The Financial Inclusion Centre submitted evidence to the House of Lords Industry and Regulators Committee Inquiry into UK regulators. We made some general comments on regulation but focused on the financial regulators given the nature of our work. Our submission can be found here: FIC submission to House of Lords IRC Inquiry on Regulators 1223
The key issues the Committee addressed included:
Are UK regulators being given a clear job to do?
We argued that the overall intention of the existing objectives and duties given to regulators is reasonably clear. Of course, greater clarity on Parliament’s intentions could be created by defining statutory objectives with more precision. But, this would require Parliament agreeing and setting specific outcomes to interpret those objectives. This would risk politicians becoming too closely engaged in the operations of regulators. Moreover, on a practical level, agreeing the high-level objectives and duties through the legislative process is challenging enough as it is. Defining specific outcomes through the legislative process would significantly slow down the development of legislation.
Is the right balance being struck between the responsibilities of regulators and those of the Government, particularly where there are political or distributional trade-offs that need to be resolved?
Trade-offs can be very complex and can involve taking a political or even a moral standpoint, not just addressing technical economic or regulatory policy issues. There may be tension or conflict between objectives. For example, like many civil society organisations, we are very concerned that the growth and competitiveness objectives given to the financial regulators (and now other regulators) could undermine the primary objective of protecting consumers.
Resolving distributional trade-offs can be very difficult. It can require prioritising competing interests, which is particularly difficult when there are finite goods and services available, or when markets are a zero-sum game. Markets default to rewarding consumers who are more profitable/ represent a lower risk and penalising those who are less profitable/ represent a higher risk (the risk being set by the market, not society). One set of interests gains at the expense of another unless regulators are mandated to address the inherent disadvantages faced by vulnerable or underserved consumers, or government provides an alternative solution.
Distributional trade-offs have to be considered between consumers and shareholders, not just between different groups of consumers. The wider societal interest also must be considered (sometimes referred to as externality costs). Distributional trade-offs are particularly important in relation to services we consider to be essential to a decent quality of life that are primarily provided by the market such as water, energy, banking, insurance and so on.
Distributional trade-offs may need to be assessed at different levels. For example, is there a high-level trade-off needed between protecting the environment and promoting economic growth? Is there a conflict and trade-off between protecting consumers and maintaining financial stability, and promoting growth of the financial services industry?
If we are to achieve net zero, the transition will have to be just and fair to receive the support of citizens-consumers. How do we share the costs of the transition in a just and fair way? Who determines what is just and fair? Distributional trade-offs must be considered within current generations of consumers (intra-generational), and across different generations (inter-generational).
We concluded we do not have an effective strategic policy framework to allow Parliament, government, regulators, and stakeholders to determine distributional trade-offs and appropriate interventions to protect consumers disadvantaged by markets.
Are regulators appropriately independent of government?
Until recently, we were comfortable with the balance between Parliament, government, and regulators. Operational independence has been a key strength of the UK regulatory system. But, we are very concerned at the imposition of secondary growth and competitiveness objectives on key regulators such as the FCA, PRA, Ofgem, Ofwat, and Ofcom. This could compromise the operational independence of regulators and allows well resourced, influential industry lobbies yet another lever to undermine necessary regulation. The disingenuous argument that regulation is a burden and stifles innovation and growth is often deployed by industry lobbies.
It is important to protect the operational independence of regulators. This needs to be complemented by robust Parliamentary scrutiny and regulatory accountability mechanisms. Independence also means independence from the undue influence of vested interests. Industry lobbies are very well resourced and influential. This influence needs to be countered by robust governance, accountability, public interest representation, and transparency mechanisms.
Are the roles and remits of different regulators sufficiently discrete, or is there overlap and duplication? How effectively do regulators co-operate with one another?
The UK system of ‘vertical’ regulators covering specific industries such as finance, utilities, and telecoms complemented by ‘horizontal’ regulation provided by the Competition and Markets Authority (CMA) and Information Commissioners Office (ICO) is reasonably clear. But, there are gaps in the regulatory architecture especially with regards to AI/ tech/ data. Major detriment is occurring at the intersection of sectors such as financial services and digital services. So, it is more an issue of regulatory ‘underlap’ rather than overlap.
UK regulators do seem to cooperate well. The UK Regulators Network plays an important role in coordinating the work of various regulators.
There are occasions, such as the recent Liability Driven Investment (LDI) crisis in the defined benefit pensions sector, where coordination and cooperation failed. Prior to the crisis, the relevant regulators – Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), and The Pensions Regulator (TPR) – should have been more effective at monitoring the market and sharing data. However, even that crisis was more to do with the current regulatory architecture which meant that responsibility for overseeing that part of the market was, and remains, fragmented.
Do the UK’s regulators have the necessary skills, capabilities and expertise internally to perform the roles they have been given? If they do not, how could this be improved?
Certain financial activities and products can be very complex (often unnecessarily so). Understanding the risks associated with these products and activities does require regulators having enough staff with the appropriate levels of expertise, or the ability to call on external and independent expertise.
For the most part, we think the FCA has done a good job regulating complex financial markets, products, and activities. There are exceptions. But, where issues have fallen through the gaps, or the FCA has not performed well, this has been more to do with the fact that Parliament and government has not given the FCA the necessary mandate, the sheer number of priorities the regulator has to deal with, and the regulator’s permissive, market-orientated approach. It has not been the lack of technical skills and expertise.
Regulators will always find it hard to compete to attract people with the very highest skills who are influenced by the level of remuneration they can obtain in the market. The financial and digital sectors are a particular problem. But, more important than the skills of regulators’ staff is the approach adopted by regulators. Adopting outcomes-based regulation and a precautionary approach can mitigate the risk that complex products and activities might harm consumers or the economy.
How should regulators be scrutinised and held to account? Are regulators transparent enough about their performance? What specific mechanisms and metrics should be used to hold regulators to account?
The boards of regulators should have direct, immediate responsibility for holding regulators to account for performance against the objectives determined by Parliament. But, ultimately, Parliament has the primary role in holding regulators to account. There is a difficult balance to be struck between effective accountability, regulatory effectiveness, and independence.
Regulators should be judged on how well they make the industries they regulate serve the interests of the real economy, environment, and society not on how well they serve the interests of regulated industries. It is actually very difficult to know how well the regulators are performing against their statutory objectives. The performance frameworks and metrics are not sufficiently outcomes-based, and the protections given to commercial interests in legislation prevent meaningful scrutiny of firms and regulators.
Government is now placing greater emphasis on how well regulators support the industries they are meant to independently regulate. Specifically, in financial services regulation, HM Treasury has consulted on how to measure the success of the financial regulators. We are concerned that the Government will adopt a set of measures and metrics that focus on the operational efficiency of the regulators from the perspective of regulated firms, rather than choose metrics which measure how well regulators are serving the wider public interest.
Do any of the UK’s international comparators address the above questions particularly well? What lessons can the UK learn from other jurisdictions on these matters?
There is limited research on how international regulators perform. What research there is suggests that, counter to the views that the UK is overregulated, the UK has low levels of regulation compared to rivals in the OECD. But, this ‘light touch’ regulation has not contributed to producing better outcomes for consumers. Indeed, the ‘heavier touch’ approach adopted by other countries can contribute to more robust business practices and better risk management.
 Note that we do not consider distributional trade-offs with regards to all essential goods and services. Access to and the cost of food is the prime example. There is a good reason for this. While there may be a case for maximum prices for certain priority food stuffs, the sheer complexity of the food sector means it would be difficult to re-configure to achieve distributional trade-offs.
 Lobbies for industries that are regulated and those who want to remain unregulated.