Watchdogs (Industry and Regulators Committee Report)

Lord Cromwell Excerpts

Monday 9th September 2024 Lords Chamber

[Lord Cromwell (CB)]

My Lords, I have the honour of serving on the committee that produced this report, which was chaired superbly by the noble Lord, Lord Hollick, and is now chaired by the noble Baroness, Lady Taylor—both of whom we will hear from today. We were very fortunate in our staff, who achieved the almost impossible against excruciating timelines.

To illustrate the points that I will make with one example, I will reprise the committee’s experience with the water industry. The initial objective given by the Government to the regulator and thence to the water companies was the production of clean, cheap water—and that happened. Privatisation raised some finance but the investors’ objective was to deliver profits to their own stakeholders; that happened too, through financial engineering that its regulators did not understand or question. So long as the initial objective—cheap, clean and plentiful water—was being met, the water companies were largely left to go their own way. The result? Investment for the long term was ducked, sewage discharge facilities were abused and monitoring was inadequate until environmental objectives gained prominence and a combination of civil society, the media and the committee’s inquiry revealed that Ofwat, the Environment Agency and Defra had been both diffident and outplayed in their dealings with the water companies. Thereupon, water companies’ directors were lambasted for taking bonuses while polluting rivers and their investors were criticised for sharp practice. The regulators, exposed as complacent, imposed swingeing fines on water companies—costs that will ultimately fall on the consumer, as will the many billions for overdue investment in a catch-up that will probably take a quarter of a century or more.

Meanwhile, investors have taken fright, some water companies face bankruptcy and there is uncertainty as to whether the water companies and their regulators are even up to the job of delivering the projects needed. All this reflects a combination of poor and shifting objectives from government while complacent departments and underskilled, under-resourced regulators were outsmarted by the very businesses they were supposed to be regulating.

This brings me to my two points. First, the inherent tensions between independent regulators, the Government, consumers and delivery organisations—often with sophisticated investors—are characterised by divergent stakeholder objectives that alter over time and are not clearly prioritised. Regulators must work robustly with stakeholders while remaining independent, vigilant and inquisitive, but they also need skills ranging across both technical and financial areas. Despite the concerns that have been raised over the executive pay at regulators, the report highlights that skills gaps and resourcing at competitive financial levels are serious issues in some of them. It would therefore be helpful to hear from the Minister what plans the Government have to ensure that regulators can access a full range of skills, possibly shared between regulators—for example, in private equity financial engineering.

Before I touch on my second point, which covers regulatory accountability to Parliament, let me say that I support the report’s finding that such examination should systematically include relevant government departments whose guidance and interaction with regulators are vital determinants of their effectiveness. They should be automatically and fully in scope, rather than seeking to brush aside the inquiries from our committee.

Returning to the regulators, the question is, “Who watches the watchdogs?” The answer is, “We do”. However, with 90 regulatory bodies—perhaps considerably more—there is a simple capacity issue. In theory, every regulator should come before Parliament at least to present its annual report, be examined on it and have agreed actions followed up, but that just does not happen. Consequently, as the noble Lord, Lord Hollick, pointed out, interaction between Parliament and the regulators is typically reactive—that is, not preventing problems but seeking who is culpable afterwards. It is not systematic: the examination of those who do get called in is useful, but inquiries then hasten on to the next pressing matter and follow-up is far too limited.

A key recommendation of the report is to create an independent office for regulatory performance, as has been touched on, in order to spread the load and move towards a systematic approach rather than a reactive one. Before the election, the Labour Party said, as others have mentioned, that it would create a new regulatory innovation office with an emphasis on removing delays in regulators’ approvals of business proposals, along with strengthening the Regulatory Horizons Council.

Getting to grips with performance means constant vigilance, not complacency, and—I underline this—access to the necessary skills to get right down in the weeds on a whole range of technical and commercial areas. If such a body can both speak hard truths to government about its continuous responsibilities for clear prioritisation of objectives and bring practical help to parliamentary committees in systematically holding regulators to account, I would welcome it. It would therefore be very helpful to have a detailed update on the Government’s plans when the Minister comes to wind up.