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Lord Hollick, House of Lords
Lord Hollick, House of Lords

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UK regulators to face urgent reform “to improve accountability and performance”

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A House of Lords committee has raised “significant concerns” over the role of UK regulators, their ability to operate with genuine independence from government and how they are held to account.

The inquiry, led by Lord Hollick, examined a range of watchdogs – including the Financial Conduct Authority and Prudential Regulatory Authority – and found widespread cases of unnecessary government interference; a worrying lack of accountability; and overwhelming, sometimes conflicting objectives, without clear guidance on how they should be prioritised. 

The report entitled ‘Who watches the watchdogs? Improving the performance, independence and accountability of UK regulators’, raises concerns about the functioning of the three-way relationship between the regulators, the government and Parliament, particularly the role and performance of regulators, their independence and their accountability. 

Lord Hollick says: “We are especially concerned at cases where the government has failed to resolve political or distributional questions facing regulators, and instead interfered in their day-to-day workings.”

He adds: “Independent regulators must have the confidence to tell the government and the public about the serious problems facing their sector and be able to set out proposals to meet them with clarity, efficiency and transparency.”

The committee makes a series of recommendations including allowing Parliament to play a more prominent role in scrutinising appointments to regulators.

Giving evidence to the inquiry, Dame Meg Hillier MP emphasised that “a good non-executive body is absolutely critical, because they have that level of independence and can be really honest”.

Meanwhile a representative from insurance company Phoenix Group also emphasised the “critical role” of boards in providing accountability for the performance of regulators.

This follows a range of evidence provided to the inquiry that suggest government was unwilling to support regulatory board appointments where individuals did not meet government approval.

Professor Robin Ellison, Chair of the College of Lawmakers and former practising pensions lawyer, says that regulatory independence is “often simply notional”, and provided an example where an unnamed pensions minister “refused to reappoint a highly-regarded and experienced” Chair of the Pensions Regulator, “who was too independently minded”.

The committee also recommends that regulators be given the power to raise their own revenues, as is the case already at the FCA.

Charles Randell, former FCA Chair, notes the “enormous differences between the regulators that have taxing powers and those that do not”. 

He told the inquiry that the major financial regulators “are able to levy the industry for their costs”, giving them “a measure of autonomy” in raising their budgets. He contrasted this with the Gambling Commission and the Environment Agency, where “central government can, in effect, starve the regulator of the resources it needs to do the job” which he describes as “a fundamental problem” for some regulators.

The inquiry also explored the need to ensure regulatory bodies are remain autonomy while still being accountable to Parliament.

Michael Gibbons, an independent non-executive director at of Bluefield Solar Income Fund, told the committee that scrutiny by departments tends to be “budget oriented and finance oriented” and that, given regulators’ independence, “to be scrutinised and held accountable only like that is not very satisfactory”.

However, Randell said central government should not be given “more control over these issues than already exists”, in part because “it is natural for the government of the day to be very accessible to large business interests”. Instead he proposed strengthening Parliamentary scrutiny instead.

The inquiry recommends that government clearly state what has been delegated to regulators to decide independently, and in which areas government will provide direction.

Further, government should be responsible for how policy priorities should be decided, for example on matters of social or economic policy, such as the size of bills, and give regulators’ boards the power to seek explicit guidance on such decisions.

The committee also heard evidence from Phoenix Group and The Regulatory Reform Group that regulators lacked transparency because they have “little to no incentive to highlight their own performance failures”.

Professor Ellison adds: “there are few rewards for success … [and] reputational penalties for failure, few regulators will confess to error.”

In response, the committee recommends government create an independent statutory body analogous to the National Audit Office to “advise and support Parliament and its select committees in holding regulators to account for their performance in a routine and systematic manner”. 

Lord Hollick says the proposed ‘Office for Regulatory Performance’ would require extra resources from the Government to fund its work, but adds: “Given the fundamental importance of effective and regular public accountability, we believe this would be money well spent.”

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