Economic Growth (Regulatory Functions) Order 2017

Tuesday 28th February 2017 Grand Committee

Considered in Grand Committee

15:30

Moved by

[Lord Prior of Brampton]

That the Grand Committee do consider the Economic Growth (Regulatory Functions) Order 2017.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Prior of Brampton) (Con)]

My Lords, in moving the Economic Growth (Regulatory Functions) Order 2017, I shall speak to the Business Impact Target (Relevant Regulators) Regulations 2017 and the Growth Duty Statutory Guidance 2017. The purpose of these statutory instruments is to support regulatory bodies in the UK to create a healthier business environment by making regulation more proportionate, transparent and accountable. The Government are committed to making sure that regulation supports growth and are doing all that they can to unlock productivity in the UK.

Better regulation is central to the Government’s desire to make the UK the best place in the world to start and grow a business and is a key part of our commitment to drive economic growth and boost productivity. During the previous Parliament, the Government made significant progress through programmes such as one in, two out and the Red Tape Challenge, which were instrumental in delivering savings of £10 billion to businesses over the lifetime of the Parliament. These programmes encouraged a cultural shift in government departments towards more proportionate and smarter regulation.

This approach was formalised through the Small Business, Enterprise and Employment Act 2015, which provides a transparent framework for assessing, managing and reporting on new regulatory impacts to business, known as the business impact target. Through the Enterprise Act, we extended the ambition of the target by expanding it so that it can include the activities of a wider range of regulators beyond those acting on behalf of UK Ministers. This will support us achieving a further £10 billion of deregulatory benefit for UK businesses in this Parliament.

Alongside the business impact target, the Government also introduced a duty through the Deregulation Act for regulators to have regard to the desirability of promoting economic growth. This is known as the growth duty, which will help to ensure that regulatory bodies contribute towards creating a healthier business environment by making regulation more proportionate, transparent and accountable. Together, the business impact target and growth duty will support a positive shift in the way regulation is delivered.

It is sometimes easy to caricature all regulation as negative. The Government recognise that proportionate and well-targeted regulation is important and provides vital protections. It can help markets work better, enables new business models and start-ups to compete and protects consumers. The Government have been clear in the industrial strategy that regulatory frameworks need to support business investment rather than distort markets. This does not mean deregulation at any cost. We have to avoid, for example, the combination of light-touch regulation and emphasis on short-term financial gain that contributed to the financial and banking crisis.

Better regulation recognises that regulation can impose costs on business. It can divert attention from more productive uses, such as growing into new markets, innovation and training. It also recognises that regulation can favour more established incumbent operators in a market. For example, it is estimated to cost small business 10 times more per employee, on average, to comply with regulations than it costs a large business. The Government’s better regulation system therefore seeks to minimise these burdens by ensuring that the likely impacts of regulation are fully assessed and by providing an incentive to reduce costs on business where possible. Indeed, there are numerous examples of good, proportionate regulation that is good for business and society as a whole.

Under the previous Government, we conducted a series of sector reviews into regulator enforcement practice. Reforms delivered as a result are now saving business millions of pounds, encouraging companies to grow, speeding up multibillion-pound investments and reducing burdens, all without weakening protections. These reforms have been welcomed by businesses and trade bodies across the country. These savings are being made by removing assessment and reporting requirements from more than a quarter of a million businesses where there was no scope for them to deliver the energy savings that the requirements were in place to deliver. This allows the regulator to focus on working with those businesses where real energy savings can be made.

However, there is still more to do. The regulations before the Committee today will be an important step towards creating a healthier business environment by making regulation more proportionate, transparent and accountable. The result will be to take another significant step forward to ensuring that regulation supports growth and that Britain is the best place in the world to start and grow a business.

I turn to the detail of the regulations. The Business Impact Target (Relevant Regulators) Regulations 2017 specify the individual regulators that will be brought within scope of the business impact target. The regulators listed within the scope of these regulations will be required to assess the economic impact on business of changes to their regulatory policies and practices that come into force, or cease to have effect, during the course of the Parliament. The assessments must be verified by the Regulatory Policy Committee and the savings or burdens imposed on business incorporated into the Government’s annual report outlining their performance against the target.

The rationale for this is clear. Businesses consistently tell the Government that the actions of regulators are as important as the content of legislation in determining their experience of regulation. So the costs to business of their regulatory activities should be actively assessed and transparently reported. These regulations deliver that. Where impacts are imposed on business by changes in regulatory activity, these should be transparent. In addition, business should have confidence in the estimates that the Government have made of that impact.

The changes do not in any way undermine the core purpose of regulators, which provide vital protections and help ensure that markets function effectively. Regulation has important economic, social and environmental goals. Regulation for those reasons should be proportionate and at the minimum cost to business necessary to achieve the outcome required. Including further regulators in the business impact target will help regulators to make the move to smarter regulation that delivers outcomes with the minimum overhead. This will be good for British business and will contribute to a more consistent regulatory process.

The Government consulted on the proposed list of regulators to be brought within scope of the business impact target from 11 February to 17 March 2016. We received responses from a range of stakeholders, including business, regulators, trade associations and other organisations. The majority of respondents were supportive of the proposal to bring the regulators specified in the consultation within the scope of the business impact target, with one respondent stating that the BIT would result in regulators,

“having to design their services, policies and procedures in a way that suits the needs of business”.

No further regulators were suggested to be brought within scope, while a handful of regulators questioned their own inclusion. We have reviewed these queries and are satisfied that it is appropriate to bring the regulators listed in this instrument within scope of the target. We have also paid close attention to issues raised around proportionality. The Government have been working collaboratively with a wide range of regulators to design a process for implementation that minimises burdens on regulators.

I turn to the growth duty regulations and guidance. The Deregulation Act 2015 introduced a legislative requirement for persons exercising a regulatory function to have regard to the desirability of promoting economic growth. The Economic Growth (Regulatory Functions) Order 2017 sets out the specific regulatory functions to which this duty applies. Alongside this instrument, the Growth Duty Statutory Guidance 2017 has been produced to assist regulators in fulfilling their new responsibilities, at both a strategic and operational level.

Proportionate delivery of regulation plays an important role in supporting competitive markets and improving social and environmental outcomes. Regulatory enforcement that is not proportionate and risk-based imposes unnecessary costs on business, creates uncertainty and undermines investment. The way in which regulation is enforced can have significant effects on businesses’ ability and willingness to invest and grow.

Although there is already a great deal of good, proportionate and effective regulation, there is evidence to suggest that some regulators fail to take sufficient account of the economic consequences of their actions and place unnecessary burdens on business in the exercise of their regulatory functions. To address this, the then Chancellor announced in the 2012 Autumn Statement several measures designed to create a healthier business environment by making regulation more proportionate, transparent and accountable. Although many regulators consider the impact of their actions on economic growth, there are those that do not. Indeed, some regulators think that they are unable to take account of growth as they do not have a statutory requirement to do so or their statutory objectives do not refer to growth.

Requiring regulators to have regard to economic growth in this way will address the uncertainty of regulators that feel that they cannot have regard for economic growth and will put the obligation on a statutory footing, thereby complementing regulators’ other legal obligations. This duty will help regulators to carry out their functions in a way that is conducive to economic growth and will ensure that regulatory action is taken only when it is needed and that any action that is taken is proportionate. The growth duty will therefore encourage regulators to develop more mature and productive relationships with the sectors and businesses that they regulate, driving up the accountability of regulators to the business community. This will help to deliver our aspirations for greater productivity and growth in our economy.

Public consultations on the growth duty were held in 2014 and 2015. A further consultation was held alongside the consultation on the scope of the business impact target, and responses were received from a broad cross-section of stakeholders. The majority of responses to the consultation on the growth duty agreed that regulators should have regard to economic growth and should be accountable for whether they have properly considered business growth in their decision-making.

There were a small number of objections to the inclusion of particular regulators in scope, in the main based on arguments related to the amount of regulatory activity undertaken or the fact that the organisation did not have any regulatory functions. Having considered these responses, the Government are satisfied that it is appropriate to bring the regulators listed in the instrument within scope of the growth duty. We also received a number of responses on the draft guidance, with the vast majority commenting positively on its content.

The business impact target and growth duty play a central role in the Government’s agenda to improve UK regulation. They support a positive shift in the way that regulation is delivered through reducing the regulatory burdens that hold businesses back and prevent them from getting on with business. The measures are an important step towards creating a healthier business environment by making regulation more proportionate, transparent and accountable and I commend them to the Committee.

[Lord Mendelsohn (Lab)]

My Lords, as I arrived this morning, I thought that the House of Lords had taken to Oscar fever and that the red carpet had given way for the red of the House of Lords. I saw the Annunciator, and it read, “One Order, Six Regulations and one Statutory Guidance” as the business of the day. It reminded me of “Four Weddings and a Funeral”. I see that we have not had quite the same box-office draw.

I thank the Minister for his introductory comments. There is a lot that we all agree on as to the eventual targets that we want to reach and the sort of improvements that can be made. In many ways, we agree on motherhood and apple pie being good things. Our concern that the wrong measures were adopted in the primary legislation to achieve them are reinforced by some of the weaknesses in the statutory instruments, the consultation processes before them and the conclusions drawn, and it is on those things that I raise a few issues and questions.

Part of this relates to the overall policy context, which is the attempt to have a target of £10 billion of reductions. Central Government are unable to do it on their own, so they now look to regulators to take up some of the heft in this colossal task. Without some detailed sense of what can be achieved—to which I shall come later—it is misguided to believe that the solution can be what we have now, which is essentially a cultural response: if we have a new culture, a new way of working, things will improve. I am a huge sceptic about the creation of culture as a strong driver in making these things move. I believe strongly that we have to build able business cultures, but I find frequently that the Government’s response is to provide measures that will impact the culture.

15:45

I will turn specifically to the role of regulators shortly, but I am reminded of Debenhams, a company that has consistently enacted appalling late payment policies. Over two Christmases, delayed payments caused a huge amount of stress to its small business suppliers. It is also the business identified as having the worst record for paying people below the minimum wage. But absolutely nothing has happened to change that culture, notwithstanding all the changes that the Government have made or suggested—not one issue has been raised by shareholders or management and there has been no significant government intervention to change that. Show me where the changes introduced by the Government have impacted the culture. I would like the Ministers to think about that as I raise other questions about the cultural impact of some of these measures.

The measures before us specify the functions that are covered and define the growth duty in relation to individual businesses, sectors and overall general economic growth. That is rather a large task on rather a large scale, and all have different environments that I am not sure this adequately addresses. Let me get to the heart of some of my questions about whether or not this will have a meaningful impact. What is the current evidence base to show the negative impact that regulators have on growth? What is the overall estimate of that impact? How will that meaningfully be addressed by these measures? You then have to assess whether or not the regulators themselves are the right regulators to include to ensure that such deregulatory changes can provide that sort of benefit.

Looking at the list of regulators, very specific questions arise. How will such a duty operate in the context of the British Hallmarking Council? Is there an estimate at this stage of both the identifiable problem and the identifiable benefit of how any application of a growth target can be achieved in relation to the British Hallmarking Council, the Commissioners of Irish Lights, the Guardians of the Standard of Wrought Plate in Birmingham, the Guardians of the Standard of Wrought Plate within the town of Sheffield, the Northern Lighthouse Board, the Regulator of Community Interest Companies or the Sports Grounds Safety Authority? How can it be achieved for Trinity House, as defined in Section 223(1) of the Merchant Shipping Act 1995? How can it be achieved for the legislation listed in Part 3, such as the Conservation of Seals Act or the Bees Act? How has growth developed in the context of the Office for Nuclear Regulation, where the sector is defined by a deal created by the Government to introduce one nuclear power and in an industry with very few players? How can a regulator establish growth on a sectoral, company or general economic basis in that context?

I have tried to focus my comments on just a few of the Acts and regulations listed so that the Minister can come back with some specific examples of evidence, assessment, a means of measurement or a prognosis as to what the likely impact of establishing growth targets could be on their operation. However, what would be the achievable objective of a growth target in relation to the Avian Influenza Preventive Measures (England) Regulations 2006 or the Transmissible Spongiform Encephalopathies—I defy the Minister to pronounce that right first time—(England) Regulations 2010? What is the achievable objective in relation to the Outer Space Act 1986?

How did we get to the estimate of the eight measures identified under “plant health”? What proportion of regulations and statutes are they of those that deal with plant health? Why did we end up with a measure entitled The Potatoes Originating In Egypt (England) Regulations 2004? Why are we looking at the potential for economic growth of the Endangered Species (Import and Export) Act 1976? It seems to me that the Government have vested a huge amount of effort in this on the basis that there is a wide body of evidence that regulators have underperformed in their understanding of their economic role and rationale. I would be very interested to know what evaluation has been done of the work of any of the regulatory authorities vis-à-vis the Endangered Species (Import and Export) Act 1976. I would be more than prepared for the Minister to write to me on that point if he does not have the information at his fingertips.

I am always a great sceptic about many things. This debate gives me an opportunity to ask a question about the European Convention on Human Rights. Paragraph 6 of the guidance states:

“The Parliamentary Under Secretary of State for Small Business Margot James MP has made the following statement regarding Human Rights: ‘In my view the provisions of the Growth Duty Statutory Guidance are compatible with the Convention rights’”.

I would be interested to know whether that was the Government’s opinion, and what legal advice was taken, and at what level.

I reinforce the point about the regulators. I have made this point on a few occasions but I will give it a go again. The Government have said in the policy background document that although many regulators consider the impact of their actions on economic growth, some do not. Which evaluation has established those that do not? Is there a list of those that do not? Some regulators think that they are unable to take account of growth. Can the Minister tell us which ones they are, and which do not because they do not have a statutory requirement to do so? Economic impact is not the same as economic growth; these are two fundamentally different concepts. Are we confusing economic impact with economic growth? Requiring a regulator to have regard to economic growth would address this uncertainty and would put this obligation on a statutory footing, complementing regulators’ other legal obligations.

The guidance identifies productivity. It would be interesting to evaluate that. Many of the measures with a growth target refer specifically to making sure that you have an understanding of the impact of the measure on businesses. How does that relate to growth? Are the regulators competent to assess this? Has there been any evaluation of any of the regulators’ competency to do so? How are they expected to gain the expertise to do this? How will they be evaluated on whether or not they are achieving that? Specifically, I would be interested to understand how the Commissioners of Irish Lights, for example, or the staff of Natural England are becoming competent in some of the areas they are being asked to look at. What training or competencies will be required of the staff or their advisers in achieving an economic growth target, as opposed to an economic impact target?

One of the other areas I am most concerned about is the suggestion that the benefits of this measure to small businesses include reduced administration. There is a sense that proportionate decisions will inherently benefit small businesses. There is absolutely no evidence for this. I would be grateful if the Minister provided any evidence that proportionate decisions by regulators help small businesses. Any decision by a regulator disproportionately impacts the capacity of a small business. Therefore, I would be interested to hear how this duty will suddenly change the entire 50-year history of small business operations in this country. That would be a very useful piece of evidence to illustrate. There is a notion that this measure will result in a massive reduction in administrative duties, inspection costs, duplication of information and the use of external contractors. Again, I would like to know what the specific evidence was that this would be achieved.

Of course, we ended up with a very interesting consultation. There has always been a great deal of optimism that changing regulation and how it is made will have direct business impact. There is always a great deal of enthusiasm from businesses that this will be achieved. Businesses were hopeful but uncertain as to what the establishment of the growth duty would measure. In fact, in this consultation—which goes through the business impact target as well as the overall guidance—it is very clear that one massive area of regulation has a massive impact on businesses. I would like to note the first, second and third, but instead I will deal in a second with the one that is first by an overwhelming majority: tax collection, which is, I believe, outside these duties.

When the regulators were asked about the potential impact of the growth duty, a thumping 69% felt that it would have absolutely no impact whatever. I like the notion in the report—one tries to be generous—that:

“A sizeable minority … however were highly positive about the potential impact”.

I would like to have some understanding of the use of the word “highly”. It is in paragraph 70 of the “Business Benefits” section of the impact assessment. There is an estimate of how many businesses in this country will now benefit—495,215 out of more than 5 million. I would be very grateful if the Minister broke down that figure. Are they small businesses? Is it by size; by demographic? Is there any particular measure whereby we can get to 495,215?

I turn to the potential growth benefits, which are beautifully laid out in a document for which I am very grateful. Remarkably, it talks about the actual benefits that will accrue to business. The benefits based on the 31% are worth in total an extraordinary £37 million to the economy—once you net out the costs to businesses for the regulator, which are somewhere between £134,000 and £1.5 million, the figure is some £36 million.

The Government, in a vague attempt to try to boost the number of potential benefits, then create an assumption of an even larger overall benefit of this growth duty, this huge transformation of culture, this huge transformation of the ability of regulators to give an overall benefit, of—wait for it—£90.3 million. But the assumption, based on 31% of businesses—some 495,000—receiving benefits, moves from a 0.06% reduction in time used for administration to a 5% reduction. I am not bright enough to work out the maths of what the multiplier is to get from 0.06% to 5%, but that means that we are looking more than 100% of businesses, not the 31% estimated. Even if we change the dial, that number is the largest number that comes to the £90.3 million benefit. I would like the Minister to set a target as to how this massive legislative change will provide a benefit, and give us some idea of how it will be achieved.

I appreciate that the golden target for changing behaviour in respect of the impact is important, but this measure is not right. It confuses the notion of impact and growth, and ends up having little impact and causing little growth.

16:00

I want to cover several questions on the Business Impact Target (Relevant Regulators) Regulations 2017, including on the consultation and how the regulations join the dots between the business impact target and its goals. Warren Buffett expressed a notion that can be applied to this. He said:

“In the long run, managements stressing accounting appearance over economic substance usually achieve little of either”.

It seems that we may be going down that path with this provision. On the regulators’ contribution to the £10 billion cost reduction target, I would be grateful to know what the expectation is from the Minister on the specific list of regulators. I will say this slowly, so that he can write down a list and give me figures at the very end. How much of this target are we expecting these regulators to achieve?

There is the British Hallmarking Council. There is also the Civil Aviation Authority, which recently wasted a whole sum of money trying to undermine a business that was restructuring and refinancing itself, for which it has not been held to account at all. I would be interested to know if the contribution that was expected in the business target was anywhere near enough adequately to deal with the costs and expenditure wasted on pursuing Monarch Airlines during its restructuring. I would be grateful to know what the expected target is. There is also the Commissioners of Irish Lights and the Competition and Markets Authority—I thought that that might be a good example, so I want to throw in a full toss. To throw another, there is also the Financial Conduct Authority, but I would also be interested to know what the Incorporation of Goldsmiths of the City of Edinburgh and the Edinburgh Assay Office are meant to achieve.

I am concerned about the context of the consultation. As the Minister said in his comments, there were a number of responses about inclusion in the list. The government response said that seven respondents, six of which were regulators, questioned the inclusion of specific regulators on the grounds that they had either never exercised their regulatory functions or that they were small and therefore would be less able to fulfil their obligations. The Government’s argument is that the test for whether regulators should be brought in is not whether they are small or whether they use these regulatory functions, but on the hypothesis that, where regulators do not use their powers, they would still be included on the basis that, if they were ever to use such powers, it would have an effect on business; if they do not use them, the impact target places negligible burdens on them, but it places a whole series of duties and other burdens that otherwise would not exist. If a regulator has not exercised those functions at all, what is the context in which it is likely to do so? Would there not be a case to introduce this when those conditions are more likely? I would be grateful to know, particularly of those regulators that raised that question, whether any of them has ever exercised a regulatory function, what consideration was given to how they have operated, what the circumstances are in which they would exercise those regulations and whether there is a case to reconsider their inclusion in this list at this stage.

I would also be grateful if the Minister addressed the fundamental problems about the business impact target. In the end, the policy context, as the Government have said and which we understand, is the target reduction of £10 billion. The Government have estimated that in this Parliament, thus far, they have achieved an improvement of £0.9 billion, although there are an additional £8.3 billion of net costs to businesses based on regulatory decisions that fall outside the business impact target. The issue of whether the regulators can really perform any meaningful function in achieving this through their inclusion within the business impact target is an extraordinary red herring.

Some 90% of the total expected reductions in costs during the last Parliament were achieved through 10 regulatory decisions, and one was overwhelmingly more significant than all the others: changing the inflation index used to increase pension benefits. That simple regulatory decision—the great justification for the Government’s achievement in the last Parliament—has led directly to pension deficits and a whole range of other problems. Whether this was a great deregulatory measure that has not led to the perverse outcomes we are witnessing, such as the number of companies now having to address pension deficit problems and insolvency issues, is another matter. I will turn to the associated issues a bit later.

Ten decisions taken and 900 regulations introduced, of which, broadly, 40% are included in the target and 60% are not, does not constitute a particularly effective measure. Businesses believe that the level of regulation is an obstacle to success, but a majority identify tax and administration as the principal regulatory problem. This majority is particularly clear when it comes to small businesses, many of which identify tax and administration, which is not within the scope of the Government’s business impact targets, as the burdensome area of compliance. This is one of the key issues that the Government need to address.

Let me turn to one of the problems with the business impact target, which will impact on how the regulators will perform. The evidence base for what the regulators can achieve is not there, and all these issues have been uncovered in an excellent National Audit Office report. Do the Government know the costs that business incurs as a result of existing regulations? The National Audit Office was absolutely clear that they do not: they have not the first clue about the overall burden. Establishing a target without any understanding of the burdens is impossible, but the Government have achieved it—perhaps it is an achievement to include in the next manifesto. However, this does not help to achieve a decline in regulatory burdens.

Nor does this measure appear to be helping to improve the analysis. Five of the 14 departments with a regulatory responsibility within the scope of the target have told the National Audit Office that they have no plans to quantify any existing regulations. Not all of them even answered the question, but five were clear that they had no desire or plans to do so. The measure does not in fact reflect the administrative or regulatory costs to businesses in any meaningful way because it excludes all tax and administration, European Union regulation, fees, charges, self-regulation and co-regulation. There is no sense of how these costs really affect businesses.

The Better Regulation Executive and the Regulatory Policy Committee are doing an important job, which we support, and we are keen to make progress, but I am not sure that these measures entirely help them to do so. On evaluating their impact, it is clear that there is no ongoing, clear and identifiable system of effective measurement. A calculation is made of the intended deregulatory impact; it is then counted as a five-year target, no matter what is achieved, because there is no effective method of ensuring ongoing measurement.

In the National Audit Office’s utterly caustic, in my view, review of the business impact target, it identified not just weaknesses in the calculation of these impacts but a huge gulf in terms of departments’ desire to calculate the targets because ultimately they do not provide any real potential savings to business. I make the point again that, according to the calculation, on average businesses should be saving £400. I have a few businesses and I am still trying to find the money from the savings from all these deregulatory impacts. I have not found any. I have found a lot more costs associated with them but I have not found any savings.

This lack of evaluation means that the Government cannot know the real impact of their efforts on businesses and do not learn from any previous interventions. There is no systematic evaluation of any of the previous interventions. As a result, we are now putting a duty on a series of regulators to be involved in this business impact target, which again have made no evaluation of their impact on businesses and have no mechanism of targeting or tracking those impacts by any sampling or pooling of data from businesses. It is very clear that they will miss these targets as a result.

I will give an example. Regulatory impacts are not just direct. According to the Financial Conduct Authority, I am not a politically exposed person. According to Ministers at the Dispatch Box, I am not a politically exposed person. According to every bank in this country, I am a politically exposed person. Therefore, the banks’ duties of compliance, based on their estimate of what their duties are likely to be—be they international or domestic—mean that they will evaluate me beyond what the regulation says. In one case, it took so long to open a bank account that we even received compensation from a bank. How do you measure the impact of the unintended consequences of regulation and therefore the unintended consequences of deregulatory drag?

Health and safety is the third most complained about area. Yesterday I undertook a 40-minute interview for a work experience opportunity for a young adult to come here from school to shadow me, which was one of the most extraordinary and onerous tasks because of the interpretation of health and safety. Of course, that suggests that I will not do it again. Again, what are the impacts of regulation and how can one be assured that regulators are able to deal with those sorts of issues? Ultimately—and I will turn to this later in more detail, or I might not, given the time—the essential issue comes down to whether or not regulators communicate effectively what their regulations are, how best to make proportionate judgments and how best to fill in forms or do other things.

Actually, the benefits are more in regulators’ duty to communicate. The Small Business Commissioner in Australia has transformed the ability to deal with regulatory drag and problems, giving the regulators a duty to communicate and an obligation to ensure that businesses are able to fulfil their duties in regulation. That has been far more successful than giving them an arbitrary target that they cannot deal with, that they have no competency to deal with and that they have no experience of dealing with.

Turning to the guidance, I must say that I found it utterly fascinating to read and utterly depressing to consider as a duty on the regulators with any real confidence that they will be able to meaningfully achieve growth. Of course, a variety of issues come with this. The Explanatory Notes state that, as a result of placing the growth duty, the annual indirect benefit to businesses is a potential £28.1 million—another whopping sum. Rather than dissect that, I will give the Minister an opportunity to explain how that figure was reached, what was measured, the detail behind it and the economic model used. That would be helpful. If he does not have all the assumptions or the economic model to hand, I am more than happy to receive a letter.

16:15

The notes go on to explain that, as a result of regulators considering economic growth, businesses should experience more proportionate decisions and see a reduction in administrative burdens. Have the Government seen any evidence of this since the implementation of the Act? Has there been any indication that this is a cultural shift that takes place, with or without more specific regulation?

The document itself contains a significant number of words on how regulators need to understand the business environment and it deals with the business environment on a company, sectoral and overall economy basis. It looks at minimising burdens on business productivity at a company level. I was pleased to see at least some economic theory introduced in the pursuit of productivity, which I thought was meaningful. It also talks about proportionate decision-making and the need to demonstrate a regard for the growth duty, which I thought was not a coherent section and was particularly weak.

I have to ask one fundamental question: what is the theory behind how regulators will perform their duties in relation to growth? Is there some macroeconomic theory that we can look at? In looking at the duties, is there some sense in which business-based productivity exists? I understand the Government’s five-plank system of measurement, which is orthodox within economic theory, but how do regulatory duties on a sectoral business basis achieve those productivity gains? Are we asking the regulators to try to achieve something that will simply be impossible to achieve?

That leads me to the conclusion that there is a reasonable fear that this can be used to game the system. The Government made it clear in Committee that companies will be able to hold regulators to account by means of the growth duty. Does the duty not achieve the means for companies to try to seek redress through the courts? The Minister admitted this during its passage in the other House, where the assumption was—

[The Deputy Chairman of Committees]

My Lords, there is a Division in the Chamber. The Committee stands adjourned for 10 minutes.

16:17

Sitting suspended for a Division in the House.

16:33

[Lord Mendelsohn]

My Lords, as I was saying before I was so rudely interrupted—I thank the noble Lord, Lord Foster, for that wonderful line—I will conclude with these points. I noted the sceptical faces from the other side on the point about whether businesses will do this. It was not addressed. In Committee in the other place, the Minister said:

“Businesses told us that they were unlikely to mount judicial reviews except in extreme circumstances. As we all know, judicial reviews are very costly”.—[Official Report, Commons, Deregulation Bill Committee, 20/3/14; col. 526.]


They are not that costly compared with regulatory impacts. The cost of lawyers may be quite significant, but compared with the benefits that can be gained from regulatory changes it is certainly a calculation worth making. If you give someone an instrument to do something, you have a duty to shareholders to do it if you have an operable option. Anyone involved in business will know that.

The impact assessment says:

“This duty will provide a framework for regulators explicitly to factor growth into their decision-making where they have not previously felt able to do so, enabling businesses to hold regulators accountable for their actions”.


The guidance provides far too many opportunities for the sorts of challenges and arguments that undermine the regulators’ principal role and functions. The way the guidance is written has no regard for any particular growth theory, target, goal or effective paradigm. It provides a lot of opportunity for options and arguments to be laid against it and against decisions on the basis of growth.

Again, the Government should not be surprised about this. Even its own report on the consultation said that,

“the business community sought clarity on how regulators can be held to account if they failed to comply with the Growth Duty, or to follow the guidance”.

I do not think the answer will be, “Look in the annual report and take a view”. This is a very important issue. Fundamentally, the core aspects, which this does not address or help, provide legal capacity on the one side and on the other do not give a real sense about the principal duties that regulators have in existing law without the growth duty and whether they will be able to fulfil them.

In conclusion, while we share the Government’s view on a variety of the objectives and goals and even on the journey they wish to take, we were sceptical when the main legislation passed. All these statutory instruments do is lay bare the lack of evidence, thinking and design of these policies, and how, through the unfortunate circumstance of unintended consequences, they are likely to cause more harm than good. I would be very grateful if the Minister responded to all, some, or even a few of my questions.

[Lord Foster of Bath (LD)]

My Lords, I am delighted to follow the noble Lord, Lord Mendelsohn. Like him and no doubt everyone else in the Room, I too am in favour of motherhood and apple pie. I am in favour of the removal of unnecessary red tape, bureaucracy and the gold-plating we have seen on too many EU directives. Like the Minister, I accept entirely that some regulations serve a vital purpose. The much-maligned health and safety regulations provide a very good case in point. If we are to take steps such as the ones proposed here, it is vital that we are aware of precisely what the targets are, what they are expected to achieve and what evidence we will gather to see whether they have been achieved, and that we ensure there is proper policing of any new directives, regulations or whatever is put in place.

I spent a relatively brief time in government. For a short period I was a junior Minister in the Department for Communities and Local Government. As a Minister in a Government who had introduced in 2010 the various proposals to encourage, as it says in our documentation,

“a cultural shift in Government Departments towards more proportionate and smarter regulation”,

I nevertheless came up against the difficulties that could be created by the one-in, one-out and later one-in, two-out policies. As a result of that experience, and subsequently as the Government Deputy Chief Whip serving on Oliver Letwin’s committee that dealt with these issues, I learned a number of lessons.

There are six lessons, and I will briefly share them and use this as an opportunity to probe the Minister about the proposal before us today. The first lesson related to energy performance certificates. Regulations were brought in requiring commercial buildings in certain circumstances—depending on their size, whether there was public access, and so on—to display an energy performance certificate visibly in the premises. The idea was that putting the energy performance certificate up would lead the owner of the building to try to improve energy performance, thereby saving overall cost to both the occupiers of the building and the nation as a whole. I was very much in favour of the certificates.

However, the lesson I learned was that often, those certificates never appeared in commercial buildings. Indeed, I would go so far as to say that they did not appear in a number of government buildings. The question I therefore ask is: what policing mechanisms will apply to the measures and what procedures will be put in place to ensure that we can assess whether they are successful—a point raised earlier by the noble Lord, Lord Mendelsohn—so we can learn from them in future? We have learned nothing from energy performance certificates because they were not properly introduced, policed or evaluated.

The second lesson I learned was from the introduction of zero-carbon homes, something I felt strongly about as a Minister. That fell under all sorts of difficulties, particularly from Conservative colleagues within the coalition, because they said that we had to ensure that we abide by the “one regulation in, one regulation out” rule, commensurate financial implications, and so on. It got into real difficulty because of the way the target was assessed. It was argued that the regulation’s requiring improved energy efficiency of domestic premises would impose an increased cost on the builders of those premises, so it had to be counted as a “one in” for which we had to find a “one out”. In truth, the most sensible way to look at it would have been to say that the improvement of the building’s energy performance when built would lead to a long-term saving for the resident occupants of the property and the nation as a whole but, whereas with energy performance certificates for commercial building, it was okay for the occupants to benefit, when it came to domestic property, it was not.

If we have targets, we must be careful that we do not hit the target but miss the point. I worry that in some of the regulations before us, particularly given the list of regulatory bodies, we may be missing the point.

The third lesson, which I am prepared to acknowledge is not relevant to the documents before us but I want to get on the record, is that these things are not always straightforward common sense. They are often political. I share with noble Lords my experience on Oliver Letwin’s committee when I proposed a measure that would have reduced the cost of business—not requiring certain things to be advertised in local newspapers. This was prevented on the purely political grounds that we did not want to upset local newspapers in the run-up to the 2015 general election.

I also learned that we have to apply common sense. On the basis of common sense, I will not go through the long list of regulatory bodies to which the noble Lord, Lord Mendelsohn, referred. I will just pick one at random and ask the Minister, to whom I have given a little advance notice, about the Northern Lighthouse Board. I wonder what the Minister sees as its ability to perform an economic growth responsibility. The Northern Lighthouse Board is there to serve Scotland and the Isle of Man, and to deliver a reliable, efficient and cost-effective aids-to-navigation service for the benefit and safety of all mariners. I genuinely have difficulty seeing how it will be able to fulfil its requirement.

That leads to my fifth and penultimate point: these things should be based on sound consultation. We have before us a very long list of regulatory bodies that will be brought in under these regulations. Yet, as the noble Lord, Lord Mendelsohn, has pointed out, and as it says in paragraph 8.2, there were 49 respondents, and 38 responses were received on the question of scope from a broad cross-section of stakeholders, including regulators, businesses and representative bodies. It is clear that only a small number of regulators responded to the consultation, as paragraph 8.3 hints at. It says that there were five objections to the inclusion of particular regulators within scope; the noble Lord, Lord Mendelsohn, dealt with the rest of the list.

16:45

I find it difficult to know, with such a large number of bodies, whether real efforts were made—I would be grateful if the Minister could tell us—to go to those regulators that were going to be included specifically to ask them for their individual comments. I find it difficult to believe that more of them would not have responded if they had known that this would have an impact on their roles and responsibilities.

Finally, the other lesson that I learned from all this was to study carefully the impact assessment. I have gone through the impact assessment of a number of these documents in some detail. I do not intend to pull this to shreds, but I just to say the Minister that, like the noble Lord, Lord Mendelsohn, I have concerns about what impact assessments tell us. I will raise just one example—and there are many—which is from the impact assessment in paragraph 25. It says:

“The total cost to regulators in year 1 associated with QRP assessments, NQRP summaries and familiarisation is estimated to be £1.985 million”.

That is a precise figure. Paragraph 26 tells us how it was achieved. It was based on a survey carried out in 2013, followed up with another a bit later, of a small number of regulators about a totally different question. That question was whether they would be likely to have cost recovery from businesses for the introduction of small business appeals champions. I have to question whether that sort of analysis can lead to such a precise figure as a cost of £1.985 million. I am sure that the Minister has looked at these things in detail and he has convinced himself that he is satisfied with it, but it would be helpful to ask him to put on record that the Government are satisfied with the assessments within the impact assessment.

I have no intention to challenge any of the instruments before us, but, like the noble Lord, Lord Mendelsohn, I have some concerns about the number of bodies that have been included, about the impact assessment and about whether the absolutely admirable aims that the Government have in mind really will be achieved by these measures.

[Lord Prior of Brampton]

My Lords, I cut my speech down, but I rather wish that I had not—I could still be talking. The noble Lord, Lord Mendelsohn, has raised too many issues and I cannot answer them all. I got to 38 questions and I stopped counting—I had forgotten what the first one was. I will have to write to the noble Lord on a number of the points that he raised.

While it is still fresh in my mind, I will just deal with the Northern Lighthouse Board—the noble Lord, Lord Foster, gave me warning about it during the vote. The Northern Lighthouse Board and the Commissioners of Irish Lights provide advice to ports about navigational safety matters. Because that advice can affect the business of port operators and their customers, it is right that the bodies should have regard to growth in making regulatory decisions. In a sense, that illustrates another issue that he raised about whether we had gone through all these regulators carefully, talked to them and found out what impact they might have. I hope that that answers that question.

The noble Lord, Lord Mendelsohn, started off positively. He said that he agreed with our objectives and goals, but then he went on to qualify that by referring to them both as motherhood and apple pie. Nevertheless, I think that the noble Lord, Lord Foster, also agrees. Who can possibly argue with the objectives of reducing regulation and achieving economic growth? The noble Lord, Lord Mendelsohn, also quoted—I wish that I had written it down, but he spoke too quickly—Warren Buffett. I will give him back another quote from Warren Buffett, if I can. It is much shorter and more succinct: you get what you incent for. For me, in business, that is a pretty profound statement.

I would like to apply that, if I can, to regulation. The noble Lord was sceptical about culture. I am less sceptical about it. I think that the culture that exists within individual firms can be hugely powerful. I will give an illustration that quite neatly contrasts culture with regulation or law. RBS and HBOS had been in banking for 200 years in Edinburgh. They were absolutely conservative, traditional Scottish banks. In the space of 10 years, their culture completely changed. I do not know whether the noble Lord has read the reports, particularly into HBOS, by the Treasury Select Committee of the House of Commons. The culture in those two banks was deeply shocking. To some extent, it was set by the deregulation that his Government brought into the City after 2001, when Gordon Brown was Chancellor of the Exchequer, and subsequently. It may go back earlier to the deregulation of the City in the 1980s. Nevertheless, the culture within those two banks effectively destroyed them.

Culture is hugely important and very powerful. For example, there are laws about smoking now but there is also a culture around it: you feel bad about lighting up a cigarette in a car or in a building, irrespective of the law. When I was at the Care Quality Commission, we found that the leading indicator—

[Lord Mendelsohn]

We agree on culture and the capacity to destroy culture. The point that the noble Lord made, which I thought was very interesting, was about incentives. I am not clear about how this creates incentives as opposed to duties, which then have a numeric capacity to meddle and to change. Can he give me some idea?

[Lord Prior of Brampton]

May I finish off on a regulator that is not covered by BEIS, but is important none the less—the Care Quality Commission? We found there that the leading indicators of performance, whether you measure it in terms of patient safety, hitting waiting time targets or patient satisfaction, were around staff engagement, such as whether doctors and nurses enjoyed working in the hospital. A junior doctors survey done by the GMC was probably the single most predictive of all the indicators. Culture is hugely important.

The noble Lord referred to a duty to communicate, which plays into the point about culture. Putting that obligation to communicate on to regulators is important. In a sense, what we are trying to do by having a duty to promote growth is to change the culture and outlook of regulators. As the noble Lord, Lord Foster, said, they are not there to hit the target but miss the point —how often does that lead to unintended consequences? For example, we hit the waiting time target in an A&E department but the patient died. That is the kind of absurdity we can get into when targets become—

[Lord Foster of Bath]

I think that we are all singing from the same hymn sheet in our speeches, but the documents before us say something rather different. They talk of the sums of money that it is anticipated will be achieved by this. I entirely accept that the Northern Lighthouse Board is there to provide safety. Clearly, if it switched off the lights in all its lighthouses, ships would crash, the economy would be in difficulty and so on. Presumably, it could spend a lot of money and put up more lights and sirens and have more people sailing around rocky outcrops warning people to stay away, and there may be some more savings in that. That is all common sense. But the way in which it has been enumerated is about having a target but missing the cultural point that the Minister is rightly talking about. The papers do not talk about the culture.

[Lord Prior of Brampton]

One way to change the culture is to change the message. We are not setting specific targets for regulators. The purpose is to increase transparency, which I will talk about a little. I qualify it as “intelligent transparency”. If we can put people in the position of making intelligent decisions and provide them with useful information, in my book that is the best form of regulation.

We are all agreed on the objectives and outcomes that we want from this. I see the exercise as trying to get a cultural shift in the behaviour of regulators. Both noble Lords have given examples of the road to hell being paved with good intentions. The last thing that we want is to encourage bad behaviour by pursuing regulation to the letter and achieving the opposite of what we want to. On one level, we are in violent agreement and, on another, we are clearly not. However, some important points have been raised and I would like to reflect on them and write to noble Lords on those issues.

To conclude, I would like to read out a few notes, just to get them on the record and perhaps explain a little better what I have just said. The importance of extending the scope of the business impact target is clear. Businesses consistently tell the Government that the actions of regulators are as important as the content of legislation in determining their experience of regulation. That has to be true. It is the way we interpret laws and decide whether they are helpful or not. For example, in giving up broadband at home I want to get through to BT to cancel my existing contract. Can I get through to BT? Can I hell. No one will answer the phone. It is about customer service. Funnily enough, having spoken briefly to the Intellectual Property Office yesterday, I think that it has a client-friendly attitude, which is the kind of attitude that we want from regulators.

The rationale for applying the growth duty is also clear. While there is already a great deal of good, proportionate and effective regulation, evidence suggests that some regulators fail to take sufficient account of the economic consequence of their actions and place unnecessary burdens on businesses. I think that the noble Lord wanted some examples of regulators that fall into that trap. We will certainly write to him on that.

Some regulators consider the impact of their actions on economic growth. It cannot be wrong to do that. If we said that regulators should not take into account economic growth, we would be shot at, quite rightly, from all sides. Many regulators think that they are unable to take account of growth because they do not have a statutory requirement to do so. That tells you something about the psychology of some regulators, frankly. They have to be told that economic growth matters. You would not think that you would need to be told that. We need to write to the noble Lord on that point. The new duty will help to bring all regulators up to the same high standard.

The growth duty will help regulators to carry out their functions in a way that is conducive to economic growth and will ensure that regulatory action is taken only when needed and that any action that is taken is proportionate. Again, the key words are “accountable”, “transparent” and “proportionate”. It will encourage regulators to develop more mature and productive relationships with the sectors and businesses that they regulate, driving up the accountability of regulators to the business community.

I conclude by saying that it is very easy to knock the regulators. Few people will stand up for regulators. But in some of the Brexit debates that we have had, when you look at the performance of the British regulators—for example, the EMA, the MHRA, the CAA or in the nuclear world—they are universally respected throughout Europe. Our regulators are highly respected and in the main they do an outstanding job. All we are trying to do in this legislation is to tilt the culture a little further towards practicality, transparency, productivity and growth.

Motion agreed.