rose to move, That this House takes note of the report of the Select Committee on Regulators on UK Economic Regulators.

The noble Lord said: My Lords, it is with great pleasure that I open my remarks by thanking those who have taken part in the work of the Select Committee on Regulators in the past Session. I thank the members of the committee, in particular those few who have found it possible to stay until this last moment before we depart for our Recess. I thank the clerk and the specialist adviser, Sarah Price and Boaz Nathanson, and the two specialist advisers, Graham Corbett and Eileen Marshall, who helped us so much.

I have been in this House for 25 years and have never had any contact with the committee system before. I am puzzled by it; it is a very strange way to gain wisdom. First, for a committee such as ours, which lasts only for one Session, the timing is very tight. You put out for evidence in December, get it back by February, talk and listen to people between February and June, produce a draft report by the end of July, and debate it in October. I am a researcher by trade and I would wish to spend a considerable time ascertaining basic facts before I started asking questions. Evidence-based, which these reports are, means evidence in the legal sense—in other words, what people said to us, rather than what is the truth. It is our ability to discover and ask the right questions, and question answers if they are not clear, which leads to the quality of the final report. Any defects in that quality are my personal responsibility and not those of the others who took part. It is a strange business.

In the time available to me, I am going to do two more things, other than question the committee procedure of this House. First, I am going to race through the recommendations of the committee. Secondly, I want to say some things about what has happened in the regulatory world since we drafted our report at the end of July and since we reported in October. What has been happening is quite dramatic. I have 11 points to make about the report and I will race through them.

On regulators’ statutory remits, we decided that they were pretty good, despite being arrived at almost at random in a series of privatisation Acts which were never thought out as a whole. There were never any consistent policy decisions about the establishment of the regulatory estate, but it seems, on the whole, to work. We recommended against new legislation, but said that there should be standardisation of remits as opportunities arise.

We looked at the working methods of regulators and the value for money they provide. It is certainly true that the cost of regulation has gone up, but we concluded that, generally, the cost has gone up because of the increased workload that has been put onto regulators, rather than through inefficiency. I take the particular example of the FSA being given mortgages and general insurance markets, which enormously increased the number of firms that it had to regulate.

We looked at the issue of risk-based regulation and principle-based regulation. In evidence to us, Ed Balls made it clear what had not been entirely clear to me: that you can have risk-based and principle-based regulation. You have to have it when you are dealing with large numbers of smaller firms—what you might call retail regulation—but it is much more difficult and not necessarily desirable for very large firms. I shall be saying more than a word about Northern Rock in due course. Some of the conclusions to which we came have been invalidated by subsequent events.

Thanks to the National Audit Office and Ed Humpherson in particular, we looked at regulatory impact assessments. The NAO concluded in a study that it did for us that regulators are pretty good at pre-impact assessments—better than the Government in fact—but not so good at post-evaluation. It is a bit like post-legislative scrutiny: it is a good thing but it has not actually happened. We concluded that regulators on the whole should be responsible for their own impact assessments although there were certainly exceptions, particularly for post hoc examination.

We looked at the issue of the citizen and the consumer—the public interest. We concluded that the definition of “public interest” or the obligations to citizens should be defined by the Government and Parliament and promoted by the regulators. Ofcom is a good example of that. But we certainly did not think that the interests of citizens should be ignored even though the phrase “public interest” is not much more than a Humpty Dumpty phrase. It means whatever you wish it to mean, but it should mean something. On consumer representation, we concluded that, generally, consumer representation should stand alone as separate from the regulators themselves.

We looked at the relationship between sector regulators and functional regulators—the OFT and the Competition Commission. We thought that concurrency arrangements were working quite well, but we still needed more referrals to the functional regulators and there should be more use of competition law.

We looked at relationships between regulators and the Government. Again, we thought that it was working pretty well, but we were taken aback that Ministers giving evidence to us did not seem to know much about what each other were doing although they were reasonably well informed about their own responsibilities.

Because we were concentrating on economic regulators and the economic effects of the regulation system as a whole, we looked at issues of competition and competitiveness. Not all regulators are competition regulators and, on the whole, although competitiveness should follow from greater competition, that does not always happen. We were unkind to Ofwat and the water industry for not achieving any effective competition.

We looked at whether sectoral regulators were going to fade away—whether there should be a sunset clause—as many people thought would happen when they were first established. We came to the conclusion that St Augustine of Hippo was right:

“Make me chaste Lord … but not yet”.

Yes, it is a desirable thing, but we are nowhere near that yet. There is a continuing role for the Government. Matthew Parris in the Times last Saturday made that very clear. He said:

“The market must be the engine of our economics and therefore our politics. That argument is over. But now another starts. What about the accelerator, the brakes, the gearing, the emissions control?”

If the committee had known that it would have agreed with it.

Finally, we looked at accountability and parliamentary oversight. Some of that happens, of course. We think that it is important for the OFT to report to the Joint Regulators Group and that it is important for Ministers to talk to each other perhaps more than they do. We are very appreciative of the work of the House of Commons departmental Select Committees. For example, the Treasury Select Committee report on Northern Rock in January was an outstanding piece of work. We felt very much frustrated by our limited timescale, the fact that we had to limit ourselves, therefore, to particular issues of regulators, not of regulation, to economic regulators and to cut out all sorts of important issues that this House should consider; for example, the social and environmental effects of regulation. Therefore, we recommended, in line with the recommendation of the Constitution Committee, chaired by the noble Lord, Lord Norton, in 2003-04, that ideally there should be a Joint Committee of both Houses or, if not, a continuing Select Committee of this House, which would have responsibility for the regulatory estate, because, as I have said, it is always with us.

What has happened since we drafted and considered our report? A huge amount has happened. I could give many examples, but I shall concentrate on the FSA and Northern Rock. Ofgem, for example, after giving very self-congratulatory evidence to us, allowed price increases in January this year of 12.7 per cent for electricity and 17.2 per cent for gas. As for competition, Ofgem has allowed the number of suppliers to decrease from 20 in 1998 to six today, with vertical integration that makes it very hard for anyone else to enter the market. There have been problems with the Civil Aviation Authority and the Office of Rail Regulation, with which I do not have time to deal, and with OFWAT, with which we did have time to deal.

I want to talk most of all about financial regulation, because there has been a huge change in the success and stability of financial markets. A lot of it was predictable. It was predictable while we were reporting, so we are at fault, or I am at fault. Alan Greenspan said in 2005:

“Increasingly complex financial arrangements have contributed to the development of a far more flexible, efficient, and hence resilient financial system than existed just a quarter-century ago”.

I do not think that anyone would say that now, although he wrote a typically equivocal article in the Financial Times a couple of weeks ago. The Minister, my noble friend Lady Vadera, will recall that he spoke at a meeting in the Treasury a few years ago when he made a particularly opaque speech which I came out of saying, “I don’t think I understood much of that, but I think that he was approving of derivatives and hedge funds. And I think he is wrong”. I still think that he is wrong.

We had plenty of warning, if we had known about it. The Government and society had plenty of warning. The Bank of England Financial Stability Report in April last year said:

“Macroeconomic stability is encouraging greater risk-taking … use of risk transfer markets is affecting the depth and quality of risk assessment”.

That means that those who are supposed to be assessing risk are,

“less inclined to assess credit quality … if they bear little of the ultimate risk”.

The report said that there is less information on borrowers and on monitoring. Has not all of that proved to be true in the past six months?

The FSA’s oral evidence to us in March last year—and the questioning, which again is my fault—was all about over-regulation. It was all about the accusation by the Royal Bank of Scotland that the UK regulatory regime was one of the more onerous. I do not think that we would say that today. The Treasury Select Committee, in its report in January, found no excuses for the way in which Northern Rock was regulated by the FSA. There were plenty of warning signals. The report said that the business model of Northern Rock was clearly stated, that there should have been a warning in the rapid expansion of Northern Rock, that the fall in the share price was a warning, and that the Basel II waiver, where they pay dividends and weaken the balance sheet, should also have been a warning. The report said that Northern Rock looked at solvency and not liquidity and pointed out that liquid assets for all of these businesses had gone down from 20 to 30 per cent 40 or 50 years ago to 1 per cent now. Mervyn King told the Treasury Committee last week that,

“financial institutions will have to hold more capital in the longer run”

and,

“their activities will have to be monitored much more closely”.

In other words, more regulation, not necessarily lighter regulation.

The FSA internal audit, published in February this year, was candid about what went wrong in the supervision of Northern Rock. There have been three reorganisations—three heads of department—in the past four years. In that time, there have been eight meetings, of which five were on the same day and none kept adequate formal records. The Treasury Committee questioned whether there was any meaning in “close and continuous supervision”. It questioned the lack of a risk mitigation programme. Since it made comparisons with only five other banks, there is still a lot of work to be done. The FSA audit said that Northern Rock was at,

“the extreme end of the spectrum of regulatory practices”.

What does that mean? Does it mean that other banks were being regulated more closely? I think not—but that is what it ought to mean. It ought also to mean that Northern Rock was inspected more closely. Mr Hector Sants, in his response last week to the internal audit report, said that the,

“overall regulatory philosophy as a risk-based outcome-focused regulation is supported and reinforced by this analysis”.

Is it indeed? It seems to me that Mr Sants is recommending much more regulation, increased links with the Bank of England and with international organisations, increased resources, an increase in the number of staff, and an increased priority for their work.

At the conclusion of this exercise, I am deeply dissatisfied, not with the work that we did, which was of considerable value in the limited time available to us and with the terms on which we were appointed. However, I do think that we and everyone else failed to anticipate the conclusion that society must now reach—that the regulatory state is with us for good. The Economist this week said that the experiences of Northern Rock,

“make calls for tougher regulation hard to resist”.

It added that,

“writing rules may do more harm than good if the regulator is unable to enforce them”.

The regulatory state is with us to stay and we shall need continued and better parliamentary oversight of it. We shall have to find a way of achieving that. I beg to move.

Moved, That this House takes note of the report of the Select Committee on Regulators on UK Economic Regulators (First Report, Session 2006-07, HL Paper 189).—(Lord McIntosh of Haringey.)

My Lords, it is a great pleasure to follow the noble Lord, Lord McIntosh. I begin by congratulating him on his extremely good and efficient chairmanship of our committee in what was a daunting task. He did it superbly. I also thank our clerk and our special advisers for all their assistance.

I entirely agree with the noble Lord that the regulatory state is here to stay and that there is a constant need for parliamentary supervision. I will come to something of an opposite conclusion on Northern Rock, but I agree with his general concluding point. I said that the chairman had a difficult task because we were confronted with a difficult problem. We had only one session and it was a huge task to look at overall regulation, which no one else had undertaken in the same way. It was right that we concentrated on the economic regulators.

We looked at regulation in the round and had a massive response in the evidence that we took and assimilated, although inevitably we had to skim the surface in some areas. We tried to draw out the broad principles in the key areas, and I hope and believe that we did so successfully. I think that the noble Lord, Lord McIntosh, was unfair to himself in the criticisms that he made, and I shall come to that later.

Certainly, I believe that our report, including the evidence, will be a big quarry for policy makers, regulators and academics for some time to come. The Government’s response—including, in part, in the Regulatory Enforcement and Sanctions Bill—showed that in many areas they were in agreement, and I was pleased to see that they supported many of our recommendations.

I say in parentheses—this point was referred to by the noble Lord, Lord McIntosh—that one recommendation that the Government rejected was the one in paragraph 6.60, suggesting that,

“an inter-ministerial forum be established to require ministers to compare views and share best practice”.

We came to that conclusion because we had three Ministers in front of us who were all responsible for regulation in their departments and they confessed that the first time they had met to discuss regulation and regulatory principles was when they were aware that they had to give evidence to our committee. The Government outlined in some detail the ways in which they believed that they required Ministers to compare views and share best practice, but I wonder whether that always works out in the way that was indicated. Some of us have past experience, as Ministers, of huge workloads, and sometimes we can focus attention on issues only when they arise, as was the case when the Ministers had to appear in front of the Select Committee. I suspect that it is more a thought in principle than in practice that Ministers regularly share best practice. I ask the Minister to comment on that but I still think that our recommendation stands.

In the time available, I can pick out only a few of our recommendations. I start with the one that a Select Committee should continue to be established. The Government rightly said that this was for Parliament to decide, but I think that that recommendation stands because no other departmental or Select Committee undertook the work that we did, and it was worth while. Apart from the general overviews, which will occur from time to time because, however much we seek in principle to see the regulatory estate diminished, in practice it will always be substantial and, in a complex world, possibly grow, I have identified three areas where I believe ongoing scrutiny would be valuable.

The first is in operating costs and value for money—I refer noble Lords to our recommendation in paragraph 4.17. We had a National Audit Office study, which was extremely useful, and, in particular, we took evidence from the OFT and the Competition Commission about their methodology, which struck us as being at the forefront of the best ways of doing value-for-money work. Of course, we were extremely interested in keeping operating costs down.

In a letter to all members of the committee, Ofgem drew attention to the fact that its operating costs have recently come down in real terms because it had taken the same approach to its operating costs as it had to its regulated industry’s pricing. I acknowledge that sometimes the costs will have to be higher. The noble Lord, Lord McIntosh, gave an example relating to the FSA. In the light of Northern Rock, it is certainly the case that the FSA will have to employ more highly qualified, and therefore much more highly paid, people in that area. I agree with the point made by the noble Lord, Lord Borrie, the other day in Question Time that seconding high-level staff is one way of doing it, but that could of course increase the costs. Nevertheless, it is important that value for money and operating costs are constantly scrutinised and I believe that a Select Committee would do that across the board.

The second area is impact assessments. I refer both to pre-policy work, with regard to which we made recommendations about the presentation of impact assessments and clear targets to enable post-impact work to be done more effectively, and to post-impact assessments. Here, we made perhaps the most detailed recommendations of the whole report. I recognise how much work the Government and regulators are doing in this context. However, there is a danger that this will become an area for regulatory wonks, if I may put it that way, and that insufficient parliamentary attention will be given to it, except where there is a critical contemporary issue, such as Northern Rock. Because of the pressure of work elsewhere, Members of Parliament and Members in this place do not always give sufficient attention to this matter, and therefore the importance of regulatory impact assessments gets downgraded. I believe that a Select Committee charged with reviewing progress on this front would help considerably to overcome that danger.

The third area relates to our recommendations in paragraphs 7.32, 7.45 and 7.46 on self-regulation and withdrawing from sectoral regulation wherever appropriate. I agree that the scope for complete or even substantial removal may be limited, but I believe that this nevertheless continues to be an important area for scrutiny from outside—from Parliament in particular. I cannot see anyone else doing it, other than a Select Committee created specifically for that purpose. That is a strong reason for a committee of this sort to continue.

In paragraph 5.50 we made a recommendation about the public interest and the citizen interest. We received a lot of evidence pressuring us to involve the regulators in those areas, over and above their main rule of promoting competition, and in the social and environmental policy areas, which we were told should be devolved to the economic regulators. However, I believe that those areas are for Parliament and the Government to decide and should not be devolved to regulators. Therefore, I stress the importance of our recommendation that,

“the interests of citizens and the general public are for Government and Parliament, and not for the regulators, to define or promote”.

As I say, we had quite a lot of evidence pressuring us to go into that field.

Finally—perhaps this is my main message this afternoon—there is the importance that we attached to principle-based and risk-based regulation. Those are not quite the same things. Principle-based regulation has to be balanced against the danger of sometimes reducing the clarity and certainty of rules for the regulated. That point was made to us by a number of witnesses. Nevertheless, I feel that principle-based regulation has a lot of merit. In this section of our report, we commended the FSA for its approach to principle-based and risk-based regulation. We quoted the National Audit Office, which also commended the FSA in this area. The then chief executive of the FSA, John Tiner—I warn the noble Lord, Lord McIntosh, that I am going to reach a different conclusion from his—told us in oral evidence that,

“there are two guiding principles about how we do our work. One is what we call ‘risk-based regulation’. That means in the financial services markets there will be failures and there should be failures—that is the essence of a marketplace, and that is the essence of risk transfer, which, after all, is what financial services is all about … Secondly, we believe very strongly that high level principles create a better way of delivering those statutory objectives in a marketplace which is competitive, vibrant and innovative, than lots of lots of very detailed rules”.

Of course, that hearing and the drawing-up of our report came before the Northern Rock debacle, which I do not blame the noble Lord, Lord McIntosh, for not anticipating. There will always be more pressure for greater regulation after such a crisis. In such circumstances, the media, many Members of this House—and certainly Members of the other place—and the public will often press for greater regulation. That includes those who, in other circumstances, seek less regulation, as many did in evidence to our committee. The noble Lord is quite right that much of the evidence that we took about the FSA was in the direction of less detailed regulation and control, rather than the other way round. However, when a Northern Rock crisis emerges, some of those people change their tune and call for more regulation.

It is not appropriate in this debate to discuss some of the other aspects of Northern Rock, such as whether the tripartite system of institutions worked—that is for another day—or Basel 2 and that whole area, in which there needs to be greater emphasis on liquidity, not just solvency and the capital base of the financial institutions. I think that that was the point that Mervyn King was referring to in the quotation used by the noble Lord. However, the position of the FSA is relevant to this debate. I very much agree with Richard Lambert, director-general of the CBI, who, in a recent and, I thought, brilliant speech on what has happened since the credit crunch, said, “Don’t rush things”. In particular, he said:

“There are limits to what regulation can achieve, and attempts to regulate complexity can actually make things worse”.

He of course referred to the Sarbanes-Oxley situation post-Enron, which greatly damaged New York and greatly enhanced the position of London in the world financial markets.

There are three reasons why Richard Lambert was right to say that. First, let us bear in mind that it was not only the FSA that did not see the rocks ahead, if I can put it that way; investment analysts and investment managers were supporting and advocating investment in Northern Rock when it was at £12 a share. They were supported in particular in their analysis by the credit rating agencies. I want to quote what Richard Lambert said in his speech; this area merits every bit as much attention as do the regulators. He said:

“The credit rating agencies have been dubbed the alchemists of the financial world, turning base metal into gold by their ability to attach high-grade ratings to repackaged junk”.

There is a salutary lesson there. He continued:

“EU Commissioner Charlie McCreevy put it this way the other day: ‘Credit rating agencies must ensure better management of conflicts of interests, a more transparent rating process, stronger rating methodologies and enhanced governance and accountability’”.

I particularly agree with that, especially the comment about the need for a more transparent rating process and stronger rating methodologies. The credit agencies, on which so many financial institutions depend for banking decisions and investment, are at least equally at fault—much more so in my view.

Secondly, the primary responsibility lies with the boards and senior executives. It is striking that many shareholders have suffered—it is perhaps the shareholders who do—the impact of what happened recently. I believe that the wealth of shareholders in the five leading UK banks has shrunk by £60 billion in the past year, and we have seen what happened to Northern Rock shareholders. I think—I believe that I share the view of many—that it is pretty intolerable that the chief executive of Northern Rock should have such compensation as he leaves, having guided Northern Rock through this period, when so many others are suffering. That is not a matter for government, but it is certainly a matter for corporate governance by the financial sector and institutions generally.

My third point is perhaps my most significant in relation to the FSA. If you read the FSA’s own highly critical report of itself—I spent a happy flight back from Spain over the weekend doing so—it is clear that the problem was caused not by a risk-based principle but because the process was not in this case properly applied. It was starkly and clearly not properly applied in a number of ways; the noble Lord, Lord McIntosh, referred to some of them. Northern Rock, for the FSA, was a high-impact firm. That means that it should have had very strong attention from within the FSA. It was one of the most potentially risky firms and required the greatest supervision but it simply did not get it. There were many examples—high turnover of top-line staff and a lack of supervision of middling staff, some of whom have left. One of the tables in the FSA report demonstrates that, of all the high-impact firms, Northern Rock got the least attention—quite disgracefully so in some instances. There was very poor supervision, which was why it was described as being at the extreme end of the spectrum of high-impact firms. I believe that our support of risk-based and principles-based regulation still stands. If anything, the Northern Rock experience does not undermine it but underlines it.

My Lords, as the first speaker in this debate this afternoon who is not a member of the committee, I congratulate the committee and its chairman on the excellence and thoroughness of the report and on all the work that went into it. The Select Committee has given the economic regulators quite a favourable end-of-term report. As the chairman said this afternoon, it would have been somewhat different—somewhat more qualified—as to the Financial Services Authority if it had been published somewhat later. An editorial in the Financial Times on 27 March following the FSA’s self-flagellatory criticisms of the previous day said that we will never know whether an alert Financial Services Authority could have prevented the Northern Rock fiasco but the questions raised are about regulatory practice more than regulatory principle—what the noble Lord, Lord MacGregor, referred to as regulatory process.

Your Lordships may believe that this is a criticism of the Select Committee’s report but its favourable comments about regulators cover both principle and practice. Most regulators were said by the report to be interpreting their remit both appropriately and effectively; they gave value for money and have developed some sound consultation procedures. There were some elements of criticism about lack of co-operation between Ministers and one regulator and another, but, in the light of later events—I speak with the benefit of hindsight—the substance of the Select Committee report seems a bit sanguine if this substantial document is to go down as a major work for academics and others to rely on as to the state of regulators, their principles and practice in the year 2008.

Chapter 3 is critical of what appear to be major variations in the statutory remits of the various regulators. It says that the Office of Fair Trading does not have a statutory duty to facilitate the development of self-regulation. It is true: we cannot find such a word in the Fair Trading Act 1973 or the other provisions, but I know from experience that the Act, which set up the Office of Fair Trading, requires it to pursue and foster self-regulation among trade associations. Some of the earlier ones are to do with strong consumer interests such as travel and the second-hand car trade.

Although only Ofcom and Ofgem have a specific statutory duty to implement the principles of good regulatory practice, so what? Those principles were only stated and articulated in 1997 and the 10 regulators to which the Government referred as the ones examined in detail by the Select Committee now feel obliged to follow those principles. It may be that in due course Parliament will get around to tidying up and filling in statutory gaps but I am not sure that it matters a hoot that practice follows the requirements and it does not appear in specific words in a statute.

As the noble Lord, Lord MacGregor, indicated, it seems a little ironic in the light of later events that the Select Committee holds up the Financial Services Authority as a model in terms of risk-based regulation and principles-based regulation. It seems to me that recent events in no way reduce the value of those concepts for regulators generally, yet I agree with what Ed Balls said to the Select Committee: clarity and certainty are to some extent in tension, one with another, and particularly in terms of tensions with a principle-based approach. The committee is right to spell out that not only consumers but also the smaller regulated businesses in particular may lose out from the lack of certainty and predictability that follows from the absence of prescriptive rules. People do not like prescriptive rules when asked in the abstract whether they like them, but there is a risk of firms exploiting less intrusive and detailed regulation. As the consumer organisation Which? argues, the FSA needs to review the incentives it has in place for compliance and, in particular, to reconsider its traditional opposition to naming and shaming firms that have gone against it. I think that the FSA could learn something from the competition authorities about being prepared to reward whistleblowers who reveal wrongdoing within the firm of which they have knowledge.

All the regulators have a clear statutory remit to further and protect the interests of consumers. Regulated companies invariably have internal complaints procedures. There are also various ombudsmen and other redress procedures available. I understand that the financial ombudsman scheme came in for a lot of criticism from business before the Select Committee, but the Council on Tribunals was complimentary, so different views were received by the Select Committee. However, the Select Committee was evidently not convinced because it has called for a review by the National Audit Office. As far as I can see from the Government’s response, they have not accepted that, mainly for the legal reason that there is an absence of power to do so in the Financial Services and Markets Act. Fortunately an independent review is being conducted by the noble Lord, Lord Hunt of Wirral, to which the Select Committee and the Government referred, and I hope that a lot of attention is paid to whatever it says.

There are various models for sector-specific consumer panels, and the Select Committee follows the consumer organisation Which? in its preference for stand-alone consumer panels as being more transparent and effective. At present, the Financial Services Consumer Panel is integrated with the FSA, and is not a stand-alone body, and Which?, which I am happy to follow in this, argued convincingly that even if the panel became a stand-alone body, there is still a need for adequate consumer or, at any rate, non-business representation on the FSA. I do not think that even a separate consumer panel should be any sort of argument for excluding anybody with experience of the consumer world from being a member of the authority itself. They have different functions. A consumer panel is a body of people to which requests can be made for information on what the regulator is going to do, but it is not a decision-making body, and it is desirable for consumers and other non-business people to be part of the decision-making body as well. They are not alternatives.

In recruiting its staff, the FSA must dip into the same resource pool as the regulated companies, but it has less money to play around with. The noble Lord, Lord MacGregor, kindly quoted a remark I made at Question Time the other day about how the FSA could perhaps learn from the model of the self-regulatory City Takeover Panel, which for the past 40 years has recruited by secondment from the firms it regulates.

I have perhaps said more about the Financial Services Authority than is necessary or desirable, but my noble friend the chairman of the committee—naturally, given recent events—did so as well. I hope that there is some agreement around the House today that we need a stronger, more robust Financial Services Authority, with wide-ranging board membership and a dedicated and adequately remunerated staff.

My Lords, I declare an interest as a member of the Select Committee on Regulators, and I pay tribute to the excellent chairmanship of the noble Lord, Lord McIntosh of Haringey. He provided a cogent overview of our recommendations and, since our report was published, there have been important developments, as he clearly delineated. Those developments reinforce the case that I shall develop.

Rather than repeat what the noble Lord, Lord McIntosh, said, I shall concentrate on one aspect of the report, reinforcing what my noble friend Lord MacGregor said. I shall focus not on specific regulators but rather on regulators as a species, and address one question posed in the report: who regulates the regulators? Not who regulates a particular regulator, but who regulates the regulators?

I begin with a statement of fact and a number of propositions, which I think are generally acceptable. The statement of fact is that, over recent decades, there has been a substantial increase in the number of regulatory bodies established by statue, and in the volume of regulation. As the Constitution Committee noted in its 2004 report on the regulatory state, the regulatory state is now extensive, with significant costs attached to complying with regulation.

I have four propositions. First, the need for some regulation is apparent, especially to encourage competition and to protect consumers. Secondly, where established by statute, the powers and responsibilities of the regulator need to be clearly prescribed. Thirdly, where there is scope for competition, the extent of regulation should diminish as competition is achieved and, in the fullness of time, the regulatory body should cease to exist. Fourthly, the activities of the regulators should be characterised by transparency, efficiency and accountability. It is the last of those that I shall address.

In the report, we have made recommendations designed to improve the transparency and efficiency of regulators, not least through the introduction of impact assessments and post-implementation review. The value of such assessments and review is clear. Indeed, the principle of post-implementation review is crucial, applicable to all public policy-making bodies, be they government departments in respect of primary and secondary legislation or regulators making regulatory decisions. The case for such review has been made by the Constitution Committee, the Merits of Statutory Instruments Committee and the Regulators Committee. I am pleased that the principle is accepted by the Government and is being pursued, including in respect of post-legislative scrutiny.

As we made clear in the report, advances are being made in respect of regulators, but there is still a considerable way to go in ensuring systematic assessment and review. That is clear from the study undertaken for the committee by the National Audit Office. I draw attention in particular to Table 14 on page 113.

However, it is the issue of accountability that I wish to pursue. As the noble Lord, Lord McIntosh, mentioned, in 2004, the Constitution Committee produced its report entitled The Regulatory State: Ensuring its Accountability. As he mentioned, I chaired the committee. In its response, the Government welcomed the report as,

“the first-ever comprehensive inquiry”

of its sort. That may seem surprising, given that regulators are subject to extensive scrutiny by parliamentary committees, as well as by other bodies. Indeed, in the report, we identified what we referred to as 360 degrees of accountability.

Each regulatory body established by statute is bound by the statute creating it—the Lord, Lord Borrie, touched on that. Each is accountable to government, consumers, the regulated bodies, the courts and to Parliament, but it is the accountability of the individual regulator. In terms of parliamentary accountability, each regulatory body is covered by a departmental Select Committee in the other place. Most are subject to scrutiny by the National Audit Office. However, there is no mechanism in place for scrutiny of the regulators collectively, of what the Constitution Committee termed the “regulatory state”. There is what I would call “vertical scrutiny”—that is, scrutiny within a sector—but very limited “horizontal scrutiny”; that is, across all regulatory bodies. The more the number of regulatory bodies has increased, each created by a statute tailored to that particular regulatory regime, the greater the need to stand back and ensure that regulators collectively are accountable to Parliament.

The need to ensure consistent and comprehensive scrutiny of the regulatory state is clear from the report of the Constitution Committee as well as from the report before us today. Particular regulators may be subject to scrutiny by their respective departmental Select Committees—but how do we know what is happening with regulation as regulation? How do we know what the overall burden of regulation is? Is it increasing or decreasing? How do we know what is best practice? Is one regulatory regime proving more effective and efficient than another in encouraging competition and protecting the needs of the consumer? We can answer those questions only through comparative scrutiny.

What capacity does Parliament have to engage in such scrutiny? The NAO, which reports to the Public Accounts Committee in the other place, can examine most, but not all, economic regulators. The Constitution Committee of this House can look at the regulatory state—that is within its remit—but it has other responsibilities. The Regulators Committee, as we make clear in the report, necessarily had to limit the scope of the inquiry to regulators, not regulation, and to focus on the economic regulatory work of the major UK economic regulators. Even that narrow focus still required extensive work over the course of the Session. Our report is therefore a prompt to take the necessary action to ensure accountability, rather than delivering such accountability.

As the Constitution Committee argued in 2004, improved parliamentary scrutiny rests on capacity, consistency and co-ordination. A departmental Select Committee does not have the capacity for sustained and consistent scrutiny. Its terms of reference do not permit co-ordinated scrutiny of the regulatory state. Anyone who doubts the need for looking at regulators in a consistent and co-ordinated way should look at Table 2 on page 25 of the report. One can see from that the sheer variety of statutory duties imposed on regulators; it is a patchwork quilt of duties. It may be that each set of duties is appropriate, but there may be a case for more consistency. How do we know without thorough inquiry?

The need for greater parliamentary scrutiny was made by various witnesses who gave evidence to the Constitution Committee and was reiterated in evidence to the Regulators Committee. We have agreed with those witnesses who have stressed the need for such scrutiny. How, then, to deliver such accountability? The Constitution Committee recommended a Joint Committee of both Houses. It felt that such a committee would supplement, not supplant, the committees that had oversight of individual regulators and that it should focus its work around the annual reports and published impact assessments of the regulators. When the other place appeared unreceptive to the proposal, your Lordships’ House agreed to set up an ad hoc committee. The Regulators Committee was given a broad remit, to “examine the regulatory process”, but, for the reasons already explained by the noble Lord, Lord McIntosh, we looked at the major economic regulators. In other words, we have not had the opportunity to examine the whole regulatory process. Furthermore, as we say at paragraph 6.63,

“we are the child of the Constitution Committee’s report, but not the wished child. Our existence is terminated with the publication of this Report and the subsequent debate on it to be held on the floor of the House”.

It is vital that examination of the regulatory state, of the health of the process of regulation, does not come to an end with this very debate. As we stress in paragraph 6.65, there is a need for a wider, and continuing, review. We also state:

“We agree with the conclusion of many of our witnesses that ‘there is a crucial need for greater parliamentary oversight ... over regulation bodies’ ... The question of who regulates the regulators has not been answered and will not go away. There is a need for a committee to pursue cross-sector best practice and to ensure that the recommendations of this Report are followed-through”.

We therefore recommended that the creation of a Joint Committee of both Houses be established. If that proves impossible to achieve, then we recommend a sessional committee of your Lordships’ House.

The volume of regulation in this country is substantial, it imposes substantial costs and it has implications for the health of our economy. Yet we have no means of ensuring that such regulation is monitored, assessed and, if necessary, modified by Parliament in order to meet the needs of the consumer and of competitiveness.

A parliamentary committee is a means of ensuring such accountability. It is to the benefit of not only Parliament but Government. Government establish regulatory bodies for constitutional, political and economic reasons. It is to Government’s benefit to ensure that regulation is effective, efficient and utilised only where necessary.

The Minister may feel that she has got off lightly in that she need only respond—as she did in the written response to the report—that this is essentially a matter for the House and House authorities. However, Government are not totally detached from the parliamentary process. As I have indicated, it is to the benefit of Government to see such a committee established. The Minister’s response to the report acknowledges in effect the value of comparative scrutiny. How are we to ensure that what the Minister acknowledges is desirable, as for instance on post-implementation evaluation, is delivered? Recent events have reinforced the case. Although my comments are addressed as much, if not more so, to the House authorities as they are to the Minister, it will, however, be helpful to have the Minister’s endorsement of the recommendation.

The impact of regulation needs to be assessed and monitored on a consistent and comprehensive basis. We presently lack the means for doing that at a parliamentary level. We need to create the means. There are resource implications, but the importance of the subject is such that it would be a false economy for this House not to act on the committee’s recommendation.

My Lords, I am pleased to be taking part in this debate. I congratulate the committee and my noble friend Lord McIntosh of Haringey on chairing it. It is a most excellent report. I gave evidence to the committee as chairman of the Rail Freight Group and I declare an interest in that regard. Having read the report and listened to the excellent contributions so far, there is a strong case for ongoing scrutiny of the whole regulatory structure.

A common theme in the report is the burden on the regulated industries. There has clearly been a lot of lobbying from these industries which, I believe, resulted in the Regulatory Enforcement and Sanctions Bill that many of us participated in. I am grateful to my noble friend the Minister for the changes that she agreed to make to the last part of the Bill in trying to deal with some of the concerns of the economic regulators.

However, we hear far less about the effect on the regulated industries and the need for the regulators to be really independent; to have lots of information to do their jobs properly; and to get the support from customers, users, Parliament and others to feel confident that they can act without fear of government intervention or judicial review.

One of the jobs of regulators is often to promote competition and to get costs down, particularly if they are regulating a monopoly such as Network Rail or Royal Mail. Nobody, in my experience, has come up with an alternative way of doing it. We hear a lot of complaints from the regulated industries. The Royal Mail is the latest one, warning of the dire consequences if it is not allowed to do anything and that it might go bust. Railtrack did go bust and the railways are still running. The regulators have to have solutions up their sleeve.

When trying to find a regulatory balance, we must recognise that, where regulation is necessary, in particular when there is a need to support or develop competition or regulate the costs of monopolies, regulators need the maximum encouragement to go further and faster in their work; otherwise, one will get regulatory capture. We have talked about that many times previously—I do not want to go into it in too much detail tonight—but big companies which are regulated can spend unlimited resources on putting out information which will either make the regulator’s job impossible or help to mitigate the effects. One has only to listen to the debate on the third runway at Heathrow and the information that is put out, sometimes against the CAA and others, to see that we must be very careful about that.

There is the question of the last mile for Postcomm getting letters delivered or opening up Post Offices to allow them to accept parcels, letters and other trade from companies other than Royal Mail. I was astonished to read in paragraph 7.22 of the report about Ofwat being unable to encourage competition. The report is not very clear about whose fault it is—Ofwat’s, the Government’s or somebody else’s—but it is quite extraordinary that, in a network industry, of which plenty of others are mentioned in this report, you apparently cannot have competition. Competition will in almost any way allow bench-marking and possibly some good cost reductions, too.

I cannot let this opportunity go without spending a few minutes on railways. The Office of Rail Regulation is mentioned quite a lot in the report. I and other people believe that it has good processes, and consults well and widely. It needs to be a little more proactive on occasions, but it is after all keeping on programme to get Network Rail’s costs down; by 31 per cent in five years and we hope much the same in the next five years, although that is not decided. Costs down means charges down; it does not apply just to railways either. It also improves efficiencies. The little detail with which we are troubled at the moment is keeping the network open for the customers, the train operators, to run the trains rather than closing it for maintenance. In that regard, they have a long way to go.

I hope that the Office of Rail Regulation will in the future look at corporate structure and accountability. The noble Lord, Lord Norton, talked about accountability of regulators. In the case of Network Rail, there is a problem of accountability of the company itself, which is a peculiar hybrid. I do not think that anybody wishes to change it, but it has to be reviewed. Network Rail is similar to Royal Mail, not in the company structure, or who owns it or its accountability, but in the fact that it gets much of its money from the state, which certainly affects the way in which the regulators have to deal with problems when they arise.

It was good to read in paragraph 6.56 of the report that the Minister for Transport, Tom Harris MP, put in a plea for,

“a long-standing period of settling down into the current regulatory framework”.

He is absolutely right. My noble friend Lord Jones of Birmingham, talking about regulation of the railways in a debate in which several of us participated on 14 March, said:

“Governance will depend on stronger and more independent national regulatory authorities. Noble Lords have this Government’s assurance that we will continue to push and press on that. I shall refer the specific transport points raised by noble Lords to the Secretary of State for Transport and I assure them that they will be taken up”.—[Official Report, 14/3/08; col. 1705.]

Ten days later, they still have not been taken up. In a debate on the Channel Tunnel Rail Link on Monday evening, my noble friend Lord Bassam of Brighton said that the Government wanted to ignore the regulatory policy of this Government and keep the Department for Transport as a regulator of the Channel Tunnel Rail Link because,

“the current structure will secure a higher sale price by enhancing the commercial stability of High Speed 1”.—[Official Report, 31/3/08; col. 784.]

There is nothing about any other regulatory rule, nothing about getting more traffic on the line. It is just for the short-term taxpayer’s gain. The department will set the charges to suit its own ends rather than relating them to the costs of operations and maintenance and it is very unlikely to do what the Office of Rail Regulation is doing and impose an efficiency requirement on the baby that it has just sold off.

The noble Lord, Lord Bradshaw, and I both met potential buyers for this line who said that, as investment companies, they would much prefer the certainty of independent regulation than the uncertainty of departmental regulation. Not only that, but they would pay a higher price for that certainty. I do not know whether my noble friend Lord Bassam did not believe us but he seems to be batting on with this policy, which is totally contrary to the BERR policy and will do nothing to provide the comfort and stability of investors that the Government clearly intend.

I suggest to my noble friend—who I hope is going to respond on this—that she advise her noble friend in the Department for Transport what government policy on independent regulation is. Perhaps it is time, as the report says in paragraph 6.60, to have this inter-ministerial forum, as the noble Lord, Lord MacGregor, suggested. My honourable friend the Minister for Transport Tom Harris suggested in his evidence that a long period of stability is needed to settle into the current regulatory framework. We have not had it that long—only three or four years—and already the Government are trying to change the rules. I hope my noble friend can persuade her noble friend and my noble friend to look at the Channel Tunnel Rail Link again and possibly comply with the regulatory policy that she and her colleagues are putting out.

I conclude by congratulating my noble friend on this excellent report, emphasising again that there is much more to do on regulation in the medium and long term and that we need some process for scrutiny here and in the other place.

My Lords, it is just as well to remind ourselves of the history of the development of regulation. It was a result of the privatisation of the industries. Most of the industries were transferred from the public sector to the private sector, almost debt-free. The companies who bought them borrowed huge sums of money, geared up their balance sheets, gave the money away to shareholders and then came back to the Government and said, “You want us to do all this; give us some more money or let us put the price up”. In the case of water, for example, people’s supplies were being taxed in order to pay these big companies. In my view, it is quite staggeringly bad economics. I have never supported the privatisation and I still think it was wrong. A company like Railtrack went bust because a) it was incompetent and b) it had paid out too much money—not very different in some ways from Northern Rock. But you need to have in place regulators who are thoroughly professional and able to take information, both from here and abroad—benchmarking information to which the noble Lord, Lord Berkeley, referred. That is very important and it becomes more important as the number of companies supplying power has dropped from 20 to six. The more concentration you get, the more important it is to get benchmarking from overseas. The regulators are gaining experience and are more professional, and some companies such as Network Rail do not like it very much when they are told that the services that they are giving are being given elsewhere more cheaply and efficiently and with less impact on the customer.

Obviously there is a need for the Government to keep abreast of what is going on, but the quoted paragraph 6.56 shows that they are not. I endorse the comments made here that there is a definite need for a specialist or sessional Select Committee. I do not have the confidence that has been expressed here about the National Audit Office. We were until recently almost inundated with great thick reports from it full of pictures and not much substance. The NAO is not highly professional. Members of this House probably bring more focus to the issue than a National Audit Office person who moves from job to job looking at the health service one day, education the next and transport two or three weeks later.

Politicians should not hide behind regulators. It is the regulators’ job to evaluate business plans and to determine how much it should cost to fulfil them. If there is any public money involved, it is for the Government to decide what they want to buy and how much should be picked up by the customer. That is an explicitly political decision, and I do not applaud the idea of the Government somehow blaming regulators when many of the things go wrong.

The noble Lord, Lord MacGregor, referred to the comment by the Railways Minister that Ministers are so busy that they simply have no time to get around to this. If Ministers are that busy, they are not doing their job properly, which means that they must delegate away from themselves the trivia that many of them deal with so that they can get their minds around the principles as they are paid to do. It came to our notice last week through the trade press that the Department for Transport has now decided that any variation in the Great Western Trains franchise is a red box item. Quite honestly, if Ministers have the time to deal with the variations in the Great Western timetables but not with serious regulatory issues, I am sorry but they have got their priorities wrong and need to be put right about them.

Promotion of competition is important, but it will come as no surprise to Members of this House that the train company of the person who is lauded by the general public as being at the forefront of competition—I will give noble Lords a few guesses, but Richard Branson might be one of them—is invoking the agreement, which was made a long time ago when the west coast main line was opened, to moderate competition between the Midlands and London, which in fact means shutting out the new train operator operating from Wrexham and Shrewsbury to London so that it cannot call at Wolverhampton or Birmingham. What a competitive attitude to take. Even worse, the company has now announced that it is running a service from Wrexham. Lo and behold, Mr Branson is now running a faster train from Wrexham via Chester. He is, I think, receiving £250 million a year in compensation from the taxpayer to undermine someone else who is providing a service to the people of the Borders which people in Wrexham, Shrewsbury and Telford do not have. It is important that we promote real competition and challenge the people who would prevent it.

The noble Lord, Lord Berkeley, has mentioned the need for independence of regulation. It is most important that there is a clear dividing line between what the regulator is supposed to do and what people can expect from the regulator, and what Ministers are supposed to do and what people can expect of them. When a quinquennial—meaning every five years—review, is made by a regulator, it has to be done in that time, whereas with Ministers, I am afraid that often the decision will be made in the summer, at the end of the year, early next year, or later on. It really does drag on and on. I have Answers at home with all that sort of information from Questions I have asked.

The Competition Commission is cumbersome and expensive. It is expensive to go to and very slow to answer. I urge people not to send more things there than are really necessary. I believe that our regulators are doing a good job. This is a good report and it is right that Parliament should focus on it. I look forward to what the Minister has to say.

My Lords, I thank the noble Lord, Lord McIntosh of Haringey, for bringing to this House, if reluctantly, the report of the ad hoc Select Committee on Regulators entitled UK Economic Regulators. He obviously did not enjoy it; he was obviously embarrassed by doing it. The noble Lord is the first to say that the evidence was taken as far back as June last year; that, by the time the committee had produced its work, all hell had broken loose; and that what it had written was rather dull and dreary. I think he is wrong. The noble Lord will look back on this episode in his life as worth while and far-reaching. He said that it is the first time he has had anything to do with a Select Committee. I have been on several Select Committees and, over time, you begin to realise just how much can be done. I served on the Science and Technology Select Committee. I remember the small piece of work we did on aircraft travel, health and deep vein thrombosis. We have revisited that work, and it is quite amazing now what the airlines are doing about it. It cost the country very little because it was done by a little Select Committee of this place. I do not want the noble Lord to give up hope on this or to think that this is the last time he is ever going to do it.

The main conclusions of the report, which we can take away, and that the Government have thought on—and will, I hope, think on even more—may seem to the noble Lord, Lord McIntosh, to be rather broad-brush. Under the statutory remit of the regulators, the committee has recommended further standardisation of the remits and made all sorts of good recommendations about working methods, value for money, regulators committing to evaluating the impact of their work, regulators’ use of impact assessments and—very importantly—the relationship between the regulators and the regulated. This is a particularly good recommendation. The report concludes that industry needs reassurance that the time it invests in consultation is time well spent and is meaningful in the decision-making process. A 12-week consultation period to allow industry a reasonable amount of time to respond is recommended, because these are very big issues to work with. It is an excellent suggestion by the committee to build the confidence of the industry in a body that it often sees as a hindrance, rather than a help, to the good order of the industry, to its customers and its consumers.

On the protection of consumer, citizen and public interest, the committee recommends that the interests of citizens and the general public are for the Government and Parliament to define and promote. That is a good statement and one that should be made. It goes on to describe the consumer interest as the regulator’s duty. The most important thing that has come out of this is that the consumer interest should be able to stand aside. The noble Lord, Lord Borrie, and I know this well. We saw these things set up years ago and were worried about the fact that they were captured within some of the regulatory frameworks. Yes, they should be able to have their own representation outside: this is an excellent suggestion. As the noble Lord, Lord Borrie, pointed out, that does not mean that there would be no voice on the governing body of the regulatory body.

On co-operation between regulators, I do not like the sound of that. I like the idea of competition between regulators. The committee recommends that a joint regulators group should be formalised. No, no, no: that sounds expensive, bureaucratic and a bit of a closed shop. I do not like the sound of the cartel of regulators, but it was interesting to read it and interesting to see it. When I think about it, we have looked at some real blue skies thinking here, and I think that there has been a necessary and fundamental shift. The noble Lord, Lord McIntosh, will look back on this work and be extremely proud of it, as he is not today.

I read paragraphs 1.29 and 1.31 and reflected that some 10 years ago, when I was chairing the National Consumer Council—an enormous privilege—we did a piece of work called “Who guards the guards?”. We were worried at that time about who looked after the ombudsmen. What were they doing floating around out there? One or two of them had never been used. We discovered afterwards that the funeral ombudsman had never actually been telephoned. Therefore, with my noble friends Lord Norton and Lord MacGregor, I am keen that a Joint Committee of both Houses of Parliament should regulate the regulators and hold them to account. That is a wonderful suggestion. It is the right suggestion and I hope very much that the Minister will give it a long hard thought.

We would all agree that the dreadful performance of the Financial Services Authority should have been exposed long ago. Sadly, the days have long gone since there was “a regulator” to hold to account. The noble Lord, Lord Borrie, is a shining example of a man who would stand up and take the blame for absolutely everything that happened when he was in charge. He was a lead voice and I sense that the commission that replaced him is not vigorous enough. It is not alert enough and it is not well led. It is glaringly obvious that its members are running themselves like a committee. There is no healthy tension and no real scrutiny. Nobody is guarding those guards and many people in this country have been made wretched by the disgraceful conduct of Northern Rock and the systematic failure of the Financial Services Authority in its duty as a regulator.

The good reputations of all regulatory authorities have over recent times been gradually eroded and the public and industry view of them now is one of mistrust, with such comments as “a cosy billet”, “out of this world”, “process driven” and “neither efficient, economic nor effective”. The FSA is a glaring example of that.

This has been a timely and good piece of work by the best brains in your Lordships' House. Sadly, Lord Garden, who served on the committee, has been lost to us, but by great good fortune, the wisdom, experience and energy of the noble Lord, Lord McIntosh, was kidnapped. The noble Lord has been a fine Minister in this House and his brush with cancer was a worrying time for us all, but here he is today to present this report and, I hope, to carry on to do other Select Committee work.

I ask the Minister to reflect on what she has heard today. I have a whole heap of questions which I was given to ask—lots of snidey little questions and all sorts of stuff that as a good Conservative I should be saying. I have lists and lists of them, but the most important thing that we have heard today is that we want that scrutiny committee of both Houses. We must get that off the ground. This is a marvellous report and I am delighted to have been able to speak to it.

My Lords, I am grateful for this incredibly rich debate. We welcome the report into economic regulators. I understand that my noble friend Lord McIntosh has qualms, but I completely agree with the noble Baroness, Lady Wilcox, that he will be incredibly proud of this report in time. I am very grateful for the dedication and incisiveness of the investigation and the invaluable recommendations. As many noble Lords have noted, this surprisingly is the first cross-cutting look at economic regulation that has considered such a wide range of regulators. It is a very good time to take a step back and see whether the system that has grown up around us somewhat ad hoc is sustainable and suitable for the challenges ahead.

The UK was among the first movers in the area of economic regulation; and yet I believe that the Select Committee report is correct to say that the regime that has been built around the principles of independence, competition and certainty has stood the test of time, despite the reservations caused by recent events. It has adapted to changing circumstances, starting in the post-privatisation period, by encouraging cost efficiency and productivity, competition and consumer protection, as well as investment for future needs.

My noble friend Lord Berkeley and the noble Lord, Lord Bradshaw, commented on the importance of independence, particularly in terms of their experience in the rail sector. Independence is an absolute cornerstone of the regulatory framework. The independence of regulators to make decisions without fear or favour—I echo my noble friend’s words—is central and should continue to be enshrined in everything that we do. We recognise that the powers relating to rail regulation are controversial and this has been debated just this week. We understand the House of Lords Select Committee on the Crossrail Bill is considering petitions that will provide the Government with an opportunity to explore these issues more fully.

One of the central tenets of this area is to provide business certainty. That is essential in terms of new infrastructure and investment. Our regulators have been set up with clearly defined duties which help businesses with the certainty that they need to make long-term decisions. I would simply make one point with reference to the comment of my noble friend Lord Borrie on Ed Balls’s submission to the committee about the interesting relationship between rules-based and principles-based regulation and certainty. It is interesting that small firms take a very different view on rules-based regulation, which they find quite hard, and they often look for simple rules and guidelines to follow. We need to take account of that.

On competition, I was intrigued by the four principles put by the noble Lord, Lord Norton, particularly the third, in which he said that competition reduces the requirement for regulation and, in due course, he could envisage a situation in which it is not necessary at all. I am a very firm believer in markets and have always used them as a central tenet for solving almost every problem. Nevertheless, I do not really believe in perfect markets. I am intrigued by the notion that we can have perfect competition that does not require regulation at all.

Our approach to creating strong and independent regulators has been around the central theme of competition, in order to raise productivity. That is a fundamental objective and although, as the report points out, it is not a primary statutory duty for all regulators, the approach has been successful—as was pointed out by the report with regard to Ofwat. We believe that the RPI-minus-x model that the UK developed incentivises efficient providers and that model has been used or copied across the world—from Australia to Argentina. A lot of visitors come to talk to us about this.

I understand the surprise of my noble friend Lord Berkeley when he expressed concern about Ofwat. Noble Lords might be interested to know that since the report, Ofwat has carried out a wide-ranging review of competition in the water and sewerage industry that was published a month after the report in December. The Government have now asked Professor Martin Cave to carry out an independent review, which will report in the spring of 2009, to consider the scope of water supply, to deliver benefits and drive innovation through developing competition and contestability in all aspects of the water supply chain. In our response to the committee’s report we set out that, when it comes to allocating blame, Parliament’s intention was that the cost principle is retail minus—that was highlighted in the debate on the Water Bill in 2003. Ofwat has recommended the removal of the cost principle from legislation on the grounds that this would enable it to promote competition. We expect that Professor Cave will look at this in his review of the water sector. Consumers are the stakeholders whom we are attempting to protect with the regulatory regime. The report comments on the fact that the requirement to protect consumers is well embedded in statute. We believe that we are delivering, and will continue to deliver, a world-class consumer protection regime. We have announced a review of consumer protection and will be calling for evidence shortly.

I should also mention the new National Consumer Council, which brings together consumer bodies into a single, stronger unit, and our extension of the availability of redress schemes. Some noble Lords have commented sceptically on the effectiveness of this new council, and I have noted those concerns, but we believe that we will have a council that is more open, accountable and effective than its predecessor. Its creation on a statutory basis means that it will be subject to the scrutiny of the NAO and the PAC, and we will be looking at it ourselves in due course.

I understand the strength of feeling about the question of who is regulating the regulators. I completely agree with, and was struck by, the point made by the noble Lord, Lord Norton, about the importance of comparative scrutiny in ensuring that we have an effective system of regulation. We do not wish to compromise the independence of regulators in any way, and there are existing scrutiny mechanisms, including departmental Select Committees and appeals to Competition Commission tribunal judicial reviews. But I understand the strength of feeling. I know the lines in my brief. It states that, “It is obviously not for us to comment on the necessity of a new committee, which is a matter for Parliament”. Nevertheless, while I cannot be prescriptive about the form of effective scrutiny that might be put in place, I would strongly endorse and support some form of extra scrutiny for a collective and comparative look at regulators.

There was a lot of discussion about impact assessments and post-implementation reviews. I know that the noble Baroness, Lady Wilcox, is very attached to those ideas. The Select Committee correctly highlights the need for regulators to use better cost-benefit analyses in their impact assessments and to make these documents much more easily accessible. We cannot direct them to do this, because of their independence, but we fully support those recommendations and would strongly encourage regulators to follow them. A similar need was expressed for the post-implementation evaluation of policies. We now require that those are set out. When you do the impact assessment, you need to set out when you are going to do the post-implementation review. It is a key tool and we strongly support it. Noble Lords will be interested to know that my right honourable friend the Leader of another place recently wrote to the Cabinet on new measures to implement post-legislative scrutiny of Acts that received Royal Assent from 2005 onwards. This will involve all departments producing memoranda on the effectiveness and impact of legislation that has been introduced. These memoranda will be considered by the respective departmental Select Committees, which will decide whether to conduct post-legislative scrutiny on the Act. Again, although the committees do not cover the independent regulators and are limited in scope in terms of advising or directing them, we strongly urge them to consider how they can apply these reviews in their own circumstances.

I was also very struck by the comments relating to co-ordination. I fully endorse the view of the noble Baroness, Lady Wilcox, that there should not be a super-regulator in any shape or form, but I accept that there is a need for better co-ordination. We hope that the Joint Regulators’ Group—which is just a group; it is not a new super-regulator—will ensure that co-ordination is improved.

We have carefully considered the case for a central point in Whitehall to deal with economic regulatory policy in the round. I have to admit to being quite cautious. I do not wish to create a new bureaucratic unit to co-ordinate these issues just because there is no obvious home in Whitehall. We certainly do not wish to create a body that would appear to compromise the independence of regulators. Therefore, my department is considering whether the Better Regulation Executive would be a good home for this task to be taken in hand and we are currently looking at its terms of reference. I hope that it will help with the problems of ministerial co-ordination that were raised. There is an inter-ministerial panel for regulatory accountability, and I shall definitely have to take away from this debate the need to revive it and put some vigour into it.

I should also like to comment on reducing regulatory burdens on business where they are unnecessary. My noble friend Lord Berkeley mentioned the Bill that we have all been working on. I am very grateful for his comments of support, together with those of my noble friend Lord Borrie, and for the improvements that we have made to the Bill as a result. We believed it was very important to state in the Bill that some of the economic regulators should have a duty to ensure that they do not impose unnecessary regulatory burdens, given the significant impact that they have on the economy.

I turn to some of the more topical issues that have dominated the debate. Despite those issues, I do not believe that the underlying strength of the regulatory principles and system or our position as a world leader in the regulatory field is altered. Therefore, I accept the view of the noble Lord, Lord MacGregor, that mistakes do not invalidate good principles, and I do not accept my noble friend’s view that somehow the regime has been invalidated.

Clearly, we are facing a very difficult time in terms of the international financial markets, but it is important to remember that this is the single most globalised sector. Capital flows and the financial institutions are international but the regulators are national, and therefore this matter cannot be dealt with simply by national regulators. The regulation of credit rating agencies, which was mentioned, or understanding the flow of derivatives and the risks that are transferred with those derivatives, for example, are not matters that a national regulator can remotely deal with on its own.

I do indeed remember the dinner where Alan Greenspan spoke about the fact that derivatives in themselves reduce risk. I simply quote something that Alan Greenspan has often been known to say:

“If I seem unduly clear to you, you must have misunderstood what I said”.

That sums up the position with derivatives.

I do not think that the case of Northern Rock undermines the argument for better regulation and the proportionate approach that we have all been discussing and promoting. Mistakes, as I say, do not invalidate good principles. I have read Richard Lambert’s speech and very much accept his view that we should not have any knee-jerk reaction.

The FSA acknowledged in its report published last week that its supervision of Northern Rock was not of sufficient intensity or appropriate rigour to challenge the company’s risk management practices and understanding of the risks posed by the business model that Northern Rock chose to pursue. The FSA accepted the conclusions and recommendations on improvements and steps are now being taken to strengthen the overall supervisory process.

As for the regulatory architecture, the Treasury Select Committee endorsed the view that the UK’s tripartite framework for financial stability—with a single regulator undertaking principles-based regulation — remains right. However, there is no room for complacency and we need to clearly address issues thrown up by recent events.

Later this year, we plan to bring forward legislation to introduce a package of reforms, which are currently being consulted on. For example, we propose to give the FSA an additional power to collect information from banks at short notice. The consultation document also proposes giving the Bank of England a statutory role on financial stability. There are also other changes to the Bank of England’s governance arrangements.

This debate, as much as the report, has given me enormous food for thought and a new agenda, certainly in understanding the cross-Whitehall collective view of economic regulation. It has also given me some views on the role that my department could play. I am very grateful for all the suggestions and comments that have been made. I apologise if I have not answered all of them; those that I have not, I will do so in writing.

My Lords, noble Lords would not thank me for detaining them at a time when they are anxious for the House to rise so that they can leave for a couple of weeks, so I will not do that. The classic job of the mover of the Motion in winding up is to defend the report and the committee’s work. I do not need to do that as there has been no attack on them. Indeed, some speakers, such as the noble Baroness, Lady Wilcox, have gone quite a long way in the opposite direction of praising us and our work.

I am not and was not saying that we did not do a decent job in the circumstances that we faced. On the whole, we got the right evidence for the time and assessed and reported on it properly. That was not my complaint. Rather, my complaint was purely selfish. I would have had even more fun—because I enjoyed doing it—if I had been able to produce a report that had taken into account the events of the subsequent six months.

Let me thank, in particular, the noble Baroness, Lady Vadera, for going just a little bit beyond her brief in her support for a sessional or Joint Committee. She is quite right. Her lines to take were, of course, correct, but she showed some personal understanding of the need for this work and I am grateful to her for that. Let me also thank her for what she said about ministerial responsibility and the need for better co-ordination, because this is a cross-governmental issue. We do not want more bureaucracy in government but we want this issue to be taken with the seriousness that it deserves, which cannot be done on a piecemeal basis by departmental Select Committees.

Let me make it clear that, although I have criticised particular failures of financial regulation—I am doing no more than the FSA did itself, after all—it is not my assertion that the financial regulation system or the regulatory system is broken as a whole. I believe that there have been cracks and it is important to put those things right. My complaint was that the financial markets were at fault; that should have been seen by a lot of people much earlier than it was.

I am a great believer in anti-aphorisms; as Bernard Shaw said, if a thing is worth doing, it is worth doing badly. He was referring, I think, to amateur piano-playing. My anti-aphorism here is that a trouble shared is a trouble doubled; in other words, if you spread the risk, as the Bank of England said a year ago, you lose clarity about who is responsible and you create new risks rather than eliminate them. We have had a terrible lesson in that in the past few months. I rely on the regulatory state in this country to improve the protection that the people of this country have a right to expect against such abuse.

I have one bit of thanks; that is, to thank the noble Lords, Lord MacGregor, Lord Norton and Lord Ramsbotham, for taking the chair for a period in which I was having a heart operation. They performed the role marvellously well and I am very grateful to them.

On Question, Motion agreed to.

House adjourned at 6.41 pm.