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Economy: Regulators (Regulators Committee Report)

My Lords, I am grateful for this incredibly rich debate. We welcome the report into economic regulators. I understand that my noble friend Lord McIntosh has qualms, but I completely agree with the noble Baroness, Lady Wilcox, that he will be incredibly proud of this report in time. I am very grateful for the dedication and incisiveness of the investigation and the invaluable recommendations. As many noble Lords have noted, this surprisingly is the first cross-cutting look at economic regulation that has considered such a wide range of regulators. It is a very good time to take a step back and see whether the system that has grown up around us somewhat ad hoc is sustainable and suitable for the challenges ahead. The UK was among the first movers in the area of economic regulation; and yet I believe that the Select Committee report is correct to say that the regime that has been built around the principles of independence, competition and certainty has stood the test of time, despite the reservations caused by recent events. It has adapted to changing circumstances, starting in the post-privatisation period, by encouraging cost efficiency and productivity, competition and consumer protection, as well as investment for future needs. My noble friend Lord Berkeley and the noble Lord, Lord Bradshaw, commented on the importance of independence, particularly in terms of their experience in the rail sector. Independence is an absolute cornerstone of the regulatory framework. The independence of regulators to make decisions without fear or favour—I echo my noble friend’s words—is central and should continue to be enshrined in everything that we do. We recognise that the powers relating to rail regulation are controversial and this has been debated just this week. We understand the House of Lords Select Committee on the Crossrail Bill is considering petitions that will provide the Government with an opportunity to explore these issues more fully. One of the central tenets of this area is to provide business certainty. That is essential in terms of new infrastructure and investment. Our regulators have been set up with clearly defined duties which help businesses with the certainty that they need to make long-term decisions. I would simply make one point with reference to the comment of my noble friend Lord Borrie on Ed Balls’s submission to the committee about the interesting relationship between rules-based and principles-based regulation and certainty. It is interesting that small firms take a very different view on rules-based regulation, which they find quite hard, and they often look for simple rules and guidelines to follow. We need to take account of that. On competition, I was intrigued by the four principles put by the noble Lord, Lord Norton, particularly the third, in which he said that competition reduces the requirement for regulation and, in due course, he could envisage a situation in which it is not necessary at all. I am a very firm believer in markets and have always used them as a central tenet for solving almost every problem. Nevertheless, I do not really believe in perfect markets. I am intrigued by the notion that we can have perfect competition that does not require regulation at all. Our approach to creating strong and independent regulators has been around the central theme of competition, in order to raise productivity. That is a fundamental objective and although, as the report points out, it is not a primary statutory duty for all regulators, the approach has been successful—as was pointed out by the report with regard to Ofwat. We believe that the RPI-minus-x model that the UK developed incentivises efficient providers and that model has been used or copied across the world—from Australia to Argentina. A lot of visitors come to talk to us about this. I understand the surprise of my noble friend Lord Berkeley when he expressed concern about Ofwat. Noble Lords might be interested to know that since the report, Ofwat has carried out a wide-ranging review of competition in the water and sewerage industry that was published a month after the report in December. The Government have now asked Professor Martin Cave to carry out an independent review, which will report in the spring of 2009, to consider the scope of water supply, to deliver benefits and drive innovation through developing competition and contestability in all aspects of the water supply chain. In our response to the committee’s report we set out that, when it comes to allocating blame, Parliament’s intention was that the cost principle is retail minus—that was highlighted in the debate on the Water Bill in 2003. Ofwat has recommended the removal of the cost principle from legislation on the grounds that this would enable it to promote competition. We expect that Professor Cave will look at this in his review of the water sector. Consumers are the stakeholders whom we are attempting to protect with the regulatory regime. The report comments on the fact that the requirement to protect consumers is well embedded in statute. We believe that we are delivering, and will continue to deliver, a world-class consumer protection regime. We have announced a review of consumer protection and will be calling for evidence shortly. I should also mention the new National Consumer Council, which brings together consumer bodies into a single, stronger unit, and our extension of the availability of redress schemes. Some noble Lords have commented sceptically on the effectiveness of this new council, and I have noted those concerns, but we believe that we will have a council that is more open, accountable and effective than its predecessor. Its creation on a statutory basis means that it will be subject to the scrutiny of the NAO and the PAC, and we will be looking at it ourselves in due course. I understand the strength of feeling about the question of who is regulating the regulators. I completely agree with, and was struck by, the point made by the noble Lord, Lord Norton, about the importance of comparative scrutiny in ensuring that we have an effective system of regulation. We do not wish to compromise the independence of regulators in any way, and there are existing scrutiny mechanisms, including departmental Select Committees and appeals to Competition Commission tribunal judicial reviews. But I understand the strength of feeling. I know the lines in my brief. It states that, ““It is obviously not for us to comment on the necessity of a new committee, which is a matter for Parliament””. Nevertheless, while I cannot be prescriptive about the form of effective scrutiny that might be put in place, I would strongly endorse and support some form of extra scrutiny for a collective and comparative look at regulators. There was a lot of discussion about impact assessments and post-implementation reviews. I know that the noble Baroness, Lady Wilcox, is very attached to those ideas. The Select Committee correctly highlights the need for regulators to use better cost-benefit analyses in their impact assessments and to make these documents much more easily accessible. We cannot direct them to do this, because of their independence, but we fully support those recommendations and would strongly encourage regulators to follow them. A similar need was expressed for the post-implementation evaluation of policies. We now require that those are set out. When you do the impact assessment, you need to set out when you are going to do the post-implementation review. It is a key tool and we strongly support it. Noble Lords will be interested to know that my right honourable friend the Leader of another place recently wrote to the Cabinet on new measures to implement post-legislative scrutiny of Acts that received Royal Assent from 2005 onwards. This will involve all departments producing memoranda on the effectiveness and impact of legislation that has been introduced. These memoranda will be considered by the respective departmental Select Committees, which will decide whether to conduct post-legislative scrutiny on the Act. Again, although the committees do not cover the independent regulators and are limited in scope in terms of advising or directing them, we strongly urge them to consider how they can apply these reviews in their own circumstances. I was also very struck by the comments relating to co-ordination. I fully endorse the view of the noble Baroness, Lady Wilcox, that there should not be a super-regulator in any shape or form, but I accept that there is a need for better co-ordination. We hope that the Joint Regulators’ Group—which is just a group; it is not a new super-regulator—will ensure that co-ordination is improved. We have carefully considered the case for a central point in Whitehall to deal with economic regulatory policy in the round. I have to admit to being quite cautious. I do not wish to create a new bureaucratic unit to co-ordinate these issues just because there is no obvious home in Whitehall. We certainly do not wish to create a body that would appear to compromise the independence of regulators. Therefore, my department is considering whether the Better Regulation Executive would be a good home for this task to be taken in hand and we are currently looking at its terms of reference. I hope that it will help with the problems of ministerial co-ordination that were raised. There is an inter-ministerial panel for regulatory accountability, and I shall definitely have to take away from this debate the need to revive it and put some vigour into it. I should also like to comment on reducing regulatory burdens on business where they are unnecessary. My noble friend Lord Berkeley mentioned the Bill that we have all been working on. I am very grateful for his comments of support, together with those of my noble friend Lord Borrie, and for the improvements that we have made to the Bill as a result. We believed it was very important to state in the Bill that some of the economic regulators should have a duty to ensure that they do not impose unnecessary regulatory burdens, given the significant impact that they have on the economy. I turn to some of the more topical issues that have dominated the debate. Despite those issues, I do not believe that the underlying strength of the regulatory principles and system or our position as a world leader in the regulatory field is altered. Therefore, I accept the view of the noble Lord, Lord MacGregor, that mistakes do not invalidate good principles, and I do not accept my noble friend’s view that somehow the regime has been invalidated. Clearly, we are facing a very difficult time in terms of the international financial markets, but it is important to remember that this is the single most globalised sector. Capital flows and the financial institutions are international but the regulators are national, and therefore this matter cannot be dealt with simply by national regulators. The regulation of credit rating agencies, which was mentioned, or understanding the flow of derivatives and the risks that are transferred with those derivatives, for example, are not matters that a national regulator can remotely deal with on its own. I do indeed remember the dinner where Alan Greenspan spoke about the fact that derivatives in themselves reduce risk. I simply quote something that Alan Greenspan has often been known to say: "““If I seem unduly clear to you, you must have misunderstood what I said””." That sums up the position with derivatives. I do not think that the case of Northern Rock undermines the argument for better regulation and the proportionate approach that we have all been discussing and promoting. Mistakes, as I say, do not invalidate good principles. I have read Richard Lambert’s speech and very much accept his view that we should not have any knee-jerk reaction. The FSA acknowledged in its report published last week that its supervision of Northern Rock was not of sufficient intensity or appropriate rigour to challenge the company’s risk management practices and understanding of the risks posed by the business model that Northern Rock chose to pursue. The FSA accepted the conclusions and recommendations on improvements and steps are now being taken to strengthen the overall supervisory process. As for the regulatory architecture, the Treasury Select Committee endorsed the view that the UK’s tripartite framework for financial stability—with a single regulator undertaking principles-based regulation — remains right. However, there is no room for complacency and we need to clearly address issues thrown up by recent events. Later this year, we plan to bring forward legislation to introduce a package of reforms, which are currently being consulted on. For example, we propose to give the FSA an additional power to collect information from banks at short notice. The consultation document also proposes giving the Bank of England a statutory role on financial stability. There are also other changes to the Bank of England’s governance arrangements. This debate, as much as the report, has given me enormous food for thought and a new agenda, certainly in understanding the cross-Whitehall collective view of economic regulation. It has also given me some views on the role that my department could play. I am very grateful for all the suggestions and comments that have been made. I apologise if I have not answered all of them; those that I have not, I will do so in writing.