Watchdogs (Industry and Regulators Committee Report)

Lord Hollick Excerpts

Monday 9th September 2024 Lords Chamber

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[Lord Hollick]

That this House takes note of the Report from the Industry and Regulators Committee Who watches the watchdogs? Improving the performance, independence and accountability of UK Regulators (2nd Report, Session 2023–24, HL Paper 56).

[Lord Hollick (Lab)]

My Lords, I am pleased to introduce this debate on the Industry and Regulators Committee report. I thank our committee members and staff for their valuable contribution to the committee’s work, particularly my noble friend Lady Taylor, who has taken over from me as chair of the committee. Over the last three years, the committee examined the regulators of energy, water, higher education, and financial services. This report drew on our findings in those inquiries and built on them by hearing from a wide range of other witnesses, whom we thank.

Our report focused on how power is delegated to regulators and how they are held accountable for the use of that power. The 90 or so regulators in the UK usually have oversight of particular sectors, such as Ofgem, for the energy sector, or particular issues across the economy, such as the Competition and Markets Authority. Regulators are set up to act independently from government, with the aim of providing long-term stability and instilling confidence that enforcement decisions against citizens and organisations are not affected by political considerations or lobbying. They wield significant power and influence over our economy and our everyday life; that unelected bodies wield such power is unusual, and for this reason it is important that Parliament holds regulators to account for how this power is used.

Primarily, this is done through Select Committees. However, we found that the scrutiny of regulators by committees tends to be piecemeal and reactive. There is little routine scrutiny that focuses specifically on whether each regulator is carrying out its duty effectively in line with its remit. We recommend that a regular review is needed to provide an assurance that regulators are carrying out their duties as required and to identify problems before they occur—I hope—rather than examine the debris after the fact. The Industry and Regulators Committee has been filling some of this gap, and so will the new Financial Services Regulation Committee, which I now sit on, but they are not able regularly to scrutinise all the UK’s regulators. In the absence of a regular review of regulatory performance, each inquiry has to start from scratch. This contrasts starkly with the practice of the European Parliament, which can call on European regulators and examine their performance and hold them to account, well informed by the knowledge and evidence prepared by a substantial permanent group of officials.

We have important bodies to aid scrutiny. The National Audit Office does sterling work in supporting the Public Accounts Committee, including, on occasion, by assessing the value for money that regulators provide. However, it does not have the resources to cover all regulators on a routine basis, and neither does the PAC have the time to do so. The National Infrastructure Commission has an important role to report on the delivery of UK infrastructure where regulators such as Ofgem, Ofcom, Ofwat and the environment agencies hold some responsibility. Given the importance of investing in infrastructure and securing growth—the key aspiration of the new Government—we recommend that the National Infrastructure Commission be put on a statutory footing, giving it the freedom of independence to speak truth to power and to inform the public about what is going on, or often not going on, with large-scale investments into our public realm. For instance, we were disappointed to find that the NIC did not have the power to investigate proactively catastrophic underinvestment in the water infrastructure over many years, which led to widespread sewage discharges. Why is that? Because it is not allowed to investigate areas of settled government policy.

We recommend a more effective approach to improve parliamentary oversight of regulators, and a new independent statutory body, the office for regulatory performance, should be created to advise Parliament and its committees to hold regulators to account on a more thorough and systematic basis and provide an annual report card on each regulator’s performance. The resources to fund its work would be well spent to ensure that regulators are delivering what they are asked to by Parliament. We recommend that the Government consider provisions for the office for regulatory performance as part of their forthcoming creation of the regulatory innovation office.

Imposing multiple statutory responsibilities on regulators can muddle them and their accountability. Some regulators have been given too many objectives and matters to have regard to without any clear guidance on priority. This makes it difficult for a regulator to achieve its objectives and for Parliament to assess its performance. Take the case of Ofwat, which prioritised keeping consumer costs down instead of increasing essential investment in the water infrastructure to meet population growth and replace its failing century-old system. Where there is a lack of clarity in the job role given to regulators, they often reach for the most cautious solution and avoid raising bills, even where this might be necessary. This lack of clarity undermines the independence of regulators; Parliament and the Government need to be clearer when setting and prioritising objectives and not remain mute on the issue.

The recent introduction of the competitiveness and growth objectives for regulators brings a welcome focus on growth and improving the performance of regulators, but it also brings a challenge for regulators to balance the new growth objective with their overriding responsibility to sustain the integrity and enforcement of effective regulation in their sector and, particularly, the protection of customers.

Noble Lords will recall the enthusiastic embrace of the coalition Government for a bonfire of red tape. Earlier this afternoon, we were reminded of the dangers of thoughtless implementation of that approach when the Grenfell fire report cited lax regulation as a key contributory factor to the devastating fire. The objectives of growth and competitiveness must sit side by side with a strengthening of public protection and an improvement in the clarity and speed of response and remediation provided by regulators to the public and business alike.

Regulators can have a significant impact on growth. In the Industry and Regulators Committee’s 2023 letter to the London insurance market, we noted how the introduction of rules to allow the advent of securitisation and captive insurance was widely applauded and adopted in many jurisdictions, and opened attractive growth opportunities for London. In Singapore, where the regulator promoted the virtues of these same UK rules, they rapidly authorised several companies to open for business. UK regulators were far too slow off the mark and introduced a very long process of authorisation, which prevented London taking advantage of being the primary rule setter.

When the CEO of the London Market Group appeared before the Lords Financial Services Regulation Committee last week, she reported that there had been no improvement in London’s regulatory process since our earlier report. In the same meeting, the head of Marsh McLennan told us that the cost of compliance in the UK was estimated to be six times greater than in the nearest major competitor jurisdiction. These examples appear to be a result of our regulators’ passion for process rather than effective outcomes. This results in great frustration for customers and businesses; it adds costs and undermines growth.

That regulator passion for process is in part born of an understandable need to minimise the danger of getting something wrong and missing key information. Perhaps the advent of AI software, which itself presents some interesting regulatory challenges, can transform that process by collecting all the data, verifying it for an available, possibly centralised database, and identifying those cases and authorisations that require further inquiry and judgment to resolve. The regulators can then focus their resources and well-honed skills on resolution rather than procrastination. Innovation like that can improve regulatory performance and protection, and promote growth.

The Government’s announcement to legislate to set up a regulatory innovation office provides an important opportunity to consider how AI and other innovations can be harnessed and regulated to improve protection, competitiveness and growth. Will the Minister please confirm that there will be a pre-legislative consultation, when the recommendations of our committee and others can be considered? When do the Government expect to set up this new body and are they supporting the previous Government’s May 2024 White Paper, Smarter Regulation, ensuring that regulators play their part in supporting growth?

Regulators protect citizens and the environment against those who, by design or otherwise, wish them ill. By providing a clear and efficiently managed set of rules, regulators provide the predictability, stability and competitiveness that help businesses to attract domestic and overseas investments, which can help them flourish and boost growth. Regulators need a clear remit, independence from political interference, and the necessary funding and resources to do their job.

Regulators have the responsibility to operate in a transparent manner, to explain the reasons for making their decisions, and to speak candidly to Parliament and the public if there are significant issues that need to be addressed and resolved, however discomfiting the Government of the day might find them. Parliament, for its part, must adopt the reforms proposed to strengthen its oversight of the regulators and to fulfil its role watching the watchdogs. I beg to move.

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[Lord Hollick (Lab)]

I thank noble Lords for their contribution today. I think it has been a very good debate. There is clearly a strong appetite to be a good and effective watchdog, or guide dog, and I believe that some of the points that have been made and some of the recommendations from the committee will considerably assist this House to fulfil the duties that it clearly wants. It is hopeful that my noble friend the Minister said that she is looking at everything afresh. When she does that, I hope she will be able to return to the House and explain how it is that we will be helped to hold the regulators to account and how clarity and transparency will be ensured. Without those fundamental reforms, we shall be back having the same debate in two or three years’ time.

The fact that the previous Minister was otherwise occupied and could not come to see us should be taken as a very clear point that we need serious engagement from the Government about how we can improve the regulatory regime and the performance of regulators in this House, to the benefit of the protection of our citizens and for better regulation for those businesses and sectors that, frankly, need to have a lighter but more effective burden on them to stimulate growth.

These are big issues, they are important issues and, when the Minister looks afresh, hopefully she will be in a position to come forward to explain how they are to be addressed in a practical way over the next period.

Motion agreed.