28
Examination of witnesses
Professor Sean Ennis and Dame Julia Black.
Q1 The Chair: This is the Industry and Regulators Committee of the House of Lords. We are beginning to take evidence on regulators and growth. Our two witnesses this morning are Professor Sean Ennis, who is director of the Centre for Competition Policy, and Dame Julia Black, who is professor of law and regulation at the University of Oxford. Welcome to you both, and thank you for coming.
Can I start with a very general question about what the Government have been saying about regulators and their role in the growth agenda? We have had quite a few messages from government about the importance of this, but not a great deal of detail. I am wondering what each of you would say that regulators can and should do to support the growth agenda, as requested by the Government. Professor Ennis, would you like to start?
Professor Sean Ennis: It is a delight and an honour to be with you today. My first thought on growth is that it is wonderful to hear the Government emphasising its importance in much louder terms than we have heard in the last two or three decades. The big question though is the extent to which growth is actually impacted by regulators and regulation.
There is mitigated evidence, but certainly there are two sorts of consideration. First, there is the quantitative consideration of what growth is and what makes it happen. Secondly, there is a holistic origin to growth which is much harder to get to grips with. Some evidence that exists certainly suggests that predictability is a very important element of the overall regime for regulation, and affects the interests of the corporate sector to invest and take the actions that would lead to growth. Proportionality in regulation is also very important, as well as transparency and adaptability. In this day and age, we are facing a very rapid change in economic structure and technical possibilities. It is not realistic to think that legislation could evolve as quickly as the environment around us. So this adaptability of regulators is quite important and creates a bit of a contrast with the need for predictability by business. Those are some of my initial thoughts.
The Chair: We will come back to you on that. Dame Julia, do you want to give us your first thoughts?
Dame Julia Black: Thank you very much for inviting me to talk to you today and for enabling me to join online. I flew in from the US very early this morning and the traffic was dreadful; I was not at all convinced I would be able to get to you on time.
The Government are completely focused on growth, for very understandable reasons. The Government also realise and recognise, as I am sure you all do, that regulation has a part in growth but that there are many other ingredients that generate economic growth that are not in the control of regulators but are in the control of others. So it’s is the skills of the workforce or infrastructure, for example, and there are a lot of conversations around planning, which is in itself a form of regulation. And as Sean was saying, there needs to be a stable environment, which includes a stable political and stable regulatory environment.
Coming to regulation and how regulation interacts with growth, this is really fundamental when thinking about our economy. What is it that we want growth to look like: growth for whom and in what areas?
Let us start off with a very basic question: why do we regulate at all? We have a model of shareholder corporate governance, which is directors of companies, who are the bedrock of the economy have to act in the interest of the company, which is interpreted as the interest of their shareholders. If we want them to act in the interest of any form of society, or any goal that we might want as a society, they are not necessarily going to do so if it is not directly in the interest of their shareholders. We know that the pressure of markets tends to create short-term pressures. If we want them to think in the slightly longer term, some form of regulation is needed. So regulation is there to change behaviours; to get people to do things they would not otherwise do and to carry on doing them when you are not looking.
As a state, as a society, we are necessarily always going to want to be directing companies and therefore the economy in different directions through some form of stakeholder, state intervention. We have a very well-developed system now after the last 100 to 150 years of regulatory capitalism.
It is always going to start with the understanding that for firms there will be instances where regulators will require them to do things they were not otherwise going to do, do not want to do, and will have to put costs towards doing, but which successive Governments have decided it is in the wider interests of society that they do.
A lot of these things protect people or society from risk. This is important because a lot of the conversation at the moment is about squeezing risk out of the system. Regulation is really thinking about who has responsibility for managing risks and how those risks are being distributed. We have health and safety regulations so companies take responsibility for protecting their workforce from health and safety risks at work. We have had that for decades; in fact, over a century. We have regulations to ensure that consumers are not mis-sold products and we have accurate labelling. We have regulations to ensure that companies do not get into monopolistic positions so cannot overcharge consumers or, if they are in that position, that there are price controls. We have regulations to prevent damage to property, to the environment, to rights, and privacy. We have imposed all these things because we are trying to achieve a wider social goal.
It is obvious, but worth repeating, that regulations have often been put in place for a reason. We can then go on to ask if that is the right reason. We can go on to ask if they have been appropriately designed and are proportionate. Are they appropriately adaptable, and is the way we are regulating the most efficient and effective method to achieve those social goals?
What we are trying to do is think about how we are distributing risks and responsibilities between companies and firms who might be producing some of those risks, and providing benefits, and the consumers or society participating in those markets who are benefiting from all that activity—all the goods and services that are produced—which might also be subject to risks, externalities, or other costs in the way they are being distributed and produced. We are trying to protect society, or different aspects of society, in different ways. Yes, regulation influences growth and regulation is going to get really deep into the economy and into the way firms work. As I said, we start off with a model of the corporation where the legal duties of companies and directors are to act in the best interests of their shareholders and not of society. Therefore, we have regulations to make them think in a more pro-social way. I just wanted to frame it.
The Chair: That is good background to what we are talking about. Do you both think the Government have been clear enough, and do you think regulators will understand what it is that the Government are trying to get them to do? Professor Ennis, you talked about predictability and stability being significant but you also wanted flexibility, adaptability, and moving quickly. We are in a very fast-moving situation as far as the economy is concerned or in terms of what the Government want to do. Could you pick up those points?
Professor Sean Ennis: Yes. There are some sectors where we know there is very rapid change. My focus on adaptability is probably towards those sectors where we think there would be really rapid evolution. Many of those are technology-based sectors, and Parliament has recently passed various new pieces of legislation that help to provide some framework in those areas. Developments are going to continue to be rapid and somewhat unpredictable; whether we are considering AI or quantum computing, we do not know all the consequences of some of these technologies.
If we accept the premise that legislation takes substantial time to develop and pass, that is a reason to allow regulators in some of these fast-moving areas to make changes to the way they operate. The question is, can those changes be predictable to operators? If they are unpredictable to operators, we now have a deep problem in motivating investment and innovation, especially in making it happen in this country as opposed to other countries where there might be a clearer promise of what the future holds. So giving principles to regulators about what values they will espouse or what their objectives will be in the future is one way of helping to establish predictability.
We will probably come on to objectives later, but in having multiple objectives there is a risk of it not being clear how future policies should evolve, what Parliament’s view is of how they should evolve, and what the Government’s view is of how they should evolve in the shorter term. That is a reason why one may wish to be very hesitant about adding more objectives to regulators without taking some away. I recognise that it is extremely hard to take away some objectives the way they are framed, but having multiple objectives that are potentially inconsistent makes predictability harder to achieve if regulators are given flexibility.
The Chair: That echoes what we were saying in one of our other reports. I will bring in Baroness Valentine, who is online.
Q2 Baroness Valentine: I am going to give you a long question so you do not need to come back to me. You have touched on some parts of this already, but what are the key challenges and trade-offs between growth and other objectives which regulators may have, such as competition and consumer or environmental protections? That is the overarching question and there are follow-ups: does a regulator’s approach to growth depend on the type of regulator it is? Is the balance different for regulators that are responsible for preventing harm from what it is for economic regulators? Finally, can regulators have a different impact on growth in the short term compared with the long term, and how can this be managed?
Dame Julia Black: That is the key question: it is all about trade-offs.
To come in on the first part, have the Government been clear enough? They have been very clear about the need for economic growth. What they have not been so clear about is actually how regulators should make the trade-off between economic growth and their other objectives. In many cases you could think about what that growth looks like and for whom. Do we want lower prices so that consumers have more choice and can spend their money on other things, or do we want higher prices because that enables companies to be more investable as they have high profits, can pay out more dividends, and attract inward investment which we are desperate to have? It also means that they might be able to invest, for example for utilities, in our infrastructure. So we need to think about their prices and profitability and, in the different areas that they are operating in, we need to think about what they are responsible for. What sector of society are they responsible for and what is their role—critically, I would argue—also in our societal resilience, which includes our infrastructure.
So you have some very clear potential trade-offs between the objectives and, as your question picked up, the short term as opposed to the long term. If we take electricity regulation, for example, we had a very clear goal before the price spike to get more entrants into the electricity market so that you would have more competition and options for consumers and lower prices, et cetera. The focus was not being placed on the financial resilience of those companies, so when you had a price spike you had companies that were not able to absorb that stress. Companies went under and you had disorder in the electricity market. You had to take over Bulb Energy, for example, so there was short-term versus long-term trade-off. We see the same very clearly in financial regulation. We could lower capital standards, which would mean that banks would have more capital to lend into the market and we might get some more short-term growth. However, would we then weaken the resilience of the financial system in the longer term, with consequences that we saw in the financial crisis?
The Government are always the risk taker of last resort. When things really do go wrong, which we saw when Jaguar Land Rover did not invest in cybersecurity insurance when it could have done, who picks up the tab? The Government are the risk taker of last resort, so they really have to ask whether they want to be promoting growth in the short term, even though it might be building up risks in the system elsewhere—to consumers, infrastructure, et cetera—that the Government might have to pick up the tab for in the longer term. So there is that constant trade-off. How to manage this is the regulatory question that we all face, and policymakers face as well. There is no clear answer.
Picking up on Professor Ennis’ point on objectives, a hierarchy of objectives helps regulators and parliamentarians in terms of accountability, or other stakeholders or citizens, to understand what the regulator is going to prioritise. What have the Government required the regulator to prioritise when making these trade-offs? Is it environmental protection over economic growth? Is it workers’ rights over a more flexible labour force or other priority set? Is it privacy over security? There could be some hierarchy or the Government could give a steer as to what the priority should be, but the Government have to then be prepared to take the consequences.
You could argue that we have to steer towards growth at all costs but, from a regulator, do they really mean it? So if you roll back and deregulate to get the gold star on the economic growth dashboard and then something goes wrong because you pull back on regulation, are the Government going to stand there and say, “That is okay because we told you to go for growth. We accept the fact that something went wrong”? That is what is missing in this debate. Yes, go for growth, but what really is that trade-off?
Finally, are the Government getting their message across loud and clear? Yes, but in language which is possibly going against one of the really strong features about the way regulation is designed in this country, which is to give predictability for investors through independent regulators.
When companies were being privatised back in the 1980s and 1990s, they really wanted to get investment in. Independent regulation was seen as a way of giving a credible commitment from government to investors that regulation would take place without political interference. They would not be governed by short-term, political, “time-inconsistent decisions”, as economists call them. When the head of the CMA was summarily dispatched because they did not offer up sufficient initiatives to promote growth, for me that was a very worrying sign in terms of what we are doing to the independence of our regulators and ensuring the credibility for investors that they are coming to a stable environment which is governed by expertise, and not by short-term political gains.
Baroness Valentine: Can I just come back on one bit of the question? Is there a difference between economic regulators and other regulators in what you have said?
Dame Julia Black: I forgot to pick up on that bit and it is a really good question. They are doing different things: economic regulators are facing oligopolies or sometimes just a single service provider. Those service providers are also providing universal services, utilities and elements of critical national infrastructure. They have a different focus because they also have a mandate requiring that the companies are investable as we need them to keep going because they are service providers.
You have a policy ‘quatrilemma’ of prices, profitability, productivity, and innovation and resilience. That is different from the health and safety regulators that regulate every single workplace in the country for health and safety, or financial services regulators that have 50,000 companies to regulate, or law firms with 100,000 individual solicitors, or whatever. They are different in nature, in the types of choices they might be able to make and the lack of substitutability in those industries if one company were to go under. There is a difference. They have a particular set of challenges and trade-offs in those areas, different perhaps from what regulators face in other areas.
Baroness Valentine: On the other side of the coin, where do the trade-offs come on economic growth for the health and safety regulators?
Dame Julia Black: That is again a really good question. Health and safety is in every workplace in the land but it also covers very high-risk industries. The trade-offs are still there, but the question is how safe is safe enough? If there is an area of zero-risk tolerance which, just to pick a big one, could be nuclear, for example, then clearly we are going to put an awful lot of effort and cost into making sure that nothing goes wrong. In many other areas, it is a question of how intensive we want the regulation to be. A while ago, as you will probably remember, there was a mantra of “health and safety gone mad”, with all these rules and regulations to put in place. So it is always a question of balance. How safe do we need to make this particular workplace, process, et cetera? How much can we do by prescriptive regulation? How much responsibility, in a health and safety context, do we place on managers and companies to ensure a safe working environment? How much do we leave them to come up with a means by which that environment is safe and to demonstrate that to us?
There are still trade-offs, but the health and safety regulator is not concerned about prices. It is not concerned about a universal service being provided in the Shetland Islands at the same price as it is being provided in London, for example. It is just a different set of challenges.
The Chair: Professor Ennis, did you want to add anything?
Professor Sean Ennis: Maybe a few comments. I would agree that there are substantial differences between health and safety and more classically economic regulators. I would also suggest there are quite a few differences between the economic regulators. Sectoral regulators such as Ofgem, Ofwat and Ofcom are quite different beasts in a sense from the Competition and Markets Authority, which, in turn, is quite different from the Prudential Regulatory Authority and the Central Bank and their obligations. I will just take apart some points.
Focusing on systemic risk for the financial regulators is an extremely important task. One might imagine that we are in more of a high-risk moment in the market cycle than a low-risk moment. It is very important to keep that in mind in the political sphere because, if we make it easier or encourage people to purchase stocks as part of their pension plans right now, for example, it is a riskier moment to do so than when markets are quite low.
We then come back to the point that the Government becomes the backstop in case something goes wrong. The Government, in this area, has less capacity to deal with bad outcomes than at many moments in the past simply because debt levels are relatively high. That is not unique to the UK at all; it is common in many developed countries.
Systemic risk is perhaps a different creature. I would not necessarily focus so much on having a growth objective for its overseer, but, for industry and sector regulators, one could imagine implementing such an objective. The question is, how does one give a concrete focus on growth to the energy regulator? The Government might say to the energy regulator, “Please make sure that actions are taken so that energy prices fall for citizens or prices fall for industry”.
If one wants industry to succeed in the UK, which I would say has been a higher priority in other European countries than in the UK, then energy prices are key in making that happen. Getting acceptable energy prices for steel is a very difficult objective to achieve in the overall environment that we have here. What is the implication of that? A long-running implication might be that resilience for the economy as a whole suffers because we are choosing not to produce steel in the UK. If we let steel be produced in other countries and they do not want to provide steel to us at some point, we will have a problem. Some industry regulations could be viewed from a top-down or bottom-up angle. I am not sure what the healthiest response for the Government is, but sometimes objectives need to be quite detailed and not just generic.
In terms of competition, there is evidence to suggest that competition plays a role in innovation and growth. We even see it in the most recent Nobel prizes in economic sciences, in which there has been an emphasis on avoiding monopoly or avoiding perfect competition. Perfect competition might yield zero profits and monopoly might yield quite high profits. In either case, the incentives for firms to pursue innovation may be lower than where there are multiple firms with a potential to profit from the innovation. So getting the competitive environment right is very important and is a different problem from the one that exists for the sector regulators.
Environmental regulation was also mentioned. This is a very delicate topic to deal with, but there may be elements of environmental regulation that are not pro-growth. If that is the case, it is up to the Government and Parliament to make choices, just as it is up to them to make choices about distributional decisions. Such decisions should not be left entirely with regulators, because they are deeply fundamental and may reflect the views of the population, which might not be fully taken into account by a regulator.
Building on this, another point is that the duties and objectives given to regulators may sometimes be inconsistent. This makes being on a board or a decision-making body of a regulator extremely uncomfortable or difficult, with personal values coming into decisions quite substantially. This means that the Government and Parliament lose a bit of control over what is happening at the regulator and it may not be an appropriate democratic outcome for the regulator’s board to be making such decisions.
The regulatory levers are also sometimes relatively few, especially if we think about a central bank: it does not have that many levers. So giving it many goals when it only has two or three levers is a very complex situation, because mathematically you cannot really achieve more outcomes than you have levers. Those are a few points on this front.
Q3 Lord Gilbert of Panteg: I have a brief declaration of interest: until very recently, I was a board member of the Electoral Commission and chaired its Audit and Risk Assurance Committee, so some issues you have addressed are familiar.
You have talked about the duties layered on regulators, and I just wanted to explore that. The Government have acknowledged that regulators’ duties, objectives, and strategic steers have often increased uncertainty rather than provided clarity. What are your thoughts on how the Government and Parliament can improve the setting of objectives, duties, and steers to provide better guidance and clarify the role of regulators, including in relation to growth? It is not yet absolutely clear how the growth requirement is going to be mandated, but presumably it will be through one of these mechanisms. How can we ensure that it is delivered with clarity?
Professor Sean Ennis: One action that we have taken at the Centre for Competition Policy is to document the changes in objectives of regulators over time. What we essentially find is that, as time moves on, we have a Christmas tree for all the sector regulators. This is a common story. The problem of the boards and staff is becoming more substantial over time as there are more objectives to consider in the process of regulating.
Fundamentally, some infrastructure regulators have a dual role in encouraging a stable environment for investment and appropriate returns to business for investment and, at the same time, making sure those returns are not related to prices that are too high in some sense. So the focus on consumers is there as well.
Having spoken with many people in the regulators recently, a lot of staff feel their focus is on the consumers but it needs to be much more balanced. It is balanced in the legislation, so there is a focus on both keeping the companies healthy when they are taking appropriate risks and making sure that prices are not unduly high for consumers.
The time-inconsistency problem is definitely very substantial. Governments would wish to convince corporations to undertake major investments and then, after the investments are made, come back and say, “By the way, we are going to lower the prices quite substantially because it is politically more attractive for us to do that”. Having an external regulator is part of the solution to that, but giving them more and more objectives moves us away from this bifurcated focus of the regulators to a much more multidimensional focus.
Based on research including confidential interviews with people who have been on regulatory boards, I worry that their decision-making is really more complex now. It is more complex than one might desire it to be in order to implement your own decisions of what should be happening, especially in some sector regulators.
The Chair: Is that research available?
Professor Sean Ennis: Yes, we can provide copies to you. We can also provide you with copies of the Christmas tree-style diagram that illustrates what is happening. Adding a growth objective is increasing the breadth of the Christmas tree unless some objectives are removed.
Dame Julia Black: To build on that, in terms of giving strategic steers, there is a reason why the Government give broad objectives to regulators: we do not want to keep changing statutes all the time. Time is a precious thing within Parliament, so you want a regulatory and legislative framework that is going to last.
As Professor Ennis said, there is understandably a constant need to do one more thing, one more thing, one more thing. So you end up not just with the objectives sometimes shifting, but also with the list of have-regards going on and on. Understandably, when a piece of legislation is going through everybody wants to pile everything they care about into it as much as they can, because these opportunities do not come along very often.
There is a need for some self-restraint when legislation is being passed by Parliament. It is a government and parliamentary responsibility to think and focus on the main things that we need a regulator to do. What powers are we giving to it? How do the powers that we are giving it align with what it is we are asking it to do? Those things can get out of kilter. The Cunliffe review of water regulation is a really good example of the issue.
The role of Ofwat has changed. Traces of how it was set up in the 1980s are still there, but it has had many duties layered on it. It is apparent that, as water companies have evolved, Ofwat has required an approach and some potential powers that enable it to get much further into the corporate governance and holding structure, and act more like a financial supervisor in relation to the companies it supervises, for example with big prudential category one high risk-banks, including, as Sir Jon Cunliffe pointed out, getting into senior management responsibilities, et cetera.
We need to have a really strong focus on what it is that we require this regulator to do. Does it have the appropriate powers? We need to recognise that there will be tensions between, for example, prices, investment and dividends to shareholders, therefore investability, the cost of capital and investment in infrastructure, particularly in those big infrastructure regulators.
How can the Government do that? They can do that by setting steers, but there is a balance here. If you set them too often, the regulator switches around and that does not go particularly well with the need for predictability. If you leave them too long, that is not very good from a democratic accountability point of view and you also have opportunity for drift.
A few years ago, the NAO looked at the electricity regulator and recommended the five-year steer. You can have those steers in one of two ways, not mutually exclusive: you can have broad objectives within the legislation—but not the Christmas tree effect—to make sure you have alignment of powers. The Government, having the power in the legislation, can give strategic steers to the regulator that should be open and transparent, and the regulator should then be required to report on those.
The other thing which could be very helpful, as I referenced before, is having a hierarchy of objectives. In the recent round of reform to financial services regulation that came in, a secondary competition and growth objective was introduced. There are two important things about this. First, it was secondary to the primary objectives; secondly, it specified that it was a need for economic growth over the medium to long term. That is also very helpful for regulators because it gives a steer that there might be some short-term gains to get cash back to companies by having some deregulation. However, growth in the medium to long term requires stable infrastructure, a resilient financial system, resilient electricity and water industries, et cetera. So that steer to regulators, that they have to look to the medium to long term, is important because, as I said at the outset, companies are geared to look at the short term, particularly from their equity capital-raising needs. So those are ways in which we can try to make progress on difficult issues in relation to managing these trade-offs in different ways.
Lord Gilbert of Panteg: Dame Julia has addressed the issue of the growth objective and how it is mandated on regulators. Recognising the tensions that Dame Julia described, how do you think the growth duty can be made meaningful and how should it be mandated?
Professor Sean Ennis: There has been a subtlety, which she was implying, in how it is being mandated. For financial regulators, there is an acknowledgment that the timing is not necessarily meant to be immediate. There is also the clarity that it is secondary. For other regulators, it might not be equally secondary. For the central bank, you might want inflation control to be a clear primary objective of its actions and stability might be another primary objective of its actions. You might not need that same distinction of foci for regulators in the energy and communications sectors. I understand there might be different techniques of including a growth objective, but I am a bit surprised by the whole discussion. All government officials should be focused on growth: it is a core part of any economy, so it is sometimes surprising to me that it needs to be spelled out quite so clearly.
Q4 Viscount Chandos: Dame Julia, you have already talked about risk this morning. I wanted to go back and explore with a simple question: the Government have described the present regulatory approach as too risk-averse. Do you both agree with that?
Dame Julia Black: To go back to where I started, quite a lot of regulation is about managing risk. It might be risk to health and safety, food, medicines, transport, or the environment. A key question is, who is going to bear the risk if something goes wrong? In terms of producers bearing a risk, they bear the responsibilities for mitigating the risks to others and/or compensating them for harm: for example, strict liability for faulty products as well as product standards. You require companies to conform to product standards, food safety standards, et cetera.
The question then is, do we require firms to be responsible for managing all risks? What risks, as a society, are acceptable to place on consumers? When should consumers be responsible for managing risks that they might face? For example, is it their responsibility to cover the cost of harm by taking out insurance against flood risk, defective products, defective services, or cyber security? Is it their responsibility to just become better-educated consumers? Does a firm need to give disclosure about the nature of its product or service, and then the consumer has a responsibility to educate themselves about that and make a decision?
When the Government talk about squeezing risk out of the system, do they mean that they require firms to take too much responsibility for managing those various risks and consumers are being overprotected? They might do, but it is not very clear when they just say “squeezing risk out of the system”. You could argue that squeezing risk out of the system, if I am a consumer, is really good as I am not exposed to as many risks from the activities of firms, such as building standards, fire risk, food risk, or any of those other different things.
You could argue that risk being squeezed out of the system is great for me as a consumer because I now have more trust in the market. I am now going to buy more products and services because I trust that, if something goes wrong, there will be a compensation scheme, a firm, somebody will owe me some responsibility in some way, or the Government will somehow make this right.
Is risk being squeezed out of the system because the consumer is being overprotected or is it because the consumer is being underprotected? I do not really know what the Government mean when they say that risk is being squeezed out of the system; risk does not get squeezed out, it just gets distributed differently. When they say that firms are being overregulated, do they mean that consumers are being overprotected or do they mean something different? It would be worth asking them.
Professor Sean Ennis: This is a very hard question to answer, in part because it is difficult to define what excessive risk aversion is and to know it when you see it. For example, the Competition and Markets Authority in the UK has a very large number of really competent people working for it. If this statement of being too risk-averse is directed at them, it might be right with respect to an individual case but, with respect to their overall caseload, it is a relatively low set of outcomes that they have compared with some other competition authorities.
It would be harder to justify a general statement but feasible to justify a specific one, and that applies to all the regulators. There is a human challenge in making bureaucrats risk-neutral or not risk-averse, but I am not sure we want bureaucrats to be risk-loving either, so risk-neutral might be what they would be aiming for if we are going to put words on it. I do not know how to identify a risk-neutral regulator.
Viscount Chandos: Could you even say, which I think you were hinting at, that the overall approach or environment is too risk-averse? It seems to me that there are clear examples of a regulator that was insufficiently rigorous in looking at risk, such as Ofwat, and the Building Safety Regulator causing concern that the processes builders and developers have to go through are inhibiting growth. It seems to me that there is no single generic regulator which is risk-averse. Some may be, but others have not paid proper regard to the risk to consumers.
Professor Sean Ennis: Yes. With respect to building regulations, for example, there are trade-offs that are built into the whole regulatory apparatus. Some regulations may have been proposed by industry, others are designed to protect architectural heritage. Certainly, the combination of regulations in that area has really prohibited the construction of large buildings in London and made the cost of living probably quite a bit higher here. You might not want there to be towers in London like there are in Manhattan, but a professor at LSE did a very interesting study comparing the cost of building an extra floor in London to the cost of building an extra floor in Manhattan. Interestingly, the cost of building the extra floor in Manhattan was much closer to the marginal cost of the structure than in London. His finding was potentially three times as high a price for that extra floor as in Manhattan, which has an impact on us all.
Viscount Chandos: If you accept the hypothesis that across the board there is too much risk aversion, to what extent is it appropriate for the Government to intervene with independent regulators? How do you stop the pendulum swinging too far, creating precisely the problem in terms of stability and predictability that you have both referred to, particularly in terms of making companies investable?
Dame Julia Black: That pendulum swing is inevitable, and it is exacerbated when there has been a disaster or a catastrophe. In building regulations, we had Grenfell. We had the inquiry. We got a new regulator. It is not one that I know particularly well, but it is very common in that situation that you will have a swing to risk aversion because you have this memory of a very tragic disaster which you do not want to happen again.
It is a very common pattern but, as memories recede of that disaster, the pendulum starts to swing again in a more relaxed deregulatory way. That is what you can see happening in financial services. As 2008 was an awfully long time ago, there is a sense of questioning as to whether we really need all this risk protection.
One challenge in thinking about risk protection is that you can look at it and think, “Nothing has gone wrong, so why do I need all this risk protection? Why do I need all this safety and resilience built in, because nothing has gone wrong?” The answer might be that nothing has gone wrong because you have all this resilience and all these safety protocols built in.
How safe is safe enough? The definition of risk appetite and defining who should bear risks and to what extent is something that has to be continually negotiated. There are things that regulators can do and can be wary of. This is when it comes down to the proportionality of the requirements that they are imposing on firms. Do they need to go down to that nth degree? Can they find other ways in which firms are able to demonstrate that they can achieve the outcomes they want to achieve without having a very prescriptive approach? In order for that to happen, you need an industry that is quite sophisticated.
Going back to building, there are different examples of building regulations in the UK and New Zealand, where you have a workforce which is not professionalised. If it does not have a very strong understanding of what the regulations are or should be, there is probably a need for greater prescription. If you have a more professionalised workforce with professional education-related norms, which are expected, you can row back a little and concentrate on more outcomes-focused types of regulatory requirements.
There are other things that regulators are now doing, promoted by the Government, which are making them think about whether they need these extra layers of regulation. Are they adding much to the achievement of an objective? Are there places where we can pull back because we are confident that that objective will be achieved in other ways?
Also on reporting requirements, there is a natural desire on the part of regulators to know what is going on and the key to that requires oceans of information to come in. It is difficult to strip that back and ask how much of that information we really use despite collecting it all. When was that data last used? When was it systematically used to define our inspection regime, our supervisory approach, or in enforcement? We need to be really focused and get a grip on what we need firms to tell us, when we need them to tell us by, and in what level of detail.
A good thing at the moment is that the Government are prompting regulators to really think very hard about that administrative burden of regulation and about the cost of compliance. Some might be in terms of the way they do regulation and some might be about the design of regulation itself. The NAO has just reported on tax regulation—another form of regulation—showing that the complexity and burden on small businesses in particular of complying with our tax regime is, in its terms, “very high”. Sometimes you might be able to stay within the current regulatory system and pull back on the administrative burdens, and sometimes the system itself has become too complicated. As Professor Ennis said, you get this Christmas tree effect when you have regulation piled on regulation, so it might require more of a pruning. I will pause there.
Q5 Lord Teverson: One thing that struck me is that, in a way, the Government have been fairly focused in that an action plan was published in March, and we even had a follow-up in October. What makes me rather more cynical is that the action plan said that admin costs will be cut by 25%—a quarter—by the end of Parliament. Yet, if we look back at the history of one in, one out, moving up to one to three out, and all that side of it, all this has been seen as fairly unsuccessful in the past. First, is the action plan within a suitable strategic understanding? Is there really a strategy in the background?
Secondly, is there any chance of getting these burdens down in reality in business? Thirdly, rather more cynically, is one of the answers to actually get rid of the regulations that we cannot even be bothered to enforce? This week we had an example of a fellow Select Committee that published a report that said that no one was really enforcing the waste industry at all and that we have had huge growth in the black economy of illegal dumping of waste, which we do not bother to enforce. There are other examples. Should we actually get rid of the regulations that we cannot afford to, or do not want to, enforce?
Professor Sean Ennis: It is quite common for different countries to establish an objective of reducing regulation by 25% in one measure or another. It might be 25% of volume or 25% of financial impact. Having a financial impact objective is better than a volume objective; it is more likely to achieve something useful. In principle, the objective is achievable but it requires real strategy—that is, real choices and the use of, if I dare say, a scythe rather than sewing scissors. It is really difficult for government departments to actually bring out a scythe; whether it is the Department for Business and Trade or the Treasury wielding the scythe, there would be pushback from every other department. I have never met a Minister or head of department who thinks they have anything wasteful happening in their department while they acknowledge that it might be happening elsewhere. Structurally, a bit more would be really useful.
One thing the Government has done is to seek business views as to where regulation might be cut. That is a really valuable initiative to understand where the details are because the truth is that one of the ways to get regulation to work better is to make hundreds of small changes and modifications, and that is hard to do unless you have a sense of where they should be. Going out to you and me, perhaps, might not be so useful for figuring that out, but business may have a better idea of where the excesses are, and then their claims of excess would need to be judged in some kind of neutral way. Perhaps focusing more on having a process change for how regulation might be improved would be really valuable, at least during one government Administration.
Lord Teverson: Are you saying that, in some ways, it ought to be more tactical rather than the big strategy?
Professor Sean Ennis: The scythe is almost inconceivable, but 400 small changes are very conceivable if the process is set up to deliver good ones, and it is possible to set up such a process. One way to do it might be to have a bipartisan commission that goes out and seeks evidence from businesses in many different parts of the United Kingdom and really goes to the communities. There is not always a high participation rate in an online survey, which is what I understand the Government have basically done for the moment, but if there was a much more aggressive reaching out to business, we could hear some fantastic stories. One example of where there might be a story is what has happened to road paint regulation over the last 30 years. It used to be that when I drove at night and it was raining, I could see the lines on the road pretty clearly. Now, I have a difficult time and I wonder if it is my vision that has deteriorated slightly, or if there has been a change in regulation of the paint. It may be the latter, but it is not the sort of thing that would ever come across our desks. However, it might come out if we talk to some businesses that have been affected by it.
Lord Teverson: Just in one sentence, do you think the 25% is realistic, whether it is measured in volume or finance—or is it just a good post that sounds impressive at the beginning?
Professor Sean Ennis: It is feasible.
Lord Teverson: Excellent. Thank you. Dame Julia?
Dame Julia Black: It is a good number. We do not really have a very good baseline for known costs of compliance at the moment. If you have various systems at work, it is often quite difficult to tease out whether that is due to regulation or whether it is just you running a very good business. You pay attention to how you handle your food and your food processing because you do not want to give your consumers health issues. Is that running a business or is that a cost of compliance? Is there scope? There is bound to be. Is it 25% uniformly across every single regulator for every single firm, or even on aggregate? To be honest, I do not know. Does it mean there is a useful focus on trying to cut administrative costs? That is a helpful prompt, for sure. Is there a way to just think about whether the issue is the amount of reporting or tedious additional requirements that regulators have imposed—or is the system of regulation to which any one particular business is subject to in performing any one activity just in itself too complex?
We may come on to talk about regulatory accountability, but I will herald it now. We have been focusing, myself included, on individual regulators. What we often fail to look at, when holding regulators to account and scrutinising them, is the entire system of regulation. I read the waste management report to which you referred and one of the things that is really striking is that you have the Environment Agency, Defra, HMRC, the police—therefore, the Home Office—and local authorities. You have a plethora of actors, all responsible for managing different bits of the system as it were, or not managing, in this case, illegal waste dumping. If we were to look at any one of those and say the Environment Agency needs to cut back 25%, would you not say that a lot of those operators have no cost of compliance anyway because they are just not complying. Is it actually just a useful housekeeping thing to which we should all pay attention, or, much more fundamentally, is there is a need to think about the system of regulating, in this case, illegal waste dumping. If I go back to Sir Jon Cunliffe’s report, for example, one of the challenges there was partly that each individual regulator had broad objectives for what we have talked about. But more fundamentally, all the regulators whose actions impact on water and water provision in some way—Ofwat, the Drinking Water Inspectorate and the Environment Agency—have different objectives that cut across one another. That is a much more fundamental problem than managing the processes, the sort of housekeeping aspects of regulation.
Q6 Lord Teverson: Thanks very much. Perhaps I could move on to something different. One area that we have come across in a number of the inquiries we have done is the speed that regulators take to give approvals. It could be anything from pharmaceuticals through to building design, and those can be real barriers to growth, both short and long term. In order to speed up approvals, do we actually need to get more resources into certain of these regulators? One of the solutions has been to potentially fast track the processes. That exists in certain regulators, where you can buy your way through speedier approvals. However, does that have risks of bias towards those organisations or actually discriminate against SMEs, for instance? Dame Julia, perhaps you could give us your views on that first.
Dame Julia Black: Yes, I am happy to—that is a really good question. When you are choosing to regulate, you have three main stages of intervention. There is market access: is the gate basically wide open, or is there in a huge fortress with multiple locks before you can get in? Once you are in, you can regulate the process as companies actually do business, and you can decide to put really intensive focus on that or zoom up and do it from 30,000 feet. Then there is what happens when things go wrong. Do you have a very light system of compensation where people go to court and they sort themselves out? Do you have a very heavy system where you have public enforcement and fines which regulators can impose? Is it somewhere in between, which is a bit more complicated? They may have to go to court, but the court does not necessarily enforce its powers. So I could speed up my operations and have really easy market access, or have no market access provisions—not all markets are gated—and just rely on regulating firms when they do business and/or rely on being able to clean up something when it goes really wrong.
Again, risk comes into it. If the risk is it will happen to an individual and it is compensable or reversible—for example, you can give somebody compensation because they have a defective product—you might not need market access or authorisations at all. However, if it is a higher risk and it might happen to more sectors of society, or we do not think it is compensable and it is not reversible—for example, a significant risk to health—then we have authorisations and we have gated access. You then have a choice. Let us take medical products: you could speed up the authorisation for medical products because we are thinking of market access growth and access to medicines, et cetera. How confident are we that this medical device or medicine is not going to cause harm once it is in the field? Do we need to be 100% or 80% confident? Do we need to be 60% or 50%? Where are we going to draw that boundary? Therefore, how rigorous do we need to be in that authorisations process? If we are confident that we can do quick recall, it does not matter because if it starts to cause harm, we can quickly stop that harm and we might just speed up the authorisations process but be less confident as to the safety of this product or medicine going into the market. We can then absolutely speed that up, and this is one of the challenges where innovation really comes in.
We see this in relation to innovative products. Can we let this into the market really quickly? In fact, AI—non-gated—goes straight in and does not need a ticket to enter; off you go. Why? Because that is very pro-innovation and pro-growth. We know loads of harm and risk are being stored up in that and we can see that being manifested now, but the governmental decision is to just sort that out in due course. For now, we want growth in this area. That is a choice.
So yes, you can speed up authorisations. That might need additional resources, but it might need specific expertise. Arguably, you might be able to get faster authorisations of the same quality and rigour if you have regulators, particularly when dealing with innovative products, who really understand the technology route and what they are letting into the market. Do we want to speed up authorisations by reducing rigour and our confidence? That is a choice, and we just need to be very clear and articulate about that. Do we just want the same quality and rigour, but faster? We can ask regulators to be more productive, to change the way they are working, or to think about their own skills and capacities.
When it comes to fast lane or speedy boarding into the market I can see the temptation, but there are challenges with that as you have absolutely pointed out. One is the perceived fairness of the system. For example, if I am a small firm, an SME as you say, I need to get market access because without market access I cannot start to do business in this particular area and provide this product or service—yet I am right at the back of the queue. I am group 7 or 29 for boarding because everybody else who has paid more is in groups 1 and 2 as they board. I have just got off a flight. I think it is problematic to have fast lanes because that has implications for competitiveness. It has implications for SMEs, and there is certainly a risk to the perceived fairness and neutrality of the regulatory system because it will only be available for those who can afford to pay.
Lord Teverson: Thank you. Professor Ennis, do you have any other thoughts?
Professor Sean Ennis: Yes. It is quite common for regulators to say they need more resources and powers, and sometimes they want less oversight. Those are the three common stories that I have seen and heard when I have worked in regulators. This is partly a story about the need for more resources. We would give a faster approval but we are constrained by resources. Then government suggests that perhaps we should find a way to give some extra resources without raiding the Government purse, so let us have those who really value speed pay for speed. The principle of getting people who value something to pay more for it is not harmful in itself, but Dame Julia Black is absolutely right when she says that there may be a perception issue of unfairness. Everything depends on what we are talking about because I would want to see more context before getting into a detailed judgment on this. If it is a very small extra payment for getting an important process done that small enterprises could pay equally well as large ones, that seems okay to me in principle. But if it is a substantial payment that would disadvantage some companies relative to others, I would be more worried about it. Again, if there are only large companies in the industry, I might be less worried. So the context matters a lot to me.
Lord Teverson: That is very helpful—thanks very much indeed. As someone who used speedy boarding over the weekend, I must admit the queue on the other side looked a little annoyed at me being ahead of the others, even though I had a legitimate reason to do so. So I take the point.
Q7 Lord Udny-Lister: My question really follows up on the speed thing, but it is in a totally different direction. I want to ask you about data, technology and AI: all the big changes that are at play at the moment. How much is that going to change the way regulators and companies operate? Is that the answer to improvements in efficiency and effectiveness?
Professor Sean Ennis: This is the area where we are facing imperceptible change on a daily basis, but enormous change on an annual or decennial basis. Consequences are occurring that we have not even categorised before, such as loss of ability to concentrate for an extended period of time. This was not on the agenda of policymakers before some recent developments, and I still do not think it is really on the agenda, but it is a really important social consequence of some technologies. There are new questions that are going to be raised that have never been brought up before and have not been considered. One way to think about what is happening is that some problems fall into very traditional sets of concerns. For example, if you are reading the papers, you are seeing that some very large digital companies are making special deals for access to computer chips in the next couple of years. That suggests that there is a bit of an access problem to such chips if deals are being made with such alacrity to lock them up. That means there are perhaps competitive consequences to access to this facility. That is a traditional area of concern potentially for competition laws, but it might go beyond what is normally considered.
There is also a skills shortage, especially in the public sector, in relation to what some of the real problems are for these companies and what potential solutions are feasible and implementable. Those with the most substantial technical knowledge have a very strong financial reason to work for some businesses and a less substantial reason to work for government, unfortunately. That leads to a skills shortage which means it is fundamentally hard to address some new problems arising in these areas.
If one of the questions is what can be done to become aware of innovation for regulators, giving regulators a focus on being adaptable to new technology is really important. One of the techniques they have developed to deal with this, especially in the financial sector, has been to introduce regulatory sandboxes. Regulatory sandboxes may have some positive effects on the speed of the rollout of new technologies and making sure they are relatively safe. They are not a panacea, but at the same time their existence within a regulator starts to pass the message to the staff that we should be open to new ideas. That is a very important message to get through which might not otherwise be present and might not be pushed by management without the existence of this process. So regulatory sandboxes may be one area to think about.
Another one is: when is regulation going to be excessive in some product areas? When might it go too far? That is hard to know right now. If regulators are risk averse, they might have a tendency to use their flexibility to hold back developments. If they are risk neutral, they might be more open to see how things go. If the focus is on growth and how growth comes into the equation, that seems to have pushed the Government to be a bit more risk loving in some respects and let us see what comes out in these areas. Part of the reason for that is geostrategic. The UK is not alone in regulating these sectors; other countries are doing it too, or not doing it. If they are not doing it and the UK does it, that tells you pretty clearly where the future investment will be and raises some substantial problems from the growth perspective.
The Chair: Dame Julia, is there anything you want to add to that?
Dame Julia Black: The question is completely on point: data, tech and AI are absolutely changing the way that we all operate and the way that regulation and regulators will operate. To briefly break it down into three buckets as it were, there is the use of enhanced data analytical tools, including AI, by regulators to help them do their job. There is the use of such tools to help those who have to comply with the morass of regulations and requirements. Then there is the broader question about the regulation of AI as a general-purpose technology. On the first one, various regulators are thinking hard about how they can improve their data. In order to have good data analytics, you obviously need very good data in the first place.
Going back to the question I was raising earlier about regulators thinking very hard, or about how they should be thinking very hard: do regulators really need the data they are asking for at the moment? The power of the data analytical tools is to enable them to analyse the data they have much more effectively—both the routine data and the unstructured management reporting—because regulators will often just get management information, or information that companies are producing for their own purposes, because that is a more efficient thing for companies to deliver, but it is very difficult to analyse. Regulators for the Financial Conduct Authority, for example, are investing a lot in enhancing their data analytical capacities and capabilities and are using AI techniques with it for aspects of that analysis. They are identifying much more and trying to find patterns—for example, for potential fraud and misconduct—of areas where you might need to intervene.
Moving over to companies: there is a growing industry in regtech, which is selling products and services to companies in highly regulated sectors to enable them to manage their own compliance, including, similarly, internal detection of malpractice across different teams or sectors of a company or sectors of a business. There are rapid changes going on in both those sectors with perhaps the regtech industry going into the private market possibly a little ahead of the regulators using them, but it gets very sector specific.
Finally, if we look at the overall approach to AI regulation: as we know, the Government have continued with the sector-specific approach, so regulators have to regulate AI as it is being used in the sectors for which they are responsible in accordance with the five principles from a previous Government’s White Paper—safety, transparency, fairness, accountability and contestability—and you have the regulators that form part of a Digital Regulation Cooperation Forum, or DRCF. The ICO is looking very hard at privacy and putting out guidelines within its remit on AI development. The financial regulators are getting together—the Bank of England and FCA—to create an AI lab where companies can come in and demonstrate and experiment with what they are doing with AI so that you can be in dialogue with the regulators to enable each to learn from the other as to what is happening and what the expectations might be. The CMA is looking at AI models and how that market is emerging, and it has powers to intervene before you get to a monopoly stage. So you have quite a lot of activity going on within some particular regulators in terms of thinking about how they can look at how AI is being used.
Then, Ofcom is going to implement and enforce the Online Safety Act as it applies to generative AI tools. This will cause quite a fundamental shift. Is it a shift, or is it a change? We can safely say it is certainly a new set of issues for regulators to take on board. One of the questions we really need to think about is how to really enhance the capacity of regulators to think about and to understand what is happening in the AI world because it is developing so quickly. Personally, I like the model of the National Cyber Security Centre: a central body of expertise that lends that expertise out to other bits of government, the public sector and, indeed, the private sector, but it is most relevant to regulators. To have a similar one for AI, so that you have that central body of expertise that others can pull on to help them develop their own capacities in data analytics in this area because it really can have a very fundamental transformative effect on how regulation is performed. Thanks.
Lord Best: I have learned a new word today: regtech. It is a whole industry—wow.
Dame Julia Black: It is an industry, yes.
Q8 Lord Best: My question really follows from that. The Government have said that they want to strengthen regulators’ accountability, and they have told the sponsor departments to conduct more formal performance reviews. But do the departments have the right tools and information to hold regulators to account? Perhaps regtech is going to be the answer that is going to help that process. The Government have already brought together information on performance in their regulator KPIs. Is this information all that is needed? What else is required by government, and indeed by Parliament, to assess whether regulators are really succeeding?
Professor Sean Ennis: I will begin with the observation that KPIs are very difficult to formulate, especially for any public entity. My experience, having worked at a regulator and proposing KPIs to government, was that it is actually quite challenging to formulate a set of KPIs that do not distort incentives in a problematic way. I will just give you an example: if one is at a competition authority and one establishes a KPI that is related to the level of fines one might issue, that would give the authority an incentive to issue fines, even in years where there might not be a strong justification for issuing fines. That would be problematic. But if the KPI is about the number of cases that are addressed that might also be problematic, encouraging the authority to undertake more cases than it actually feels the need to do, creating an environment where there is a constant improvement every year. So even if you establish a right baseline—I would dispute that is even possible—there will be turning of the screws by the government department over time to get more out, and that might be problematic.
So the first thing I would say is the generic point that KPIs for public entities can be very challenging to set in a good way. Having a detailed, holistic review of what is going on in regulators may be more valuable in some ways. A question could be: who should perform that review? Is it appropriate for the responsible government department to do so? If the department feels like a bad review would reflect poorly on it as a department it might make it less likely to have a bad review. If a good review reflects positively on the department it might make it more likely to have a positive review. So I would look at what the incentives are for the reviewer.
I would think that departments have a lot of the right knowledge built in if they have been overseeing an entity in the past, but they might not have the full sense of what is happening inside or the ability to figure that out as an external entity could. The UK Government have the National Audit Office and other external entities that are also very experienced at going in and looking at some of the operations. A big question for me would be: who should carry out the reviews, if there is going to be a review process?
Lord Best: Were you hinting it should be an external body?
Professor Sean Ennis: Yes, I was.
Dame Julia Black: I have three points to make here: first, what is reviewed? I would absolutely agree with Professor Ennis’s point that it is absolutely critical who does the review. The sponsoring department is often implicated in the regulatory process; it might be responsible for some part of it, but it might not have sufficient independence, so I completely agree in terms of who does this.
Actually, if I can do a sort of “Blue Peter” and bring out something I prepared earlier, I was very grateful to be asked to give evidence to a previous inquiry of this committee looking at regulator accountability, and there I proposed something which I just called the office of regulatory performance—as a placeholder name—which would be similar to the National Audit Office and might be part of it or might not, but very crucially it would actually be providing advice to Parliament because it is Parliament that calls the Executive to account. These are executive agencies, so having the Executive do a review of what the Executive are doing is not necessarily helping Parliament. My concern was to enable Parliament to have greater capacity to call regulators to account by having a more systematic body of reports and reviews on which it could draw. This body would be independent and able to conduct its own reviews on its own initiative, as well as respond to requests from committees such as yourselves to go and do research or reviews into particular areas.
Could we do this in the National Audit Office? My argument there is that the NAO’s focus is simultaneously too broad and too narrow. It is too broad because it has to cover the whole of government and many public bodies, not just all regulatory bodies. It is also too narrow because it has to focus on value for money. Regulators are not often spending a lot of public money. It does a very good job in what it does, but the team within the NAO necessarily have to bid for resources to do a review on the regulator and it may be that something gets squeezed out by something else, whereas this body would be absolutely dedicated to reviewing the way that regulators operate. That would be the first point.
The second point is: review the system and—I want to just underscore this point—keep reviewing the system. I mentioned the Cunliffe review once already, and this time I will go to building, for example, as we have touched on already. One of the findings of the Grenfell inquiry pointed out that at the time of the fire it was the Department for Communities and Local Government—now the Ministry of Housing, Communities and Local Government—that was responsible for building regulations and statutory guidance. It was BEIS, now DBT, that was responsible for regulating products. It was the Home Office that was responsible for fire and rescue services. Building control was partly in the hands of local authorities and partly in the hands of approved inspectors operating as commercial organisations. Enforcement of the law was carried out by trading standards at local authority level—and you had a certification service. So you had this fragmented system. The answer is not necessarily to put everything in one big mega regulator, but if you are looking at this system for building control and regulation of buildings—we should probably bring Natural England in here as well—you have to look at that entire system. Another very good example we have already referred to today is waste management.
The third point is that you need people who really understand the business of doing regulation. There is an example here which comes from the global system of policing compliance with financial regulatory standards: an international standard-setting board called the Financial Stability Board. It has a system which is actually run by the IMF and the World Bank, whereby you have peers going round to do peer group reviews of different regulatory systems of all the G20 countries, which have to be made public. But those peers consist of regulators from other countries coming to review a particular country. So my expert body coming round will consist of those who do regulation within the UK, but also those who are responsible for doing that regulation of a similar activity in another country; for example it might be Australia, New Zealand or Canada, just so you have some international comparison and contrast coming in.
The final point is that it has to be transparent. Those reports have to be public and they have to be open for all to see. That is how we could really substantially enhance how we can call independent regulators to account in a clear, transparent and systematic way.
The Chair: Thank you. You have covered some of the points that we were going to raise later, but that is very useful. Did you want to come back, Lord Best?
Lord Best: No, I have another new word: Ofreg.
The Chair: We are all learning. Baroness Nichols, do you want to come in now? We are going to have to be quite brief because we are running out of time for everybody.
Q9 Baroness Nichols of Selby: There is a view out there, and often in the public domain, that there might be too much regulation. Some of those points have already been made but I understand that in the past many regulators have argued that there need to be more reviews of existing legislation so that they can innovate and regulate quite flexibly because some of the criticism is that they do not have enough flexibility.
What can regulators do within the current legal structures, and to what extent is legislative or policy change needed to reduce regulatory burdens? Where are such changes most urgently needed? You might have covered some of that with earlier questions around the various regulators and how they interlink with each other, so that is the point of the question. I am not sure who wants to go first.
Professor Sean Ennis: I have been pointed to, Dame Black, so I will just run with it. Focusing on essentials, I believe that if we are interested in growth, one of the topics that is really worth paying attention to is what generates foreign currency for this country. We know the mechanics of domestic growth, but one of the ways that we can do better is by having increased foreign spending or investment in this country. The City is tremendously important because it is one of the current account surplus areas for the UK. When I say the “City” I mean it in a very broad sense, so it would include professional firms that are working within a few miles of us, but also elsewhere in the UK. The City is not just the City of London but also the financial sector in the UK as a whole. I will just do a little advertisement for Norwich, as quite a bit of the insurance industry is based there as well. This is an area where it seems like the UK is somewhat weakening—one reads certain evidence from the London Stock Exchange about going public, for example, and maybe some other areas. So that seems like a real priority area to me.
Another one is education, where higher education and secondary education bring in a fair number of students from outside the country. There is not very much focus on making that successful in the future but actually some of the foreign students are really helpful in terms of paying the costs of institutions and actually keeping rates affordable for British citizens. So those are two areas I would focus on.
I would maybe just again raise this problem of predictability. The problems with PPI are one example of an area where, although there was not a dramatic lack of information by the regulators prior to some of the developments, there was a surprise for those companies that had been giving out the PPI when they were found liable to such a high extent for what had happened. That kind of unpredictability is a really big problem. One way to handle it is for regulators to come out with announcements of what they think is good behaviour and what they think is bad behaviour. If many different institutions are doing something very similar, that sounds like it is an accepted way to proceed. If the regulator feels it is not an acceptable way to proceed, communication is perhaps more appropriate than issuance of fines or lawsuits that follow on from that.
Dame Julia Black: We have covered a lot of ground. The question about where our regulatory powers and functions are fit for purpose and where they are not is something that you will really have to go sector by sector on. Specifically on that I can give some examples where Parliament itself has actually called out that there is a need for reform and change.
Just to build on Professor Ennis’s point, however, one area to start looking at is that Government have the industrial strategy and the industrial sectors that they want to see grow, so absolutely look at the regulation in those sectors and see to what extent they are facilitating growth. We also have to think about which parts of industry—one of those sectors is the creative industries, for example. I have sat in round tables with people looking at the policy in relation to creative industries, including investors, and asked investors, “When you look around the world, where do you invest in the creative industries?” They said, “Wherever the IP protections are the strongest”, because that is where they can protect their return on investment. That is copyright. However, in another part of the field you could actually allow tech companies to grow by not necessarily respecting copyright. So there are choices, sometimes, about which sectors you want to grow and which sectors you do not, or not right now—or not to the same extent, or not at the expense of others.
My final point is that you may well often have some bits of government or government departments whose mandate is absolutely to get those sectors to grow, but other decisions coming across from other parts of government are cutting across that. For example, we have already seen that life sciences has been a big area for R&D investment seeking to grow that sector, and rightly so; it has had that push for many years now. What was cutting across it? It was the prices that NICE said it would pay for those medicines, plus the wider geopolitics in which all regulation is ensnared right now.
Student fees have been raised. Higher education is one of our really strong competitive sectors globally. Students, particularly global students, have the world to choose from, so one part of government may want to be pushing that and pushing the R&D sector, both in terms of researchers and in terms of students in our higher education sector, and other parts of government want to impose levies on international students and make sure that our visa costs are some of the highest in the world. There is a very good Royal Society report on that out just now.
Some of this is not just about consistency across different objectives but about consistency across government. What often happens is that, if you are an industry, you are caught between these competing tensions, and you are trying to manage them as you are trying to run your business. Talking to those industries in those sectors is probably a really good way of just trying to tease out some of the issues in practice that we have been exploring today, from their point of view.
Q10 Viscount Chandos: On the eve of Guy Fawkes Day, I guess the analogy of the bonfire of quangos or a bonfire of public bodies is appropriate. In the regulatory sphere, there is talk of abolition and mergers, taking it in-house into departments. Very quickly, how do both of you see the chances of that being positive and successful? Or is there a risk that that much turning inward-looking risks diversion from actually delivering the better regulation that is needed?
Dame Julia Black: Professor Ennis raised the problem of KPIs before, and I quote the wonderful phrase of the wonderful—sadly departed—Professor Christopher Hood: “Hitting the target and missing the point”. Is your target to reduce the number of quangos from, say, 100 to 90? Yes, you can merge some and you will go from 100 to 90, but will that make the world a better place? Possibly not. Will that just cause a lot of organisational distraction? Remember that in these different regulators people are not always employees of the Civil Service, so you have to merge terms and conditions and pension schemes, for example, and you have a whole pile of organisational distraction that can come just from trying to hit a target and missing a point.
So it depends why it is being done, and how much really careful and rigorous analysis has gone into whether it makes sense to introduce quite a disruptive reform into a system. Are we confident that it is at least more likely than not that this will result in improvements in what it is we are trying to achieve? If you have a really deep analysis that this is going to be a better way to deliver what we Government wants to be delivered, as you have done in some of the reports that we have been referring to and in others, then yes, absolutely; you will need some reform, and I have highlighted areas where that has been the case. If it is just for the sake of reducing a number on some dashboard, then obviously not.
Professor Sean Ennis: I would only say that I have not seen a lot of evidence to support the idea that mega regulators actually do a better job than individual ones that are focused on particular domains. Nor have I seen a lot of evidence that there is a major financial benefit to the Government from such combinations, but that does not mean there is not one; it just means that I have not seen a lot of evidence to suggest there would be.
Q11 Lord Gilbert of Panteg: You have been very generous with your evidence. We are just at the start of the inquiry and we are looking for other places to go for evidence. It may be that you can write to us if you have some thoughts, but are there any other countries we should be looking at, particularly where a growth mandate has been imposed on regulators, or are there any other regulatory practices that would be of interest to us? Do you think there are any particular sectors or industries that we could be looking at as case studies to inform our inquiry? Maybe you could give us a quick response now and then write if you have further points to make.
The Chair: That is quite a broad question and we have covered some of these points. I would also mention the points you mentioned earlier about the research that you have done, Professor Ennis, if you could write to us on that. Dame Julia, I know you have done a lot of work on how Parliament can hold regulators to account. That is something that this committee is very much concerned about, and we have talked about it and reported on it in the past. So if you want to give us a quickfire answer now that is fine, but we are happy to receive further information in due course.
Professor Sean Ennis: As a quickfire answer, I would not necessarily look to the United States because it has a number of very different structural features from the UK. But perhaps there is something that could be learned there in terms of a country with a higher growth rate: what is going on that is otherwise relatively similar, and how do the regulations differ?
I would also consider focusing on examples from the Netherlands and Germany with respect to how they have managed some of their industrial sectors from a regulatory perspective. I would not ignore China: the Chinese are very good at sending expert committees to other countries to learn about processes and how they are operating. They have performed a lot of experiments within their own country with different provincial regulations to figure out what works well for them, so there might be points to learn there as well.
Dame Julia Black: Again, it varies one would have to sector by sector. People often look to Singapore, for example. We tend to have a fair amount in common with the Netherlands; obviously for any EU country you have the overarching framework of EU regulation in that space so that is going to have an impact, as it were, on their freedom to operate in different environments.
Whenever you are looking internationally—and it is very important to do that in different areas—it is really important to think, “Okay, so they are good at promoting economic growth, but at what cost? What kind of growth is there, and is this inclusive growth? Is this sustainable growth over the medium to long term? Is this growth at the expense of consumers, the environment or workers’ rights, for example? Are there other things that actually, as a UK society, we do not want to trade off against growth?”
It is always about trade-offs and choices and trying to see when you can get those wonderful elusive win-win solutions that we all like to put at the end of a PowerPoint and say, “That is the way forward”. So really it is about testing out whether they are managing to achieve very similar objectives to us with similar values, but then doing it in a novel and more efficient way. It is always worth looking out and around, for sure, while always keeping that question in the back of your minds.
The Chair: Thank you, and thank you for your patience and your time. We have had a full two hours, which is quite a long time, but we have actually managed the technology, so thank you to you both. I declare this meeting closed.
