not on “celebrating success”, as the government seems intent on doing,30 but on informingbusinesses, especially at the grassroots level, of the work undertaken and seeking their views. This could inturn not only generate useful insights for policymakers but also help change one of the most frustratingperceptions of all, namely that the government does not understand business well enough to regulate.31

2.6 Regulatory reform as business support, and business support as regulatory reform.

Governments around the world, including the UK, have embraced fiscal policy interventions in an eVortto contain the eVects of a global downturn. As a substitute for fiscal policy, regulation could limit the eVectsof fiscal stimulus—and regulatory reform can be used to reinforce them. The UK government came closeto taking this route in autumn, when it was widely reported that new employment regulations were likely tobe delayed in order to support small businesses.32 But it missed this opportunity and also appeared tomisjudge how the administrative burden of implementing VAT cuts at a very short notice would compromiseits fiscal stimulus.33

Throughout 2008, ACCA urged the government to consider regulatory reform as part of its support tohard-hit businesses. We noted in October that if every sole practitioner discouraged from hiring byemployment regulation were to take on one member of staV, they would reverse all of the job losses sustainedin the preceding year.34 We were delighted that the Anderson Review employed a similar rationale tosupport its recommendations.35

However, research commissioned by BERR suggests that the burden or otherwise of regulation isdetermined at least in part by business’ own capabilities and resources. This suggests a role for businesssupport as a regulatory reform mechanism. Building small businesses’ ability to comply can both reduce theburden of regulation and, by changing compliance behaviour, improve regulatory outcomes.36

3. Designing Better Regulation

3.1 Understanding business.

Independent evidence suggests that businesses don’t believe that Government oYcials understand themwell enough to regulate.37 It is fair to say that the practicalities of life in a small business cannot readily beappreciated by anyone working in a larger organisation, private or public. It is also a fact that SMEs arenumerous and diverse, and it is diYcult to derive a representative picture of their behaviour withoutcompromising its value through aggregation.

25 See for instance HMRC “HM Revenue and Customers and the taxpayer” June 2008 and Companies House, “StrategicDirection for 2010”. Commons Business and Enterprise Committee, “Companies House” November 2008.

26 Evaluation Partnership, “Evaluation of the Commission’s Impact Assessment System”. EC, April 200727 BERR Impact Assessment Guidance v3.0, 2008 and BERR, “Transposition guide: how to implement European Directives

eVectively” September 2007.28 BCC Burdens Barometer, 200829 See for instance Arenius, P and M Minniti, 2005, Perceptual variables and nascent entrepreneurship, Small Business

Economics 24(3), 233–24730 Commons Regulatory Reform Committee, “Getting Results: the Better Regulation Executive and the Impact of the

Regulatory Reform Agenda: Government Response to the Committee’s Fifth Report of Session 2007–08” November 200831 This view was expressed by 63% of respondents to a NAO survey in February 2008. NAO, “The Administrative Burdens

Reduction Programme 2008” October 2008.32 See for instance J. Eaglesham, “Mandelson faces union backlash” Financial Times, 21 October 2008.33 20% of respondents to a British Chambers of Commerce survey conducted in January 2009 found that the VAT cut had

imposed a net burden on their business, while 76% claim not to have benefited. “Business reports deteriorating relationshipwith bank managers” BCC Press Release, 15 February 2009.

34 “Don’t give up on regulatory reform, says ACCA urges to the new Minister for Communications, Technology andBroadcasting.” ACCA press release, 10 October 2008.

35 “The Good Guidance Guide: Taking the uncertainty out of regulation.” BERR, January 200836 Hart et al, op cit.37 NAO, “The Administrative Burdens Reduction Programme 2008” October 2008



We have welcomed the initiative to make small firms impact testing compulsory for all ImpactAssessments and are encouraged by the NAO’s reporting of a 78% compliance rate in 2008.38 But theselection of “representative” businesses, the design of a consultation process and the consideration ofalternatives for the purposes of the test all rely on oYcials’ familiarity with the realities of small business,which brings regulators back to square one.

We have welcomed the Regulatory Reform Committee’s call for grass-roots information39 as a means ofimproving policy-makers’ understanding of business, and would like to see more of it complementing themore aggregated process of “stakeholder engagement”. Initiatives such as the Small Firms ConsultationDatabase can contribute to this body of knowledge and should be strengthened.

Additionally, a requirement that IAs outline their assumptions on SME compliance behaviour would bewelcome. Making oYcials conscious of their assumptions concerning in-house resources and capabilities,supply chain relationships and bargaining power, the state of workplace relations, as well as recourse toadvice and compliance behaviour, would, we believe, improve the overall quality of IAs.

3.2 Understanding implementation.

IAs typically assume that regulations can be applied ideally, eliciting 100% compliance rates and a uniformresponse from businesses of all shapes and sizes.40 In reality, research carried out for the Anderson Reviewsuggests that the compliance behaviour of some 42% of SMEs will not fit a standard model,41 and that onein six businesses are unlikely to take proactive action in order to remain compliant. It is also documentedthat the adequacy of SMEs’ internal resources determines to a large extent the costs and benefits ofcompliance.42 In failing to account for the complexities of compliance behaviour, IAs can misrepresent thecosts and benefits of regulation.

There is potential to improve this understanding through post-implementation reviews, wherebyregulators can assess the responses of businesses and their antecedents. But the evidence suggests that theproportion of IAs that make reasonable provision for such fell to one in three between 2006 and 2008 despiteimproved IA guidance.43 That said, oYcials can hardly be expected to plan for reviews when they haven’tplanned for implementation in the first place. Incredibly, the NAO found that the proportion of IAs thatincluded an implementation plan plummeted from 74 to 20% between 2006 and 2008.44

February 2009

Memorandum submitted by the EEF

Summary

— The current economic downturn strengthens rather than weakens the case for reducing theregulatory burden faced by businesses.

— The regulatory response to the financial crisis must be targeted and proportionate. There remainsa strong case for risk-based regulation in many circumstances.

— A more strategic and coordinated approach to better regulation is required. Regulatory budgetsoverseen by an independent body should be introduced.

— Regulatory Impact Assessments need to be more consistent, based on more realistic assumptionsand take account of the cumulative impact of regulation.

— Better regulation appears to be a low priority for the European Commission, which is responsiblefor the majority legislation aVecting UK businesses.

About EEF

1. EEF is the representative voice of manufacturing, engineering and technology-based businesses witha membership of 6,000 companies employing around 800,000 people. A large part of our representationalwork focuses on the issues that make a diVerence to the productivity and competitiveness of UKmanufacturing, including regulation, investment, innovation and tax issues.

38 NAO, “ Delivering High Quality Impact Assessments” January 2009.39 Commons Regulatory Reform Committee, “Getting Results: the Better Regulation Agenda and the Impact of the Better

Regulation Executive” July 2008.40 NAO, op cit.41 Ipsos MORI, “Business perspectives of government guidance” BERR, July 2008. This percentage is based on a statistical

classification of SMEs and includes all SMEs except those classified as “capable but unconcerned” and “prepared andestablished”, whose compliance behaviour is considered predictable as it is unconstrained by the adequacy of internalresources.

42 Hart et al, op cit.43 NAO, op cit.44 Ibid.



Implications of the Economic Downturn

2. The current economic downturn strengthens rather than weakens the case for reducing the regulatoryburden. A 2007 EEF survey45 showed that a fifth of companies thought that the regulatory burden was oneof the three main barriers to growth facing their business. And in specific areas, such as health and safetyand tax compliance, a majority of companies had seen an increase in the cost and management time spentdealing with regulation and compliance.

3. Manufacturers are currently facing extremely diYcult trading conditions that are set to last well intothis year. It is essential, therefore, that companies are not faced with additional cost burdens as they copewith the rapidly deteriorating economic outlook. It is particularly important that no additional regulatoryrequirements are introduced that might impact on the flexibility of their operations. Departments acrossgovernment must seriously consider the merits of forthcoming regulation on businesses and delay thoseregulations which might negatively impact on companies’ flexibility.

4. The regulatory response to the financial crisis must be targeted and proportionate. Government mustavoid over-generalising and assuming that regulatory oversight must be increased in all areas of theeconomy. There remains a strong case for risk-based regulation in many circumstances. For example, theproposed risk-based auditing of compliance with the forthcoming Carbon Reduction Commitment is vitalto ensure that the cost of the scheme does not outweigh the benefits.

The Regulatory Reform Agenda

5. In addition to minimising the flow of new regulations in the short term, there is a growing need for amore coordinated approach to better regulation across government. Indeed, there is scope for more far-reaching reform of the regulatory framework. To date regulatory reform has been piecemeal, characterisedby range of isolated measures—eg guidance on consultations and changes to the Regulatory ImpactAssessment (RIA) process. But there is no sense of an overall strategy. The introduction of regulatorybudgets, and an independent body to oversee them, would help deliver a more robust, consistent, andstrategic approach to regulation across government.

6. EEF strongly supports the principle of regulatory budgets outlined in the BERR’s 2008 consultationdocument. A framework that provides a structured means of ensuring the flow of regulation is manageableand the cost burden minimised would begin to address businesses’ growing concerns about regulation.However, an independent body with oversight of the total regulatory budget and responsible for ensuringdepartmental compliance would be essential to ensuring that the system is robust, credible and delivers realbenefit to businesses.

7. A failure to commit to the introduction of regulatory budgets in the near future would be a majormissed opportunity at a time when businesses would really benefit from less onerous, better quality and moreconsistent regulation.

Improving the Quality of Regulation

8. In addition, there are a number of ways in which the existing regulatory framework in the UK couldbe improved. Perhaps most important, is improving the quality of RIAs and ensuring they fully capture thecost of business compliance with new regulations.

9. RIAs underpin the proposed system of regulatory budgets. While the framework for RIAs has evolvedin recent years, there remains a need for more realistic assumptions and consistency across departments.

10. The RIA process would benefit from greater engagement with businesses to ensure the full extent ofcosts is captured as accurately as possible. For example, the RIA completed prior to introduction of the EUEmissions Trading Scheme significantly underestimated the administrative burden of participation.

11. RIAs are based on assessing the cost of regulation on a policy-by-policy basis and there is nomechanism to take into account the cumulative impact of regulations on business. A framework for bettermanaging the total regulatory burden is urgently needed.

12. Other aspects of the regulatory framework which should be reviewed include the adequacy of (1)incentives for senior oYcials to deliver regulatory reform and (2) reviews of how regulation is working onceit has been implemented.

European Dimension

13. The regulatory burden faced by UK businesses is to an increasing extent dictated by the EU wherethe majority of legislation now originates. EEF is concerned that meaningful regulatory reform is a lowerpriority for European Commission (EC) than it is for UK government. Unless this is addressed any reformsimplemented in the UK will have limited impact.

14. EEF is concerned by the EC’s approach to assessing the impact of regulation is too often based uponthe theory of what should happen in a perfect world, rather than upon what will happen in practice. TheArtificial Optical Radiations Directive (2006/25EC) illustrates the point. Despite no evidence of a significant

45 EEF (2007) Blurred Vision.



problem that needs to be tackled, or any demonstrable health and safety benefits, implementation of theDirective would impose significant burdens on businesses and is due to be implemented by April 2010. Thisis just one example of an endemic problem, especially in health and safety legislation.

15. EEF is also concerned to note how “simplification” is used in practice by the EC. There appears tobe a mechanistic approach whereby replacing two directives with one is automatically regarded assimplification, regardless of whether the requirements on businesses have increased or decreased. Againhealth and safety provides an example. There are proposals to replace two directives (1990/269/EEC and1990/270/EEC) with one musculoskeletal disorders directive and this is being presented by the EC assimplification. However, the indications are that the new directive would contain all of the requirements ofits predecessors and more. It would therefore be better regulation in name only; businesses would experiencean increase in regulatory requirements.

Conclusion

16. The regulatory reform agenda is now more important than ever. Manufacturers are facing extremelydiYcult trading conditions that are likely to persist well into this. Government must make every eVort toensure that the burden of regulation and the costs it imposes on business are kept to an absolute minimum.There remains a strong case for risk-based regulation in many circumstances and any regulatory responseto the financial crisis must be targeted and proportionate.

17. To take the reform agenda forward, the immediate focus should be on improving the quality ofregulation by refining impact assessments. To deliver significant and enduring benefits, more ambitiousreforms are required. In particular, regulatory budgets overseen by an independent body should beintroduced and UK government must champion the cause of better regulation in Europe.

March 2009

Witnesses: Mr Stephen Haddrill, Director General, Association of British Insurers, Professor Robin Jarvis,Head of Small Business, Association of Chartered Certified Accountants, Mr Roger Salomone, Head ofBusiness Context and Mr Steve Pointer, Head of Health and Safety Policy, EEF, gave evidence.

Q108 Chairman: Good morning. There appears tohave been a slight communication problem with theABI. We had the name of a diVerent witness.Perhaps you would like to introduce yourself.Mr Haddrill: I am Stephen Haddrill. I am theDirector General of the ABI.Chairman: Thank you very much. The rest of thewitnesses, of course, we already knew. Perhaps wecould go straight on to the questions.

Q109 Lorely Burt: Do you think better regulationcould have avoided the financial crisis? What failuresof regulation or regulators have come to light as aconsequence? Was there a lack of managementcapacity or sector expertise or enforcementresources? What do you see as the main culprits inthis?Mr Haddrill: We have just heard from the FSA ofsome of the things that were particularly lyingbehind the crisis. First, I think the question of theimplementation of regulation is something to whichthey need to pay more attention and was a big partin the failure. It is all very well to get the rightframework of rules or even the right framework ofprinciples, but unless you know what is going onwithin the firm and you have eVective supervisiongoing on, then that rulebook will not deliver what weneed in terms of safe outcomes. Another part ofbetter regulation is that regulators work eVectivelytogether. Clearly we saw some gaps emerge betweenthe role of the Bank of England and the role of theFSA and those need to be closed. Equally, good andeVective working together across nationalboundaries I think is very important. That issomething that has started to be addressed in the

EU, and obviously the G20 process has started toaddress it, but I think there is much further to gothere. I guess the other issue, which should come outof a better regulation approach, is: Are we reallylooking for the dynamics in the market, the potentialunintended consequences in the way that firms willinevitably take changes in rules or change inregulation and try to find ways round it? I suspecttoo much of the analysis in the past has been a bitstatic: This is the market, we make this change,people then look like that, rather than trying toanticipate how the market itself will change.Professor Jarvis: Regarding the formulation, thedevelopment of better regulation, if you like, it seemsto me there is a deficiency. Fundamentally, hardlyever are consumers really consulted, so you have asituation where you have the industry and you havethen the regulators—and we have already heard thatthere is some questioning about the expertise of theregulators. Where is the end-user in this process?

Q110 Lorely Burt: Do they know what is going on?When the products are so complex, sometimes eventhe people in the industry cannot understand them.Surely it is up to the regulator to protect theconsumer in their own interests.Professor Jarvis: You may think that, but there isstill a strong case for involving consumers. Likeyourselves. Fundamental questions should be asked.There is no reason why they are not consulted. In themain they are not consulted.

Q111 Lorely Burt: Who are the consumers you aretalking about in this case?



12 May 2009 Mr Stephen Haddrill, Professor Robin Jarvis, Mr Roger Salomone and Mr Steve Pointer

Professor Jarvis: I am talking about the consumersof the end product; that is the product of banking orwhat-have-you, of all the products in the financialservices industry.

Q112 Gordon Banks: All of us.Professor Jarvis: Yes, exactly. My particular interestis small business, in fact, because I perceive that thesmall business owner is in a very similar situation intheir needs, et cetera, as a consumer. As there issomething like 3.8 million one-person businesses outof a total of 4.7—that is, 70% of businesses are one-person businesses—I think it is a very relevant point.Mr Salomone: I would say, briefly, that we representthe manufacturing industry, so our expertise is not infinancial services, although, of course, ultimatelyour members are consumers of some of thoseproducts. Probably the easy and honest answer, butmaybe not the most helpful one, is that it is too earlyto tell what the implications are for the widereconomy. The post-mortem of the banking crisis andregulatory reforms are ongoing, but we wouldcertainly like to flag upfront that we think there isvery much a continuing role for risk-basedregulation—or whether you want to call itproportionate regulation—where in the approach toregulation you take the level and the nature of it asproportionate to the risks and the activities you areregulating. For example, for our members there isenvironmental regulation or health and safety, and itstill very much has a role to play there. So if theoutcome of this is that it is seen as a failure of theimplementation of risk-based regulation in, say,particular parts of the financial services, that doesnot invalidate the general approach when properlyimplemented.

Q113 Lorely Burt: Thank you. Mr Pointer, do youhave anything to add?Mr Pointer: No.

Q114 Lorely Burt: Mr Haddrill, I understood fromwhat you said and the previous witness said that youseem to be in a situation where certain aspects of the

Supplementary memorandum submitted by ACCA

REGULATORY REFORM COMMITTEE INQUIRY INTO THEMES AND TRENDS INREGULATORY REFORM

ACCA’s Key Points

1. In general, most SMEs regard the overall objectives of regulation as a positive thing and agree thatgood regulation is vital to business success. Good regulation provides many important safeguards—for theenvironment, businesses, consumers and society. Regulations work well when they are proportionate,targeted to the problem and introduced only when absolutely necessary. However, regulations that are tooheavy-handed, or poorly conceived, can severely impact on the finances of small businesses—aVecting theproductivity, imposing burdensome administration and costs, and stifling innovation.

2. Due to their size, resources and constraints, small businesses are especially vulnerable to regulatoryburdens. The regulatory and administrative costs (measured, for instance, per employee and compared toturnover) for smaller businesses can be up to ten times higher than for large companies.46 The Government

46 European Commission.

financial service industry are whizzing around andchanging so quickly that it is almost like a virus, andthe FSA and the other regulators are like a team ofdoctors chasing it around, that as soon as they pin itdown to one aspect, then it will mutate and they willfind something else. Do you see that as a validquestion? Do you think we will ever have the tools inorder to be able to regulate properly?Mr Haddrill: Yes and no really. If you take theinsurance industry, which is the bit I know best, thenit is a highly competitive industry. In fact, financialservices generally is highly competitive. That drivesthat desire to innovate and find that extra margin,knowing full well that you will not preserve thatmargin for very long before new people come in andcompete it away. So, yes, that is part of the industry,but of course that can be extremely beneficial for theconsumer. It is beneficial to the consumer that thesedays you get a courtesy car if you have an accident.You did not used to get anything like that. That maybe a trivial example compared to what we are talkingabout, but it is an example of innovation. I think theFSA does have some of the tools it requires. To takean insurance example: the insurance industry gotinto a certain amount of trouble in about 2002/2003when the dot.com bubble brought the stock marketdown, and the FSA then introduced a new approachto setting capital requirements, capital reserves in theinsurance industry which was based on a verydetailed assessment of risk with very high levels ofcapital required. That has been extremely successful.AIG I think most people now accept was a kind ofbanking-related failure, rather than an insurancefailure. We have not had a failure in the Britishinsurance sector—touch wood. It went into the crisiswell capitalised and it has suVered and dealt with themost horrible shocks in the last few months. I thinkit can be done. When we talk about risk-based, whatit means is really understanding that risk in depth.That is not a light-touch option and it can be donevery eVectively.Chairman: We are inquorate now so we will take theremaining evidence informally.



needs to ensure that regulation, which is generally aimed at larger organisations, which have the resourcesto comply, is drafted with the “think small first” principle in mind, rather than trying to adapt legislationaimed at larger companies to fit smaller ones.

3. The priority has to be to ensure that existing legislative and regulatory measures are implemented andenforced eVectively, rather than reactively rushing through new legislation, or deregulating in a “knee-jerk”fashion. These are options that result in bad regulation. For example, the European Commission, which hasa target which we support, of cutting red-tape for SMEs by 25%, is pushing through a measure which meansthat micro-entities no longer have to file accounts. As they will still have to file accounts in order to accesscredit etc. this is a headline-grabbing measure that will not achieve what it claims.

4. Priority must be placed on ensuring that existing legislative and regulatory measures are implementedand enforced eVectively, rather than reactively rushing through new legislation. Reform of the regulatoryregime should not be seen as the only solution to the crisis. Implicit government involvement and tightregulation have been proven not to be a panacea, for example, in the case of government-sponsoredenterprises such as Fannie Mae and Freddie Mac.

5. The regulatory framework needs to be redesigned to cater for increasingly complex financial structures,and steps need to be taken to improve the transparency and stability of financial markets. The questions thatneed to be examined are many, and include: how to cope with the increasing complexity of financial markets;how to strike a balance between financial innovation and the management of systemic risks; what the roleof global co-ordination of financial regulation should be.

6. Globally accepted standards of supervision and regulation should be applied equally and consistentlyin all countries.

7. A key issue is the need to separate the activities of retail (ie taking deposits and making loans) fromall other forms of banking, although the calls for an absolute institutional separation between the two formsare unlikely to be met in the short term.

8. The challenge is and has always been how to manage beneficial financial innovation without stiflingit. Regulatory overbearance can kill innovation, so it is vital that the right balance is struck, however,innovation, as we have seen recently, often moves faster than regulation, thereby generating risks of its own.

9. Governments need to be clear on the purpose of regulation. The purpose of regulation is to facilitatelegitimate and competitive business activity while providing safeguards for the interests of stakeholders.Regulation should be flexible and principles-based, with a strong emphasis on ethical codes and practices.It should recognise the complexity of trading in global markets, while being grounded in simplicity.

10. The complexity and opacity of some investment products contributed to the crisis. Neither regulatorsnor bank boards appear to have suYciently understood or controlled these products. EVective regulatorycontrol at any level requires both transparency and comprehensibility; regulation should encourage greaterclarity and understanding and, where necessary, demand proper explanation of opaque financialinstruments.

11. It has been argued that many of the present problems arise from poor supervision of existingregulation rather than insuYcient regulation. The nature of the reforms proposed will place additionaldemands on supervisors. They will almost certainly need additional resources and skills to meet what willbe required of them.

1.0 The consumer

1.1 The consumer’s voice is critical in the decision making structures at EU and at national level if thefinancial services market is to operate eYciently. The current economic problems have further highlightedthe deficiencies in the regulatory process due to the lack of consumer representation in the development offinancial services policy. It is critical that in the process of re-building the regulatory framework the enduser—the consumer must be a participant in this process if future financial services regulations are to beeVective and the financial services markets are to run eYciently.

1.2 FIN-USE, a consumer and small business expert group set up by the European Commission to helpit meet the need to improve policy-making in the field of financial services by including a user perspectivehas recently published a paper47 addressing this issue. Small business owners have similar needs in respectof financial services products as the consumer and these comments refer also therefore, to SMEs.

1.3 According to the paper, a new regulatory architecture is required to restructure the system to restoremarket confidence at international, EU and at national levels. Regulators need new statutory objectives andpowers. A much more robust approach to prudential and market regulations and enforcement is also neededto maintain stability of the system and individual firms, and promote fair and eYcient markets.

1.4 The eVectiveness and accountability of the regulatory system has been undermined by the lack ofdirect public interest representation at policy making and decision making level. As a matter of principle,there is simply every justification for financial regulators and policy makers to have meaningful userrepresentation embedded at the highest level given the importance of financial markets to society.

47 Position Paper on Consumer Voice in Financial Services, FIN-USE, May 2009.



1.5 Indeed, previous failures to ensure that consumer interest is properly represented have been repeatedwith the creation of the De Larosiere Group. There was no direct representation of users on the Group, norapparently any meaningful attempt to involve consumers and their representatives during the Group’sdeliberations. This oversight could well result in further inappropriate and ineVective systems and regulationfor such an important market.

1.6 The lack of resources available to consumer/user groups hinders their ability to fully participate inlobbying policymakers, respond properly to consultations and participate in consultative panels and groups.The conventional models for involving interested groups in policy making and regulation seem to assumethat consumer groups are just as well placed as industry groups to respond in the consultation process.

1.7 If the financial services market is to become eYcient new measures are needed to improve consumerrepresentation and availability of resources at both national and at EU levels.

1.8 A series of recommendations are set out in the FIN-USE paper to address these deficiencies in thefinancial service market from a national and EU perspective. These are underpinned by three mainobjectives:

— To introduce much needed improvements in regulatory governance and accountability and toprovide users with more direct involvement in the policymaking process.

— Significantly improve the capacity of user representatives to represent the interests of users atEU level.

— To introduce principles of good consultation, to improve the consultation process.

ACCA strongly believes that the issue of consumer representation is one which needs to be addressed.

June 2009



Tuesday 7 July 2009

Members present


Gordon Banks Dr Doug NaysmithJohn Hemming John PenroseJudy Mallaber

Witnesses: Ian Lucas MP, Parliamentary Under-Secretary of State (Minister with responsibility forRegulatory Reform), Mr Jitinder Kohli, Director General of Strategy and Communications, and Mr PhilipRycroft, Chief Executive, Better Regulation Executive, Department for Business, Innovation and Skills,gave evidence.

Q115 Chairman: Can I welcome you, gentlemen, tothe meeting: Ian Lucas, the new Ministerresponsible, a particular welcome to you; PhilipRycroft in one of your early outings in this field; andMr Kohli, we are sad to see you moving on but bestof luck in your new career and thank you for theevidence that you have given on previous occasions.I am not going to say that about this session untilafter it is over! If I may go straight in because I knoweveryone is on very tight diaries at the moment. Inour evidence sessions various people havementioned the work of the Better Regulation Sub-Committee of the National Economic Council andwords like “waste of time if it had no powers” andit will be “candy floss”, and so on, have cropped up.What powers of challenge will the new NEC Sub-Committee and the Regulatory Policy Committeehave, who will be on it, and how will its members beempowered to challenge government thinking? Willit publish its opinions and if not how will theGovernment be held to account?Ian Lucas: The new Regulatory Policy Committeewill be transparent in the advice that it gives and oneof the roles that is very important is the advice thatit provides to the National Economic Council Sub-Committee relating to regulation will actually bepublicly available. By that we mean that thepressures that it is exerting upon the committee willbe there for all to see. I think that is extremelyimportant because in a similar way to the way thatthe information of the National Audit OYce ispublicly available and exerts political pressure on thepoliticians who ultimately make the decisions, thisadvice will be there in the open. I think that in itselfwill be a major pressure on the system to ensure thatthe agenda that it is pursuing is taken forward. Wesee it as a relatively small committee because I thinkit is important that its advice is tightly broughttogether and presented to the Sub-Committee of theNational Economic Council, but we do believe thatit should represent the broad range of businessexperience. It will certainly be tuned into consumerinterests because this is a very important agenda forconsumers too, and although it will be a smallcommittee it will be informed by the wholeregulatory reform agenda, informed by the work ofthe Better Regulation Executive and it will be—andI stress this again—conducting its work in the open.

Q116 Chairman: Will any of its work not betransparent?

Ian Lucas: Certain discussions will clearly not betransparent in that not everything that is said withingovernment is transparent, but the key issues and theadvice that it gives will be there for all to see.

Q117 Chairman: So it will hold the Government toaccount by virtue of its transparent process?Ian Lucas: Absolutely. What it says will be there andif the Government chooses not to follow its advicethen clearly the politicians will have to justify thosedecisions.

Q118 Chairman: It is a small committee you havesaid but it is an important committee. When will itmeet? What sort of budget will it have? And aquestion that stems from slightly derogatorycomments about yourself, has the importance of theregulatory reform agenda been downgraded by theDepartment?Ian Lucas: If I can deal with that question first. Ihave been in post for three to four weeks now and theregulatory reform aspect of my job has been a very,very important role within the work that I have beendoing. I think I met Jitinder if it was not on day oneit was certainly day two—Mr Kohli: It was day one.Ian Lucas: And he has conveyed to me theimportance of better regulation and the work of theExecutive in the strongest terms. I have beenenthused by his enthusiasm, which you will knowvery well, and I have also discussed the issue veryclosely with Philip on my left who will be takingmatters forward. This is an agenda that I personallysee as extremely important. I have run a smallbusiness in the past and I have been frustrated bybad regulation in the time that I was running thatsmall business and I know the importance andfrustrations that business has with bad regulation. Ihave already met with a number of members ofrepresentative organisations such as the CBI and theInstitute of Directors and heard directly from themabout their frustrations, so I am well aware of thehigh priority that business and industry give to thisagenda and I am determined to take it forward. TheGovernment sees it as a very, very important agendaand it certainly has not been downgraded and I amnot at all oVended by your suggestion that—

Q119 Chairman: It was not my suggestion; I just readthe press!



7 July 2009 Ian Lucas MP, Mr JitinderKohli and Mr Philip Rycroft

Mr Kohli: If we look at this from a long-termperspective of where we were three or four years ago,we did not have targets on administrative burdens,and people were talking about that. We had verylittle progress in Europe. We did not have impactassessments that gave transparently costs andbenefits. Over the last few years all of that haschanged. We have an admin burden target which hasdelivered real savings for business which the businesscommunity genuinely welcomes. There is obviouslymore to do in the future and we need to make surethat the target is delivered in its entirety rather thanin part, which is where we are to date. At theEuropean level we have 27 Member States signed upto a similar target at the European level. To say thatwas almost unimaginable a few years ago is not anexaggeration. Looking forward we are talking aboutan external committee to hold the Government toaccount, indeed reacting to some of the commentsthat this Committee has made to us. There has beena transformation in Parliament too. A few years agowas government getting the kind of scrutiny that weare now getting on regulatory reform? I do not thinkwe were. I think there has been a real transformationand I very much hope that can continue in the future.

Q120 Chairman: So when will the Committee meetand what is its budget?Ian Lucas: The National Economic Council Sub-Committee?

Q121 Chairman: The Regulatory Policy Committee?Ian Lucas: The first meeting of the NationalEconomic Council Sub-Committee is fixed and theRegulatory Policy Committee will meet in thesummer.

Q122 Chairman: I would be grateful if you couldkeep this Committee informed about that.Ian Lucas: Absolutely.

Q123 Chairman: How will the new committeesinteract with each other and the BRE and avoidoverlapping or creating gaps for things to fall downas an alternative? Who will have the power toexamine and change impact assessments and directactions based upon those changes?Ian Lucas: The National Economic Council Sub-Committee will be informed by the RegulatoryPolicy Committee, so the advice will be presented bythe smaller committee to the Sub-Committee. Thereason we want a small committee is that we wantthat advice to be very focused, very specific and, asI say, very public. The work of the Better RegulationExecutive will continue in a broader sense. It has avery, very broad role, an advocacy role as far as theagenda of better regulation is concerned which isextremely important, and the role of the BetterRegulation Executive will inform the specific advicethat the smaller committee is giving to the NEC Sub-Committee.

Q124 John Penrose: Just a quick follow-up,Minister, the reason we are asking these questions isobviously because the arrangements are an

alternative to the regulatory budgets which wereabandoned a couple of months ago. Why were theyabandoned?Ian Lucas: We made a decision that because of thepresent economic circumstances, which areunprecedented certainly for 50 years, we are in aposition where the focus of government needed to beon the assistance that government could provide tobusinesses under immediate pressure. As a result ofthe economic situation the Government has withinthe last year produced a number of diVerent policieswhich have themselves created additional burdenswithin government. In that context, the Governmentmade a decision that to introduce regulatory budgetsat this particular time was not the right way forward.Although we understand the compelling case forregulatory budgets, the focus was on the Real HelpNow strategy, providing help to business with theadditional funding that is being supplied bygovernment and that has been at this particularjuncture in the economic cycle the focus ofgovernment.

Q125 John Penrose: Can I just check, does that meanhad you had regulatory budgets basically you wouldhave broken them already because of the Real HelpNow strategy and therefore it was just not going tobe helpful and even embarrassing to introduce themand then break them immediately?Ian Lucas: No, it would not have been embarrassingto introduce them because it is a considered policyand a policy that brings benefits, but we have had anextraordinary economic year, one in whichgovernment has had to react very quickly to aworldwide recession which has created extremelyunusual economic conditions and at that particulartime the Government made the decision that theReal Help Now agenda and the implementation ofthe policies linked to that were to be the absolutefocus of government steps that were taken. That iswhat has been done. We are also taking forward thevery important regulatory reform agenda becausewe know that it is important for business at thisparticular time in the economic cycle not to haveadditional burdens placed upon them and the waythat we are doing that is through the structures thatwe have been talking about. They are structureswhich are closer in form to those of regulatorybudgets and we believe that is an eVective way ofdealing with the issue of regulatory reform at thisparticular time.Mr Kohli: If regulatory budgets had come into forcethe first year would have been a shadow year, so theyear 2009–10 would have been a shadow year, and sothe first year in which they would have had bitewould have been the year 2010–11. In the midst of arecession saying to the business community that ourpriority is to deliver something that is going to helpthem in two years’ time is not necessarily the rightthing to do, and indeed when the Governmentannounced its policies a number of business peoplesaid, “We can understand that right now your focushas to be on helping businesses through the




recession.” In the announcement the Governmentmade, it made it clear that it is looking to implementregulatory budgets at some future date.

Q126 Dr Naysmith: It is a pleasure to see you herethis morning, Minister, welcome. We have takenevidence already in this inquiry from consumers andconsumer organisations, particularly the CitizensAdvice Bureau, Consumer Focus and theAssociation of Chartered Certified Accountants,and all of these bodies advocated much greaterinvolvement of consumers in forming regulatorypolicy, including specifically the financial sector.Given the potential impact of regulatory policy onconsumers, do you agree that there is a case forgreater representation of consumers on the boards ofregulators?Ian Lucas: I have a real enthusiasm for the voice ofthe individual consumer to be heard loud and clearin the regulatory process. Exactly how that isachieved I think is the complex and, as is so often thecase, diYcult question. I already touched in one ofmy answers earlier on the fact that the consumervoice needs to be heard in the Regulatory PolicyCommittee, although that does not necessarily meanit should be a specific advocate from a consumerorganisation, but I think it is very, very importantthat we do take into account those voices.

Q127 Dr Naysmith: Will there be consumerrepresentation then on the Regulatory PolicyCommittee?Ian Lucas: The voices of consumers will be part ofthe mix.

Q128 Dr Naysmith: Some people would suggest thatthat is a slightly weasel phrase because we do notknow what it means.Ian Lucas: I mentioned that the committee wasgoing to be small and the challenge when you have asmall committee is that it is important to get the rightmix of abilities and experience within thatcommittee. What I am trying to make clear is havingthe experience and knowledge of individualconsumers will have to be reflected in that committeebut whether there is going to be a specificrepresentation I think that is diYcult to achieve witha very small committee.

Q129 Dr Naysmith: Are you saying the decision hasbeen taken not to have the contribution ofconsumers?Ian Lucas: No, I am not.

Q130 Dr Naysmith: It is still possible.Ian Lucas: —Because we are not talking about theindividuals concerned. I think we need to hear thevoice of the consumer in the process and a reallyimportant part of what I want to achieve is ensuringthat the diVerent regulators across the board make ita fundamental part of their work to involveconsumers and consumer organisations indeveloping policy and any regulation that they arepursuing, so it is very important that that voice isheard. I want to be an advocate for the consumers

within that process to make sure that regulators aretaking notice of the consumer in the policies thatthey present.Mr Rycroft: If you think about the process ofmaking regulation, it is also about getting thatdeeply embedded within the process by whichdepartments make the regulations they want to putforward—the consultation mechanisms that theyput in place, their responsiveness to the wider groupof stakeholders that the policy will impact on—sothat when the regulations come through we havesome assurance that they are, if you like, reflectingthat broad range of interests. For the organisationwhich I now have the privilege to lead it seems to meone of the roles that we have is to be testing thequality of the propositions that are coming forwardacross that whole range and making sure that theregulation is proportionate and fit for purpose, andthat means reflecting the needs of all stakeholders.

Q131 Dr Naysmith: I can see that that is reasonableenough because if you have one individualrepresentative they become a sort of token and youhave got to do much more than that, but whether ornot there should be a representative as well as doingmuch more than that or not is a matter that stillneeds to be sorted out. If I can switch the emphasisslightly. How can regulators be given moreindependence and more power to challenge thebusiness strategies of regulated companies to avoidrepeats of some of the things that happened in thefinancial sector? Normally they say it is a businessstrategy but actually you need some sort ofregulation or ability to look at that and possiblyregulate it.Ian Lucas: Clearly we are operating in a diVerentcontext now because of the financial events of thelast year. People are generally looking at the issue ofregulation and taking into account the experience ofthe economic events of the last year or so, but I thinkit is important not to simply look at the agendathrough that prism. I think it is very important thatwe accept that good regulation is important in whatwe need to achieve. I see good regulation asinvolving close working between regulators and therelated and a relationship where the regulated,whether it be a company or an individual business,can have a relationship with the regulator that setsparameters and a framework within which they bothwork together so that there is co-operation and apositive relationship. I have a personal experiencewhich is seared in my memory of being regulated bysomeone who I considered at the time of as being ofa tick-box mentality who was telling me how to domy job, which I did not think was the appropriateway to proceed, and it created a very negativeimpression by me of that particular regulator at thatparticular time. That is an example which is at thefront of my mind when I look at regulation. I thinkthat we have a complex system of regulation withlots of diVerent regulators across diVerentdepartmental sectors and one of the roles that I wantto take forward is to work to get those regulators tohave a positive relationship with the businesses thatthey have responsibility for.




Q132 Dr Naysmith: And you are suggesting that theywould have a close enough relationship to be able toknow what new business strategies were as they werebeing developed?Mr Kohli: I think this depends on what you areregulating. If you are regulating financial serviceswith significant systemic risk, the implication of amanagement strategy can be that a financialinstitution folds or is under risk of folding andtherefore the government has to bail it out because itis too big to fail. That is a very diVerent propositionto a company which is installing machinery thatcarries some risk for those people who are using thatmachinery. It is not clear to me that there is a case inthat kind of case for the regulator to second-guesswhether it is appropriate for that machinery to beinstalled or not. The regulator’s job is to protect thesafety of the worker. It is probably not appropriateor proportionate for a regulator to start saying,“Hold on a second, why are you in that market in thefirst place?”

Q133 Dr Naysmith: A financial regulator would notnecessarily be interested in health and safety issues.What we are talking about is financial institutions.Mr Kohli: I am sorry, I misheard the question then.

Q134 Dr Naysmith: Sorry, I maybe did not phrase itvery well.Mr Kohli: In financial services, whether theFinancial Services Authority has increased powersas a result of the lessons that it and the Governmentand everyone is learning from the crisis—AdairTurner’s report sets out clearly a way forward for theregulation of financial services and the Governmentis due to publish a consultation document in thecoming days on financial services, which will be verymuch based on the learning of Adair Turner’sreport. If the question is about financial services Isuppose I would say we are on that case.

Q135 Dr Naysmith: Could I ask you, Minister, hasthe financial crisis changed the better regulationagenda, for instance by illustrating the need forbetter implementation and enforcement?Ian Lucas: It has certainly indicated that we are in adiVerent context, as I said. I do not think that thebetter regulation agenda—the words you used—hasbeen changed. I think what we need to address iswhether the regulation in place is the appropriateregulation for any particular sector. The realchallenge is to set out and be clear about what themajor risks are in any particular sector and to try toensure that the regulation addresses those risks. Thisis not easy and clearly the lesson from the financialservices problems over the last year has been thatthis is not at all an easy process. If it were an easyprocess it would have been fixed right across theboard some time ago. What we need to do is be veryfocused in addressing the real risks and theimportant risks within society as a whole in diVerentareas and ensure that the regulators are addressingthose risks.

Q136 Dr Naysmith: Do you think there have beenany failures then in implementation andenforcement in just the areas that you are talkingabout?Ian Lucas: I think sometimes we address the wrongrisks within regulation. One of the most diYcultroles of any regulator is to focus on the correct risksbecause very often I think those risks may not be atthe top of the political agenda at any particular timebut they are the most important ones because theycan have the most profound consequences if they gowrong. Health and safety is an obvious example.Clearly, important health and safety regulationwould protect individuals but it needs to beproportionate and sensible in the way that it isapplied but it can have very severe consequences ifthat regulation is not properly established.Mr Kohli: If you look at Lord Turner’s earlier reporton pensions, one of the lessons of that report is thatin regulating defined benefit pension schemesincreasingly through the 1970s and 1980s whatgovernments achieved was making defined benefitpension schemes less and less attractive foremployers to oVer so we were regulating more andmore a particular thing and in doing that we made itso unattractive that people ceased to oVer theseschemes. That is an example of where governmentfailed to regulate the right risk because it waslooking in the wrong place. A real lesson both fromthat report and new Adair Turner report is that it isactually really hard to look at the right risks and it isa constant challenge for regulators always thinkingabout where are the risks in society that we are tryingto protect people from and how do we designregulations that genuinely work in protecting peopleagainst those risks.

Q137 Chairman: So we are always behind the curve,we are always catching up for the last mistake thatwas made?Mr Kohli: There is always a need to constantlyimprove regulation.

Q138 Dr Naysmith: That is another way of lookingat it.Mr Kohli: You have always got to improve.

Q139 Dr Naysmith: You are right.Ian Lucas: There will be cases where we are doing theright thing but nobody notices. In fact, that is one ofthe problems, is it not, that when a policy issuccessful people tend not to notice?Chairman: That neatly leads us on to Judy Mallaber.

Q140 Judy Mallaber: Talking about people notnoticing, there have been surveys by the Forum ofPrivate Business and the Institute of Directors stillshowing dissatisfaction with the Government’sprogress on reducing burdens. I note that yourevidence quotes the National Audit OYce asshowing a positive shift in business perceptionswhere it is still small but statistically significant, sothe question is how can perceptions of regulation bechanged quickly rather than at the snail’s pace thatseems to be indicated in that survey?




Ian Lucas: I would come back to the point that Ihave just made. If I go back to the sunny days whenI was a solicitor in Oswestry many years ago, and Iwas filling in forms as was my responsibility at thattime, if one year I was not filling in a form that I hadfilled in the year before, I probably would not haveregistered that I had not filled in that individualform. Even though there was a reduction in myburden of regulation I may not have had a positiveimpression about that reduction. I think one of thereal challenges about improving perceptions of theGovernment’s regulatory reform agenda is thatsometimes improvements may not be as noticeableas when things go wrong. On the other hand, I wouldhave noticed if I had had an extra form to fill in. Thatis one of the challenges of my present job. I thinkwhat I would like to do—and I mentioned I havealready met with some representatives of thebusiness sector to talk about precisely this issue—isto be very responsive to the concerns that thoserepresentative organisations and also individualbusinesses have. I am very impressed by the BetterRegulation Executive website which has a portal forindividual businesses to raise concerns that theyhave about bad examples of regulation andfrustrating examples of regulation. I think thatresponsiveness within our organisation to theconcerns of the sectors and also the perceptions, ifwe are responsive, is hugely important. I do think wehave made a lot of progress but there are alwaysgoing to be examples of businesses being veryfrustrated by what they see as unnecessaryregulation, and I think the Department and also theBetter Regulation Executive have tried to create astructure within which it can respond to thoseconcerns when they are expressed, and I think weneed to improve that.

Q141 Judy Mallaber: Does it matter to you that yoursuccessor as the Oswestry solicitor is not aware? Areyou going to write to him or her or just hope that youdo not get a complaint on the portal?Ian Lucas: I hear loud and clear when the individualsI used to work with are dissatisfied with things and Iam always listening!

Q142 Judy Mallaber: But you reckon it is perceptionand not reality?Ian Lucas: If you look at the independent statisticsand reports to which you referred, the World Bankranks the UK sixth in the world and second in theEU in terms of the ease of doing business. You heardJitinder earlier talking about the progress that hasbeen made over the last three years. I think that thisis an agenda that the Government has pursued withvigour. The situation is better now than it was someyears ago but we want to get it better still. It is atough agenda and it is a complex system and it alsoinvolves cultural change.

Q143 Judy Mallaber: Can I move on to the areawhich obviously needs regulation but which causesfrustration: employment and health and safetyissues generally. What progress has been made on the

pilot helpline for SMEs that was meant to beestablished under the Anderson Review whichsuggested a helpline on those issues?Ian Lucas: The Anderson Review was a documentwhich was broadly welcomed by government andmany of the recommendations that were made bythe review have been agreed to be taken forward. Ithink there were ten recommendations and nine ofthose are being taken forward. There was asuggestion, for example, that we were going to haveone year’s free access to assured advice onemployment and health and safety regulation. Thiswas to ensure that businesses who have taken advicefrom government on employment issues do get thatadvice, so we have accepted that recommendation,at least in part, and we are carrying out the pilot. Wehave announced the strategy in June and we gave acommitment to run some pilots to explore this andthey are going to be run between June of 2009 andApril of 2011 and we are going to be focusing ontailored and assured advice to help those businessescomply with employment and health and safety law.

Q144 Judy Mallaber: Is that helpline too recent—wewere told it was set up in the spring—to yet havelearned any lessons from it? Do we know if it is beingused? If you do not have that information can we besent anything that you do have?Ian Lucas: I think it is even more recent than that.The pilots are going to run from June and thereforeI need to give you more information on that as itcomes through.Mr Rycroft: We will be watching this very closelybecause I think this is an absolutely critical area, thatinterface between particularly small business andthat body of regulation and helping them to traversethat complex territory. We will be keeping a veryclose eye on this, watching what lessons we can learnfrom it and we certainly look forward to comingback to this Committee and sharing that knowledgewith you.

Q145 Judy Mallaber: I think if we could have thatinformation and also if you feel that in the futurethat it is a model that could be applied more widelyto other sectors that would be very helpful.Mr Kohli: Indeed, that is the key question. This ispotentially enormously powerful. The idea that asmall business can ring up a phone number and thatphone number will tell businesses what to do. Thething I hear from small businesses up and down thecountry is, “We believe in regulation. We all think itis a good thing. We understand why you have it butwhy can you not just tell us what to do and then wewill do it? It is all so complicated. It is hard to getyour head round.” That is what we are going to do.We are going to give them a phone number and say,“Ring this number and they will tell you what to doand you can just do it. If you do it and you findyourself facing an issue in terms of employment lawor health and safety law then you will be covered asa result of the helpline.” It sounds like a brilliantidea. We need to check whether it works and that iswhat the pilots will do. If it does work then I knowthat a number of other regulators in other areas of




policy are already thinking about whether this ideacan be translated across the board. I am terriblygrateful to Sarah Anderson for coming up with thisidea and really hearing from the business communitywhat will make a diVerence and coming up with avery innovative idea in that area.

Q146 John Hemming: That leads into this area ofhow you can develop co-operation between theregulators and the regulated to try to make sure thatpeople are doing the right thing. There are twoangles to that. One is that you have the assuredthing, the concept that if you do what you are toldyou will not get a kicking for it, which is important,and the other one is from Clive Davenport of theFederation of Small Businesses who said: “Theproblem we have is that, when a regulator comes intoa business, it is perceived, sometimes correctly,sometimes incorrectly, that he is there to penaliseyou . . . and therefore you do everything you can notto tell him anything in case it could result in apenalty.” You have this problem to what extentregulators can be encouraged to have oV-the-recorddiscussions on compliance with businesses thatpermit sensible dialogue without prejudicingenforcement. In a sense, it goes both ways becausethey cannot forget what they have been told but thequestion is whether it could be used in evidenceagainst them.Ian Lucas: I think that it is always diYcult to giveblanket immunity in a case. If there were an extremecase of particularly bad behaviour it would not beappropriate for me to sit here saying there shouldnever be a case where action should be taken, but Ihope what I have conveyed already the type ofrelationship that I would like to see between theregulator and the regulated. It is a relationship thatwould be based on mutual understanding, thatbusinesses have businesses to run, so the regulatormust understand that, but the regulator also has hisresponsibilities in terms of ensuring that appropriateregulation is properly enforced. I think the first keyissue is communication and information so thatbusiness understands that the regulator has a role toplay and understands what the focus of thatregulator is, and that the main risks, the key risks,are the most important risks and the ones that needto have his main focus of attention. I think that agood policy of communication between regulatorand business would mean that those key risks areidentified and become a better focus for theindividual business. That is about a continuingrelationship between the regulator and the regulatedand I think that at the heart of that is very, very goodcommunication and real understanding of theshared goals that both business and the regulatorshould have.John Hemming: Going through that I think I mayhave a declarable interest which I have previouslydeclared in this Committee as being a director of anFSA-regulated company where there is that sort ofconversation going on. If I need to declare it, hereit is.

Q147 John Penrose: Could we move across to impactassessments and the quality thereof. There has beena lot of discussion about the variation in quality andways to improve and one of the suggestions has beento increase the amount of external validation andaudit and commentary on the accuracy and qualityof the numbers, particularly from businesses if theyare the ones on the receiving end of regulation. Isuppose the same thing might apply to public sectororganisations too. Do you think that is a good ideaand, if so, how would you make that progress work?Ian Lucas: I think transparency is a very good idea.Impact assessments are a hugely powerful tool and Ithink that the more open they are and the clearerthey are in terms of the aims that the policy has andthe measure of the impact that that policy has themore impressive they are as a tool for government.We are very committed to that. We are takingforward more and more public scrutiny and what weare trying to do is really develop that. ImpactAssessments are already published on the internet.We are also going to have a forward programme,which is going to be taken forward from the summerand we want to take that still further forward bytrying to pull together a clearer benefit/cost ratioagenda which we are going to be taking forward inthe autumn.

Q148 John Penrose: I am talking about externalaudit by businesses or others. Do you have aprogramme of that at all?Mr Kohli: One of the reasons for setting up theRegulatory Policy Committee is precisely to tacklethis issue. I believe the quality of impact assessmenthas improved enormously over the last few years andindeed National Audit OYce reports say that thequality of impact assessment has improved, but theyidentify, and others have identified, a gap in the UKmachinery, which is where is the external scrutiny ofimpact assessment? To some extent, that externalscrutiny is there and it comes much more eVectivelyfrom the business community through trade bodies,et cetera, than it used to because the new impactassessment is much easier to scrutinise than the oldone. However, there is still this gap and that is whatthe RPC will hopefully fill.

Q149 Chairman: Can we be clear on that, Mr Kohli.Are you saying that the RPC will have the power tochange impact assessments and direct action basedon those changes?Mr Kohli: I am saying the RPC will have the powerto comment publicly on the accuracy of estimates inimpact assessment.

Q150 Chairman: So in the new regime who will havethe power to change impact assessments?Mr Kohli: It slightly depends on how it works in aparticular case and each case will be diVerent, so youcan imagine a case where the RPC has an earlyconversation with a government department where agovernment department shares an early draft of theimpact assessment and the RPC says, “We just donot believe these numbers and if you were to putthem out into the public domain we would come




along and tell you publicly that these numbers donot work for us and the correct numbers would be X,Y and Z.” I think it would be a fairly odd thing forthe department to take no notice of that early advicefrom the RPC about its intention in a future publicdocument. So that is the kind of dynamic you want.Do you really want a dynamic where the RPCpublishes reports all the time saying impactassessments are wrong? No. What you want is thepressure to lead to impact assessments being betterin the first place.Ian Lucas: The power of that process is in thetransparency of it, the fact that this information isgoing to be public, which is why I talked abouttransparency at the outset. It would be a very, veryrash department that would go ahead with an impactassessment that it had been advised by the RPC wasnot a suitable or a good one.

Q151 John Penrose: A related point on this. Giventhe changes to the impact assessment templateswhich you two have mentioned, it looks as thoughpost-implementation review is going to be very muchmore frequent. Are you envisaging it happening inevery case or the majority of cases, in which casewhich ones will get the treatment? How are yougoing to deal with that in the future?Ian Lucas: I am a great believer in post-implementation review. I think Parliament shoulddo a lot more of it. One of the weaknesses of, forexample, the introduction of legislation is that in thepast there has been a tendency to believe that oncewe have passed a bill then our job is finished, and Ithink that is entirely the wrong approach. Across thepiece, whilst we may not have an individual reviewin each individual case, I think it is always the rightthing to see how information is being rolled out.

Q152 John Penrose: I am with you on the principle.What I am trying to get at is how many instrumentsand bits of legislation will it apply to? Will it applyto everything or will it apply to just some, in whichcase which ones?Mr Kohli: What government departments arerequired to do under the new impact assessmenttemplate to which you referred is say, “When do youintend to find out what the real costs and benefitswere through a post-implementation reviewprocess?” The impact assessment template has notbeen in place that long and so people have writtendates like 2010, 2011, 2012 or 2013. I think it will bethe role of Parliament, the BRE and external bodiesto come to a government department and say, “Youpassed a piece of legislation a few years ago and yousaid that you were going to do a post-implementation review in June 2011. Well, actually itis August 2011, where is your post-implementationreview?” That external scrutiny would be on a case-by-case basis.

Q153 John Penrose: That is everything then?Mr Kohli: In some cases departments may havefound ways to explain that there may not be a needto do a post-implementation review. I would hopethat Parliament and stakeholder bodies held them to

account at the time and said that was unacceptable.There will be cases where that did not happenthough.

Q154 John Penrose: But the assumption iseverything.Mr Kohli: The default is you have to do it.Mr Rycroft: Just as with a lot else we have discussedthis morning in terms of shifting that boundary andthe expectations going forward, this is anothercritical juncture, in a sense, in our capacity tounderstand how regulation is working. The fact thatwe can now ask the question and expect people to beable to demonstrate what they have done in responseto that again becomes quite a powerful tool in ourkit. We will be keeping a very close eye on this andagain it is something that we would expect to bringback to the Committee over time.

Q155 John Penrose: Swiftly moving on to EUimpact assessments of one sort or another, clearlythe process that the EU goes through starts veryearly and the impact assessment comes along atsome point later on in the process. Are we getting inearly enough in the discussions of draft Directives orshould we be getting the EU to do it earlier in itsprocess?Ian Lucas: I think the key is to be in there atinception and if not at inception as early as possiblein respect of any proposed legislation that is beingbrought forward. I have had experience of this as aconstituency MP with a business in my constituencywhen they have seen on the agenda an individualproposal that causes them concern. I think Membersof Parliament can play a really valuable role here interms of flagging up anything that is raised withthem, with the Department in the first instance sothat we are aware of the specific concerns that arebeing expressed, because sometimes those concernsare ill-founded and we can resolve the diYculty fairlyeasily, but the earlier we know about it the better. Wewant that to be a process that we are taking forwardin a very aggressive way where we ensure theconcerns are addressed as soon as possible.

Q156 Gordon Banks: The Risk and RegulationAdvisory Council’s paper Response withResponsibility recommended a Public RiskCommission with a range of objectives. What is yourview of this Commission and could you comment onits membership and funding?Ian Lucas: The RRAC has made a really valuablecontribution to this hugely important issue of publicrisk and policy-making. It has brought forward thereport and we are considering at the moment thatreport, its content and reflecting upon therecommendations that it has made. We would reallylike to take on board the points that it is raising andwe are actively considering it as we speak.

Q157 Gordon Banks: So you think there might besome merit in it?Ian Lucas: Absolutely. It has been an importantpiece of work and it is something that we want totake forward.




Mr Kohli: There is certainly merit in having a betterunderstanding of public risk across our society. Ithink the question that remains unresolved iswhether the right way of achieving that is by settingup a new body or whether in a world where we aresetting up the Regulatory Policy Committee and anNEC Sub-Committee it makes more sense for muchof the work to be carried forward by existingstructures. If there is some gap that remains whichexisting structures cannot pick up then there is aquestion as to whether it then makes sense to set upa new body, and that needs a bit of working throughinternally.

Q158 Gordon Banks: Because that is a real worrythat there are so many bodies doing so many factionsof an agenda that you could get to the position wherenobody—and I mean the public and business andthe regulated—knows who is responsible for doingwhat and that is probably as bad a situation as wecould get?Mr Kohli: Absolutely, and that is the risk thatgovernment needs to weigh up and that needs a littlebit more internal thinking.Ian Lucas: We have talked a lot about risk thismorning already before we got on to this particularquestion. Clearly a lot of these areas cross over witheach other and we are considering how best to createthe structure that is going to deal with that issue best.

Q159 Gordon Banks: I am not meaning to be toopersonal but there have been management changesin BRE and we have already heard about the RPCthis morning and the role that that would play. Isuppose I am giving you an opportunity to sum upanything you have not said. What is the future of theregulatory reform agenda and what are the majorchallenges?Ian Lucas: Clearly we have got a new department inplace—Business, Innovation and Skills—and Iknow concern has been expressed on the fact that theRegulatory Reform title is now no longer there in theDepartment. Similar concerns have been expressedby universities in a diVerent context. I would make itabsolutely clear that regulatory reform and itsimportance to business is at the heart of theDepartment’s agenda because it is such animportant part of any successful business. It is not anadd-on; it is part of the core, and therefore theimportance of the regulatory reform issue isexpressed in my title of Minister of Business and

Regulatory Reform. As I said earlier, it is a very, veryimportant and also exciting agenda. It is a diYcultagenda for many of the reasons that we have beendiscussing and you on this Committee have longperformed a valuable role in taking forward where Ithink there has been real progress in this area. Wehave discussed the new structures that are going tobe set up because we want to improve on what wehave done so far. I also think that one of the keythings I want to take forward is the responsiveness ofthe Department to business. I have just touched onthe way that Members of Parliament can help interms of flagging up diYculties from their ownconstituencies. I want it to be a very responsivedepartment because I think that will make us do ourjobs better and our job is to take forward betterregulation. That is the aim.

Q160 Gordon Banks: Would you agree that one ofthe overarching ambitions must be to see theregulated seeing the regulator as a partner instead ofsomeone who is out there to get them and going tocost them a lot of money and therefore they will tellthem what they need to tell them and what they donot need to tell them they will not tell them?Mr Kohli: I have two observations on that. One is thevery valuable questions you were asking oncommunications earlier and how do we get themessage out on the good things that are happening.Indeed, we have bought for the Committee a set ofmaterials that we are using to communicate out tobusinesses which you may be interested in. The otherthing to mention, I suppose, is that we have a publicindicator to improve the perception of business inrelation to regulation. It is a little bit morecomplicated than asking is there more or lessregulation because we have talked about that onebefore. It is about do you think regulation is fair andproportionate, which very much gets to the heart ofyour question around partnership and trust betweenregulators and the regulated.

Q161 Chairman: We presume this note will includedetails of the MPs’ hotline that the Minister has justperhaps alluded to! On that note can we thank youvery much for your attendance and your very frankresponses to our questions. Again, can I say, MrKohli, we wish you well in your future career and,Mr Lucas and Mr Rycroft, we look forward toworking with you in the next session. Thank youvery much.Ian Lucas: Thank you very much.



Supplementary memorandum submitted by the Better Regulation Executive

RESPONSES TO SUPPLEMENTARY QUESTIONS FROM THE HOUSE OF COMMONSREGULATORY REFORM COMMITTEE’S INQUIRY: THEMES AND TRENDS IN

REGULATORY REFORM

1. Paragraph 2.22 of the BRE’s memorandum to the inquiry mentions the External Validation Panel’s scrutinyof claimed savings in Departmental Simplification Plans. How often will the Panel sit? Please provide someconcrete examples of cases where a claimed saving was questioned, revised or rejected and, in addition, thenumber and proportion of savings that were accepted versus those that were questioned, revised or rejected.

Paragraph 2.22 of BRE’s Memorandum states:

“In response the Government put in place an external panel to independently challenge, scrutiniseand validate departments’ claimed savings. This External Validation Panel first sat in October2008 to scrutinise departments’ claimed savings for December 2008 Simplification Plans.Following their review an estimated £1.7 billion of gross simplifications were approved, with anadditional £182 million approved subject to follow up actions. The External Validation Panelmembers asked government to re-review the remaining simplifications to ensure they are credibleand we have done this for all simplification measures worth more than £10 million; an additionalestimated £220 million. The panel will continue to sit annually to carry out its independent scrutinyfunction”

The External Validation Panel (EVP) will sit annually, ahead of the publication of simplification plans,until the end of the programme in May 2010.

24 simplifications measures (gross value £2 billion) were specifically examined by the Panel:

Of these:

— 10 measures had been approved based on initial evidence (approx gross value £780 million);

— one measure was deferred by the panel until 2009, as the business would not feel savings until thistime (approx gross value £30 million); and

— 13 measures were selected for review at an evidence session (approx gross value £1.23 billion).

— three of them have been withdrawn for the process by Departments prior to the evidencesession (approx gross value £96.1 million);

— four of them have been technically approved based on written additional evidence priorto the evidence session, three of them approved pending on Departments carrying outfollow-up actions (approx gross value £98 million); and

— six measures were technically approved by the panel during the evidence session.

The following measure was questioned and subsequently approved:

DWP—Simplify Member Nominated Trustee Requirements—£23 million

Additional evidence provided by DWP proved savings, which were subsequently approved bythe EVP.

The panel asked that the following measure was deferred until 2009:

HSE—Manual Handling Operations Regulations proposal—£32.5 million

The panel considered that HSE should not score these savings until further evaluation had beencarried out.

During the additional evidence round, EVP members were advised that BERR and Defra had withdrawnmeasures from the process:

BERR

— Other Companies Act measures including codification of directors’ general duties—£28 million.

The Department for Business considered that the sum of costs reflected changes made in a number ofdiVerent areas, some of which will not yet be felt by business.

Defra

The Pollution, Prevention and Control Regulations 2000—£24 million.

The Transmissible Spongiform Encephalopathies (TSE) Regulations—£44 million.

The EVP process highlighted these measures were corrections to the estimates made during theinitial burden measurement exercise and should therefore not be counted towards theDepartmental administrative burden reduction target.



2. What are the BRE’s views on the future role of principles-based regulation? Should it in future always becombined with specific rules? Are there areas in which the BRE sees principles-based regulation actually beingextended in the face of current thinking? The FSA has expressed an intention to move toward more outcomes-focused regulation? What is the BRE view of that and what it actually means in practice?

Principles-based regulation focuses both regulators and the regulated on delivering against regulatoryobjectives. This avoids regulation becoming an exercise in purely “going through the motions” or “box-ticking”. It also provides a flexible means for businesses to meet the regulatory outcomes that are set bylegislation. However, principles-based regulation should be used where it is appropriate and where it willdeliver the best outcomes. Regulatory application needs to be flexible enough to accommodate those areaswhere principles-based regulation is not the ideal. Small businesses, for example, often prefer specific ruleswhich provide clarity. In all cases, it is critical to ensure that the right risks have been identified and arereviewed regularly.

Current principles-based regimes combine specific rules and general principles. The BRE believes thatcreating this balance is the correct approach and will continue to help ensure that this is the case. It isessential that clear guidance is provided, where appropriate, to assist those regulated in understanding whatis required in order to comply with regulation.

The FSA will continue with a mixture of principles-based and rule-based regulation. However, the FSAinformed the Treasury Select Committee that they had been too focused on examining systems, processesand structures in those they regulated and are now focusing much more closely on the risks presented bydiVerent business models and on outcomes for consumers. They also concluded that they had focused onfirm-specific risks and needed to concentrate more on systemic risks, working closely with the Bank ofEngland. The FSA have said that “outcomes-focused regulation” provides a better description of theirphilosophy toward supervision: ie the FSA will judge firms on the outcomes and consequences of theiractions. The BRE supports outcome-focused approaches to regulation.

3. What is the BRE’s opinion of the suggestion made by the Risk and Regulation Advisory Council in “WhoseRisk is it Anyway?” to establish a FARO (Fast Assessment of Regulatory Options) Panel to avoid knee-jerkreactions to new regulatory challenges? Would such a panel have a role in the response to the currenteconomic crisis?

While it accepted all the other recommendations of the Better Regulation Commission’s “Whose Risk isit Anyway?” report, the Government rejected the recommendation to establish a Fast Assessment ofRegulatory Options (FARO) Panel. In doing so it noted the importance of bringing real expertise to bearon the policy questions being addressed.

In responding to the issues thrown up by the crisis in financial services, the Government asked LordTurner to lead a review of the issues, so ensuring a considered and evidence-based response which avoidedknee-jerk reactions.

The Government’s view remains unchanged that the probable lack of expertise that is relevant to anyspecific policy issue among the membership of a generic Panel like a FARO would be a fundamentalweakness.

4. What is the BRE’s view on why the idea of a Consumer and Trading Standards Agency proposed byHampton was not implemented and of the advantages and disadvantages of such a body over and above theLocal Better Regulation OYce?

Philip Hampton’s 2005 report highlighted that the approach to Local Authority regulation permittedwide variations and inconsistencies and that the system as a whole was uncoordinated. He suggested thatimproved consistency at Local Authority level requires better coordination of Departments and LocalAuthorities at national level. The review proposed the creation of a new Consumer and Trading StandardsAgency (CTSA), to bring greater coordination to the work of Local Authority trading standardsdepartments.

The proposed remit of the CTSA was consumer protection and trading standards. It would have beenresponsible for coordinating all trading standards work and for improving the consistency of regulationexperienced by businesses that trade in several Local Authorities. Hampton said this could include theestablishment of a central operation to lead on the regulation of large multi-site businesses.

The decision to establish the Local Better Regulation OYce (LBRO) has achieved the original intentionbehind Hampton’s recommendations but will ensure further reaching benefits than the proposed CTSA. Theremit of LBRO is wider than that originally envisaged for CTSA. LBRO’s remit covers environmentalhealth, licensing and fire safety, in addition to trading standards. A wider remit was required in order toachieve greater co-ordination and consistency across the regulatory system, and hence improve theperformance of Local Authority regulatory services and outcomes for businesses, consumers, workers andthe environment. LBRO has the remit to work across organisational boundaries that exist at local andnational level.



5. A year ago, it was the BRE’s intention to communicate regulatory reform initiatives to one million smallbusinesses (see Question 17 of 29 January 2008 evidence session)? Has that been achieved?

The intention was specifically to communicate a coherent summary of changes in regulation that comeinto eVect twice a year on Common Commencement Dates to one million businesses. A one page summaryof new regulations is provided to businesses, which is supported by more detailed information on specificregulations.

The BRE continues the work for each successive Common Commencement Date. A variety of channelsare used, which include direct e-mail but is principally through working with business organisationsrepresenting more than 600,000 members and Professional bodies, including accountants, with250,000 members, who subsequently use their own contacts with businesses. Our information also appearson a variety of business news websites aimed at small businesses. Common Commencement Date summariesare published on the BusinessLink website (http://www.businesslink.gov.uk/ccds).

6. Recommendation 8 of the Committee’s “Getting Results” report said that the BRE should take steps toadvertise its existence at all levels, including trade association level, to improve awareness of the BRE and theregulatory reform agenda. What specific such steps have been taken?

Recommendation 8:

We recommend that the BRE strengthen its channels for obtaining grass roots information from the level ofindividual businesses and individual local authorities, as well as individual organisations in the third sector. TheBRE should use its contact with the new Local Better Regulation OYce as one means of achieving that objective.The BRE should take steps to advertise its existence at all levels, including trade associations.

The BRE has continued to strengthen its existing relationships with key trade associations and businessorganisations.

Building on this, in March 2009 the BRE initiated contact with 76 trade associations and businessorganisations with whom we have had little, if any, previous contact to raise awareness of who we are andwhat we can oVer to their audiences. We are following this up individually.

Since December 2008, the BRE has taken forward a series of week-long regional visits to reach a widerange of business organisations and businesses.

The programme has so far achieved:

— 5 regional visits—with a further 5 planned

— 21 business visits & 24 open/networking events

— Media coverage: 30 articles, reaching in excess of 750,000 people

The BRE maintains a close working relationship with the LBRO and is discussing ways to maximisereaching their audiences.

We are continuing to develop the range of direct and indirect ways in which we reach out to businessgroups and businesses.

7. Recommendation 9 of the “Getting Results” report recommended more active BRE involvement infacilitating sharing of best practice among regulators and Government Departments. In addition to themeasures described in general terms in the Government Response to the report, what steps have been takenspecifically by the BRE in relation to that recommendation?

Recommendation 9:

We recommend that the BRE become more actively involved in facilitating greater sharing of best practiceamong regulators and Government Departments. The new Local Better Regulation OYce should be involvedin articulating the local authority perspective in that exchange.

The main focus of the BRE “good practice” activity is built on the Hampton Implementation Reviews.These are independent peer reviews which promote cross-fertilisation and foster good practice networksbetween regulators.

The BRE interacts with regulators in support of good practice issues at a number of levels: in regularnetwork meetings, and in putting regulators in touch with each other regarding specific issues where goodpractice could be shared.

In March 2008 five Hampton Implementation Reviews of major regulators were published—The Healthand Safety Executive, the Food Standards Agency, the Financial Services Authority, the EnvironmentAgency and the OYce of Fair Trading.

A further 31 reviews are being conducted between Oct 2008—Dec 2009. Currently three of these reviewshave been published—Gambling Commission, Medicines and Healthcare products Regulatory Agency(MHRA) and Animal Health.



The Local Better Regulation OYce (LBRO) will work to secure the eVective performance of localauthority regulatory services. This will ensure businesses receive greater consistency in advice, support andinspection from local authorities, particularly those that operate across council boundaries.

The BRE continue to build relationships and share best practice across Government through our internalstakeholder networks which include Departmental Board Level Champions (BLCs) and Better RegulationUnits (BRUs).

8. Paragraph 2.3.7 of the BRE’s first memorandum in the “Getting Results” inquiry mentioned NationalIndicator 182—the dedicated measure of business satisfaction with local regulatory services. What trends arethere in that indicator and what early indications are there of what eVect the Local Better Regulation OYce ishaving on business satisfaction?

Paragraph 2.3.7 states:

To ensure that these priorities are embedded, the new performance framework for local authoritiesand local authority partnerships, published by CLG in October 2007, includes indicators on all ofthe National Enforcement Priorities of Central Government, as well, as a dedicated indicator tomeasure business satisfaction with local regulatory services (NI 182). This indicator will measurewhether businesses feel that they have been treated fairly by regulatory services, and whether theyfeel that the contact that they had was helpful. The results will allow local government todemonstrate that they are contributing towards a business friendly environment, at the same timeas achieving excellent regulatory outcomes.

National indicator 182 is one of the 198 national indicators against which Local Authorities will beassessed. All Local Authorities report on all 198 indicators, but 35 are picked by each Local Authority tomake up their Local Area Agreement (LAA). Three Local Authorities have adopted 182 as part of theirLAA. LAA’s run between 2008–11 and targets are set that the Local Authorities must reach to entitle themto a reward grant from central Government. The BRE is responsible for national indicator 182. BERR hasa total of five of the national indicators.

2008–09 is the first year of these indicators, so no data is yet available. Local Authorities will be submittingtheir data at the end of June 2009, after which performance information will be available.

LBRO has made firm progress in establishing itself as an organisation whose role is to reduce unnecessaryburdens on business, but doing so in a manner that is consistent with Government commitments to the newperformance framework for local Government, a framework that seeks to reduce unnecessary burdens onlocal authorities themselves and allow local Government to lead its own improvement.

One of the key projects that LBRO has developed is the Trading Places project. This is a new initiative toshow Local Authority regulators first-hand how their decisions aVect the businesses they inspect. By the endof 2009, hundreds of council trading standards, environmental health, licensing and fire safety oYcers acrossthe UK will have spent two days in branches of major retailers and other companies—finding out the lengthscompanies must go to in complying with the law.

OYcers will spend time talking to company managers about compliance policy—and will also spend aday on each shop floor, finding out how compliance issues aVect day-to-day working in stores and factories.

May 2009

Further supplementary memorandum submitted by the Better Regulation Executive

RE: REGULATORY REFORM INQUIRY:THEMES AND TRENDS IN REGULATORY REFORM—SUPPLEMENTARY QUESTIONS ON

STRENGTHENING REGULATORY MANAGEMENT

I am now able to let you have some of the detail concerning the National Economic Council SubCommittee on Better Regulation. The committee will have the following composition and Terms ofReference:

Composition

— Chancellor of the Exchequer (Chair)

— Chief Secretary to the Treasury

— Secretary of State for Justice

— Secretary of State for Business, Enterprise and Regulatory Reform

— Leader of the House of Commons (and Lord Privy Seal); Minister for Women and Equality

— Secretary of State for Health

— Secretary of State for Work and Pensions

— Minister for the Cabinet OYce; and Chancellor of the Duchy of Lancaster



— Minister for Communications, Technology and Broadcasting

— Minister for Competitiveness and Small Business

— Other ministers will be invited to attend meetings relating to their own policies.

Terms of Reference

“To scrutinise planned regulation and proposals for new regulation; and to report to the NationalEconomic Council”

The Committee has been tasked with taking forward the work programme set out in the WrittenMinisterial Statement of 2 April, and will also take forward the existing responsibilities of ED(PRA).

I will update you further in relation to your questions when I am in position to do so.

June 2009

Further supplementary memorandum submitted by the Better Regulation Executive

What progress has the BRE made on the Benefits of Regulation project? (Mentioned in Consumer Focusevidence)

The aim of the Benefits of Regulation project is to analyse and highlight the wide-ranging benefits thatregulation, and especially regulation that follows “better regulation” good practice, can deliver. Thedeliverables will include a research report, a report for policy-makers and communications materials to assistdepartments in improving their policy development processes.

The project began in January 2009. It has been informed by considerable stakeholder engagement. Adiscussion event was held on 12 May where there were 70 attendees from a range of backgrounds. A numberof meetings with experts have been held and the project has been shaped by an active advisory group of 10–12organisations. The project is nearing completion and all outputs should be delivered by Autumn 2009.

The project should result in:

— The Better Regulation Executive communications team adding new examples to their suite of casestudies that highlight the benefits of regulation to society.

— Policy-makers having easy access to details about case-study regulations that are widely consideredto be delivering a high net benefit, approaches linked to success and a checklist of points to considerin policy development.

— Considerable advances in our understanding of how ordinary citizens and business people perceiveregulation and its benefits.

— Insights into the nature of benefits, generally easier to overlook than costs, to inform future workfor example on measurement approaches and strategy.

What progress has the BRE made on the Consumer Law review? (Mentioned in Consumer Focus evidence)

In May 2008 the Department for Business Enterprise and Regulatory Reform (BERR) issued aconsultation paper calling for evidence on a comprehensive review of the UK’s consumer protection regime.

The call for Evidence sought views in four main areas:

— the case for reform;

— options for legislative reform;

— consumer empowerment and redress; and

— securing compliance with the law.

The Department received around 100 responses from a wide range of business associations, individualbusinesses, regulatory and enforcement bodies (including many local trading standards departments),consumer interest groups, legal and academic institutions, professional organisations and other individualconsumers.

The responses have informed the proposals set out in the Government White Paper “A Better Deal forConsumers: Delivering Real Help Now and Change for the Future”, published on 2 July 2009, particularlyas detailed in chapters 3 and 4 on empowering consumers through better enforcement and information andmodernising consumer law.

A summary of the consultation responses and the responses themselves have been published alongside theConsumer White Paper and can be accessed at: http://www.berr.gov.uk/whatwedo/consumers/consumer-white-paper/clr-responses/page51670.html

The Consumer White Paper itself can be accessed at: http://www.berr.gov.uk/files/file52072.pdf



Written evidence

Memorandum submitted on behalf of the Food Standards Agency (FSA) by Dame Deirdre Hutton,the Chair of the FSA

The Food Standards Agency (FSA) notes with interest the Committee’s recently announced inquiry.While we have not been asked to submit written evidence, I would like to take this opportunity to oVer ourviews. The inquiry raises some interesting questions but I believe that our existing consistent andproportionate approach to regulation, which ultimately protects public health and consumers’ interests inrelation to food and drink, remains equally valid in these times of economic downturn and uncertainty.

The FSA is aware of the burdens that regulation and enforcement can place on business. However, someregulation will always be necessary if we are to deliver our statutory obligations. Maintaining consumerconfidence in the food industry is still vitally important during the current financial crisis.

We published our Framework for Regulatory Decision Making in the FSA in December 2006 and arefully committed to following the principles of good regulation; that regulatory activities should be carriedout in way which is proportionate; accountable; consistent; transparent; and targeted only where action isneeded to protect consumers. In our Strategic Plan to 2010, we made a commitment to “seek to ensure thatour actions are proportionate, risk-based and outcome-focused, in line with the principles of goodregulation; that we foster improvement and reward good practice; whilst seeking firm action against thosewho persistently fail to meet acceptable standards. We want our actions to be practical and deliverable.”

By following these principles, and recognising that the majority of food businesses are committed toproducing and selling high quality, safe food and wish to comply with the law, we aim to create minimalburden on responsible businesses and penalise only those that are wilfully and repeatedly noncompliant, orseriously negligent with respect to consumer safety. The introduction and acceptance of more risk-basedfarm assurance schemes (eg Red Tractor) are an example of the trend away from regulation and enforcementto a voluntary approach. By belonging to a farm assurance scheme, the frequency of inspections is reducedand industry has more time to spend on running and making a success of their business.

We also tend to take a voluntary rather than regulatory approach in delivering the nutritional agenda toimprove public health. A current example of this is our drive to encourage product reformulation by industryto reduce the level of salt and saturated fat in ready meals. Several major retailers, manufacturers, caterersand trade associations have already made good progress in helping us work towards the salt targets andearlier this month we launched our saturated fat campaign, which includes a 40-second televisioncommercial that is running throughout this month.

Where we can, we give consumers clear information so that they drive change themselves. Examples ofthis are our front of pack traYc light labels, which provide nutritional information, and the Scores on theDoors scheme, which provides information about hygiene standards in food businesses.

Over 90% of food regulation comes from Europe. It is important that we comply with EU Directives andregulations and we work closely with the European Commission to reduce the burden of current regulationsand the flow of new ones. The FSA sets great store by seeking and representing the views of UK stakeholdersbefore and during negotiations in Europe and we are particularly mindful of the need to assess the impactof any new regulations on small and medium sized enterprises, where any additional burden can falldisproportionately. This approach is particularly important during the current climate, and in view of thefact that over 80% of food businesses employ fewer than 20 staV. We therefore recognise that if we are tosucceed in continuing to protect public health, we must build appropriate relationships with these smallerbusinesses and make it easier for them to comply with food legislation and to be successful in a globalmarket.

By making it easier for businesses to understand and act upon what regulation requires them to do,compliance with food law will improve, citizens will be better protected and consumer confidence will remainhigh. We developed the successful Safer Food, Better Business (SFBB) programme by working closely withsmall caterers and local authority enforcement oYcers. Its purpose is to help small businesses put in placeeVective yet proportionate food safety management procedures that comply with food hygiene regulations.

Along with other Government Departments we have a rolling programme of regulatory simplificationand we report annually on our better regulation performance. We published our third Simplification Planand Report in December last year. This set out how we are reducing the burdens of legislation currently inforce, how we continue to minimise the impact of new regulations and how we are reducing administrativeburdens for business. Above all, we are an evidence-based organisation that considers both the benefits andburdens of our policies on industry before taking forward any necessary new regulations.

Our aim is to reduce burdens on business and help them to understand and make best use of their resourcesin complying with new regulations and initiatives by developing good guidance and sharing best practice.To understand better the problems facing smaller businesses, we undertook a sector-specific review ofregulatory issues faced by craft bakers and butchers producing and selling locally. Our key findings were thatthey need clearer guidance on hygiene approvals; a route-map to food legislation; to know which guidance



applies to them; and better engagement on policy issues. We have also reviewed all our guidance and hopeto be one of the first Government Departments to publish a comprehensive list on our website, which is oneof the recommendations of the Anderson review, published last month.

I have provided an overview of our approach to regulation rather than answer the specific questions raisedby the Committee as I believe that by maintaining our current proportionate approach to regulation we willassist food businesses during the current economic downturn; deliver market stability through maintainingconsumers’ trust; and protect the health and other interests of the public.

February 2009

Memorandum submitted by the Chartered Institute of Environmental Health

The Chartered Institute of Environmental Health

As a professional body, we set standards and accredit courses and qualifications for the education of ourprofessional members and other environmental health practitioners.

As a knowledge centre, we provide information, evidence and policy advice to local and nationalgovernment, environmental and public health practitioners, industry and other stakeholders. We publishbooks and magazines; run educational events and commission research.

As an awarding body, we provide qualifications, events, and trainer and candidate support materials ontopics relevant to health, wellbeing and safety to develop workplace skills and best practice in volunteers,employees, business managers and business owners.

As a campaigning organisation, we work to push environmental health further up the public agenda andto promote improvements in environmental and public health policy.

We are a registered charity with over 10,500 members across England, Wales and Northern Ireland.

1. Regulatory Reform Committee Inquiry—Themes and Trends in Regulatory Reform

1.1 The CIEH oVers the following submission in accordance with our mission to maintain, enhance andpromote improvements in environmental and public health through knowledge, understanding andcampaigning. Our concern is therefore only in the context of regulation intended to protect or promotepublic health.

1.2 The prevailing Government approach on regulatory reform usually starts from the premise thatregulation is a burden on business that must be reduced. While we agree that regulation should not beoverburdening on business, we also consider that sound regulation, sensibly drafted and implemented, canbe a spur to innovation and can encourage the development of new technologies. For example, had therebeen stronger regulation in the past the UK might have been better placed in the development of “green”technology—with a stronger developed domestic industry and less reliance on imported technologies, suchas wind turbines.

1.3 In the current recessionary economic conditions there is a temptation to soft-pedal on the regulationof business, but we do not feel this would be the best way forward; it can be argued for instance that thelight-touch regulatory approach (or inadequate regulation) of the banking and securities sector hascontributed greatly to the economic downturn. What UK plc continues to require is appropriate andeVective regulation.

1.4 The general public expect regulations to safeguard them from unacceptable business practices, “rip-oVs” and “rogue traders”, but the regulations in themselves do not achieve that. We rely upon those chargedwith enforcing the legislation to do that and too often they are pulled in diVerent directions.

1.5 There needs to be less emphasis on the provision of advice and guidance from the centre, a trend thatis set to continue in terms of local authority regulation with the establishment of the LBRO for example,while there should be greater allowance for local accountability and expertise, allowing local governmentto truly fulfil its ability to reflect local needs. Local authorities constitutionally at least, are not local agentsof government.

1.6 The Chartered Institute of course supports risk-based regulation, which has been at the foundationof the work of environmental health practitioners for some time, but a greater understanding of risk andwho is at risk should be more explicit.

1.7 We perceive that there is a clear gap between the expectations of regulation and their implementationor enforcement. There needs to be more thought given in Government when framing regulations on howthey will be implemented in practice. Government could improve its ability to regulate proportionatelyfirstly by better working between departments so that regulations that aVect a business are consistent andnon-contradictory. To that end we support the eVorts that have been made towards the simplification ofregulation.



1.8 We believe that that there is an inconsistency of approach to regulation and enforcement across (andeven within) central government departments and agencies. It needs to be remembered that local authoritiesare sovereign bodies and as such it will be diYcult to achieve (or impose) consistency across them all, noris it desirable; but is uniformity necessary, so long as the public have confidence in regulatory services andthose on the receiving end of regulation know how they will be dealt with?

1.9 The Committee’s interest in the conditions for business growth is welcome. We would also welcomeconsideration of how business success might be defined—what might constitute “success” from theperspective of the owner might not necessarily be the same from the consumer’s point of view. Perhaps thecontribution of a business to sustainable development may be a better approach.

1.10 The Regulatory Enforcement and Sanctions Act 2008 introduces the primary authority scheme andallows local authorities to charge a fee on a business with which they enter a primary authority partnershipfor that service. The issue of charging for Primary Authorities must consider the impact on other regulatoryactivities. We know from our members’ experience that SMEs and micro business benefit most from theadvice and guidance on compliance issues that environmental health practitioners can oVer them. What willhappen to those businesses that need support yet do not qualify, or cannot aVord, a primary authorityrelationship at a time when we know that local authority budgets are extremely stretched?

1.11 It is our view that Regulations are now more likely to be drafted with the needs businessparamount—whereas a better balance must be struck, with the needs of those required to interpret andimplement regulation given due prominence. At present, we feel there is an inadequate focus on complianceand enforcement issues.

1.12 EVective regulation can be achieved as much by ensuring the competency of inspectors as by anycentral guidance. The CIEH as the professional body of EHPs is taking steps to ensure that the routes toprofessional practice are robust and up to date and that its members are competent. But we are only partof the picture: the eVectiveness of this approach depends much upon local authorities as employers, andenvironmental health is often under-resourced. Like all functions of local government, environmental healthis coping with the impact of cut backs but there needs to be a good understanding of the impacts of cutson consumer protection—and this in turn impacts upon the understanding of risk and the assessment of“what works”.

1.13 We are concerned that local authorities will cease to invest in the professional competence anddevelopment of EHPs but, encouraged by central direction and the drive to find savings, will seek to employoYcers able only to take a “tick box” and rigid approach to regulation who may be less able to utiliseprofessional judgment and take a proportionate approach, or even provide the sort of advice and supportthat many businesses and managers appreciate.

1.14 In their eVorts to design better regulations and more eVective enforcement, we believe thatGovernment could make better use of the professional institutions. The regulations are drafted byGovernment departments not the regulators and it might be that there would be no need for the “regulatoryreform” business if there was better drafting and more eVective Parliamentary scrutiny. This would alsoimply fewer new regulations. There ought also to be a more coherent process for assessing how newregulations work in practice.

February 2009

Memorandum submitted by the Aldersgate Group (AG)

Introduction

The Aldersgate Group (AG) is a coalition of private, public and third sector organisations who believethat high environmental standards are essential for long term economic growth and internationalcompetitiveness. The Group engages actively with government and other key decision makers to contributeto the future development of UK economic, environment and sectoral policies, as well as providing a distinctvoice that advances the better regulation and sustainability agendas.

In a recently published report entitled Green Foundations 2009, the AG argues that the current financialcrisis reinforces the urgent need for a regulatory reform programme which addresses key systemic risks toeconomic growth and stability. It also sets out the case that the better regulation agenda should aim to deliverhigh environmental standards providing the maximum stimulus to innovation and the creation of businessopportunities, while minimising the administrative burdens of complying with them.



Members

ACCA GlobalAtkins IEEPBarratt Developments Institution of Civil EngineersBIFFA John EdmondsBT Johnson MattheyDinah Nichols Lord WhittyDalkia Michael Meacher MPDrivers Jonas LLP Peter Jones OBEEftec RSPBElliot Morley MP SEEDAEnvironment Agency Scottish Environment Protection AgencyEnvironmental Industries Commission Sir John HarmanEnvironmental Law Foundation SustainEnviros Speechly BirchamFriends of the Earth TescoFriends of the Earth Scotland UK GBCGreen Alliance United UtilitiesGreg Barker MP WWF

Summary

Implications of Economic Recession

— The economic recession is a unique opportunity to make rapid progress towards addressing longterm challenges facing the economy such as climate change, resource eYciency and energy security.

— The 2008 financial crisis illustrates how the unregulated excess of the free market and bankingsystem, governed by a “light touch” and “hands off” approach that does not adequately addressmarket failure, can have devastating economic and social consequences.

— Whereas removing unnecessary regulation and reducing the cost of compliance improves theoverall productivity of the economy, particularly during the economic recession where costs tobusinesses must be minimised, the vital role that regulation plays in correcting market failures,promoting fairness and protecting the environment must not be overlooked.

— Any evaluation of a regulation regime must include a balanced and proportionate assessment ofthe potential economic and social benefits, and not be crudely based on rudimentary grossestimates of the overall burden.

Regulatory Reform

— While the UK is consistently recognised as having one of the best regulatory environments in theworld, there is a tendency to overly focus on reducing regulatory burdens.

— Better Regulation should focus on simplifying regulations into a more manageable and mutually-consistent form, or reducing the burden of paperwork and the time taken dealing with informationrequests. What must be avoided are crude regulatory reform initiatives that focus on narrowlydefined cost burdens, whilst ignoring tangible societal and economic benefits.

Impact Assessments

— Despite reform to the impact assessment procedure with some welcome developments, intrinsicand systematic defects remain.

— Cost assessments tend to be an overestimate because innovation potential is rarely assessed andare routinely based on exaggerated figures from industry—in the past trade organisations havesystematically inflated cost estimates to combat new regulations.

— At the same time, environmental benefits tend to be underestimated, as they are complex tomonetarise and are rarely assessed in a rigorous manner.

— As well as being more objective, impact assessments must be used early in the policy formationprocess to be most eVective.

Environmental Regulation

— Green Foundations 2009 argues that far from presenting a crisis for environmental policy making,the challenges posed by the credit, resource and energy crunches reinforce the urgent need toaccelerate the transition to a low-carbon, resource eYcient economy, and align economic,environmental and societal benefits.



Sustainable Buildings

— The AG report Better Regulation for a Sustainable Built Environment finds that disjointed policyand weak enforcement risk damaging the credibility of the Government’s ambitious targets forlow-carbon buildings.

Memorandum

Implications of Economic Recession

1. It is evident that the world economy is facing a crisis not seen since the Great Depression. The creditcrunch, coupled by peak prices in oil and food last year, has infected the entire global economy, and led tofinancial losses of over £1.8 trillion according to the Bank of England.1 At the same time, large scale marketfailures associated with climate change, resource depletion and energy security necessitate an industrialtransformation of unprecedented scale and speed.

2. The AG’s recently published report Green Foundations 2009 argues the current financial crisis reflectsthe interaction of credit, energy and resource crunches which reinforce the urgent need to accelerate thetransition to a low-carbon, resource eYcient economy, and align economic, environmental and societalbenefits. It draws on new evidence that substantiates a positive interaction between high qualityenvironmental regulation and economic growth—enabling companies to become more eYcient andproductive, and creating new opportunities to secure the jobs and wealth of the future.

3. The financial crisis illustrates how the unregulated excess of the free market and banking system,governed by a “light touch” and “hands off” approach that does not adequately address market failure, canhave devastating economic and social consequences. It should serve as a palpable warning, as the inherentrisks associated with market failures relating to fundamental long term challenges facing the economy, suchas climate change, resource depletion and energy security, are much graver.

4. The AG supports the aspirations of the Government’s better regulation agenda, aimed at reducingregulatory burdens on UK businesses by cutting unnecessary red tape and financial costs, thus removingobstacles to industrial eYciency and profitability. Whereas removing unnecessary regulation and reducingthe cost of compliance improves the overall productivity of the economy, particularly during the economicrecession where costs to businesses must be minimised, the vital role that regulation plays in correctingmarket failures, promoting fairness and protecting the environment must not be overlooked.

5. For example, Lord Adair Turner, Chairman of the Financial Services Authority (FSA), has stated thatif the FSA had wanted to embark on a fundamental regulatory reform programme in early 2007 thataddressed many of the root causes of the 2008 credit crunch, such as higher capital adequacy, disclosure ofliquidity information and key issues around remuneration, it would have been “strongly criticised forharming the competitiveness of the City of London, for red tape, and for over-regulation.”2 Such over-sloganised and over-zealous criticism must be judged in the wider context of overarching policy objectives—and inherent risks to economic stability must be identified and eVectively addressed.

6. Yet faced with the challenges of the economic downturn, increased competition from the global marketplace and the elimination and simplification of regulations worldwide,3 it is precisely these benefits that arebeing overlooked in the drive to minimise costs. This has led to some industry groups, such as the BritishChambers of Commerce, injudiciously arguing that “the success of the government’s drive for betterregulation must be judged on the extent to which the UK’s regulatory burden has been reduced”.4 Whileit is crucial to reduce unwarranted costs, any evaluation of a regulation regime must also include a balancedand proportionate assessment of the potential economic and social benefits, and not be crudely based onrudimentary gross estimates of the overall burden.

7. Such views merely encourage “better regulation” to be interpreted as “deregulation”—regardless of thelonger-term costs this can impose on economic growth. The government’s own enterprise strategy,5

launched alongside the 2008 Budget, portrays regulation as a “barrier” and “obstacle” to growth, citing anumber of studies that assume a negative association between regulation and productivity. The AldersgateGroup strongly oppose this perspective—far from undermining the UK economy, proportionate, eVectiveand well-designed environmental regulation generates essential public benefits and is a cornerstone ofcivilised society.

8. The AG report Green Foundations 2009 draws on new evidence and research that substantiates apositive causality between high quality environmental regulation and economic growth—enablingcompanies to become more eYcient and productive, and creating new opportunities to seize the jobs andwealth of the future. In doing so, it supports the views of the Network of Heads of European EnvironmentProtection Agencies, which finds that good environmental regulation, management and performance assists

1 Bank of England (October 2008) Financial Stability Report.2 Larry Elliot (17 October 2008) The Guardian: We’ll get tough with the City, says watchdog3 HM Government (August 2008) Regulatory Budgets: A consultation document, p13.4 Smith, David (17 February 2008) The Times: Cost to British business of government red tape leaps by £10 billion.5 HM Treasury & BERR (March 2008) Enterprise: Unlocking the UK talent.



competitive advantage by reducing costs, creates markets for environmental goods and services, drivesinnovation, creates and sustains jobs, improves the health of the workforce and the wider public, andprotects the natural resources on which business and society depend.6

Regulatory Reform

9. The credit crunch has exemplified the underlying problems of soft-touch regulation that is overlysensitive to the demands of big business and helps fuel unsustainable economic growth. While the UK isconsistently recognised as having one of the best regulatory environments in the world,7 there is a tendencyto overly focus on reducing regulatory burdens. In doing so, there is a danger that the better regulationagenda loses sight of how to most eVectively deliver the outcomes it is designed to achieve, and so puts atrisk future wealth and prosperity.

10. There is no doubt that some regulations are outdated, badly designed or poorly applied. BetterRegulation should focus on simplifying regulations into a more manageable and mutually-consistent form,or reducing the burden of paperwork and the time taken dealing with information requests. What must beavoided are crude regulatory reform initiatives that focus on narrowly defined cost burdens, whilst ignoringtangible societal and economic benefits.

11. The government should continue in its increasingly modern approach to regulation, which is outcomefocused and risk-based. By focusing on the highest hazards and poorest performing operators, businesseswith the best records can be rewarded with less supervision and control.

Impact Assessments

12. In April 2007, the government reformed its impact assessment procedure to ensure they presented costand benefit information in a more transparent way and are undertaken throughout the policy making cycle.Significant developments are the requirement to indicate value changes in greenhouse gas emissions on thefront page summary (which must be signed oV by the sponsoring department’s chief economist) and theintroduction of a new toolkit to guide policy makers for considering how their proposals contribute to thefive principles of sustainable development. However, a strong focus on monetisation risks marginalisingrigorous qualitative assessments of environmental and non-monetarised impacts.

13. Although it is too soon to comprehensively evaluate the new process, a number of intrinsic andsystematic defects remain. On one side, cost assessments tend to be an overestimate, first and foremostbecause the innovation potential is rarely assessed. Routinely, impact assessments focus on currentlyavailable solutions and static assessment of current costs, as corresponding financial data is easily andreadily available. A key recommendation of the Commission on Environmental Markets and EconomicPerformance (CEMEP) is to reform the process, allowing for the potential of innovation and investment todeliver better, cheaper solutions. It suggests that “finding ways to value the future benefits of innovation, in away that realistically reflects the financial and risk-reward perspectives of the private sector innovator, wouldgreatly enrich the contribution of policy appraisal to the longer-term health of the economy”.8

14. Additionally, costs can be based on exaggerated figures from industry and in the past tradeorganisations have systematically inflated cost estimates to combat new regulations. A pertinent example isthe European Commission’s impact assessment for EU car eYciency targets for 2012. Originally, thesupplementary cost per vehicle was estimated to be an average of ƒ577. The car industry then heavilyinfluenced the secondary analysis, providing much of the new cost data, and the final estimate was over sixtimes the original figure.9 This profoundly influenced the European Commission’s decision to water downits original proposals, which remains a contentious issue.

15. On the other side, environmental benefits are complex to monetarise and are rarely assessed in arigorous manner. Well-designed environmental regulations can produce comprehensive economic benefits,such as improving health, amenity and ecosystems. For example, the European Commission estimates thatfor large combustion plants alone, the IPPC Directive, preventing pollution from stationary installations,will lead to net environmental and health benefits of at least ƒ7–28 billion per year, including the reductionof premature deaths and years of life lost by 13,000 and 125,000 respectively.10 Such benefits are extremelycomplex to accurately and objectively evaluate.

16. The net result is that environmental issues are being undervalued and often overlooked. A study bythe Environmental Audit Committee found that policy appraisals often neglected the sustainabledevelopment agenda in the pursuit of minimising regulation. It recommends that impact assessments includeall relevant environmental impacts, as well as adequately recognise and consider the contribution that would

6 Network of European Environment Protection Agencies (November 2005) The Contribution of Good EnvironmentalRegulation to Competitiveness.

7 For example the World Bank Doing Business Survey 2008 placed the UK second in the EU and sixth in the world for the bestbusiness conditions and the OECD Going for Growth Survey in 2005 ranked the UK top among the G8 countries for liberalproduct market regulation.

8 BERR & Defra (November 2007) Commission on Environmental Markets and Economic Performance Report, p34.9 See http://ec.europa.eu/enterprise/automotive/projects/report co2 reduction.pdf10 European Commission (December 2007) Press Release: Questions and Answers on the Commission’s proposal for the

revision of industrial emissions legislation in the EU.



be made by a flourishing environmental industries sector. Fundamentally, a more even-handed approach isrequired and it is “no longer viable to view environmentally-minded regulation as a straightjacket toindustry”.11

17. As well as being more objective, impact assessments must be used early in the policy formation processto be most eVective. In practice, they are habitually an exercise in ex post justification, validating pre-determined policy decisions. A recent report by the National Audit OYce finds that impact assessments arenot an integral part of decision making—informing and facilitating all stages of the policy making process—and the assessment of costs and benefits is the weakest area.12 While the new process addresses this intrinsicproblem, it remains to be seen what eVect the reforms will have on policy making.

18. Fundamentally, policy appraisals should reflect the strategic framework set out by government.Keystone policy objectives such as increasing resource eYciency and decarbonising the economy will onlybe achieved if they are adequately reflected in price signals, both as regards to the market price and the valuesto be accorded in policy formation. To avoid the potentially severe long term economic impacts of climatechange or a resource crunch, high values should be accorded to the natural resources whose use iscontributing to these market failures; essentially what Stern did by using a low discount rate for futurecarbon costs. Policy appraisals on the basis of current or anticipated market prices are not adequate toolsfor addressing wider, longer term challenges facing our economy and society.

Environmental Regulation

19. Green Foundations 2009 argues that far from presenting a crisis for environmental policy making, thechallenges posed by the credit, resource and energy crunches reinforce the urgent need to accelerate thetransition to a low-carbon, resource eYcient economy, and align economic, environmental and societalbenefits. It sets out five key points that justifies this argument.

20. Firstly, it puts forward the case that our long-term economic success depends on a healthyenvironment and the sustainable use of natural resources. The economic fallout from the financial crisis isan opportunity to reconsider the relationship between business and society, and address the inherentproblems of unsustainable growth. The natural capital assets that lay the foundations for our economy andsociety should not be oV-balance sheet items similar to the risk exposures and subsequent heavy lossesincurred in the banking sector during the 2008 credit crunch. Rapid resource depletion necessitates theadoption of new business models and requires a range of well-designed environmental measures to smooththe path towards a more sustainable economy—the “green foundations” needed to underpin future growthand jobs.

21. Secondly, at the company level, good environmental performance translates to tangible economicbenefits and is a major source of competitive advantage. In response to the upward trend and imminentreturn to high energy, water, raw material and waste disposal costs when global demand picks up again,systematically addressing environmental performance is one of the most cost-eVective measures businessescan undertake to reduce expenditure. Achieving high environmental standards across the UK wouldproduce significant cost savings and boost competitiveness—which currently lags far behind major tradingpartners such as Germany, France and Japan. The role of government in providing a clear policy frameworkis crucial, particularly in the long-term, where competitive advantage will increasingly depend on resourceeYciency, innovation and energy security.

22. Thirdly, environmental regulation creates new business and employment opportunities in a fiercelycompetitive global marketplace. The economic downturn presents a unique opportunity to use public sectorinvestment to fuel the economy with green jobs and growth. Environmental regulation is a key driver in thislucrative market and the government has a critical role to play in setting out an explicit industrial strategywith planned support for particular technologies and establishing the right policy frameworks that willstimulate business innovation through improving environmental performance.

23. Fourthly, policy appraisals must accurately assess environmental costs and benefits (see the sectionon impact assessments).

24. Lastly, the better regulation agenda must not lose sight of the need to maximise outcomes in the driveto reduce unnecessary costs (as noted previously).

25. Increasingly, businesses which take a long-term view of value are demanding more regulation, so thatthey can address emerging challenges and provide a competitive edge without being undercut in the short-term. The headline finding from 2008’s Carbon Disclosure Project,13 a survey of 1,550 of the world’s majorcompanies, is that global corporations view climate change as a driver for risk and opportunity and havecited clear regulation as key to managing the impacts. For the Global 500 companies, a backdrop ofregulatory uncertainty is delaying strategic investment decisions and senior management are calling forgreater visibility on climate change related policy in order to better anticipate the impact of regulation drivencarbon markets and carbon prices. Similarly, a survey commissioned by CliVord Chance of more than

11 Environmental Audit Committee (February 2007) Regulatory Impact Assessments and Policy Appraisal, p3.12 National Audit OYce (July 2007) Evaluation of Regulatory Impact Assessments 2006–07.13 Carbon Disclosure Project (September 2008) Global 500 Report 2008.



100 major financial institutions and businesses over a broad geographical and sectoral spread found that81% called for increased regulation—demanding clarity and coordination in order to remove uncertainty inthe markets and exploit potential opportunities.14

26. Government must listen to the industry leaders in the transition to a low carbon, resource eYcienteconomy, who are demanding long, loud and legal policy framework, and ensure that the laggards are notgiven short term competitive advantage. For example, the Climate Change Levy, a tax on the business useof energy, has improved UK business competitiveness and economic resilience, in complete contrast to thefear than an additional regulatory burden would damage company performance.

27. Strong environmental regulation will also benefit SMEs by enabling cost reductions, increasingbusiness potential and providing long-term certainty but further government support is required byadopting a modern, risk-based, proportionate approach and targeted assistance through programmes suchas NetRegs.15

28. To maximise the potential economic benefits which companies are so eager to exploit, environmentalregulation should combine price and policy certainty with a mixture of policy instruments rather thanadopting a “one size fits all” approach. In a final report to Defra, UK-based consultancy SQW found thatthe design and implementation of environmental regulation can positively aVect competitiveness. Itrecommends that the “pollution prevention pays” principle should become a central policy thread runningthrough all approaches to environmental regulation and emphasises the need for clarity, ambition anddetermination of the regulating bodies to increase pollution prevention requirements and to use a hybrid ofinstruments to do so.16 The more uncertain the regulation, the more polarized is the private sector—withsome “over managing” (eg paying high prices for carbon) and some sitting back and waiting in the hopethat nothing will happen. Either way the cost of uncertainty is likely to be higher than cost of an appropriatelevel of consistent regulation.

29. This is reiterated in a BERR occasional paper which finds that regulation can have positive impactson firm productivity through innovation and faster diVusion of technologies; firms may respond toregulatory uncertainty by postponing or abandoning investment decisions; and government should focuson the rate at which new regulations are introduced as well as the total stock of regulations.17

30. A common misguided criticism of the UK framework is that there is excessive “gold-plating”(extending the scope of European legislation), more often than not founded on questionable, rudimentarymeasures—such as comparing the number of words used in European and domestic legislation. TheDavidson Review put to rest such claims by finding that inappropriate over-implementation is notwidespread and it is sometimes beneficial to set regulatory standards that went beyond the minimumrequirements of European legislation.18 Nevertheless, the government will rarely go beyond these minimumrequirements, even if its own analysis finds that there would be an overall societal and economic benefit. Forexample, in regard to the implementation of the Environmental Liability Directive, the Environment, Foodand Rural AVairs Committee19 suggests that the “minimum implementation” approach is a pan-Government one, with a political motive of avoiding accusations of gold-plating, and challenges therobustness of Defra’s defence of the environment in response to the predominant “business friendly”approach of BERR.20

31. A good example of an eVective simplification plan is the Environmental Permitting Regulations. Thiswas introduced in April 2008 by Defra, the Welsh Assembly Government and the Environment Agency,replacing over 40 pieces of legislation and established a single permitting platform. It cut 507 pages ofregulations to 130. This delivers more flexibility for industry, a simpler risk-based system for regulators andcontinued protection of the environment and human health. It will save £70 million over 10 years, withgreater savings estimated as more regimes enter into the Environmental Permitting Programme.

32. Another Environment Agency initiative which illustrates the economic potential of a well-designedregulatory regime is the Waste Protocols Project which aims to turn waste into useful and valuable resourcesby developing guidance on how to recover waste, remove it from the regulatory regime and cut through redtape. Early indications from the financial impact assessments, which were developed using marketpredictions from industry, suggest that over the next ten years the first eleven Quality Protocols could seecost savings to business of £407 million and £280 million in increased sales to business. Environmentalbenefits include 17 million tonnes of waste diverted from landfill and saving 15.5 million tonnes of virginmaterials.

14 CliVord Chance (November 2007) Climate Change: A business response to a global issue.15 NetRegs is a web-based tool oVering UK businesses, and SMEs in particular, guidance on how to comply with environmental

legislation and reduce their environmental impacts. It currently attracts over 40,000 unique web visitors per month,generating an estimated £60 million per year in savings.

16 SQW (June 2007) Phase 2: Exploring the relationship between environmental regulation and competitiveness, final reportto Defra.

17 BERR (September 2008) Occasional Paper 3: Impact of regulation on productivity.18 Lord Davidson (November 2006) Davidson Review: Implementation of EU legislation.19 EFRA Committee (July 2007) Implementation of the Environmental Liability Directive.20 Formerly the Department for Trade and Industry.



Sustainable Buildings

33. The AG report Better Regulation for a Sustainable Built Environment finds that disjointed policy andweak enforcement risk damaging the credibility of the Government’s ambitious targets for low-carbonbuildings. Tackling the environmental performance of the built environment, especially buildings, is afundamental concern for the UK economy, and better regulation and fiscal incentivisation have major rolesto play in stimulating transformational change.

34. This lack of consistency and regulatory rigour is already undermining the potential role of the builtenvironment in securing a sustainable future for the UK economy. It also undermines the competitiveadvantage that should accrue to those companies and organisations that have shown leadership inresponding to sustainable development priorities.

35. The report finds that:

— A sustainable built environment is good for business and good for competitiveness;

— Far greater regulatory and fiscal emphasis is needed on improving the environmental performanceof our existing building stock;

— Key new market-based instruments designed to improve the performance of existing buildings riskgiving rise to perverse environmental and economic outcomes;

— More robust implementation of existing regulations is needed urgently to achieve compliance andstimulate innovation in the delivery of new buildings; and

— Government is failing to show the leadership expected of it on its own estate.

February 2009

Memorandum submitted by the Institute of Chartered Accountants in England and Wales (ICAEW)

Introduction

The Institute of Chartered Accountants in England and Wales (ICAEW) welcomes the opportunity tosubmit evidence in response to this Regulatory Reform Committee inquiry. As a public interest body, theICAEW is committed to working with Government and regulators, as well as wider market participants, inorder to improve regulation and help restore economic confidence.

We were pleased to be able to contribute to the Regulatory Reform Committee’s inquiry into “GettingResults: The Better Regulation Executive (BRE) and the Impact of the Regulatory Reform Agenda” in2008.

Executive Summary

— The majority of businesses questioned in the ICAEW 2008 Global Enterprise survey believe thatthe UK regulatory and taxation environment is not business friendly. Members in the EU were onlymarginally more positive regarding their regulatory and taxation business environment, but a clearmajority of those in the US and the Far East thought their environment business friendly.

— The Global Enterprise survey measured the annual cost to business of implementing newlegislation in 2007–08 at an estimated £11.3 billion. ICAEW research indicates that the burden ofregulation falls disproportionately on Small and Medium Sized Enterprises.

— The ICAEW believes the current UK regulatory reform agenda has only achieved limited success,but that much of the framework for an eVective regulatory regime is already in place.

— The ICAEW believes that the UK regulatory framework would be improved by the followingmeasures:

— The Better Regulation Executive (BRE) should be responsible for signing oV proposals(particularly the Impact Assessment) for legislative changes before they get into the legislativeprogramme. Alternatively the role could be carried out by the National Audit OYce. If therole remains with the BRE it should be moved to HM Treasury or back to the Cabinet oYceto enhance its ability to challenge departments.

— The Impact Assessment system introduced in April 2008 would benefit from further externalinput into the assessment of the costs and benefits of proposals.

— The Government should proceed with the introduction of regulatory budgets to helpdepartments to focus on priorities.

— In the current economic climate the ICAEW supports calls from within Government for amoratorium on legislation and legislative announcements, which have not yet been implementedthat will entail additional costs for business. As a minimum, the ICAEW believes that there shouldbe a moratorium on all Employment law and Health and Safety changes until the economy is inrecovery.



— Regulation can also have “unintended consequences”. ICAEW research has shown that regulationcan have potentially negative eVects on economic eYciency, in particular on entrepreneurship andcompetition, for example, by deterring new entrants to a marketplace.

— The ICAEW believes it is critical that the G20 continues, in partnership, to lead the regulatoryresponse to the financial crisis, taking all necessary steps to tackle problems whilst refraining fromtaking competing national or regional measures, which could undermine the long-term benefits ofglobalisation.

— The ICAEW welcomes the BRE’s and Department for Business, Enterprise and RegulatoryReform (BERR) leadership in the context of the European better regulation agenda, but wouldencourage greater partnership and sharing of experience between better regulation authorities inEU member states and with the European Commission itself.

— The ICAEW recommends that the Government accepts the recommendations of the AndersonReview and implements the recommendations as soon as possible.

Background

1. Successive Governments have sought to address the regulatory burden on business. Early UKinitiatives included the Better Regulation Task Force (later Commission). The Conservative Governmenthad a “deregulation” agenda, which became a “better regulation” agenda under the 1997 LabourGovernment. The current UK Government agenda on regulation has been devised around the HamptonReview for HM Treasury (Reducing administrative burdens: eVective inspection and enforcement, March2005) and the Better Regulation Task Force report to the Prime Minister also in March 2005 “Regulation—Less is More: Reducing burdens, improving outcomes”.

2. The “Less is More” report advocated that the government should:

— Measure the administrative burden which Government imposes on business.

— Commit to a target for reducing administrative burdens.

— Set up the necessary organisational structure to oversee the process of targeted administrativeburden reduction.

3. The “Less is More” report followed a feasibility study on introducing the system of targetedadministrative burden reduction adopted by the Netherlands. The other major recommendation of thereport was for the government to introduce a “One in, One out” approach to manage and reduce regulatoryburdens. It argued that “If ministers do want new laws they will need to prioritize and drop otherproposals—thus stemming the flow, or repeal existing laws—thus reducing the stock”.

4. The Hampton Review suggested that “Administrative burdens are the costs that come fromenforcement activities. If regulators operate eVectively, and use the best evidence or programme their work,administrative burdens on compliant businesses can be reduced while maintaining or even improvingregulatory outcomes”. It recommended:

— Comprehensive risk assessment should be the foundation of all regulators enforcementprogrammes.

— There should be no inspections without a reason, and data requirements for less risky businessesshould be lower than for riskier businesses.

— Resources released from unnecessary inspections should be redirected towards advice to improvecompliance.

— There should be fewer, simpler forms.

— Data requirements including design of forms, should be co-ordinated across regulators.

— When new regulations are being devised, Departments should plan to ensure enforcement can beas eYcient as possible, and follows the principles of the report.

— Thirty-one national regulators should be reduced to seven or more thematic bodies.

5. The UK Government accepted the recommendation of the “Less is More” report and committedthrough the Administrative Burdens Reduction Programme (the Programme) to reduce the administrativeburden imposed by regulations on private and third sectors by 25% by 2010. At EU level, a similar target(25% by 2012) was endorsed by the European Council in March 2007. The Better Regulation Executive(BRE) is responsible for co-ordination of delivery of the Programme across departments and regulators, aspart of a broader agenda to reform and improve the regulatory environment and to provide the best possibleconditions for business success. Progress in implementing the Programme is examined in an annual reportby the National Audit OYce. The Government also accepted the recommendations of the Hampton Review.

6. These two initiatives formed the basis of the Government’s current “Regulatory Reform Agenda”which has four main components:

— Simplify and modernise existing regulation (principally through administrative burdensreduction).



— Change attitudes and approaches to regulation to become more risk based.

— Improve the design of new regulations and how they are communicated.

— Work across Europe to improve the quality of European regulation.

Is the current Regulatory Reform Agenda succeeding?

7. In the 2008 BRE report “Making Your Life Simpler: Simplification Plans, A Summary”, LordMandelson, Secretary of State for the Department of Business, Enterprise and Regulatory Reform (BERR)stated, “We are on track to meet our target of achieving approximately £3.4 billion of net annual savings forbusiness by 2010”.

8. However, evidence from the National Audit OYce (NAO) report “The Administrative BurdensReduction Programme”, 2008 found “only two percent of businesses stated it had become easier to complywith regulation over the past 12 months, 30% stated it had become more diYcult, and 66% stated it hadstayed about the same. One percent of businesses stated that complying with regulation had become lesstime consuming while 40% stated that it took longer and 57% stated it had stayed about the same”.

9. ICAEW research supports NAO report findings that there has been little significant improvement inthe burden regulation places on business. The ICAEW annual Enterprise Survey, now in its twelfth year,draws upon the expertise of our members working at the heart of business. The 2008 report, includesresearch from chartered accountants working in the EU, Far East and the US, giving a global perspective.

10. The majority of businesses surveyed by the ICAEW believe that the UK regulatory and taxationenvironment is not business-friendly. Just over half (53%) of businesses in the survey say that the regulatoryand taxation environment in the UK is not (“not very” or “not at all”) business-friendly. Fewer then halfof businesses in the UK and the rest of the EU consider the regulatory and taxation environment underwhich they operate to be business-friendly. This contrasts with two-thirds of US businesses and approaching90% of those in the Far East Countries.

These findings are drawn from the following chart:

CHART 16: How business-friendly is your country's

regulatory and taxation environment?

41%34%

50%

34%

4% 14%

16% 53%

37% 32%21%

8%

16%16%

8%

5%

- 6 0%

- 40%

- 20%

0%

20%

40%

60%

80%

100%

UK (1,020) Rest of EU (100) US (101) Far East (150)

Fairly Very Not very Not at all

11. Businesses in the UK are more likely than those in the EU, US and Far East to consider that theiroperation and development are hindered by employment legislation, employment tax, business tax changes,health & safety regulation, environment law, planning regulations and Corporate Social Responsibilityreporting requirements. However, they are less likely than those in the US to feel that they are hindered bycorporate governance requirements and financial reporting requirements. In contrast, businesses in the FarEast, consider their regulatory regime a help to their operation and development rather than a hindrance.



12. Business owners complain about regulation, because it involves the diversion of scarce resources awayfrom productive, profit-generating activities and towards the discovery, understanding of, and compliancewith regulations. In the 2008 Enterprise survey 70% of the cost of implementing new legislation in the UKin 2007–08 was borne by Micro businesses (those businesses with nine or less employees).

13. Regulation can also have “unintended consequences”. A report “Regulation in the Marketplace: anEconomic Literature Review” by cebr, an Independent Research Consultancy, for the ICAEW has shownthat regulation can have potentially negative eVects on economic eYciency. These negative eVects arisethrough the impact of regulation on entrepreneurship and competition in particular. A preponderance ofregulation that acts as a barrier to the free operation of businesses, both in theory and in practice, leads toa reduction of the number of firms entering the marketplace and a consequential lessening of competitivepressures.

14. Therefore, although regulation is often intended to correct market failures, it is important to realisethat there may be a trade-oV between these goals and economic eYciency. Hence, overbearing regulationcan diminish competition and hold back entrepreneurship. Therefore, the impact of new and existingregulations on businesses—especially SMEs—needs to be considered thoroughly.

15. The ICAEW believes that the depreciation in the value of Sterling has aVorded the UK anopportunity to emerge from the current recession more quickly through a significant boost in its exports andforeign currency earnings. However, if UK businesses are placed at a competitive disadvantage throughburdensome regulations, that business opportunity will soon evaporate.

Departmental regulatory budgets

16. In August 2008 John Hutton, the then BERR Secretary of State published proposals to improve theregulatory regime through a system of regulatory budgets. The document (Regulatory Budgets: AConsultation Document) stated;

“As a government we have already made great progress in improving our regulatory regime. TheUK is recognised as a world leader in better regulation and ranked by the World Bank as one ofthe top places to do business internationally. But we want to go further, which is why we areconsulting on the idea of introducing a system of regulatory budgets to make explicit the costs andbenefits of new regulations. Introducing Regulatory Budgets would be a radical new development,a world first in the management of regulation. We need to make sure that any system would workfor all those aVected by regulation which is why we are seeking views on key issues”.

17. The regulatory budgets proposal is a variant of the second proposal in the “Less is More“ report “Onein, One out” system of “stemming the flow, or repeal existing laws—thus reducing the stock”. The regulatorybudgets consultation stated, “A regulatory budget system will provide better prioritised regulation bygovernment departments; greater transparency on the impact of regulation and better accounting of theopportunity costs of regulation; better maximisation of the benefits of regulatory interventions andminimisation of the costs; and greater scrutiny of regulatory proposals.”

18. The introduction of regulatory budgets builds on the launch last year of a new template for ImpactAssessments and a commitment by the Government to publish the benefit-cost ratio of regulationintroduced from 2008. The foundations for regulatory budgets are in place. In taking this natural next step,the Government will be introducing additional transparency in setting out its ambition for regulation andgreater control over the costs that will be introduced.

19. The ICAEW supports the introduction of regulatory budgets, but believes exempting tax measuresand other exemptions (such as climate change) creates a “credibility gap”. The ICAEW recommends thatthere is independent, external scrutiny of the regulatory budgets system to provide assurance that the systemdelivers the intended benefits.

EVective Government Guidance on Regulation

20. The Anderson Review reported in January 2009 on improving government guidance on regulationin its report The Good Guidance Guide: taking the uncertainty out of regulation.

21. Its recommendations to Government sought to improve certainty in government guidance in thefollowing ways:

— Increasing certainty over outcome, by providing access for SMEs to a tailored, insured advicehelpline and taking responsibility for the quality of its guidance.

— Making guidance more accessible, by expanding the content of Business Open Advice Days andreviewing the brand of its single guidance website.

— Making guidance clearer, by introducing “quick-start” guides and moving to ensure that allguidance complies with the Code of Practice on Guidance.



— Achieving consistent guidance across government.

— Culture change and increasing communication of improvements.

22. The ICAEW recommends that the Government accepts the recommendations of the AndersonReview and implements the recommendations as soon as possible.

Response to Inquiry Questions

Current Developments

What are the implications of the recent economic developments (for example, the economic downturn; creditcrunch and problems within the financial sector) for the design and delivery of the regulatory reform agenda,including risk-based regulation?

23. The findings of this quarter’s ICAEW UK Business Confidence Monitor (BCM) show that businessesare suVering, as the fall-out of the recent crisis in the global financial system spreads. The survey indicatesthat the outlook for business prospects for the next twelve months is negative. Turnover and profits are allexpected to contract, while budgets for capital investments, R&D and staV training, as well as headcount,are forecast to fall. Firms of all sizes suVered a fall in confidence in the first quarter of 2009, with the largestfall recorded among medium sized firms (those with 50–249 employees), which experienced a 15.1 point dropin the Confidence Index to—45.2.

24. Demand for products and services is dropping and unemployment is increasing as consumers copewith an accumulation of debt. Given this outlook many UK businesses are struggling for survival. The creditcrunch has made access to finance increasingly diYcult for business (and consumers) and expensive both interms of the recurring interest costs and the one-oV arrangement fees charged by finance providers. Manybusinesses have cut capital expenditure, reduced their headcount, and are reigning in discretionarymarketing and other expenditure.

25. The ICAEW believes that the Government should not be imposing a greater regulatory burden onbusiness at this particularly diYcult time. More regulation on business will increase costs, at a time whenprofits are contracting. Increased regulation is a distraction at a time when the attention of the business needsto be totally focussed on survival.

26. The ICAEW supports calls from within Government for a moratorium on legislation and legislativeannouncements, which have not yet been implemented that will entail additional costs for business. As aminimum, the ICAEW believes that there should be a moratorium on all Employment law and Health andSafety changes until the economy is in recovery with an earliest date for new legislation being April 2011.

27. Clearly the UK Government, along with those in other EU Member States and other developed anddeveloping nations, needs to address the systemic failures which created the credit crunch and its aftermath.


28. The ICAEW believes that much of the framework for eVective regulatory conditions is already inplace, in particular, the move towards a risk-based approach, the co-ordination by the BRE and the newImpact Assessment process. However these need to be supplemented in a number of ways.

29. The BRE needs to have greater powers and influence. It is significant that the Dutch approach toregulation on which the “Less is More“ report was based includes an independent external watchdog—theDutch Advisory Board on Administrative Burdens (ACTAL). ACTAL’s role is to safeguard the adequateassessment of the administrative burden for businesses (including the burden of subsidies) and theadministrative burden for citizens. Besides this assessing role, ACTAL provides strategic advice to the Dutchcabinet concerning red tape, in particular administrative burden and compliance costs. ACTAL draws itsstrength and influence, in part, because it signs oV proposals before they get into the legislative programme.The ICAEW believes the BRE should have the same role over UK legislation, particularly over ImpactAssessments. To give the BRE greater authority to challenge departments the ICAEW believes that the BREshould be moved either to HM Treasury or back to the Cabinet OYce.

30. The Impact Assessment system, introduced in April 2008, has improved measurement, but the qualityof assessment is still very variable. It would benefit further with greater external input into the assessmentof the costs and benefits of proposals. The KPMG report on the Administrative Burdens—HMRCMeasurement Project in March 2006 is a good example of the value of bringing in outside experts to assistwith this assessment. The National Audit OYce (NAO) has built up a body of expertise in evaluatingdepartmental simplification plans, and an alternative to increasing the powers of the BRE might be for theNAO to be given the role of preparing the assessment of costs and benefits in each Impact Assessment.



31. The annual NAO report on the Administrative Burdens Reduction Programme (also see 8) includedthe following comments on claimed reductions in the administrative burdens:

“The reductions claimed were not calculated on a consistent basis and were subject to only limitedindependent validation. Departments used diVerent approaches to estimating the value of savings,including variations in: the detail of calculations and the extent to which businesses were asked toverify them; the treatment of common issues, such as the expected take-up of revised requirements;and procedures to monitor and challenge claimed savings.”

32. An example highlighted in the ICAEW’s Budget 2009 submission is the temporary reduction in VATfrom 17.5% to 15%. At the time of the 2008 PBR HM Treasury published an impact assessment thatestimates total costs for the temporary reduction of £300 million, based on businesses’ time using standardcost model data. The ICAEW remain concerned that the burdens on businesses, especially small businessesand retail businesses have been significantly underestimated.

33. Lastly, the ICAEW believes that the introduction of regulatory budgets would help departments tofocus on priorities, (as intended in the Less is More report to the Prime Minister, see 2), although the ICAEWrecommends independent, external scrutiny of any regulatory budget system. Sir William Sargent, thecurrent Executive Chair of the Better Regulation Executive has stated that the Better Regulation Agendarequires a culture change in the civil service. We believe that the proposal to have a total budget approvedby the Cabinet which covers all regulation, including policy costs, has great merit. Whilst the focus onadministrative burdens is necessary, in isolation it will not fully achieve its objectives. Consideration ofpolicy options and costs will significantly increase the likelihood of successful reduction in administrativeburdens.


34. The ICAEW’s representation to the G20 will highlight the need for a proportionate and targetedresponse to improving the regulatory framework in the wake of the financial crisis, which must beinternationally co-ordinated in its response.

35. The ICAEW believes that it is critical that the G20 continues, in partnership, to lead the way inresponding to the crisis, taking all necessary steps to tackle problems whilst refraining from takingcompeting national or regional measures which could undermine the long-term benefits of globalisation.

36. Auditing was developed to provide greater confidence in reported financial information. However,auditors have very limited responsibilities to provide information to banking regulators and supervisors.Audit could now help play a role in strengthening confidence in financial services.

37. The financial crisis has made clear the need for reform of capital adequacy requirements. The ICAEWbelieves that reforms to the capital requirements framework should incorporate a greater sensitivity to riskand be able to address market-wide stress scenarios as well as those at firm-level. Consideration should begiven to adding a systemic risk layer to the capital requirements, increasing capital requirements forinstitutions most exposed to systemic risk or financial contagion. This may require new regulatorymonitoring tools to be developed, working with central banks given their responsibilities in respect offinancial stability.

38. The financial crisis has equally highlighted weaknesses in the regulation of liquidity. The Basel IIframework focuses on prudential capital requirements: it does not deal with liquidity managementadequately. The ICAEW believes that action to better deal with liquidity risk will be as important as reformto the capital adequacy framework.

39. Liquidity risk has had insuYcient attention from regulators in recent years. Regulatory regimes needto be updated to address the current and potential future liquidity risks in the financial system. Asinternational banks often managing liquidity on a group-wide, international basis, the regulatory tools needto be also international in nature. Previous attempts to strengthen the regulation of liquidity managementhave failed due to lack of international consensus.

40. The relationship between bank auditors and regulators has been generally weakened in recent years.The Basel II framework does not specifically require the involvement of external auditors for supervisorypurposes. In many jurisdictions, auditor responsibilities are to audit the financial statements which areaddressed to shareholders. Responsibilities to bank supervisors may be limited to whistle-blowingrequirements.

41. The audit profession can contribute to greater confidence in banks by providing objective, expertopinions on the information reported by banks, so that those relying on that information can be confidentthat it has been properly prepared. There are various examples of financial information not currently subjectto audit, including bank capital ratios published alongside the accounts, Basel II Pillar 3 disclosures as wellas certain bank regulatory returns.

42. In response to the ICAEW’s oral evidence session in front of the Treasury Select Committee on28 January 2009 the Institute submitted additional written evidence to the Committee on how the role ofauditors might be extended to enhance confidence in bank reporting.



43. In the UK, the Financial Services Authority can request reports from skilled persons (such asauditors) on regulated firms (including banks). This is a flexible regulatory tool which can be used in anumber of areas such as financial information, fraud, internal controls or compliance with particularregulations.

44. More general reports looking at bank controls were used under the previous regime under the Bankof England. The Bank used to routinely request auditors to conduct specific work, often planned to happenat the same time as year end audits. Auditors reported directly to the Bank on these reports. Although thenature of the work might vary from year to year, the fact that there was often consistency across banks aswell as the fact that it could be built into the year end audit planning process for all bank audits, allowedgreater eYciency. The existing powers under the FSA “skilled persons” regime could be used in a similarway to the previous Bank of England regime to obtain intelligence, for example, on systemic risk.


See response to: How does the Government balance the need for an eVective regulatory framework.


45. The ICAEW’s response to the BRE’s consultation on “Regulatory Budgets” in November2008 advocates that policy costs should be included in the consideration of the cost of implementing newlegislation/regulation.

46. The ICAEW believes that all regulations which impose a cost (policy cost or administrative burden)must be included in the budgets. This makes the inclusion of EU legislation essential.

47. In setting the regulatory budgets the Government’s primary consideration should be the additionalcosts to business in the context of the economic growth over the budget period. Budgets should incentivisedepartments to constantly search for cost reductions in order to pay for new regulatory costs.

48. The ICAEW believes that the budget period should be three years. This facilitates alignment with theComprehensive Spending Review periods. It also gives departments a shorter focus for complying withbudgetary targets. Departments should publish annual reports on the cumulative costs incurred withforecasts for the remainder of the three year period.

49. The ICAEW supports the introduction of regulatory budgets, but believes exempting tax measuresand other exemptions (such as climate change) creates a “credibility gap”. The ICAEW recommends thatthere is independent, external scrutiny of the regulatory budgets system to provide assurance that the systemdelivers the intended benefits.

Design of the New Regulations

Does Government understand businesses suYciently to design eVective regulations? Is suYcient emphasisevidence given to small businesses and enforcement issues?

50. ICAEW written evidence recommends that the BRE be given authority to sign oV all regulations(particularly Impact Assessments) or alternatively for NAO to be given the role of preparing the assessmentof costs and benefits in each Impact Assessment (see 29 & 30). If the role remains with the BRE it shouldbe moved to HM Treasury or back to the Cabinet oYce to enhance its ability to challenge departments. Acentral, professional, expert quasi independent team (like the Parliamentary Counsel who draft alllegislation) would avoid the problems of lack of consistency and departments using diVerent approaches toestimating the value of savings outlined in the 2008 NAO report on the Administrative Burdens ReductionProgramme.

51. The ICAEW welcomes the BRE’s and DBERR’s leadership in the context of the European betterregulation agenda, but would encourage greater partnership and sharing of experience between betterregulation authorities in EU Member States and with the European Commission itself. Whilst, the EWP hascommitted to take the better regulation message to Europe and to ensure coordination between UK and EUsimplification measures, we believe that eVective coordination in this regard will require careful thought andconsiderable resource and innovation.

52. The ICAEW believes that the Government should continue to maintain its strong commitment toengaging in the EU simplification process. As noted above, the EU is committed to reducing regulatoryburdens on business by 25% by 2012. Over the last four years, the European Commission has takenimportant steps to implement the better regulation agenda. Work continues to simplify legislation that isalready on the books to ensure that it is up to date and more accessible. The Commission has alreadypresented a number of legislative measures that will bring about significant reductions in administrativeburdens for business, with more legislative initiatives expected. Impact Assessment Guidelines have beenreviewed and modernised.

53. The European Commission is also finishing the process of identifying and measuring possible burdensand is expected to present legislative proposals later this year. The study looks at how Member States haveimplemented directives and the extent to which there has been unnecessary “gold plating”, the process where



Member States add further requirements other than those stipulated by EU legislation when transportingit into their own legislation. Preliminary results screened 42 EU Acts and identified 356 associate EUinformation provisions. The transposition of implementation of these EU obligations has resulted in theadoption of more than 9,500 national obligations across Member States. More than 700 of these wentbeyond the required EU law.

54. Analysis varies as to the exact proportion of the total regulatory burden on business accounted forby EU directives introduced into UK law. However, the British Chambers of Commerce 2007 BurdensBarometer, which compiles and totals UK Government Impact Assessment cost figures, indicates that 71.1%of the £66 billion UK regulatory burden is accounted for by EU sourced legislation and regulations. “Goldplating” exists as an additional burden on the UK business environment, on top of the necessary enactmentof directives. The ICAEW cautions against “gold plating” and would argue that the implementation of EUdirectives should not be seen as an opportunity for UK departments to introduce policy without engagingin the proper policy development process, including full economic analysis at the correct stages. We wouldrecommend that a system of greater transparency and scrutiny be considered to highlight gold-plating whereit exists.


55. Initiatives introduced by the Government, as a result of the Hampton Review include reducing thenumber of regulators, streamlining the regulatory process and improving communication to businesses. TheReview recommended that many of the existing regulators merge, to reduce the total number to just seven.This work is being carried out at the moment. The relevant Government departments are planning andoverseeing the mergers. To enable streamlining of the regulatory process the Regulatory Enforcement andSanctions (RES) Act 2008 has been introduced to help regulators focus time and resources on non-compliantbusinesses, while reducing the amount of administration for those that do comply. The RES Act 2008 givesstatutory powers to the Local Better Regulation OYce, while the Retail Enforcement Pilot is testing a newmethodology for joined-up working between regulators within local authorities. In addition the BRE isproducing a clear summary of new or updated regulations, to help businesses quickly understand whatregulations aVect them, and what they should do to comply.

56. The ICAEW believes that it is too early to tell whether these initiatives will result in an improved focuson compliance and enforcement issues. The ICAEW believes that the BRE has improved communicationto businesses on new regulations. Implementation of the Anderson Review will help businesses to gainconfidence in the guidance issued by government and the national and local regulators.

February 2009

Memorandum submitted by Andrew Tyrtania

Summary

— Avoid rules—stick to principles.

— Concentrate on competence.

— Competence must extend from those who advise clients, to those in administration and ultimatelyand most importantly to those in control of the firms.

— Competence must also be applied to those in regulation.

— Regulators must monitor, communicate with and advise firms.

I would like the committee to bear in mind the following when considering any proposed amendments tofinancial services regulations:

1. Rules or Principles

1.1. The financial services market is by nature dynamic and inventive. London and to a certain degreetherefore, the UK, relies on its dynamic nature to attract financial services firms. This same characteristichowever, makes it extremely diYcult to regulate by means of a system of written rules and regulations.

1.2. The principles-based approach is therefore, likely to be most eVective in controlling and restrainingrisks in the sector, as principles do not need constant revision. To be eVective, a principles-based systemrequires competent individuals within firms and within the regulator. I believe the current FSA training &competence rules to be lacking in ensuring that this is the case within firms. I also believe the current crisisto be the first real test of principles-based regulation and a wake-up call to the senior management offinancial services firms that they have not properly understood and acted on their obligations under thePrinciples.



1.3. In some areas, rules are entirely appropriate. But they will only be eVective where they are recognised,understood and enforced. The more rules we have, the less likely they are to be recognised. The morecomplex the drafting of the rules and the larger the rulebook becomes, the less likely they are to beunderstood. Where rules exist the regulator must be capable of interpreting rules, understanding the firmsthey apply to and of giving appropriate guidance to those firms.

1.4. I recently heard Vince Cable speaking at a debate organised by the Securities and InvestmentInstitute, at which he called for “more rules”. As one of the examples he gave to support his argument hecited the ludicrous multiples of income that mortgage lenders have been oVering in the recent past.

1.5. Since the regulation of mortgage sales by the FSA in the UK there has been and remains arequirement (a rule) for the adviser to consider, and evidence, aVordability.If this rule had been adhered to,no unsuitable mortgage oVers would have been made in the UK. It doesn’t matter what multiple of incomeis oVered, or even whether the applicant is “self-certifying” their earnings. It’s either aVordable, or it isn’t.Having the rule alone doesn’t make the system work.

1.6. The existing FSA Handbook is enormous, complex, impenetrable and ambiguous.

1.7. I believe the Committee should encourage FSA to maintain the principles-based approach. Workshould commence on a new rule book, structured in-line with the activities that firms must seek permissionto carry out, rather than the “type of firm” approach that we have ended up with at present.

1.8. As firms develop and adapt, they change type, they adopt or develop new products and their riskprofile changes.

1.9. There are so many rules that each firm must adhere to that the individual compliance oYcers rarelyunderstand which rules apply to their firm, or to which individuals within their firm. As a consequence,employees are presented with huge and complex in-house compliance manuals—which they never read.

1.10. In creating a new principles-based and activity focussed set of rules, the new handbook must besimple, concise and precise.

1.11. Principles can be applied to any situation, but they require intelligent application. Intelligentapplication should be cited as best practice and set as a benchmark for others to aspire to or exceed.

2. Adopting a Competence-Based Approach

2.1. The present FSA Training & Competence regime focuses almost exclusively on those individualsadvising Retail clients. Examination standards are set and must be attained. Competence must be regularlymonitored and assessed.

2.2. Unlike threshold examinations, there is however, little guidance provided to firms on what makes aneVective competence monitoring system. Some firms do it well—others poorly. So standards of competencevary. Some people may be technically competent, some may be consummate salesmen. Guess which becomewhistle-blowers and which get listened to.

2.3. Retail products tend to be less complex than those available between professionals, yet those whoadvise professionals, or those buying investments on behalf of professionals are subject to less or even nocompetence requirements.

2.4. As we go on up towards the ultimate management of a firm—they move further away from clientsand further away from competence requirements. Is it any wonder we get directors who don’t understandhow their firms have got into diYculties, when below them are managers who don’t understand what thewhizz-kids in the front oYce are really doing.

2.5. Talking to the senior management about the risks in their firms we have a Regulator staVed by a bodyof largely lawyers and accountants, rather than experienced financial services practitioners.

2.6. The committee should encourage FSA to adopt a competence-based system of managementcontrols, and to extend that system to all employees of the firm. The regulator itself should adopt those sameprinciples, develop best practice and disseminate that throughout firms.

2.7. There are competence models that can be followed and they can be applied to anybody, at any levelwithin any firm. They could even be applied to health service professionals or possibly even to those chargedwith child-protection issues!

3. The Role of the Regulator

3.1. As mentioned previously, the current crisis is a wake-up call to the senior management of financialservices firms within the UK. Enforcement action may be necessary, but a witch hunt will be of little value.

3.2. The regulator asks firms to adopt “open and honest dialogue” with its regulator. Unfortunately theobligation is not mutual. When firms seek guidance on the interpretation or application of rules they are toooften told “I’m sorry, that’s for you to determine”. As one grows old, hopefully one also matures. A matureapproach when faced with a question you cannot answer is to admit that you do not know the answer. Butthe obligation doesn’t end there.



3.3. Regulatory staV must be prepared, trained for and empowered to jump to the aid of firms asking forhelp. They should visit and work alongside firms to develop a mutual understanding of their business, therisks within it and to formulate systems and practices that the firm can adopt to meet the Principles andcontrol their risks.

3.4. The incentives are mutual. If firms are better controlled, crises like the present one are less likely andbusinesses with better risk controls become less risky businesses and therefore attain a higher market value.

In Conclusion

Senior management often fail to understand how to control the risks within their businesses. They seerules as barriers and that culture trickles downwards from the top. Compliance is still too often viewed asa necessary evil and unwarranted expense.

So compliance oYcers, many highly skilled and competent, sit between a workforce burdened with toomany rules and a management that views them as an unwanted overhead.

The FSA should use the current ARROW system to engage with management at all levels within firms.They should champion the empowerment of their own staV to help firms seek solutions to the industry’scommon problems.

We do not need a radical solution or thousands of new rules, we just need the methodical application ofcommon sense. If you do not understand something—don’t sign it oV!

My background and interest in the issues are as follows:

I have been a practitioner in UK financial services since 1989, having operated under all of the regulatorssince the 1985 Financial Services Act, namely LAUTRO, FIMBRA, SFA, IMRO and FSA. I am poacherturned gamekeeper, now working as a compliance consultant to the asset management industry.

Early on in my career I was exposed to the pre-regulation hangover of poor sales practices in the provisionof retail financial advice and found these objectionable. This included being guided by the firm I first enteredthe industry with, to transfer a senior accountant away from his firm’s employer pension scheme to apersonal pension plan.

I therefore, migrated to firms operating at a higher level of professional standards and acquired relevantindustry qualifications along the way.

I moved from personal financial advice into investment management, acting as both a private clientdiscretionary investment manager and as fund manager for collective funds (broker funds and unit trusts).

Prior to the problems in the split capital investment trust sector in the UK, I worked for a large regionalstockbroker that was one of the top three players in split-capital investment trusts. One of my last activitieswithin the firm was to edit and produce “The Investor Guide to Investment Trusts”, a title taken over fromS.G. Warburg. Within the firm my investment analyst, our investment director and myself had developed asystem of analysing the shares of the split-capital trusts that properly illustrated their risks and potentialreturns and allowed us to provide predictable returns and to avoid the high-risk shares. We were invited tojoin the “magic circle” that existed within the industry, so that we would get the shares we wanted for ourclients as long as we also took the shares that the issuers wanted to sell to us. We declined. No-one from thatfirm was ever called to assist the FSA with its investigations.

At my previous employer I designed and implemented a risk-based system for controlling the investmentsentered into by portfolio managers on behalf of clients. It is not rules based, it does not limit risk by usingnumbers, it relies on assessing the competence of the portfolio manager to understand his client’s needs,objectives and tolerance of risk, and to understand and properly utilise the investment he is considering. Itallows for creativity and changing products. To date—it works.

I have met and worked alongside investment managers and financial advisers both good and bad. Veryfew have been inherently bad people, but some have been ill-informed, uninformed or misguided.

I recognise that you do not create a low-risk product by combining together many hundreds of high-riskmortgages. The best simile I can muster is that it’s like trying to increase your chances of winning theNational Lottery by buying lots of tickets, all with the same numbers.

February 2009

Memorandum submitted by the Law Commission

Summary of the Law Commission’s Response to the Inquiry: Themes and Trends in RegulatoryReform

1.1 The Law Commission was established by the Law Commissions Act 1965. The Law Commission hasa statutory duty to keep the law as a whole, both statute and common law, under review.



1.2 Taking into account the link between the principles of regulation under the Legislative andRegulatory Reform Act 2006 and the Law Commission’s statutory objectives, the Law Commission feelsable to contribute to the discussion on two of the points being considered by the Inquiry, namely:

(1) How could the Government improve its capability to regulate in a proportionate and eVectivemanner? (Consideration 1, Question 4)

(2) Is there suYcient consideration of how regulations will be implemented, including an appropriatefocus on compliance and enforcement issues? (Consideration 2, Question 2)

1.3 The Law Commission includes in its response to these questions examples drawn from recentlycompleted or ongoing projects. What it draws from these examples is that the regulation of particular areasof human activity needs to consider the detailed circumstances of the specific situation, and develop asolution that is fair, proportionate and eVective in those circumstances.

1.4 In expanding on this general conclusion, the Law Commission highlights the following features of itsworking methodology that help it to achieve its goals:

(1) key to the Law Commission’s development of law reform proposals is its commitment to wide-ranging and informative consultation;

(2) the Law Commission’s development of policy in relation to its law reform projects must be, andis, informed by Government policy;

(3) law reform should be proportionate and sensitive to the particularities of the specific area of humanactivity, always seeking the least intrusive means of achieving a project’s objectives; and

(4) even where recourse to legislation is deemed necessary, this should impose the lowest possibleregulatory burden upon those aVected by it.

Response to the Regulatory Reform Committee Inquiry: Themes and Trends in Regulatory Reform

Introduction

1.1 The Law Commission was established by the Law Commissions Act 1965. The Law Commission hasa statutory duty to keep the law as a whole, both statute and common law, under review. This is with a viewto law reform under the general principles set out in the first part of section 3(1) of the Law CommissionsAct 1965. This states that:

It shall be the duty of each of the Commissions to take and keep under review all the law with whichthey are respectively concerned with a view to its systematic development and reform, includingin particular the codification of such law, the elimination of anomalies, the repeal of obsolete andunnecessary enactments, the reduction of the number of separate enactments and generally thesimplification and modernisation of the law…

1.2 Since the establishment of the Law Commission in 1965, about 90 Acts of Parliament have containedLaw Commission recommendations. These have encompassed a wide range of civil and criminal law. TheLaw Commission’s reports on statute law repeals have led to the repeal of more than 2000 Acts in theirentirety and the partial repeal of several thousand other Acts. In addition, 220 consolidation statutes havebeen passed, many, though not all, prepared by the Law Commission. Of these, a significant number haveincluded amendments of the law to give eVect to Law Commission recommendations.

1.3 Following the entry into force of the Legislative and Regulatory Reform Act 2006, intervention intoareas of economic activity is now subject to sections 1 to 3 of that Act. These sections set out generalprinciples for the regulation of economic activity.

1.4 In accordance with sections 1 to 3 of the Legislative and Regulatory Reform Act 2006, whereregulation is necessary, it should be:

(1) transparent;

(2) accountable;

(3) proportionate;

(4) consistent; and

(5) targeted.

1.5 It can be seen that the principles of the Legislative and Regulatory Reform Act 2006 resonate stronglywith the objectives that the Law Commission must seek to achieve under the Law Commissions Act 1965.

1.6 The Regulatory Reform Committee Inquiry requested that the Law Commission contribute to itsInquiry by a letter of 9 February 2009. As explained below, the Law Commission conducts extensiveconsultation as part of the discharge of its statutory duty. As a general rule, the Law Commission does notparticipate, as a consultee, in investigations or inquiries conducted by other bodies, whether in the publicor private sector, for such participation would lie outside its statutory remit.



1.7 However, in relation to the Regulatory Reform Committee Inquiry, the Law Commission, taking intoaccount the link between the principles of regulation and the Law Commission’s statutory objectives, is ableto contribute to the discussion on two of the points being considered by the Inquiry, namely:

(1) How could the Government improve its capability to regulate in a proportionate and eVectivemanner? (Consideration 1, Question 4)

(2) Is there suYcient consideration of how regulations will be implemented, including an appropriatefocus on compliance and enforcement issues? (Consideration 2, Question 2)

1.8 At this point, it is helpful to explain the Law Commission’s working methods, before turning toanswer the two specific questions by reference to evidence drawn from recent and current reform projects.

The Law Commission’s Working Methods

1.9 The Law Commission comprises a Chairman and four other Commissioners appointed by the LordChancellor. Under section 1A of the Law Commissions Act 1965, the Chairman must be a judge of eitherthe High Court or the Court of Appeal in England and Wales. The current Chairman is a judge in the Courtof Appeal. The Law Commission is staVed by civil servants, drawn mainly from the Government LegalService.

1.10 The Law Commission undertakes projects as set out in its three-year programmes of law reform.These programmes are approved by the Lord Chancellor and laid before Parliament. Currently the LawCommission is engaged on the tenth programme of law reform. The Law Commission consults widely whendrawing up a proposed programme of law reform. The Law Commission can also take on individual projectsreferred to it by central government departments outside of these programmes.

1.11 The Law Commission is independent as to the conclusions it draws and the recommendations itmakes in relation to individual projects.

1.12 The Law Commission is split into four subject-based teams. Law Commission projects are allocatedto the most relevant team. The teams are: Commercial and Common Law; Criminal Law; Property, Familyand Trusts Law; and, Public Law.

1.13 There is also a team dedicated to Statute Law Repeals, which works across all areas of statute lawand proposes the repeal of obsolete statutes. Finally, the Parliamentary Counsel seconded to the LawCommission undertake not only the drafting of the Bills annexed to Law Commission reports, but also—with others engaged for the purpose—the Law Commission’s work on consolidation of statutes.Consolidations which the Law Commission considers desirable are undertaken when resources and thenecessary support of the relevant Department permit.

1.14 The Law Commission is a non-departmental public body sponsored by the Ministry of Justice.Nowadays, in practice, the Law Commission undertakes a project only with the support of the relevantcentral government department.

1.15 Where the Law Commission takes on a law reform project, the normal timeline for such a projectis in the region of three years, although some projects may take less time. This is usually broken up into fourkey stages:

(1) investigation and analysis of legal framework;

(2) Consultation Paper with provisional proposals—including initial Impact Assessment;

(3) analysis of Consultation Paper responses and determination of policy; and

(4) Final Report—including final Impact Assessment—and, where appropriate, a draft Bill.

1.16 These stages are sometimes preceded by Scoping Papers, which frame a project and seek to informdebate on the topics contained within an ongoing project and Issues Papers which draw stakeholders’attention to particular areas of concern.

1.17 In undertaking these stages, the Law Commission engages in a wide range of consultativetechniques. Prior to general consultation with the public, this includes the convening of expert groups toassist in the development of a project. Public consultation is not confined to the seeking of written responses,it also includes the organisation of expert seminars and the giving of both public and private lectures.Furthermore, where the Law Commission has had occasion to reformulate its proposals significantly on thebasis of consultation responses, it will undertake a further round of consultation.

1.18 The Law Commission sees consultation as a core part of a project’s development and vital to theachievement of a project’s goals. The Law Commission takes pride in the fact that its reports are informedby contributions from those with the widest expertise and experience in the relevant area under scrutiny. TheLaw Commission is a signatory to the Government’s Code of Practice on Consultation, though it believesthat its actual practice goes further than the requirements of the Code.

1.19 The Law Commission uses socio-legal and other research techniques where these are thoughtnecessary. The Law Commission also, where appropriate, takes account of the solutions adopted in othercountries having similar traditions and values to the UK.



1.20 The Law Commission now uses the Impact Assessment process throughout the development of itslaw reform proposals. To facilitate the best use of this process, the Law Commission employs dedicated in-house economists.

The Law Commission and Regulatory Reform

1.21 The general principles of law reform contained in section 3(1) of the Law Commissions Act1965 above match, in many significant ways, the general principles for regulatory reform set out above.

1.22 In particular, the role of simplified law, which may include consolidation, can both streamlineregulatory burdens and ensure that those on whom the law places obligations find it easier to follow thoseobligations. Simplified law also increases transparency and accountability, which is consistent with the goalsof regulation set out above.

1.23 Modernisation should include updating the law to take into account changing regulatory priorities.Modernisation also includes the promotion of what may be termed “soft law” approaches—that is, usingguidance or codes of practice rather than legislation—where that is thought most appropriate.

1.24 Now that Impact Assessments are required in all policy fields, the core principles of regulatoryreform have a much wider reach and are important to all areas of law reform.

1.25 In an eVort to aid the Committee in its inquiry, the Law Commission presents the followingexamples. Some broad conclusions are then drawn from these examples. Specifically the following recentlycompleted or ongoing projects are referred to:

(1) renting homes;

(2) housing: Encouraging Responsible Letting;

(3) consumer remedies;

(4) Trustee Exemption Clauses; and

(5) termination of tenancies.

1.26 At present there are no formal Government responses to the completed projects, namely: (1); (2);(4); and, (5). It is worth noting though that (4) needed no Government intervention as those aVected adoptedthe recommendations through self-regulation.

1.27 These are only a small part of the wide range of projects that we have undertaken recently. However,they demonstrate how the Law Commission seeks to reform the law in a way that makes it clearer andsimpler, but which at the same time seeks to strike a fair and proportionate balance between individualinterests and the cost burden that such reform is expected to impose.

Examples

Renting Homes

1.28 This project was referred to the Law Commission by the Minister for Housing in 2001. In theConsultation Papers published in 2002,21 the Law Commission identified that the law was complicated,unclear and did not properly address the interests of those involved in the sector. This was caused by theway in which the legal regime had developed, the multiplicity of tenancy types and the interests that theregime sought to protect.

1.29 In the project’s first Report, the Law Commission recommended a simple system of secure andstandard contracts, in place of the existing multiplicity of tenancy and licence types.22

1.30 The Report suggested that landlords and occupiers would benefit from:

(1) Government approved model contracts to make private renting easier, cheaper and more flexible;

(2) a consumer protection approach to the provision of rented housing; and

(3) a clear and practical legal framework for supported housing, which provides accommodation forpeople with drink, drug or mental health problems, women’s refuges, etc.

1.31 Such an approach has been widely welcomed by private landlords. In 2006, the Law Commissionpublished a Final Report in two volumes that contained a draft Bill.23

21 Law Commission Consultation Paper, Status and Security (CP 162, 2002); Law Commission Consultation Paper, Co-operation, Transfer and Succession (CP 168, 2002).

22 Law Commission Report, Renting Homes (Law Com No 284, 2003).23 Law Commission, Renting Homes: The Final Report (Law Com No 297, 2006), Volume 1: The Report, Volume 2: Draft Bill.



Housing: Encouraging Responsible Letting

1.32 This project was specifically concerned with the regulation of the private rented sector.

1.33 Our analysis of the current law found that the law in this area was overly complicated, not usedeVectively and did not accord to modern regulatory preferences.

1.34 In our Consultation Paper of 2007,24 which was informed by a “smart” regulatory perspective, theLaw Commission proposed that that all private landlords should either join a local authority accreditationscheme, become a member of one of the associations of private landlords, or let their premises through anaccredited letting agent. The Consultation Paper also proposed that the Government set up a centralregulator with powers to approve industry schemes and to ensure that they worked eVectively. Included inthis regulator’s powers would be a power of last resort to prevent an unaccredited landlord or agent fromletting residential property.

1.35 In the light of consultation and after further consideration, the Final Report took a more nuancedand proportionate approach, recommending a system of progressive and varied regulation that took intoaccount the diYculties in regulating such a complex market.25

1.36 The Final Report concluded that meeting the regulatory demands of the residential lettings marketrequired a change in approach to existing legal obligations, rather than the creation of new ones. It statedthat any costs of regulatory compliance should be both reasonable and proportionate.

1.37 Consequently, the Final Report recommended that there should be a staged programme of reform,starting with a system of voluntary self-regulation. However, in order achieve a change of culture in theresidential lettings market, the Report stated that it may ultimately be necessary to impose a compulsorysystem of self-regulation.

1.38 This is a good example of how a multifaceted and soft law approach may be the most appropriateway of regulating a complicated area of human activity which contains a wide range of diVerent actors.

Consumer Remedies

1.39 This ongoing project, which is joint with the Scottish Law Commission, aims to report “on thereform and simplification of remedies available to consumers relating to the sale and supply of goods”. Theproject was recommended in 2005 by the Davidson Review, set up by the then Chancellor of the Exchequer.

1.40 Although consumer protection is vital to consumer confidence, it can impose a significantadministrative burden on business. In all, the cost of government regulation has been estimated to bebetween £1.4 billion and £4.2 billion per year.26 Administrative burdens created by consumer law alone havebeen estimated at around £1.25 billion a year, of which £770 million is taken up by external costs andoverheads.27 With such large figures, even comparably minor improvements can lead to significantly loweroverheads for the business world.

1.41 Five factors were identified by the Better Regulation Executive as important in relation to regulatoryburdens:28

(1) the volume and complexity of regulations;

(2) regulatory change;

(3) poor quality of government guidance;

(4) uncertainty, risk and lack of confidence; and

(5) low awareness of government guidance.

1.42 Thus, the type and content of guidance needs careful consideration. The rewards, however, are high.Better guidance which enables businesses to ensure self-compliance saves the economy significant amountsof money.

1.43 In November 2008 the Law Commissions published their Joint Consultation Paper.29 On itsanalysis of the existing law, the Law Commission found that it was unduly confusing. This confusion madeit diYcult for consumers to understand their rights and for sellers to understand their obligations.

1.44 The Law Commission has proposed simplifying the law and clarifying a consumer’s right to rejectfaulty goods. This included ensuring a better “fit” between EC law and domestic regulation.

24 Law Commission Consultation Paper, Housing: Encouraging Responsible Letting (CP 181, 2007).25 Law Commission Final Report, Housing: Encouraging Responsible Letting (Law Com No 312, 2008).26 Better Regulation Executive, Regulation and Business Advice (2007) p 8. The higher figure was calculated on the basis of the

Government’s administrative burdens exercise, while the lower figure comes from a private sector consultancy.27 BERR, Consumer Law Review: Call for Evidence (May 2008) pp 8 and 9. These are based on the Better Regulation Executive’s

database of administrative burdens.28 Better Regulation Executive, Regulation and Business Advice (2007) p 9. The burdens referred to here are those across the

whole of economic activity, rather than just in relation to consumer remedies.29 Law Commission and Scottish Law Commission Joint Consultation Paper, Consumer Remedies for Faulty Goods (CP 188,

Discussion Paper 139, 2008).



1.45 The project built on previous work of the Law Commissions in this area, which was implementedby the Sale and Supply of Goods Act 1994.30 Simplified law here has benefits for all sides and by loweringcompliance costs is of benefit to the eYcient operation of the economy.

1.46 In consultation, the support of business for such an approach has come across clearly.

Trustee Exemption Clauses

1.47 This project considered the extent to which trustees should be protected by clauses in trustinstruments exempting them from liability for negligence. The Law Commission provisionally proposed ina Consultation Paper in January 2003 that there should be legislative restrictions on reliance on suchclauses.31

1.48 The Law Commission adjusted its position in the light of consultation responses demonstrating arange of negative impacts for both the trust industry and trust beneficiaries.

1.49 Our Final Report issued on 19 July 2006 recommended a rule of practice governing the fulldisclosure and proper explanation of trustee exemption clauses.32 That rule has been adopted by therelevant professional bodies and, we understand, now influences trust practice worldwide.

1.50 Here one can see how law reform was influenced by consultation to take into account the potentialregulatory impact of its proposals. The Final Report in this project sought to achieve its aims through theleast intrusive—but still eVective—means possible.

Termination of Tenancies

1.51 This project examined the circumstances in which landlords can end a tenancy by forfeiture on thegrounds that the tenant has breached the terms of the lease. It considered the law as it aVects both longresidential tenancies and commercial leases.

1.52 Following extensive consultation,33 the Law Commission concluded that the current law containsserious defects which adversely aVect both landlords or tenants, and recommended a new statutoryscheme.34

1.53 The proposed scheme requires the early exchange of information by both parties and provides aneutral framework for negotiation and resolution without the intervention of the court.

1.54 First, it suggests the removal of a legal principle that prompts many landlords to end tenancies forfear of being treated as accepting the tenant’s breach.

1.55 Secondly, the proposed scheme removes the landlord’s unilateral right to enter commercial premisesand exclude the tenant, severely—sometimes critically—disrupting the tenant’s business operations. Thishas a particularly disproportionate eVect on Small and Medium Enterprises (SMEs).

1.56 Thirdly, it suggests making available to the court a range of orders, such as an order for sale and thedistribution of proceeds, where litigation cannot be avoided. These were designed to decrease the incentivefor landlords to push for termination in the hope of a windfall far exceeding the value of the tenant’s breach.

1.57 Finally, in seeking to put forward a balanced solution, the Final Report suggests a summarytermination procedure for landlords in clear-cut cases.

1.58 The recommendations oVer a more eYcient means of resolving instances of tenant breach for allparties. In particular, they provide protection for SMEs who are currently vulnerable to disproportionateaction that can severely damage their continuing ability to trade.

Conclusions

1.59 What can be drawn from these examples is that the approach to the regulation of specific areas ofhuman activity needs to consider the detailed circumstances of the specific situation, and develop a solutionthat is fair, proportionate and eVective in those circumstances. The Law Commission’s law reformmethodology is designed to achieve this.

1.60 First and key to the Law Commission’s development of law reform proposals, is its commitment towide-ranging and informative consultation. This also entails the willingness to be genuinely responsive tosuch consultation and to re-formulate any suggested proposals in the light of new facts and matters revealedby the consultation, or of valid arguments put forward by consultees.

1.61 Secondly, the Law Commission’s development of policy in relation to its law reform projects mustbe, and is, informed by Government policy, and law reform proposals need to take into account theevolution of Government policy in areas relevant to the particular project.

30 Law Commission and Scottish Law Commission Joint Final report, Sale and Supply of Goods (Law Com 160, Scot Law Com104, 1987).

31 Law Commission Consultation Paper, Trustee Exemption Clauses (CP 171, 2003).32 Law Commission Final Report, Trustee Exemption Clauses (Law Com No 301, 2006).33 Law Commission Consultation Paper, Termination of Tenancies for Default (CP 174, 2004).34 Law Commission Final Report, Termination of Tenancies for Default (Law Com No 303, 2006).



1.62 Thirdly, law reform should be proportionate and sensitive to the particularities of the specific areaof human activity, always seeking the least intrusive means of achieving a project’s objectives. There are areasof law where self-regulation and the removal of regulatory burdens form the most appropriate solution—as seen in our Trustee Exemption Clauses project.

1.63 Finally, in other cases we have concluded that the only way in which a fair and proportionatesettlement could be achieved is through recourse to legislation. However, even where it recommendslegislation, the Law Commission seeks to ensure that it achieves the appropriate policy objective in a mannerthat imposes the lowest regulatory burden upon those who would be aVected by the proposed reform.

Lord Justice Etherton (Chairman)Kenneth Parker QCProfessor Elizabeth CookeDavid HertzellProfessor Jeremy Horder

March 2009

Memorandum submitted by the Business Services Association

Introduction

1. The BSA—Business Services Association—is the trade body that represents companies, and theiradvisors, delivering outsourced and business services across the public and private sectors.

2. BSA members are involved across the full range of public service provision—including health,education, waste management, defence, the Olympics and housing. They are also specialist providers ofservices such as building maintenance, engineering, communications and catering in the private sector. Alist of members is attached to this document in the Appendix.

3. Regulatory reform is critical to BSA members and has an integral role in shaping the market foroutsourced services. For instance, as workplace and market regulation increase, the rules governing suchthings as employment and training of staV, health and safety compliance, property management, energymanagement and accounting standards become more complex. A client can outsource the meeting of theserequirements to a specialist outsourced service provider. This can be more cost eVective and can improve theoverall product or service. Good providers also ensure these requirements are met further down thesupply chain.

4. We therefore welcome this opportunity to submit evidence to the Regulatory Reform Committee onthemes and trends in regulatory reforms.

5. The submission makes the following key points:

— Regulators could do more to understand the specific nature of this industry as it operates acrossthe public and private sectors.

— Regulation must ensure a level playing field can operate.

— Interventionist and superfluous regulation causes unintended consequences that often lead tofurther regulation.

— It is vital business has the flexibility to innovate and respond to diYcult economic conditions.

Regulators could do more to understand the specific nature of this industry as it operates across the public andprivate sectors

6. Good regulation protects consumers and service users and creates eYcient markets. To do this it mustbe industry specific. The Julius Review, commissioned by the then Secretary of State for BERR, John HuttonM.P., in 2008, was an important milestone in improving the understanding and scope of the outsourcingindustry as it operates in the public sector. However, many of the companies that make up the “publicservices industry” also operate in the private sector.

7. The BSA believes the market would benefit if the regulators understood the unique challenges facedby this dynamic and growing sector. The outsourcing industry is evolving rapidly. New players are enteringthe market and new markets are opening up, for instance in welfare to work programmes and the educationsector. The government should be engaging with industry specific bodies to help understand the changingbusiness environment.

8. In addition to formal regulation, the industry is subject to informal regulations and “rules of the game”that exist when operating in the public sector. For instance, those that have emerged from the Public ServicesForum, such as access to training and unions. These informal rules must be taken into account whendetermining regulatory burdens on the industry.



Regulation must ensure a level playing field can operate

9. A major concern of the outsourced services industry when competing for contracts with in-housebidding teams is that of competitive neutrality. When the government creates a mixed economy by allowingpublic, private and voluntary organisations to compete, then competitive neutrality policy insists that thegovernment should not discriminate between operators with diVerent ownership structures.

10. Where providers compete with an unfair advantage, public spending will be redirected away from themost eYcient producers, resulting in a decline in social savings. The beneficiaries of unfair competitions willwin a disproportionate number of tenders, undermining the credibility of the process and leading to lesscompetitive markets. And if private and voluntary providers are not convinced of the fairness andsustainability of public service markets, then they will be averse to innovating with new technologies andnew service models.

11. Public enterprises should be subject to the same regulatory environment as their private and voluntarysector competitors, including laws on environmental regulation, health & safety regulation and anti-competition practices.

12. For example, in the UK healthcare sector, independent providers are inspected routinely by theHealthcare Commission, whereas it is only obliged to undertake an annual assessment of NHSorganisations, which might not include an inspection. Around 10–20% of inspections of the independentsector are unannounced. In addition, NHS organisations do not pay for inspection whereas privateproviders do, although the Commission is looking at changes to this system.

Interventionist and superfluous regulation causes unintended consequences that often lead to further regulation

13. Creating an eYcient and eVective regulatory system is a constant challenge for the government. Thescope of economic and social objectives underlying regulations necessarily results in complexity. However,minimising the costs and complexities of regulation is also an important objective. Such a task is diYcultgiven the numerous sources of regulations—various departments and diVerent orders of government. Wesupport the government’s actions to reduce the regulatory burden and the strengthening of impactassessments.

14. However, we are concerned about the government’s tendency to respond to policy problems byimplementing new regulations and putting regulations into law. This happens when the government needsto be seen to be doing something. Top down management like this can create unnecessary bureaucracy, stifleinnovation and local initiative, create perverse incentives, demotivate front line staV and drive the best talentand innovations away from overregulated businesses into less regulated ones.

15. For instance, in the waste management sector regulatory changes have driven the need to developexpensive new facilities and this in turn has led to a consolidation of providers of waste management services.As a result there are now relatively few suppliers of waste disposal and treatment—eight to nine suppliersmanage at least 78% of municipal waste by weight. Excessive regulation also creates barriers to market entry,especially SMEs. Superfluous product testing regulations can disincentivise companies to invest ininnovation and new technologies to the detriment of the service user.

16. We need to be sure regulations properly deliver on the tasks of protecting service users and investors,appropriately regulating the markets and instilling confidence in users of and participants in those markets.Regulation must be proportionate, consistent and transparent. For instance, there are some changes toregulations that do not undergo legislative scrutiny such as retention of employment and changes to pensioncodes. The government must ensure these processes are transparent.

17. Any regulation has consequences, some can be unintended and can make the regulation self-defeatingby creating undesirable outcomes. These unintended consequences can worsen a situation somewhere elseand often require more regulation. For example, stringent regulation of new sources of air pollution mayaggravate pollution problems by perpetuating the life of old, dirty sources. If government closely monitorsthe release of information, there may be less information produced to the possible detriment of consumers.

18. Unintended consequences can occur when departments have conflicting targets and objectives. Thegovernment’s proposal to introduce regulatory budgets may add to this if departments have not suYcientlytaken ownership over cross-cutting issues such as climate change.

19. Interventionist regulations almost always have unintended consequences, sometimes creatingproblems more serious and more complex than those they are meant to correct. They can also cross the linefrom market maintenance to market manipulation. The moral hazard of interventionist regulation is thatpeople will take ever-greater risks when they believe that the government will swoop in and rescue them atthe last minute. Such rescues assure the “survival of the unfittest” and can lead to uncompetitive markets.

20. What makes the situation even worse is when interventionist regulation is coupled with inadequatetime to consult with those aVected by the regulation or with those in a position to provide seriousconsideration of the issues. Consultation is a critical part of the exercise to help ensure unintendedconsequences are exposed and ameliorated.



21. The right way to deal with a problem is to repeal the law that caused the problem in the first place,not to add another layer of regulations on top. Because those regulations too will have unintendedconsequences.

It is vital business has the flexibility to innovate and respond to diYcult economic conditions

22. The current financial crisis has yet to run its course. It is vital business has the flexibility to innovateand respond to changing economic conditions. This includes workforce flexibility. The flexibility of thelabour market has been central to the success of the UK economy and its low rate of unemployment overrecent times and any interference with it, through the advance of unnecessary regulation, must be seen as athreat to economic prosperity.

23. BSA members face considerable restrictions in terms of workforce flexibility when operating in thepublic sector. For instance, Agenda for Change, Retention of Employment and TUPE restrict employers’ability to be flexible with terms and conditions. The reality of this is balancing employment requirementsand maximising the eYciency of production of a labour force. Agenda for Change is a good example whereits introduction absolutely counters the basic output of innovation which is to produce a more eYcient resultand service for clients. The job evaluation scheme has worked in exactly the same way in Local Authoritycontracts.

24. The impending Agency Workers Directive could have a significantly detrimental impact on business.The current arrangements are beneficial to many people who choose to work flexibly. In a survey of agencytemps 80% suggested they were satisfied with their arrangements.35 A majority of employees choose agencywork for positive reasons36 such as it providing them with greater flexibility, choice in their workingactivities, and a route into a permanent position. Agency work is used by students, new mothers returningto work and those with children, for example, to their benefit and to suit their requirements from a job.

25. Legislators and unions have also concentrated unreasonably on companies being able to easilyterminate agency workers contracts, but the fact that people can leave with very little notice can be a benefitto some individuals. The flexibility that agency workers enjoy should mean diVerent treatment. If not, itmeans employment terms do not recognise the commitment of permanent staV. Flexible positions areneeded and wanted by workers; they exist because of a mutual benefit to the individual and employers andshould not be jeopardised.

26. 58% of employers surveyed believe that the EU legislation would lead to a “significant” cut in the useof temporary workers,37 meaning a huge number of placements could be put at risk. Lawmakers must becareful not to confuse concerns about “vulnerable” workers with changing the arrangements regardingagency workers.

27. While no precise assessment of costs can be made until the details of the Directive and domesticlegislation are fully drafted, the BSA considers that the new arrangements will inevitably result in increasedcosts to business and have a knock on eVect on the wider economy.

28. The rise in benefits for agency workers will obviously cause a direct increase in costs, but compliancewith the new rules will also add a further layer of expense to business and eventually the taxpayer. Forexample, it will be necessary for businesses to “compare” the work of a new agency temp to that of a fulltime member of staV.38

29. New regulations could create labour market distortions whereby employers terminate temporaryworkers’ contracts before the 12 week period to avoid the rules becoming eVective. Alternatively,recruitment agencies might take on former “temps” as permanent members of staV to be subcontracted touser firms; but this will still involve increased costs which will have to be passed on. Another possiblescenario is that businesses send jobs abroad to cheaper and more flexible markets.

30. The proposed Directive will force employers to be much more cautious towards business expansionand less able to manage changes in demand, and this will have a knock on eVect for the wider economy.As a HM Treasury study itself said, “badly designed EPL (employment protection legislation) can imposeexcessive costs on employers and deter them from oVering jobs where the returns from creating the job aretoo low in relation to the expected cost”.39

31. Another cause of inflexibility is that of planning regulations. For example, there is a growing demandfor Energy from Waste/Incineration capacity which is unlikely to be satisfied in the foreseeable future dueto the length of time it takes to erect a facility.

32. The UK government is unique in its literal adherence to EU procurement directives such asCompetitive Dialogue. No other EU state implements the directives so strictly. In light of economic pressuresthe government must look at ways it can reduce these unnecessary and disproportionate compliance rules.This is essential in order to ensure the market for outsourced services remains competitive and achieves valuefor money for the benefit of service users and taxpayers.

35 REC/BMG 360)Ttracking Survey 2006.36 The Recruitment and Employment Confederation Tracking Survey 2007.37 2007, CBI/Pertemps Annual Employment Trends Survey.38 CBI Brief: Temporary and Agency Workers—CBI Response, February 2008.39 HM Treasury, EMU Study: EMU and Labour Market Flexibility, 2003.



Appendix

LIST OF BSA MEMBERS

Full Members

AmeyARAMARKBabcock International GroupCapitaCompass GroupDalkiaEcovert FMHaden Building ManagementInterserveMITIE GroupMorrisons Facilities Management LtdOCS GroupPinnacleRentokil InitialSodexoVT Group

Associate Members

3iAddleshaw Goddard LLPBarclaysDeloitteHarvey NashKPMGLyceum Capital Partners LLPMetzgerOdgers Ray & BerndtsonPinsent MasonsPrudentialReformSerco InstituteTravers SmithTrowers & Hamlins

February 2009

Memorandum submitted by the OYce of Fair Trading

Summary

The OYce of Fair Trading believes that the economy is best served by vibrant competition in open andwell functioning markets; however, sometimes regulation is essential for markets to function well forconsumers. It is a priority for the OFT to emphasise to government and to business the importance of aconsistent and clear framework of consumer and competition enforcement for long-term businessinvestment and decision making. Thus we act to safeguard competition, which in turn drives long termproductivity growth.

In our operation as a non-Ministerial Government Department, we aim to comply with the principles ofbetter regulation across our work, ensuring that our actions are risk-based, targeted and proportionate. Webelieve that any unnecessary costs on business can only detract from benefits to consumers and the widereconomy.

In responding to current economic developments, it is essential that any policy response is correctlytargeted and that the Government, in designing new regulations, eVectively applies its framework for theconsideration of competition aspects, including the potential impact on businesses that might chose to entera market.

Introduction

1. The OYce of Fair Trading (OFT) welcomes this opportunity to respond to the Regulatory ReformCommittee Inquiry into Themes and Trends in Regulatory Reform. We have focused our comments on thefollowing areas:

— How does the Government balance the need for an eVective regulatory framework with thecommitment to improve the conditions for business success?



— What are the implications of recent economic developments?

— In the design of new regulations, is suYcient emphasis given to competition issues?

— Is there suYcient consideration of how regulations will be implemented?

2. Given the OFT’s specific role and functions, we have emphasised the following points in our response:

— The role of competition in the regulatory framework and in creating conditions for business success

— The OFT’s response to recent economic developments

— The design of eVective regulations and consideration of competition issues

— The implementation of new regulations

— Consumer regulations: compliance and enforcement

3. In Appendix I we have outlined the relationship between the OFT’s various functions and theregulatory reform agenda. Appendix II is a recent speech by John Fingleton, OFT Chief Executive, entitled“Competition policy in troubled times” which sets out how the OFT is responding to the changing prioritiesof the recession. Appendix III is a list of recommendations made in light of the OFT’s work on MarketStudies.

OFT’s Mission and Functions

4. The OYce of Fair Trading (OFT) is the UK’s competition and consumer authority.40 Our mission isto make markets work well for consumers. We do so through a range of functions, including:

— enforcement of competition and consumer law and merger control

— researching and publishing market studies

— making market investigation references to the Competition Commission

— advising government and carrying out wider advocacy work

— encouraging industry codes and self-regulation

— promoting business and consumer education

— supporting the provision of advice to individual consumers via Consumer Direct.41

5. In most of our work we do not act as a regulator within the meaning of the Legislative and RegulatoryReform Act 2006, although we do so in our work on consumer enforcement, consumer credit licensing andanti-money laundering supervision. We do not make rules or regulations but use the framework they give tomake targeted interventions to make markets work well. Appendix I provides a summary of the relationshipbetween the OFT’s various functions and the regulatory reform agenda.

6. We seek to ensure that we comply with the principles of better regulation across our work, ensuringour actions are risk-based, targeted and proportionate. We aim not to impose unnecessary costs on business.When regulation puts undue burdens on business the costs are passed on to consumers and therefore webelieve a consumer-focused approach is a good one for determining the proportionality of regulation andenforcement.

The Regulatory Framework and Conditions for Business Success

7. The Committee has asked us to consider how the Government balances the need for an eVectiveregulatory framework and improvements to the conditions for business success. Our view is that theeconomy is best served by vibrant competition in open and well-functioning markets, which are in turndriven by empowered and confident consumers. It is a priority for the OFT to emphasise to government andto business the importance of a consistent and clear framework of consumer and competition enforcementfor long-term business investment and decision making. Thus we act to safeguard competition, which in turndrives long term productivity growth. Markets optimise consumer welfare only when they are working well,and the OFT’s job is to promote the process of competition and good standards of consumer protection suchthat markets can deliver value eYciently.

8. The UK competition regime—in particular market studies and market investigation references—canalso be used to solve problems and ensure and demonstrate that markets are publicly accountable. In thisway the regime is capable of building certainty and public confidence in markets. For example, a marketinvestigation reference in the groceries market42 and a market study in the homebuilding market43 haveprovided an independent review of the evidence and usefully set aside concerns that weak competition wasa problem in these markets.

40 The OFT was established in its current form—an independent non-ministerial government department headed by a Boardand funded by the Treasury—under the Enterprise Act 2002

41 The OFT is unable directly to take up complaints on behalf of individual consumers. Further information on ConsumerDirect can be found at consumerdirect.gov.uk

42 Market Investigation into the Supply of Groceries in the UK, available at www.competition-commission.org.uk/inquiries/ref2006/grocery/index.htm

43 Homebuilding in the UK available at http://www.oft.gov.uk/advice and resources/resource base/market-studies/completed/home1



Responding to Recent Economic Developments

9. We recognise that, while recent years have witnessed growing public confidence in the ability ofcompetitive markets to deliver positive outcomes, the credit crunch and the recession risk damaging thatconfidence. Recession is potentially hostile towards competition policy: the less visible and less immediatecosts of restricting competition can look more attractive to policy-makers faced with a range ofunpalatable options.

10. We need to ensure that today’s solutions do not inadvertently become tomorrow’s problems. Policiesto relax competition in the US in the 1930s and in Japan in the 1990s arguably added to the duration of therecession in both countries. It is essential that any policy response to current economic events is correctlytargeted. If we mistake regulatory failure for market failure, we risk undermining the source of much of thewealth creation that came from the opening of markets to competition.

11. In a recession, the types and areas of intervention which best achieve our mission may change and weneed to be able to respond quickly to changing priorities. We consider that this regime is suYcient to dealwith current challenges, and that we are well positioned to respond to those challenges. The guiding aimsin our response to the economic downturn are set out in a recent speech by John Fingleton, OFT ChiefExecutive, which is attached as Appendix II.

The Design of Effective Regulations: Competition Issues

12. The OFT has a particular interest in monitoring the competition impact of new regulations put inplace by Government. This is encompassed by Section 7 of the Enterprise Act 2002, which gives the OFTa power to advise government and other public bodies on competition and consumer issues. But the OFThas no direct powers to change regulations. The onus is on the Government to make whatever changes areneeded to address the competition issues associated with regulations.

13. Impacts on competition should be a major concern for government in designing new regulations.Some degree of regulation is essential in order for markets to function, to protect consumers, and in somecases to deliver wider policy objectives. But regulation can also restrict competition, making markets lesseYcient, and leading to outcomes which are worse for consumers and limit economic growth. Regulationscan have this eVect, for example, by restricting entry to a market (say through introducing a licensing schemeor raising entry costs), or by limiting the scope for competition between firms (say by placing restrictionson prices).

14. The Committee has asked whether Government understands business interests suYciently in orderto design eVective regulations. From a competition perspective, it is important that Government policyreflects and takes account of the full range of diVerent business interests (as well as those of consumers).While better regulation typically focuses on overall burdens to business, competition concerns arise in themain where regulatory burdens impact diVerently on diVerent businesses. In particular, in looking atcompetition eVects we need to think about impacts on new entrants and innovative approaches as well asexisting businesses. Concerns might also arise where a regulation imposes proportionately greater costs onsmaller businesses which might have the potential to grow to challenge the larger incumbent businesses.Regulations that restrict competition are generally in the interests of incumbent businesses—because theyreduce competitive pressure on incumbents. Therefore the fact that some businesses are in favour of aregulation does not necessarily mean that it has a benign impact on competition.

15. More generally, it should be noted that incumbent producer interests are generally articulated morestrongly than those of consumers, whereas it is consumer welfare that is paramount and policy making musttake that into account.

16. The Committee has also asked whether Government gives suYcient emphasis to competition issuesin designing new regulations. We believe that there is a sound framework in place through the ImpactAssessment process, but that it is not always applied eVectively in practice.

17. Under the framework overseen by the Better Regulation Executive (BRE), all new regulations mustbe accompanied by an Impact Assessment. This includes a specific Competition Impact Assessment. Whereregulations can be expected to have a significant impact on competition, policymakers need to carry out adetailed analysis of that potential competition eVect. The OFT produces detailed guidance on how to carryout the assessment44 and provides advice to policymakers where there are complex issues or significantcompetition eVects. We believe this is a helpful framework to ensure that competition implications areconsidered. It is also in line with international best practice, for example as demonstrated in the OECDcompetition assessment toolkit45 which is very similar to that used in the UK.

18. In practice however, we are not convinced that competition assessments are always carried out in full,or given suYcient weight in the overall impact assessment alongside other policy considerations. Thisconcern goes wider than Impact Assessments themselves, to the overall process of policy making. A majordiYculty is that competition impacts of policies can be hard to predict, and the costs may not be immediatelyobvious. In contrast, the benefits of a regulation (for example in terms of greater direct protection forconsumers) tend to be easier to predict.

44 http://www.oft.gov.uk/shared oft/reports/comp policy/oft876.pdf45 http://www.oecd.org/dataoecd/15/59/39679833.pdf



19. An example of a case where competition eVects may have been given insuYcient weight is pharmacyreform. In 2002 the OFT published a market study recommending liberalisation of the control of entryrestrictions on new pharmacies. The OFT argued that supply was being held back, and that this was limitinginnovation and quality of service, and imposing costs on consumers (ie pharmacy patients). The OFT’srecommendations were not accepted, largely because of concerns about the impact on patient access and onthe viability of small pharmacies. However, the Government allowed some exemptions from the control ofentry regulations, eg for pharmacies opening for longer than 100 hours per week. Subsequently there hasbeen strong growth in pharmacy provision taking advantage of the 100 hours exemption. An evaluation bythe Department of Health in 2005 suggested that this greater competition had been beneficial for consumers,and has by-and-large not had the negative impacts on access or survival of small pharmacies that were fearedat the time. The OFT continues to believe that further liberalisation would be beneficial for consumers, andthat the limited liberalisation that has happened to date has demonstrated the benefits of competition toconsumers. A list of the recommendations from the OFT’s Market Studies is at Appendix III.

Implementation of New Regulations

20. As set out in Appendix I, the OFT does not itself design legislation or regulations, but works closelywith the Department of Business Enterprise and Regulatory Reform (BERR) when new legislation is beingdeveloped. The development of the Consumer Credit Bill is a good example of where the OFT was consultedextensively and input expertise to BERR during the development of the Bill. The BRE/NAO report,EVective inspection and enforcement46recognised this.

21. When new legislation reaches the stage of practical implementation, the OFT takes care to consultwith business and other stakeholders on guidance and detailed arrangements. In preparing forimplementation of the Consumer Protection from Unfair Trading Regulations 2008, a fundamental changein consumer protection law, we worked at European and domestic levels to build understanding of the likelylegal meaning of the Unfair Commercial Practices Directive, and thus to explain and understand its likelyimpact on stakeholders. With BERR (then DTI) we engaged with a core stakeholder group on theproduction of illustrative guidance. The group included the Confederation of British Industry, British RetailConsortium, Advertising Association, Advertising Standards Authority and Federation of SmallBusinesses, as well as other enforcers and consumer groups, and the Better Regulation Executive as anobserver. We first discussed the scope, content and structure of the guidance document, and then went onto share draft versions at each subsequent meeting. A final session was held to agree as much of the text aspossible. The guidance was published jointly by BERR and OFT in draft form for a wider publicconsultation and then in final form on implementation in May 2008.

22. In developing our approach to our new supervisory duties on anti-money laundering, we tailoredguidance to smaller firms, and proposed to inspect riskier businesses more frequently. We drew on theexperience of other supervisory authorities to inform our approach and consulted with industry workinggroups throughout.

23. We have a current project covering irresponsible lending (implementing the irresponsible lending partof the Consumer Credit Act section 25 fitness test). We have started with a 12 week consultation on the scopeof the project itself. During this we had bilateral meetings with all main stakeholders and spoke at5 conferences on the subject. After making our decisions on the scope of the project we have moved to theinvestigation and analysis phase and are holding a series of workshops and roundtable discussions with allstakeholder groups to get their views on what the OFT should consider to be irresponsible lending underthe Consumer Credit Act and how we should deal with it, amongst other issues. We will fully consult on thefinal guidance.

Consumer Regulations: Compliance and Enforcement

24. We believe that most businesses want to treat their customers fairly and to comply with the consumerprotection law that the OFT enforces. We aim to enable and encourage them to do so, and to takeenforcement action only where there is no better route to securing compliance. Enforcement action is usedto protect consumers, and particularly vulnerable consumers, from rogue traders, unfair commercialpractices and other instances where businesses disregard their legal obligations. Formal enforcementinterventions are used in relation to specific practices outlawed in consumer legislation and require a courseof action by reference to that legislation.

25. In December 2008 we published our updated Statement of consumer protection enforcementprinciples47 which sets out our approach to compliance and enforcement. It complements our prioritisationprinciples and explains how our choice of compliance and enforcement tools is aligned with the principlesof better regulation.

26. We encourage business compliance by ensuring businesses have clear, targeted and timely informationand guidance on legal requirements relating to our functions, and especially on changes to thoserequirements. StaV across the OFT work closely with businesses and business groups to identify their needsand consider how best these needs can be met in terms not only of the content of information provided, but

46 http://www.berr.gov.uk/files/file45359.pdf p.1647 http://www.oft.gov.uk/shared oft/reports/consumer protection/oft964.pdf



also of presentation and means of dissemination. We pay particular attention to the requirements of smallerbusinesses, and following requests from some stakeholders, we are currently producing a short documentexplaining the Business Protection from Unfair Trading Regulations 2008, which implement the amendedComparative and Misleading Advertising Regulations.

27. Alongside our statutory consumer enforcement powers, we also employ a number of tools whichpromote self regulation and stronger consumer confidence and empowerment. We provide incentives toimproved trading practice: we rely, where appropriate on “established means”48 as a way of dealing withconsumer complaints about, for example, misleading advertising and have consulted about how to extendour network of “Compliance Partnerships”. We target enforcement activity in line with our prioritisationprinciples towards cases of high detriment. Under the prioritisation framework we have first to considerwhether the OFT is the most appropriate body to deal with the issue. Implicitly, this requires us to thinkabout what else might be done to address the issue and this includes consideration of what other body mightbe able to take speedy, eVective action to stop the harm to consumers.

28. We promote the voluntary adoption of good trading practice through our Consumer Codes ApprovalScheme (CCAS).49 Where appropriate we encourage higher standards when using tools other thanenforcement such as guidance and training, and in particular through our Codes scheme. The CCASrepresents a means of giving businesses an incentive to go beyond the basic requirements of the law. Itrewards those who adopt best practice, giving them a competitive edge in attracting and retaining customers.However, when providing advice and guidance, we distinguish between what is necessary to meet statutoryobligations and what is desirable for the purposes of achieving improvements above the minimum requiredby law.

February 2009

Annex 1

The OFT’s Regulatory Role

1. This Appendix sets out in general terms where the OFT’s functions stand in relation to thegovernment’s regulatory reform agenda. That agenda has now been put on a statutory basis by two majorpieces of legislation, in which regulatory functions are defined50 as those

(a) imposing requirements, restrictions or conditions, or setting standards or giving guidance; and

(b) securing compliance with, or enforcement of, requirements, restrictions, conditions, standards orguidance.

In the case of the OFT and comparable authorities, the legislation applies to regulatory functions other thanthose exercised under competition law.51

2. The regulatory reform agenda aims to restrict imposition of regulatory burdens, particularly onbusiness. The two kinds of function defined above diVer greatly in their potential to impose burdens. Lawsand regulatory rules are the source of most costs and administrative inconvenience for business. Action tosecure compliance with such requirements can, at most, only exacerbate their burdensome eVect. Oneparticular way of securing compliance with requirements—individually targeted enforcement action—hasminimal scope to impose additional burdens on lawful business activity in general, since only suspectedwrongdoers are aVected, and action against them is subject to judicial control, specifically in relation tocosts.

3. The detail of the following analysis will show that

— the OFT has relatively few functions within the scope of the regulatory reform agenda;

— these are confined to the areas of consumer enforcement, licensing and market supervision;

— they confer powers only or mainly to take individually targeted enforcement action; and

— the OFT has very limited scope to impose unnecessary burdens on businesses and we do not believewe do so.

Functions Falling Outside the Regulatory Reform Agenda

4. General functions. The OFT has a number of functions of a general nature, particularly under Part 1 ofthe Enterprise Act 200252—for instance preparation of an Annual Plan, provision of information to thepublic and advice to Ministers, promoting good consumer practice, and responding to “super complaints”.Under these general powers the OFT carries out market studies (see below), engages in research and

48 Established means are bodies able to act in place of OFT in encouraging compliance with the consumer protectionRegulations. We are consulting on ways in which we can extend the reach of established means to aid compliance with theCPRs see http://www.oft.gov.uk/shared oft/consultations/oft1043con.pdf

49 www.oft.gov.uk/oft at work/consumer initiatives/codes/publications/<named350 Legislative and Regulatory Reform Act 2006 (LRRA) s.32(2) and Regulatory Enforcement and Sanctions Act (RESA)

2008 s.7451 Schedule 1 to the Legislative and Regulatory Reform (Regulatory Functions) Order 2007 made under s.24 of the LRRA,

and RESA s.73(2)52 But s.1 of the Consumer Credit Act 1974, and relevant parts of other legislation, also confer certain general functions on

the OFT, particularly in relation to provision of information.



advocacy, promotes consumer education, supports the provision of advice to consumers via ConsumerDirect, and approves self-regulatory consumer codes for (voluntary) adoption by businesses. Thesefunctions, do not involve issuing or securing compliance with enforceable requirements, and raise no issueof the OFT itself imposing burdens on business.

5. This is true in particular of market studies. It is necessary to consider (a) the way these are carried outvia information demands etc, and (b) their outcome in terms of legislation. As regards (a), the OFT doesnot exercise compulsory powers in carrying out market studies (except when investigating a market for thepurpose of making a reference to the Competition Commission, which is a competition function—seebelow). As regards (b), any OFT market study, whatever its purpose, can only make recommendations,which other parts of Government (or businesses) are free to take forward or not as they choose. The carryingout of market studies therefore does not involve either making, or enforcing, requirements, and is thereforenot a regulatory function.

6. This does not, of course, mean that the OFT has no regard to the potential repercussions of its marketstudy recommendations. On the contrary, the impact of any legislative options identified is carefullyevaluated. The OFT assumes that costs to business will be passed on to consumers, and our overall aim isto make markets work well for consumers, so we are keen to take account of any business costs that wouldresult from our recommendations. Market studies often make recommendations to change legislation thathave the ultimate eVect of reducing burdens on business rather than the reverse.

7. Competition functions. The OFT is the UK’s national competition authority. Functions undercompetition law are excluded from the scope of Part 4 and related legislation, including recent regulatorybudgeting proposals. This exclusion is in line with the established legislative policy of ensuring the fullindependence of competition enforcement, embodied in the Competition Act 1998 and the Enterprise Act2002. OFT’s functions under these Acts include

— merger control,

— making Market Investigation References to the Competition Commission,

— prohibition of agreements preventing, restricting or distorting competition

— prohibition of abuse of a dominant position.

The OFT seeks to minimise unnecessary costs for business arising from its competition work since these areliable to be passed on to consumers, in conflict with its overall purpose of making markets work well forconsumers. The general purpose and eVect of competition enforcement is, in any case, to remove barriersto entry and operation by businesses in markets, not to impose burdens.

Functions Falling Within the Regulatory Reform Agenda

8. Consumer enforcement functions. The OFT has a leading role in the consumer area comparable to itsspecial position in competition work, although its consumer enforcement functions are shared rather morewidely than its competition powers, in particular with local authority trading standards services. Thesefunctions involve securing compliance with enforceable requirements, and as such fall within the scope ofregulatory reform legislation. They involve powers to

— seek injunctive remedies under a range of measures, particularly Part 8 of the Enterprise Act,53 forbreach by traders of specified laws aimed at protecting consumers

— prosecute traders for unfair commercial practices, under the Consumer Protection from UnfairTrading Regulations 2007

— issue warning and prohibition orders to estate agents who have been found to have engaged inspecified forms of wrongdoing or undesirable practice under the Estate Agents Act 1979

9. These functions do not confer any power to make rules or issue guidance that binds businessesgenerally, only to take proceedings before a court or tribunal against individual businesses on the basis ofevidence. They thus come within the second limb of the statutory definition of regulatory functions.Furthermore they fall within the subset of those functions which have least potential to imposeunnecessary burdens.

10. The OFT takes a strategic approach to consumer enforcement, working alongside and incooperation with

— local and sectoral enforcement partners with whom it has coordination arrangements andmemoranda of understanding

— other “established means” of dealing with consumer problems, including self-regulatory bodiessuch as the Advertising Standards Authority.54

53 The OFT also has injunctive powers under other more specific legislation including the Unfair Terms in ConsumerContracts Regulations 1999, the Consumer Protection (Distance Selling) Regulations 2000, and the Financial Services(Distance Marketing) Regulations 2004.

54 Enforcers of the Consumer Protection from Unfair Trading Regulations 2007, including the OFT, are required incomplying with their duty to enforce the Regulations (reg.19) to have regard to the desirability of encouraging self-regulatory control of unfair practices by other established means.



As a market-focused enforcer, committed to delivering high impact outcomes in partnership with others,our actions against individual businesses are necessarily few and highly selective, and are generally confinedto cases of national importance.

11. Any action we take under compulsory powers in the consumer area, including requests forinformation, is inherently open to challenge before an independent judicial decision-maker. An award ofcosts against the OFT is likely where any action is found by the court to be unfounded or disproportionate.

12. The OFT thus cannot be considered to be a significant source of burdens on UK businesses generallyin its consumer enforcement work. Nevertheless we recognise that the way in which we carry outenforcement has an impact on individual businesses. Our work in this area is subject to the Regulators’Compliance Code, and we have published a Statement of Consumer Protection Enforcement Principles toshow how we seek to meet its requirements. We issue an annual Simplification Plan setting out the measureswe propose to take over the financial year to keep any burdens to a minimum.

13. Consumer credit licensing functions. Under the Consumer Credit Act 1974 (CCA), as amended, theOFT has the function of administering the licensing system set up by the Act. That system does not givethe OFT powers to impose generally applicable requirements or restrictions comparable to the rule-makingfunctions exercised by (for instance) the Financial Services Authority in the financial services sector as awhole. It is the Secretary of State, not the OFT, who has the power to make rules—for instance Conductof Business Regulations under s.26. Guidance issued by the OFT is for information purposes, and is notenforceable. However the CCA does confer a limited discretion to take decisions aVecting businessesgenerally, as well as enforcement powers for use against individual consumer credit businesses.

14. Any person who wishes to engage in consumer credit business must obtain a licence from the OFT, via

— application in such form, and accompanied by such particulars, as the OFT may specify,

— payment of a fee approved by the Secretary of State and the Treasury.

15. The Act thus gives the OFT the power to decide how much information must be provided by anybusiness wishing to start lending money, engaging in a hire business or credit brokerage, oVering debt advice,management and collection services, or acting as credit reference agency. That is a regulatory function withinthe first limb of the LRRA definition. The CCA does not give the OFT the discretion unilaterally to decidethe level of fees payable on application.

16. The OFT’s approach to exercise of its credit licensing functions is designed to minimize costs andother burdens, within the constraints of the CCA as recently amended. It has been subject to a series ofsimplification initiatives starting with a complete redesign of documentation in 2005. Businesses in generalare now required to fill in a single form, prepared and trialled with the cooperation of users, of which ashorter and simpler version is available for sole traders. Applicants are subjected to closer scrutiny onlywhen they fall into in relatively small groups identified via an evidence-based risk model.55 Licences are notnormally time-limited, so that filling in one form and paying a fee is the full extent of the burden on 85–90%of credit businesses. Full guidance as to licensing requirements is available on and oV-line, and applicationscan be made electronically. OFT’s compliance with Hampton principles in relation to its licensing work wasnoted in the course of the Hampton Implementation Review.56

17. Apart from requiring information on application from intending licensees, the principal role of theOFT is to secure compliance with basic requirements of good practice towards consumers, a function fallingunder the second limb of the definition of set out above. The OFT considers the fitness and competence oflicence applicants and licensees, and, on the basis of evidence

— decides what additional information is needed

— makes refusal or revocation decisions as appropriate taking into account that information

— imposes conditions and requirements on licensees where appropriate.

The OFT also makes certain kinds of decision under the Act, on application, for instance as to the validityof individual consumer credit agreements.

18. Functions under the CCA that involve action targeted at individual businesses are, like OFT’s generalconsumer enforcement powers, based on evidence. They similarly oVer little scope for imposing unnecessaryburdens on business generally. Lawful activity is largely unaVected, and proceedings are subject to thecontrol of a tribunal.

19. Supervision of anti-money laundering compliance. The OFT is one of the group of supervisoryauthorities required by the Money Laundering Regulations 2007 to oversee compliance with theRegulations.57 The OFT has the duty to monitor eVectively compliance by estate agents and consumer

55 Businesses in high risk categories also need to complete a Credit Competence Plan or Credit Risk Profile along with theirapplication form, and may be subjected to an initial visit, normally by a local authority trading standards oYcer acting onbehalf of the OFT.

56 Section on data requests, pp 24ff—http://www.berr.gov.uk/files/file45359.pdf57 The group also includes the HMRC, the Financial Services Authority and regulatory bodies for solicitors and

accountants. The Regulations implement the EU’s third Money Laundering Directive. The UK’s work to ensurecompliance with the Directive is led by H M Treasury, which will report in 2009 to the Financial Action Task Force.



credit lenders who are not authorised by the FSA or supervised by the HMRC, and to take necessarymeasures for the purpose of securing compliance. Enforcement action can include imposition of civilfinancial penalties and prosecution.

20. The Regulations give the OFT a discretion as to how monitoring and securing compliance is to occur,but the arrangements involved are required to be eVective and also to be self-funding. The OFT has a powerto require businesses to register, but without provision for a fitness test (whereas authorities who supervisehigh-value dealers must operate registration systems and satisfy themselves that applicants are fit and properpersons). The Treasury have indicated their expectation that arrangements should be risk-based and in linewith the recommendations of the Hampton Review.

21. The OFT gave extremely thorough consideration to the issue of whether to require registration, beingvery conscious of the need not to impose undue burdens on business. A decision was ultimately reached in2008, at Board level, that registration was necessary as a means of spreading the costs of the scheme fairlyand ensuring that OFT could operate it eVectively. Without registration, a minority of businesses would haveto pay disproportionately more, and there would be a real risk of OFT not receiving the funds it needs tooperate an eVective system in line with its statutory obligation, in particular targeting advice at high-riskbusinesses.

22. The OFT is planning to introduce registration in July 2009. Information requirements will be kept toa minimum, and fees thereby minimised also (the OFT can levy fees only so as to cover its reasonable costs).In designing and rolling out the system, the OFT will continue to work with representatives of business viaindustry working groups. This is in line with the approach on which OFT’s Hampton ImplementationReview commented favourably in its report last year.58

Annex 2

Competition Policy in Troubled Times

By John Fingleton59

CEO, OYce of Fair Trading

20 January 2009

Summary

While recent years have witnessed growing public confidence in the ability of competitive markets todeliver positive outcomes, the credit crunch and the recession have shocked markets, policy-makers and thegeneral public and risk damaging that confidence.

Recession is potentially hostile towards competition policy: the less visible and less immediate costs ofrestricting competition can look more attractive to policy-makers faced with a range of unpalatable options.Policies to relax competition in the US in the 1930s and in Japan in the 1990s arguably added to the durationof recession in both countries. Learning from history and the robust economic evidence linking competitionto productivity growth, we need to ensure that today’s solutions do not inadvertently become tomorrow’sproblems.

It is essential that the causes of the credit crunch are properly diagnosed so that the policy response istargeted “micro-surgery” rather than drastic amputation. If we mistake regulatory failure for market failure,we risk undermining the source of much of the wealth creation that came from the opening of markets tocompetition.

Intervention to rescue the financial system from systemic collapse in exceptional circumstances can becrucial, but should not be seen as a reason to suspend the importance of competition in other sectors, eithervia State aid, anti-competitive mergers or cartels.

Subsidies are rarely ideal: they are costly for the taxpayer, can prop-up less eYcient firms, createdependency, and ultimately damage competitive incentives. Restrictions on competition are worse. Inaddition to higher consumer prices and the ineYciency, they are less transparent and can result in permanentchanges to market structure. Ad hoc changes to the competition rules can also remove consistency andpredictability for business, with additional harm to eYciency. Naturally, incumbent business will rarelyobject to subsidies or restrictions on competition.

The OFT—and other competition agencies—need to be able to respond quickly to changing priorities,and display a degree of pragmatism in recognising times when other policy interests may over-ridecompetition policy. At the same time, our role as advocates of competition, within government, with fair-dealing businesses and beyond has never been more important; supporting governments in tacklingpowerful private vested interests whose solutions would cost us dearly well into the future.

58 Paragraphs 58 and 63—http://www.berr.gov.uk/files/file45359.pdf59 This paper is based on a speech given on 3 December 2008 at the Annual Charles River Associates Conference in Brussels,

in a panel on “Competition Policy in Troubled Times”. I am grateful to colleagues at OFT and Akira Goto, David Lewis,and John Vickers for comments.



Have we reached a turning point?

We have witnessed a decade or more in which there has been growing and wider confidence in the abilityof competitive markets to deliver positive outcomes for consumers and the economy alike. In an era ofmacroeconomic stability and growth, and high employment in many countries, the deregulation,privatisation, opening and deeper international integration of markets has thrived against the backgroundof evidence that competition is a key driver of productivity growth and wealth creation.60 Competition, andpolicy to support it, have thrived in this environment. Competition advocacy against disproportionate staterestrictions on competition grew. The openness of international trade and the opportunities to compete inwider geographic markets has lessened traditional arguments about competition policy standing in the wayof “necessary” national champions. Governments have opened more markets to foreign investment andownership, including key strategic industries that had once been nationalised, although many limits clearlyremain. Greater appreciation of the importance to business, and thus to consumers and economic growth,of stable and predictable policy towards mergers supported an increasing reliance on politically independentagencies applying a competition framework.

Recently, two things have happened. First, many leading economies have slowed down or enteredrecession. Second, the “credit-crunch” has shocked markets, policy-makers and the general public.Recession increases public pressure on politicians to intervene to deal with failing firms, unemployment andconsumer vulnerability. The credit-crunch, aside from its impact on the real economy, alters publicconfidence as between markets or state intervention to deliver good outcomes. Greater demand for publicintervention in markets has resulted.

Reduced support for competition?

A recession has the potential to be inimical to competition, and policy to support it, for several reasons.First, competition delivers its best market outcomes when it drives improved eYciency, and this takes time.Second, it does this in part by enabling new entry of eYcient firms and driving the exit of ineYcient firms.Third, competitive, and especially innovative, markets often produce better value for consumers alongsidemore uncertainty around price, quality, range or service.61

In a recession, the short-run may be prioritised; the exit of failing firms may be perceived to be more costlyfor society, especially if concentrated in a local area; and tolerance for uncertainty among consumers mayreduce. Or, put another way, the immediate costs of competition to existing business, employees andconsumers may be up-front and visible, with the benefits delayed and less visible. Tolerance for this will belower in a recession.

The airline sector in Europe illustrates all three features. The initial liberalisation delivered substantialbenefits to consumers and the economy, albeit with more variation in consumer experience.62 More eYcientnew entrants created incentives for incumbents to be more eYcient. There was greater tolerance (in the EU)towards allowing failure (for example, Sabena post 9/11) and to opening markets to foreign entry and evenforeign ownership of traditional flag carriers. While the initial liberalisation was slow to achieve tangibleeVects, there has been widespread public support for the benefits. Notwithstanding, many countries retainprotectionist ownership rules for airlines and restrict competition in airport and landing slots in ways thatcontinue to limit competition. Positive outcomes such as this might easily be forgotten in times of crisis.

The credit-crunch raises a more general risk that the emphasis on open, competitive markets and thebenefits that they deliver is reduced or even lost as part of an over-regulatory response. The suspension ofthe competition rules by the Roosevelt administration in 1933 is argued to have added to the duration ofthe Great Depression, and government intervention to restrict competition in “structurally depressedindustries” prolonged the Japanese recession in the 1990s.63 On top of the clear evidence that competitioncontributes positively to productivity growth and competitiveness, these episodes should serve as a warningagainst the attractive sirens of reduced competition.

60 The 2001 White Paper, “Productivity and Enterprise: a World Class Competition Regime” which preceded the UKEnterprise Act 2002 set out the evidence at that time (available at www.archive.oYcial-documents.co.uk/document/cm52/5233/523301.htm. This evidence was influential internationally: see, for example, the Australian ProductivityCommission’s Review of National Competition Policy Reforms Inquiry Report, April 2005, available atwww.pc.gov.au/projects/inquiry/ncp/docs/finalreport.For more recent evidence, see Productivity and Competition: an OFT perspective on the productivity debate, January2007, OFT 887 and our evaluation work programme, available at www.oft.gov.uk/advice and resources/resource base/evaluation/publications.

61 Standardising, even non-price factors, can inhibit competition, see, for example, Response to the super-complaint oncredit card interest rate calculation methods by Which? 26 June 2007, OFT935, available atwww.oft.gov.uk/shared oft/reports/financial products/oft935.pdf

62 Much of this (online sales, more destinations, etc) was for the good. Some of it has required enforcement action underconsumer law. See, for example, press release 118/07“OFT takes action against 13 airlines over misleading holiday pricing”, 9 August 2007.

63 For the US, see Harold L. Cole and Lee E. Ohanian, 2004. “New Deal Policies and the Persistence of the GreatDepression: A General Equilibrium Analysis,” Journal of Political Economy, University of Chicago Press, vol. 112(4),pages 779–816, August. See also “The battle of Smoot-Hawley” (Economist, 18 December 2008) on the negative impact ofprotectionist tariV raising. On Japan, see Hayashi and Prescott, “The 1990s in Japan: A lost decade”, Review ofEconomic Dynamics, 2002; Porter, Can Japan Compete? Macmillan Press 2000, pp 2–3 and Chapter 4; Porter andSakakibara, “Competition in Japan” Journal of Economic Perspectives, Volume 18, number 1, 2004 p.47; Bill EmmottRivals Chapter 8,: How the struggle between China, India and Japan will shape our next decade, Penguin 2008; “What AilsJapan” (Economist, 20 April 2002).



It is important that the cause of the credit crunch is properly diagnosed so that the policy response istargeted micro-surgery to address this cause rather than crude amputation as a reaction to the symptoms.If we mistake regulatory failure for market failure, we risk undermining the source of much of the wealthcreation that came from the opening of such markets to competition. Regrettably, market failure has becomea mantra recited whenever economic outcomes do not accord with what a well-organised group ofproducers want.

The cumulative eVect of the recession and credit crunch is that we see more distressed businesses, includingbanks, turning to government for assistance at exactly the time when support for public intervention isgrowing.

Responding to the crisis

A recession can facilitate strong growth in long term productivity. Unlike a boom, when ineYcient playersmay survive and even grow, an economic downturn will tend to drive out the less eYcient market players.This process of creative destruction leaves a stronger and more eYcient supply base, thus driving innovationand productivity growth in the next period of expansion. This is a reason why competition agencies shouldapply a rigorous failing-firm “defence”, especially in a downturn. And it is a reason why governments shouldbe very careful about propping-up ailing firms via State aid or other means.

The fact that banks are fundamentally diVerent from other businesses may exceptionally justifyintervention.64 Bank failure risks contagion eVects (ie, the failure of one bank may lead to a run on others,as opposed to other sectors where the removal of one player would normally be in competitors’ interests).The collapse of confidence in turn caused liquidity to disappear, and thus removed an essential lubricant forthe banking system to function and brought us close to systemic collapse. In this sense, the credit crunchresulted from an exceptional implosion of supply, and not simply a cost increase or a contraction of demand.

The state of the financial sector points to a further rationale for intervention. If the credit market hasceased to function eVectively, then firms that struggle could be those whose re-financing is due earlier orwhich lack a broader conglomerate base, and not those who are least eYcient. Put another way, banks orother providers of finance normally play a crucial role in sorting out the eYcient from ineYcient players:with rationed credit, they may cease to perform this vital function. In this case, eYciency and productivitygrowth could suVer further.

Government intervention to get banks lending to business on a vigorously competitive commercial basiswould enable banks to resume their critical function for the economy as a whole. This would be far betterthan directing government State aid to failing-firms or their (non) customers.

Aside from measures to restore competitive and eVective banking, there are two ways in whichgovernments can respond to companies in distress: they can give them money directly via State aid, or grantthem monopoly profit by allowing anti-competitive mergers. Either way the citizen pays; as taxpayer and/or as consumer through higher prices. In all cases, eYciency and competition are harmed, often with long-term consequences.

The risks with State aid are clear: if the government lacks the expertise and knowledge to sort out eYcientfrom ineYcient players, then it may just end up rescuing ineYcient firms. A policy that is open to argumentsfor State aids additionally creates incentives for wasteful rent-seeking65 activity (businesses seeking profitsthrough manipulation of the economic and/or legal environment rather than trade and wealth production).For these reasons, the EU competition framework uses State aid control to prevent harmful interventions,and independent merger control to prevent mergers that restrict competition.

If it is, exceptionally, necessary for the government to intervene (as in the case of banking outlined above),State aid might be preferred to allowing an anti-competitive merger:

— State aid may have an immediate eVect, whereas monopoly profits may not flow immediately.

— It may be that State aid can be limited in duration (and indeed there may be political mileage inso doing). However, State aid may be extremely diYcult to remove because of rent-seekingbehaviour by powerful vested interests, as subsidising agriculture in the EU and US demonstrate.

— State aid may be tied to specific policy objectives, such as restructuring, whereas an anti-competitive merger hands a licence to charge monopoly prices with no conditions attached.However, absent clear and measurable incentives, State aid could have the same negative eVect oneYciency as anti-competitive mergers.66

— On the other hand, State aid that is not applied on an equitable basis can further distortcompetition by creating an uneven playing field. In contrast, an anti-competitive merger will likelybenefit rivals because it lessens competition for all players in the market.

64 See John Vickers, “The Financial Crisis and Competition Policy: Some Economics”, Global Competition Policy(www.globalcompetitionpolicy.org, 15 December 2008).

65 Rent-seeking occurs when companies seek to profit through lobbing or other activity to change the regulatory and legalenvironment than through trade and wealth creation. See Tullock, Gordon (1967). “The Welfare Costs of TariVs,Monopolies, and Theft”. Western Economic Journal. See also R. A. Posner, (1975) “The Social Costs of Monopoly andRegulation”, Journal of Political Economy.

66 “X-eYciency”, see footnote 11 below.



These arguments are compelling in the framework of State Aid in the EU, which specifically requires thataid be specific and constrained, transparent in application, time-bound, and with a clear rationale. The EUframework pays close attention to the distortionary eVect on the market (ie, prevents beggar-thy-neighbourapproaches) and thereby supports open markets and a level playing field.

Some may argue for allowing an anti-competitive merger over State aid because it would give rise tosynergies: this argument should be treated with the caution normally given to claims about eYciencies madeby merging parties, especially in the light of evidence that market power leads to less, not more, eYciencyinside firms.

Overall, subsidies harm competition and the consumer and, unless very carefully structured and time-limited, may do as much harm as anti-competitive mergers. The need for intervention to prevent systemiccollapse in banking in exceptional circumstances should not cause us to set aside the competitive frameworkwhich, in preventing both distortionary State aid and anti-competitive mergers, provides an essential partof the foundation for long-term productivity growth.

Restrictions on competition

I have spoken above about mergers, but the argument applies equally to other forms of anti-competitiveagreement. Not all agreements between competitors are harmful to competition and competition law clearlyallows collaboration and competitor agreements that are beneficial to eYciency and long-run consumerwelfare.

Concerns may arise, however, over certain types of “voluntary” agreements among competitors that areput forward by government or its agencies as a means to achieve laudable and important health,environmental or other policy objectives. The diYculty of changing consumer behaviour directly—currentlya hugely attractive policy goal in many areas—makes it very attractive to do so indirectly by asking, forexample, retailers or manufacturers to agree voluntarily not to supply certain “bads” (for example, fat, salt,incandescent light bulbs) or to raise prices (for example, plastic bags).

Although the long-term impact of such agreements may appear to be less than that of a merger (becausethey do not alter market structure) their eVect may be more costly in other ways, such as weakeningcompetitive incentives in those markets and undermining compliance with competition law in other marketsby sending mixed signals to business as to what is permitted and what is prohibited.

When it comes to market failure, two wrongs do not make a right: creating a second market failure byrestricting competition is not a sound policy response to a market problem that is due to informationfailure.67 The highly costly and ineVective use of barriers to entry in markets such as taxis and pharmaciesto “correct” informational market failures also illustrates this point, and our economies are still riddled withthe long-term legacy of such flawed policy measures.

There are several reasons why restrictions on competition may be chosen even though they are more costlyto society than alternatives. First, the costs are generally less visible and less immediate; this combined withgenerally low levels of transparency means accountability for them can also be unclear. Moreover, thepersistence and nature (for example, X-ineYciency68 and rent-seeking) of the costs are likely to beunderestimated. Second, such policy-making rightly relies on a close-working relationship with businessand, more generally, the business voice (especially in a particular sector) is louder and more focused thanthat of consumers. Many businesses will likely prefer less competition. In contrast, alternative instrumentssuch as regulation and taxation tend to involve more visible, up-front costs and a greater degree oftransparency. The move to better (that is, less) regulation and the pressure on consumer budgets from higherfood and energy prices during 2008 made regulation and taxation less attractive as policy responses.

The case for a consistent framework

Perhaps the most compelling reason for favouring other instruments to deal with the recession and credit-crunch is the potential cost in terms of deterrence and compliance.69 Setting clear and consistent rules forbusiness (and if possible also for policy makers) creates a predictable environment for investment. Whencombined with strong competition, such investment brings and innovation and results in long term benefitsfor consumers and productivity growth.

This applies equally to private and public decision-making. In essence, our aim should be to supportmergers and policy measures that increase eYciency and consumer welfare without increasing market power.In doing so, we should avoid unnecessary train-crashes that arise because the chosen track proves to be asiding.

67 The same is true for externalities, which is relevant to policies addressing environmental issues.68 “X-eYciency” is the eVectiveness with which a company converts inputs to outputs. Firms facing competitive pressure are

less likely to be ineYcient. See Leibenstein, Harvey. “Allocative EYciency versus X-eYciency” American EconomicReview, June 1966, 56(3), pp. 392–415.

69 For an examination of the importance of deterrence eVect see, The Deterrent EVect of Competition Enforcement by theOFT, A report prepared for the OFT by Deloitte, OFT 962, November 2007.



Consider, for example, merger policy as an example of private decision-making. At the outset, a companymay have several alternatives in terms of merger, takeover, etc., involving diVerent potential partners.However, the company will generally need at an early stage to select one of these for development andimplementation. When companies know the merger rules, the project that they develop will be one that keepswithin (or perhaps on the edge) of the rules. This minimises two costs: first the risk that the deal falls foulof the rules and gets blocked, and second the risk of choosing safer but less eYcient deals. Such an approachhas substantial cost-savings for the economy, both in avoiding big failures, the waste of resources and time,and in lower risk for the companies involved. In a failing-firm situation, the initial choice is particularlycrucial because the company is unlikely to have time for alternatives.

The public sector analogy might be a proposal to achieve a policy objective with public benefits (forexample, raising the price or restricting the supply of an environmentally harmful product). Here thealternatives centre on the policy instruments available (for example, taxation, regulation). The policy-makermust outline the net benefits to be obtained and work out the most eVective instrument. Just as an anti-competitive merger may be a company’s preferred alternative because it ignores the wider social costs of themarket power (resulting from a behavioural or structural measure which generates anti-competitive eVects)it may also be the policy-maker’s first choice because the long-term impacts of reduced competition are lessvisible than the immediate costs of other instruments. In the policy-making context, the costs associated withfavouring the more socially costly instrument at an early stage are also high. If the proposal does not goahead, there is the waste of time and eVort, and possibly damage to support for an alterative approach. Ifthe measure is implemented, it can result in substantial and often persistent harm to consumers and societythat could have been avoided by a less restrictive approach.

Two features of UK competition policy incentivise consistent decision-making that improves welfare. Onthe merger side, decisions are taken by independent and accountable agencies (the OYce of Fair Tradingand the Competition Commission) using a competition test.70 Guidance, reasoned decisions, speeches andmeetings with business and its advisers serve to increase consistency and predictability, thereby assistingbusiness in their investment planning. The combination of not regularly being faced with substantial anti-competitive transactions and regular and significant use of remedies suggests that the UK systemincreasingly minimises the costs and risks identified above.71

On the policy side, there are several measures in place to ensure that policy-makers take account of theimplications and costs of their decisions on competition and the competitive process. All new policyproposals must be supported by an Impact Assessment, which explicitly takes account of possiblecompetition eVects. The OFT supports that framework and co-chairs a cross-Whitehall competitionforum.72 The OFT’s Advocacy Unit works more closely with individual government departments and onspecific issues to advise on the costs and develop alternatives that are less-restrictive of competition. Ourexperience is that early engagement is most helpful. In addition, market studies73 enable the OFT toexamine existing restrictions and to make recommendations to government: the government commits torespond within 90 days, or to refer the market to the Competition Commission. The ability of consumerorganisations to make a Super-Complaint is the most innovative of a range of measures to ensure that theconsumer voice is better represented. Some of these features are unique to the UK system.

So what should agencies do?

So what are the lessons for the OFT and our counterparts around the world?

Flexibility and prioritisation

First, agencies need to be both pragmatic and flexible in their application of competition policy. I favoura “Goldilocks” approach to flexibility: it needs to be just right; if too inflexible, we may cause wider harmto the economy in the short-term; if too flexible, we may cause greater long-term harm by undermininginvestment, incentives and innovation. This is not about moving away from the core aim of making marketswork well for society, or weakening our enforcement stance, but simply recognising that, in crisis andrecession, the types and areas of intervention that best achieve this may change.

The OFT’s prioritisation principles reflect the balance described in the preceding paragraph.74 There areeight principles grouped under the headings of impact, strategic significance, risk and resources. Theprinciples are not applied in a mechanistic way: they focus our eVorts and resources on deterring and

70 If firms are restricted to considering mergers that are consumer welfare enhancing, or at least not detrimental, they willchoose the one that is most profitable from amongst those that do not harm consumers. This profit-maximising behaviouragainst a consumer harm constraint is likely to be better for total welfare. See M Armstrong and J Vickers, “A Model ofDelegated Project Choice” http://else.econ.ucl.ac.uk/papers/uploaded/268.pdf.

71 EYciencies may be taken into consideration alongside certain anti-competitive eVects. However, it should be noted thatthis is a necessarily high but not insurmountable evidentiary standard (see completed acquisition by Global Radio UKLimited of GCap Media plc ME/3638/08, 27 August 2008).

72 In 2007 the OECD published a “Competition Assessment Toolkit” that provides a methodology for identifyingunnecessary restraints of competition in existing and draft laws and regulations, while at the same time developing policiesthat are less restrictive of competition. www.oecd.org/dataoecd/15/59/39679833.pdf.

73 See The OFT’s Market Studies, Beesley Lectures on Regulation Series XVIII 2008 available at www.oft.gov.uk/shared oft/speeches/spe0908a.pdf.

74 OFT Prioritisation Principles, OFT 953, October 2008 available atwww.oft.gov.uk/advice and resources/publications/corporate/general/oft953.



influencing behaviour that poses the greatest threat to consumer welfare, and intervening in order to protectlong-run consumer welfare and, in the process, drive higher productivity growth. They also demonstrate thatwe recognise the need to avoid imposing unnecessary burdens on business. In a similar vein, our annual planconsultation75 explicitly builds in our desire to have greater flexibility to ensure our resources are deployedin the way that best furthers the OFT’s mission of making markets work well for consumers.

In terms of individual issues, agencies will need to be creative and engaged at the outset. All too often,restrictions on competition result not so much from malign intent as from a lack of awareness of the fullcosts and imaginative alternatives, especially early in the process. Here it will be particularly important toensure that other frameworks (for example, industrial policy, financial services policy) harness strongcompetition to deliver their objectives. At the same time, we must recognise that there will be situationswhere competition in the market may not be the answer. Our existing competition framework and ourapplication of it already does this well.

What is important here is that these costs, especially the longer-term ones, are fully included in thedecision-making process. If, having weighed up all the pros and cons, a restriction on competition isconsidered necessary, then we should attempt to be creative in terms of narrowing its scope and, if possible,its duration.

Advocacy

Second, agencies will need, individually and collectively, more than ever to engage in competitionadvocacy. The OFT already engages in a great deal of advocacy on individual issues, and I suspect we willneed to do more. But we will also need to engage in “framework advocacy”, that is, for the competitionframework. In many countries, competition authorities have a statutory role in advising government on theeVects of restrictions on competition: a feature generally designed to help counter-balance the power ofstrong producer vested interests that lobby for less competition.

It is our role, and duty, to repeatedly emphasise the importance for long-term business investment anddecision-making of a consistent and clear framework of competition and consumer enforcement. When thecurrent recession is over, the UK and the EU will face even stronger competition from growing economiessuch as China, India, Russia, South Africa and Brazil. Restrictions on competition would represent a long-term drag on the economy in the future. Similarly, the UK has had an enormous influence on thedevelopment of a policy of open markets, challenging protectionism, and leading best practice in the EUand beyond in the past decade. We should not lightly ignore the potential long-term cost to our future welfareof any diminished leadership, especially at a time when key international standards in this area are beingdetermined.

Another aspect of this is that, in a recession, agencies will often face a diYcult trade-oV between doingwork that addresses “real” harm (washing dirty laundry) and addressing issues that raise huge publicconcerns but where there is not a competition problem, or not an intervention that could make things better(washing clean laundry that looks dirty). Agencies should not underestimate the broader value of the latterin terms of public confidence in market outcomes, and this value may be much higher now (in a more maturecompetition regime and in light of the current financial climate) than it was in recent years. The UKcompetition regime, and in particular market studies and market investigation instruments, can and shouldbe used to build public confidence in markets, not just by solving problems but also by ensuring anddemonstrating that markets are publicly accountable.76 Recent market studies and market investigationreferences in markets such as groceries77 and homebuilding78 have provided an independent review of theevidence and usefully set aside concerns that weak competition was a problem in these markets.

Furthermore, it may not be enough to advocate competition without putting forward suggestions for howto deal with the side-eVects. We need to practice smart medicine. For example, often markets work well, buthave adverse distributional consequences. Should competition agencies advise governments on themagnitude of these eVects so as to assist wider government policy on equity?

Vigilance and coherence

Third, agencies need to think about how they work, and understanding and anticipating what ishappening across the economy. The OFT’s recent study on sale and rent-back is a good example ofresponding quickly to a new and potentially very harmful form of exploiting financially distressed home-owners.79 We must also be equipped to deal with more failing-firm mergers; for this reason, the OFTrecently restated its approach to these issues whilst announcing that it will oVer informal advice to partiesin appropriate cases that involve potential failing-firm issues.80

75 Annual Plan 2009–10, An OFT Consultation, OFT 1036con, November 2008 available at www.oft.gov.uk/about/what/annual/.

76 See page 31 of speech, The OFT’s Market Studies (the Beesley Lectures) Lectures on Regulation Series XVIII2008 available at www.oft.gov.uk/shared oft/speeches/spe0908a.pdf.

77 Market Investigation into the Supply of Groceries in the UK, available atwww.competition-commission.org.uk/inquiries/ref2006/grocery/index.htm.

78 Homebuilding in the UK available at www.oft.gov.uk/advice and resources/resource base/market-studies/current/home1.79 Available at www.oft.gov.uk/shared oft/reports/consumer protection/oft1018.pdf.80 Restatement of OFT’s position regarding acquisitions of “failing firms”, 18 December 2008, OFT1047, available at

www.oft.gov.uk/news/press/2008/146–08.



Other areas are less immediately obvious, but nonetheless could be important. For example, we may seegreater temptation to cartelise markets with rising competition between existing suppliers for a shrinkingdemand. The UK’s criminal and civil cartel law should have a powerful deterrent eVect. It is important thatwe are vigilant to the potential rise of cartels in a recession, and have the resources to respond to a rise inimmunity applications. In this regard, achieving early resolution of cases may be a useful way to increaseeYciency, and free up resources to address other issues.

All this also requires good communication and co-ordination within government, across business andconsumer stakeholders, and across international partners. Working with international partners is key notjust to ensuring that our responses to the crisis and recession build on best practice and are co-ordinated,but more so that long-term business investment can be based on a consistent international approach.

Conclusion

It is widely accepted that open and competitive markets deliver benefits. The existence of competition lawand policy recognises public intervention is necessary to support strong competition and resist the marketfailure that arises from monopoly, cartels and other restrictions. The legal framework in the UK is relativelynew, but is based heavily on both the EU (more in terms of the formal law) and US systems (more in termsof methodology and enforcement tools).

The competition frameworks in both those jurisdictions have stood the test of time very well, and dealtwith hugely varying economic conditions on both sides of the Atlantic. We can see clearly the benefitsbrought, and the costs inflicted, when not applied. The example of airlines in Europe illustrates the former;the example of delayed recovery from the depression in the 1930s the latter.

Both regimes have demonstrated an ability to balance the flexibility to deal with changing economicconditions alongside the need for a stable and consistent approach to foster long-term investment. Thepriority for competition agencies should be to continue to demonstrate the benefits of that framework, andto do so consistently internationally so that our economies are poised to grow on the back of strongcompetition and open markets, delivering better outcomes for consumers and societies.

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Annex 3

Name Recommendations Government Response

Pharmacies Remove control of entry regulations for community pharmacies in Rather than deregulating, government chose to modify entryJanuary 2003 the UK so that all registered pharmacies with qualified staV may controls. Some restrictions were lifted, but only on large shopping

dispense NHS prescriptions. developments, pharmacies open for more than 100 hours per week,those part of a consortium to establish new one-stop primary carecentres, and to exempt wholly internet or mail order based pharmacyservices.The (then) Scottish Executive rejected OFT’s recommendations,citing concern they would have negative eVects in remote/rural areas.

Private Dentistry 1. Department of Health to reconsider the case for restrictions on All recommendations accepted by DTI and DH.March 2003 dental corporate bodies specified in the Dentists Act 1984. 1. Act amended

2. Amendment of the Dentists Act to end restrictions preventing 2. Changes made to section 60 of the Health Act 1999 to removeselected registered Professionals Complementary to Dentistry to restrictions on certain professionals.supply their services directly to the consumer. 3. An independent complaints service, the Dental Complaints3. Support for DH/General Dental Council eVorts to institute an Service, established May 2006.independent complaints procedure. 4. OFT awareness campaign and consumer information leaflet4. Strengthen and broaden regulation and self-regulation to reassure published 2006 to raise consumer awareness of informationconsumers and to increase the information available to them. requirements and so help spur better self regulation.

Taxis Reform of some elements of the regulatory framework. In particular: 1. Quantity restrictions not completely repealed, but onus placed onNovember 2003 1. Repeal legislative provisions allowing licensing authorities to local authorities to justify maintaining them. As a result,

impose quantity controls on taxi numbers. LAs to remove any approximately one third of LAs derestricted between 2003 and 2007.quantity controls imposed. November 2006 DfT issued guidance on quantity restrictions, leaving2. DfT to develop and disseminate local best practice in applying it to individual LAs to reach their own decisions in light of their ownquality and safety regulations to assist LAs to apply standard quality views of the relevant considerations.and safety attributes in a proportionate manner. 2. Best practice guidance on vehicle and driver quality implemented.3. LAs to set maximum fare tariVs (not fixed or minimum) and toactively facilitate more price competition in the market.

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Opium Derivatives Government to consider competition issues for the purposes of Government recognised importance of licensing policy in ensuringMarch 2006 devising future licensing policy, in light of negative competition competition, but did not revise policy.

eVects of previous policy on licensing of imports for opium In September 2006 DTI committed to Government review of thederivatives. licensing policy every five years.An existing undertaking for MacFarlan Smith to publish maximum Government to carry out a full market analysis and present itsprices should be maintained. findings to the European Commission.

MacFarlan Smith to improve compliance with the undertakings, tobe monitored by OFT.

Public Sector Advocacy report only 1. Report presented to and discussed by groups such as theProcurement Competition Forum, OGC Board and Chief Executives AdvisoryMarch 2004 Group, and Cross Departmental Ministerial Group on Innovation.

Strongly supported by OGC Kelly Team.2. May 2006: “More competition, less waste: public procurement inthe municipal waste management sector” in collaboration with OGCand Defra.3. January 2007: “Making competition work for you” guidance forpublic procurers of construction services, jointly published withOGC.

PPRS The “profit cap and price cut” scheme should be replaced with a The Government’s new PPRS scheme incorporates elements of theFebruary 2007 patient-focused, value-based pricing scheme in which the prices the recommendations outlined in the OFT’s PPRS market study.

NHS pays for medicines reflect the therapeutic benefits they bring topatients. In particular, the scheme incorporates a degree of value basedTwo options proposed: pricing, which was the key recommendation in the OFT study. The1. Ex-post value-based pricing – retaining upfront freedom of pricing OFT continues to believe that more fundamental changes to futurefor companies but replacing company-wide profit controls and price schemes are necessary to bring about the benefits to patients, thecuts with reviews of the cost-eVectiveness of individual drugs or NHS and the pharmaceutical industry that were highlighted in itsclasses of drugs. report, but the new scheme is a step forward.2. (preferred long-term option) Ex-ante value-based pricing – thiswould involve fast-track ex ante assessment of a new drug’s cost The new scheme also incorporates changes to deal with the pricing ofeVectiveness before launch. oV-patent brands, which was another issue raised in the OFT’s

report. The proposed changes should help ensure that the NHS paysprices for these medicines that more closely reflect their valuecompared with equivalent generic medicines.

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Distribution of 1. Changes to the PPRS so that discounts currently given in supply Government response on 2 May 2008. Agreement that theMedicines in the chain are instead formalised in the manufacturer’s list price or to recommendations on changes to the PPRS should be discussed asUK have minimum discounts to pharmacies agreed in the PPRS (or tied part of the current PPRS negotiations.December 2007 into the re-negotiation of the same). Following consultations with industry the government concluded

2. If the government is concerned about reductions in service there had been no past and was likely to be no future change in thestandards to pharmacies it should seek the agreement of standard of service oVered to patients, and as such concluded theremanufacturers to adopt minimum service standards. Government was no need to bring forward legislation to clarity service standards.should ensure that it pays less if service standards are reduced.3. Highlight to manufacturers the need to protect their long terminterests by ensuring competition in wholesaler/logistics/distributionsector.

Property Searches 1. LAs to make available, on demand, all the unrefined information Government accepted all recommendations. Regarding terms ofSeptember 2005 needed to compile a property search for inclusion in a HIP, and to do availability of unrefined information, OFT suggested two pricing

so on terms that do not advantage their own compiling activities over options. Of these, government chose for LAs to set their own fees atthose of third party compilers. a level that covers their costs, rather than the alternative of central2. Government to agree revised targets with local authorities to government setting uniform fees.ensure that information is made available quickly and on the same NLIS Council accepted the recommendations directed at it. CLGtimescale as they apply to themselves. went out to consultation on Good Practice Guidance for local3. Central government to provide clear guidance to LAs on how they authorities and personal searchers in May 2007. This was publishedshould cover costs and set prices for providing property information in January 2008. OFT broadly welcomed the guidance, butso as to avoid distorting competition. encouraged CLG to monitor compliance with it, and cautioned that4. LGIH to remove all the exclusivity provisions contained in the allowing LAs to make profit on value-added information could createhub and channel licenses as soon as is practicable and before an incentive to act unfairly in providing access to unrefinedsubsequent licenses are issued after the current set expire. information.5. LGIH should assign the fourth channel licence as soon as ispracticable.6. LGIH should remove limits on the number of hub and channellicences and set objective criteria for all potential licensees to ensureadequate consumer protection.7. Whom to contact in the event of a problem should be includedwith the searches in the HIP.8. A consumer information campaign on the property searchoptions should be included as part of the launch of the HIP.

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CUPI PSIHs should: Government accepted (June 2007) all but two recommendations,September 2006 1. Make as much public sector information available as possible for those two being:

commercial use/re-use, particularly addressing the inadequate — that PSIHs make unrefined information available for reuse—availability of unrefined information. Government to report back in six months on the implications of2. Ensure that businesses have access to public sector information at these possible changes;the earliest point that it is useful to them. — on accounting separation and pricing—HMT and DTI to3. Provide access to information where the PSIH is the only supplier conduct further work on the economics of information pricing.on an equal basis to all businesses and to the PSIH itself. February 2008: BERR and HMT published an independent4. Use proportionate cost-related pricing and account separately for review of Models of Public Sector Information Provision viatheir monopoly activities and their value-added activities so that Trading Funds. This concluded that socially optimal policyPSIHs can demonstrate they are providing and pricing information would involve leaving the charging regime for many productsfairly and in a non-discriminatory manner. (primarily refined products built on unrefined data) unchanged,Government should enable the regulator (OPSI) to monitor PSIHs but moving to marginal (ie zero) cost charging for a subset ofbetter, with improved enforcement and complaints procedures. products, roughly approximating to the bulk “unrefined” digital

category. Refined products would then be in commercialcompetition with other suppliers as such suppliers would haveaccess to unrefined data at marginal cost.Following this report the Government (para 3.49 of the Budget2008) committed to looking more closely at public sectorinformation held by trading funds to distinguish more clearlywhat is required by Government for public tasks, ensuring thisinformation is made available as widely as possible for use inactual and potential downstream markets.It committed to a pricing policy based on the principle that“information collected for public purposes will be madeavailable at a price that balances the need for access whileensuring customers pay a fair contribution to the cost ofcollecting this information in the long-term”. At the same time(para 5.14 of Budget 2008) the Government announced anassessment of the governance, business plans and futuredevelopment strategies of each of the trading funds.

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Public Subsidies Guidance published in January 2007 by which UK government Guidance used in HMT’s Green Book March 2007. As a result it willJanuary 2006 departments and agencies can identify the costs and benefits of a have a major impact on a wide range of decisions before spending is

proposed subsidy, including its potential impact on competition. The committed.guidance applies to subsidies carrying the highest risk of distorting Work with the Commission has been cited directly in a number of ECcompetition: those of more than £500,000 to an individual firm with a papers. Recent drafts of the state aid framework for research andmarket share exceeding 5 to 10 percent of the aVected market. development and risk capital for SMEs reflect the principles OFTProposals made to the European Commission for reforming state aid proposed and there seems to be a degree of common agreement oncontrols to avoid distorting competition. A two-stage assessment these.process was suggested, which examines the characteristics of thesubsidies and the markets involved. OFT recommended a formaladvisory role for national competition authorities in helping theCommission decide whether or not to approve state aid.

Estate Agents 1. Changes to the law so that it covers new ways of buying and 1. DTI accepted OFT recommendations. July 2004 governmentMarch 2004 selling property, it is more enforceable, and it is easier for consumers accepted that the law needed to be strengthened to eVectively deal

to understand. with rogue agents. Consumer Estate Agents Redress Act became law2. Improved self-regulation through establishment of independent, July 2007.low-cost complaints procedures. 2. September 2005 Ombudsman for Estate Agents Company Limited3. Call for consumer action and awareness. got OFT approval for code of practice.

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Care Homes Government/DH should: Government response generally positive. In particular, governmentMay 2005 — Establish an information source, or “one stop shop”, for people recognised the key recommendation—to create a one-stop shop to

to get information about care for older people. allow easy access to care home information.— Clarify guidance to make it clear that self-funded older people National care homes regulators committed to ensure that written

have access to the same level of information, advice and contracts are in place for all care home residents in line with theguidance as those receiving public funding. Care home minimum standards and regulations for care homes.regulators and inspectorates to monitor this. Government further announced a wider review of health and social

— Amend legislation and guidance so that Authorities are care regulation.responsible for full accommodation costs, including any top up CSCI website has been updated to provide more information,fees. Authorities should then ensure that guidance states clearly including care home inspection reports.that publicly funded residents don’t need to pay top-up fees.

— Amend regulations to require care homes to provide prices inwriting before residents move in.

— Run pilot projects to measure the benefits and costs to olderpeople and care homes of advocacy services.Care home regulators to:

— Produce practical information about redress avenues and torequire homes to supply this to residents (to be made a legalrequirement by DH)

— Improve collection and use of complaints data, and to makepublic the outcomes of non-trivial complaints.

— Make inspection reports available online. Use of these reportsshould be supported and encouraged, and care homes shouldprovide copies to residents.

Authorities:— Care home directories should cover all care homes for

older people in their area, including a given list of information.(This to be monitored by care home regulators)

— Ensure all care home residents are provided with writtencontracts (also to be monitored by regulators)

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Doorstep Selling 1. Extending to solicited visits the cooling-oV period and After government consultation on the OFT recommendations, DTIMay 2004 cancellation rights which currently apply to unsolicited visits by announced it would accept recommendations 1, 6 and 7.

traders. Recommendation 1 to be addressed by primary legislation, being2. Amending regulation 7(2)(iv) of the Doorstep Selling Regulations incorporated into the Consumers, Estate Agents and Redress Act1987, which enables a trader to recover costs of fitting or installing 2007. Recommendation 6 was addressed by secondary legislation,goods if a contract is cancelled, so that this protection for traders which came into eVect in October 2008. Recommendation 7 to beapplies only in cases where a customer asks for work to commence as addressed by industry self-regulation, encouraging traders to operatesoon as possible and is aware of the eVect on cancellation rights. under approved Codes of Practice or through participation in3. Prohibition on goods being delivered or work being carried out TrustMark (for the building and construction trades).under a contract before the seven-day cooling-oV period has elapsedin the case of unsolicited visits.4. Prohibition on money being paid or taken before the seven-daycooling-oV period has elapsed.5. A ban on cold calling to oVer property services with possiblenecessary exceptions.6. Requiring cancellation notices to be more prominently and clearlydisplayed in the contract, providing a clear indication of thecircumstances in which cancellation rights may be lost.7. Firms trading via doorstep selling to provide consumers withgreater transparency on prices for their products and demonstrategreater willingness to provide written quotes.

School Uniforms Findings of short market study passed to DfES, with a call for school DfES undertook consultation from March 2007 to JuneSeptember 2006 governors to end exclusive agreements. 2007 covering draft guidance on school uniform, dress codes and

other rules on appearance. Guidance not binding, schools continue tohave power to set uniform policy and discipline pupils who do notcomply.DCSF guidance states “Schools or retailers that have exclusivecontracts with suppliers may in principle be subject to enforcementaction under Chapter I of the Competition Act 1998, on the groundsthat these exclusive agreements may restrict competition betweenretailers to supply uniform.”

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UK Airports MIR, but also recommendations to Government in relation to Recommendations 1 and 2 accepted.March 2007 airports in the North of England that: A consultation document was issued 26 February 2007 setting out the

1. Government publish criteria for de-designation of airports preferred criteria for designation and de-designation, new criteria2. CAA advises the DfT whether to de-designate Manchester airport decided May 2007.before the statutory price control reference to the CC is due Formal consultation on possible de-designation of Manchester and3. Government consider transferring decisions on designation to the Stansted airports was issued by DfT in July 2007. ConsultationCAA. closed October 2007. Decided to de-designate Manchester airport but

not Stansted January 2008.

Home Building in Representatives from across the sector have agreed to form a body to None as yet. No government action required unless recommendedthe UK deliver a code of conduct and redress scheme for consumers, which it voluntary approach fails.September 2008 aims to have fully operational by March 2010. However, if the

industry fails to make adequate progress or deliver an eVectivesolution, the OFT recommends further intervention through astatutory redress mechanism. This would involve a means of redressfor homebuyers with the ability to award compensation for anyfailings in the sales process, shortcomings in contracts, delays orfaults, and would need to be funded by a levy on the industry.

Sale and Rent There should be statutory regulation of the sale and rent back sector Government agreed all recommendations, and in February 2009 theBack by the Financial Services Authority (FSA). The details of regulation HMT and the FSA launched consultation documents on regulationOctober 2008 will be up to the FSA to determine but the OFT considers it should for sale and rent back.

include:an obligation on sale and rent back firms to be more transparentabout the initial valuation and sale price, the terms of the tenancyand the amount of rent to be paid. In particular, firms must oVerforms of tenancy that match the assurances they give to customers,and a requirement on firms to tell consumers about the free,independent advice available to them before they decide to sell.Regulation may also require firms who fail to honour theircommitments to oVer redress to consumers.

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Personal CurrentAccounts in theUK(Ongoing)



Supplementary memorandum submitted by the OYce of Fair Trading

Introduction

1. OFT is the UK’s competition and consumer authority. We aim to take action to protect the process ofcompetition in order to maximise consumer welfare, and to stop malpractice in consumer transactions. Wealso investigate markets where competition appears not to be working well, and scrutinise governmentproposals for competition purposes. Our expertise is therefore in competition and consumer enforcementand advocacy, rather than rule making more generally. We endeavour to coordinate our actions with thesectoral regulators who are responsible for the proper working of specific markets in the UK, includingfinancial services, but they operate independently from us. Our response is framed in this context. Annexedare replies to those questions which it is therefore appropriate for us to answer.

2. Although we are not a regulator in the full sense of the term,81 we aim to comply with the principlesof better regulation across our work, ensuring that our actions are risk-based, targeted and proportionate.We believe that any unnecessary costs on business can only detract from benefits to consumers and the widereconomy.

3. OFT is responding to the economic crisis actively playing its role to encourage confidence in themarkets by

— acting to safeguard competition, which in turn drives long term productivity growth andcompetitiveness; and

— using the range of tools available to us to ensure consumers receive a fair deal and engage inmarkets without being ripped oV.

4. In order to carry out our functions eVectively it is sometimes both necessary and proportionate to placerequirements upon businesses—to comply with those laws ultimately aimed at ensuring overall economicwell being both at the individual and the macro level. Regulation is sometimes essential for markets tofunction well for consumers and nor should we underemphasise the importance of a consistent and clearframework of consumer and competition enforcement both for long-term business investment anddecision making.

Strategic Approach

5. As outlined in our earlier Memorandum provided to the Committee, the OFT believes the economy isbest served by vibrant competition in open and well functioning markets. In responding to current economicdevelopments we consider it essential that any policy response is correctly targeted and that government, indesigning regulations, eVectively applies the framework for competition considerations, including thepotential impact on businesses that choose to enter a market.

6. It is vital to maintain a strong legal framework as the basis for fair competition between firms.Competition policy needs to ensure that anti-competitive behaviour is deterred, while being suYcientlyflexible to allow beneficial agreements to go ahead. For instance, many beneficial cooperation agreementsaimed at delivering eYciencies and consumer benefits, including those pursued under an industrial activismagenda, will be permissible under competition law.

7. Targeted government intervention can help support markets to increase growth and benefitconsumers—markets cannot always do it on their own. But government needs to assess any long-termnegative eVects on competition and minimise them. For example, this means doing proper impactassessments on new policies, and considering whether there are alternative ways of achieving the intendedpolicy eVect in a way which distorts competition less.

Advocacy for Competition and Consumer Policy

8. We see the need for better engagement with and greater transparency for business. There is also a needfor greater advocacy to government policymakers and the wider public. We want to work with theGovernment to develop a strategic approach to meeting key challenges in policy and enforcement.

9. At a time when there is growing realisation of the need for joined-up regulatory frameworks (forexample in the financial sector), competition and consumer policy needs to respond.82 Market studies arealso increasingly being used by competition authorities as a means of advocacy, including makingrecommendations to government for regulatory or policy change to reduce state restrictions oncompetition.83

81 See Appendix 1 to the OFT Memorandum to the Committee 27 February 2009.82 An example of this is the International Competition Network’s Advocacy Working Group, co-chaired by the OFT and

Russia’s Federal Antimonopoly Service. As part of this work, in January we hosted a teleseminar on “Competition Advocacyin an Economic Downturn”, in which we highlighted the need for advocacy in the current climate and presentedrecommendations on how to maximise the impact of competition advocacy.

83 Within the ICN Advocacy Working Group we are leading a project which is surveying and evaluating member countries’experience in this area. The projectwill promote convergence, and will consider the scope for outlining best practice in relationto a number of aspects of the conduct of market studies.



10. We have also been involved in wider advocacy work. Some of this has related to specific issues wheregovernment actions or regulations have an eVect on markets. For example we have a role in overseeing thecompetition assessment of all new policies as part of the Impact Assessment process. In addition, we haveincreasingly developed our “framework” advocacy, explaining the continuing role and importance ofcompetition and consumer policy. This is often via public outlets (speeches, press pieces), but also throughworking with other government policymakers (eg through the cross-government Competition Forum). Ourfinancial services strategy is a good example of advocacy, where we have been engaged with the FinancialServices Authority, HM Treasury and others in raising competition issues alongside government’s otherpolicy objectives.

11. Achieving our objectives in partnership remains part of the OFT’s Vision. For example, we work inpartnership with Local Authority Trading Standards Services in our consumer protection work. We areworking with the Competition Commission making improvements to our processes for marketinvestigations. We are committed to ensuring that the competition regime:

— Is responsive, timely and minimises financial burdens—for example through reducing duplicationand faster decision making

— Makes optimal use of resources and expertise

— Makes the best use of public money by being eYcient and cost eVective

— Provides consistency in policy and approach and

— Is strong, robust and independent, and continues to be a world leader in the competition andconsumer field.

New Challenges

12. The OFT believes it is well placed to meet the challenges of the economic crisis by using itscompetition and consumer protection tools to build trust in markets and choice. Specifically, the DigitalBritain initiative oVers the OFT the opportunity to reflect on its functions, on what we have done and howwe can contribute more eVectively, in particular as regards enforcement, jurisdiction, legislation and policy.For example, the OFT has a role in ensuring that fraudsters and free-riders do not harm the incentives ofbusinesses to make the right investments in innovation. The interim report has also served to highlight ourdesire to build our IT competence in e-consumer protection.

Answers to the list of Questions

1. Does the complexity of financial markets, the global nature of the financial system and the corporate andpersonal incentives in financial institutions make the financial services sector unique? Does the regulatoryresponse in the financial services sector have wider implications for the regulatory reform agenda?

Financial markets are atypical in a number of ways including complexity, systemic risk and the speed ofinnovation. This does not mean that we should be complacent about potential failings of regulation in otherareas, but it does mean that it is dangerous to extrapolate from financial markets to the experience ofregulation across markets as a whole.

The crisis in the financial markets and the global recession have raised questions and generated debate insome quarters about reliance on markets and competition to provide for optimum outcomes, and the rolesof competition and regulation in markets. This may be partly a debate about market theory but it also raisesvery practical issues for consumers in terms of trust and confidence in markets and in business. Consumersmay now more rigorously question what they are buying, who they are buying from, on what terms, andwhether they are buying wisely and safely (as regards quality, delivery and payment).

We continue to believe that open markets and competition provide the best outcomes for consumers inmost markets. This does not mean no regulation at all—there is a need for a regulatory framework in orderfor markets to operate eVectively. We see competition and consumer law as providing such a framework.

Ultimately we do not think that government should move away from acting only where there is a clearneed for external intervention, and from ensuring that costs and benefits of any new regulations have beenproperly evaluated. Regulators need to be nimble in their application of the tools at their disposal to ensurethey are used to best and most appropriate eVect in the current environment.

3. Is “risk-based” regulation fine in theory but flawed in practice? What is required to make it work eVectively?What are the risks of risk-based regulation itself?

“Risk based regulation” can mean a number of things, depending on the sector, the legal framework andthe risk model employed. At its core is the simple idea of deploying regulatory resources where they are mostneeded, but its implications and implementation vary hugely. In the regulation of financial markets—particularly regarding wholesale markets and prudential regulation—the principles and practice of risk-based regulation will be very diVerent from, for example, its application to the enforcement of consumers’rights in shops on the High Street. Lessons drawn from one sector may not be applicable in another.



At the OFT we use a set of prioritisation principles to focus our eVorts and resources on deterring andinfluencing behaviour that poses the greatest threat to consumer welfare. Our interventions are intended toprotect consumer welfare and, in the process, drive higher productivity growth. The prioritisation principlesare not mandated by any statutory provision, but are contained in guidance drawn up and published by theOFT after public consultation.84 The current principles include factors such as: the likely eVects of theintervention on consumer welfare, the strategic significance of a matter, the likelihood of a successfuloutcome, and the OFT’s resources.

The principles are starting points which are not adhered to mechanically; they are illustrative rather thanexhaustive, and other factors are considered where relevant. The advantage of applying these principles isthat they give the exercise of the OFT’s discretion a framework in which to enable consistency of approach,and to avoid the OFT’s eVectiveness being reduced through diversion of resources to lower impactinvestigations. If an agency with limited resources attempts to cover everything, regardless of risk, then itcovers little or nothing eVectively. The principles are intended to be suYciently flexible to apply consistentlyregardless of economic conditions. They may be changed after future consultation, if necessary andappropriate.

A decision by the OFT to close a case having reference to the prioritisation principles does not precludeOFT from subsequently investigating the matter, for example if it should reassess the evidence that has beenpresented, should further facts come to light or should its priorities change.

We take a risk-based approach when applying the statutory provisions of the Consumer Credit Act1974 which controls businesses in their dealings with consumers, rather than economic or prudential aspectsof credit markets. Our model is based on our experience of 30 years of licensing.

Regulatory failure in this context is not apparent. Gaps in the regulatory framework were addressed byParliament in the passage of the CCA06 which allows for more eVective regulation. This has beendemonstrated by a number of high impact actions over the last year, for example the OFT-imposed conductrequirements on Citifinancial Europe plc after its terms and conditions had wrongly claimed it did not sharejoint liability for overseas credit card transactions. Under the requirements Citi will invite those consumerswho feel they may have been misled, and think they have a claim, to contact them. The OFT also imposedrequirements on 1st Credit Ltd requiring the company to improve its debt collection practices—includingrequiring it to refrain from issuing statutory demands to consumers warning of bankruptcy where it isunlikely that proceedings will be initiated.

4. What are your organisation’s views on the future role of principles-based regulation? Should it in futurealways be combined with specific rules to avoid uncertainty? Are there areas in which you see principles-basedregulation actually being extended in the face of current thinking? The FSA has expressed an intention to movetoward more outcomes-focused regulation. What is your view of that and of what it actually means in practice?

There is a place for both principles-based regulation and more prescriptive regulation. For example, theConsumer Protection from Unfair Trading Regulations 2008 (“CPRs”) contain high-level prohibitions onmisleading and aggressive trading practices, and so they can be said to be principles-based, but there is alsoan annex list of 31 specific practices banned in all circumstances. Where principles-based regulation isemployed, it is important that there is suYcient clarity as to what adopting the principles means forbusinesses in practice. This means the provision of supporting guidance illustrating the necessary standardsof behaviour. Without this, there is too much scope for businesses to misinterpret what the regulatorconsiders constitutes adherence. Using the same example, the OFT and BERR have jointly publishedillustrative guidance on the CPRs.

During the OFT’s current consultation on irresponsible lending guidance for the Consumer Credit Act,a number of business consultees have indicated that they favour “mixed guidance”—principles basedguidance with prescription where this would be considered helpful and appropriate—for example inclarifying what would be required of lenders with regards to providing “adequate explanations” as topotential risks and benefits to potential borrowers in advance of granting loans.

Under the Competition Act, the OFT publishes general guidance and information setting out how it willapply competition law in practice; and the OFT’s website contains further information about theCompetition Act, including a register of decisions adopted by the OFT and sectoral regulators.

The Competition Act as originally enacted provided a system of notification of agreements (and conduct)to the OFT for guidance or a decision as to whether the Competition Act was being infringed. This approachwas abolished in 2004 as a result of the adoption of the EC Modernisation Regulation. As regardscooperation agreements, for example, businesses must now conduct their own “self-assessment” of theapplication of competition law and any exemptions. Since this self–assessment regime has entered into eVectthere has been nothing to suggest that this is causing diYculties in practice.

The OFT may oVer confidential informal, non-binding, guidance to undertakings on the application ofcompetition law on an ad hoc basis. In specific cases that raise novel or unresolved questions of law, it maybe possible to obtain fuller written guidance from the OFT in the form of an Opinion. However, this will beexceptional. The OFT will consider a request for an Opinion only where certain criteria are fulfilled.

84 http://www.oft.gov.uk/advice and resources/publications/corporate/general/oft953



5. Is the Government implementing a coherent and intelligent approach to addressing the regulatory issues inthe financial services sector? How can the Government guard against the media and public pressure to “gettough”—and consider the changes needed to the regulatory framework in a way that avoids a knee-jerkreaction? How does the UK’s response in changing the financial services regulatory framework compare withother countries?

An appropriate balance needs to be achieved between providing eVective consumer protection andensuring businesses and markets can operate without being fettered by undue burdens. Introducing anumber of well intended new consumer protection initiatives at one time risks a potentially negative impacton businesses and the operation of markets—and ultimately a restriction in consumer choice. Before anyintervention, there should be sound evidence of—and intelligence about—problems and detriment. Lack ofconfidence on the part of consumers can result in calls for increased regulation, but we think it is necessaryto avoid any short-term fix. The OFT firmly believes that regulation or re-regulation must not limitcompetition on the supply side beyond that which is essential for prudential and financial stability reasons.That said, it is more imperative than ever that consumers are aVorded appropriate levels of protection duringthe economic downturn. The current focus needs to be on maintaining and giving eVect to existingregulatory protections. Some problems (for example those relating to debt management, irresponsiblelending, or the increased risk of certain kinds of scams) can be tackled using consumer protection measures,whereas others may require competition enforcement interventions

The OFT, like all responsible regulatory bodies, is committed to proportionate forms of enforcement andregulatory intervention in line with the Regulators’ Compliance Code—and as such, should not besusceptible to external pressures to take inappropriate or disproportionate action. There are also internalsafeguards build into OFT procedures which would prevent the OFT taking any such inappropriate actionseg the adjudication and subsequent appeals process open to estate agents and credit businesses subject toformal “fitness” actions by the OFT.

Earlier this month, as part of our wider financial services strategy we announced our plans to launch areview into the consumer credit sector. This review was prompted by the turbulence in the global financialmarkets which has aVected the availability of credit, lending criteria as well as patterns of demand, consumerrisk ratings and sector segmentation. We want to examine the nature of these changes, their impact on themarket and how consumers are aVected. The review will focus on unsecured consumer credit (which is amajor market with gross loan advances for unsecured consumer credit totalling around £200 billion in 2007)and want to consider issues such as consumer behaviour and decision making, the degree of transparencyin pricing, how risk-based pricing operates and whether the right incentives are in place for suppliers toprovide the right products for customers.

We are currently consulting on scope and will launch in the summer. This review sits alongside our ongoingconsumer credit work which seeks to ensure that consumers are aVorded appropriate levels of protectionduring the current downturn. For example draft guidance on second charge lending is currently out toconsultation following a government review of arrears and repossession policies and practices in the secondcharge sector.

6. What will be the implications of more intrusive regulation, if that is what emerges from the current reviewsof the financial services sector? Do you see this as being in conflict with the objectives of the better regulationagenda?

The current debate serves to strengthen the relevance and importance of competition and consumerregimes that are robust, coherent, cohesive and modern —which means equipped to deal with technologicalchange and responsive to the needs of consumers in dealing with them and the issues that they raise. Suchregimes need to enable timely, eVective and proportionate interventions where necessary in response tochanging needs. They also need to allow the use of new or diVerent, flexible tools to resolve problems anddeter infringements while fostering compliance and influencing and changing behaviour, both on the supplyand the demand sides.

7. Is there an inherent tension between the Government’s aim to support business and the need to respond tothe financial crisis? Do the principles of better regulation still hold good?

We refer you to the comments in our Memorandum at paragraphs 7–11.

8. Do Government and regulators have the necessary skills, expertise and understanding to regulate eVectively?What if anything is lacking—is it the lack of management capacity, sector expertise or enforcement resources?Would more intrusive or more eVective regulation require greater resources?

There is a need to respond flexibly to changing circumstances, in particular those caused by the economicdownturn. New risks to consumers and businesses are likely to come from the economic downturn and theinterventions we use to address these problems may also need to change. We need to be ready for thesechanges before they happen and are organising our work accordingly, so that we can react quickly. So farour responses have included:

— delivering quickly in response to emerging events, such as our study of the sale and rent-backmarket, in which consumers were getting a poor deal on releasing the equity in their houses;



— regular and consistent use of our prioritisation principles—balancing impact and strategicsignificance against risk and resources— to ensure that our portfolio provides the optimum returnfor the investment ; and

— shifting our resources to anticipate problems related to the downturn—for example in our workon consumer credit and financial services, cartels and scams.

While we are being more flexible in the deployment of our resources and seeking to apply eVectiveprioritisation principles, some changes in legislation have led to a requirement for increased resources. Forexample, the OFT is able to meet the new requirement to assess the credit competence of applicants forconsumer credit licences wishing to engage in high risk credit activities only by adopting an eVectivepartnership approach with our enforcement colleagues in local authority trading standards servicesthroughout the United Kingdom. A significant advantage of adopting a more supervisory regulatoryapproach in our regulation of consumer credit businesses is that it has facilitated our developing a betterunderstanding of our licensed population and more knowledge and expertise about these sectors.

9. Does Government need to collect better information to better understand the complexities of the sectors/markets they regulate?

The eVectiveness of risk-based regulation depends on the quality of the information and intelligence thatunderpins it. The features of markets fluctuate (and consequently so do associated levels of risk) and if theregulator does not respond and adapt its approach at the same speed then its focus will be misaligned withthe risk profile in the market. We take an intelligence led-approach to monitoring markets incorporatinghorizon scanning and one of our objectives is to be a centre of intelligence and excellence, sharing with othersappropriately.

10. How can Government and regulators ensure that regulations achieve their intended objectives and deliverthe desired outcomes? How could the current approach be improved? Is suYcient thought given to enforcementand compliance and the capacity of Government bodies to implement regulations? What can be done to raisestandards in the design of regulations?

Government departments need to work closely with front-line bodies during the process of drafting (andnegotiating) new European and UK regulations. This involvement helps to ensure that practical diYcultiesand opportunities are identified and resolved as early as possible. A good example of this in practice wouldbe the implementation of the Unfair Commercial Practices Directive where long-term involvement of theOFT by BERR (then DTI) in the early discussions in Brussels led to a great deal of UK-focused content inthe Directive, and also helped prepare both organisations for the complex processes of transposition andengagement with other UK stakeholders including the advertising sector, Trading Standards and otherbodies, all of whom were deeply aVected by the radical shake-up of UK consumer protection legislationengendered by the Directive.

Alongside the “downturn” issues it is also important to maintain ongoing scrutiny of new policydevelopments. We do this, for example, through our oversight of competition assessments that have to becarried out by policymakers where there is likely to be a significant market impact. And we also think aboutlong-term issues: for example we have published work on the design of environmental product standards,which will be a live issue for the foreseeable future.

12. What might now be the future of the regulatory reform agenda? What are your views on the fact thatregulatory budgets are not to be adopted and on the proposed alternatives?

The regulatory reform agenda has two main limbs, corresponding to its roots in the 2005 Hampton andArculus reports respectively. The Hampton report, focusing on enforcement and inspection, especially atlocal level, has already been taken forward extensively, via the Hampton implementation review process, theMacrory and Anderson reviews, and substantial statutory changes. The entrenchment in law of principlesof good regulation and the Regulators’ Compliance Code, the creation of the LBRO and the PrimaryAuthority system changes to regulatory sanctions, and introduction of a new duty under Part 4 of theRegulatory Enforcement and Sanctions Act for regulators to review their activities, have all happened sincethe beginning of last year. In our view they represent major safeguards for the future against unnecessarilyburdensome enforcement.

The government’s regulatory budgeting proposals were designed particularly to take forward itsprogramme for reduction of administrative burdens and had more relevance to central governmentdepartments and to rule-making regulators, as distinct from enforcers. It was proposed that regulatorybudgets should not be compulsorily applied to statutorily independent authorities. The OFT hasparticularly limited and specialised regulatory functions which do not enable it to act as a significant sourceof administrative burdens on business generally.

We believe that it is very important that new and existing regulations are scrutinised objectively on thebasis of clear market failure. Government regulations can continue to impose barriers to marketdevelopment, and leave consumers worse oV. In this sense, we think the regulatory reform agenda continuesto play very important role.



Having said this, it is a good time to step back and think about what the ultimate objectives of betterregulation should be and it is important that better regulation does not just focus on incumbent businesses.From the OFT’s perspective, we would like to see greater focus also on the impact of regulation on: i)potential new entrant businesses, and ii) consumers. Both of these groups can be under-represented indebates over regulation, but are key to the way that markets work in practice.

May 2009

Memorandum submitted by the Environment Agency

1. Introduction

1.1 The Environment Agency welcomes the opportunity to give evidence to the Regulatory ReformCommittee’s inquiry into Themes and Trends in Regulatory Reform. This builds on the evidence we gave tothe Committee’s 2008 inquiry on the regulatory reform agenda. We are committed to better regulation andcontinue to work with the Better Regulation Executive and others to deliver real results for the environment,public and consumer protection and for business. We have already achieved significant results from ourbetter regulation approach and will continue to build on this success.


2.1 The current economic situation is clearly very serious. However climate change and energy shortageare also real threats to be faced. While attention, understandably, is focused on the current financialsituation, it is an opportunity for wider change. There is a need for long-term thinking, not just short-termresponses.

2.2 We believe that part of the economic recovery package should include a “Green New Deal”. Theopportunity has to be seized to invest in green business opportunities, low-carbon technologies andinfrastructure. The shift to a low-carbon economy, coupled with a new drive in environmental technologyand green jobs is a vital component of long-term economic success. So too is maintaining consistent,proportionate regulation, which benefits business and society as a whole.

2.3 A proportionate and risk-based approach to protecting the environment must be maintained. Ourapproach is built on an understanding of the risk to the environment from activities and behaviours andresponding appropriately. During an economic downturn, risks to the environment could increase, forexample through businesses cutting staV (particularly those focussed on environmental management), orcutting costs associated with maintenance regimes and capital programmes, or through potential legacies ofdamage to the environment by businesses ceasing to operate.

2.4 Our response to a given situation during the downturn will still be about regulating in proportion tothe risk to the environment. However we will be flexible where we can for example recognising thatbusinesses may need longer timescales for investment to implement improvement programmes. It is essentialthat a long-term, risk-based view of both business and the environment is taken.

2.5 We would however caution against any inappropriate de-regulation as a response to the financialcrisis. That would not only put the environment at risk, but would send mixed signals to business and raiseuncertainty. More eVective and sensitive regulation is needed as opposed to de-regulation. This will ensurethe continued delivery of the high environmental standards essential for long-term competitiveness. We willcontinue to monitor the eVectiveness of the regulations we enforce and work hard to ensure that they meetthe tests of better regulation.

2.6 This approach to eVective and consistent regulation will provide the necessary protection for peopleand the environment, a level-playing field for business and a more predictable environment for investment.In the longer term, as the economy moves into recovery, it will play a vital role in supporting andstrengthening the economy, by providing first-mover opportunities for UK business and eVectively tacklingfree-riders who seek an unfair competitive advantage over legitimate businesses.

2.7 The Government’s better regulation agenda must deliver eVective regulation which benefits business,supports innovation and delivers environmental outcomes in the long term by:

— Achieving real reductions in costs through a more targeted, proportionate approach that focuseson regulations with the highest costs to business.

— A more strategic and ambitious approach to improving the eVectiveness of regulation at source,mainly in Europe.

— More emphasis on consolidating regulations to remove inconsistencies and complexity and toincrease the transparency and eYciency of regulations for business and regulators, for examplethrough continued support for future phases of the Environmental Permitting Programme.

— Better coordination between diVerent regulatory bodies, to reduce the burden of separate visits,inspections and procedures wherever possible.



— Greater involvement of a wide range of stakeholders including aVected communities, not justbusiness, and being clear about the purpose and benefits of regulation to ensure that publicconfidence in eVective risk-based regulation is not undermined as a result of the financial crisis.


3.1 The process of developing new regulations must focus on outcomes, but avoid detailed prescriptionat a UK and European level. Those close to the ground are best placed to tailor approaches to localsituations to deliver the outcomes. For example allowing a regulator to decide the most eVective complianceand enforcement solution at a national level, or an individual company being given the space to come upwith an appropriate innovative solution that will deliver the best outcomes. To achieve this will require achange in approach particularly at a European level and to ensure that transposition of EU laws eVectivelycommunicates the outcomes being sought.

3.2 The need for new regulations must be driven by robust evidence which also recognises those areaswhere enough has already been achieved. In developing and delivering new policy and legislation, suYcienttime must be allowed for businesses and regulators to prepare for implementation. Greater certainty overoutcomes, phasing and timetabling will assist businesses to plan better for compliance, including time todevelop innovative solutions. Regulators too need time to prepare eVective advice, guidance and regulatoryapproaches.

3.3 More consideration must be given to compliance and enforcement issues during the design ofregulations, to ensure better outcomes. As well as involving business and other stakeholders it is essentialto involve regulatory practitioners. European networks of practitioners have developed checklists to ensurethe practicability and enforcement of new regulations. This thinking should be integrated into the impactassessment process along with consideration of how support to help businesses comply will be delivered.

3.4 We regulate based on the environmental risk posed by an activity and not on the size of a business.We recognise the needs of small business for example by providing tailored guidance through our NetRegsweb site (www.netregs.co.uk) and have reduced the regulatory burden on many small business on the basisof low environmental risk. For example we have removed 23,000 low-risk abstractors from the licensingregime and have ensured that 500,000 low-risk hazardous waste producers do not need to register with us.

3.5 Our approach of being a firm and fair regulator is responsive to the wider pressures faced bybusinesses as well as the need to protect the environment. Dealing eVectively with non-compliant businessesthat undermine the investment of the compliant majority will continue to be an important strand of ourwork.

March 2009

Memorandum submitted by the Council for Healthcare Regulatory Excellence

1. Summary

The Council for Healthcare Regulatory Excellence is an independent body accountable to Parliament.Our primary purpose is to promote the health, safety and well-being of patients and other members of thepublic. We scrutinise and oversee the nine regulators of healthcare professionals.85 We also carry outresearch, develop policy and give advice on regulatory issues.

In anticipation of the Government’s intended review of healthcare professional regulation in 2011 we arecurrently undertaking policy work in a number of key areas. These include developing the concept of“agility” in regulation (as supplementary to the Better Regulation Executive five principles); exploringalternatives to the current geographical boundaries of regulation; developing protocols for regulation tolearn from crisis when it occurs; and exploring how the interests of patients and the public can be ensuredwhere they are multiple and complex regulatory systems. We expand on these points below.

The principal focus of our work is the regulation of healthcare professionals and how that engages withother healthcare regulatory systems. However, we believe there is substantial read-across to the regulation ofother sectors. Increasingly we are involving representatives of regulatory bodies outside health in our policydevelopment work, from both the public and other sectors, in order to promote learning and best practicesharing. We are also looking to inform our policy development work with research into how regulation isconducted internationally.

85 General Chiropractic Council, General Dental Council, General Medical Council, General Optical Council, GeneralOsteopathic Council, Health Professions Council, Nursing and Midwifery Council, Pharmaceutical Society of NorthernIreland, Royal Pharmaceutical Society of Great Britain.



Although the success measures in healthcare professional regulation may be diVerent from those in othersectors, nevertheless there is significant potential for learning across these boundaries in the way thatregulation is conducted. We are concerned in all of our work to promote “right-touch” regulation; that is,regulation that is neither so light as to be ineVective nor so heavy as to present unreasonable demands tothose regulated, and which does not restrict innovations in practice.

In the next section we give a description of a number of key policy development areas. We would bepleased to expand on any of these areas, were that useful to the Committee.

2. Four Key Areas of CHRE’s Policy Development Work

(i) Agility

The underpinning of much of our policy work is the Better Regulation Executive’s five principles ofregulation—that it should be proportionate, accountable, consistent, transparent and targeted. In our policywork we are developing a sixth principle—that it should be agile. In other words, regulatory bodies shouldbe staying up to date with the changes in registrants’ practice and the environment in which they work.Responsive to change, regulatory activity should pay closest attention to the areas of highest risk to patientsand the public.

The concept of agility as a sixth principle arose from a commission from the Department of Health toadvise on aspects of the establishment of the new General Pharmaceutical Council. Our researchdemonstrated that pharmacy practice was likely to undergo significant and rapid change over the next5–10 years. Therefore, its new regulatory body would need to demonstrate agility in order to regulatepractice eVectively and meaningfully. Our advice is enclosed as an appendix, and we direct your attentionto paragraphs 2.3 and 5.1–5.22.

(ii) The geographical boundaries of regulation

Another area of focus for us is the geographical boundaries of regulatory activity. At the current time, theregulation of healthcare professionals is principally UK-based, with standards common to the registrantsof the regulatory bodies irrespective of where in the UK they practise. The exception to this is pharmacy,where there are separate regulatory bodies for Northern Ireland (the Pharmaceutical Society of NorthernIreland) and Great Britain (the Royal Pharmaceutical Society of Great Britain, whose regulatory functionsare soon to be taken over by the General Pharmaceutical Council). As part of our policy development workwe will be examining the risks and benefits that would arise were regulation to be conducted at a countryor local level, or indeed at a European level. We are mindful in this work of such considerations as (i) thediVerent powers of the devolved administrations where healthcare professional regulation is concerned (ii)economies of scale and other cost impacts and (iii) relevant European law and the free movement of bothhealthcare professionals and patients.

(iii) Learning from crisis

A recurring theme in CHRE’s discussions with stakeholders has been that the focus of regulatory policydevelopment is too backward-looking—that regulation focuses too much on preventing the last crisis fromhappening again. This might be at the expense of being forward looking and working to address future areasof high risk, the agility theme described above. Of course, this is not to say that crises when they occur shouldbe ignored. Rather, the question is how regulatory bodies should learn the lessons without allowing crisisprevention to monopolise the policy development agenda, or over-reacting with unnecessarily heavyregulation. This will be another key area of our policy development work.

(iv) Multiple and complex regulatory systems

There are numerous bodies involved in regulating diVerent aspects of health and social care, looking atprofessionals, systems, products and premises. A further area of policy analysis for us will be to considerwhether the interests of patients and the public are best served by the way that these systems are constructedand interact with each other. There is a high level of public interest in the way that diVerent services interactand communicate to look after their needs, and particularly when they fail. We will be looking at whetherthere are gaps between regulatory systems; whether the number of diVerent systems and organisations causesconfusion to the public; and how boundaries between systems should best be managed.

March 2009



Annex 1

ADVICE TO THE DEPARTMENT OF HEALTH AND THE PHARMACY REGULATION ANDLEADERSHIP OVERSIGHT GROUP ON ASPECTS OF THE ESTABLISHMENT OF THE

GENERAL PHARMACEUTICAL COUNCILNOVEMBER 2008

1. Introduction

1.1 Pharmacy practice will undergo significant change over the next decade. The new regulator of thepharmacy profession will need to meet that challenge. Pharmacists and pharmacy technicians are a mobileworkforce, operating in a wide range of settings, often working within commercial imperatives whileensuring that patients receive the best possible service. The future development of pharmacy outlined byrecent policy initiatives presents the profession with exciting challenges and changes as it moves increasinglytowards the delivery of clinical services.

1.2 The establishment of the General Pharmaceutical Council presents an opportunity to create a trulypatient-focused regulatory body, whose activities are directed by assessment of risk to patient safety ofrapidly developing pharmacy practice, which anticipates change and reacts quickly to it. The GPhC has thepotential to become an exemplar of modern professional regulation: eVective in protecting patients, agile inidentifying and responding to change, and balanced in its approach to risk and regulation.

2. Executive Summary of Recommendations

2.1 The Council for Healthcare Regulatory Excellence’s key observations are:

— Change in pharmacy will be rapid, in terms of role development of pharmacists and pharmacytechnicians, and technological advancement in pharmacy products.

— Pharmacists and pharmacy technicians will be interacting with patients and the public in new anddiVerent ways.

— With the changes in their roles, pharmacists and pharmacy technicians will need to develop newways of working with colleagues.

— Change will introduce new areas of risk to patient safety.

— Pharmacists and pharmacy technicians will need clear advice and guidance on standards in thesenew areas.

— Pharmacists and pharmacy technicians will need to acquire what may be new skills and knowledge,for example in behaviour change in the public health role.

— Pharmacy will in future be practised in a wider range of settings, for example in patient’s homesor GP/veterinary surgeries.

— Individual pharmacists increasingly work across diVerent settings, in diVerent sectors, potentiallyresulting in a complex risk profile at an individual level.

— Changes in an increasingly globalised society will aVect both the practice of pharmacy and presentchallenges to its regulation and the protection of public safety—for example, the availability ofpharmaceutical products on the internet.

— Changes in IT, for example electronic prescribing and online pharmacy, will aVect practice, andwill need to be reflected in GPhC’s standards.

— Pharmacists will continue to play an important role in industry, clinical departments andregulatory matters.

2.2 Our main recommendations are that:

— It is essential to ensure that the closely integrated regulation of pharmacy professionals, premisesand products continues. This is a great strength in ensuring patient safety.

— Across all of its functions, GPhC will need to allocate its resources according to assessment of riskto patient safety, taking a light touch where risk to patient safety is low and focusing on areas whererisk is highest.

— The GPhC will need to establish a horizon-scanning function capable of anticipating the changesin pharmacy practice which will occur over the next decade.

— GPhC itself will need to be able to adapt quickly to reflect change in its standards, structures andprocesses.

— The GPhC’s standard-setting function will need to be flexible, with new areas of practice beinganticipated and standards developed and promulgated quickly.

— In the establishment of the GPhC consideration should be given to the examples of best practicewhich have arisen from the CHRE 2008 performance review.



— In the transfer of responsibility to GPhC, areas of good and developing practice in the currentregulation of the pharmacy professions, identified by CHRE’s performance review, should notbe lost.

— In the preparation of legislation for the new GPhC appropriate statutory powers should beincluded to make continuing professional development (CPD) mandatory.

— The governance arrangements of the GPhC should follow the principles set out in the reportEnhancing Confidence in Healthcare Professional Regulators.86

— The GPhC is set up in such a way that at a logistical level it is a straightforward matter to registerNorthern Ireland’s pharmacists and pharmacy technicians, should Northern Ireland’s HealthMinister decide in future that this is his wish.

2.3 These recommendations are based on the Better Regulation Executive’s five key principles of betterregulation:87

— Proportionate: regulators should only intervene when necessary. Remedies should be appropriateto the risk posed, and costs identified and minimised.

— Accountable: regulators must be able to justify decisions, and be subject to public scrutiny.

— Consistent: government rules and standards must be joined up and implemented fairly.

— Transparent: regulators should be open, and keep regulations simple and user-friendly.

— Targeted: regulation should be focused on the problem, and minimise side eVects.

In addition CHRE proposes a sixth principle:

— Agile: regulators must be consistently in a state of readiness to respond to changes anddevelopments in healthcare professional practice and circumstances.

2.4 These recommendations are also based on the following good governance principles:88

— The council should uphold the purpose of the organisation as established by parliament, determineits values and keep both its purpose and values in mind at all times, with mechanisms in place forannual review.

— The council should be forward- and outward-looking, focussing on the future, assessing theenvironment, engaging with the outside world, and setting strategy.

— The council should determine the desired outcomes and outputs of the organisation in support ofits purpose and values.

— For each of the desired outcomes the council should decide the level of detail to which it wishes toset the organisation’s policy—any greater level of detail of policy formulation should then be amatter for the determination of the chief executive and staV.

— The means by which the outcomes and outputs of the organisation are achieved should be a matterfor the chief executive and staV; the council should not distract itself with operational matters.

— The chief executive should be accountable to the council for the achievement of the organisation’soutcomes and outputs.

— In assessing the extent to which the outcomes have been achieved, the council must have aframework of pre-determined criteria against which performance is reported both internally andexternally.

— The council should engage with its key interest groups including patients, the public, registrants,employers, educators and the devolved administrations, and be confident that it understands theirviews and priorities.

— The membership of the council should have the capacity and skill to understand the priorities ofeach of these key constituents.

— Information received and considered by the council should support one of three goals—to allowinformed decision making, to fulfil control and monitoring processes or to enable the council toco-operate with CHRE and to be accountable to parliament.

— The council must govern itself eVectively, with clear role descriptions for itself, its chair, and itsmembers, with agreed methods of working and self-discipline to ensure that time is used eYciently.

— The council must ensure that issues of equality and diversity are considered as part of all its work.

2.5 The recommendations are also based on CHRE performance standards:89

86 Department of Health (2008). Implementing the White Paper Trust Assurance and Safety: Enhancing Confidence in HealthcareProfessional Regulators.

87 Better Regulation Executive www.berr.gov.uk/bre/index.html88 Department of Health (2008). Implementing the White Paper Trust Assurance and Safety: Enhancing Confidence in Healthcare

Professional Regulators, Table 1.89 CHRE (2007). Standards of Good Regulation.



2.5.1 Standards and guidance

— The regulator publishes standards of competence and conduct which are appropriate,comprehensive, prioritise patient interests and reflect up-to-date professional practice.

— The regulator makes its standards available and accessible proactively to registrants and potentialregistrants in the UK,90 and informs them of their current or future responsibility to meet thesestandards.

— The regulator informs the public of the standards that professionals should meet and the actionthat they can take if these standards are not met.

— The regulator requires registrants to maintain standards through a process of CPD or equivalentsystems, and is working towards a system of revalidation.

2.5.2 Registration

— The regulator has eYcient, fair and transparent processes for entry to the register and periodicrenewal of registration.

— Registers are accessible to the public and include appropriate information about registrants.

— The regulator takes appropriate action to prevent non-registrants practising under a protected title.

2.5.3 Fitness to practise

— The regulator has a process through which patients, the public and others can raise concerns aboutregistrants and understand how their concerns will be dealt with.

— The regulator keeps all relevant parties informed of progress on cases at all appropriate stages.

— Fitness to practise cases are dealt with in a timely manner at all stages.

— There are quality processes for the appointment, assessment and training of fitness to practise panelmembers. Panel members also have clear guidance on how to assess cases.

— Decisions made at the initial stages of the fitness to practise process (pre-fitness to practise panelstage) are quality assured.

— Fitness to practise panels make appropriate, well reasoned decisions on cases.

2.5.4 Education

— The regulator ensures that its standards for the education and training to be met by students areappropriate, comprehensive, prioritise patient safety and interests and reflect up-to-dateprofessional practice.

— The regulator ensures that its standards for the delivery of education and training are appropriate,comprehensive, prioritise patient interests and reflect up-to-date professional practice.

— The regulator has a transparent and proportionate system of quality assurance for education andtraining providers.

2.5.5 Governance and external relations

— The regulator is a transparent and accountable organisation and significant policy decisions aredemonstrably based on the public interest.

— The regulator establishes and works within eYcient and eVective organisational processes.

— The regulator fosters a culture of continuous improvement within the organisation.

— The regulator co-operates with stakeholders and other organisations.

3. Background

3.1 On 6 May 2008 CHRE was commissioned by the Department of Health to provide advice on thefollowing aspects of the establishment of the General Pharmaceutical Council:

— Existing good practice in relation to the regulation of the pharmacy professions.

— Likely changes to pharmacy practice over the next five to ten years which could have implicationsfor the way that the pharmacy professions are regulated.

— The core functions of a regulatory body (drawing on the White Paper Trust Assurance andSafety—the Regulation of Health Professionals in the 21st Century and the preceding reviews ofregulation).

— What constitutes good governance arrangements, in terms of the functions and procedures of aBoard and internal governance processes.

90 It is noted that at establishment GPhC will cover England, Scotland and Wales. Pharmacy regulation in Northern Ireland isdiscussed at paragraphs 3.4 and 9.3.8–9.3.12.



— Operational implications arising from the various settings for pharmacy practice (eg community,hospital, industry etc), the need to operate in the context of devolved government in the UnitedKingdom, European Community law and the general movement of people across internationalboundaries.

3.2 In preparing to provide advice on these aspects of the establishment of the new body, we have bothlooked at the key documents setting out the future of pharmacy practice across the UK, and have held face-to-face discussions with a wide range of people and organisations. This has included the RoyalPharmaceutical Society of Great Britain, the Pharmaceutical Society of Northern Ireland, other regulatorybodies, the devolved administrations, and organisations representing pharmacists working in specificsectors. In a few cases, where meeting has not been possible, written submissions have been received.

3.3 We are extremely grateful to those with whom we have discussed aspects of this advice and othercontributors for the time that they have taken to share their thoughts with us. We are particularly gratefulto the RPSGB and the PSNI for their proactive co-operation with us, and for the lengths to which they havegone to ensure that we have the information that we need and to set up meetings. We have enjoyed wide-ranging discussions on the future of pharmacy, and ask our contributors to recognise that unfortunately ithas not been possible to reflect on all of the matters that we have discussed when writing our advice on thespecific questions put by our commission, or to reflect all points of detail.

3.4 Throughout this advice in discussing the future of pharmacy we have taken a UK-wide perspective,unless otherwise stated at any point, while appreciating that in the first instance at least GPhC will be a bodywhich covers England, Scotland and Wales. We discuss the regulation of pharmacy in Northern Ireland inmore detail at 9.3.8–9.3.12.

4. Existing good practice in relation to the regulation of the pharmacy professions

4.1 In this section we draw on our performance review of the RPSGB and PSNI in 2008, summarisingthe particular points which were noted as good practice and commenting on wider issues and areas forfurther work going forward into the establishment of GPhC. As the existing regulatory departments ofRPSGB will form the basis of the new GPhC in the first instance, we have considered the performance reviewof RPSGB in more depth than that of PSNI.

Existing good practice at RPSGB and related issues

4.2 Our 2008 performance review confirmed that the RPSGB carried out its regulatory functionssuccessfully during a period of change and challenge, not least of which being the preparations for theestablishment of the GPhC. It will be important to ensure that successful performance of functions andcurrent developmental work across the organisation is not lost in the transfer to GPhC.

4.3 We found that standards form the basis of the RPSGB’s statutory functions, prioritise patient safety,are comprehensive and the Code of Ethics is well laid out. There is an eVective communications strategywith key groups. The registration process is well-managed with applications handled in a timely manner; theregister is accessible and reasonably easy to understand and search. There is an eVective process to deal withcases of unregistered individuals claiming to be pharmacists. Work is in hand to introduce improved IT-based case management in fitness to practise which we consider is essential for the eVective operation offitness to practise processes. Cases are handled relatively quickly by the RPSGB and further improvementsare anticipated.

4.4 The Inspectorate is eVective in detecting fitness to practise concerns and investigating them; a futureissue to address will be to establish the relationship between the Inspectorate, the fitness to practisedepartment and the National Clinical Assessment Service, as NCAS expands its remit to includepharmacists.

4.5 In the oversight of pharmacy practice the RPSGB collaborates eVectively with the Medicines andHealthcare Products Regulatory Agency, the Healthcare Commission and the police. A future issue forresolution will be to manage the relationship and the interface with the Care Quality Commission (onceestablished) to agree protocols on registration of premises, for example, when a pharmacy registered withGPhC expands its activities into areas that are registerable with the CQC.91 It is essential to ensure that theclosely integrated regulation of professionals, premises and products continues. This is a great strength inensuring patient safety.

4.6 Areas needing further work include raising the profile of the register, in particular with the public,introducing IT-based fitness to practise case management as noted, and setting service standards acrossfitness to practise. The membership of the Council of the RPSGB does not reflect a suYciently broad rangeof interests in view of the wide range of stakeholders in pharmacy regulation, due to existing legislativerestraints. This must be addressed by the GPhC in establishing its Council. We discuss board governance inmore detail below (paragraphs 7.1–7.3). Finally, the RPSGB does not currently have the statutory power tomake CPD mandatory, and it will be essential that the GPhC has the right statutory powers in this area.

91 In England. We note the comment at paragraph 7.8 of Pharmacy in England Building on Strengths—Delivering the Future thatit will not be an immediate requirement for pharmacies to be registered with the CQC but that in future as their range ofservices expand this may be necessary.



Existing good practice at PSNI and related issues

4.7 In our performance review of PSNI we found that it fulfils most of its functions satisfactorily withinthe constraints of existing outmoded legislation. Noting the good work that is already underway across therange of functions to improve its performance, and the obvious desire and commitment of its leadership todevelop its practice, we strongly recommend that a new legal framework for the regulation of pharmacy inNorthern Ireland is put in place as soon as possible.

4.8 A particular area of good practice which we commend to GPhC (and other regulatory bodies) is theappointment of pre- and post-registration facilitators by PSNI. These professionals play a useful role inimproving communication and promoting standards with students, registrants and employers.

4.9 We discuss pharmacy regulation in Northern Ireland further at paragraphs 9.3.8–9.3.12.

5. Likely Changes to Pharmacy Practice Over the Next Five to Ten Years which Could haveImplications for the way that the Pharmacy Professions are Regulated

Summary of the likely changes to pharmacy practice

5.1 Pharmacy practice will undergo significant change over the next decade. In the community, there willbe an expanded public health role, with emphasis shifting from the dispensing of medicines to the provisionof clinical services. Pharmacies will provide a wider range of services supporting healthy living, includinghelping patients to manage long-term conditions and supporting self-care. In hospital practice, there will bean enhanced clinical role, taking a higher profile in the work of multidisciplinary teams and leading in areassuch as medicines reconciliation on admission. Hospital and community pharmacy will work together inhealth community clinical pharmacy teams. From industry, we heard in particular about innovations inproteomics, and their potential for the development of new more individualised medicines. From veterinarypharmacy we heard about the likely increase in the dispensing of medicines for companion animals bycommunity pharmacies. Increasing automation and technological advancements have freed up pharmacytechnicians to be able to make a fuller contribution to services. Pharmacy products and their administrationare also changing and developing rapidly, including the increasing range of pharmacy medicines.

5.2 Another area of rapid development will be in the use of IT. Increasingly, prescriptions will betransferred electronically. As pharmacists develop their clinical role, protocols will need to be developed toenable them to access and contribute to the NHS Care Records Service, both the detailed locally-heldinformation and the Summary Care Records held nationally.

5.3 We asked many of those with whom we have discussed this advice if there were significant diVerencesin the development of pharmacy in the diVerent countries of the UK. We heard that there were somediVerences in emphasis, with specific initiatives occurring in only a single country, or innovations that weremore advanced in some locations than others. To some extent this is explained by the diVerent distributionof the workforce in the diVerent countries across the settings in which pharmacy is practised. However, ingeneral it is clear that that the general principles and direction of travel apply across all four countries ofthe UK.

Key considerations for GPhC arising from change in pharmacy practice

5.4 The key considerations for GPhC are as follows:

— Change will be rapid, in terms of role development of pharmacists and pharmacy technicians, andtechnological advancement in pharmacy products.

— Pharmacists and pharmacy technicians will be interacting with patients and the public in new anddiVerent ways.

— With the changes in their roles pharmacists and pharmacy technicians will need to develop newways of working with colleagues.

— Change will introduce new areas of risk to patient safety, for example, in the area of themaintenance of proper boundaries in hands-on diagnostic procedures, and in the risks inherent inthe prescribing, dispensing and use of more individualised pharmaceutical products which mayrequire highly skilled administration.

— Pharmacists will need clear advice and guidance on standards in these new areas. For example,community pharmacists expanding their role into dispensing veterinary pharmaceutical productswill need to understand the boundaries between this area of work and those tasks which must onlybe carried out by a registered veterinary surgeon, as well as the other considerations specific todispensing for animals.92

— Pharmacists and pharmacy technicians will need to acquire what may be new skills and knowledge,for example in behaviour change in the public health role.

92 We note that this is not a new area in legal terms, however is likely to become more prevalent in future. The boundary withthe veterinary surgeon is only one example of the various areas that would need to be covered, including matters relating todispensing, storage, the “cascade”, breaking of packs, labelling and recording as specific to veterinary products.



— Pharmacy will in future be practised in a wider range of settings, for example in patient’s homesor GP/veterinary surgeries.

— Individual pharmacists increasingly work across diVerent settings, in diVerent sectors, potentiallyresulting in a complex risk profile at an individual level.

— Changes in an increasingly globalised society will aVect both the practice of pharmacy and presentchallenges to its regulation and the protection of public safety—for example, the availability ofpharmaceutical products on the internet.

— Changes in IT, for example electronic prescribing and online pharmacy, will aVect practice, andwill need to be reflected in GPhC’s standards.

— Pharmacists will continue to play an important role in industry, clinical departments andregulatory matters.

Implications for the new regulatory body—risk-based regulation

5.5 Having identified the characteristics and changes listed in 5.4, we considered the implications for thenew regulatory body. In order to regulate in the diverse, complex and fast-moving area of pharmacy practiceit will be necessary for the GPhC to allocate its resources and order its priorities on the basis of risk-assessment in accordance with the Hampton principles93 and the principles set out by the Better RegulationExecutive, as referenced by the Foster review,94 namely that statutory regulation should be:

— Proportionate: regulators should only intervene when necessary. Remedies should be appropriateto the risk posed, and costs identified and minimised.

— Accountable: regulators must be able to justify decisions, and be subject to public scrutiny.

— Consistent: government rules and standards must be joined up and implemented fairly.

— Transparent: regulators should be open, and keep regulations simple and user-friendly.

— Targeted: regulation should be focused on the problem, and minimise side eVects.

5.6 In addition, we propose a sixth principle—agile. The regulatory body must be able to anticipatechange, including in the environment in which its registrants work, and react quickly. This should bereflected in its structure, standards, policies and processes.

5.7 The RPSGB is thorough and detailed in the application of its processes. Given the rapid pace ofchange that is anticipated in the development of pharmacy practice, the GPhC will need to develop itsapproach to risk management and proportionality so that it can focus most closely on those areas whererisk to patient safety is assessed to be highest. This approach will give GPhC the flexibility to adapt quicklyas pharmacy practice develops in future. The organisation will wish to refer to the outcome of the workcurrently being commissioned by the Department of Health on risk assessment in the context of theimplementation of Trust, Assurance and Safety, specifically for the working groups on non-medicalrevalidation and extending professional regulation.

5.8 We heard about the work currently being undertaken to develop and define advanced practice, bothwithin RPSGB and other initiatives such as that being led by the Joint Programmes Board (London, Eastand South East England).95 This is an area of rapid development, where pharmacists are working in theareas of greatest uncertainty and have the highest levels of responsibility for managing that uncertainty, forexample in combining drugs in unprecedented ways for critically ill patients. As such, it is a good exampleof an area where GPhC should focus its attention, where there are demonstrable issues of public protection.GPhC should support those working in high risk areas by defining standards and advising on thecircumstances and parameters within which risks can reasonably be taken. Following the report A HighQuality Workforce: NHS Next Stage Review,96 CHRE will be undertaking work on advanced practice inclose liaison with the regulatory bodies, and drawing on existing work from across the UK.

Implications for the new regulatory body—horizon scanning and stakeholder network management

5.9 The next question that we considered was how the new regulatory body would stay abreast of, andahead of, the rapid advance in practice that is anticipated over the next five to 10 years.

5.10 Our advice is that from the outset GPhC will need to establish the capacity for continuous horizonscanning. This will ensure that it stays ahead of practice and anticipates changes and developments beforethey occur, enabling it to reflect these back into its standard-setting and other functions of the organisation.In doing so, it will need to manage proactively a network of stakeholders, including the professional body,patients and the public, consumer groups, employers in all sectors, organisations representing pharmacistsand pharmacy technicians working in particular sectors, higher education institutions, trades unions, theMedicines and Healthcare Products Regulatory Agency, and the devolved administrations (see section 9).

93 Hampton, P (2005). Reducing Administrative Burdens: EVective Inspection and Enforcement, Box E2, p 7.94 Department of Health (2006). The Regulation of the Non-medical Healthcare Professions: A Review by the Department of

Health, chapter 1 paragraph 12.95 www.postgraduatepharmacy.org96 Department of Health (2008) A High Quality Workforce: NHS Next Stage Review.



5.11 Several times during our interviews the issue arose of whether it would be cost eVective for theregulatory body to perform its own horizon scanning given that the professional body would also beperforming a similar function, and whether the professional body might in some way be commissioned toperform horizon scanning on behalf of the regulatory body. Although there could be some sharing ofintelligence in this area, and the professional body will be an important source of advice and input, theorganisations must perform their own horizon scanning, reflecting their distinct roles—the professionalbody will be creating and shaping the future of pharmacy practice, while the regulatory body will beanticipating change and reflecting it in the standards that it upholds for its registrants.

Implications for the new regulatory body—standard setting

5.12 We are aware that the standards documentation of the RPSGB was revised last year and publishedin August,97 and that a wide range of stakeholders was involved in the redrafting. We are also aware that,in order to remain up to date for as long as possible without the need for review, the standards were wordedin such a way as to be statements of principle and therefore to some extent future-proof. The standards arecomprehensive, prioritise patient safety, and are well laid out.

5.13 However, given the likely pace of change over the next 10 years, a standards-setting function basedon a document reviewed at intervals and published in paper form will not be the best way to ensure thatstandards stay up-to-date with practice and cover all eventualities.

5.14 We advise that the GPhC moves towards a more flexible and dynamic standards-setting process, inwhich standards can be reviewed and changed quickly. The organisation will need to establish protocols fordeciding when changes to practice as they occur require changes to standards, and how stakeholders will beconsulted on proposed changes. It will also need to find ways to communicate changes to registrants,building on the RPSGB’s current eVective communications strategy, for example through supplementaryand issue-specific guidance. As changes to the standards may occur more frequently in future, an archivingand version control process will be required to ensure that it will always be possible to know what versionapplied at any given time, not least to inform fitness to practise processes.

5.15 In the remaining paragraphs in this section we reflect in general terms on the implications of a moreflexible, rapidly developing standards-setting function for the other functions of the new regulatory body.

Implications for the new regulatory body—quality assurance of education

5.16 The standards-setting function will need to inform the quality assurance of the education functionto ensure that pharmacists and pharmacy technicians with the right skills, knowledge and professionalattitudes to meet contemporary standards are emerging from pharmacy courses. We note as a result of therecently published A High Quality Workforce: NHS Next Stage Review CHRE is to be commissioned toconduct research to identify and promote best practice in the quality assurance of education.98

Implications for the new regulatory body—fitness to practise

5.17 A mechanism will be required to ensure that the standards setting function and the fitness to practisefunction inform each other. As standards change, this will inform the way that referrals are handled at anearly stage, the indicative sanctions guidance available to panels when a case proceeds to a hearing and thetraining of panellists. Likewise, learning from fitness to practise cases will need to feed back into thestandards setting function. If in future standards are to evolve more quickly than has previously been thecase, version control will be required so that throughout the consideration of a case it is judged against thestandards applicable at the relevant time.

5.18 It will be essential to ensure that GPhC has a full range of sanctions available to it in fitness topractise cases. CHRE is currently working on harmonisation of the sanctions available across the healthcareprofessions. Another issue for the GPhC to consider in establishing its fitness to practise function concernsthe chairing of panels in fitness to practise hearings. From its consideration of over 4,000 decisions by fitnessto practise panels CHRE concludes that panels with legally qualified chairs do not produce higher qualitydecisions or better-written adjudications than panels with chairs who are not legally qualified.

Implications for the new regulatory body—continuing professional development

5.19 High-quality continuing professional development will be essential for a profession going throughrapid change and development, to ensure that the existing workforce in pharmacy is able to keep pace withthe new skills and knowledge they will need to acquire. This adds further weight to the urgency for CPD tobe made mandatory under the GPhC, which we discuss elsewhere in this advice (paragraphs 4.6 and 8.5).

97 RPSGB (2007). Code of Ethics for Pharmacists and Pharmacy Technicians and Professional Standards and GuidanceDocuments.

98 Department of Health (2008). A High Quality Workforce: NHS Next Stage Review, paragraph 138 p 41.



Implications for the new regulatory body—revalidation

5.20 Revalidation decisions will be based on whether a registrant meets the contemporary standards,based on submitted evidence. It will need to be clear to registrants which is the contemporary set of standardsagainst which this decision will be made in order to ensure that they provide relevant evidence andinformation.

5.21 The GPhC will need to develop sophisticated methods of risk profiling its registrants as the basis forrevalidation, given the increasing appearance of combined roles across sectors in pharmacy, the increasingdiVerentiation of roles within sectors and the mobility of the pharmacy workforce. The organisation willneed to determine the amount and nature of information that it will be reasonable to demand of registrantstowards the revalidation decision, given the range of roles that they may have at any one time. To do so willrequire dedicated eVorts to map trends in the pharmacy workforce, building on the work that RPSGBalready undertakes in this area.

Implications for the new regulatory body—patient and public involvement

5.22 The rapid pace of change will present GPhC with a considerable challenge in patient and publicinvolvement, both in finding ways to communicate to the public the standards that they can expect frompharmacists and pharmacy technicians, and in involving patients and the public in its work. There arevarious successful models of patient and public involvement, such as the approach by the General MedicalCouncil, which we would encourage GPhC to consider, building on the strong programme of work alreadybeing developed by RPSGB and on its existing links with public and patient representative organisations.Key characteristics of successful models are that they engage with a wide range of people, use a variety ofmethods and that those involved are able to see that their involvement makes a diVerence.

6. The Core Functions of a Regulatory Body

6.1 CHRE reviews the performance of the health professional regulators against five key standards anda set of minimum requirements under each standard. The standards were developed during 2007 incollaboration with nine health regulators, and focus on the outcomes for regulation and the protection ofpatients and the public.99 They were piloted in the 2008 performance reviews. It should be noted that thestandards will be reviewed in the light of this pilot process and in advance of the 2009 performance reviewround. For reference they are quoted below in paragraphs 6.2–6.6. At 6.7 we quote the functions as definedby the White Paper Trust Assurance and Safety.

6.2 Standards and guidance

— The regulator publishes standards of competence and conduct which are appropriate,comprehensive, prioritise patient interests and reflect up-to-date professional practice.

— The regulator makes its standards available and accessible proactively to registrants and potentialregistrants in the UK, and informs them of their current or future responsibility to meet thesestandards.

— The regulator informs the public of the standards that professionals should meet and the actionthat they can take if these standards are not met.

— The regulator requires registrants to maintain standards through a process of CPD or equivalentsystems, and is working towards a system of revalidation.

6.3 Registration

— The regulator has eYcient, fair and transparent processes for entry to the register and periodicrenewal of registration.

— Registers are accessible to the public and include appropriate information about registrants.

— The regulator takes appropriate action to prevent non-registrants practising under a protected title.

6.4 Fitness to practise

— The regulator has a process through which patients, the public and others can raise concerns aboutregistrants and understand how their concerns will be dealt with.

— The regulator keeps all relevant parties informed of progress on cases at all appropriate stages.

— Fitness to practise cases are dealt with in a timely manner at all stages.

— There are quality processes for the appointment, assessment and training of fitness to practise panelmembers. Panel members also have clear guidance on how to assess cases.

— Decisions made at the initial stages of the fitness to practise process (pre-fitness to practise panelstage) are quality assured.

— Fitness to practise panels make appropriate, well-reasoned decisions on cases.

99 CHRE (2007). Standards of Good Regulation.



6.5 Education

— The regulator ensures that its standards for the education and training to be met by students areappropriate, comprehensive, prioritise patient safety and interests and reflect up-to-dateprofessional practice.

— The regulator ensures that its standards for the delivery of education and training are appropriate,comprehensive, prioritise patient interests and reflect up-to-date professional practice.

— The regulator has a transparent and proportionate system of quality assurance for education andtraining providers.

6.6 Governance and external relations

— The regulator is a transparent and accountable organisation and significant policy decisions aredemonstrably based on the public interest.

— The regulator establishes and works within eYcient and eVective organisational processes.

— The regulator fosters a culture of continuous improvement within the organisation.

— The regulator co-operates with stakeholders and other organisations.

Consistency with Trust Assurance and Safety

6.7 The definition of the functions of a regulatory body as set out above in our view is consistent withthat set out in the White Paper Trust, Assurance and Safety, namely: setting and promoting standards foradmission to the register and for remaining on the register; keeping a register of those who meet thestandards and checking that registrants continue to meet the standards; administering procedures fordealing with cases where a registrant’s right to remain on the register has been called into question; andensuring high standards of education for the health professionals that they regulate.100

Examples of best practice arising from CHRE’s 2008 performance review

6.8 We have recently published our reports on the performance reviews of the healthcare professionalregulatory bodies, including a general report on the state of healthcare professional regulation.101 Wecommend the examples of best practice that are identified.

7. What Constitutes Good Governance Arrangements in Terms of the Functions and Proceduresof a Board and Internal Governance Arrangements

General observations—policy governance model

7.1 CHRE supports the findings of the report of the working group (chaired by Niall Dickson)Implementing the White Paper Trust Assurance and Safety: Enhancing Confidence in Healthcare ProfessionalRegulators. As a contribution to the discussions of the working group CHRE compiled a list of principlesthat should underpin the work of a board, which the working group refined into principles specificallyapplicable to the council of a healthcare professional regulator. The principles are quoted in 7.3 below.

7.2 We advise that the governance arrangements of the GPhC reflect the findings of that report, and the“policy governance” model developed by John Carver.102

7.3 Principles that should underpin the work of a council of a healthcare professional regulator:103

— The council should uphold the purpose of the organisation as established by parliament, determineits values and keep both its purpose and values in mind at all times, with mechanisms in place forannual review.

— The council should be forward- and outward-looking, focusing on the future, assessing theenvironment, engaging with the outside world, and setting strategy.

— The council should determine the desired outcomes and outputs of the organisation in support ofits purpose and values.

— For each of the desired outcomes the council should decide the level of detail to which it wishes toset the organisation’s policy—any greater level of detail of policy formulation should then be amatter for the determination of the chief executive and staV.

— The means by which the outcomes and outputs of the organisation are achieved should be a matterfor the chief executive and staV; the council should not distract itself with operational matters.

100 Department of Health (2007). Trust, Assurance and Safety—the Regulation of Healthcare Professionals in the 21st Century,chapter 1, paragraph 1.2.

101 CHRE (August 2008) Performance review of health professions regulators 2007/08—Helping regulation to improve.102 In preparing the principles, we drew in particular on the work of John Carver, and his “policy governance” model as described

in Boards that Make a DiVerence, Third Edition, 2006. We commend this model to the GPhC. It draws a clear distinctionbetween the strategic, monitoring, and oversight role of a board, and the delivery of an organisation’s executive functions.

103 Department of Health (2008). Implementing the White Paper Trust Assurance and Safety: Enhancing Confidence in HealthcareProfessional Regulators, Table 1.



— The chief executive should be accountable to the council for the achievement of the organisation’soutcomes and outputs.

— In assessing the extent to which the outcomes have been achieved, the council must have aframework of pre-determined criteria against which performance is reported both internally andexternally.

— The council should engage with its key interest groups including patients, the public, registrants,employers, educators and the devolved administrations, and be confident that it understands theirviews and priorities.

— The membership of the council should have the capacity and skill to understand the priorities ofeach of these key constituents.

— Information received and considered by the council should support one of three goals; to allowinformed decision making, to fulfil control and monitoring processes or to enable the council toco-operate with CHRE and to be accountable to parliament.

— The council must govern itself eVectively, with clear role descriptions for itself, its chair and itsmembers, with agreed methods of working and self-discipline to ensure that time is used eYciently.

— The council must ensure that issues of equality ands diversity are considered as part of all its work.

Implications of CHRE’s special report to the Minister of State for Health Services on the Nursing andMidwifery Council

7.4 CHRE’s special report to the Minister of State for Health Services on the Nursing and MidwiferyCouncil104 highlighted the importance of good governance arrangements to a healthcare professionalregulator. Our recommendations to the NMC reflect this.

7.5 We commend the recommendations to the NMC in some respects as general pointers for goodgovernance, and in particular, that “there should be no representative members on the new council and noreserved places for interest groups. All members, whether registrant or public should be appointed againstdefined competencies and be subject to appraisal. The President should be appointed not elected”.105 Wealso highlight to GPhC the recommendations for an eVective statement of organisational values and a codeof conduct for council members.

OYce of the Health Professions Adjudicator

7.6 A strategic decision will need to be made at an early stage about the point at which the OYce of theHealth Professions Adjudicator will hear cases against pharmacists and pharmacy technicians. GPhCshould anticipate the likely transfer of the adjudication to OHPA at whatever stage by ensuring best practicein the separation of adjudication from other fitness to practise functions. The capacity of OHPA may beaVected by our recent recommendation that the Department of Health and the Nursing and MidwiferyCouncil consider early transfer to OHPA.

8. Operational Implications Arising from the Various Setting for Pharmacy Practice

8.1 Our commission asked us to consider the operational implications arising from the various settingsfor pharmacy practice. We have focused our advice in four particular areas.

Revalidation

8.2 A key component of revalidation will be evidence and information about performance which arisesfrom the registrant’s workplace. This places two specific responsibilities on a regulatory body. First, it willneed to understand the workplaces in which any given registrant practises pharmacy, in order to be able todetermine what is a reasonable evidence base to require from the registrant in support of their revalidationapplication. In pharmacy this will be a significant challenge, given the high percentage of locums in theworkforce and the increasing trend towards pharmacists moving between sectors not just as a sequence ofjobs but as part of a portfolio of diVerent posts held at any one time. Within this mobile workforce, the GPhCwill need to find ways to manage the particular risk around failing professionals who move jobs quickly.

8.3 Secondly, the regulatory body will also need to keep up to date with diVerent employers’ processesfor producing the kinds of evidence and information which will be germane to revalidation decisions. Theregulatory body will also need to set out evidence requirements for those who work outside a corporatestructure which is routinely producing information—for example, owners of individual high-streetpharmacies.

104 CHRE (2008). Special Report to the Minister of State for Health Services on the Nursing and Midwifery Council.105 As footnote 10, paragraph 5.2.1.



Receiving fitness to practise referrals

8.4 Concerns about registrants working within corporate structures with developed human resourcescapacity, for example in the commercial sector or where NHS clinical governance arrangements apply, willoften be dealt with by their employers, and will frequently not be brought to the attention of the GPhC. Thisis desirable; ensuring that concerns are identified and dealt with quickly at a local level where appropriateshould be an objective of the new regulator. However, where there is no corporate structure, referrals willoften be made directly to the regulatory body. The GPhC will need to be able to manage referrals at all levels,with appropriate training and protocols for staV on how to handle reported concerns at all levels ofseriousness.

Continuing professional development

8.5 Pharmacists are increasingly moving between jobs at any one time as part of a portfolio of posts indiVerent sectors. This raises significant challenges for the GPhC in developing a system of continuingprofessional development which will be able to address development needs arising from those diVerentsectors. It will also be a significant challenge to ensure that CPD is eVective in supporting the upskilling ofthe existing pharmacy workforce. The system developed will need to feed into GPhC’s processes for makingdecisions on whether or not to revalidate registrants. We are aware of, and commend, the work currentlybeing undertaken by RPSGB on developing CPD systems, and advise that in the preparation of legislationfor the new GPhC appropriate statutory powers are included to make CPD mandatory.

Standards-setting function

8.6 As has previously been discussed, the GPhC will need to stay abreast, and indeed ahead, of practicedevelopment across all of the diVerent settings for pharmacy practice as part of its standards-settingfunction, and will need to understand the characteristics of the diVerent environments in which pharmacistsand pharmacy technicians work through its network and stakeholder management.

9. The Need to Operate in the Context of Devolved Government in the UK

General observations

9.1 It will be important for the new regulatory body to maintain close contact with the devolvedadministrations, to participate in discussions about the future direction of pharmacy in the diVerentcountries and to reflect this back into GPhC’s standard-setting and other functions. For example, as partof its horizon scanning the GPhC will want to understand the eVects on practice of the diVerent contractualarrangements for pharmacy services. This process could be led by country-based oYces, subject to thedecisions taken about the functions to be conducted at country level as described in the section below.

Delegation of functions to country level

9.2 A major focus of discussion in the preparation of this advice has been the question of what countrypresence the GPhC should have, distinct from its headquarters functions.

9.3 A number of suggestions were made for country-level functions, the most frequently occurring ofwhich were:

Receiving fitness to practise referrals

9.3.1 It was suggested by many interviewees that a country-level facility for receiving fitness to practisereferrals would be desirable, not least on the grounds that members of the public might be likely to be mostcomfortable reporting concerns to an oYce based in their own country. We are not however aware of anyevidence to support this proposition. GPhC might wish to commission market research to establish the viewsof the public and other complainants on this point.

Providing advice to registrants

9.3.2 No interviewees were of the opinion that separate standards of conduct and performance wereneeded for the diVerent countries. However, many felt that it would be useful if GPhC could oVer a serviceto registrants to assist them in understanding how the GPhC’s standards applied to the particularcircumstances in their own country. This could well arise in ‘learning points’ to be fed back to GPhC’s centralstandards-setting function.

Holding fitness to practise hearings

9.3.3 Several interviewees suggested that fitness to practise hearings should be held in the country inwhich the concerns arose, rather than requiring registrants who were the subject of hearings to travel todistant venues. It was also noted by some, however, that from a registrant’s perspective it might be preferableto have a hearing held at a distance from home. If GPhC wished to pursue this policy, it would need tocommission further research and advice on the Scottish law implications.



Country-level relationship management and stakeholder engagement

9.3.4 Many interviewees commented that there was a country-level role for working with the devolvedadministrations and other country-based stakeholders.

Patient and public involvement work

9.3.5 Several interviewees felt that public and patient involvement work conducted at country level,feeding into the central standards-setting and other functions, would result in patients and the public havinggreater confidence in the regulatory body, its standards and their application. It was noted that many patientgroups are locally based and it would be sensible for there to be a country-based presence to which theycould relate.

9.3.6 Less frequently occurring suggestions included assessing CPD portfolios and making revalidationdecisions, pre-registration examination and assessment and support for health problems.

9.3.7 We advise that the costs and benefits to the organisation of conducting these functions at a countrylevel are assessed and used as the basis for deciding what GPhC’s country presence will be. There is thepossibility of diVerent regulators sharing premises, functions and costs to achieve economy at country level.

Northern Ireland

9.4 We have heard the arguments surrounding the issue of whether or not Northern Ireland’s pharmacistsand pharmacy technicians should be registered by a UK-wide GPhC.

9.5 At the time of writing the position of Northern Ireland’s Health Minister is that a final decision willbe deferred until the GPhC has been established and its protocols for working with the devolvedadministrations have been agreed.

9.6 It could be some considerable time before a final decision is taken, and therefore we advise that Inthe context of the provision made in the Health Act, the GPhC is set up in such a way that at a logisticallevel it is a straightforward matter to register Northern Ireland’s pharmacists and pharmacy techniciansshould the Minister decide in future that this is his wish.

9.7 We have also drawn attention in our 2008 performance review of PSNI to the need for early legislativechange in Northern Ireland to enable PSNI to fulfil its aspirations to be a better regulator and to performits functions better on behalf of the people of Northern Ireland.

9.8 We have no doubt whatever of the commitment of PSNI’s leadership to protect the public in NorthernIreland. However, we believe that it would be in the interests of public protection in the longer term for acloser working relationship between GPhC and PSNI to be developed, perhaps through working towardsshared standards and CPD, as an interim measure until the way ahead for Northern Ireland is made clear.This could assist in maintaining cost-eVectiveness.

10. European Community Law and Freedom of Movement across International Boundaries

10.1 The RPSGB collaborates with other regulatory bodies is discussing and managing the issues arisingfrom the free movement of professionals and patients across borders. This work should continue withinGPhC, such that the new body stays up to date with European Union developments and contributes to bestpractice. The GPhC must comply with EU legislation particularly in respect of mutual recognition ofprofessional qualifications. They must be consistently aware of changes and developments in EU legislationwhich aVect patients, professionals and the pharmaceutical industry. RPSGB has played an active andvaluable role both in the development of EU directives and also with the cross member state voluntaryproject Healthcare Professionals Crossing Borders.106 It is recommended that GPhC continues with thisvaluable work.

10.2 GPhC will need to keep abreast of pharmacy practice internationally, in order to understand anyrisks to patient safety that might result from pharmacy practice in other countries diVering from that inthe UK.

Documents Consulted

A High Quality Workforce: NHS Next Stage Review, Department of Health (June 2007)

Boards that Make a DiVerence, John Carver (Jossey-Bass 2006)

Code of Ethics for Pharmacists and Pharmacy Technicians, Royal Pharmaceutical Society of Great Britain(August 2007)

Future of Pharmacy Registration, Regulation and Representation in Northern Ireland, Pharmaceutical Societyof Northern Ireland (February 2008)

Implementing the White Paper Trust Assurance and Safety: Enhancing Confidence in HealthcareProfessional Regulators, Department of Health (June 2008)

106 http://www.hpcb.eu/



Healthcare Professionals Crossing Borders Agreement, Alliance of Health Regulators on Europe, ScottishExecutive, Department of Health (October 2005)

Healthcare Professionals Crossing Borders Portugal Agreement (October 2007)

Making it Better—A Strategy for Pharmacy in the Community, DHSSPSNI (February 2004)

Pharmacist Work Patterns—Pharmacy Workforce Census 2005: Main Findings, Royal PharmaceuticalSociety of Great Britain, University of Manchester (August 2006)

Pharmacy in England, Building on Strengths, Delivering the Future HM Government, Department of Health(April 2008)

Professional Leadership in Pharmacy—Exploring the Case for a Royal College for the Pharmacy Profession,King’s Fund (April 2007)

Professional Standards and Guidance Documents, Royal Pharmaceutical Society of Great Britain, August2007

Reducing Administrative Burdens: EVective Inspection and Enforcement, HM Treasury (March 2005)

Remedies for Success—A Strategy for Pharmacy in Wales, Welsh Assembly Government (September 2002)

Report of the Independent Inquiry into a Professional Body for Pharmacy, The Clarke Inquiry (April 2008)Report of the Working Party on Professional Regulation and Leadership in Pharmacy, Department ofHealth (May 2007)

Special report to the Minister of State for Health Services on the Nursing and Midwifery Council, Council forHealthcare Regulatory Excellence (June 2008)

Standards of Good Regulation, Council for Healthcare Regulatory Excellence (2007)

Statutory Code of Practice for Regulators, Department for Business, Enterprise and Regulatory Reform(December 2007)

The Regulation of the Non-medical Healthcare Professions—a Review by the Department of Health,Department of Health (July 2006)

The Right Medicine—A Strategy for Pharmaceutical Care in Scotland, Scottish Executive (2002)

Trust, Assurance and Safety—The Regulation of Health Professionals in the 21st Century, Secretary of Statefor Health (February 2007)

Annex 2

We are grateful to the following people who gave their time to discuss this piece of work with us, or madea written contribution.

RPSGB

Steve Churton, PresidentAndrew Cairns, Chair, Veterinary Pharmacists Group CommitteeJane Nicholson, member, Industry Pharmacists Group CommitteeJeremy Holmes, Chief Executive and RegistrarWendy Harris, Deputy RegistrarSue Ambler, Head of Research and DevelopmentRichard Anderson, Acting Head of RegistrationSarah Billington, Chief InspectorLyndon Braddick, Director, ScotlandHoward DuV, Director, EnglandJanet Flint, Head of Support StaV RegulationChristine Gray, Head of Corporate GovernanceRos Hayles, Head of Investigations and HearingsElaine Mulingani, Governance Co-OrdinatorMartha Pawluczyk, Head of Overseas RegistrationDavid Pruce, Director of Policy and CommunicationsCath Savage, Director, WalesVanda Thomas, Patient and Public Involvement ManagerPeter Wilson, Head of Post-registration



PSNI

Raymond Anderson, PresidentTrevor Patterson, DirectorMark Neale, Head of Public AVairs

Other Regulatory Bodies

Peter Coe, former Chief Executive and Registrar, General Optical CouncilJane Hern, Registrar, Royal College of Veterinary Surgeons

Scotland

Bill Scott, Chief Pharmaceutical OYcer, Scottish Government Health DirectoratesAudrey Cowie, Professional Adviser, Scottish Government Health DirectoratesCatherine Clark, Head of Regulatory Unit, Scottish Government Health Directorates

Wales

Jeremy Savage, Deputy Pharmaceutical Adviser, Welsh Assembly GovernmentBarbara Bale, Head of Workforce Policy, Development and Commissioning, Welsh Assembly GovernmentMary Gilbert, Regulation and Education Project Lead, Welsh Assembly Government

Northern Ireland

Norman Morrow, Chief Pharmaceutical OYcer, DHSSPSNIJoyce Cairns, Deputy Director HR, DHSSPSNI

Other

Nigel Clarke, Chair, Clarke Inquiry, member CHREDavid Colin-Thome, National Director of Primary Care, Department of HealthFelicity Cox, Pharmacy Negotiating Lead, NHS EmployersJean Curtis, Professional Secretary, Guild of Healthcare PharmacistsRob Darracott, CEO, Company Chemists AssociationCatherine Duggan, Senior Clinical Lecturer, School of Pharmacy, University of London/UK ClinicalPharmacy AssociationMargaret Goose, Chair, Royal College of Physicians Patient and Carer Involvement Steering GroupTaryn Harding, Project Manager, NHS EmployersPeter Noyce, member, PROLOG

Memorandum submitted by PricewaterhouseCoopers LLP

Response to Regulatory Reform Committee Inquiry: Themes and Trends in Regulatory Reform

Summary

1. The global financial crisis has spurred unprecedented levels of government intervention in business andhighlighted the importance of government’s role in addressing global and systemic risks. Government is nolonger a bystander but an active participant in business. Citizens, as taxpayers, have become the new ownersand guarantors (through loans) of large swathes of the financial services sector and are now entering othersectors for example automotive.

2. Today, the need for businesses and governments to understand each other and work together in theteeth of a global recession has become critical to citizens worldwide.

3. The burden of regulation is still seen as one of the top issues of concern by CEOs internationally. Inthe UK, despite attempts by Government to reduce regulatory burdens the perception of the businesscommunity is that there has not been any noticeable improvement. PwC’s most recent Global CEO Surveyindicates that the UK is performing less well in this regard than other developed nations.

4. Many UK businesses contend that the aggregate cost of complying with all regulations is too high andincreasingly, putting UK firms at a competitive disadvantage. Business would welcome a debate about thelevel of the aggregate cost of regulation that is sustainable. This needs to be linked to an agreed mechanismfor measuring these costs and could inform an overall Regulatory Budget. We see this as potentiallybenefitial for UK business provided the intention is to deliver an overall reduction in regulatory burdens.

5. We think that it makes sense, at least in the short term, to draw a distinction between the financial sectorand the rest of the economy with regard to regulatory reform. There is a growing consensus for a review ofboth regulation and its enforcement in the financial sector. We welcome such a review if it is donemethodically, comprehensively and calmly, with an understanding that regulation is not a panacea—it cannever prevent every possible instance of failure.



6. In the non-financial sector, largely as a consequence of the diYculties caused by the credit crunch, thereis increasing pressure on businesses of all size to cut costs in order to survive. Therefore, more than ever,there is a responsibility on Government wherever possible, to simplify and reduce both the policy andadministrative costs associated with regulation. Government has an important part to play both in helpingbusinesses survive the downturn and maintaining levels of compliance.

7. The business community would welcome greater coherence and simplification in the regulatoryenvironment. It is important that all “regulatory” requirements, whether statutory or not, should be part ofan overall approach rather than a fragmented approach, for example banks are subject to a variety ofregulations from a number of diVerent sources. It is very important that regulatory action is only broughtafter rigorous up front assessment of regulatory costs. Regulation should only be made on a benefit overcost basis.

8. We consider that it is imperative for the Government to ensure that regulatory action in the UK istransparent and robust, fully financially assessed with benefits for action clearly identified and articulated.It is only by doing this that UK business will have confidence in the need for regulatory action, when taken.

Response to Regulatory Reform Committee Inquiry: Themes and Trends in Regulatory Reform

Introduction

9. We welcome the opportunity of responding to the Regulatory Reform Committee Inquiry: Themes andTrends in Regulatory Reform.

10. Before addressing the specific questions asked, we would like to make some general comments on theeconomic environment and on regulatory reform.

Economic environment

11. The environment within which governments interact with business has undergone a seismic shiftduring the last year. Around the world government and business leaders were caught unprepared for a globalfinancial crisis which has evolved into worldwide economic deceleration. Business confidence has fallen oVa cliV and as a result, public authorities have been taken into uncharted territory.

12. The global financial crisis has spurred unprecedented levels of government intervention in businessand highlighted the importance of government’s role in addressing global and systemic risks. Governmentis no longer a bystander but an active participant in business. Citizens, as taxpayers, have become the newowners and guarantors (through loans) of large swathes of the financial services sector and are now enteringother sectors for example automotive.

13. Today, the need for businesses and governments to understand each other and work together in theteeth of a global recession has become critical to citizens worldwide.

Regulatory reform

14. For over a decade, PricewaterhouseCoopers’ (PwC’s) Annual Global CEO Survey (http://www.pwc.com/ceosurvey/) has provided an authoritative barometer of CEOs’ views of the most pressingissues facing them. The recently released 12th Survey finds that CEOs’ generally want governments to takethe lead by creating institutions, policies and mechanisms for collaboration that are appropriate for globalflows of capital, knowledge, labour, goods, services and information. The survey also indicates that theburden of regulation is still one of the top issues of concern internationally.

15. The UK business community welcomed the Government’s target of reducing the administrativeburden of regulation by 25%. However, despite the eVorts of departments and agencies to reduce burdens,the perception of the business community is that there has not been any noticeable improvement. Evidencefrom our latest Global CEO Survey indicates that the UK is performing relatively worse than otherdeveloped nations in reducing regulatory burdens.

16. UK businesses are not of the view that regulation per se is a bad thing. All regulation is intended todeliver benefits and some of these benefits help create and maintain open, competitive markets, withoutwhich many businesses would not survive. On the whole, business makes significant eVorts to comply withregulation. However, what many businesses do contend is that the aggregate cost of complying with allregulation is too high and increasingly, putting UK firms at a competitive disadvantage.

17. As identified in the recently published National Audit OYce report on the Administrative BurdensReduction Programme107 there is still concern by the majority of businesses as to the burden of regulationwith only 1% indicating that complying with regulation had become less time consuming in 2007.108 Thereport also identifies that reported reductions in administrative burdens should be treated with caution asa result of the measurement methodology used by Government Departments.109

107 Link: http://www.nao.org.uk/publications/nao reports/07-08/0708944.pdf108 Paragraph 17, page 7, of NAO report.109 Paragraph 10, page 6, of NAO report.



18. One of the diYculties surrounding the debate on regulation is that there is no agreed measure orauthoritative benchmark of the aggregate cost of regulation on business (comprising direct and indirectcompliance costs, not just administrative costs). For any budgetary system, using a monetary amount as itsbasis, to be eVective there must be confidence in the accuracy of the information obtained.

19. Business would welcome a debate about the level of aggregate costs of regulation that is sustainableif UK businesses are to survive in the global economy. This debate could help inform the setting of the overallregulatory budget for UK government. We note the recent consultation on Regulatory Budgets conductedby the Better Regulation Executive and re-iterate one of the key points in our submission that thisproposition has many potential benefits for UK business, if the intention is to deliver an overall decrease inregulatory burdens.

Response to your questions

20. In the following pages we turn to your specific questions using the structure outlined in yourinvitation.

Current Developments

21. We think it is important to draw a distinction between regulatory requirements and the supervisionof those requirements. There is a danger that collectively, authorities in diVerent jurisdictions will make theassumption that the current economic diYculties have arisen because of a failure of regulation rather thana failure in the supervision of existing regulation. Both need to be reviewed.

22. As Lord Turner, Chairman of the Financial Services Authority, recently said “we have to make sure[regulation] is intelligent and focused on where the risks really are“.110 It is important that any proposedGovernmental regulatory action is carefully considered with a responsibility on Government to reject anyproposals that impose box ticking requirements that result in disproportionate burdens on business. This isparticularly true as Government and Regulators consider what, if any, regulatory action is required inresponse to the current economic diYculties.

Question 1

What are the implications of recent economic developments (for example, the economic downturn; creditcrunch and problems with the financial sector) for the design and delivery of the regulatory reform agenda,including risk-based regulation?

23. We think that it makes sense, at least in the short term, to draw a distinction between the financialsector and the rest of the economy with regard to regulatory reform.

24. There is a growing consensus for a review of both regulation and its enforcement in the financialsector. We welcome such a review. Knee jerk reactions and the imposition of hastily drafted regulationshould be avoided. A proper assessment of what contributed to the “credit crunch”, what went wrong andwhat needs to be addressed is key. This needs to be done methodically, comprehensively and calmly, with anunderstanding that regulation is not a panacea—it can never prevent every possible instance of failure.

25. In the non-financial sector, largely as a consequence of the diYculties caused by the credit crunch,there is increasing pressure on businesses of all size to cut costs in order to survive.

26. In this environment it is possible that there could be a temptation to cut corners, potentially resultingin reduced levels of compliance. Therefore, more than ever, there is a responsibility on Government whereverpossible, to simplify and reduce both the policy and administrative cost associated with regulation.Government has an important part to play both in helping businesses survive the downturn and maintaininglevels of compliance.

Question 2

How does Government balance the need for an eVective regulatory framework—providing the necessarybenefits and protections—with the commitment to improve conditions for business success?

27. It is very important that regulatory action is only brought after rigorous up front assessment ofregulatory costs. Regulation should only be made on a benefit over cost basis.

28. We note the various concerns around the measurement of costs and benefits. Impact Assessments, forexample, are not conducted in a consistent or comparable way, nor are they necessarily validated by businessthemselves. Engagement with business is essential to produce an accurate and consistent assessment of thecosts of regulation. We recognise that only those businesses aVected by proposed regulatory action canproperly assess the financial cost of that action, for example, only audit firms can accurately estimate thecosts of changes in auditing standards.

29. For there to be confidence in the process there must be proper recognition of the time and costcommitment that will be needed to collate and assess this information. We believe the business community,through a body such as the CBI, should be incentivised to produce accurate costing information. One key

110 http://business.timesonline.co.uk/tol/business/industry sectors/banking and finance/article4959789.ece



way in which this might be achieved would be an agreement that regulatory action would not be proceededwith in instances where disproportionate cost had been identified. This is one option, others might need tobe considered; what is important is the production of accurate, reliable information.

Question 3

How might a proportionate and targeted response to improving the regulatory framework in the wake of thefinancial crisis be made. What lessons are there for the wide regulatory reform agenda?

30. For specific suggestions related to the banking industry, we refer you to the paper of 10 Feb 09 fromthe ICAEW Financial Services Faculty to Rt. Hon John McFall MP, Chairman of the TreasuryCommittee—which identifies ideas for enhancing confidence in bank reporting.

31. The general point is that professional bodies may be well placed to advise Government and be ableto provide specific examples of proportionate and targeted regulatory action. Government is not always bestplaced to develop regulatory requirements and needs to engage broadly with business groups, professionalassociations and regulators.

Question 4


32. Co-operation and dialogue are increasingly seen as the best way of ensuring alignment of aims andincentives between business and government. One example of a collaborative partnership, identified in our11th Global CEO Survey, comes from Australia. The Australian Taxation OYce explicitly recognises thatinvolving business leaders more actively in the design of policy improves compliance. This is because itcreates a better understanding of regulatory objectives and ensures that unintended consequences aredesigned out of policy at an early stage by those who have to implement it.

33. We suggest the creation of formal links between Government, regulators and business groups todiscuss regulations during the early stages of development. This could help ensure that appropriate andproportionate regulations are created which have “buy in” from businesses directly impacted and, thatregulators have the ability to enforce them.

Question 5

Whether there is a coherent package of regulatory measures for improving the conditions for business success;and how regulatory reform initiatives fit into wider government support.

34. In general, the business community would welcome greater coherence and simplification in theregulatory environment. It is important that all “regulatory” requirements, whether statutory or not, shouldbe part of an overall approach rather than a fragmented approach, for example banks are subject to a varietyof regulations from a number of diVerent sources.

35. Coherence is particularly important for Small-Medium Enterprises who have to spenddisproportionate resources understanding and complying with regulation. It is worth noting some of thefindings of the recent Anderson Report which identifies issues related to a lack of clarity around guidanceprovided by government departments and agencies and how this adds to the uncertainties in the businessenvironment.

36. We would support measures to develop an overall approach from Government to the regulatoryenvironment.


The European context

37. The role of the EU is increasingly important as the majority of new regulation stems from Europeanlegislation and there is little room for the UK Government to manoeuvre once EU Directives have beenenacted. That said, there is an important role for the UK Government to guarantee that Europe has properpolicies in place to ensure that European legislation is brought forward on a “benefit over cost” argument.In addition, the UK should avoid any “gold plating” if at all possible.

Question 6

Does Government understand business suYciently to design eVective regulations? Is suYcient emphasis givento small business and competition issues?

38. As previously noted there should be a close relationship between Government and business in thedevelopment of regulation. This was our position before the current economic downturn and we believe thisstill holds true in the current climate.

39. With regard to small business, we think that Government needs not only to engage with representativegroups during the design stage but also to seek direct input from business likely to be impacted byregulation—including small businesses.



Question 7

Is there suYcient consideration of how regulations will be implemented, including an appropriate focus oncompliance and enforcement issues.

40. We stress the need to involve regulators and enforcers in the design and development stages.

41. Whilst it is very important that regulatory action is only brought after rigorous up front assessmentof regulatory costs, provision must also be made for ongoing periodic assessment to reflect subsequentchanges that may have occurred.

42. We also believe that each regulatory action should be subject to the cost and benefit test after a suitableperiod of time has elapsed, for example, a three year period, and that any regulatory action that issubsequently identified as disproportionate or as not achieving agreed policy objectives should be removed.

Conclusion

43. In conclusion, we consider that it is imperative for the Government to ensure that regulatory actionin the UK is transparent and robust, fully financially assessed with benefits for action clearly identified andarticulated. It is only by doing this that UK business will have confidence in the need for regulatory action,when taken.

March 2009

Memorandum submitted by the North East Chamber of Commerce NECC

Regulatory Reform Committee Inquiry into the Themes and Trends of Regulatory Reform

The North East Chamber of Commerce welcomes the Regulatory Reform Committee Inquiry into theThemes and Trends of Regulatory Reform. NECC is the North East’s leading business membershiporganisation, representing 4,500 businesses in an area co-terminus with Government OYce for the NorthEast. Our members are drawn from all sizes of business across all sectors and employ about 30% of theregion’s workforce.

The Better Regulation Executive has set out five key elements that must be satisfied as part of a betterregulation strategy: transparency, accountability, proportionality, consistency, and targeting. If these criteriaare met, this will greatly improve the system of regulation, which has often been rigid, overly bureaucratic,and time consuming for businesses.

Please find below NECC recommendations regarding some of the themes and trends of regulation.

There must be a moratorium on new regulations during the recession—and this should also prompt amore thorough and fundamental re-appraisal of the necessity of regulations. Future regulations should takeinto account the impact they will have in all economic circumstances.

NECC welcomes single implementation dates for regulation, and we welcome the work of the BetterRegulation Executive, but the Government must ensure that businesses are informed that there is anopportunity to highlight problems with regulation. This must be done using existing business networks, andusing resources of other public sector agencies. There must also be a consistent application of regulations.For example, regulations administered by local government can be treated more stringently in one part ofthe country than another—this has a negative impact on competition.

Regulations on the public sector can transfer into unnecessary bureaucracy for businesses. For example,regulations governing public procurement that public agencies must adhere to lead in turn to a morecomplex and rigid system for private sector suppliers. Public bodies must therefore be given clear guidanceon what is and is not permitted under regulations so they can pass this on to businesses and apply flexibilitywhere appropriate.

There is a need for a risk-based approach, and furthermore, there is a need for inspectors to have moredetailed knowledge of specific business sectors. Businesses must have confidence that they can ask for adviceon compliance from Government agencies without the fear that this may constitute an inadvertentadmission of breaches.

Regulations can often be imposed more stringently indirectly—for example through requirements ofinsurance companies. If regulators make genuine eVorts to ensure that the burden on businesses isminimised, they must also consider how others will respond.

Regulators must not be allowed to change advice retrospectively. NECC members have reportedoccurrences of this specifically related to HMRC, where an unnecessary burden is often placed onbusinesses. This kind of application of regulations not only places pressure on the private sector, but thepublic sector also.



I hope that the above points prove useful. If you require any further information please do not hesitateto contact me.

February 2009

Memorandum submitted by the International Centre on Financial Regulation (ICFR)

Regulatory Reform Committee Inquiry: Themes and Trends in Regulatory Reform

At your request, this paper sets out, within the limited remit of the International Centre on FinancialRegulation (ICFR), our views on the questions posed from your letter of 9 February. Please note inparticular, that we have given a generic view, as we are not experts in the Legislative and Regulatory ReformAct of 2006, nor the remit of this Committee. Please do not hesitate to contact me should you have anyquestions on the paper.

Barbara RidpathChief Executive


Submission from the International Centre for Financial Regulation (ICFR)

Executive Summary

1. The need for a contextual framework: Without a clear understanding of why and when regulation needsto exist, what purpose it fulfills, and whether it is fit for purpose, it is diYcult to succeed at regulatory reform.

2. The need for an international outlook: The interaction between the decisions of this Committee and thebroader European and international context cannot be ignored, particularly where (1) there is overlappinglegislation within the European Union, particularly on banking, insurance and consumer protection, and(2) more globally when regulation addresses an industry or constituency which operates across nationalboundaries. The “unintended consequences” caused by the creation of national regulation extend inincreasing order of importance to: decreasing private sector eYciency by ensuring compliance with a varietyof similar but not identical regulations in the various jurisdictions within which they operate, making itimpossible to operate in certain jurisdictions due “conflicts of law” for companies operating across borders,as far as eVectively imposing barriers to the free trade in goods and services by way of regulation unintendedfor that purpose.

3. Lessons for regulation from the current crisis:

— To be eVective the shape of regulation must match the shape of the industry being regulated.

— It is almost impossible to have successful regulation without eVective leadership.

— Consider the potential “unintended consequences” of any regulation.

— The interaction across players or reliance on outside or unregulated parties can create dependencieson third parties not originally recognized in regulation.

— The alignment of interests is key.

4. The need for consultation across user groups: One of the best means to consider possible unintendedconsequences is a broad and wide consultation process in advance of major regulation.

5. The need for focus on compliance and enforcement: In most cases, regulation without any commensurateoversight, supervision, or enforcement makes it extremely unlikely to achieve compliance, unless the veryact of complying is of direct positive utility to the regulated.

Terms of Reference

1. Current developments:

— Implications of the recent economic developments for the design and delivery of the regulatoryreform agenda, including risk-based regulation?

— How does the Government balance the need for an eVective regulatory framework—providing thenecessary benefits and protections—with the commitment to improve the conditions forbusiness success?

— How might a proportionate and targeted response to improving the regulatory framework in thewake of the financial crisis be made? What lessons are there for the wide regulatory reform agenda?

— How could the government improve its capability to regulate in a proportionate and eVectivemanner?



— Whether there is a coherent package of regulatory measures for improving the conditions forbusiness success; and how regulatory reform initiatives fit into wider Government support.

— Balance between knee jerk political pressure for action and the correct and thoughtful responsewhich relies on understanding what regulation is trying to achieve.

The need for a contextual framework

6. The current economic and financial crisis demonstrates the need for a genuine understanding of whyand when regulation needs to exist, what purpose it fulfills, and whether it is fit for purpose. Without a clearunderstanding of these issues for regulation in general and for the specificities of each regulation underdiscussion, it is diYcult to succeed at regulatory reform. With a clear framework for these questions, itbecomes a fairly quick process to determine which regulations meet the criteria and which do not.

7. It is our understanding that your remit currently addresses only a portion of these issues; that is toensure regulatory activities should be carried out in a way which is transparent, accountable, proportionateand consistent; and that regulatory activities should be targeted only at cases in which action is needed. Itis not clear to us how “need” is defined, and this may be a critical area on which your committee may wantto reflect. In particular, it is very diYcult to determine the utility of regulation without understanding whatit is intended to achieve, and the need for what it is trying to achieve. Perhaps the Regulatory ReformCommittee’s remit is achievable if it works closely with departments actually proposing regulation in orderto understand the need and purpose for such regulation.

8. Current public opinion seems to be calling for “re-regulation” or increasing regulation to prevent anyfuture financial or economic crisis from occurring. This is both unrealistic and populist. A better approachis to use current circumstances to ask if and where existing regulation failed, and why, and then to drawlessons from that about how better to approach your remit in future. Continuing along the path of tryingto ensure the conditions for business success is clearly in everyone’s interest and at no time more so than inthe current economic climate.

9. We note that the questions largely address new regulation and regulatory reform. It is absolutely criticalto look at existing regulation as well. Keeping existing regulations “on the books” when new regulations arewritten often causes both duplicative work and conflicts. Moreover, existing regulation can often outlive itsusefulness. A regular review schedule for the eVectiveness of existing regulation would be fruitful if notalready in place.

The need for an international outlook

10. While the remit of the Regulatory Reform Committee is clearly purely domestic, the interactionbetween the decisions of this Committee and the broader European and international context cannot beignored, particularly where (1) there is overlapping legislation within the European Union, particularly onbanking, insurance and consumer protection, and (2) more globally when regulation addresses an industryor constituency which operates across national boundaries. The “unintended consequences” caused by thecreation of national regulation are manifold. They extend in increasing order of importance to: decreasingprivate sector eYciency by ensuring compliance with a variety of similar but not identical regulations in thevarious jurisdictions within which they operate, to making it impossible to operate in certain jurisdictionsdue “conflicts of law” for companies operating across borders, to eVectively imposing barriers to the freetrade in goods and services by way of regulation unintended for that purpose.

11. While it is a valiant task to attempt to ensure regulatory activities should be carried out in a way whichis transparent, accountable, proportionate and consistent within and across domestic governmentdepartments, it is equally critical to do the same thing across jurisdictions, however diYcult or unpalatablethis may be. Now more than ever, when as a nation, the United Kingdom’s economy is a primary beneficiaryof international trade, capital and labour flows, national regulation cannot be done in a vacuum if we areto avoid the “beggar thy neighbour” policies that have led to such disastrous consequences in previousrecessions.

The Current Crisis

12. There has never been a better time to examine what worked and what did not within the regulatoryframework. It is only in times of crisis that we have a “living laboratory” to help us understand where andwhy regulation proved an ineVective restraint for the financial crisis and to learn from this for the future.There is still enormous work to be done on causality and lessons from the crisis, but this paper posits fivetentative conclusions.

13. First, the regulatory framework was not tailored to the nature of the financial system in the case ofmany of the institutions. Many institutions had a global business with a largely domestic regulator. Whilethis is an oversimplification, a key condition of an eVective regulatory structure is that it fits the shape ofthe industry. This reinforces concern that the committee remit does not permit you to look at the purposeof regulation, and only its implementation.



14. Second, often it is not merely a question of the quality of the written regulation or compliance withthe letter of that regulation that drives the quality of the regulation, but rather, a much broader evaluationof the quality of the supervision and enforcement that accompanies it (see below) as well as the leadershipstrength of the department, regulator or supervisor in question to influence behaviours. This is almostimpossible to write into regulation, but it is almost impossible to have successful regulation without eVectiveleadership.

15. Third, the cause of the crisis may be outside the scope of the initial regulation. Within the financialworld this is the oft-heard distinction between micro-prudential regulation and macro-prudential regulation.Even if the risks did look manageable within each institution, no one was paying attention to theaccumulation of these risks across all institutions. The implications of this for non-financial risks are notimmediately obvious, but they are important to consider. Addressing a problem with regulation can oftencreate another problem unintentionally. Indeed it is argued by some that the new Basel II regulations helpedcreate the current crisis by encouraging banks to moving to an originate and distribute model in order toreduce their Basel II capital requirements while maintaining product lines and profitability. The lesson isperhaps to consider the potential “unintended consequences” of any regulation.

16. Fourth, the interaction across players or reliance on outside or unregulated parties can createdependencies on third parties not originally recognized. This can be for subcontracting or outsourcingregulatory work, or subcontracting of information provision or verification, or data processing or financialmodels with insuYcient oversight which leads to mistaken decisions. While this does not in any way intimatea need for wider or broader regulatory powers the remit to look across departments at regulation can beuseful in helping to determine where such regulatory dependencies exist and their possible consequences.

17. Fifth, the alignment of interests is key wherever possible. Often regulation is perceived as somethingto be avoided by the regulated. Or rather, intense eVort is made to produce work which complies with theletter of the regulation while completely violating the spirit of the regulation. However, where the regulatedcan understand and agree with the purpose and need for the regulation under consideration, and in somecases even see benefit in the regulation, compliance is likely to be far easier and far higher. One essential wayto encourage this is to encourage those likely to come under the regulatory regime to comment on theproposal, and on the proposed implementation (see below).

18. Each of these lessons demonstrates the importance of considering the possible unintendedconsequences of any regulation.

The need for consultation across user groups

19. One of the best means to consider possible unintended consequences is a broad and wide consultationprocess in advance of major regulation. This is not always fruitful, as it is often only the dissatisfied whosubmit to such a consultation, but it permits a look at the regulation from a broad spectrum of those aVected.

2. Design of new regulations

— Does the Government understand businesses suYciently to design eVective regulations? IssuYcient emphasis given to small business and competition issues?

— Is there suYcient consideration of how regulations will be implemented, including an appropriatefocus on compliance and enforcement issues?

20. The ICFR has limited background and knowledge of working with Government to fully answer thesequestions competently. Our answers are limited to our relatively narrow range of experience and expertise.5The need for research and consultation across user groups in advance of legislation

21. Government is increasingly reaching out to the private sector in a variety of ways to improve workingrelationships. In addition, a broad variety of consultative bodies and trade associations exist specifically toprovide input on legislative issues that aVect them. These should be actively used in advance of legislationso that the purpose of the regulation is achieved in an eYcient, transparent manner. Legislation without thisconsultative process, as seen here and in many other jurisdictions, often leads to regulation that both inhibitsbusiness success and results in ineVective regulation. It is not the purpose of government to understandbusiness suYciently to be able to write good legislation, but rather, to ensure that all appropriate voices areheard to determine that legislation is suited to purpose in a way that nonetheless permits business to operateeYciently.



The need for focus on compliance and enforcement

22. Rafts of research have been done on this subject. While cultural norms do have some impact on thelikelihood of eVective compliance with regulation, it is evident that in most cases, regulation without anycommensurate oversight, supervision, or enforcement makes it extremely unlikely to achieve compliance,unless the very act of complying is of direct positive utility to the regulated. With regulation around datacollection, you can sometimes achieve compliance by sharing the results with all those asked to comply, ifthe information collected is of value to them. Otherwise some reason for the regulated to comply must exist.

27 February 2009

Memorandum submitted by the British Retail Consortium

Summary

1. The British Retail Consortium (BRC) welcomes the opportunity to comment on themes and trendsin regulatory reform. Proportionate, evidence-based and cost eVective regulation has always been essential,however the current economic downturn has compounded this necessity.

2. Retail is in the front line of the economic downturn, with closures of up to 15% of high street storesand 200,000 job losses this year forecast by some observers. With this in mind, the BRC believes any newregulatory measures must be stringently examined for their true benefit to the interests of the UK.

3. Business planning is a key component of the viability of small and large retail operations. Thereforeclear regulatory commencement dates and proper lead in times that take notice of the realities of running abusiness are essential if regulation is not going to add onerous burdens on the staV that are responsible forimplementation.

4. Government needs to be aware that further regulatory burden is usually combined with additionalcosts, whether this is due to additional staV training, operational modifications or the introduction of newpolicies. Whilst retailers do their utmost to minimise the costs that are passed on to consumers, inevitablythese costs do have to be paid somehow and price rises can be a consequence of this. Government needs totherefore ensure any regulatory changes are essential.

5. Government needs to improve its capability to regulate in a proportionate and eVective manner. A firststep to achieving this would be to examine carefully the existing regulation and ensure future proposals donot repeat, overlap or contradict the current framework.

6. More targeted regulation is also necessary that tackles the particular problem rather than that whichaVects the whole sector or industry. Rogue traders will always seek to avoid regulation whereas responsiblebusinesses will strive to comply. More eVective regulation aimed at those for which it is required would beof significant benefit to all business sectors.

Introduction

7. The British Retail Consortium is the lead trade association representing the whole range of retailers,from the large multiples and department stores through to independents, selling a wide selection of productsthrough centre of town, out of town, rural and virtual stores. Our membership comprises approximately80% of the retail industry.

8. Retail is a heavily regulated industry. Due to the wide ranging nature of the sector, we are aVected byevery kind of regulation, from health and safety, food hygiene and alcohol licensing to environmentalrequirements, planning and employment laws. As such, the BRC is keen that all regulation complies withthe Hampton principles of regulation—transparent, accountable, proportionate, consistent and targeted.

Current Climate

9. Regulation should always be mindful of its impact on the overall economy and never more so than inthe current climate. Whilst the need to regulate against risk is clear, this in turn should not translate intoshort term, knee jerk regulatory reaction.

10. The outlook for retail is the toughest for decades. Low consumer confidence, restricted credit and afaltering labour market have all taken their toll on sales but stumbling sterling rates, soaring property costsand regulation are eroding the scope to trade profitably. Retail is an incredibly competitive sector withcustomers demanding value at all times and the current climate is making this increasingly more diYcult.

11. Retailers are at the heart of the community and clearly wish to continue to trade, remain viable andcontinue to provide an essential service to those they serve. At the current time, we would call onGovernment to halt further regulation unless absolutely necessary and undertake full and thorough impactassessments that truly understand the pressures businesses are under.



Proportionate and Effective Regulation

12. Proportionate and eVective regulation is of paramount importance. The BRC believes Governmentcan be more aware of the implications of regulation by making full use of the consultation process andensuring those aVected by proposed regulation, or their representatives are given an appropriate amount oftime and opportunity to contribute.

13. Likewise, proper regulatory impact assessments need to be carried out that take into considerationthe true, full costs of any changes, including those costs that are easily overlooked.

14. We are concerned that the consultation process in some instances has failed to engage small businessesand that the regulatory impact assessment has been made on the basis of a series of assumptions we believeto be flawed.

15. For example, the Better Regulation Executive has been concerned about the extent of consultationwith small businesses with regards one particular piece of legislation emanating from a government oYce.In response, the oYce ran a stakeholder event designed to test the assumptions in their RIA, however noneof the attendees were from micro-businesses, they were all sole traders. This meant that a key business modeland the impacts upon them were not considered. In addition, this event took place prior to the publicationof the bill and no details of the costs were known.

16. In the same example, the RIA has been costed with a focus on the simplification measures within theBill but failed to take into account the fact that, while perhaps more complicated, many businesses are atleast familiar with the current law and any change will incur time and resource to re-familiarise. Further, thepower of media reports (often inaccurate) will push many businesses to seek expensive help as they over-comply in order to avoid the risks associated with getting the law wrong. These are key issues for responsiblebusinesses keen to work within the law.

17. In addition, the BRC has questions with regards the accuracy of some RIAs. There have beeninstances of considerable diVerences in the possible costings of changes and these can mean that the overallRIA covers a huge variety in possible costs. This minimises its use and eVectiveness.

Proper and Effective Scrutiny

18. Another key way Government could improve its capability to regulate in a proportionate andeVective manner would be to enable full parliamentary and public consideration of regulation. It seems tobe an increasing trend of enabling powers being contained within primary legislation, with regulations tabledat a later date. Whilst this is sensible for minor alterations to regulatory regimes, it is not helpful when hugelysignificant changes are being made that require thorough debate and discussion.

19. One example of this was the Regulatory Enforcement and Sanctions Bill. The Primary Authorityscheme under this Bill is due to commence on April 6 but we still (5 March) do not have the Regulationsunder which it is to operate. Another is the forthcoming Mandatory Code for Alcohol Retail. The Policingand Crime Bill is going through Parliament which will allow for this code, however the shape and scope ofthe code is not included within it. Neither parliamentarians nor the public have been able to engage fully indiscussing the code during the parliamentary process. This we fear may lead to bad regulation as it has notbeen given this opportunity to be fully debated. The same can be said of the enabling powers to allow theregulation of tobacco displays in shops. Many possible regulatory issues would come to light during aneVective parliamentary scrutiny process which are, currently, in real danger of being missed.

Evidence-Based and Joined-Up Government

20. EVective regulation has to be based on sound and compelling evidence and this has to be the startingpoint for any proposed changes to any regulatory regime, including those in the public health arena. A soundevidence base is clearly of value to Government as it means proposed changes will have more chance offulfilling their objectives. Evidence-based regulation is also a necessity for business in all circumstances andwe would urge all government departments to invest the time in undertaking proper, impartial research, inthe United Kingdom, before embarking on regulatory measures that will have a huge impact on costs andretail operations.

21. The BRC believes that some regulation is properly thought out and does take into account bothcompetition and small businesses.

22. However, this is patchy across Government and, as highlighted above, small businesses can beoverlooked. Equally, so can large businesses, especially when commencement times are short or theregulations involve significant operational changes. Retail employs close to three million people and ishugely property intensive, Should we have to make changes to stores to comply with regulations, or trainstaV on new compliance requirements, this takes a serious amount of time to get right. The BRC feels thatGovernment often overlooks this.

23. Moreover, the BRC is supportive of the common commencement date principle due to the certaintyit aVords industry. However, we are disappointed that not all government departments make proper use ofthe common commencement dates which can cause confusion and problems with business planning. Thefull use of common commencement dates would be a helpful change that we would welcome.



24. Competition is currently not being considered with reference to the mandatory code for alcohol retail.The proposed regulations will hugely impact on local competition and, with customers regularly “votingwith their feet” it is important for both small and large retailers that the Government understands the impactof footfall, or lack of it, on towns, high streets and villages.

Implementation

25. The Government’s record of the consideration of compliance and enforcement is inconsistent.Proportionate enforcement and good regulation go hand in hand. Without proportionate enforcement eventhe best regulation can become a real burden on business—hence the importance of the HamptonCompliance Reviews. Recently the BRC has found a lack of knowledge of forthcoming changes to theenforcement regime, such as the LBRO, the Primary Authority principle and other measures containedwithin the Regulatory Enforcement and Sanctions Act, amongst legislators enacting changes to theregulatory environment. This is a serious issue and we would urge Government and BERR particularly toensure that all levels of Government are aware of the details of how the regulations they are proposing willbe enforced on the ground.

Cumulative Regulation

26. The BRC believes there is a temptation in Government to over-regulate in areas of policy byintroducing new regulations based on new initiatives before an assessment of the eVectiveness of existingregulation is known. For example, before the impact of the increase in the age restriction applied to tobaccoproducts could be assessed, new sanctions on retailers selling tobacco to underage persons were introduced.Subsequently, before these sanctions have even commenced, legislation has been introduced to restrict thedisplay of tobacco products. Retailers support controls on tobacco sales and support the health objectivesunderpinning them but we question why these were not introduced in one package or why time has not beentaken to assess the eVectiveness of regulation before more is introduced.

February 2009

Memorandum submitted by the Forum of Private Business (FPB)

This document sets out the response from the Forum of Private Business (FPB) to the Regulatory ReformCommittee’s inquiry into Themes and Trends in Regulatory Reform.


The current economic situation has amplified the impact of the regulatory burden on small businesses,taking valuable time away from running their businesses and hindering their ability to take advantage ofnew business opportunities. These burdens can only be reduced with fundamental changes to the way theGovernment drafts, reviews and enforces legislation.

Evidence from the FPB’s research shows that the time spent by businesses complying with regulation issubstantial, and can be a barrier to survival and growth of smaller businesses in a recession. There is alsoconcern amongst our members that the failure of market regulation in the financial sector will mean thatmore regulations are introduced for all businesses. At present …

13% of small employers work extra hours to comply with regulation(1)

but in a recession, survival of the business must take precedence. This means that owners spend the majorityof their time chasing bad debts and marketing their businesses to potential customers rather than worryingabout compliance.

In 2007, the FPB(2) estimated that the amount of time spent by a typical business on key aspects ofregulation was …

15 hours per month on tax, 14 hours on health and safety, five hours on absence control andsickness, four hours on dismissals and redundancy,and 3 hours on maternity and paternity legislation.

The FPB’s research(1) shows that 42% of small and medium-sized businesses find health and safetylegislation particularly onerous in terms of compliance. Amongst businesses termed as “proactive SMEs”by the Anderson Review,(3)one in five owners is still uncertain about whether his/her company is compliant.Whilst the Health and Safety Executive always caveats any regulation with the belief that common sensewould prevail, turmoil in the financial sector has increased concern amongst private businesses that insurersmay increasingly use spurious health and safety reasons for refusing to pay out on claims. As a result …

89% of the FPB’s members would like to see health and safety legislation better defined andcommunicated.(4)



Despite the Government’s eVorts to understand and lessen employment law burdens, employers continueto have problems, particularly regarding redundancies. There is a growing frustration that even well-runbusinesses are facing retributive action for making people redundant and have sought our help too late toprevent costly and time consuming legal proceedings. This would partly explain why

25% of owners of smaller firms stated that they were not equipped to deal with employmentregulations, compared to 13% who felt that they were not equipped to deal with health and safetylegislation.(3)

This evidence points to a necessary re-think of the Government’s structure around the introduction oflegislation, and its communications regarding the benefits and burdens of regulation. Much was made of theannouncement in the Budget in 2008 to introduce a system of regulatory budgets and yet, to date, nothinghas come of those proposals. The FPB is concerned that an excellent opportunity has been lost to providea coherent structure for regulation.


The detrimental eVects of a haphazard approach to regulation has not been overlooked by smallerbusinesses. Owner-managers do not see a coherent framework for regulation, but simply furtherdisproportional costs for small businesses. Around 88% of the FPB’s members disagreed with the flexibleworking regulations, but this went largely ignored.(5) If legislation is to achieve its desired eVect withoutundue burden on business, the design of new regulations must reflect the lessons learned by those businessesand citizens who will be asked to comply with them.

First and foremost, Government’s approach to regulation should draw more extensively on theexperiences of those businesses that will have to comply with the regulation and the organisations thatrepresent them. The consultation process should be strengthened to ensure this is done. Instead of relying onimpact assessments with hypothetical figures, more practical tests with actual small businesses may provide abetter idea of what is necessary for compliance.

Second, the Better Regulation Executive’s (BRE’s) oversight of the regulatory process must be reinforced.Unfortunately, sitting as it does within the Department for Business, Enterprise and Regulatory Reform(BERR), it still raises questions about the eYcacy of the better regulation agenda. The BRE should havethe freedom to act outside the political agenda, as the voice of the citizen and taxpayer in the policy process.It should be overseen by a non-partisan panel of parliamentarians and its delivery should be reportedannually to the public and both Houses.

By taking these steps to improve the process of crafting legislation, the Government can help make itsregulations as business-friendly as possible from the point of conception. Support for compliance andgovernment enforcement, however, presents a diVerent set of challenges.

The Anderson Review points out that micro-business employers (those employing fewer than 10 people)are less likely to receive helpful advice from government sources.(3) This is generally indicative of theGovernment’s regulatory and enforcement track record as well.

Some eVort has been made, notably by the BRE and HMRC, to further understand the “audiences” ofregulation and government services. HMRC’s attempts to become more commercially aware have improvedtheir interactions with taxpayers and resulted in schemes that have helped small businesses cope with therecession. The Business Payments Support Service has been welcomed by the business community and thenumber of businesses taking advantage of the service indicates how far HMRC has come in the last18 months.

The BRE’s work to improve commercial awareness across diVerent departments, however, has been lesssuccessful. The needs of the employer and the protection of the employee is now more closely aligned thanat any time in the last 15 years, yet …

84% of small-business employers expect the time spent on regulation to increase in 2009.(6)

This demonstrates the cynicism of owner-managers towards regulatory reform. This cynicism was notreduced by news that the burden of employment law(7) had reduced for businesses, when 67%(1) felt that ithad increased. This is most probably a two-pronged issue of communication about the benefits of legislation,and the willingness of ministers and departments to accept some hard truths about regulation.

Communication from the Government does not adequately convey how new regulations will improve theway owner-managers do business. Nor is there any understanding of the eVect they have on smaller firms.Although steps are being taken(9) to improve this, in terms of better communication by civil servants, theregulations themselves are still unclear. They still cannot be understood easily by owner-managers, who haveno expertise and often turn to support helplines, such as the FPB’s, only after they have made an error.

Timescales are also perceived as inadequate for full compliance and the Government is viewed as notunderstanding the pressures incumbent on owner-managers. The recently introduced REACH Regulationshighlight this perfectly, where the resources of small, niche businesses were drained by trying to comply withthe Regulations. Such moves only served to reinforce the owner-manager’s perception that the Governmentdoes not understand small businesses, which leads to further distrust of any new changes.



71% of business owners saw the cost of complying with new regulations to be a significant barrier todeveloping their businesses.(8)

In general, smaller businesses have developed internal processes for coping with legislative burdens, buteach time they have to recalibrate these processes it is a time-consuming process. Changes in legislation mayonly aVect one particular aspect of a businesses compliance process, but teasing out which element is aVectedand making the suitable changes is diYcult for many small businesses without the proper support. Guidanceplays an important role in clarifying what an owner-manager needs to do to comply with legislation.

The FPB would like to see new regulations minimised for the next year and any new regulations to besupported by clear and concise guidance that employers can use as their first step in compliance.

By producing eVective guidance, the Government can make it easier for businesses to take the first stepsfor compliance. However, further support for compliance, more often than not, is necessary for many smallbusinesses. The provision of these front-line services should fall principally on the business supportorganisations—not on publicly-funded solutions. The Information, Diagnostic and Brokerage (IDB) modelof Business Link is an excellent example of how publicly-funded programmes can direct owner-managersto the solutions that are right for their businesses.

These are long-term solutions. In the short term, there are steps that the Government can take to improvebusinesses’ ability to cope with the regulatory burden.

92% of the FPB’s members(8) would like to see general red tape slashed to help them to continue inbusiness …

… and twice as many stated that this, rather than a permanent cut in VAT, would be the key reform that theGovernment could make to improve the business climate. Many would, however, settle for a moratoriumon legislation until the economy starts to grow again.

However, any short-term eVorts to help businesses cope with the regulatory burden must come as partand parcel of larger reforms. The Government should strengthen the oversight role of the BRE by settingit beyond the reach of the political agenda and giving it the ability to enact real change in departmentalbehaviour.

By establishing a clear vision for reform, listening more closely to the views of businesses and citizens, andtaking full advantage of the expertise oVered by business support organisations, the Government can fulfilits role without putting undue pressure on those who must comply with regulation.

About the Forum of Private Business

The FPB is a business support organisation, providing its members with the tools and support they needto grow profitably. It was founded in 1977 and is a company limited by guarantee. It is a formalrepresentative of small and medium-sized businesses in this country and represents 25,000 smaller firms,which in turn have a total of 600,000 employees. For more information, visit www.fpb.org.

Sources(1) FPB Survey on support for SMEs (December 2008).

(2) FPB Cost of Compliance (February 2007).

(3) The Anderson Review of Government Guidance on Regulation, BERR (July 2008).

(4) FPB Referendum 185 ballot results.


(6) FPB Feedback from Health & Safety Guide 2008.

(7) Employment law admin burdens survey.


(9) Supporting business through better regulation, BERR (December 2008).

March 2009



Memorandum submitted by the Chemical Industries Association


What are the implications of recent economic developments for the design and delivery of the regulatory reformagenda, including risk-based regulation?

The current economic situation makes the Better Regulation agenda even more important. The moreGovernment can do to improve the regulatory burden on businesses within the next year the better chanceyou give industry to reverse the current down turn.

The economic circumstances also highlight stress areas in regulations, such problems and costs forcompanies in the UK who want to avoid redundancies by using short term working.


Government needs to make sure it always applies proper risk based analysis when it is formulating newpolicy. We have been alarmed by the apparent move in Europe away from risk to hazard based policymaking.

Recent changes to draft EU pesticides legislation resulted in the basis of the legislation being changedfrom risk-based criteria to hazard based ones. To deny approval of pesticide products using intrinsicproperties of a chemical based on hazard cut-oV criteria or classification categories is scientificallyquestionable. Risk assessments must be based on rigorous science and weight of evidence.

In the case of pesticides, the legislative process failed to take a holistic approach to regulation, based ona clear understanding of the consequences for agricultural productivity, resistance management, food prices,food security and trade, as well as potential consequences for the wider environment before the criteriawere adopted.

When assessing safety, the optimum scientific approach is to consider harmful properties and theirpotency (hazard) and to understand their occurrence or in-use scenarios relative to humans or theenvironment (exposure). These two elements can then be used to determine the level of risk and it’sacceptability in relation to either humans or the environment. Risk % hazard x exposure. This approach ispredicated on the concept that there is a threshold for a biological/toxicological eVect, ie the “dose makesthe poison”.


The Chemical Industries Association seeks an improvement in the quality and application of regulationsrather than deregulation. High hazard industry does and should meet tough regulatory standard to protectthe health and safety of employees and the public.


An open dialogue with stakeholders is important right through the policy development process.Government must seek input from stakeholders on the broad theme and objectives of policy and then onthe detail to ensure it is workable. Whether this requires formal consultation will depend on the nature ofthe policy work.

Consultations should be set within broader frameworks and each proposed piece of legislation should beevaluated against Better Regulation principles established by the Hampton and Macrory reviews. Inparticular, it would be useful for consultations on legislation to show how the legislation interacts with otherregulatory frameworks.

It may also be relevant to begin using standard templates for certain types of consultation. This wouldinclude: best-case and worst-case scenarios of implementation, accuracy, or relevance of the informationpresented in the consultation; an analysis of key variables (ie sensitivity analysis); a simple presentation ofadvantages and drawbacks of diVerent in a table; and the mechanisms in place to ensure relevant monitoringand review takes place.

We feel that Regulatory Impact Assessments are often of poor quality because of false assumptions thatstakeholders could have highlighted if given the opportunity. We would welcome more rigorousconsultations to ensure RIAs are consistently of high quality.

We give a cautious welcome to the idea of regulatory budgets. Rigorous assessment of the net benefit, andin particular the accurate specification of not only one-oV but also recurring costs, should be central to thewhole regulatory process. Regulatory budgets should not preclude revision/abolition of past regulation. Theultimate objective should be to prevent the net cost of the aggregate regulatory burden increasing. Ideallyany new regulation should be balanced by repeal, or administrative simplification, of existing legislation.






The role of the business relation function in the Department of Business, Enterprise and RegulatoryReform is essential for Government understanding business when designing regulations. The Chemical Unithelps to ensure that the business voice is represented to other Government departments. We would welcomefurther moves to improve the understanding of business across Whitehall.

We would like to see more emphasis placed on competition issues as the chemical industry exports 60%of its products. We have to compete against countries with lower labour costs and energy prices so it is vitalthat exporters are not further hampered by poorly conceived or implemented regulations.


Consideration to how regulations will be implemented needs to be given more attention. For instanceREACH regulations have already been adopted into UK law but we are not yet clear how the EU andMember States will ensure that products imported into the EU comply with the REACH regulations. Ifimports are not properly regulated this has significant implications for the competitiveness of EUmanufacturers.

Before Government rushes to regulate it must do more to determine if current failings lie within theregulations or with enforcement. For example we believe that the current recast of the EU IntegratedPollution Prevention and Control Directive is unnecessary. The UK has successfully implemented the IPPCand before the imposition of more regulations on compliant member states there should be a concerted eVortto enforce the existing regulations across all Member States.

March 2009

Memorandum submitted by Ofcom

1. Ofcom is the regulator for the communications sector, with responsibility for regulating telecoms,broadcasting and the radio spectrum.

2. Ofcom is a public corporation that is held accountable to Parliament and subject to ongoing scrutinyby the National Audit OYce. We are also subject to scrutiny by the Competition Appeals Tribunal, whichcan hear appeals on the merits of a significant range of decisions.

3. Ofcom welcomes this opportunity to contribute to the Regulatory Reform Committee’s inquiry intoThemes and Trends in Regulatory Reform. We believe that ongoing debate, review and reform of regulatoryapproaches are important.

4. We take this opportunity to set out an overview of our own approach to regulation and key examplesof successful innovation in our regulatory approach. We believe these set a good standard for best practicein regulation and are relevant to the issues of eVective regulation which the committee is considering

Ofcom’s Approach to Regulation

5. Ofcom’s primary statutory duty is to further the interests of citizens and consumers, where appropriatethrough the promotion of competition.

6. Ofcom is committed to the principles of better regulation. We have a statutory duty, as set out below,to have regard to the principles of better regulation and to other principles of best practice as they evolve.

7. Under section 3(3) of the Communications Act we are specifically required to have regard to theprinciples under which regulation should be transparent, accountable, proportionate, consistent andtargeted only at cases where action is needed.

8. Under section 6 of the Communications Act we have a duty to keep the fulfillment of our functionsunder review, to ensure that regulation by Ofcom does not involve:

— The imposition of burdens which are unnecessary; or

— The maintenance of burdens which have become unnecessary.

9. These principles are reflected in the more detailed regulatory principles that guide our day-to-day work.These regulatory principles include:

— Ofcom will regulate with a clearly articulated and publicly reviewed annual plan, with stated policyobjectives.



— Ofcom will intervene where there is a specific statutory duty to work towards a public policy goalwhich markets alone cannot achieve.

— Ofcom will operate with a bias against intervention, but with a willingness to intervene firmly,promptly and eVectively where required.

— Ofcom will strive to ensure its interventions will be evidence-based, proportionate, consistent,accountable and transparent in both deliberation and outcome.

— Ofcom will always seek the least intrusive regulatory mechanisms to achieve its policy objectives.

— Ofcom will research markets constantly and will aim to remain at the forefront of technologicalunderstanding.

— Ofcom will consult widely with all relevant stakeholders and assess the impact of regulatory actionbefore imposing regulation upon a market.

10. We take an evidence-based approach to regulation and are committed to consulting widely, where itis appropriate. We constantly seek to improve and update our consultation process to reflect changes insociety and technology. In recent consultations, including our Public Service Broadcasting Review andMobile Sector Assessment, we have included an option to contribute to our consultations via online “blogs”.

11. We seek to ensure that we follow a transparent, systematic and objective approach when consideringwhat regulatory solutions (self-, co—, or formal regulation) to rely on in specific cases. To this end, werecently published a statement on “Identifying appropriate regulatory solutions” in December 2008.111 Thestatement sets out the high-level principles we will adopt to guide our thinking when analyzing alternativeapproaches. These principles are based on best practice in the communications sector and beyond, our ownexperience of co-regulation over the past five years, as well as stakeholders’ input received duringconsultation.

12. We have a duty to undertake impact assessments to ensure that our regulation is well targeted andconsistent with the principles set out above. Impact assessments encourage policy makers to consider a widerange of options, including not regulating, and provide a framework for analyzing the pros and cons of theseobjectives objectively. Impact Assessments are embedded in our policy development processes, includingthrough training and corporate governance “check points” along the policy development path.

13. We think it is very important to take compliance and enforcement into account when introducing newregulation. A particular area of importance is considering the costs of compliance and providing clearinformation and guidance to companies about what they need to do to comply. We have a number ofiniatives to ensure that the enforcement group of Ofcom is closely joined up with the policy developmentgroups to make sure that compliance and enforcement is considered appropriately.

14. An example of this is our recent work on the misselling of mobile phones, which we will release aStatement on shortly. An important part of determining our regulatory approach has been considering thestrengths and weaknesses of various enforcement mechanisms. We have also looked at what informationand evidence we would need from a company if we were to undertake an investigation—to make sure thatwe are not imposing unnecessary record-keeping and evidentiary burdens on business. We have also writtendetailed guidelines to make it clear to companies how they can comply with new regulation.

15. We believe that we have strong analytical framework in place which is backed up by well integratedprocesses. This ensures that our regulation fulfills our primary goal of furthering the interest of citizens andconsumers.

Risk Based Regulation

16. The concept of “risk-based regulation” has been an important part of the regulatory reform debatein recent years. Our starting point for this is that before deciding whether to apply risk-based regulation itis first necessary to distinguish between:

— universal regulation—regulation that applies to all companies (for example, employment law orhealth and safety regulation); and

— targeted regulation—this includes economic regulation, regulation that is ancillary to economicregulation in that it is designed to ensure orderly markets as competition develops and regulationthat is designed to achieve specific public policy goals (for example Public Service Broadcastingobligations).

17. Risk-based regulation has a part to play in relation to universal regulation where it makes sense todirect resources towards companies that are most likely not to comply.

18. As a general point, we note that it is useful to consider the extent to which companies have theincentive to self-regulate—on their own companies may take too narrow a view of risk, focusing on the riskto their own businesses and not taking into account systemic risk. As set out in our statement on “Identifyingappropriate regulatory solutions”, industry-led regulation is likely to be eVective where companies’

111 Please see http://www.ofcom.org.uk/consult/condocs/coregulation/statement/



commercial interests are aligned with public objectives. Where this is not the case, companies may not havesuYcient incentives to self-police, and regulatory intervention is likely to be needed, either in the form ofco-regulation or a full statutory solution.

19. Another general point we note is that Ofcom does consider “risk” as a normal part of our analysisof policy options—by taking into account the risks attached to diVerent policy options.

20. We also note that as well as thinking about the extent to which companies (as opposed to Governmentand regulators) should be trusted to manage risks it is also useful to consider the responsibilities ofconsumers and citizens. For example, we consider that media literacy for consumers and citizens is animportant way that the public can manage online risks for themselves

The Impact of Current Economic Developments

21. Recent economic developments will clearly have an impact on the sectors which Ofcom regulates. Weare considering and analyzing these potential impacts closely on an ongoing basis.

22. We do not think that the current economic challenges will require a diVerent fundamental approachand philosophy towards regulation in our case. The current principles and regulatory approaches which wealready have (as set out above) mean that we have the structures and processes in place to be able toeVectively take the changing economic environment into account in fulfilling our regulatory function.

23. We do note, however, that the current economic situation brings particular issues into sharper focus,including the following three:

(a) New challenges in achieving investment in the consumer interest

24. The changing economic climate presents new challenges in considering the best way to achieveinvestment which is in the consumer interest. Investment is more likely in a growing than in a contractingeconomy. Less investment may not be in the consumer interest. The extent to which competition can impacton investment is an important part of this consider, which can in turn be aVected by the changing economicenvironment. There is a need to balance certainty of regulation and flexibility, which allows for changingeconomic conditions.

25. Our work on super-fast broadband is a good example of how we can achieve this balance. Super-fastbroadband can allow the delivery of new and improved technologies to consumers—a clear consumerbenefit.

26. Our approach to super-fast broadband is to remove barriers to investment while preserving thepotential for competition. BT, as the dominant provider, is an important player in investing in these newtechnologies. We have ensured BT lets competitors access the new technology it invests in. However, we willallow BT to set the prices it will charge to these competitors (with certain conditions ensuring there is notdiscrimination among competitors or BT’s own retail business). Therefore, consumers can benefit frominvestment by BT and competitors who use the access technologies that BT invests in.

(b) The importance of the consumer safety net

27. The current economic situation is likely to lead to greater potential for individual consumer detrimentand harm. For example, in the telecommunications sector which we regulate there may be increasedinstances of telecommunications customers losing services because of company failure. An important partof our ongoing work is making sure that we are monitoring and responding to new instances and trends inpotential consumer harm and detriment resulting from the changing economic conditions.

(c) The impact of regulatory burdens

28. Changing economic conditions can clearly impact the impact that regulatory burdens can have onbusinesses. When following our standard processes of evaluating and weighing up the impact of regulatoryburdens considering the impact of regulatory burdens on business is an important aspect. In doing this wewill take into account changes in the economic environment.

Key Examples of Regulatory Best Practice which could Inform the Design of New Regulations

29. We have identified four specific areas where we believe Ofcom demonstrates best practice inregulatory innovation, and which it may be helpful for the Committee to consider.

(a) Regulation and Business

30. With respect to the relationship between regulation and “business success” we think it is importantthat business success and an eVective regulatory framework are not seen as mutually exclusive. Byestablishing a secure and stable environment to operate in, regulation can be an important component forensuring business success. An example from the telecommunications sector is the regulation of “roguetraders”, who through misleading practices can take business away from legitimate businesses.



31. As a general position we take the view that regulation should promote sustainable competition andeYcient investment, and should be focused on what is in the interests of consumers and citizens rather thanthe interests of particular companies.

32. The potential impact of regulatory burdens on regulated companies is an important part ofconsidering the consumer interest—eYcient and cost eVective business is in the interests of consumers—which ultimately bear the cost of regulation. As said, an important part of our impact assessment processis looking at the potential regulatory burden on regulated companies. An example of this is our current workon telecommunications migration processes. At the moment there are diVerent processes for diVerentservices (eg broadband compared to fixed). This can be confusing to consumers. However, it may also beineYcient for businesses to create single migration processes. We are currently working with industry toconsider the potential options for change and the impacts on businesses.

33. As part of our ongoing focus on consumers, we also looking at the interests of “business consumers”.Ofcom has recently launched a new project to better understand the interests of business consumers and toensure that their interests are being met in a rapidly evolving telecoms market and economic environment.

(b) A Strategic Approach to Regulation

34. An important aspect of the way we approach regulation which we have found to be successful is ourstrategic approach to regulation—where we look at sectors and the regulatory framework as a whole, ratherthan specific regulatory issues.

35. For example, key Ofcom projects have been strategic reviews of telecommunications, spectrum andpublic broadcasting. We are currently undertaking a strategic review of the mobile sector.

36. A strategic approach involves looking at the sector, identifying key issues that require regulatoryintervention and stripping away regulation that is unnecessary. The benefit of taking a strategic approachis that it ensures that regulation is clearly targeted, balanced and joined up rather then becoming a“regulatory mesh” that evolves over time.

(c) Focus on Consumer Issues

37. A good example of Ofcom’s eVective regulatory approach is our work on consumer issues. In itsrecent report “Rating the Regulators” Consumer Focus praised Ofcom’s approach to consumer issues.

38. Ofcom believes that regulation should have a positive outcome for consumers. This can be direct orindirect, short or long term—but the regulation should have a clear pay oV for consumers that can be clearlyarticulated. Considering and evaluating the “citizen and consumer benefit” is an important focus of ourpolicy development process.

39. An interesting point to draw from the Consumer Focus review of Ofcom is that regulatory reformshould not only focus on analytical principles and approaches but also on organizational structure anddynamics. For example, Consumer Focus drew attention to the beneficial impact that expanding Ofcom’sConsumer Policy team and moving it into a diVerent area (the Strategy and Market Development group)has had on Ofcom’s approach to consumer issues.

(d) Strength of Market Research and Intelligence

40. Our experience in regulation has also demonstrated the importance that strong market intelligencecan play in achieving high standards of regulation.

41. Ofcom dedicates significant resource and energy to market intelligence and research. A key piece ofwork we do is the annual Consumer Experience Report, which surveys trends and changes across thecommunications sector. However, we also have an ongoing internal and external programme to ensure thatwe are across developments, trends and changes in the sectors we regulate.

42. This market intelligence allows us to do evidence based decision making, understand how the marketswe regulate are evolving and the implications thereof, and in particular spot risks ahead of time. This ensuresthat we have a strong overall picture of the sectors we regulate. We can therefore approach specific regulatoryissues in a well-informed way, backed up by a strong evidentiary base.

43. Ofcom would be happy to provide further information on these or other relevant issues if that wouldbe helpful to the Committee.

March 2009



Memorandum submitted by the Competition Commission

Summary

1. Competition and regulation are not mutually exclusive. Competition results from open markets, withcompetition law addressing market failures. But competition law also has a role in sectors already subjectto regulation, perhaps most obviously through use of the market investigation regime. Such investigationscan address markets which are not working well for consumers using powers not available to sectoralregulators for addressing failures of competition.

2. The Competition Commission (CC) believes that the benefits of a free and competitive marketeconomy are fundamental to economic well-being and must be preserved, even in diYcult times such as thecurrent recession. Competition law must continue to be applied properly, avoiding short-term expediencyat the expense of long-term market distortions. Of course, the CC recognizes the need to be pragmatic in itsactivities, as economic circumstances and the diYculties that are currently being experienced will aVect theright course of action in particular cases.

Introduction

3. The CC welcomes the opportunity to respond to the Regulatory Reform Committee Inquiry intoThemes and Trends in Regulatory Reform. We have focused our comments on the following areas raisedby the Committee:

— balancing the need for an eVective regulatory framework with the conditions for business success;

— understanding businesses suYciently to design eVective remedies; and

— the implications of recent economic developments.

The CC’s Role and Functions

4. The CC is one of the independent public bodies which help ensure healthy competition betweencompanies in the UK for the benefit of companies, customers and the economy. It is essentially a Phase IIAuthority deciding on mergers, markets and regulatory issues. It is a Phase II Authority in the sense thatall cases it considers are on reference from another body–the CC has no jurisdiction to originate cases:

— On mergers, the OYce of Fair Trading (OFT) is the sole referring body on competition issues(Ministers may make references on specific public interest issues, as was the case for the BSkyB/ITV merger).112

— In relation to markets, the power to refer is extended also to the principal economic regulators.113

— On regulatory issues the CC’s task is essentially to rule on licence modifications and price controlreviews where there is disagreement between licensees and the regulator. Each regulatory regimehas its particular features. For example, in relation to airports, the CC’s involvement, fordesignated airports at least, is compulsory; for communications, an appeal is made to theCompetition Appeal Tribunal (CAT), which refers price control matters to be decided by the CC.And for Energy Code Modifications under the 2004 Energy Act, there is a process for appeal tothe CC.114

5. Hence the CC’s role is to conduct in-depth investigations into matters where initial investigations haveidentified concerns that merit further consideration, and to act as an expert body hearing, or providing inputto, appeals.

Competition and Sectoral Regulation

The benefits of competition policy

6. Competition policy imposes important discipline on firms which results in lower prices and increasedinnovation in products and services. It ensures that firms continuously improve their eYciency andproductivity. For consumers, it means that they get the best possible product or services at the lowestpossible price. For the economy as a whole, it ensures that only eYcient firms will be successful in the longrun. In markets where there are no natural–or even unnatural–monopolies regulation is normally a poorsubstitute for competition. The idea of a market economy without a strong competition policy is veryunattractive.

112 See: Acquisition by British Sky Broadcasting Group plc of 17.9 per cent of the shares of ITV plc, report sent to Secretary ofState (BERR), 14 December 2007.

113 ORR’s power to make a market investigation reference to the CC derives from section 67(2A) and (2B) of the Railways Act1993; GEMA’s in relation to gas derives from section 36A(2A) and (2B) of the Gas Act 1986 and, in relation to electricity,from the Electricity Act 1989, section 43(2A) and (2B); Ofwat’s derives from section 31(2A) and (4) and section 36 of theWater Industry Act 1991; Ofcom’s derives from section 370(1) to (3) of the Communications Act 2003; and the CAA’s derivefrom section 86(2) and (4) of the Transport Act 2000.

114 The Postal Services Bill, currently before the House of Lords, similarly envisages an appeal function for the CC, against pricecontrol decisions made by Ofcom.



The overlap between competition and regulation

7. Competition and regulation are sometimes seen as polar opposites: competition results from openmarkets, with competition law used to address market failures (applied ex post), whereas regulation is usedto control (ex ante) the activities of natural monopolies. Thus, in the ideal world, “regulation” gives way to“competition”, except when (natural) monopolies persist.

8. This is a somewhat stylised view of how regulation and competition interact with each other and inreality things are not quite so simple. First of all, not all competition interventions are “ex post”. Forexample, market investigations carried out by the CC are “ex post” in the sense that they assess how marketshave worked in the observable past, but are “ex ante” in their assessment and prescription of remedies.

9. Merger investigations are a mix of “ex ante” and “ex post” investigations, depending on whether themerger is in contemplation or whether it has already been completed. The CC Chairman, Peter Freeman,has commented previously on the risks inherent in the UK’s system allowing mergers to be completed priorto scrutiny by competition authorities. A copy of his speech “Merging is such Sweet Sorrow” is attached asAppendix 1 to this submission.115

10. Secondly, and obviously, regulatory and competition roles are typically combined and fulfilled bysingle authorities in the UK. Apart from the CC’s own particular position, the main economic regulatorsin the UK have “concurrent” competition powers giving them a choice of measures to use.116

11. Thirdly, other jurisdictions’ experience also illustrates the range of links between regulation andcompetition. For example, in the EU, DG Comp has undertaken several sector studies under Article 17 ofthe Modernisation Regulation.117 These are intended to examine sectors which appear to exhibit lack ofcompetition to see what further intervention, either by way of competition enforcement, regulation, or de-regulation, may be appropriate. These sector inquiries open up issues that go wider than “a narrowcompetition focus”. For example, its investigation into the energy sector found problems including: a highlevel of market concentration; vertical integration of supply, generation and infrastructure leading to a lackof equal access to, and insuYcient investment in infrastructure; and possible collusion between incumbentoperators to share markets.118 To tackle these problems, it decided to take follow-up action in individualcases under the competition rules (anti-trust, merger control and state aids) and to act to improve theregulatory framework for energy liberalisation.119

12. A fuller description of the overlap between competition and regulation is set out in a speech given byCC Chairman Peter Freeman, “Regulation and Competition–Chalk and Cheese?” A copy of this speech isattached as Appendix 2 to this submission.

The use of competition law in regulated sectors

13. Thus the regulatory and competition fields overlap, and can support each other. This is perhaps bestseen in the use of market investigation references for regulated activities. Sectoral regulators have the abilityto refer to the CC markets for which they are responsible, and in determining any remedies to be imposedthe CC must take account of the regulator’s objectives, in order to reduce risk of conflict.120 The OFT alsohas the ability to refer regulated markets to the CC. For example, payment protection insurance (PPI) hasbeen regulated by the Financial Services Authority since 1 January 2005, but was referred to the CC by theOFT (with the support of the FSA) in 2007. The CC found a lack of competition and has announced thatit will impose remedies to address the root causes.121 Those remedies include actions that the FSA could notitself take to address competition problems122—in particular, a prohibition on selling PPI within seven daysof the sale of the underlying credit product and a prohibition on selling PPI policies with the lifetime costof the policy paid at the start of the policy (single-premium policies).123

14. There has, however, been little use to date of the market investigation as a tool in the regulatedindustries. Since the market investigation regime was introduced in June 2003, only one reference has beenmade by a sectoral regulator—the rolling stock leasing market, by the ORR.124 Two other recentinvestigations have involved regulated sectors: PPI (see paragraph 13) and the supply of airport services byBAA Ltd.125

115 See paragraphs 58–63.116 For a detailed discussion of these issues, see the DTI/HM Treasury report Concurrent competition powers in sectoral

regulation, May 2006, URN 06/1244.117 Regulation 1/2003, OJ [2003] L1/1.118 http://ec.europa.eu/competition/sectors/energy/inquiry/.119 http://europa.eu/rapid/pressReleasesAction.do?reference%IP/07/

26&format%HTML&aged%0&language%EN&guiLanguage%en.120 Section 168 of the Enterprise Act 2002.121 CC report, Market investigation into payment protection insurance, 29 January 2009.122 The FSA does not have Competition Act powers and as such it cannot use, as a primary basis for imposing rules, the objective

of improving the functioning of competition or for addressing competition problems in a regulated market.123 Whilst the FSA cannot itself prohibit single-premium policies for competition reasons, in January 2009 it welcomed moves

by some companies to stop selling unsecured personal loan PPI with single premiums (see www.fsa.gov.uk/pages/Library/Communication/PR/2009/012.shtml), and in February 2009 asked all firms still selling unsecured personal loan PPI withsingle premiums to stop doing so as it had ongoing concerns about whether customers had been treated fairly during the salesprocess (see www.fsa.gov.uk/pages/Library/Communication/PR/2009/031.shtml).

124 See www.competition-commission.org.uk/inquiries/ref2007/roscos/index.htm. Rolling stock leasing is not subject to specificeconomic regulation.

125 CC report, BAA airports market investigation: A report on the supply of airport services by BAA in the UK, 19 March 2009



15. It is worth considering why the market investigation tool has not been used more frequently inregulated sectors, and in particular whether the regulatory system, taken as a whole, has a built-in tendencyto avoid references. From the perspective of an economic regulator, there are some good reasons not to havecases referred to the CC. CC investigations take time (we are currently actively considering how we canreduce significantly the length of our market investigations), cost money and risk reputational damage if aregulator is perceived to have “lost”, in the sense of not having achieved its desired outcome. Theseconsiderations apply as much to regulated companies as to the regulators. But all the regulators need to beable credibly to threaten a CC reference if they are to achieve any sort of settlement which is worth having.The longer a sector goes without a reference, the risk is the less credible that threat becomes, and the morethe regulatory system as a whole comes under scrutiny and pressure.

16. The House of Lords Select Committee on Regulators recommended that “… where possible, utilityregulators should work to bring more cases to the competition authorities and that the regulators shouldwork to ensure that the cases most likely to establish useful precedents are brought to the CC” (paragraph6.26)126 and the Government’s response was “… the Government agrees with the Committee that regulatorsshould be encouraged to think about whether they can be more pro-active in using competition law,including market investigation references to the Competition Commission” (paragraph 1.22).127

17. The competition regime is a key tool in regulated industries. It can be used to resolve competitionproblems, using its significant remedial powers if necessary. It can also be used as a “bargaining chip” byregulators, who can use the prospect of a market investigation to achieve change. However, for it to beeVective in both of these ways, it does need to see suYcient use.

Remedies in Competition Investigations

18. The CC has significant powers to remedy problems it identifies. When considering remedies, the CCis required to “achieve as comprehensive a solution as is reasonable and practicable” to address the adverseeVect (section 134(6) Enterprise Act). The CC may also have regard to any relevant customer benefits(section 134(7) Enterprise Act). When deciding on what is an appropriate remedy, the CC will consider theeVectiveness of diVerent remedies and their associated costs and will have regard to the principle ofproportionality (see CC Guidance on Market Investigation References, CC3, at paragraph 4.9).

19. The CC’s remedies fall into two basic categories: structural remedies and behavioural remedies.Structural remedies typically involve the divestment of assets–for example, in the Airports marketinvestigation the CC has required the divestment of Gatwick, Stansted and either Glasgow or Edinburghairports in order to remedy the adverse eVects on competition identified.128

20. Behavioural remedies fall into two categories. The first is enabling measures which are designed toovercome, for example, barriers to entry. The second category, very much a matter of last resort, isbehavioural remedies which control the anti-competitive outcomes, for example by imposing a price cap.Both types of behav-ioural remedy are likely to require ongoing monitoring and, potentially, enforcement,to ensure compliance.

21. The CC (and the OFT) has a preference for structural remedies over behavioural remedies. Structuralremedies generally constitute a direct, one-oV, measure to restore the competitive position (for example, torestore the rivalry that would be lost by a merger). There is less risk of market distortion, and structuralremedies avoid all the diYculties associated with monitoring and enforcing ongoing behavioural remedies.In merger inquiries the CC will generally seek divestiture of the smallest, viable stand-alone business thatcan compete successfully.

22. It would be unusual for the main remedy in a merger inquiry to be behavioural. They tend to be onlyappropriate where a structural remedy is not feasible, as in Drager/Airshields,129 or where the substantiallessening of competition can be expected to be of limited duration, as in First/ScotRail.130

23. There are always exceptions, and an example of a case where behavioural remedies were used in amerger inquiry was the Macquarie/National Grid Wireless merger.131 This merger brought together the onlytwo providers of national managed transmis-sion services and network access to UK broadcasters. On acursory assessment, it seemed that structural remedies would be the best solution. However, for severalreasons the CC took a diVerent view:

— We identified significant customer benefits which were likely to be lost as a result of the mostfeasible divestment option.

126 House of Lords Select Committee on Regulators, 1st Report of Session 2006-07 UK Economic Regulators HL Paper 189–I,13 November 2007.

127 Her Majesty’s Government’s Response to the House of Lords Select Committee on Regulators Inquiry “UK EconomicRegulators”, 31 January 2008.

128 CC report, BAA airports market investigation: a report on the supply of airport services by BAA in the UK, 19 March 2009.129 CC report, Drager Medical AG & Co KGaA and Hillenbrand Industries, Inc: a report on the proposed acquisition of certain

assets representing the Air-Shields business of Hill-Rom, Inc, a subsidiary of Hillenbrand Industries, Inc, May 2004.130 CCreport,First Group plc and the Scottish passenger rail franchise: a report on the proposed acquisition of the Scottish passenger

rail franchise currently operated by ScotRail Railways Limited, June 2004.131 CC report, Macquarie UK Broadcasting Ventures Limited and National Grid Wireless Group: a report on the completed

acquisition, 11 March 2008.



— There was also a very real risk of delay to digital switchover which is under way and due to becompleted by 2012. This would have resulted in significant cost and inconvenience to thebroadcasters, the public and the public purse.

— The behavioural remedy was embedded in existing regulation as there was already regulatorycontrol of the network access element. The remedy was supported by Ofcom, as well as by allsignificant customers, ie the broadcasters.

24. So for reasons of practicality, proportionality and potential loss of customer benefits, a set ofbehavioural remedies were adopted. This case should not be interpreted as in any way indicating a trendtowards the use of behavioural, or regulatory, measures in the CC’s practice.

25. In market investigations behavioural remedies have often played a significant part in remedying thecompetition problems identified. Imposing structural remedies in market investigations is not somethingthat is undertaken lightly, but in order to remedy competition problems we sometimes find that we have torequire that assets are divested or businesses ceased; for example, in PPI, with a prohibition on selling PPI atthe point of sale of credit, and in Airports, where the CC has imposed a requirement on BAA to sell Gatwick,Stansted and either Edinburgh or Glasgow airports.

26. In conducting its investigations, including its analysis leading to identification of any problems andthe consideration of remedies, the CC takes the time needed to learn about the industry it is investigating.It does this through conducting hearings with parties and, when available, industry experts, conducting sitevisits to understand the physical processes involved and discuss these with the parties who run the sites, andthrough seeking views on its developing thinking and analysis on all aspects of its investigations. If necessary,it brings in specialist advice–for example, in the Airports investigation the CC engaged the services of aninvestment bank in order to help it with some aspects of the possible divestments of airports.

27. In summary, the CC’s approach to remedies is to find an eVective solution to an identified problem,with a view to remedying the problem where possible through a one-oV intervention that will minimize theneed for new and ongoing regulatory over-sight to ensure that the conditions for eVective competition aremaintained.

Implications of the recent Economic Downturn

28. The recent economic downturn has resulted in some questions being asked about whether regulatoryregimes are fit for purpose, both absolutely and in the current economic climate. The competition regime isno exception. We consider here how competition law and policy are interacting with other policyimperatives.

29. Recent CC inquiries have made it clear that not everyone views competition as the answer to allquestions. A good example is our Groceries investigation,132 where many pressure groups and somemembers of the public voiced their concerns that competitive markets may result in unfavourable“externalities”, such as binge-drinking, the extinction of the “small corner shop” and fundamental changein the “high street”. Viewed in this way, competition policy can be seen by some as irrelevant or even hostileto the major policy issues that we face. Other policies, such as those tackling climate change, and morerecently, financial stability, can appear much more important, and competition policy faces particularchallenges in an economic downturn.

30. Competition between suppliers does not have to be sacrificed to achieve other policy goals. Thechallenge is to make sure that the benefits of competition are retained while, where appropriate, addressingother important policy goals–which can cover policy areas as diverse as environmental, social or fiscal policy.In its investigations the CC must take care to find solutions to competition problems whilst recognizing andworking within the other policy goals within regulated sectors. Similarly, other agencies need to ensure thatpolicy measures, or changes to how sectors are regu-lated, avoid restricting competition to the extentpossible.

31. Of course, sometimes there will be tensions, at least in the short term. For example, it has becomeclear from the recent Lloyds TSB/HBOS133 case that, when faced with the danger of systemic collapse, manywill say that safeguarding financial stability should override longer-term concerns about restrictions oncompetition, and that the benefits of a detailed investigation of a merger should be forsaken in order toensure that the merger can proceed. Such exceptional events are capable of being accom-modated within thecompetition regime. There are specified public interest consider-ations within the Enterprise Act for nationalsecurity and media.134 In addition, there is now a new public interest criterion for “financial stability”135 andthe Secretary of State can issue an intervention notice pursuant to the Enterprise Act 2002 enabling him toretrieve the power to decide whether a banking merger should be prohibited and to balance competitionissues against those of financial stability.

132 CC report, Market investigation into the supply of groceries in the UK, 30 April 2008.133 Anticipated acquisition by Lloyds TSB plc of HBOS plc, OFT report to the Secretary of State for BERR, 24 October 2008;

Decision by Lord Mandelson, the Secretary of State for Business, not to refer to the CompetitionCommission the merger betweenLloyds Group TSB plc and HBOS plc under Section 45 of the Enterprise Act dated 31 October 2008.

134 Enterprise Act 2002, sections 58(2), (2A), (2B) and (2C).135 Enterprise Act 2002, section 58(2D).



32. Turning to the current economic climate, we note that these are challenging times for businesses, butalso for regulators. There is no point in regulators pretending that the challenge does not exist. Just carryingon as if nothing was happening is not a sensible course. The CC intends to be pragmatic in its activities,recognizing that economic circumstances and the diYculties that are currently being experienced will aVectwhat is the right thing to do in particular cases. For example, whilst the merger was not necessitated by thefinancial crisis, in January 2009 the CC cleared, in just three months, the completed acquisition by LongClawson Dairy Limited of the Stilton cheese business of Dairy Crest Group plc, on the grounds that Millwaywould have been closed by Dairy Crest absent the merger.136 More generally, the CC is consider-ing in depthhow it should respond to the current circumstances, using the combined knowledge and experience of itsmembers to take account of the various issues that the current economic circumstances raise for competitionauthorities.

33. More broadly, the CC believes that it is important not to retreat on the principles of competition.There is a real danger that we will otherwise lose the benefits of a free and competitive market economy, withall the damage that will follow. We should take care not to “kill the goose that lays the golden egg”.

Annex 1

“Merging is such sweet sorrow”

Peter Freeman, Chairman of the Competition Commission, spoke at the British Institute of International andComparative Law (BIICL) Mergers Conference on 13 November 2008. The full text of his speech follows.

Summary

1. In this speech, with the regime in the “process of maturing”, Mr Freeman takes the opportunity toassess the operation and eVectiveness of UK merger control, in the light of “a remarkable year”.

2. Assessing one such recent event, the decision not to refer the LloydsTSB/HBOS merger, he underlinesthat this should be seen as the “exception rather than the rule”, where “speed and urgency overrode the needfor full investigation”. A merger system must be able to deal with “wider policy issues” and as suchjudgments on conflicting policies are “in a democratic system, … in the end best made by Ministers”. Hisbelief remains that this shows the UK system to be ‘in operation, not disarray’.

3. Admitting that the merger system causes “some pain and some pleasure”, Mr Freeman stresses thatthe criticism is not that it delivers “wrong answers” but rather that it is “too heavy, intrusive andburdensome”. He outlines how the CC has improved its approach to give greater focus and time disciplineto its inquiries, provide more clarity and reduce the burden on parties.

4. Mr Freeman then tackles one of the major challenges that have emerged from the CC’s recentexperience—the “substantial” problems that arise from inquiries into completed mergers. This has led theCC to take an increasingly firm line to ensure that “our ability to achieve divestment … should not becompromised”. Although for parties it may seem “attractive” to be able to complete mergers withoutclearance, a subsequent referral means significant inconvenience and uncertainty during the inquiry itselfand ultimately the possibility of incurring considerable costs, if the merger has to be “unscrambled”.

5. As such, this issue warrants “a serious discussion to assess the advantages and disadvantages of movingto a mandatory notification system”. Any change would rightly require a great deal of thought on matterssuch as notification thresholds but also whether there is actually evidence on a “chilling” eVect of pre-notification on the economy “beyond the anecdotal”.

6. Mr Freeman concludes by examining the problems from balancing Phase I and Phase II. Clearly it isdesirable that with “problematic” mergers, most time should be spent on Phase II. However, there may alsobe some mergers that could benefit from a longer examination at Phase I, if they are suitable candidates forundertakings in lieu. “Some skill is obviously needed to tell the two cases apart” and to filter out as early aspossible cases that require in-depth examination—as well as to avoid the trap of the filtering process takingas long as the examination itself.

7. He stresses that this is not a problem that depends on the number of examining authorities. But giventhat two-stage investigations are the norm, then the “existence of a separate, well established Phase IIauthority is a big advantage”. However, he concludes, regardless of the number of institutions involved, “thequestion of how much work is done at which stage will not go away and needs to be addressed”.

136 CC report, Long Clawson Dairy Limited/Millway merger inquiry: a report on the completed acquisition by Long Clawson DairyLimited of theMillwayStilton and speciality cheese business ofDairy CrestGroup plc. TheCC (and theOFT) have strict criteriato satisfy on whether to allow a merger to proceed on the grounds that the target business is a failing firm.



BIICL Mergers Conference, 13 November 2008

Peter Freeman137

“Merging is such sweet sorrow”—the Competition Commission’s Perspective on UK merger control

Introduction

1. When Shakespeare’s Juliet exclaimed from her balcony that “parting is such sweet sorrow; that I shallsay good night till it be morrow” (Exit above),138 she was referring to the contradictory pleasure and painof separation. The theme of my talk today is that the same can be said of merging—and more particularlyof the system of merger control in the UK: some pain and some pleasure.

2. I will try and guide you through this oxymoronic maze and give you an assessment of the operationand eVectiveness of merger control in the UK at present and whether it is meeting the challenges it faces,and oVer you some thoughts for future development.

3. This has, after all, been a remarkable year. Not only have we had the first CC examination of a caseunder the special media provisions139 but one of the biggest UK mergers in asset value terms has beenallowed to proceed, although found to be anti-competitive, on stringent regulatory terms,140 and anothermajor and arguably anti-competitive merger has been allowed to proceed on public interest grounds.141

The Perception of the Regime

4. Various survey ratings and rankings suggest that the UK competition regime in general and the mergercontrol system in particular enjoy a very high international reputation.142 However, not everyone shares thispositive assessment and there is from time to time criticism that the whole process is altogether too heavy,intrusive and burdensome on businesses and takes too long.

5. Interestingly, there seems little suggestion that the system delivers wrong answers (although there areoccasional concerns about remedies, to which I will return); more that we (that is the OFT and ourselves)take too long and that it costs too much to get to the right answer. These are important concerns that needto be addressed. They occasionally get confused with more institutional matters—like, how manyauthorities do we need to look at mergers? That is a diVerent issue, to which I will also return. Let me firsttry and take stock of what has happened since 2003.

Overview

6. Five years of merger control at the CC has involved 46 reports and a considerable amount ofexperience. OFT has obviously considered many more cases, and made some notable decisions such asLovefim143 and Seaweed144 and recently, Global Radio/GCap.145 You will understand if I concentrate moreon the CC’s work.

7. Of the 46 merger cases, 24 were cleared and 22 resulted in an adverse finding. A further 21 cases werecancelled at an early stage of the CC’s investigation. Of the remedies imposed in those 22 adverse cases, threewere outright prohibitions, 13 involved structural remedies, four behavioural remedies and two required amixed remedy.

8. It is to be hoped that, after five years of operation, the regime is in the process of maturing. It is notimplausible, as is sometimes suggested and as it would be tempting to believe, that businesses and theiradvisers now feel that they have some experience in how the new law operates and may no longer notifymerely to avoid any risk, as may have been more likely in the early years.

9. The number of references to the CC has decreased over the last year or so. This is probably due toseveral factors, and it is diYcult to assign definite weight to any of them; merger activity is linked to theoverall economic climate and does not stay constant over time; the OFT has developed its policy onundertakings (UILs) and it is plausible that the parties and their advisors are more confident in oVering anddealing with UILs. The OFT has also repeatedly stated the desirability of dealing with cases at Phase I ifthis can be done without disproportionate eVort.

137 Chairman, Competition Commission. All views expressed are personal.138 Romeo & Juliet Act II, Scene 2 184–5.139 Acquisition by British Sky Broadcasting Group plc of 17.9 per cent of the shares in ITV plc. Decision of the Secretary of

State 29 January 2008. British Sky Broadcasting Group plc v (1) The Competition Commission (2) The Secretary of Statefor Business, Enterprise and Regulatory Reform; Virgin Media, Inc, v (1) The Competition Commission (2) The Secretaryof State for Business, Enterprise and Regulatory Reform, Judgement of 29 September 2008, [2008] CAT 25.

140 CC Report, Macquarie UK Broadcasting Ventures Limited/National Grid Wireless Group, completed acquisition, 11 March2008.

141 Anticipated acquisition by Lloyds TSB plc of HBOS plc, OFT report to the Secretary of State for BERR, 24 October 2008;Decision by Lord Mandelson, the Secretary of State for Business, not to refer to the CompetitionCommission the merger betweenLloyds Group TSB plc and HBOS plc under Section 45 of the Enterprise Act dated 31 October 2008.

142 Global Competition Review’s Annual Survey of the World’s Leading Competition Authorities—Rating Enforcement,11 June 2008; Department for Trade and Industry, Peer review of Competition Policy, 6 June 2007.

143 Anticipated acquisition by LOVEFiLM International Limited of the online DVD rental subscription business of Amazon,Inc; OFT decision of 15 April 2008.

144 Anticipated acquisition by FMC corporation of the alginates business of ISP Holdings (U.K.) Limited, OFT decision of30 July 2008.

145 Completed acquisition by Global Radio UK Ltd of GCap Media plc, OFT decision of 8 August 2008.



10. Also, in November 2007, the OFT issued new “de minimis” guidance.146 Generally speaking, it isdesigned to screen out cases and avoid a reference to the CC where the OFT takes the view that the nature,size and probability of the competitive harm would not merit an in-depth assessment at Phase II. The OFTwill now generally consider adverse mergers as insuYciently important in markets accounting for less than£10 million, unless other factors are present, such as very high market concentration and low entryprospects, evidence of coordination, important precedent value of that specific case, and/or a substantialdetriment to vulnerable consumers. The policy underlying this more is eminently sensible.

11. From the CC’s perspective it is much less likely that a merger could be referred “by accident”. Ingeneral, the cases that are referred to us are not obviously unproblematic—that is they raise potentiallysignificant competition issues which merit an in-depth assessment. That said, it is important to ensure thatthe balance of scrutiny between Phase I and Phase II be correctly struck, and I will return to that themelater on.

Consideration of Mergers by the CC

12. Let me now turn to how we at the CC consider mergers.

More focus

13. We are always seeking to improve our internal procedures and to make the best possible use ofresources at the available time, through improved project management and by focussing on the keycompetition issues and evidence. One way to do this is by identifying “theories of harm’ early in the inquiry.Theories of harm are simply ways in which a merger could harm competition. The use of the term does notin any way imply that the CC has already formed a view that harm will arise which would pre-empt a properand unbiased assessment; it is merely a tool to help provide the analytical framework. Testing these theoriesthen becomes the basis of the analysis.

Better evidence

14. Another technique to ensure better focus is the increased use of “primary evidence”. This meansmaterial, including data, generated in the ordinary course of the parties’ business, most likely before theinvestigation, as opposed to documents that have been specifically prepared for the purposes of submissionto the OFT or CC in a particular case.

15. The obvious advantage of primary evidence from our point of view is that it is potentially less biasedand more persuasive than evidence prepared specifically for the inquiry, which inevitably tend to emphasizethose facts or arguments that support the parties’ case. Primary evidence provides valuable insight into theparties’ corporate strategy and how they view the nature, state and extent of competition in a market, andhow markets naturally behave, outside the context of an inquiry.

16. This approach has already been used extensively in market investigation cases, but is also increasinglybeing used in merger inquiries (recently in the current BOC/Ineos merger inquiry).147 Early meetings withthe merging parties are meant to ensure that we have access to the relevant data from the start of the inquiry.This can reduce the initial length of our questionnaires and thus decrease the burden on the parties. We alsoseek to avoid situations where a lot of additional work is required to adapt data sets to the CC’srequirements.

New guidelines

17. A major development is the joint OFT/CC review of their respective merger guidelines with a view toissuing revised joint merger guidelines in 2009.148

18. The aim is to provide a comprehensive and updated set of substantive merger guidelines for bothPhase I and Phase II in one single document. This will cover substantive merger assessment issues such asjurisdiction, market definition, the appropriate counterfactual, unilateral and coordinated eVects, andvertical aspects. Separate OFT guidance on jurisdiction and procedure is likely to remain as will CCguidance on merger remedies. We have received a number of submissions from those involved or interestedin merger control, including from external lawyers, economists and business representatives and have heldround table discussions. We are now in the process of drafting the new guidelines, which will be put out forconsultation in due course.

146 OFT 516b, Revision to Mergers, Substantive assessment guidance, Exception to the duty to refer. Markets of insuYcientimportance.

147 BOC/Ineos packaged chlorine merger inquiry. Provisional findings report, published 18 September 2008.148 More information is available on http://www.competition-commission.org.uk/about us/our organisation/workstreams/

analysis/cc2 review.htm.



Sharper procedures

19. The CC has recently carried out an internal review process which suggested that to speed up ourprocesses, we should be more rigorous in enforcing deadlines for the provision of information. In a numberof inquiries, the case has been delayed due to late submission of evidence by the parties. In turn, this meansthat the CC’s analysis will be delayed as well, resulting in greater costs for all.

20. The CC has formal information gathering powers under section 109 of the Enterprise Act2002 (Enterprise Act) to issue a Notice requiring the production of information or documents, or requiringspecific individuals to give evidence to the CC. In the past, the CC has rarely used these powers but this hasstarted to change. Ironically, recent instances of the use of Section 109 notices have been to delay an inquiry.Sending Notices to the parties to the Project Kangaroo joint venture149 resulted in a suspension of thetimetable until the required information was provided and similarly in the Patientline case,150 referredrecently and subsequently cancelled. The overall purpose of section 109 remains clear, however, to imposea time discipline on the inquiry as a whole.

21. These improvements to the CC’s work are all important, but there are some more fundamental issuesto address. One of them is the high incidence of completed mergers.

The problem of completed mergers

22. One of the challenges under the current merger regime is how to deal adequately and eVectively withcompleted mergers. By international standards, the UK system is unusual in not requiring compulsory pre-notification to the competition authorities of qualifying mergers.151 Five years into the application of theEnterprise Act, we have some experience with the problems associated with completed mergers and knowthat they can be substantial. Completed mergers account for more than half of all merger cases we havereported on. Of those completed mergers, nearly half152 resulted in an adverse finding by the CC.

23. This means that parties are completing, or seeking to complete, a significant number of anti-competitive mergers and we have found that, notwithstanding the availability of certain tools such as interimmeasures (hold-separate undertakings), this poses a significant challenge to the eVective operation of ourmerger control. The CC has sought to address this by taking an increasingly firm line on interim measuresand now generally obtains them in all completed mergers. The CC may also require the appointment of ahold-separate manager and/or a monitoring trustee to ensure the eVectiveness of the interim measures.153

The aim of these measures is to ensure that in case of a final SLC finding, divestment remains possible inpractice.

24. Of course, in the voluntary regime that we presently have the parties are perfectly entitled to completethe merger without awaiting approval by the OFT/CC. But it is equally clear that in doing so they are takinga risk. Our ability to achieve divestment—if the competition concerns in the relevant case warrant it—shouldnot be compromised. Otherwise, this would lead to the perverse situation of rewarding parties who choseto take the risk of completion prior to a formal clearance decision. Our Guidance makes it clear that we willgenerally not take into account the potential loss the merged company may incur when having to sell theacquired business, nor the costs involved in implementing the sale.

25. It should be noted that the OFT has also firmed up its practice and in its draft procedural andjurisdictional guidance also proposes to lower its threshold for obtaining hold-separate undertakings inPhase I.154

26. Another problem arising in completed mergers is the potential lack of incentives on the parties toachieve an eYcient and timely divestment in case of an adverse finding in the CC’s final report. This issuehas arisen in several cases before the CC and it is in addition to the problems which usually arise from hold-separate issues. To date, the CC has required the appointment of divestiture trustees in three cases,155 all ofwhich were completed mergers.

149 Anticipated Joint Venture between the BBC through BBC Worldwide Limited, Channel Four Television Corporation andITV PLC relating to the Video on Demand sector.

150 Anticipated acquisition by Hospedia Ltd of Premier Telesolutions Limited, OFT decision of 7 October 2008. Referencecancelled on 30 October 2008.

151 Although there are several other countries operating a voluntary regime, including Australia, New Zealand, India, andSingapore.

152 46%.153 The CC’s approach in this area has been upheld by the CAT in Stericycle/CC, CAT judgement of 19 September 2006.154 OFT 526con, Mergers, jurisdictional and procedural guidance. Draft guidance consultation document, March 2008, at

paragraph 6.31. In a completedmerger, “[t]he OFT is likely to seek initial undertakings in respect of a completed mergerwherethere are preliminary indications that the merger raises or is likely to raise competition concerns”. By contrast, the OFT’scurrent Procedural guidance at paragraph 5.14 states that “As a matter of practice […] the OFT is unlikely to seek initialundertakings or orders in respect of a completed merger unless a reference is a real possibility”.

155 CC report, Somerfield plc/Wm Morrison Supermarkets plc: a report on the acquisition by Somerfield plc of 115 stores from WmMorrison Supermarkets plc, 2 September 2005; CC report, Tesco plc and the Co-operative Group (CWS) Limited: a report onthe acquisition of the Co-operative Group (CWS) Limited’s store at Uxbridge Road, Slough, by Tesco plc, 28 November 2007.CC report, CliVord Kent Holdings Limited and Deans Food Group Limited: A report on the completed merger of CliVord KentHoldings Limited, parent company of Stonegate Farmers Limited, and Deans Food Group Limited, 20 April 2007.



27. Overall, our experience clearly suggests that the issues raised by completed mergers warrant a seriousdiscussion to assess the advantages and disadvantages of moving towards a mandatory notification systemand I will say a little more on that later on.

Public interest mergers

28. Mergers involving public interest issues are much in the news, and rightly so. Perhaps they oVer thebest proof that we are experiencing pain and pleasure in equal measure in that there are two recent cases toconsider, one of which came our way, the other, it is apparent, will not come before the CC.

29. These cases are BSkyB/ITV156 and HBoS/Lloyds TSB.157 Both are significant. Both are unusual inthat they involve an intervention notice served under section 42 Enterprise Act, on the basis of a publicinterest consideration, thus bringing the decision back to the Minister. The diVerence between the two casesis that in BSkyB/ITV the Secretary of State, having considered competition and media plurality advice,referred the case to the CC and, on receipt of the report, decided against the merger; in HBoS/LloydsTSBthe Secretary of State, having considered competition and financial stability advice, allowed the merger toproceed. This decision has aroused the opposition of the Financial Times, the Economist, other well knownparts of the press and not a few influential voices in Scotland.

30. Both cases, I would submit, show how the UK system is established to cope with mergers where theissues extend beyond competition. I am particularly pleased to see that the CAT’s judgements in BSkyB/ITV158 suggest that our analysis of what is a merger, and what are its likely eVects, was regarded as soundand reasonable, and that our approach to applying remedies similarly so. The CAT found that ourinterpretation of the media plurality test159 was incorrect on this occasion. I will say a little more on theapproach to remedies later, but the case is still subject to the possibility of appeal, so I will not dwell furtheron the substance.

31. On HBoS/LloydsTSB, the issues are subtly diVerent, despite similarity in the statutory basis. Let usfirst consider the context. Public interest intervention in mergers is not a new thing. It would be tempting tothink that merger control must be based exclusively on competition. Indeed, in seeking to give greateremphasis to competition under the pre-2002 “public interest” test, the so-called “Tebbit doctrine” of1984 was pushing in that direction. But other factors must also count. Indirect re-nationalization (the so-called “Lilley doctrine” of 1990) was not favoured by our predecessors. But national security has long beena potentially countervailing factor, and was specifically reserved in the 2002 Act, as was concern aboutconsolidation in the media, again specifically protected in the Act and reinforced in the CommunicationsAct the following year. The Enterprise Act makes it quite clear that the list of public interest considerationsis not closed and can be added to even whilst a merger is in progress.

32. So I am not in the least surprised that, faced with evidence of risk to the banking system as a whole,and the existence of a significant merger proposal in the banking sector, the Secretary of State decided toserve an intervention notice in the HBoS/LloydsTSB case and to prepare and present to Parliament thenecessary new public interest consideration.

33. Since then, of course, OFT has carried out its duty to investigate and report to the Secretary ofState,160 various parties, including the FSA, the Bank of England and HM Treasury have expressed views,to OFT and in some cases also to the Secretary of State (SoS), and the SoS took a decision on 31 Octobernot to refer the proposed merger to the CC.

34. The OFT’s Report of 24 October essentially advised that there was a relevant merger situation whichmay result in an SLC. That advice was binding on the SoS as to its terms. But the SoS went on to decidethat the new financial stability public interest consideration was relevant and, taking that into account, themerger was not expected to operate against the public interest. This was because he considered that thebenefits to the public interest from ensuring the stability of the UK financial system outweighed the potentialharm to competition.

35. The Secretary of State placed some weight on the fact that the OFT’s advice was couched in termsof “a realistic prospect” rather than a probability of the merger restricting competition in personal currentaccounts, the market for banking services in Scotland, and to a lesser extent, the mortgage sector. This choiceof words reflects the OFT’s statutory duty. He also attached some significance to the OFT’s counterfactualanalysis, which envisaged that a two stage course of events was realistic, with the Government stepping into stop HBoS failing, and with HBoS exerting some competitive pressure (albeit less than its pre-creditcrunch self) for an initial period and providing greater pressure once stability had returned to thefinancial markets.

36. So what view should one take of these events? First, as I said, I regard this as the UK merger controlsystem in operation, not in disarray. Second, it is of course true that had the CC been asked to consider thiscase in detail, it would have been diYcult, even with the most streamlined inquiry, for us to give anauthoritative view in a short time. Third, it is also clear that the issues are not straightforward. Competition

156 See reference earlier.157 See reference earlier.158 See reference earlier.159 Enterprise Act section 58a. A tortuous section on which the CAT has attempted to shed some light.160 Enterprise Act.



analysis is a “broad church”, and many of the matters bearing on financial stability could also be relevantto an analysis of the competitive eVects of the merger against the likely counterfactual. And even if the casehad been referred to the CC, the ultimate decision would have lain, as it did with BSkyB/ITV with theSecretary of State.

37. The case is therefore best seen as one where the need for speed and urgency overrode the need for fullinvestigation. Such cases should be seen as the exception rather than the rule.

38. It does seem to me that it is essential for any merger control system to include processes to deal withthe wider policy issues raised in particular merger situations. How the various policy considerations relateto each other cannot always be predicted. A defence merger, for example, might reduce competition, as mostprobably do but preserve a capability judged essential for national security. A media merger mightconceivably not restrict competition, but nevertheless threaten plurality of media voices, particularly in thelight of the CAT’s recent clarification. And a financial services merger might, as we have seen, be judgednecessary to avert systemic collapse. I remain of the view that such judgements, in a democratic system, arein the end best made by Ministers—better than attempting to place that burden on unelected agencies suchas ourselves. Recent cases may serve as a reminder that the potentially controversial nature of mergerdecisions was one of the factors lying behind the removal of Ministers from most aspects of merger controlin 2002. They also underline the need for transparency of process. Balancing the merits of diVering policiesmay be necessary, but it should always be done in a way that is understandable and open.

Remedies

39. Remedies are often the most diYcult aspect of eVective merger control. Let me briefly describe ourthinking and then consider some specific issues.

Revised guidance

40. The CC consulted on its draft new merger remedies guidance between May and August this year withthe aim of publishing the final version of the new remedies guidance soon.

41. Our original guidance on remedies was published five years ago in June 2003, as part of the generalguidance on merger references. It coincided with the coming into force of the Enterprise Act, so at the timewe had no experience of exercising our new powers in relation to remedies. Those initial guidelines weresupplemented in December 2004 by a specific set of guidelines dealing with divestiture remedies, and we thenpublished some guidance on the use of interim measures. One purpose of the new guidance is therefore toconsolidate all that into one document.

42. While we have “outgrown” the current guidance(s), we are not proposing any wholesale changes.Rather, the new guidelines are an evolution of what we already have, filling in gaps where necessary, so thatit is comprehensive and up-to-date and incorporates our experience of operating the regime since 2003.

43. I do not have time today to go into too much detail on the new guidelines, but will instead highlightthe main areas, particularly those aspects which are new and intended to fill existing “gaps”.

44. The introductory section now gives an overview of the range of available remedies and thecircumstances in which, typically, particular remedies will or will not be appropriate. It is made clear thatin choosing an appropriate remedy, we will look first at eVectiveness. Only then, we will separately look atproportionality and choose the least restrictive and costly remedy.

45. It will come as no great surprise that we prefer structural (divestiture) remedies to behaviouralremedies, as the former generally constitute a direct measure to restore the rivalry that would be lost by themerger. There is less risk of market distortion and structural remedies avoid all the diYculties associatedwith monitoring and enforcing ongoing behavioural remedies. The CC will generally seek divestiture of thesmallest, viable stand-alone business that can compete successfully. I will discuss the exceptions to this below.

46. A frequently contentious issue in the course of the divesture process is the identity of the purchaser.We are now making it clear that the purchaser must have access to suYcient finance to develop the businessand must be committed to competing in the relevant market.

47. There is now also a small section on Intellectual Property remedies. In most cases, we are likely totreat these as a form of asset divestiture. However, a key aspect in an actual inquiry will be whether IP aloneis suYcient to enable the purchaser to compete eVectively and it may only form part of a morecomprehensive remedy.

Structural vs behavioural remedies

48. I mentioned our preference for structural remedies, as they directly address the competition problemand provide a one-oV lasting solution, without the need for continuous monitoring. It would be unusual forthe main remedy to be behavioural. They tend to be only appropriate where a structural remedy is notfeasible, as in Drager/Airshields,161 or where the SLC can be expected to be of limited duration, as in First/Scotrail.162

161 CC report, Drager Medical AG & Co KGaA and Hillenbrand Industries, Inc: A report on the proposed acquisition of certainassets representing the Air-Shields business of Hill-Rom, Inc, a subsidiary of Hillenbrand Industries, Inc, May 2004.

162 CC report, First Group plc and the Scottish passenger rail franchise, A report on the proposed acquisition of the Scottishpassenger rail franchise currently operated by ScotRail Railways Limited, June 2004.



49. We see behavioural remedies as falling into two categories. The first are enabling measures which aredesigned to overcome, for example, barriers to entry. The second category, very much a matter of last resort,are behavioural remedies which control the anti-competitive outcomes, for example, by imposing a pricecap.

50. Having said that, there are always exceptions, and an example is the recent case of Macquarie/National Grid Wireless.163 This merger brought together the two main providers of national managedtransmission services and network access to UK broadcasters. On a cursory assessment, it seemed thatstructural remedies would be the best solution. However, for several reasons we took a diVerent view.

— We identified significant customer benefits which were likely to be lost as a result of the mostfeasible divestment option.

— There was also a very real risk of delay to the digital switchover which is underway and due to becompleted by 2012. This would have resulted in significant cost and inconvenience to thebroadcasters and the public.

— The behavioural remedy was embedded in existing regulation as there was already regulatorycontrol of the network access element. The remedy was supported by Ofcom, as well as by allsignificant customers, ie the broadcasters.

51. So for reasons of practicality, proportionality and potential loss of customer benefits we adopted aset of behavioural remedies. This case should not be interpreted as in any way indicating a trend towardsthe use of behavioural, or regulatory, measures in the CC’s practice. Nor does it mean that we do not careabout competition, as has been suggested by one distinguished commentator in the context of this case.164

52. Let us also say a few words about the BSkyB case. Although this case may still be subject to appealthe CAT’s recent judgements in the BSkyB165 case contain interesting comments on the CC remedy powers.I will touch briefly on these.

53. In its application to the CAT, BSkyB claimed that by, in the first place, considering the more stringentremedy of full divestment the CC had wrongly rejected its proposed alternative remedies. In referring to itsjudgement in Somerfield166 the CAT noted that the CC and the Secretary of State have a margin ofassessment in relation to appropriate action for remedying the SLC created by a merger. As set out in itsguidance, the CC needs to achieve as comprehensive a solution as reasonable and practicable to remedy theadverse eVect. As the CAT had already held in Somerfield it was not unreasonable, as a starting point, toconsider “restoring the status quo ante”.

54. BSkyB further challenged the divestment down to a holding of 7.5% as irrational and suggested that,on the basis of expected eVective voting turnout, a divestiture to below 15% would have been suYcient. Atthe other end of the spectrum, Virgin’s challenge argued that the CC should have ordered a full divestmentand that the CC’s partial divestment was a departure from its own guidance. Pain and pleasure again, orperhaps double pain?

55. The CAT found that in deciding on a remedy, the CC was entitled to a significant element ofjudgement and was permitted to take a cautious and conservative approach to likely future voting patterns.But equally, the removal of any “realistic prospect” of material influence as a result of partial divestmentrather than full divestment did not constitute a departure from its guidance. In any event, given that thereasons for choosing that particular remedy where fully explained in the report and had been subject toconsultation, any departure was fully reasoned.

56. In its second judgement on relief, the CAT found that the SLC remedy was the culmination of alogically distinct investigation and decision-making process. Given that the SLC finding was upheld by theCAT, the validity of the respective remedy was not in any way aVected or undermined by the report’s findingsin relation to the plurality issues.167 The CAT found that the competition remedy was suYcient to addressany plurality issues. It is now for BERR to implement it.

Looking ahead

57. Looking ahead I do not, first of all, believe that the analytical approach approved by OFT and CCneeds any fundamental change—it is soundly based on sensible competition theory, buttressed by fair andrigorous evidence gathering and is at the apex of international best practice. I do see two areas of interest.First, possibly moving to a mandatory, rather than voluntary system. Second, how to ensure the rightbalance is struck between the Phase I and Phase II stages, assuming, as most people do, that a two-stageprocess is worthwhile.

163 CC report, Macquarie UK Broadcasting Ventures Limited/National Grid Wireless Group, completed acquisition, 11 March2008.

164 Martin Cave, Does the Competition Commission care enough about Competition? 16 [2006/2007] 4 ULR; Diana Guy, Does theCompetition Commission care enough about Competition?—The CC’s perspective, 16 [2006/2007] 5 ULR.

165 Judgment of 29 September 2008, [2008] CAT 25; Virgin Media, Inc and (1) The Competition Commission (2) the Secretaryof State for Business, Enterprise and Regulatory Reform and British Sky Broadcasting Group PLC, Judgment of 30 October2008, [2008] CAT 32. The former (“Main judgment”) decided both Sky’s application for review and Virgin’s application. Thelatter dealt with the plurality issues.

166 Somerfield plc/Competition Commission, CAT judgment of 13 February 2006, [2006] CAT 4.167 See reference earlier, at paragraph 20.



58. Let me talk first about pre-notification.

59. The starting point is that the UK merger control system does not require mandatory pre-notificationof mergers and an investigation by the OFT has no general suspensory eVect. In practice, mergers can be andare agreed, completed and implemented even if subsequently OFT or CC find them to be anti-competitive. Insuch a case, the merger may have to be “unscrambled” through divestiture, which raises a range of practicalproblems some of which I have described earlier.

60. I have referred to the possible weakening of the overall eVectiveness of the merger regime and the needto expend considerable resources on establishing eVective interim measures to stop further integration of themerged business for the duration of the investigation. These resources could be much better employed in theinvestigation of the merger itself.

61. Even from the parties’ point of view the non-notification system is not necessarily favourable. Whileit may seem attractive to be able to complete without awaiting competition clearance, it is by no means risk-free. Parties who choose to consummate the deal can find themselves in a situation where the OFT and/orCC will require them to commit to hold-separate undertakings at a stage where they may be half-waythrough the integration process. This can and does cause considerable inconvenience for the business, notto mention the legal uncertainty. And they may be required to divest themselves of the undertaking or assetsthey have required, possibly at considerable cost or loss.

62. Of course any change to the system may have consequences which would require carefulconsideration. If the UK moved to a compulsory pre-notification system, a great deal of thought would haveto go into choosing the appropriate notification threshold. Would the share of supply test—which resultedin many reference cases in the recent past—need to be abolished, not least because it might not be consideredcompliant with international best practice in a notification system? And if we do go down that route, do weneed or want some sort of “claw back” to replace it to ensure “smaller” anti-competitive mergers remainreviewable? Do we have robust evidence, beyond the anecdotal, of an actual chilling eVect of pre-notificationon the economy? Overall, how would we quantify the costs and benefits of moving to a notification system?

63. It seems that all these and, I am sure, many more questions need careful consideration and assessment.This would need to include meaningful comparative research on how other merger notification systemsfunction and to what extent we can or (cannot) draw conclusions for the UK. But that debate is one thatreally needs to be had soon if we want to travel in the right direction in the medium term.

64. The second issue is Phase I/Phase II.

65. I mentioned earlier a decrease in the number of references to the CC recently. This it may be deducedreflects in part greater activity at Phase I. Generally since the IBA Healthcare168 case, the OFT has soughtto provide much detail and reasoning in its Phase I work, and to cover more ground. Equally, parties havetended to provide more material and data in pursuit of Phase I clearance. The OFT has become moresophisticated in obtaining undertakings in lieu and has been more explicit on de minimis clearances. All thesefactors have much in their favour.

66. The question of overall time taken by the system as a whole remains a concern. It is hard to assessthis objectively as in the absence of mandatory pre-notification the start date for Phase I is not always clear.One issue is the time taken to examine a “problematic” merger (ie one that will in all probability go to theCC). The time spent on Phase I should preferably be limited as the main focus should be Phase II. Can thisbe done? There would appear two possible ways. One would be to have statutory time limits at Phase I (theneed to fix a start date inherently implies a move to mandatory notification).

67. Another, possibly complementary, move would be to provide for “fast tracking” of clearlyproblematic mergers—identified as such either by the authorities or by the merging parties. OFT mayalready oVer such a possibility in practice, it is understood. This may involve some asymmetry oftreatment—in other words possibly a lower reference threshold for these types of merger. By contrast,mergers that clearly lend themselves to solution by means of undertakings in lieu, for example, could perhapsbenefit form a longer period at Phase I. After all there is a good prospect that Phase II can be avoidedaltogether. Some skill is obviously needed to tell the two cases apart—and some mergers will not fall intoeither category.

68. But these problems are not insurmountable. DiYcult mergers do need to be looked at in depth anda filtering system is needed to identify which mergers need in-depth examination, as it would be futile to lookin-depth at all mergers. If the filter starts to take as long as the in-depth examination itself, the outcome is,as they say, “sub-optimal”.

69. It is said from time to time that the solution to this is to have merger control, at both stages, conductedby a single authority presumably with an enhanced degree of judicial scrutiny. This is perhaps not the placeto debate the merits and demerits of a single competition authority. But I do not believe this particular issuewould be greatly diVerent in a single authority environment. The problem merely becomes internal. Forexample, single authorities, such as DG Comp, typically operate a system based on mandatory pre-notification and a two-stage examination, subject to statutory time limits at each stage, albeit with “stop

168 IBA Health Limited v OYce of Fair Trading, Court of Appeal judgement of 19 February 2004.



the clock” conditions. The issues there are not very diVerent from ours, although there is the added need todemonstrate that the examination at stage two is genuinely objective. Disputed cases tend now to go toappeal.

70. Perhaps the better way to look at this issue is positively. If an investigation is to be in two stages, asis the norm, the existence of a separate, well-established Phase II authority is a big advantage. Having twoauthorities overcomes many of the common criticisms that the administrative procedure, normal in Europe,combines the role of investigator, prosecutor, judge and jury. A powerful independent body has its uses inthe merger control context.

71. Leaving that question on one side, however, the issue of how much is done at which stage on whichcase will not go away and needs to be addressed, regardless of any debate on institutions. Simply increasingthe amount of work at Phase I, although understandable, is not the appropriate way to deal with all kindsof cases, and in this context it is important to remember that the objective of merger control is not to clearall mergers, but to control, in an eYcient and proportionate way, those mergers which harm competition.So the challenge of striking the appropriate balance between Phase I and Phase II remains.

November 2008

Annex 2

Regulation and Competition—Chalk and Cheese?

The Role of the Competition Commission

Peter Freeman169

CRI Frontiers of Regulation Conference, Keynote Speech, University of Bath, 7 September 2006

I. Introduction

It is a great privilege to be speaking at Bath University at this important CRI Conference. Promotingsensible discussion of regulatory issues is very necessary in this regulatory age and the CRI is to becongratulated for what it has done—and does.

The title of my talk is “Regulation and Competition—Chalk and Cheese? The role of the CompetitionCommission.” This expresses the view that the two do not easily mix. I am going to talk, however, aboutthe interaction between regulation and competition. I will suggest that the boundary between the two is notclear and that attempts to draw a sharp distinction ignore what happens in practice. And I will seek to showhow the Competition Commission (CC) in particular bestrides the dividing line (if indeed there is one) andis well-equipped to carry out competition and regulatory functions through its market investigations andregulatory reviews. I will conclude that without an appropriate degree of use, however, these functionsmay atrophy.

II. A Stylised View?

“Regulation” is popularly supposed to be “ex ante” and flexible, enabling “regulators” to control theactivities of natural (or unnatural?) monopolies. Once markets have “opened up”, competition comes intoplay and competition law (applied “ex post“) can be used. Thus, in the ideal world, “regulation” gives wayto “competition”, except when (natural) monopolies persist. Retail telephony is thus deemed to be suitablefor deregulation; local water services less so.

This is a somewhat stylised view of how regulation and competition interact with each other, but it is quiteprevalent.170 However, things may not be quite so simple. First of all, not all competition interventions are“ex post“. For example, market investigations carried out by the CC are “ex post” in the sense that theyassess how markets have worked in the observable past, but are “ex ante” in their assessment andprescription of remedies.

Secondly, and obviously, regulatory and competition roles are typically combined and fulfilled by singleauthorities in the UK. Apart from the CC’s own particular position, the main economic regulators in theUK have “concurrent” competition powers giving them a choice of measures to use.171

Thirdly, other jurisdictions’ experience is giving rise to similar issues. For example, in the EU, DG Comphas recently undertaken several sector studies under Article 17 of the Modernisation Regulation.172 Theseare intended to examine sectors which appear to exhibit lack of competition to see what further intervention,

169 Chairman of the Competition Commission. The views in this lecture are personal and should not be attributed to theCompetition Commission.

170 See, for example, Ofcom, “Draft Enforcement Guidelines: Ofcom’s draft guidelines for the handling of competitioncomplaints, and complaints and disputes concerning regulatory rules”, 6 July 2006, which make the case for progressing fromregulation to “ex post” competition enforcement.

171 For a detailed discussion of these issues see the DTI/HM Treasury report Concurrent competition powers in sectoral regulation,May 2006, URN 06/1244.

172 Regulation 1/2003, OJ [2003] L1/1.



either by way of competition enforcement, regulation, or de-regulation, may be appropriate. These sectorinquiries open up issues that go wider than a narrow competition focus—see for example the interim resultsof the energy study discussed by Commissioner Neelie Kroes in a recent speech, which point to a need formerger control, other competition interventions and market liberalisation measures.173

III. Investigation or Prohibition? The Role of the CC

The UK regulators’ “concurrent” competition powers mentioned above do not only mean Article 81/82 (or Chapter I/II in the UK). A parallel means of competition enforcement is provided, in the UK at least,by the market investigation regime (MIR) contained in the Enterprise Act, and use of these powers is alsoavailable to UK regulators. (Interestingly, in the various regulatory statutes, regulators’ powers under theEA to refer markets to the CC for investigation are mentioned before their powers to take enforcementaction under the Competition Act).174

This alternative system for confronting competition issues centres round the CC. So what exactly doesthe CC do? The CC is essentially a Phase II Authority deciding on mergers, markets and regulatory issues.All cases are on reference from another body—the CC has no original jurisdiction. On mergers, the OYceof Fair Trading (OFT) is the sole referring body on competition issues (Ministers may make references onspecific public interest issues). In relation to markets, the power to refer is extended also to the principaleconomic regulators.175 On regulatory issues the CC’s task is essentially to rule on licence modifications andprice control reviews where there is disagreement between licensees and the regulator. Each regulatoryregime has its particular features. For example, in relation to airports, the CC’s involvement, for designatedairports at least, is compulsory; for communications, an appeal now lies to the Competition Appeal Tribunal(CAT), which refers pricing aspects on to the CC. And for Energy Code Modifications under the2004 Energy Act, there is a new process for appeal to the CC. Let us now look at how these various functionsoperate in more detail.

IV. The UK Market Investigation Regime

The present MIR derives from the Enterprise Act 2002 which gives the CC the power, on reference fromthe OFT or a regulator, to investigate markets, to assess restrictions of competition and to impose remedies(if needed). Review of CC decisions is by way of judicial review by the CAT.

The CC cannot initiate a market investigation on its own. It can only investigate particular markets thatthe OFT (or one of the sectoral regulators) refers to it for further investigation. The purpose of marketinvestigations is to enable the competition authorities to take an in-depth look at markets where competitionis thought to be not working well, but where the problem does not at first sight appear to emanate from thedominant position of a single firm or the existence of hard core cartels.176 They are meant to be detailed andthorough and to apply a cure rather than a punishment. In their deployment of decision-making and remedyimposing powers they are probably unique to the UK.

The OFT and sectoral regulators are each tasked to study and observe markets to assess whether a marketinvestigation is appropriate. There is no specific statutory basis for these studies in the Enterprise Act, andfor the OFT they fall under the general function of studying the economy. As with EU sector studies, if theOFT finds that a particular market appears to be subject to restrictions of competition it must use furthermeans to remedy them, either by the use of CA98 or Article 81/82 or by referring them to the CC for a marketinvestigation, or by seeking assurances or formal undertakings from the parties concerned (if they are willingto oVer them). For regulators, the position is a little diVerent as they will be closely acquainted with theconditions on the markets they regulate. The question will be more one of the choice of further measures(either regulatory or competition) that are appropriate in any given situation.177

173 Speech/06/480, 2 September 2006. Competition and regulatory concepts are also regularly combined in EU communicationsregulation where this must be in line with “the principles of competition law”, and “significant market power” (a competitionconcept) triggers regulatory intervention (see Directive 2002/21/EC on a common regulatory framework for electroniccommunications networks and services, OJ L 108, 24 February 2002, page 33, Article 15(1)–(3) and Commission Guidelineson market analysis and the assessment of significant market power under the Community regulatory framework for electroniccommunications networks and services, OJ 2002, C165/03, paragraph 4.

174 See eg Communications Act 2003, section 370 and similarly in the Water Industry Act 1991, the Railways Act 1993, the GasAct 1986 and the Electricity Act 1989.

175 ORR’s power to make a Market Investigation reference to the CC derives from section 67(2A) and (2B) of the Railways Act1993; GEMA’s in relation to gas derives from section 36A(2A) and (2B) of the Gas Act 1986 and, in relation to electricity,from the Electricity Act 1989, section 43(2A) and (2B); OFWAT’s derives from section 31(2A) and (4) and section 36 of theWater Industry Act 1991; Ofcom’s derives from section 370(1) to (3) of the Communications Act 2003; and the CAA’s derivefrom section 86(2) and (4) of the Transport Act 2000.

176 A good summary of this is given in the Explanatory Notes to section 370 of the 2003 Communications Act.177 http://www.oft.gov.uk/Business/Market!studies/cases.htm. Such market studies by the OFT or regulators can also result in

the following outcomes: (i) the market is given a clean bill of health; (ii) information is published to help consumers; (iii) firmsare encouraged to take voluntary action: (iv) a consumer code of practice is recommended; (v) recommendations are madeto regulators or to the Government.



Adverse Effects on Competition

Although it is the successor to scale and complex monopoly investigations, the MIR relies on a new legalframework based on “adverse eVects on competition” (AEC). An AEC arises where “any feature, orcombination of features, of each relevant market prevents, restricts or distorts competition in connectionwith the supply or acquisition of goods or services in the United Kingdom or a part of the UnitedKingdom.”178 The AEC test has a considerably wider scope than Articles 81 and 82 EC (or Chapters I andII of the Competition Act 1998) and can arise from one or more of the following features of the market:179

(1) the market structure;

(2) the conduct of suppliers or acquirers of goods or services; or

(3) the conduct of customers.

Conduct includes any failure to act, whether intentional or not, and any other unintentional conduct.

The reference decision

Whether to make a reference to the CC is, unlike the case for mergers, a discretion rather than a duty.180

The hurdle is not high for exercising this discretion. As the CAT said in Association of Convenience Storesv OFT, “There is, if we may say so, some risk that one may mistake the height of the hurdle. … It is a‘reasonable ground to suspect’ test. The scheme of the Act is that a full investigation is carried out at thestage of the Competition Commission, not at the stage of the OFT.”181

Undertakings “in lieu” of a reference

It is open to the OFT or the sectoral regulators to accept undertakings from the parties to avoid the needfor a CC reference.182 This power has not been much used so far. Undertakings were, however, accepted byOfcom in the BT case last year.183

The threat of a CC reference can be a powerful inducement for parties to oVer undertakings in lieu.Furthermore, in so far as they oVer a remedy to a perceived problem in a way that minimises the investigativeburden, they are very much in line with current deregulatory policy. But they cannot cure all ills and I willdiscuss them further later in this talk.

The Market Investigation Process

The CC has a statutory maximum of two years within which to complete a market investigation, althoughthe aim is to complete most investigations within about 18 months (if not more quickly for an investigationwith a relatively narrow focus). In the current Groceries investigation, the CC has indicated it will seek tomake provisional findings within a year. A CC decision is final and eVective, subject only to review by theCAT, as to the existence or otherwise of an AEC. Of the six investigations started since the Enterprise Acttook eVect, the CC has so far reached two such decisions (Store Cards and Bulk Domestic LPG), neither ofwhich has been subject to review by the CAT.

The CC has wide-ranging powers of investigation, and is able to invite and require evidence from partiesboth in and outside the market under investigation. In cases referred to the CC by sector regulators, the CCwould seek to treat them as a special party to the reference in order to reap the benefits of their expertise.The assistance of the relevant regulator also would be critical at the remedies stage.

The CC’s procedure is highly transparent. During the investigation itself, the CC normally publishesmany documents on its website and much information is shared with the parties. The CC holds many privatehearings with the parties and sometimes also an open hearing, especially when there is a significant consumerinterest. After publication of its provisional findings, the CC consults aVected parties and will normally holdanother round of hearings. CC market investigations are large and complicated processes, involving a greatdeal of evidence and many interested parties (for example more than 450 in Home Credit and 375 in StoreCards. Groceries is likely to be larger still).

Remedies

If the CC finds an AEC, it has a duty to remedy it in as comprehensive a way as possible, taking accountof any consumer benefits that might thereby be put at risk.

Remedies may include recommendations for action by others, in particular to change existinglegislation.184 The CC can thus make deregulatory recommendations. Critically for sector regulators, section168 of the Enterprise Act requires the CC to have regard to the regulator’s statutory functions when

178 Enterprise Act 2002, section 134(1).179 Enterprise Act 2002, section 131(2).180 Section 131(1) of the Enterprise Act states that the OFT (or a sector regulator) “may” make a reference if it has “reasonable

grounds for suspecting” that an AEC exists.181 Judgment of 1 November 2005. The CAT went on to consider the need for the OFT to seek undertakings in lieu.182 Enterprise Act 2002, section 154.183 Undertakings given byBritish TelecommunicationsGroup plc to Ofcomon 22 September 2005.Undertakings were also given

to OFT in relation to Postal Franking Machines.184 The CC got quite close to doing this in relation to the safety regime for Domestic LPG.



determining what remedial action would be reasonable and practicable, to ensure that remedies do notimpinge on activities or duties of sector regulators. For this reason as well as for the benefit of theirspecialised expertise, the participation of any relevant regulator in the remedies assessment would be verynecessary.

V. Regulatory Inquiries

The CC conducts inquiries of the major regulated industries under the relevant regulatory statutes. Theseinquiries fall into the following broad categories:185

— Licence modification references and references concerning non-licensable activities in the gas andelectricity sectors;

— Price determination references;

— Airport references in relation to designated and non-designated airports;

— References under the Communications Act 2003.

The CC also conducts appeals in relation to energy code modifications under section 173 of the EnergyAct 2004.

Regulatory Inquiries

Licence modifications

A regulator may modify the conditions of a regulated company’s licence if the company agrees to suchchanges. Where a disagreement arises but the regulator nevertheless wishes to proceed, the regulator mustrefer the question to the CC. The question generally to be answered is whether the matter referred may beexpected to operate against the public interest and, if so, whether the matter could be remedied by licencemodifications.

Price determinations

In those regulated industries that review charges made by licensed service suppliers, generally at setperiodic intervals, disagreements concerning the regulator’s price control determination may or must bereferred to the CC (depending on the relevant sectoral legislation).

Airports

In the airport sector, as we have seen, the CAA decides on appropriate pricing after obtaining a reportfrom the CC. Normally these reviews take place every five years and are referred to as “quinquennialreviews”.

Communications

In communications pricing cases, following the Communications Act 2003, appeal lies to the CAT withpricing questions delegated to the CC. In an appeal on the merits under section 192 of the CommunicationsAct against an Ofcom decision the CAT must refer the part of the appeal which relates to price controlmatters to the CC for decision within a maximum of four months.186

Process

The CC’s decisions in relation to regulatory inquiries answer those questions specified in the reference andthose required by the relevant legislation. They generally address licence modification and pricedetermination questions, including assessments by the CC of the cost of capital and rate of return, and arethus generally more technical and numerate in nature than other types of CC inquiries. The inquiries alsoare generally shorter than ones undertaken under the MIR. The last such regulatory review, a case referredto the CC by the Director General of Telecommunications in January 2002 and completed in December2002, was in relation to call termination charges of the four mobile phone network operators,187 (the casewas unsuccessfully challenged on judicial review.) As a remedy, the CC put forward a charge control by wayof a detailed price cap formula to remedy the detriment to the public interest from the mobile phoneoperators’ excess termination charges.

185 See the table inCC, GeneralAdvice and Information, CC4, June 2003,which sets out the diVerent types of regulatory referencesand the relevant statutes. There are also relevant powers under the Financial Services and Markets Act 2000, and a specificregime for water mergers.

186 See Communications Act 2003, section 193. See also Competition Appeal Tribunal Guide to Proceedings, October 2005 andCC, General Advice and Information, CC4, June 2003, AND Enterprise Act 2002, section 168.

187 Vodafone, O2, Orange and T-Mobile, Report on references under section 13 of the Telecommunications Act 1984 on thecharges made by Vodafone, O2, Orange and T-Mobile for terminating calls from fixed and mobile networks, December 2002.



Much of the substantive background work required for such inquiries is done by the regulators themselvesprior to the reference. There is also generally extensive relevant published and unpublished materialavailable that the CC can use for its inquiry. While this might limit the information gathering requirement,the CC still seeks further evidence and undertakes its own studies and analyses. It also makes its owndeterminations on questions relating to such factors as cost of capital and rate of return.

VI. Energy Code Modification Appeals

This new role derives from the 2004 Energy Act188 and is an appeal mechanism against Ofgem’s decisionson modifications to Transco’s Network Code, and the electricity industry’s Balancing and Settlement Codeand Connection and Use of System Code.

The purpose of the appeal system is to provide a fast and authoritative review by the CC of the merits ofOfgem’s decisions and is therefore an instrument for appealing decisions taken by a regulator, rather thanan appeal tool that the regulator can use himself.

The CC has published procedural rules189 to govern these appeals. The key feature of the CC’s jurisdictionis that it is an appeal but, unlike other regulatory inquiries, not a re-investigation. The intention is to decidewithin 12 weeks of Ofgem’s decision on the relevant code modification recommendation.

This appeal process is not intended to create a further tier of regulation. The CC has been given theseappeal powers because it is able to oversee a quick and eVective appeal mechanism. This has not yet beentested (the Utilita Electricity case did not proceed), but the structure is in place, and clear guidelines issuedon the rules governing the process.

VII. The Relationship between CC Market Investigations and Regulatory Inquiries

So what is the relationship between the CC’s market investigations and its regulatory work? The triteanswer is that they are done by the same body. But is there any good reason why this should be the case?To quote Sir Derek Morris, one of my distinguished predecessors, in all CC investigations, whether they be“competition” or “regulatory” ones, the CC addresses how to avoid the “exploitation of positions of marketpower that cannot be dealt with by the usual forces of competition.”190 This focus guides the CC’s work.Parliament evidently thought there was some logic in having both roles performed by one authority, andpresumably thought that the CC could contribute in both these areas, possibly addressing inter-related issuesacross these roles.

An early example of a case which combined these two tasks in a parallel process was the investigationsinto British Gas in 1992, which led to the separation of its trading and transportation functions. Fourreferences were made to the MMC in 1992, two under the Gas Act and two under the Fair Trading Act 1973.There was overlapping subject matter but diVerent remedy powers. The two reports under the FTA proposedthe separation of British Gas’ trading and transportation businesses. The Secretary of State (whose finaldecision it was) chose not to implement this recommendation, but British Gas decided to do it anyway(partly because of the onerous licence amendments put in place following the Gas Act reports).191 “Transco”was established as a separate unit in 1994 and the formal demerger that led to the creation of Centrica tookplace in February 1997.

It is possible that the same situation could occur in relation to airports. The next quinquennial review ofdesignated airport pricing is likely to involve an investigation by the CC at the behest of the CAA some timenext year. At the same time there is much speculation in the press that the CC will also be asked by the OFTto conduct a market investigation into “airports” with a view, so the media would have it, to imposingstructural remedies—the splitting of airport ownership. Speculation is idle, but if that situation were to occurthe CC would be faced with considering the same (or an overlapping) factual situation from both thecompetition and regulatory standpoints. Someone, at least, thinks this might be desirable. At the least, theCC should be able to make great use of its experience and expertise in this sector from its previousregulatory work.

188 Section 173.189 Competition Commission: The Energy Code Modification Rules, CC 10, July 2005.190 Sir Derek Morris, paragraph 899, in his evidence to the House of Lords Constitution Select Committee on regulatory

accountability, 9 July 2003. The Select Committee’s Report, The Regulatory State: Ensuring its Accountability, HL Paper 68,May 2004, contains a full discussion of the structure of UK regulation.

191 The two references under the Gas Act were reported under British Gas plc: Volume 1 of reports under the Gas Act 1986 on theconveyance and storage of gas and the fixing of tariVs for the supply of gas by British Gas plc, August 1993. At the same time,the MMC also reported on two references under the Fair Trading Act 1973 published as Gas: Volume 1 of reports under theFair Trading Act 1973 on the supply within Great Britain of gas through pipes to tariV and non-tariV customers, and the supplywithin Great Britain of the conveyance or storage of gas by public gas suppliers, August 1993. Two further volumes providingsupporting documents were published as Gas and British Gas plc, Volume 2 and Volume 3, September 1993.



VIII. Absence of References

The situation described in the previous paragraph is the exception, not the rule. Despite the CC’s powerfularmoury of regulatory and competition enforcement powers, its involvement in regulated sectors in recentyears has been minimal. Whatever the justification (and I will discuss this below) the fact is that regulatorsare not making references to the CC for market investigations nor are they or regulated companies usingthe CC to resolve licensing or price control issues. The nearest case was the BT undertakings in lieu192—although ORR’s current study into ROSCOs may also be relevant.193 On the regulatory side, there has alsobeen only one appeal against an Ofgem decision on an energy code modification (Utilita Electricity) whichdid not proceed and the last “proper” regulatory reference (termination call charges) was completed inDecember 2002.194 From January 2000 to the present, there have, overall, only been seven regulatoryreferences to the CC: three in the water sector (two of which were in relation to determinations of K andlicence modification recommendations; and one water merger); two (compulsory) quinquennial reviewsunder the Airports Act 1986; one licence modification reference under the Electricity Act 1989; and thetelecoms reference of mobile phone termination charges referred to above. Indeed, apart from the airportsreviews pending in 2007 the position has not changed since Sir Derek gave evidence to the House of Lordsin 2003. It is only reasonable to ask why this situation has arisen. Is the prospect of a CC reference toounattractive for all concerned? Is the outcome already known and discounted? Is the delay involved in a CCtoo great, particularly for fast-moving industries, such as telecoms? Or is there some other explanation?

IX. Possible Justifications

It may first be helpful to note the paradox of a system that depends, in part at least, for its eVectivenesson the possibility of detailed review by an expert authority, yet where in practice few if any such reviewsappear to occur, and where there appear to be some strong disincentives to their occurring. In no particularorder, one can envisage

— The risk of delay, expense and complexity attendant on the CC’s involvement

— The possibility that the CC may have “nothing useful to add”

— Possible loss of control of the regulatory process for regulators and regulated

— In relation to market investigations, the possibility that the CC may impose inappropriate, orineVective, remedies having regard to the particular features of the sector.

Let us examine each of these a little more closely.

“Delay, expense and complexity”

One factor may be the perception that referring a case to the CC will involve very large delay, expense andcomplexity. There is, of course, some justification for this, but it is important not to overstate the point, norto elevate it to greater importance than it merits.

On possible delay, it is true that CC investigations take time—normally six to nine months for a licensingreview case, 18 months to two years for a market investigation. It is hard to see how the CC could do its jobeVectively with very much less time than this.195 But CC references do not come “out of the blue”: theynormally follow an intense and often lengthy period of engagement between the parties. So the CAA airportspricing review began in December 2005 (arguably earlier) and will last until 2007: against this the CC’s likely6 to 8 months’ involvement looks quite modest. Similarly the last water review began in 2002 and lasted twoyears before completion by Ofwat in December 2004. This is not to say that delay is desirable—far from it.Merely that possible risk of further delay at the CC stage may not be the main issue. And for competitioncases it would not be unfair to note that in comparison with many major competition investigations underother regimes, two years from start to finish looks quite reasonable.

“Nothing useful to add”

It might be suggested that the CC has explained its methodology and approach on all the main regulatoryissues that are likely to arise, and a regulated sector was not needed to consult it again, as it were. As maybe surmised, I do not think much of this point. Even if it were true that the last word could ever be said onissues of this kind, it would be surprising indeed if the last word had been said more than five years ago now.Times and economic climates change, as do regulatory imperatives. And it would be unwise to detachmethodology from facts completely. New factual situations may require new assessments and evolution of,if not radical change to, methodologies. So I do not think that as a matter of principle the CC has nothingnew to say.196

192 See footnote 14.193 ORR, Passenger rolling stock leasing markets—Scope of our market study and provisional timetable, July 2006.194 See footnote 19.195 Note the timetable for ECM Appeals is much shorter, there being much less emphasis on fact finding.196 New factors in the past five years could include changed expectations of future interest rate changes, research on equity risk

premiums, and on possible alternatives or refinements to the Captial Assets Pricing Model.



“Loss of control”

This perceived risk is linked to the issue of delay and complexity, but has more to it than that. Regulatoryauthorities develop a profound understanding of the industries they regulate and regulated companiesobviously do the same. Both may, understandably, be concerned about the involvement of a separate andonly periodically involved authority that may disagree with the generally accepted and establishedapproach. This again should not be exaggerated but it is true that, very occasionally, it does happen that theCC and regulators disagree. In the so-called “Market Abuse”197 case Ofgem’s predecessor soughtmodification of generating licences to give it the power to control short term market abuse. Most licenseesaccepted this but two (AES and British Energy) objected, precipitating a reference to the CC. The CCdisagreed with the regulator and found for the companies.

That was not a price review case as such, but then the CC does indeed not always accept the regulator’sconclusions—or vice versa—as the last airports reviews illustrate.198 There the CC’s recommended approachdiVered markedly on one key issue (single/dual till), from that first put forward by the CAA. The CAAeventually accepted the CC’s approach but chose diVerent price caps for Manchester and Stansted from thatrecommended by the CC. (The airports regime is one where the regulator is not bound by the CC’sconclusions.)199 However, in general, and at the risk of gross over-simplification, regulators accept the CC’sconclusions and solutions and examples of serious disagreement are relatively few.

But, one is tempted to say, the whole point of having the CC involved is to take the final decision out ofthe industry’s hands. That is not to say that the CC takes no account of the regulator’s previous work andconclusions or that these do not carry great weight. But the right of review, for such it is, can only work ifthe review has “teeth”. So if the concern is that the CC might produce the “wrong” answer from the industryposition, the better view might be that the industry’s point of view is open to question.

IneVective remedies

Finally, and specifically in relation to the market investigation power, there might be a perception that itmight be diYcult for the CC to construct appropriate remedies in a regulated sector because of therequirements of the regulators’ statutory duties and the sector’s characteristics. After all, it might be said,competition is only one of the considerations that regulators have to take into account.

Again I think this fear, or risk, is overstated. The CC remedies process is painstaking and careful. In BulkDomestic LPG, for example, great care was taken to work out remedies that took full account of theindustry’s health and safety regime. And under section 168 of the Enterprise Act, as we have seen, the CCmust take into account the relevant regulatory regime and the regulator’s statutory duties when formulatingremedies.

X. Loss of Credibility of the Threat

So I do not see these perceptions as standing up to close examination and indeed I think the risk is in theopposite direction, namely there is a risk of the CC not being seen as a credible, over-arching contributorto the regulatory system because of what is best described as under-use. I do not think that we have reachedthat stage yet, but it is important to make sure that it doesn’t happen.

Clearly the threat of a reference to the CC can still be eVective. The BT case, involving the acceptance byOfcom of undertakings in lieu of a market investigation relating to the separation of BT’s retail andwholesale activities, is a good example of it working. Arguably BT must have thought that there was a riskthe CC would have gone further than the restructuring accepted by Ofcom. Similarly in relation to water in2005, it could be argued that the parties accepted a less generous settlement than some said they would haveliked (although more generous than appeared at one stage likely).200

XI. Undertakings in Lieu of a Reference

Before considering the possible consequences of the present situation, let us look a little more closely atundertakings in lieu of a market investigation reference. As we have said, there can be a powerfulderegulatory tool, providing the desired result without the time and expense of a full investigation. Theyhave certain drawbacks, however, in the following sense.

197 AES and British Energy (2000).198 BAA plc, October 2002, Manchester Airports, December 2002 and CAA Press Releases, 28 February and 13 March 2003. See

also Northern Ireland Electricity, March 1997.199 The CC tends to disagree more frequently with regulated companies.200 See Philip Fletcher’s presentation on “Water and sewerage charges, 2005–10: Final determinations”, 2 December 2004. This

notes that companies asked for average bill increases of 29% from 2004–05 to 2005–10, whereas Ofwat’s decisions resultedin a significantly lower average increase of 18%. In relation to the final price limits for 2005–10, the weighted average figurefor water only companies in their final business plans was 5.5 whereas the weighted average figure in final decisions was 3.1;for water and sewerage companies, the final business plan average figure was 6.3 versus the final decision average figure of4.3; and the industry average in the final business plan was 6.2 versus a final decision average price limit of 4.2.



First, in part precisely because they are given to avoid an investigation, their foundation in full analysismay be weaker than remedies applied following a full market investigation. They therefore may lack thedefinitive character of a final remedy and may therefore be less “authoritative”.

Secondly, they will probably represent more of a negotiated settlement than will final remedies. This couldmean that they are less far-reaching than final remedies as parties can generally be assumed to compromisein negotiation. Conversely they could be more extensive than a full investigation might produce. At the pre-reference stage it may be easier to agree something that is broader and “cruder” than what might emergefrom detailed investigation.

More importantly, however, they depend for their eVect on what is involved in a market investigationbeing clearly understood and on the threat of a reference being credible and it is to this that we now turn.

XII. The Credibility of the Reference Threat

Settlement under the threat of a CC investigation (either in licence modification or price determinationcases, or under the market investigation regime) is an important tool of enforcement. It is essentiallyderegulatory and avoids unnecessary delay and expenditure. As part of the enforcement spectrum it is veryvaluable. But its eVectiveness will be in proportion to the belief of the parties to the settlement that the threatof a reference to the CC is credible and the extent to which the CC’s actions are seen as principled, expertand liable to produce an authoritative and independently based result. A CC that was for example seen asa regulator’s cipher or one that produced random decisions would not be viewed as contributing very muchto the enforcement process.

But there is more to this than the parties’ perceptions of the CC and what it might do. It is necessary alsoto consider the position of the makers of the threat. In his seminal book “The Strategy of Conflict”, ThomasSchelling identified that to be credible a threat had to be eYcacious and that “credibility may depend on thecosts and risks associated with fulfilment for the party making the threat”.201 In other words, if the marketplayers perceive that the referring authority sees a reference to the CC as costly and risky for itself, then thethreat becomes less credible.

So in relation to regulatory inquiries all concerned must perceive that the CC’s involvement in theregulatory system is eVective and useful. This suggests that regulators, the regulated, and the CC have tobecome parties to a tacit conspiracy to maintain the necessary degree of credibility. For its part, the CC mustdo its utmost to limit cost and risk—particularly risk of an arbitrary outcome. The referring authorities mustgive timely indications of their belief in the utility of CC references, as must, in the case of regulated sectors,the industry itself. Of course, the best solution to all these needs is for an actual reference to be made, fromtime to time. This, however, needs to be stated with some care and I want to make it absolutely clear that Iam not in any way criticising any individual decision in any case to date. I am simply making a generalobservation about the state of things now and possible concerns for the future.

XIII. Conclusion

I have deliberately mixed up the discussion of licensing and pricing cases with market investigations. Thisis partly because of the things, substantive and procedural, that they have in common. But there is a moredirect connexion that should be made. Here we come back to the need to avoid too narrow a definition ofcompetition enforcement. I am suggesting that regulators’ market investigation powers can be just asimportant in particular situations as their Competition Act powers. A market investigation may legitimatelyfollow a price review or even, as could arise in the airports cases, be in parallel. Not only are marketinvestigations a very useful way of investigating industry-wide issues but, in terms of fairness of process,thoroughness of investigation and practicality of remedies, they can have important advantages over the so-called “prohibition” system. And with a maximum of two years they are comparatively quick for what theycan deliver.

So, in conclusion, I do not know what chemical is concocted from mixing regulatory “chalk” withcompetition “cheese”; but I have tried to show that the distinction between them is not as clear cut as somewould argue and that, in particular, market investigations can act as a bridge over whatever gap divides thetwo. And the CC’s regulatory functions, like all complex machinery, from time to time need lubrication.

March 2009

201 Thomas C. Schelling, “The Strategy of Conflict” (Harvard University Press: 1980 ed.), page 6.



Memorandum submitted by the National Joint Utilities Group (NJUG)

Regulatory Reform Select Committee Inquiry into Themes and Trends in Regulatory Reform

I am writing on behalf of the National Joint Utilities Group (NJUG)202 in response to the RegulatoryReform Select Committee’s call for evidence as part of its inquiry into Themes and Trends in RegulatoryReform. Background information on our organisation has been included at the end of this letter.

NJUG welcomes the opportunity to provide input into the Committee’s inquiry. Whilst we do not feelthe Government has always eVectively embraced the spirit of better regulation over the years, it is clear thatthe current economic climate has increased the need for such principles to be adopted to ensure unnecessaryand costly burdens on UK businesses are reduced.

As NJUG has argued in previous responses to your Committee’s inquiries,203 we feel Government shouldalways fully consider existing legislation before introducing new regulatory measures, especially consideringthe already excessive and unnecessary regulatory burdens placed on the utilities sector. In the area of streetworks alone, utilities are faced with the TraYc Management Act, Communications Act, DiversionaryWorks, New Roads and Street Works Act and London Local Authority Bills to name only a few. Whilsteach regulation may on its own appear eminently sensible and not overly burdensome, the cumulative eVectis increasing costs and bureaucracy for utilities, which ultimately is having an eVect on the competitivenessof UK plc, and increasing the cost for consumers.

With the additional burden of an economic recession, the need for better regulation is greater than ever.NJUG has therefore welcomed Government’s decision to introduce departmental regulatory budgets toensure costly regulation is kept to a minimum and only introduced when necessary. However, this shouldnot lead to Government unilaterally deciding not to pursue regulations essential for reasons of safety andquality, especially without first consulting relevant stakeholders.

Unfortunately this is what has occurred in the case of training and accreditation regulations, due to beimplemented as part of the TraYc Management Act 2004, to enforce mandatory re-assessment of streetworks operatives every five years. The Department for Transport (DfT) has informed the UK Highwaysand Utilities Committee, on which NJUG represents the utility industry,204 that these regulations are to bepostponed indefinitely to reduce the total cost of DfT regulations on industry.

NJUG and HAUC(UK) strongly disagree with this decision for a number of reasons. Firstly, theregulations have been supported by local authorities and the utility industry since they were first suggestedwithin the TraYc Management Bill in 2003, as important and eminently sensible measures. In line with this,the financial burden upon industry has been deemed acceptable when compared to the benefits theregulations will bring. Furthermore, any costs incurred will not be felt for many years.

The DfT’s decision also raises serious safety concerns. Without a statutory requirement to re-assess andenforce appropriate quality training among street works operatives, there is a real danger of accidentsoccurring. This is particularly worrying given the dangers posed by street and road works activity and thedisruption that arises from prolonged works. If operatives do not conduct their work properly, serious injurycan occur not only to those involved, but also to the general public. Furthermore, with an ever-increasinginflux of foreign workers (holding varying qualifications) from other EU states, the need for statutory re-assessment is greater than ever. A mandatory requirement to reassess every five years is also important toensure integrity and credibility of work. As you will be aware, the necessity of street and road works, andthe quality to which they are conducted, are often misunderstood by stakeholders and the general public.A statutory re-assessment process would guarantee that quality of work not only remains a high priority,but is also seen to remain as such.

The intended regulations would allow for operatives to be kept up to date with developments in materialsand equipment. There is considerable pressure on industry to promote the use of sustainable and recycledmaterials, as well as the use of minimum or non-intrusive technology where possible. Whilst industry iscommitted to such initiatives, they become considerably more challenging without a standard system ofassessing operatives’ abilities, knowledge and competency.

202 NJUG’s current members are Energy Networks Association (representing electricity and gas), Water UK (representing allwater and wastewater companies), National Grid, BT Openreach, Virgin Media and THUS, a Cable and Wireless Business.Our associate members are Clancy Docwra, Skanska McNicholas, Balfour Beatty, Morrison, Morgan Est, NACAP, PJKeary, First Intervention, Carillion, Enterprise and Laing O’Rourke. Including members through trade associations, NJUGrepresents thirty-eight utility companies.

203 For example, within NJUG’s response to the Regulatory Reform Select Committee’s 2008 inquiry entitled Getting Results:The Better Regulation Executive and the Impact of the Regulatory Reform Agenda.

204 The Highway Authorities and Utilities Committee (HAUC(UK)) was established in 1986 by the constituent bodies of thelocal Highway Authorities and the Utilities to assist the Secretary of State in arriving at proposals for new street workslegislation. HAUC(UK) played a significant role in the drawing up of the New Roads and Street Works Act 1991 (NRSWA),its subsidiary legislation and associated Codes of Practice. HAUC(UK) currently works with the Department for Transporton the implementation of the TraYc Management Act 2004 (TMA) and associated secondary legislation. It is made up ofthe Joint Authorities Group UK, representing local authorities, and the National Joint Utilities Group, representing theutility industry. HAUC(UK)’s website can be located at http://www.hauc-uk.org.uk/



NJUG feels that decisions on which regulations to postpone and/or cancel should be made in fullconsultation with stakeholders to ensure that Government is fully informed of the potential impact of theiractions. The indefinite postponement of the reassessment regulations under the TMA is an unfortunateexample of this not having occurred. HAUC(UK), a primary stakeholder, was not consulted in any way,and was only informed after the decision had already been taken.

NJUG’s concern is that the Government is using the recession as an excuse to abandon essentialregulation, and appears to have lost the ability to balance the need for an eVective regulatory framework—providing the necessary benefits and protections—with the need to reduce the financial burden on industry.Whilst NJUG supports the minimisation of burdensome regulation, it must be done eVectively and in fullconsultation with stakeholders so that Government is fully aware of the consequences.

March 2009

Background Information on the National Joint Utilities Group

NJUG was formed in 1977 and is recognised as the only UK industry association representing utilities onstreet works issues. Our focus is on promoting: safety; the prevention of damage to underground assets;quality and sustainability of street works; sharing of best practice; self regulation; and a two-way workingrelationship with Government, local authorities, and other key stakeholders to minimise disruption.

To further these aims we launched NJUG’s Vision for Street Works in 2007 (http://www.njug.org.uk/uploads/0801 Vision.pdf) and have since held a number of fora around the country to promote ourobjectives and achievements. Furthermore, NJUG launched the NJUG Awards in 2008 to promote goodpractice within the industry. All submissions are currently being turned into case studies, available from ourwebsite www.njug.org.uk.

Many of our members are actively supporting a number of Government sponsored projects including the2012 Olympics and Paralympics, and Crossrail, as well as representing utilities in discussions withGovernment and other key stakeholders to seek to ensure that any legislative or regulatory proposals arefair, workable and do not aVect the safe provision of our essential services.

NJUG is also the utility arm of the Highway Authorities and Utilities Committee, known as HAUC(UK),working collaboratively with local authorities to better standards of road and street works in England,Northern Ireland, Scotland and Wales.

Memorandum submitted by Network Rail

REGULATORY REFORM COMMITTEE INQUIRY INTO THEMES AND TRENDS INREGULATORY REFORM

General Introduction

1. Network Rail welcomes the announcement of an inquiry into Themes and Trends in RegulatoryReform and the invitation to provide a written submission. We regret that this submission has been providedafter your deadline and we hope that this will still be of use to your committee.

2. Network Rail runs, maintains and develops Britain’s tracks, signalling system, rail bridges, tunnels,level crossings, viaducts and 18 key stations. Our Mission is to provide a safe, reliable and eYcient railwayfit for the 21st century. In addition to being subject to general business regulations, Network Rail is alsosubject to sectoral regulation by the OYce of Rail Regulation (ORR), which is the independent safety andeconomic regulator for Britain’s railways.

3. The rationale for economic regulation of the rail sector is threefold: (1) to avoid the potential formonopoly abuses; (2) to govern competition ex-post; and (3) to impose obligations on service and delivery.Such regulation minimises the need for government intervention.

4. Our key points which we outline below include the continuation of the principles of good regulation;opportunities to improve ex-ante and ex-post the evaluation of regulatory controls; the need to encouragegreater co-regulation and the alignment of industry incentives.

Maintain Principles of Good Regulation

5. We have benefited from independent sectoral regulation based on the principles of good regulation asdeveloped by the Better Regulation Taskforce. We believe that it is important that those principles shouldcontinue to apply during times of economic turbulence. Any knee-jerk reaction that would lead to a moveaway from these principles could create risks for Network Rail and lead to increased financing costs.



Balance Between Sectoral Regulation and Independent Regulation

6. Network Rail believes that there is a clear need for sectoral regulators in industries such as ours, wherethe regulator brings a more detailed practical knowledge of the issues and processes they are regulating.ORR’s independence serves to give stability to Britain’s railway industry, facilitates longer-term businessplanning, and with it brings greater economic eYciencies.

Need to Improve Ex-ante and Ex-post Sectoral Economic Regulation

7. We are generally satisfied that the regulatory regime works well and has delivered real benefits to theindustry. However, we have some concerns about how regulatory policy is translated into practice.

8. We believe that it is important that ORR justifies the rationale for its decisions in more detail. Anunderstanding of the reasoning behind its decisions would enable the industry to better regulate itself,minimising the need for intervention. Regulatory Impact Assessments (RIAs) and cost-benefit analysisshould be part of the standard toolkit used by ORR when considering changes to regulatory controls.Currently these tools are used to a very limited extent.

9. In particular, we also consider it important that there should be retrospective assessment of regulatorycontrols, by ORR, to assess their eVectiveness. This would enable the ORR to design optimal regulatorycontrols.

10. In October 2008 ORR published its determination of Network Rail’s income and outputs for the fiveyear period from 1 April 2009. The determination placed particular emphasis on the delivery of outputsrather than inputs. This was an approach which we welcomed. If ORR were to focus on the monitoring ofinputs, this would restrict our ability to manage the delivery of the outputs in an optimal way. AlthoughORR has clarified that we are free to manage our business eYciently provided we deliver the outputs, it isimportant that this principle is applied in a consistent manner. Just as we recognise the need for changewithin Network Rail, a genuine focus on outputs would require real changes in the approach of somesectoral regulators.

The Design of New Regulations

11. In the design of regulatory controls, ORR should consider on a case-by-case basis whether a co-regulation approach to regulation would be more appropriate. We believe that the regulatory frameworkshould encourage the industry to work together. To that end, ORR should not be reluctant to “roll back”regulation where the industry has demonstrated a degree of self-regulation or regulation is ineVective.

How Government should Regulate in a Proportionate and Effective Manner

12. Although Network Rail is independently regulated, the franchised operating companies (TOCs), whoare our customers, are eVectively regulated in most respects by the Department for Transport and TransportScotland. When designing regulatory controls for the TOCs, it is important to consider the synergiesbetween Network Rail and the operating companies. In particular it is desirable that incentives are alignedthroughout the industry to make them as eVective as possible and avoid any perverse behaviour. We believethat any regulatory controls contained in the franchise agreements, in so far as possible, should encouragecollaboration between Network Rail and the operating companies, avoiding adversarial behaviour. We alsobelieve that there is merit in considering whether more of the regulation of operators could be carried outby ORR to help achieve a more joined-up approach. This would build upon the integration of safety andeconomic regulation and, more generally, we believe that a single sectoral regulator for all parts of anindustry is likely to be preferable in most cases.

Avoiding Regulatory Overlap

13. We believe that the work of the National Audit OYce (NAO) is important in making sure that thesectoral regulators oVer value for money. Nevertheless, it is important to avoid any overlaps between thework of the NAO and the ORR, so as to minimise the regulatory burden. For example in 2008 NAOevaluated train performance, which was an area already monitored by ORR.

14. We trust that the above submission will prove of value to the committee in its deliberations. We willbe happy to support any further enquiries you may have through written or verbal evidence.

March 2009



Memorandum submitted by Europe Economics

HOUSE OF COMMONS REGULATORY REFORM COMMITTEE

Submission By Robert Young, Europe Economics

Synopsis: this submission argues that the formation of larger regulators by merger of earlier smallerregulators has resulted in a shift of attention away from the limited number of basic tasks that economicregulators were created to carry out and towards an expansion of regulatory scope and ambition. The resulthas not obviously benefited consumers and it is not certain that it has resulted in greater regulatory eYciency.It is perhaps time for Government to pare back the scope of regulation but to ensure that it is rigorouslyand independently applied.

Background

1. Europe Economics is a private sector consultancy that specialises in the application of economics andeconometrics to business problems, primarily in the fields of competition, regulation and public policyanalysis and formulation. The firm’s clients include companies large and small, trade and professionalbodies, regulators and competition authorities, and law firms. About half our business, measured by numberof assignments, comes from outside the UK: our largest non-UK clients are the European Commission andIrish economic regulators.

2. My credentials for making a submission to the Committee are as follows. I spent some 20 years inprivate sector industry, completed a two-year secondment to the 10 Downing Street Policy Unit in the 1980s,and was then appointed and re-appointed a member of what was then the Monopolies & MergersCommission (MMC), serving there from 1986 to 1992. In 1993 I began consulting in competition andregulation issues for Coopers & Lybrand, and joined Europe Economics five years ago. A good deal of mywork in the past 20 years has been for regulatory bodies or for companies appearing before them. I have beeninvolved in 31 inquiries by the MMC or its successor body, the Competition Commission, and in 17 inquiriesinvolving UK economic regulators.

3. Competition and regulation involve overlapping skill sets: although the institutional arrangementsdiVer, consulting experience acquired in one is almost always of value in the other. In some cases,competition and regulation may be closely intertwined. Sometimes an authority needs to establish whetheran unregulated service ought to be regulated, or whether a regulated service ought to be removed fromregulation and left to competition. It is no accident that some UK economic regulators have now been givencompetition authority powers, to be exercised in parallel with those of the OYce of Fair Trading.

Fewer Bigger Regulators

4. The single issue I should like to bring to the Committee’s attention is whether the Government’sapparently remorseless creation of fewer bigger regulators from a greater number of smaller, morespecialised regulators has been a good thing for regulatory eYcacy, or, more importantly, for consumers andUK society. My personal view is that it has not, and I suggest that the Committee may wish to explore foritself whether, in practice, bigger regulation has proved to be better.

5. The principal regulatory “mega-formations” that have taken place under the present Government arethe Financial Services Authority (FSA); the OYce of Communications (Ofcom); and the Gas and ElectricityMarkets Authority (GEMA), which conducts its day-to-day activities through the OYce of the Gas andElectricity Markets, Ofgem. The consumer coverage of these organisations is immense: between them, theservices regulated by the FSA, Ofcom and Ofgem reach into virtually every household in the UK.

The Operating Costs of Regulation

6. It has been said that the operational costs of the new mega-regulators are greater than the pre-mergertotals of their predecessor bodies, although it is now hard to establish like-for-like comparisons. That said,some regulators have ballooned more than others:

— As at March 2008 the FSA employed 2,535 people, compared with 1,762 as at March 1999, bywhich time it had taken over substantially all the functions of the predecessor bodies. Theheadcount increase amounts to 44%.

— Ofcom, formed at the end of 2003, had 727 employees as at March 2004, rising to 812 in March2008, an increase of 12%. However, this comparison conceals a substantial dispersion of almost600 Radiocommunications Agency employees, and it is not clear that any of the impliedproductivity gain should be credited to Ofcom. The two principal sectors regulated by Ofcom—telephony and commercial broadcasting—accounted for some 420 staV (at Oftel and theIndependent Television Commission) just before the creation of Ofcom.

— GEMA and Ofgem replaced only two previous bodies, the OYce of Gas Supply (Ofgas) and theOYce of the Electricity Regulator (OFFER). Ofgem records that it reduced its headcount to 303 inits first year of operation from the figure of 380 employed by its predecessor organisations.Nevertheless, in the five years 2004 to 2008, the staV costs of GEMA and Ofgem rose by 18%, from£16.3 million to £19.2 million (the published accounts do not reveal numbers of staV).



7. The running costs of regulators are of course a burden on the regulated industries that finance them,and thus ultimately on consumers, and it is for the Committee to reach a conclusion on whether theincreasing cost burden is either necessary or fair in relation to the regulation carried out.

The Apparently Remorseless Expansion of Regulation

8. However, my concern is less with cost increases—which, however objectionable, are still a smallfraction of industry revenues—than with the expansion of regulatory scope. I am certainly not the firstcommentator to raise this matter, and I am sure I will not be the last, but I do join with others who mighthold similar views in urging the Committee to include regulatory reach and ambition in its investigation.

9. When economic regulators first came to prominence in the 1980s and 1990s it was expected that as themonopoly supply industries they regulated gave way to competition the need for economic regulation wouldwither away. This has simply not happened: no economic regulator has vanished except to form part of abigger regulator. It is not too fanciful to say that economic regulation has become an industry in its ownright, and that what has been referred to as “regulatory creep” is becoming accepted as a normal tendency.

10. There is copious evidence to suggest that regulators—and their sponsoring Ministers—now see theexpansion of regulation into sector co-management as some sort of guiding principle. I quote from threesources to illustrate the point.

11. The first is a speech given by the then Deputy Chairman of Ofcom, Richard Hooper, to an Australianaudience in November 2005. Here are some extracts from what he said:

“The conclusion of the Telecoms Strategic Review earlier this year has led to greater investmentconfidence in BT, the incumbent and in both types of BT competitors—infrastructure competitorslike Cable & Wireless, and service competitors like Carphone Warehouse—a win, win, winsituation I believe…

“We hope to have encouraged not just investment but also “innovation”…

“Ofcom engages with its stakeholders not via remote control but with the emphasis on face to facemeetings, presentations and seminars, not just in London but also around the devolved nationsand regions…

“The new building reminds visitors more of a professional services firm than a governmentdepartment…

“There is an entrepreneurial air to Ofcom’s approach to regulation which might surprise peopleand might on occasion be more reminiscent of the private sector than the public sector. There isan element of deal-making in Ofcom’s approach to some big regulatory issues, getting peoplearound a table and hammering out an acceptable solution and way forward. Whilst there is andhas to be great attention to process, process should not suck the regulator away from findinglateral, creative, innovative interventions…”

12. Ofcom’s predecessor in the telecoms sector, Oftel, was set up to carry out such basic function as price-capping BT’s retail prices and its wholesale interconnection charges. As regards the viability of BT, Oftelwas required merely to ensure that the company could finance its regulated functions. One might ask: whyis it now the business of Ofcom to encourage investment in BT or in any other competitor for that matter?Is it for Ofcom to take a position on innovation, and what exactly do the quotation marks round the wordinnovation imply? Is it appropriate for Ofcom to engage in deal-making with regulated, or even unregulated,entities? Mr. Hooper’s remarks make Ofcom sound like an old-style sponsoring Ministry—the very thingthat independent regulators were established to get away from.

13. My second source is evidence put to a House of Lords committee which in 2007 produced a reporton Regulation.205 The evidence I refer to comes from economist observers of the UK regulatory landscape,Messrs. Keith Boyfield and Tim Ambler.206 Relevant extracts are as follows:

“…regulatory agencies have grown dramatically since 1997 both in size and the roles they are nowassigned. This trend can be attributed to the current government’s relative scepticism about, orlimited understanding of, market mechanisms, and perhaps regulatory agencies’ utility asadditional branches of government. The extent to which government should intervene in detail inmarkets is a matter of political opinion. What is not in doubt is that these agencies enable the partyin power so to do…

“The Labour government’s consumerist agenda has proved hard to define in legal language. Wewould argue that it [is] open to doubt whether any government should devolve governmentalresponsibilities to unelected quangos in this way. Significantly, Ministers have provided the utilitieswith hardly any guidance on how to fund their social and environmental objectives. For instance,how far should prices rise in order to cross-subsidise those who can less aVord fuel? And how highshould prices go in order to address with [sic] specific environmental problems? Little attempt hasbeen made to establish priorities and trade-oVs. The theoretical independence of regulatoryagencies is no excuse for not specifying what they are supposed to achieve.”

205 http://www.parliament.the-stationery-oYce.co.uk/pa/ld200607/ldselect/ldrgltrs/189/18902.htm206 http://www.publications.parliament.uk/pa/ld200607/ldselect/ldrgltrs/189/7060505.htm<n3



14. My third source is again the 2007 House of Lords report on Regulation of which Chapter 7 readsas follows.

“7.38. A lot of the evidence we received highlighted the way in which regulators’ roles kept onexpanding, taking them further away from eventual demise. This is supported by the data wereceived on regulators’ costs and staV numbers. Although a few regulators within our remit havereduced their individual headcount over the past three financial years, the number of staVemployed by regulators collectively in the financial year 2006–07 was almost 6,246, a 9.14%increase over the comparable figure for the financial year 2004–05…

“7.39. Several witnesses commented upon the tendency for the regulators to keep looking for newthings to do (Q 334, Q 485, p 296, p 459). Clive Davenport from the Federation of Small Businessessaid, “when most of the regulators were formed the world was a totally diVerent place and I feelthat they have become self-perpetuating bodies, and there is a problem with that because they endup searching for something else to look at” (Q 334)…

“7.40. More often than not, however, we heard the view that the accretion of duties by regulatorswas caused by others—Government, Parliament and the EU—rather than regulators themselves.The Chairman of Ofcom made the following point about regulatory expansion: “the primary causeof that, I suspect, lies … in Parliament, because it is Parliament and Government that tend toexpand the roles of regulators” (Q 41).”

15. It may very well be true that Government and the EU are responsible for some—possibly even a largepart—of the increasing activity of regulators. But the Committee may wish to question regulators onwhether they take steps to contain or diminish the scope of regulation.

16. It has sometimes been said—rightly in my view—that the overarching objective of regulation is tocommand public confidence. Has this happened? I think not. It is hard to see that the new mega-regulatorshave undertaken thorough and fearless investigations leading to clinching successes. The current state of thebanking sector speaks for itself, as does the intractably oligopolistic structure of gas and electricity supply.The impression one gets of the mega-regulators is that they have forgotten what their predecessors werecreated to do—to defend the consumer interest against supply-side abuse—and now see their role rather asbrokering relationships with suppliers and furthering sectoral strategic goals.

A Possible Solution

17. Worryingly, the Government has shown the same tendency towards agglomeration in reorganisingconsumer watchdogs, the independent bodies created to attend to matters of detail which (curiously)regulators are not expected to manage. Thus, last October, Postwatch, energywatch and the NationalConsumer Councils were merged, not without protest, into Consumer Focus. It remains to be seen whetherConsumer Focus is more or less eVective for consumers, and more or less costly to run, than the bodies thatwere merged into it—but recent history suggests that we should not be optimistic.

18. What, then, might be done? My suggestion would be to go back to basics—to pare back the scope ofregulation and the duties of regulators to the essential things that only statutory regulation can do, but thento ensure that regulation is done yesterday and well. Such a reversal of current trends needs to jettison anyfluVy partnering relationships in favour of a fierce regulatory independence. The regulatory tool-kit, onemight argue, should contain no more than a hammer and nails—the hammer for banging companies intoline, and the nails for holding them in place. I acknowledge that regulators cannot by themselves reinventthe regulatory world: Government has an ineluctable part to play in cutting back regulation to its essentials,and then in ensuring that these essentials are carried out eVectively and eYciently, but such moves wouldbenefit from a parallel commitment by regulators.

19. If we need to look for an example of how to do it, then in round terms it seems to me that Ofwat, theregulator of water services, remains a good model, perhaps because it has moved least far from its originalform. One might argue that, unlike communications and broadcasting, the water and sewerage sector istechnologically slow-moving, but that is to miss the point. Ofwat’s strength and the source of its eVectivenessis that it has continued to concentrate its eVorts on those things—and only those things—that a genuinelyindependent regulator needs to do.

February 2009

Letter from Europe Economics

Europe Economics is a consultancy that specialises in the application of economics and econometrics toeconomic regulation in many sectors of the economy, including finance, the utilities, telecommunicationsand broadcasting, pharmaceuticals, and sectors aVected by competition policy investigations. Furtherinformation is on our website www.europe-economics.com

One of our Principals, Bob Young, has already sent you a note on the optimum size of regulatory agencies,and I attach a copy of a substantial pamphlet just published by another of my colleagues, Andrew Lilico,addressing the strategic reasons for the failures of regulation in the financial sector.



This letter comments on two apparent mistakes in the application of economic regulation, which couldhave been prevented without requiring more resources or any major reorganisation of regulatory authorities.In pointing out these issues we do not imply criticism of the people concerned; our purpose is with the benefitof hindsight to help to identify analytic mistakes that, being addressed, would improve future regulationboth of the financial and of the other regulated sectors of the economy.

The first is the general question of systemic risk. It should have been obvious to those involved in financialsector regulation that the new instruments and the processes by which claims were being valued involvedrisks to the system as a whole; and they should have had no diYculty in analysing policy options that wouldhave contained or prevented those risks.

Similar issues are present in other regulatory sectors. For example, in energy, is there a systemic risk ofinadequate capacity? Or in pharmaceuticals, is there a systemic risk of facilitating the introduction ofcounterfeits through encouraging parallel trade and expecting pharmacists to act as traders? The questionfor your Committee’s review, I suggest, is how well are systemic risk issues understood and addressed byregulatory authorities and Government Departments. There is no need for international collaboration inaddressing this; within whatever scope each regulator operates at present, our question is how well aresystemic risks being analysed and addressed?

The second general issue is conflicts of interest. Obviously, this issue features in most regulatory debates,but our impression is that it is seldom explored in great depth. The crisis in financial regulation might havebeen much less serious if at an earlier stage the firms auditing the banks and other businesses involved infinancial markets had questioned the values being placed on what are now called “toxic” assets; or if therating agencies had been more eVective. Similar comments may be made about parts of the labour market(bonus targets etc) and about the large scope of some of the banking institutions. It would have been possiblefor the OFT (for example) to investigate some of these markets in depth, seeking to understand whatconflicts of interest there are, and what risks these imply. This would still be an extremely relevantinvestigation.

Dermot GlynnChairman

March 2009

Memorandum submitted by Actal

Reaction from Actal (the Dutch Advisory Board on Administrative Burden) on the inquiry“Themes and Trends in Regulatory Reform” by the Regulatory Reform Committee.

Overview trends in the Netherlands

1. Actal was established in 2000 in the Netherlands as the first European watchdog on administrativeburdens. Since 2000 a lot has evolved within the Netherlands and within the EU on regulatory reform.

2. The Netherlands started with the aim to reduce the admin burdens for businesses. As is the case inmany countries, regulatory burden is primarily approached from an economic perspective ie the need foreVective and simple regulation in order to maintain/increase the level of competitiveness.

3. Since then citizens, professionals and compliance costs were added to the Dutch approach. When itbecame evident that 50% of the Dutch admin burden originated at the European level, this led in time to aEuropean approach on Better Regulation, initiated during the Dutch EU presidency in 2004.

4. Cabinet Balkenende III achieved the first 25% net reduction of admin burdens for businesses. The newCabinet, Balkenende IV, set a second 25% reduction target for businesses in 2007 and reiterated the aim toachieve the first 25% reduction for citizens. An important shift was that more focus was given to perceptionas the general belief was that the first 25% reduction for businesses was hardly felt. A lot of reduction cameapparently from rules that were not longer applied or had little impact on businesses. More attention neededto be given to clear results and reductions that really did matter. In the current Dutch approach, we see,therefore for professionals and citizens that the government focuses primarily on the largest irritationfactors. No objective and thorough measurements exist for calculating the benefits of better regulation.

5. Every new regulation passes through diVerent assessments. Unlike the UK, the Netherlands does nothave one integral impact assessment. Each assessment focuses on various aspects, such as the added valueof the regulation, its impact on businesses or the quality of the legislation itself. The Netherlands is workingon a pilot to introduce in due time an integral impact assessment. Actal endorses this approach. Howeverprogress is still limited. In our view, it is not likely that the present government will finalize the project.



Current developments

6. The implications of the recent economic development have highlighted the belief, underlined by Actal,that now it is even more important to come with clear, simple and eVective regulation that does notjeopardise the functioning of businesses unnecessarily and in a disproportionate manner.

7. This is reflected in the Netherlands recovery plan finalised on the 25th of March 2009. It states that theimplementation of measures leading to a reduction of regulatory costs should be accelerated. According tothe Cabinet this can lead to a reduction of 1 extra billion Euros on top of the already aimed ƒ8.8 billionreduction which the Cabinet should realise by 2011 (25% reduction target).

8. The recovery plan presents these reduction measures as impulses to stimulate businesses. It is howeverunclear how the recession will aVect the broader picture of regulation namely in the financial sector. Thebetter regulation approach will however only be successful if new or adapted regulations do no underminethe regulatory burden reductions already achieved and even more important, if new regulation is alsodesigned in a simple and targeted manner. This is the reason why Actal, with success, has always pleadedfor a net reduction target of 25%.

9. In the past we have seen that a crisis often leads to more regulation, initiated on various governmentallevels (regional, national, European) such that the sentiment is created that the problem has been tackled.It is essential that in the current crisis, regulation in itself is not seen as the solution. In order to be eVectivethe source of the problem needs to be addressed in a proportionate way, with a specific focus/target.

10. To avoid instinct reactions leading to new and not always eVective regulations, the problem itselfneeds to be analysed and addressed at the right level, ie national, European or global. To achieve this, thediscussion needs to be technical as well as political. A possible tool would be to initiate an impact assessmentat the beginning of the process setting out all relevant alternatives including the quantification of its variousimpacts. The IA should be discussed intensively with the most important stakeholders at diVerent momentsduring the policymaking process. Essential in this approach however, and this is the most diYcult in timesof crisis, is that the final solution remains open until the possibilities have been assessed from the relevantperspectives taking account of the most important eVects (eVect businesses, eVect consumers, eVectenforcement, eVect market, etc).

11. The inclusion of stakeholders in an early phase and throughout the process is a precondition to makeit possible for the regulator to take in full account the perspective of the targeted businesses, while makingnew policy. New regulation can not just be a top down process to be eVective. This inclusion will make itpossible to come with new legislation that fits into the existing processes of the various firms. In other words,the regulation needs to be more tailor-made in order for it to be truly eVective and eYcient.

Design of new regulations

12. In the Netherlands the government is aware that the inclusion of stakeholders within thepolicymaking process is essential in order to make regulation eVective. More emphasis is needed howeverfor the eVect of regulation on small businesses. There is a general awareness that small and mediumenterprises should not be hit disproportionately by new regulation regarding the regulatory burdens. Thisis however not always reflected in new regulation. When Actal scrutinises proposed legislation from adepartment, a check is made on the proportionality of its eVect on businesses.

13. The last years have shown that implementation is essential to look at when designing new regulation.This has led within Actal to check all proposed legislation that is scrutinised by Actal on enforcement andcompliance issues. Departments work more closely together with enforcement bodies when drawing up newlegislation.

14. Besides that, the Dutch Cabinet is drawing up a baseline measurement on Compliance costs. Thismeasurement will be the base for future reduction measures on compliance costs.

15. More attention is also coming from the Dutch Parliament on regulatory burden in a broader sense.The parliament, for example, supported the advise of Actal on the principle of Lex Silencio (if a citizen ora company does not receive a reaction on a certain type of application (ie building permission) on time fromthe government, the application/permission is granted automatically). The parliament also demanded fromthe government to submit the new recovery plan to Actal.

March 2009

Memorandum submitted by the Local Better Regulation OYce (LBRO)

Executive Summary

The perceived failures of regulation associated with the unprecedented crisis in global financial marketsraise critical questions for the better regulation agenda. There are renewed calls from business to deregulate,while others call for greater, more prescriptive regulation.



The debate should not be about more or less regulation, but about better regulation—how to ensure thatregulation is proportionate, accountable, consistent, targeted, transparent and based on a comprehensiveassessment of risk. Better regulation drives prosperity and supports protection both for communities andcompliant businesses—it can and must be a matter of “win-win”.

LBRO has been created to improve co-ordination, consistency and performance in local authorityregulatory services (environmental health, fire safety, licensing and trading standards), in order to helpimprove economic prosperity and community well-being. “Prosperity and Protection” is therefore at theheart of LBRO’s mission.

Achieving prosperity and protection for both communities and business requires an approach thatembraces a clear focus on regulatory outcomes, a better understanding and application of risk acrossactivities by regulators, and building a new relationship between the regulators, the regulated, and theintended beneficiaries of regulation.

Specifically, this means:

— better regulations, requiring a better understanding by policy makers of what levers can be usedto ensure markets work eVectively, what drives business and consumer behaviour, and in particular,the sensitivity of businesses to enforcement, sanctions, reputational damage, financial damage, aswell as the understanding of, and attitudes to, regulatory compliance;

— better regulators, which means ensuring oYcers are equipped with suYcient skills, knowledge, andcrucially, business understanding, to enable them to operate with sound judgement and discretion,to target their eVorts intelligently for maximum impact;

— a more strategic approach to regulation, focused on outcomes based on the wider strategic aimsof prosperity and enterprise, as well as those of protection and justice; and a more intelligentapproach to selecting interventions and sanctions—employing the appropriate choice and designof regulatory approach, so that it is well targeted to the regulatory objective.

Better regulation is very much about changing underlying cultures, and this takes time to work through thesystem and embed. Continued support of better regulation strategies is essential, including developing theevidence[N1][N2] base and intelligence required to drive through the desired change, this is a long terminvestment in the future to secure the sustained outcomes we need.

In the context of LA Regulatory Services, LBRO is strongly committed to the local delivery model, whichprovides considerable benefits from collaborative working at local level to provide tailored services, basedon democratic accountability, to achieve shared community outcomes.

LBRO is working in partnership with local and national government, local and national regulators,professional bodies, and consumer and business organisations to support and improve this model, and tofurther embed the better regulation principles throughout local regulatory services to better support businessand communities, and to ensure the continued protections of consumers, employees and the environment.

This submission expands on these themes, sets out how LBRO is working with others to respond to them,and draws out lessons for the wider regulatory reform agenda.

About LBRO

The Local Better Regulation OYce is a non-departmental public body, accountable to the Department forBusiness, Enterprise and Regulatory Reform through the Better Regulation Executive. It was established bythe Regulatory Enforcement and Sanctions Act 2008 to drive the wider regulatory reform agenda at locallevel and to support and incentivise improvement in local authority (LA) regulatory services—environmental health, fire safety, licensing and trading standards—to reduce unnecessary burdens onbusinesses and support economic prosperity.

Our mission is to secure the eVective performance of local authority regulatory services (LARS) inaccordance with the principles of better regulation. Improved regulatory services can demonstrate theirsignificant contribution to the delivery of economic prosperity and community wellbeing, while unnecessaryburdens on well-run compliant businesses can be significantly reduced.

This submission to the Regulatory Reform Committee concentrates on themes and trends in localregulation in accordance with our remit and focus.



Questions Regarding Current Developments

1. What are the implications of recent economic developments (for example, the economic downturn; creditcrunch and problems within the financial sector) for the design and delivery of the regulatory reform agenda,including risk-based regulation?

Impact on perceptions of risk and regulation

The perceived failures of regulation associated with the unprecedented crisis in global financial marketsraise critical questions for the better regulation agenda. The crisis has heightened awareness of risk. Thenature and role of regulation has been the subject of immense media scrutiny and public debate, with manycalling for greater, more stringent regulation. It would be understandable if it also weakened the appetite ofpolicy makers and practitioners to focus on reducing the regulatory burden, and instead resulted in a kindof domestic regulatory protectionism.

But at the same time, the grave pressures on business makes it all the more important that regulatoryframeworks support economic eYciency, without undermining key protections for consumers, workers, andthe environment. The debate should not be about more or less regulation, but about better regulation—howto ensure that regulation is proportionate, accountable, consistent, targeted, transparent and based on acomprehensive assessment of risk. Better regulation drives prosperity and supports protection both forcommunities and compliant businesses—it can and must be a matter of “win-win”.

An enormous proportion of business regulation is experienced and enforced at local level (which is thelevel at which LBRO was created to deliver the better regulation agenda). In the current, tough environmentfor business and for communities, it is even more important in ensuring that local regulation provides properprotection and prepares for recovery and growth. This requires a clear focus on these outcomes.

Impact on public spending

At national level, the impact of the fall-out for public spending is likely to be a constraint on governmentto support the better regulation agenda financially; government will increasingly be operating in anenvironment of spending cuts, and less within one of funding new initiatives to incentivise change. This willrequire finding ever smarter and more eYcient ways to drive change which has real impact.

Local authorities are of course impacted directly by economic diYculties, and are operating increasinglyunder budgetary pressure, at a time when demand for services is rising—this will be a significant issue in thenext spending cycle. This situation underlines the need for targeting resources and regulatory interventionsintelligently to support both business and consumers, emphasising the importance of risk based regulation,now more than ever.

Impact of recession on business and communities

The impact of the economic environment on businesses and consumers in local communities, and thesubsequent eVect on the choices, approaches and priorities of regulatory services is very relevant here, aslocal regulatory services can play an especially important role in supporting prosperity during diYculteconomic conditions. Some specific examples are set out below:

Examples of Impact on Business and Consumer Behaviour

Credit Crunch:

— The credit crunch significantly reduces available sources of consumer borrowing, leading to a risein illegal money lending or “loan sharking”, oVenders who prey on vulnerable individuals, chargeexcessive levels of interest and subject victims to intimidation and violence. This increases the needfor consumer protection, and eVective, timely advice on accessing credit and responsible financialmanagement.

Pressure on Housing:

— House repossessions are rising, placing increased demand on registered social housing and theprivate rental sector. In these circumstances, environmental health professionals play a key role inmaintaining housing standards, especially in multiple-occupancy dwellings. The people aVectedcan be among the most vulnerable in society so that poor housing impacts on community cohesion,health and education. It is important that tenants have access to advice on their rights andinformation about the help on oVer.

Shadow Economy:

— Growth of the shadow economy threatens both business competitiveness and consumer protectionfrom counterfeit, illegally imported and unsafe consumer products. This increases the need to focuseVort on rogue traders and improve co-operation across council boundaries through specialistteams such as the regional Scambusters teams and Illegal Money Lending teams, tackling thoseoVenders that target the most vulnerable in society.



How local regulation can support business and consumers

With businesses, especially SMEs, struggling as a result of the combination of restricted access to credit,and reduced consumer confidence and spending power, eVective local regulation can play an important rolein supporting business survival and recovery.

56%(i) of the face-to-face interactions between local businesses and local authorities are throughregulatory services oYcers

Regulatory services are often the visible face of local authorities in business communities. Building on theengagement these oYcers have with local businesses, they are well placed to oVer:

— a wide range of signposted assistance and improved information to businesses;

— a voice for business, for example in articulating the challenges and concerns of business to a wideraudience;

— more eVective engagement with the business community to build better understanding of andrelationships with businesses, local trade bodies and business organisations to help tailor andimprove the services provided.

— EVective targeting of regulatory activity, using local economic assessments: The requirement forlocal authorities to consider the economic conditions of the local area will help to ensure that localauthorities have a clear understanding of the conditions required for business to flourish in theirarea, and for people to take advantage of economic opportunities.

These themes are explored further in LBRO’s advice and guidance,(ii) supporting local authorities in theirduties to promote local economic prosperity by making greater use of local regulatory services and theirinteraction and relationship with local businesses.

In addition to the guidance, LBRO is focused on incentivising and supporting local regulatory servicesthrough a wide range of programmes, including improving outcome focus, leadership, capacity andcollaborative approaches and embedding risk based regulation.

LBRO strongly supports the local delivery model for provision of environmental health, tradingstandards, licensing and fire safety. Devolving decision-making to local levels enables public goods andservices to be tailored to reflect diVerences in preference and needs between places, and supports anintegrated approach to tackling issues and challenges facing particular areas. Further improvement in publicservices and the quality of life can be best driven locally through strong local partnerships across the publicsector, focusing on locally drawn targets and priorities, and working more closely with the private, business,voluntary and community sectors, based on the premise that local working is more eVective as it is closerto the user and can help service providers gain a better understanding of the end user’s individual needs.This is particularly relevant in times of economic diYculty, and LBRO is working to ensure the local modelworks eVectively by identifying and addressing systematic problems, improving coordination andconsistency, to maximize the contribution regulatory services can make in local contexts.

This, and other work LBRO is engaged with, which has relevance in the wider regulatory reform agenda,is discussed further throughout this submission.

2. How does the Government balance the need for an eVective regulatory framework—providing the necessarybenefits and protections—with the commitment to improve the conditions for business success?

Prosperity and Protection

The framing of this question suggests an inherent tension between the need for robust protection forconsumers, workers and the environment on the one hand, and supporting businesses to prosper and growon the other. However, we believe this is not necessarily a simple question of balance; a more supportivebusiness environment does not equate to increased risk for individuals and communities.

Rather, prosperity and protection can be addressed as mutually supportive concepts. Thriving businessescreate vibrant high streets and support the wider prosperity of local communities through employment andinvestment, while regulatory activity that targets high risk and deliberate non-compliance can protectcompliant businesses by removing any competitive advantage achieved by non-compliant businesses.

Regulation and Prosperity: Food Safety

A practical example of prosperity and protection through better regulation is shown in the evaluation ofthe Safer Food, Better Business initiative from the Food Standards Agency, developed as an innovativeapproach to help small businesses put in place food safety management procedures and comply with foodhygiene regulations.

Independent evaluation shows that in addition to improving standards of compliance and protection forconsumers, the programme is making significant progress in improving or supporting the eVectiveness ofthe business in general. Feedback from participating businesses is particularly positive as:

— 70% of business stated that food safety management systems had increased the eVectiveness of thebusiness; and



— 45% stated that their business is more profitable because it operates such a system.(iii)

Achieving prosperity and protection for both communities and business requires an approach thatembraces a clear focus on regulatory outcomes, a better understanding and application of risk acrossactivities by regulators, and building a new relationship between the regulators and the regulated.

Risk Based Regulation

Risk based regulation needs to be embedded in the decision making framework of regulatoryorganisations to ensure a purposeful move from risk to outcomes. Within local authorities, this meansaligning regulatory strategy and assessment of risk with a consideration of the authority’s duty to ensureeconomic and community well being.(iv)

It is the consideration of risk and use of evidence at every stage of decision making from the strategic tothe operational—encompassing strategic prioritisation, selecting intervention strategies, targeting premisesand proportionate sanctioning responses—that will realise Hampton’s vision of a comprehensive riskassessment system.

LBRO is working to strengthen and improve risk based regulation at local level, supporting LA regulatoryservices across a range of activities, including development of risk frameworks which address the national-local dynamic in terms of enforcement priorities and targeting, and developing a toolkit for use by LAregulatory services in providing increased focus on service outcomes.

New Relationships

Building a new relationship between the regulators and the regulated presents the challenge of seeingbusinesses, whether compliant or not, as customers of regulatory services. It is building an appropriate trustrelationship that encapsulates the attitudes required for better regulation, supported by a conscious movefrom the inspection-driven compliance control methods encouraged by a centrally-driven agenda towardsthe more business-aware and citizen-engaging approach fostered by a focus on local need and assessmentof risk.

Principles Based Regulation

In the wake of the financial crisis, there has been increased speculation regarding principles basedregulation in a complex and changing regulatory world, with some calls for a more prescriptive approach.LBRO is strongly in favour of placing greater reliance on principles and outcome-focused, high level rulesas a means to drive regulatory outcomes, and moving away from detailed, prescriptive rules setting out howbusinesses should operate to achieve compliance. Regulation should be able to rapidly respond to changesin market conditions. A continued shift to principles based regulation must be applied in conjunction withgreater and more eVective use of comprehensive risk assessment, and a focus on regulatory outcomes.

Consistent and Authoritative Advice

With regard to LA regulatory Services, the Primary Authority scheme provides a means to supportregulatory oYcers in providing authoritative advice and professional expertise within a principles basedframework, without creating additional inconsistency for business. The Primary Authority Scheme is anexcellent example of how the local regulatory delivery model can be supported and improved to sustain thebenefits to the local community of tailored and targeted regulation, while minimising potential disbenefits,in this case from potential inconsistency and duplication of eVort.

“170,000 businesses experience inconsistent advice from regulators”

There are estimated to be around 1.6 million contacts between businesses in England and Wales and localregulatory services per year. LBRO’s survey of business in 2008(v) found that 33.6% of all businesses (around170,000), have experienced inconsistency across three or more local councils or fire and rescue services.

Primary authorities will be a position to develop a comprehensive understanding of a business, includingits compliance record, but also the market in which it operates, its customer base and its approach to businessdevelopment. Understanding such drivers of a business will help the primary authority provide tailoredsupport and authoritative advice that both the business and other authorities can rely on.

3. How might a proportionate and targeted response to improving the regulatory framework in the wake of thefinancial crisis be made? What lessons are there for the wider regulatory reform agenda?

Supporting the regulatory framework to embed better regulation

Whilst we do not have the expertise to comment on the particular conditions and circumstances ofregulation in the financial sector, there are undoubtedly lessons to be learnt of relevance to the widerregulatory reform agenda. The financial crisis has raised critical questions regarding risk and regulation, yetthese questions are not about more or less regulation in an absolute sense, but about better regulation, andabout what that means and how to achieve it.



LBRO was established in 2007, following the 2005 Hampton Review: Reducing Administrative Burdens:EVective Inspection and Enforcement. In contrast to the proposed consumer and trading standards agencyrecommended by Hampton,(vi) LBRO is not a regulator but a new kind of regulatory instrument.Recognising the need for a more sophisticated response to the complex local regulatory landscape, LBROoperates to make the regulatory system as a whole function more eVectively by being a catalyst for change,utilising our statutory functions and ability to build relationships.

Other areas of regulation may benefit from a similar approach.

This is an approach that is important given the complexity of the wider local authority regulatory system,involving many organisations, levels of delivery and accountability. LBRO’s role includes improvingcommunication channels between national regulators and local authorities and across organisational silosthat exist at local and national level to achieve greater co-ordination and consistency across theregulatory system.

Our work at a system level is carried out with a coalition of partners across the regulatory landscape,including the representative body LACORS,(vii)national regulators, and the professional bodies, focusing onbuilding consensus about the necessary systemic conditions for excellence to deliver better outcomes. Theseconditions are being considered through a series of modules, focusing on risk, priorities, data sharing,competency and the impact and outcomes of local regulation.

Better regulation requires better regulations with policy development rooted in an understanding of risk—including public risk appetite, an understanding of the drivers of consumer, business and market behaviourand the impact of regulatory intervention, and a robust use of evidence. This approach allows an appropriateselection of policy tools, including interventions and sanctions, to achieve the desired outcomes. One of ourkey statutory functions is to provide advice to government on better local regulation, using a growingevidence base on change and improvement in the regulatory system,(viii) including advice on proposals fornew or revised regulations.

At the level of implementation, our approach to improvement is very much about working with localregulatory services and those directly impacted by regulation: businesses and consumers. By bringingtogether these groups, LBRO can seek to change the regulatory conversation, adopting an approach whereregulatory compliance is “co-produced”.

Co-production of Compliance

Selecting appropriate intervention techniques should be based on an understanding of market conditions,include the roles and relationships between citizens, businesses and regulatory bodies. Local regulators arein a unique position to understand both business and consumer behaviour, and select the most appropriatemeans, be it advice and guidance, consumer education or targeted inspection, to drive greater compliance.

Examples of how LBRO is using its statutory powers, working with and through partners across thelandscape to improve the application of regulation include:

Embedding Better Regulation— Some Examples:

Competence and Leadership:

— Working with the professional and representative bodies (Trading Standards Institute, CharteredInstitute of Environmental Health, Institute of Licencing and LACORS), supporting competencyand leadership development for regulatory oYcers, to facilitate competent application ofregulatory discretion within a consistent and transparent framework.

You can’t regulate eVectively what you don’t understand:

— Increasing regulators’ understanding of the business environment through the competence work,and the Trading Places scheme.(ix) This allows regulatory oYcers to spend time in a businessenvironment to understand business drivers and the challenges they face in achieving compliance.

Supporting and sharing best practice:

— Disseminating best practice, including the work of the Beacon winners for “Cutting Red Tape”,to support local authorities to engage business in positive ways and build a relationship of trust.Businesses will benefit from accessible, useable support and guidance, including sector specificproducts and from understanding what they can expect from regulators to support businesses inachieving compliance.

Piloting new approaches:

— The Retail Enforcement Pilot is an example; lessons from this will support LA regulatory servicesto make better use of joint working models, gathering intelligence to target activity on the areas ofhighest risk while reducing burdens on business through fewer, more eVective inspections.



EVective use of sanctions:

— Considering approaches to the application of sanctions, and guidance on the use of Macrorysanctions, with the world class coalition, will ensure consistency in their application by localregulatory services and national regulators.

Supporting eVective balance between national and local enforcement priorities:

— Using national enforcement priorities in service planning will ensure that regulatory services focusresources and activities on national priorities for enforcement, those areas that carry highest riskor require a collaborative approach to enforcement in order to control risk, while also maintainingfocus on local priorities.

Better Regulation for SMEs:

— Implementing the recommendation from the Better Regulation Executive Heath and Safety review,in developing a single compliance project, will help SMEs to demonstrate their compliance acrossa range of functions and thereby provide valuable information to support targeted activity basedon risk.

Consistent, intelligent and authoritative advice and enforcement:

— The Primary Authority scheme provides a means for regulatory services to better understand thebusinesses they are regulating, by developing a relationship with those businesses, based on goodintelligence, an agreed agenda and joint goals for improvement, where required, enabling servicesto tailor their advice and support maximum eVect, as well as ensuring a consistent approachnationally.

This, and further activity of LBRO and its partners, is driving change to improve regulations; theregulatory system; regulators’ understanding of business and capability to regulate more eVectively; theembedding of the better regulation principles across local regulatory activity; the improvement of regulatoryservices; and the improvement of the stock of knowledge and understanding about how to achieveregulatory outcomes.

There is no quick fix:

To eVect suYcient change of culture, behaviour, attitudes and relationships required to achieve the betterregulation outcomes will take time and require sustained pressure. And this means continued governmentcommitment to a long term strategy to achieve sustained change which will deliver the required outcomesfor the economy, business, consumers, communities and the environment.

4. How could the Government improve its capability to regulate in a proportionate and eVective manner?

In addition to the points made under the earlier questions, there is a need to ensure the regulatory deliverymodels are right, and are working to optimum eYciency and eVectiveness.

Supporting local delivery of regulatory outcomes:

The regulatory services of trading standards, environmental health, licensing and fire safety are deliveredat a local level, and the localism agenda is increasingly defining how they can tailor their services to meetlocal needs and eVectively work in partnership with other council departments and other local services toensure greater eYciency, proportionality and to improve access to services by creating, in part at least, a one-stop-shop for business.

The benefits of local delivery are significant, eVectively contributing to both local and national prosperityand protection. However, the complexity of structures and delivery arrangements for local regulation cancreate systemic problems that impact on businesses, consumers and regulators. These include inconsistenciesin resourcing and the resultant problems of capacity and variable service levels, enforcement inconsistenciesand the consequent cost burdens for business and loss of protection for consumers.

Oiling the machine:

Local resourcing and capacity is a matter for local democratic decision, and in balancing resources withthe risks faced by local communities, diVerences in resource levels will occur according to local conditions.

In order to address resulting unintended consequences, LBRO operates to “oil the machine”, to resolvethe inherent need for coordination and consistency without losing the innovative work, based on anunderstanding of local issues, which is currently being conducted as a result of increased devolution of powerand the development of the place shaping agenda.



With our partners in the world class coalition, we are focusing on the implications of local delivery to seekeVective solutions—some examples:

Addressing “trans-local risks”

— Our research into national “threats”—regulatory risks impacting at a national level—seeks toidentify areas in which the existing local delivery model results in resource inconsistencies as costsand benefits are misaligned, and considers how the resultant potential risk could be addressed.Examples of national threats include regulation of the safety of imported goods, the contaminationof imported food and mobile rogue traders.

Regional co-ordination

— Encouraging regional working models, regional co-ordination and innovative solutions to sharingservices to share intelligence and resources to achieve mutually agreed targets.

Primary Authority

— Primary Authority provides regulatory services with national intelligence and avoids duplicationof eVort, without losing the value added by local oYcers maintaining their rapport with localbusiness and gaining an understanding of the business compliance processes.

5. Is there is a coherent package of regulatory measures for improving the conditions for business success; andhow do regulatory reform initiatives fit into wider Government support?

Improving conditions for business success:

The approach should not be to necessarily develop new regulatory measures to improve conditions forbusiness success, but to ensure that regulation and its application, is fit for purpose—and that meansachieving outcomes which focus on the necessary protections for consumers, employees and theenvironment, and well as prosperity and well-being for business and communities.

At the level of wider regulatory reform, the BRE Health and Safety Review recommendation to developa scheme to help SMEs achieve and demonstrate regulatory compliance as a simple and single process,alongside the Anderson review of government guidance to SMEs and recommendations to help SMEs moreeasily comply with their regulatory obligations and reduce unnecessary business costs, are examples ofinitiatives to improve conditions for business success.

At the level of local regulation, LBRO has an active role in working with its partners, stakeholders andcustomers to bring together, develop, test and help implement such approaches in a way which iscollaborative, builds coherence, and is based on evidence of what works. As part of our programme of work(examples are described above), LBRO will work with LACORS and the Health and Safety Executive toprogress the recommendation for a single compliance scheme for SMEs.

Questions about Design of New Regulations

1. Does Government understand businesses suYciently to design eVective regulations? Is suYcient emphasisgiven to small businesses and competition issues?

Not well enough, but this is recognised and attempts are being made to address this. The Committee’sreport Getting Results: the Better Regulation Executive and the Impact of the Regulatory Reform agendarecommended that “BRE strengthen its channels for obtaining grass roots information from the level ofindividual businesses.(i)

The importance of “on the ground” intelligence:

This recommendation acknowledged the importance of gathering “on the ground” intelligence andunderstanding business perceptions to inform the design of regulatory initiatives. In taking this forward,LBRO has developed a comprehensive programme of business engagement to target horizontal sectorrepresentative bodies, national multi-site businesses, “vertical” trade associations and small and mediumsized enterprises. As suggested in recommendation 19, LBRO has customised all engagement andcommunications activity and targeted it to specific business sectors.

The aim of the LBRO business engagement strategy is, firstly, to raise awareness and understanding ofbetter local regulation and to work with businesses to mutually understand how to achieve better localregulation in practice and, secondly, to ensure that businesses are aware of LBRO activity and its impact forthem in reducing the regulatory burden. Insight and intelligence gathered, backed by supporting researchand evaluation is fed back to Government through our formal advice function to support the design of moreeVective and responsive regulations, providing Government with valuable feedback from the businesscommunity both at the micro and macro level.



Activity includes:

— Regular high level engagement and dialogue with sector bodies, including the FSB and CBI

— Engaging with identified business groups and businesses through a network approach. Thisnetwork acts as a consultation base and ensures wide engagement in a structured manner

— Regional business briefings with local authorities to develop a closer dialogue between businessand local authority regulatory services, and provide updates on the wider better regulation agenda

— Collecting business views, including perceptions of local regulation and experiences of theregulatory reform agenda. Examples included case studies collected from businesses involved inthe Retail Enforcement Pilot

Influencing both policy and implementation:

Our understanding of business needs and the business environment has actively influenced recent policyreviews, including the Anderson review of guidance and recommendations regarding sector specificbusiness advice.

At implementation level, our approach is to work with business to design programmes that will deliverbetter outcomes, as seen in the extensive involvement of businesses in the design and development of boththe Primary Authority and Trading Places schemes. Based on the logic that you “cannot regulate what youdo not understand”, Trading Places increases local regulators’ understanding of the business environmentand approaches to compliance, and in the next 12 months, LBRO aims to provide 750 placementopportunities for local authority regulators.

2. Is there suYcient consideration of how regulations will be implemented, including an appropriate focus oncompliance and enforcement issues?

Improving the implementation of regulation by LA services:

In relation to LA regulatory services, the policy delivery chain from design to implementation ofregulations can be both lengthy and complicated, with regulatory responsibility being either delegated tolocal level or a shared responsibility between regulatory services and national regulators.(i) Europeandirectives provide an additional layer of complexity. Given this complexity, it is important that both theenforcement and enforceability of regulations are considered at the earliest stage.

LBRO has been purposely established as a new type of regulatory instrument, with the powers to workwithin a complicated system to actively improve the implementation of regulation by local authorityservices. Our strategic objectives to support service improvement in regulatory services and to improve theregulatory system(ii) focus on implementation, both at individual authorities’ and at system wide level. At asystem level, this involves advising Government on the enforceability of proposed regulations and workingto improve the systemic conditions for local delivery, including seeking greater alignment of processes andpolicies that impact on delivery, including risk assessment, prioritisation, data sharing and professionalcompetency.

Changing the focus from enforcing to securing compliance:

Working with local authorities involves embedding a risk based and outcome focused approach. Betterregulation involves the purposeful use of regulatory tools to move from risk to outcomes. For manyregulators, this requires a cultural shift from enforcement of the law towards a duty to secure compliance,with a greater emphasis on regulatory outcomes. Within a local authority context, regulators play a role inlocal place shaping and promoting prosperity and protection. Better outcomes can be achieved throughadopting a “co-production of compliance” approach, using the relationship between the state, business andconsumers to change behaviours and select regulatory interventions appropriate to the market conditions.

References(i) The survey on “Business relations with local authority regulatory services” conducted in February

2009 and commissioned by LBRO, reported that 56% of SMEs that have had face to face contact withtheir local authority in the last 12 months have had contact with a local authority regulatory servicesoYcer.

(ii) Supporting businesses in recession and beyond, draft LBRO advice and guidance for local authorities,March 2009, available at http://www.lbro.org.uk/Pages/Resources.aspx?id%217

(iii) Food Safety Management Evaluation Research COI/FSA, 2008.(iv) The Local Government Act 2000 gave local authorities a discretionary power to promote or improve

the social, economic and environmental wellbeing of their area.(v) Based on an extrapolation using national data from LBRO/Ipsos MORI: Business Perceptions of Local

Authority Regulatory Services, September 2008, available at www.lbro.org.uk and the interim businesssurvey by Kirkman Associates.



(vi) Reducing administrative burdens: eVective inspection and enforcement, Hampton/HM Treasury, March2005, Recommendation 28, page 119.

(vii) Local Authority Co-ordinators of Regulatory Services.(viii) LBRO is committed to being an evidenced based organisation. Research and evaluation activity is a

key component of our programme of work and ability to influence the regulatory system. Research andevaluation studies conducted or commissioned by LBRO are available at www.lbro.org.uk.

(ix) OYcers now have the opportunity to step into their customers’ commercial shoes via Trading Places.An intensive two-day study course at leading UK companies oVers a great practical learning experience,plus valuable insight into how businesses are run and the challenges they can face in abiding by the rules.This scheme is open to all environmental health, fire safety, licensing and trading standards oYcersworking in local authorities, as well as businesses from any sector. It is endorsed by the Confederationof British Industry, the British Chambers of Commerce, the British Retail Consortium, the CharteredInstitute of Environmental Health and the Trading Standards Institute. Trading Places was launchedin March 2009 after extensive testing and evaluation, involving placements at Asda, B&Q, Sainsbury’s,Tesco, Thomas Cook and Total. Further details can be found at www.lbro.org.uk

May 2009

Letter from Ian Lucas MP, Minister for Business and Regulatory Reform, Department for Business,Innovation and Skills

Regulatory Policy Committee

It was good to meet you last week in the context of your inquiry on “Themes and Trends in RegulatoryReform”.

I am pleased to now enclose the terms of reference for the new Regulatory Policy Committee (RPC) whichhave been agreed by the NEC Sub-Committee (Better Regulation).

My intention is to establish the RPC as an ad hoc advisory body in the first instance for a period of 12–15months. I have decided to do this to allow for a period during which, as well as being operational in linewith its terms of reference, the RPC will be able to advise government as to how its remit and methods ofworking can be refined to ensure its maximum eVectiveness going forward. This will enable the governmentto review the RPC’s operation in the light of this experience with a view to drawing up a detailed frameworkdocument to inform, support and strengthen its future establishment on a permanent basis.

The RPC Board will initially consist of a Chair and three members with a mix of relevant skills andexperience and appointed on an interim basis. We aim to appoint the Chair in the next few weeks withmembers to follow later in the summer. These appointments are not subject to the Commissioner for PublicAppointments Code of Practice, although we will follow the spirit of the Code. However, at the point atwhich the RPC is established on a permanent basis, the appointments will be subject to the Code and a newChair and members will be appointed accordingly. The existing Chair and members will be eligible to apply.

The Committee will be supported by a secretariat provided by the Department for Business, Innovationand Skills.

13 July 2009

Regulatory Policy Committee—Terms of Reference

The Government is committed to ensuring that its policy decisions are based on strong evidence of costsand benefits, and that regulators operate in line with the Hampton principles.

In 2007, the Government brought in new arrangements for preparing impact assessments and puttingthem at the heart of the policy making process. In January 2009, the National Audit OYce reported that thenew arrangements have helped improve the standard of impact assessment but that the standards of impactassessments still vary widely, and noted that the prospect of external scrutiny is the most eVective motivatorfor departments to produce high quality impact assessments.

The Hampton Report, published in March 2005, identified ways in which the administrative burden ofregulation on businesses could be reduced while maintaining or improving regulatory outcomes throughchanges in the way that regulators work with businesses. The Government is continuing to embed theHampton principles in the way that regulators operate.

To underline further its commitments to eVective and proportionate regulation, the Government is establishinga new external Regulatory Policy Committee

The Government invites the Regulatory Policy Committee:

(a) to comment on the quality of analysis supporting policy decisions on new regulations, and onwhether the policy design will ensure the benefits justify the costs, including:



— the accuracy and robustness of the costs and benefits;

— whether the range of policy options assessed support minimising costs and maximisingbenefits; and

— the degree to which issues of public risk and the practicalities of ensuring compliance are takeninto account.

(b) to review, advise and comment on the performance of regulators against the Hampton principles.

The Committee will not comment on the Government’s policy objectives, which are a matter forMinisters, but will focus on the cost-eVectiveness of the instruments to deliver them.

In addition, the RPC can advise government in areas that it is invited to do so, or areas related to its termsof reference.

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