Watchdogs (Industry and Regulators Committee Report)

Motion to Take Note

18:40:00

Moved by

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

My Lords, I am pleased to introduce this debate on the Industry and Regulators Committee report. I thank our committee members and staff for their valuable contribution to the committee’s work, particularly my noble friend Lady Taylor, who has taken over from me as chair of the committee. Over the last three years, the committee examined the regulators of energy, water, higher education, and financial services. This report drew on our findings in those inquiries and built on them by hearing from a wide range of other witnesses, whom we thank. Our report focused on how power is delegated to regulators and how they are held accountable for the use of that power. The 90 or so regulators in the UK usually have oversight of particular sectors, such as Ofgem, for the energy sector, or particular issues across the economy, such as the Competition and Markets Authority. Regulators are set up to act independently from government, with the aim of providing long-term stability and instilling confidence that enforcement decisions against citizens and organisations are not affected by political considerations or lobbying. They wield significant power and influence over our economy and our everyday life; that unelected bodies wield such power is unusual, and for this reason it is important that Parliament holds regulators to account for how this power is used. Primarily, this is done through Select Committees. However, we found that the scrutiny of regulators by committees tends to be piecemeal and reactive. There is little routine scrutiny that focuses specifically on whether each regulator is carrying out its duty effectively in line with its remit. We recommend that a regular review is needed to provide an assurance that regulators are carrying out their duties as required and to identify problems before they occur—I hope—rather than examine the debris after the fact. The Industry and Regulators Committee has been filling some of this gap, and so will the new Financial Services Regulation Committee, which I now sit on, but they are not able regularly to scrutinise all the UK’s regulators. In the absence of a regular review of regulatory performance, each inquiry has to start from scratch. This contrasts starkly with the practice of the European Parliament, which can call on European regulators and examine their performance and hold them to account, well informed by the knowledge and evidence prepared by a substantial permanent group of officials. We have important bodies to aid scrutiny. The National Audit Office does sterling work in supporting the Public Accounts Committee, including, on occasion, by assessing the value for money that regulators provide. However, it does not have the resources to cover all regulators on a routine basis, and neither does the PAC have the time to do so. The National Infrastructure Commission has an important role to report on the delivery of UK infrastructure where regulators such as Ofgem, Ofcom, Ofwat and the environment agencies hold some responsibility. Given the importance of investing in infrastructure and securing growth—the key aspiration of the new Government—we recommend that the National Infrastructure Commission be put on a statutory footing, giving it the freedom of independence to speak truth to power and to inform the public about what is going on, or often not going on, with large-scale investments into our public realm. For instance, we were disappointed to find that the NIC did not have the power to investigate proactively catastrophic underinvestment in the water infrastructure over many years, which led to widespread sewage discharges. Why is that? Because it is not allowed to investigate areas of settled government policy. We recommend a more effective approach to improve parliamentary oversight of regulators, and a new independent statutory body, the office for regulatory performance, should be created to advise Parliament and its committees to hold regulators to account on a more thorough and systematic basis and provide an annual report card on each regulator’s performance. The resources to fund its work would be well spent to ensure that regulators are delivering what they are asked to by Parliament. We recommend that the Government consider provisions for the office for regulatory performance as part of their forthcoming creation of the regulatory innovation office. Imposing multiple statutory responsibilities on regulators can muddle them and their accountability. Some regulators have been given too many objectives and matters to have regard to without any clear guidance on priority. This makes it difficult for a regulator to achieve its objectives and for Parliament to assess its performance. Take the case of Ofwat, which prioritised keeping consumer costs down instead of increasing essential investment in the water infrastructure to meet population growth and replace its failing century-old system. Where there is a lack of clarity in the job role given to regulators, they often reach for the most cautious solution and avoid raising bills, even where this might be necessary. This lack of clarity undermines the independence of regulators; Parliament and the Government need to be clearer when setting and prioritising objectives and not remain mute on the issue. The recent introduction of the competitiveness and growth objectives for regulators brings a welcome focus on growth and improving the performance of regulators, but it also brings a challenge for regulators to balance the new growth objective with their overriding responsibility to sustain the integrity and enforcement of effective regulation in their sector and, particularly, the protection of customers. Noble Lords will recall the enthusiastic embrace of the coalition Government for a bonfire of red tape. Earlier this afternoon, we were reminded of the dangers of thoughtless implementation of that approach when the Grenfell fire report cited lax regulation as a key contributory factor to the devastating fire. The objectives of growth and competitiveness must sit side by side with a strengthening of public protection and an improvement in the clarity and speed of response and remediation provided by regulators to the public and business alike. Regulators can have a significant impact on growth. In the Industry and Regulators Committee’s 2023 letter to the London insurance market, we noted how the introduction of rules to allow the advent of securitisation and captive insurance was widely applauded and adopted in many jurisdictions, and opened attractive growth opportunities for London. In Singapore, where the regulator promoted the virtues of these same UK rules, they rapidly authorised several companies to open for business. UK regulators were far too slow off the mark and introduced a very long process of authorisation, which prevented London taking advantage of being the primary rule setter. When the CEO of the London Market Group appeared before the Lords Financial Services Regulation Committee last week, she reported that there had been no improvement in London’s regulatory process since our earlier report. In the same meeting, the head of Marsh McLennan told us that the cost of compliance in the UK was estimated to be six times greater than in the nearest major competitor jurisdiction. These examples appear to be a result of our regulators’ passion for process rather than effective outcomes. This results in great frustration for customers and businesses; it adds costs and undermines growth. That regulator passion for process is in part born of an understandable need to minimise the danger of getting something wrong and missing key information. Perhaps the advent of AI software, which itself presents some interesting regulatory challenges, can transform that process by collecting all the data, verifying it for an available, possibly centralised database, and identifying those cases and authorisations that require further inquiry and judgment to resolve. The regulators can then focus their resources and well-honed skills on resolution rather than procrastination. Innovation like that can improve regulatory performance and protection, and promote growth. The Government’s announcement to legislate to set up a regulatory innovation office provides an important opportunity to consider how AI and other innovations can be harnessed and regulated to improve protection, competitiveness and growth. Will the Minister please confirm that there will be a pre-legislative consultation, when the recommendations of our committee and others can be considered? When do the Government expect to set up this new body and are they supporting the previous Government’s May 2024 White Paper, Smarter Regulation, ensuring that regulators play their part in supporting growth? Regulators protect citizens and the environment against those who, by design or otherwise, wish them ill. By providing a clear and efficiently managed set of rules, regulators provide the predictability, stability and competitiveness that help businesses to attract domestic and overseas investments, which can help them flourish and boost growth. Regulators need a clear remit, independence from political interference, and the necessary funding and resources to do their job. Regulators have the responsibility to operate in a transparent manner, to explain the reasons for making their decisions, and to speak candidly to Parliament and the public if there are significant issues that need to be addressed and resolved, however discomfiting the Government of the day might find them. Parliament, for its part, must adopt the reforms proposed to strengthen its oversight of the regulators and to fulfil its role watching the watchdogs. I beg to move.

18:54:00

My Lords, I first draw attention to my entry in the register of interests; in particular, as chair of the financial services division of DAC Beachcroft. I welcome the opportunity to follow the noble Lord, Lord Hollick, not only to congratulate him on an important speech but to thank him and his colleagues for making such an important contribution to this debate. This report excels particularly in its shrewd and practical analysis of the eternal tension between independence and accountability. As it states in paragraph 171: “Regulators should be held to account for aspects of their performance by their sponsoring departments within government. Given the importance of regulatory independence, accountability cannot be left to the Government alone, and Parliament must play a critical role”. Experience tells us that regulators have their ups and downs. In the unlikely but possible event of one going rogue—acting outwith its statutory remit, demonstrably underperforming or even failing completely—there must be some mechanism for dealing with that. Sometimes we joke that the sign of a successful regulator is to be equally unpopular with producers and consumers, and with Governments and Oppositions. Financial regulation—the very foundation of our economic system—failed disastrously, resulting in the crash of 2008. Thereafter, the debate seemed to be between rules-based versus principles-based regulation. I say that we need proportionate, flexible and targeted regulation. There is always a risk of regulating to prevent the last catastrophe, rather than creating a system that can prevent the next one. In May, the previous Government produced a very good White Paper, Smarter Regulation, which included the observation that “regulation should only be used where strictly necessary, with a high bar for introducing it and laser-like focus on how it will be implemented and felt”. Labour’s manifesto said: “Labour will ensure economic regulation supports growth and investment, promotes competition, works for consumers, and enables innovation”. I hope that the new Government’s policy on regulation will continue to have its roots in their oft-stated intention to promote growth. For any consensus about the future of regulation to be truly sustainable, it should be across parties and not just within them. I hope to hear from the Minister a repeated echo of the spirit of practical common sense that so characterises this report. Adam Smith, who I suppose is the father of free market economics, famously wrote: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. There, in a proverbial nutshell, is the case for regulation: a totally free market might well unleash countless instances of honest entrepreneurship and public benefit, but it would also facilitate all kinds of mischiefs. As Secretary of State for Wales in the early 1990s, much of my effort was directed towards securing inward investment. When considering where to invest, major international companies, especially those in financial services, will naturally take account of taxation rates and regimes, but they will also subject regulatory systems to formidable scrutiny—and, believe me, they really do their homework. What attracts much-needed inward investment is a regulatory system that is stable, predictable and proportionate, not one that wastes everyone’s time and resource with pointless box-ticking and form-filling. I very much hope that we can all agree on that.

18:58:00

My Lords, it is a pleasure to follow the noble Lord, Lord Hunt, and a particular pleasure to follow so closely the comprehensive introduction by our excellent former chair, the noble Lord, Lord Hollick. As the noble Lord alluded to, the Grenfell report and today’s Statement have been an extremely sobering reminder of the importance of effective regulation and the effective oversight of regulators. The principal job of regulation is to ensure societal safety and benefit—in essence, mitigating risk. In that context, the performance of the UK regulators, as well as the nature of regulation, is crucial. In the early part of this year, the spotlight was on regulation and the effectiveness of our regulators. Our report was followed by a major contribution to the debate from the Institute for Government. We then had the Government’s own White Paper, Smarter Regulation, which seemed designed principally to take the growth duty established in 2015 even further with a more permissive approach to risk and a “service mindset”, and risked creating less clarity with yet another set of regulatory principles going beyond those in the Better Regulation Framework and the Regulators’ Code. Our report was, however, described as excellent by the Minister for Investment and Regulatory Reform in the Department for Business and Trade under the previous Government, the noble Lord, Lord Johnson of Lainston, whom I am pleased to see taking part in the debate today. I hope that the new Government will agree with that assessment and take our recommendations further forward. Both we and the Institute for Government identified a worrying lack of scrutiny of our regulators—indeed, a worrying lack of even identifying who our regulators are. The NAO puts the number of regulators at around 90 and the Institute for Government at 116, but some believe that there are as many as 200 that we need to take account of. So it is welcome that the previous Government’s response said that a register of regulators, detailing all UK regulators, their roles, duties and sponsor departments, was in the offing. Is this ready to be launched? The crux of our report was to address performance, strategic independence and oversight of UK regulators. In exploring existing oversight, accountability measures and the effectiveness of parliamentary oversight, it was clear that we needed to improve self-reporting by regulators. However, a growth duty performance framework, as proposed in the White Paper, does not fit the bill. Regulators should also be subject to regular performance evaluations, as we recommended; these reviews should be made public to ensure transparency and accountability. To ensure that these are effective, we recommended, as the noble Lord, Lord Hollick mentioned, establishing a new office for regulatory performance—an independent statutory body analogous to the National Audit Office—to undertake regular performance reviews of regulators and to report to Parliament. It was good to see that, similar to our proposal, the Institute for Government called for a regulatory oversight support unit in its subsequent report, Parliament and Regulators. As regards independence, we had concerns about the potential politicisation of regulatory appointments. Appointment processes for regulators should be transparent and merit-based, with greater parliamentary scrutiny to avoid politicisation. Although strategic guidance from the Government is necessary, it should not compromise the operational independence of regulators. What is the new Government’s approach to this? Labour’s general election manifesto emphasised fostering innovation and improving regulation to support economic growth, with a key proposal to establish a regulatory innovation office in order to streamline regulatory processes for new technologies and set targets for tech regulators. I hope that that does not take us down the same trajectory as the previous Government. Regulation is not the enemy of innovation, or indeed growth, but can in fact, by providing certainty of standards, be the platform for it. At the time of our report, the IfG rightly said: “It would be a mistake for the committee to consider its work complete … new members can build on its agenda in their future work, including by fleshing out its proposals for how ‘Ofreg’ would work in practice”. We should take that to heart. There is still a great deal of work to do to make sure that our regulators are clearly independent of government, are able to work effectively, and are properly resourced and scrutinised. I hope that the new Government will engage closely with the committee in their work.

19:04:00

My Lords, I have the honour of serving on the committee that produced this report, which was chaired superbly by the noble Lord, Lord Hollick, and is now chaired by the noble Baroness, Lady Taylor—both of whom we will hear from today. We were very fortunate in our staff, who achieved the almost impossible against excruciating timelines. To illustrate the points that I will make with one example, I will reprise the committee’s experience with the water industry. The initial objective given by the Government to the regulator and thence to the water companies was the production of clean, cheap water—and that happened. Privatisation raised some finance but the investors’ objective was to deliver profits to their own stakeholders; that happened too, through financial engineering that its regulators did not understand or question. So long as the initial objective—cheap, clean and plentiful water—was being met, the water companies were largely left to go their own way. The result? Investment for the long term was ducked, sewage discharge facilities were abused and monitoring was inadequate until environmental objectives gained prominence and a combination of civil society, the media and the committee’s inquiry revealed that Ofwat, the Environment Agency and Defra had been both diffident and outplayed in their dealings with the water companies. Thereupon, water companies’ directors were lambasted for taking bonuses while polluting rivers and their investors were criticised for sharp practice. The regulators, exposed as complacent, imposed swingeing fines on water companies—costs that will ultimately fall on the consumer, as will the many billions for overdue investment in a catch-up that will probably take a quarter of a century or more. Meanwhile, investors have taken fright, some water companies face bankruptcy and there is uncertainty as to whether the water companies and their regulators are even up to the job of delivering the projects needed. All this reflects a combination of poor and shifting objectives from government while complacent departments and underskilled, under-resourced regulators were outsmarted by the very businesses they were supposed to be regulating. This brings me to my two points. First, the inherent tensions between independent regulators, the Government, consumers and delivery organisations—often with sophisticated investors—are characterised by divergent stakeholder objectives that alter over time and are not clearly prioritised. Regulators must work robustly with stakeholders while remaining independent, vigilant and inquisitive, but they also need skills ranging across both technical and financial areas. Despite the concerns that have been raised over the executive pay at regulators, the report highlights that skills gaps and resourcing at competitive financial levels are serious issues in some of them. It would therefore be helpful to hear from the Minister what plans the Government have to ensure that regulators can access a full range of skills, possibly shared between regulators—for example, in private equity financial engineering. Before I touch on my second point, which covers regulatory accountability to Parliament, let me say that I support the report’s finding that such examination should systematically include relevant government departments whose guidance and interaction with regulators are vital determinants of their effectiveness. They should be automatically and fully in scope, rather than seeking to brush aside the inquiries from our committee. Returning to the regulators, the question is, “Who watches the watchdogs?” The answer is, “We do”. However, with 90 regulatory bodies—perhaps considerably more—there is a simple capacity issue. In theory, every regulator should come before Parliament at least to present its annual report, be examined on it and have agreed actions followed up, but that just does not happen. Consequently, as the noble Lord, Lord Hollick, pointed out, interaction between Parliament and the regulators is typically reactive—that is, not preventing problems but seeking who is culpable afterwards. It is not systematic: the examination of those who do get called in is useful, but inquiries then hasten on to the next pressing matter and follow-up is far too limited. A key recommendation of the report is to create an independent office for regulatory performance, as has been touched on, in order to spread the load and move towards a systematic approach rather than a reactive one. Before the election, the Labour Party said, as others have mentioned, that it would create a new regulatory innovation office with an emphasis on removing delays in regulators’ approvals of business proposals, along with strengthening the Regulatory Horizons Council. Getting to grips with performance means constant vigilance, not complacency, and—I underline this—access to the necessary skills to get right down in the weeds on a whole range of technical and commercial areas. If such a body can both speak hard truths to government about its continuous responsibilities for clear prioritisation of objectives and bring practical help to parliamentary committees in systematically holding regulators to account, I would welcome it. It would therefore be very helpful to have a detailed update on the Government’s plans when the Minister comes to wind up.

19:10:00

My Lords, I congratulate my noble friend Lord Hollick on securing this debate and his outstanding introduction. This report, Who Watches the Watchdogs?, is the crowning glory of his term as the inaugural chair of the Industry and Regulators Committee, to whose establishment he did much to contribute. The standing of the committee, which is recognised by the Institute for Government, as I shall refer to later, owes much to his term as chair. Like the noble Lords, Lord Clement-Jones and Lord Cromwell, I was proud to be a member of the committee at the time of this inquiry, and continue to be a member under the excellent chairmanship of my noble friend Lady Taylor of Bolton. Who among us has not felt frustration at the burden or impact of regulation, whether as consumers or in our business or professional lives? That, I suggest, is the result of bad regulation, not the principle of regulation, and the purpose of the committee’s inquiry was to identify ways in which regulation could be made consistently better. Further, like the noble Lord, Lord Clement-Jones, I believe that good regulation is a key determinant of the success of a dynamic social market economy. One of the most striking pieces of evidence that the committee heard was from Virginia Acha of the pharmaceutical group MSD. She argued that, if you look around the world, there is no country in which there is a thriving life sciences industry that does not have a strong pharmaceutical regulator. What is true for life sciences is true for other industries and sectors, even or particularly those that are complex and/or fast changing. For that reason, I disagreed with the previous Conservative Government’s policy of delaying overarching regulation of AI and look forward to the Labour Government introducing legislation as soon as possible, drawing where appropriate, I hope, on the Private Member’s Bill introduced in the previous Parliament by the noble Lord, Lord Holmes of Richmond. The most significant of the many good recommendations in the committee’s report is the establishment of an office for regulatory performance to improve Parliament’s ability to oversee regulators and hold them to account. As my noble friend Lord Hollick also noted, two months after the report was published, the Institute for Government published its own valuable report on the specific issue of the parliamentary scrutiny of regulators. It proposed a regulatory oversight support unit as its solution to the same challenges that the committee set out to address through the office for regulatory performance, as well as suggesting that the committee should seek to involve members of the House of Commons in its proceedings on a regular basis. This last suggestion feels to me to be way beyond my pay grade, although I would welcome it. On the difference between the committee’s advocacy of the office for regulatory performance and the Institute for Government’s recommendation of a regulatory oversight support unit, I am torn between a loyalty towards the committee of which I am a member and feeling that the pride of co-authorship should not be allowed to get in the way of achieving, as soon as possible, a practicable and cost-effective solution. Can my noble friend the Minister say whether the Government will, alongside the proposed establishment of the office for regulatory performance, also explore, with both Houses of Parliament, the best way to strengthen Parliament’s scrutiny and holding to account of regulators, drawing on the work of both the Industry and Regulators Committee and the Institute for Government?

19:14:00

My Lords, I congratulate the noble Lord, Lord Hollick, on the work of his committee in producing such a comprehensive and insightful report. It has brought into focus an important issue that has a huge impact on the wider public. Many years ago, I worked at the Financial Services Authority at its foundation. A common refrain from commentators, frustrated with democratic politics, is, “Things would be so much better if only experts were in charge”. However, I suggest that the proliferation of regulators throughout the United Kingdom has tested that theory, and the committee’s report provides ample evidence of the trade-offs inherent in delegating matters to regulators. As many in this House will know, decision-making in government consists of an endless flow of problems. These problems, almost without exception, involve distributional trade-offs between competing voices in society, each of whom has a legitimate claim on public resources. Every decision creates winners and losers: those who stand to gain or suffer from the effects of public policy. That is why I welcome the committee’s recommendation that, where decisions necessarily involve distributional trade-offs, there should be some facility for regulators to seek guidance from the Government as to how to proceed. There is a good case for making that facility more formal. The only plausible qualification for taking distributional decisions is democratic consent. Accountability to the electorate is the only effective deterrent for decision-makers to resist the temptation to serve factional interests over wider public interests. Since 2008, the Bank of England has engaged in almost £1 trillion-worth of quantitative easing. In evidence to the Economic Affairs Committee of this House, Bank officials stated that they “hope”—their word—that the effect of this stimulus would be to inflate existing asset prices, making asset-holders richer and thus prompting them to spend more money. That is a distributional decision, the consequences of which impact on us all, and one which Parliament played no role in authorising. I therefore also welcome the committee’s recommendation that the accountability of regulators to Parliament must be strengthened, although I doubt whether the committee’s recommendation for yet another statutory body will enhance that accountability. The power of regulators is supposedly curtailed by their having clearly defined statutory duties that limit their freedom of manoeuvre. I fully agree with the committee’s finding that many regulators today suffer from a proliferation of conflicting statutory duties that read more like shopping lists than legal direction. However, when a regulator catastrophically fails to exercise its statutory duties, there are seldom any consequences. The 2008 financial crisis was unambiguous evidence of the failure of the institutions responsible for supervising the financial services sector, yet the central culprit of that failure—the Financial Services Authority—was simply rebranded, with some of its responsibilities moved down the street to the central bank. The bulk of its personnel did not change, nor did their working practices. The very culture that gave rise to such failure was left to fester, and the FCA can often seem to take a greater interest in the diversity of the board members of those it regulates than it does in the macroeconomic risks arising in the financial services sector. The report also makes a number of recommendations about the appointments to regulators’ boards, including the timeliness of such appointments. This is an entirely fair criticism, but, having had some experience of such appointments inside government, I highlight that the data about these important appointments is often woeful. In the then BIS department, it took officials almost six months to pull together the data on upcoming appointments. This is important in the appointments to regulators’ boards, since those who are most qualified to undertake these roles will almost certainly have conflicts of interest and will need to be approached in good time and, often, persuaded to apply. They are not the sort of people who will check the public appointments website, so it is vital that the departments give such appointments the attention that they deserve, with officials of appropriate seniority in charge. I close by emphasising that regulators, with few exceptions, seem to have fallen prey to the temptation of governing not in the wider public interest but in the factional interest of those they apparently exist to regulate. A different incantation of statutory words cannot resolve this. The only answer, as the noble Lord, Lord Hollick emphasised, is for our democratic decision-makers to play a more meaningful role in the regulation of the British economy.

19:19:00

My Lords, it gives me great pleasure to take part in this debate and to congratulate my noble friend Lord Hollick and his committee on a most excellent report. I was not a member of the committee, but sometimes I felt I was a lone wolf in challenging HS2 and other things over their costs over the past 10 years because there was no regulator. What struck me was that, on page 5 of the report, near the bottom, there is an interesting paragraph which says: “Ministers and Departments responsible for specific regulators should be subject to scrutiny … the Committee was disappointed by the Department for Business and Trade’s limited engagement”. I think that is probably putting it mildly. It probably did not turn up at all. The same applies to the Department for Transport in my fights with it. I have come to the conclusion that there may be a difference between the way that regulators can regulate commercial companies and the way that they try, sometimes successfully, to regulate government departments. In the time available, I shall concentrate on the Department for Transport. It has sat back and seen the capital cost of HS2 go up from £37 billion to £180 billion. That is quite a jump over 10 years. When you try to challenge it, it all gets very difficult. I tried the PAC and the National Audit Office, and they were busy, as one might expect. So, I wrote to the Cabinet Secretary to ask him to investigate whether Ministers had complied with paragraph 1.3 of the Ministerial Code by failing to give an accurate and truthful account to Parliament, knowingly misleading Parliament and failing to be as open as possible with Parliament and the public. The answer to all of those was no. Simon Case, the then Cabinet Secretary, instead of doing what I asked him to do, asked the Permanent Secretary of the Department for Transport to respond. Unsurprisingly, she said everything was fine—but she would because was it her department I was challenging. Then I was told by the Cabinet Secretary that he could do nothing unless the Prime Minister agreed. The Prime Minister at that stage was Boris Johnson, who liked HS2, so there was a circle of nobody doing anything at all and just letting this thing flounder until, finally, the Treasury was persuaded that my costs were likely to be closer to what was going to happen than those the Department for Transport was producing, and the Prime Minister then cancelled most of HS2. Whether we think that is a good thing or bad thing does not really matter, but it demonstrates that there does not seem to be any way of challenging the Department for Transport unless it is through Parliament. As the noble Lord, Lord Cromwell, said, that might be a good idea, but you have got to get Parliament to do it, and that is quite hard work. My preference would be for the House of Lords to be able to do it as well as the House of Commons because we have a bit more time. This is a good report. I think there are many other bits of regulation that one could talk about—for example, nuclear power stations, the Office of Rail and Road, which does not look at road safety, and many things like that. I think an office of regulatory performance would be a very good start, and I hope that when my noble friend responds she will give it an amber, if not a green, light.

19:24:00

My Lords, it is a pleasure to take part in this debate. I congratulate the noble Lord, Lord Hollick, on his excellent introduction to the debate and thank him and the committee for an excellent report that covers so much ground in such clarity and detail. “Who watches the watchdogs?” has been the cry over centuries of human societies, and it is never more applicable than today with the proliferation of regulators covering all aspects of our economy and society. Performance, independence and accountability are exactly the three points on any tripod to get into the issues surrounding how in the UK we regulate in the 21st century. The recommendations are clear, achievable and relevant, and I agree with all of them. The themes running through the report are equally clear. There is a sense that it is as good as pointless—worse, harmful—simply to add more statutory objectives to regulators in the belief that this would impact performance and produce a better result for the market or consumers. Similarly, some regulators are able to fund themselves through levies and fees, and others have to go with their hand out to government. That financial structure must impact on the way that they operate, through no fault of their own. The cry I hear running through the whole report is for clarity, consistency and coherence across the regulatory landscape. I agree entirely. This is never clearer than when we come to artificial intelligence where, currently, there is no regulator. The previous Government had the inadequate approach of writing a letter to all regulators to ask them what they intended to do when it comes to artificial intelligence. Will the Minister say what this Government’s approach will be to get the right regulatory framework for AI? I would certainly like to see an AI authority to review many of the provisions in my AI Private Member’s Bill, and I thank the noble Viscount, Lord Chandos, for his kind words about it. When I say an AI authority, I do not mean a behemothic regulator covering all aspects of AI; I mean a right-sized, agile, nimble and, crucially, horizontally-focused regulator to look across all the existing regulators to assess their competence, address the issues, challenges and opportunities of AI and identify the gaps where currently there is no recourse. For example, in recruitment, if you find yourself on the wrong end of a recruitment decision, often without even knowing that AI was in the mix, there is currently nowhere in the regulatory landscape to seek redress. Similarly, we need an AI authority to be the custodian of the principles we want to see, not just for the right-size regulation of AI, but going further than that with an ability to transform the way we regulate across the whole of our economy and society and to look at all legislation to address its competence to address the challenges and opportunities of AI. Will the Minister say where the Government currently are with the regulatory innovation office? What will be the scope? How will it be funded? What will be its first tasks? Does she agree that it is high time that we had an AI authority if we are to gain all the economic, social and psychological advantages and benefits of AI while being wholly conscious and competent to address all the risks and challenges? I suggest that if we had such an AI authority, it would have not just a positive impact on how we go about regulating AI but could improve how we go about regulation and regulators across the piece, not just positively impacting AI, not just asking the question “Who watches the watchdog?”, but enabling those watchdogs to be more, enabling them to be guard dogs and to be guide dogs, and, crucially, if the guard dog and the guide dog fail, empowering them to show their teeth.

19:29:00

My Lords, it is an absolute pleasure to follow the noble Lord, Lord Holmes, not just because I am going to speak thematically, alongside him, but because he speaks so wonderfully. I thank the committee for its excellent report, and the excellent introduction by its chair, the noble Lord, Lord Hollick. I will restrict my remarks to two issues: the AI skills shortage across government and regulators, and the recommendation for a Joint Committee of both Houses to oversee digital regulation. I refer the House to my interests, in particular as adviser to the Institute for Ethics in AI at Oxford and as chair of the LSE’s Digital Futures research centre. AI technology is not new, and nor is competition for digital expertise to support public policy. However, in recent years, we have seen a raft of digital regulation across data, competition, safety, consumer products and so on, as well as a step change in the scale at which AI is being deployed across business, public services and direct to citizens. Together, these have created an eye-watering competition for AI skills. The US and China dominate the charts of AI talent, together currently employing 75% of highly skilled workers; that is up from 58% in 2019. One sector analysis found that there are only 10,000 people in the world with the kinds of skills that new applications of AI need. I ask the House to do the maths: if the US and China have 7,500 of those people, that leaves very few for the rest of us. What was once an issue concentrated in the tech sector, or in businesses with complex delivery or service functions, is now an issue for everyone, including the regulators. Increasingly, we hear government Ministers suggest that AI is the tool by which they will reform the NHS, justice and welfare, and that it is central to their growth agenda. This requires regulators and government itself to enter an intensely competitive market for skills in which they either pay eye-watering sums to attract talent or outsource to companies, most often headquartered outside the UK, with which they frequently make data sharing and processing arrangements that accrue long-term value disproportionately away from the UK. There are a number of actions that government might consider, from funding graduate programmes to retraining professionals in associated fields or adding digital skills to those with domain expertise, compulsory training for civil servants and government lawyers, attractive packages for foreign nationals, and so on. But without a concerted and urgent effort, our hopes to be a centre of innovation, and for the transformation of public services and functions of government, such as drafting legislation or fulfilling oversight functions, will be blighted by a lack of access to adequate skills. This leads neatly to my second point. The pre-legislative committee on the online harms Bill, on which I was privileged to serve, recommended a Joint Committee of both Houses to oversee digital regulation, setting out five primary functions for that committee: scrutinising digital regulators; scrutinising government drafting of legislation about digital technologies; reviewing relevant codes of practice; monitoring new developments such as the creation of emerging technologies; and publishing independent research or whistleblower testimonies. During the passage of the Online Safety Bill, the data Bill and the competition Bill, the creation of a Joint Committee was supported by Members of both Houses and from all parties, most notably championed by the noble Baroness, Lady Stowell, but including the Minister herself. There is not time in this debate to go into detail about emerging gaps between the intentions of Parliament and digital regulators, the speed of regulatory codes versus the speed of technological development, the twin evils of hacking and scraping of intellectual property, commercial access to publicly held data, or the ferocious lobbying of government and regulator by the most powerful companies in the world. However, along with the issues raised by the report of conflicting objectives, inadequate expertise in government and regulator, and the habit of information overload instead of transparency, each of these things would be well served by Parliament having oversight and expertise from dedicated committee members and staff. This is a time in which digital solutions, particularly those driven by AI, come before the House in ever greater numbers, with unprecedented impact on every area of public and private life. If we do not ourselves grasp the problem of skills, we will squander our sovereign resources and find ourselves renters of services and products that should be built in the UK. If we do not improve our oversight of digital regulation, we will squander our chance to be a rule-maker and not a rule-taker of the new world.

19:35:00

My Lords, I congratulate the noble Lord, Lord Hollick, on his opening speech, which was very good, and also congratulate his committee on this report, which was extremely interesting. If Who Watches the Watchdogs? is to have an impact, we in your Lordships’ House have a responsibility to hold those watchdogs to account. The report highlights a lot of challenges, but the key challenge for the new Government is to ensure that real change actually happens. It is very easy—well, perhaps not easy—to produce a report, and we produce reports and they are then often ignored. As the Institute for Government says about the infected blood scandal: “Past inquiries, including the high-profile Mid Staffs inquiry, have put forward similar recommendations on culture, candour and patient safety. These have not, however, resulted in change.” We have 90 watchdogs, a library full of regulations, and all supported by some very high-level civil servants, probably drawn from our best public schools. It is a puzzle as to why we have had Grenfell, infected blood, sub-postmaster prosecutions, Hillsborough and the PPE contract scandals. It seems that here in this country, ordinary people can die but those responsible never get jail time. Ordinary people can lose everything but will have to wait decades for compensation, while the CEOs enjoy bonus payments and retirement cheques, and never have to worry about paying any money back. It seems that ordinary people take pay cuts for years but the profits for energy companies stay excessively high. Why do the shareholders of water companies get billions in dividends while those of us paying the bills pay the interest on their debts? If noble Lords want to know why Britain has more billionaires than ever before but collapsing public services, it is because many modern fortunes have been built on regulatory capture, privatised services, and a system of corruption designed to separate taxpayers and bill payers from their money. I was shocked to discover today that water companies have a duty to not pay shareholder dividends if that stops them delivering improvements and doing their jobs. What has Ofwat being doing for the last few decades? Why do this Government think that this is going to suddenly change if they leave Ofwat in charge? This report examines the many and varied reasons why watchdogs are failing, but I want to focus on two that the proposed watchdog of the watchdogs is seeking to address. First, there is regulatory capture. The water industry is riven with revolving doors, as Ofwat is joined by water company bosses and water companies co-opt ex-Ofwat chiefs. The deals are arranged between an overstretched Environment Agency and water companies to keep the industry solvent. Is the Environment Agency captured by business interests rather than doing its job to protect the environment? This weekend, I visited Lake Windermere to see the well-publicised problem of pollution there, and I heard some distressing reports. On the August bank holiday in 2022—when, as you can imagine, a lot of holidaymakers were making their way to Lake Windermere—around the lake, six miles of blue-green algae were clearly visible in the north basin. World Health Organization limits were breached, yet the Environment Agency issued no warning because of “reputational risk”. On 15 May 2024, United Utilities spilled 10 million litres of untreated sewage into the lake in an eight-hour period. Again, the Environment Agency response was inadequate. I argue that within the definition of “national park” there should be a high standard for the water in that park, which does not happen at the moment, and that should prevent sewage dumps and other pollution. Lake Windermere could be a pilot for that idea. The Grenfell Tower Inquiry report points out the problem that successive Governments have failed. It seems that the cutting of red tape was done with a carelessness that is absolutely incredible. Regulations can be influenced by the power of money. Private developers accounted for around a third of donations to the Conservative Party for about a decade, and lobbying by developers and the construction industry undoubtedly played a part in the shameful Grenfell cladding scandal and the deaths of residents. I say to the Minister opposite and to the new Government: please listen to other voices. If you hold a meeting with the water companies, meet Feargal Sharkey to get a counterview. If you meet Post Office bosses to discuss compensation for sub-postmasters, please also meet Mr Bates. If you get a Civil Service briefing on a scandal such as infected blood, personally check what the victims have to say. You have to listen to other voices. It will not make for an easier life but it will make for wiser decisions.

19:41:00

I was lucky enough to serve on the economic committee when the noble Lord, Lord Hollick, was chairing it, so the quality of the report and the skill with which he introduced it tonight came as no surprise to me. I shall pick up what it says about transparency and accountability and draw on two examples to illustrate the point made very powerfully in the report at paragraphs 83 and 85. I shall begin with Ofwat, about which the noble Baroness, Lady Jones, has spoken so eloquently. The Government have said they are reviewing regulation of the water sector. Because of the financial crisis at Thames Water, there is now a Water (Special Measures) Bill before the House. However, I wonder whether the Government will also review Ofwat’s announcement only a week after the election, clearly made with pride, that it had knocked £16 billion off the water companies’ investment plans for the next five years. The noble Lord, Lord Hollick, referred—correctly, in my view—to catastrophic underinvestment in the sector. It does not sound as if the water regulator agrees. Perhaps the Minister could tell us whether the decision announced a week after the election stands. It seems a little odd, given the national revulsion against polluted rivers and beaches. One wonders whether the regulator was not perhaps operating under an injunction from the previous Government to give paramount priority to keeping prices down. We do not know whether that is the case because all such injunctions are not necessarily public. Like the committee, I think that is wrong. I have the same concern about Ofgem, the energy regulator, about which I know rather more because throughout the Cameron, May and Johnson years I was on the board of a company running extensive electricity networks. Ofgem cut back its investment plans in every one of the years that I was on the board, by over £1 billion in some years—it was not just us; our competitors fared no better—although everyone agreed that on present plans the national electricity grid would be quite inadequate to meet future demand. Think data centres, road transport, rail transport, domestic heating and net zero. The biggest problem is not generation but distribution. I do not know whether the Government, anxious to keep today’s prices down, were urging Ofgem not to take a long view, or whether—although this is a little implausible—they were simply looking the other way, passively allowing Ofgem to forget about tomorrow. However, we should have known and the country should have known. The report by the noble Lord, Lord Hollick, is spot on when it says at paragraph 83: “The Government’s strategic steers and policy statements to regulators often do not provide adequate clarity on how to make trade-offs between their objectives, especially in relation to political and distributional issues, such as balancing the affordability of utility bills with the need for future investment … The Government must not duck responsibility by delegating political or distributional decisions to regulators without clear objectives or any sense of priority”. I agree with that; it has to be right. Ofgem says on its website: “We are a non-ministerial government department and an independent National Regulatory Authority”. Is there not a contradiction there? How independent can a government department be? It continues: “Our role is to protect consumers now and in the future by working to deliver a greener, fairer energy system”— not a clearer, fairer and adequate energy system. Must protecting consumers now mean curtailing tomorrow’s consumption? I do not think so. Clearly there is a balance to be struck but, equally clearly, striking it is a political decision that should be public—announced to Parliament and accountable to Parliament. He who pays the piper calls the tune, but he must not pretend that it was the piper alone who picked it. Also, Mrs Badenoch really should not have refused to give evidence to the committee.

19:46:00

My Lords, when I put my name down for this debate, I suspected I would learn more than I imparted to the House. What dragged me towards this debate—that moment when you take that rare parliamentary step of getting out of your own little corner—was that, when I looked at the title, I remembered my experience many decades ago when I was the baby on the then water Bill. Indeed, when I explained this to my noble friend Lord Teverson, he asked whether I was on some sort of day release or child workforce project for Parliament. I remember being told at the time that the regulator would work and would cover everything, but we have discovered that it did not. The noble Lord, Lord Cromwell, has pulled that apart for us and shown that the regulator did not have the structure, the incentive or the vision to do anything about it, but we did not know that. The regulator just jogged on, doing its inadequate job and delivering on its original remit, and no one paid any attention until it was too late—until we had people making reports to the press, which then made their way to Parliament, and by that point you are often basically playing catch up and mend. The conclusion that I have come to is that the difference between a regulator and red tape is that the work is the same and you decide whether it is red tape or useful regulation. There are many other regulatory bodies. As my noble friend Lord Clement-Jones pointed out, there is some debate about how many we have. Surely that is something that Parliament could sort out. Is it 90 or 200? Is there some subset below 90? Surely that is something to find out. The central idea of an office for regulatory performance is a crucial one. It would be a much better way of allowing Parliament to see what was not working. If you have to come and report to Parliament, you will find out. When it comes to regulation or red tape, I do not think that many people in either House are basically evil and out to get everybody else. They may have different views and objectives but if you can say, “Something isn’t working, so please do it differently”, you stand a good chance of somebody engaging. It is just one of those things that happens. The noble Lord, Lord Holmes, pointed out something that we have not really looked at, because we did not really understand it until comparatively recently, and when it comes to new areas we have to do something. Also raised in this report is: do not just stick something into an existing body, if it has not got the structure to handle it, because everybody is panicked. Having looked at this report, I think it seems awfully like common sense to anybody who has been around Parliament for a while. If you do not know that something has gone wrong and it is not in the press, Parliament will not discuss it, so the regulatory framework carries on until something catastrophic happens and there is real public failure, or until it becomes politically desirable or fashionable for the party in power to address it. Those things are both probably undesirable, because somebody comes through and makes sweeping changes that may not make it any good, or they are responding to a disaster. Surely some form of reporting on how things are managed is very sensible. I hope that when the noble Baroness, Lady Jones of Whitchurch, replies she will say that she is looking at this favourably. It does not have to be this scheme, but there should be something that reports back and lets us know how efficient things are. We are not asking for some revolution here, just for better monitoring of our current system.

19:51:00

My Lords, I am delighted to be able to take part in this debate, but before I start I should declare my interest as an employee of Marsh McLennan, the insurance broker. I thank the noble Lord, Lord Hollick, and his committee for this report and believe that nothing but good can come from this debate around the performance, independence and accountability of the UK regulators. I know that it was welcomed by many within London’s commercial insurance and reinsurance markets. The committee’s report was particularly welcome in the context of the Financial Services and Markets Act 2023, which established a number of new accountability metrics and mechanisms, including a secondary objective for international competitiveness and growth for the FCA and PRA. These two regulators are now required to publish annual competitiveness and growth reports, the first of which were published in late July. These reports represent an important step forward and illustrate how the new accountability measures introduced are starting to engender a culture change in these regulators. Time will tell of progress. They also provide an opportunity for noble Lords, via the Financial Services Regulation Committee, to scrutinise the performance of these two regulators. To take advantage of dynamic changes, businesses need to be able to respond swiftly to new opportunities and risks. They will have many choices about how and where to do that, so the speed, responsiveness and willingness of the regulators to support these innovations are vital factors. If London is to remain the global centre of risk transfer and retain its reputation for innovation, it needs to be able to offer customers all the tools available—tools used in competitor jurisdictions. The noble Lord, Lord Hollick, touched on two topics, captive insurance and insurance-linked securities, which I would like to go a little further on. I am particularly interested in the potential of captive insurance, a rapidly growing global market estimated by Marsh McLennan to reach $161 billion by 2030, and of which the UK has no share. Core to its success will be the approach by the regulators; the regime needs to be designed and structured in a balanced and proportionate way. I urge the regulators to learn from their experience of the ILS market, an area where the UK market has broadly stalled—unlike Singapore, which copied the UK’s framework in 2019, since when 28 transactions have been launched thanks to the proactive work of its regulator, the MAS. I welcomed the inclusion of a consultation on the creation of a UK captives regime in last year’s Autumn Statement. I understand that significant progress had been made prior to the general election about that consultation nearing publication. Pressing ahead and establishing the UK as a relevant captive domicile would mean that the UK could take advantage of a market that is growing rapidly, contribute to growth and bring back taxpayer capital currently held in the captives of UK public bodies based offshore. I hope that this House will continue to review these essential topics in the years to come. We have an important part to play in making the FCA and PRA fulfil their primary and secondary objectives. I finish with two questions to the Minister. First, does she agree that, given that a number of UK public sector bodies currently base their captives offshore, the creation of a UK regime would be a positive step in bringing back taxpayer capital to the UK? Secondly, can she provide the House with an update on the Government’s work in preparing a consultation on the creation of a UK captives regime and, furthermore, will she prepared to meet me and other noble Lords interested in the potential of this market, to seek our views? We all want growth, with the UK economy thriving and driving our nation’s prosperity.

19:56:00

My Lords, I was not on the committee and therefore would like to allow myself a few mild criticisms of a very thought-provoking report. I will touch on three aspects of its central problem: “Who watches the watchdogs?” First, a bit of history might be helpful. In its present form, this challenge was created by the Thatcher reforms of the 1980s, which produced a new dividing line between the state and the private sector. Previously, the Government owned the public utilities and were accountable to Parliament, while the private sector was in the hands of private companies that were in theory accountable to the market. That was the model, anyway, but it was swept away by the reforms of the 1980s. Injected into the private sector by Margaret Thatcher and her successors were some big natural monopolies, which had to be regulated to protect the consumer and the general public, so we got Ofcom, Ofgem, Ofwat and so on. Now there are altogether 90—or is it 200?—regulators. No one seems to know, but a massive quangocracy has arisen and with it the problem to which the report speaks: people can replace their elected representatives but they cannot vote out bad regulators It would have been helpful had the report given a bit of this history, because that would have helped us to think more clearly about which bits of the economy are best in the private sector and which should be in the public sector. For all its talk of efficiency gains and protecting the consumer, privatisation was a euphemism for the sale of public assets, the main purpose of which was to raise revenue, reduce public debt and thus enable tax cuts. In short, it was a Conservative programme for shrinking the state, dressed up in the clothes of scientific economics. Any historian probably has to take some view of that kind. One way of tackling the problem of accountability is to rethink the present boundary between private and public, particularly to ask whether it makes sense to keep some of these hybrids, with their layers of regulators, in the private sector at all. The present division is based on no principled red lines. It is directly implicated in the decline in total investment as a share of GDP and the growth of inequality, but that is a matter for another debate. I do not blame the report for taking the world as it is and trying to improve it. I do not think I need to limit myself to that. My second point is mandate creep, which is something the report pays a lot of attention to. It is the loading of more and more functions on to the regulators, obscuring the character of their remits. As the report rightly says, regulators are increasingly told to “have regard to” or “take account of” or “consider” matters not in their original mandates. The general problem is illustrated by the Bank of England. The Bank of England Act 1998 mandated it to maintain price stability. The Banking Act 2009, and then the Financial Services Act 2012, added a macroprudential remit. On top of that, in 2021, there was a mandate to facilitate the transition to net zero. Here we have a clear example of mandate creep. In 2021, when I was on the Economic Affairs Committee, I strongly agreed with the noble Lord, Lord King of Lothbury, that the new net-zero mandate would set up a conflict with the Bank’s primary objective of maintaining price and financial stability. Not surprisingly, Bank officials welcomed this increased degree of ambiguity, which allows them to interpret their mandate as they see fit. What exactly is it that they are to be held accountable for? My final point is on transparency. Telling the truth to power? Not if your prose is so obscure that the truth disappears in a forest of impenetrable jargon. I am rather disappointed that the report is heavily sprinkled with acronyms, which are probably unknown to any but specialists. So-called transparency mechanisms, such as publishing board agendas, minutes, annual reports and strategic business plans, are not transparent to what used to be called “the man on the Clapham omnibus”—and not even to some parliamentarians. It is a fault that is very hard to cure. Clear reporting in very plain English should be a remit given to all regulators.

20:02:00

My Lords, I thank the noble Lord, Lord Hollick, for the way in which he chaired our committee and made sure that the work the committee has done has been purposeful. I will start by coming back—as the noble Lord, Lord Skidelsky, has just done—to why we have a body of regulators in the first place. Like the noble Lord, Lord Addington, I remember the passage of the Water Bill while I was in another place. We were told at that time that independent regulators were going to be needed to protect industry and business from too much political interference by Ministers. The idea was, as the committee was told in evidence, that independent regulators can support stability and business confidence by separating important decision-making from political considerations and the electoral cycle. The committee was, and still is, interested in just how independent our regulators really are. That raises some significant questions, as we have heard this evening. Are the regulators really given a clear remit? Are their statutory duties and objectives properly defined? The committee found that over time regulators have been given too many objectives, too many secondary objectives, and too many issues to which they “must have regard”. For example, the Office for Students was given seven general duties it has to consider. However, during our inquiry into the OfS, the regulator suggested that these duties do not necessarily have to be achieved, and the OfS merely has to show it has thought about these when making decisions. That is not a strong or clear basis on which to delegate power to an unelected body. This was clearly a cause for concern within higher education, the sector being regulated, especially when the OfS appeared not to be pursuing some of its duties, in particular in relation to institutional autonomy. In other sectors, we noted that both the energy and water regulators face trade-offs, as we have heard this evening, between their different responsibilities—the affordability of consumer bills, the necessity of providing secure supplies and the need to protect the environment. It is challenging, and who should actually decide on the right balance—regulators, Ministers or Parliament? Quite simply, the duties and objectives given to these regulators in legislation do not provide guidelines on how to prioritise between the objectives they are given and the balances that should be struck. Government and Parliament need to give greater thought as to how they assign objectives to regulators. I welcome that the Government are conducting a review into the objectives of utilities regulators. Could the Minister give us more information on the timescale of that and whether it might be extended? The power and influence that regulators have are very significant. It affects the lives of all of us and the viability and success of individual companies, and, indeed, our economy. It is therefore critical that regulatory bodies are accountable. They should be accountable to Ministers, where transparency is vital to ensure that there is clarity between the independent decisions of regulators and any political direction from Ministers. We cannot say that Ministers should not give directions, but when they do, there should be transparency. As we have heard already, we need better accountability to Parliament. We acknowledge that many Select Committees in both Houses do a great deal of important work across a range of issues, but there is no drumbeat of accountability so far as the regulators are concerned, and we need to do more. The committee called this an accountability gap, and in a democracy that is very serious. We advocated for the body that has been spoken of, which would be similar in purpose to the Public Accounts Committee, but on a much smaller scale. Independent regulators are here to stay. They have an important role, but we need changes so that their remits and responsibilities are clear; so that relationships with Ministers are clear and transparent; and so that they have a proper and appropriate degree of scrutiny, with Parliament playing a full role in this.

20:07:00

My Lords, I have not had the opportunity to welcome the Minister to her new position. Her work on the environmental side of things when she was on the Opposition Benches was exemplary, including how she worked with our Benches at that time. I wish her well in her role. I once accused my noble friend Lord Addington of having entered the House in short trousers, because of his experience here—the noble Baroness, Lady Taylor, was in the other place at that time—in terms of the water industry. With the way things are going, I suspect they may witness the full circle, not through legislation but through a lack of financial engineering and investment, of those organisations—some quite close to this building—suffering and coming back into public ownership of some kind. I found the report extremely interesting. The history the noble Lord, Lord Skidelsky, gave I found excellent as it put it in an interesting framework. The one thing that came to me from this report is that in this House we very much concentrate on primary legislation. We look extensively at secondary legislation. However, here we have another area, rule-making, which is below those tiers. It is one that is evidently quite untransparent and we need to shed light on it. That, in a way, was the most important message to someone who does not get involved in this area all the time. Having said that, for six years I was a board member of the Marine Management Organisation, one of the less known regulators of the seas around England. I congratulate the noble Lord, Lord Hollick, on his report. Like the noble Lord, Lord Kerr, I was absolutely astounded that the Secretary of State, Kemi Badenoch, refused—and was distinctly unco-operative with—the committee and, in effective, this House. It is important that Secretaries of State understand that this is a House of Parliament to which they are accountable, even though they are not Members of this place. We need to remember that. The noble Lord, Lord Kerr, is absolutely right about Ofgem. Over the last year to 18 months, it has generally been understood—even by the previous Government—that the national grid is unable to deliver net zero or what we are doing in terms of the offshore rounds and the various other areas of renewable energy, hence why this House pushed strongly for that regulator to be given an additional responsibility for net zero. It did not have that before; it therefore did not provide that basis operationally to deliver what the country required. I say distinctly that we on these Benches believe that regulation can be good. Sure, not all regulation, but this has to be said because regulation is so often seen as a burden on industry, economic growth and other areas. Generally, it is not, although bad regulation is clearly bad. It was always an irony that, during the Brexit discussions, we talked about “Singapore on Thames” as if Singapore is a rip-roaring, free-enterprise, absolutely-do-anything economy. It is not; it is one of the most regulated parts of the globe, as well as one of the most successful. A number of Members mentioned the examples of Grenfell, the financial crisis, and the fall of Northern Rock and the other financial institutions of this country, which have shown how dangerous getting rid of regulation—as rather did happen in the City prior to 2008—can be. The report mentions that we have abolished one other big regulator: the European Commission, which kept a close eye on certain areas. Secretaries of State and heads of department were very concerned about infraction procedures, but that has gone. As part of the trade and co-operation agreement, we now have the Office for Environmental Protection; I will come back to that organisation later on because it was rather ignored recently by the previous Government. We cannot have Governments without transparency; that is one of the key messages that comes out here. Let me go through one or two important areas that I learned about during my time at a regulator. One concerns independence and funding. The report mentions a divide between regulators that are independent of grant in aid by government and those that are not. I was in one that was completely dependent on grant in aid and was therefore careful about some of its decisions that it made on, in that case, Defra. It relied completely on that funding and its independence was very much impaired by that relationship. There should be a real emphasis on trying to get regulators to be, where they can, sustained through levies or other means; that is most important. One area where funding is important is enforcement; the report mentions enforcement on a number of occasions. At the end of the day, there is no point in having a regulator if it does not enforce. Clearly, you do not enforce straightaway—you warn, try to educate and do all those other things—but, at the end of the day, if someone transgresses and continues wilfully to transgress, you should be able to enforce. However, the cost of enforcement to regulators, particularly smaller ones, is often huge. In our case, we ended up subcontracting it to the Treasury under the proceeds of crime legislation. Fair enough—maybe that enforcement was done—but I strongly believe that we have an enforcement gap in this country. That is particularly true at the local authority level, which is not considered in this report but is one area that is of great importance because those who keep to regulations are discriminated against by those who do not. This is fundamentally wrong in terms of the way our economy should work. We have mentioned Ofwat on a number of occasions. It is the view of our Benches that, if a regulator publicly fails so catastrophically, I am afraid you have to get rid of it and change it. During the coalition Government, the FSA, which was mentioned by the noble Baroness, Lady Finn, was in effect abolished and replaced by the FCA and the PRA. I take the lesson that, if you abolish and change, you really have to change; you cannot just keep the same people in different positions. To us, Ofwat’s public reputation is dead, and it needs to be changed. On timing, I was particularly struck by how slow some regulators work, mainly because departments will not appoint. I applied to be a board member of the Environment Agency some time ago. I was on a shortlist of one and I thought, “I could be here”. Then they told me that I had to go and see the Secretary of State, who was Liz Truss at the time. The civil servants warned me that she could be difficult on occasion and that I had to be careful about how I handled that. Within literally 10 seconds of walking through the Secretary of State’s door, I knew that I was not going to get the appointment—it was quite obvious. I have no problem with that as I was probably not the right person; maybe that was the right judgment. What annoyed me was that it took two to three months to tell me that that was the case. I know from other boards that, exactly as the report says, departments look in their diaries and think, “Oh my goodness, so and so has come up for renewal for a three-year term and we’ve forgotten to do anything about it”. That has to change. It is key that funding is not just as independent as possible but sufficient for regulatory activity to take place fully. The Environment Agency has been an example of that in the past. Another example, with nutrient neutrality—that will be a topical subject again—is that the OEP was ignored by the previous Government. In future, will the Government take notice of the OEP’s recommendations, as they do of those of the Climate Change Committee, which is in some ways equivalent on the carbon side? I come back to my noble friend Lord Clement-Jones’s challenge: will we have an office of regulatory performance? What is the alternative to make sure that this area of important regulatory work functions?

20:18:00

My Lords, I direct Members to my register of interests, although I do not believe that I have any specific conflicts relating to this debate. I should admit that I am going through a planning process at the moment, so I can work from home; I will not raise the word “bats”, which will no doubt send shivers down the spine of anyone who has looked at regulation. I thank the Industry and Regulators Committee for its work in producing this important report. I thank the noble Lord, Lord Hollick, for his introduction to this debate and his chairing of the committee, which has been succeeded exceptionally ably by the noble Baroness, Lady Taylor. I very much enjoyed our interactions in the last few months when I was the Minister for Smarter Regulation. I welcome the Minister to her place and look forward to her replies. I look forward to hearing her clearly stating this Government’s commitment to better regulation. This is my first appearance on behalf of His Majesty’s Opposition and naturally I am extremely keen to play a strong part in holding this Government to account. I seized a copy of the Government’s response to Who Watches the Watchdogs?, sure in the knowledge that it would be full of holes and give me plenty of opportunities to challenge the Minister, and possibly even cause significant embarrassment to her so early on in her tenure. But as I read it, I was overwhelmed by a steady and growing sense of déjà vu, realising somewhat late in the document it was written by me, when I was Minister for Regulatory Reform. First, I praise the essence of the response in its balance and breadth, and I confirm that, as the noble Lord, Lord Clement-Jones, said, we supported the majority of all the extremely good points raised. I also take this opportunity to say how much I appreciated the work of the regulatory directive in the DBT, headed by Chris Carr. I am sure that the Minister and her colleagues will have a chance to work with it, because it really did excellent work in trying to introduce reforms to our regulatory environment and better understand it. It is important to state that I am personally very aware—as is my party, the Conservatives—that regulation is at the core of our high-functioning advanced economy, as the noble Lord, Lord Teverson, said. Consumers need to be protected, and we see how the failure of regulation and regulatory implementation can lead to devastating loss of life, as the noble Lord, Lord Clement-Jones, mentioned earlier. Markets need to operate effectively, and we must have frameworks that generate trust, without which we cannot function. But as the noble Lord, Lord Hollick, said, excessive regulation and the wrong standards—for example, ill-co-ordinated regulations, coming often out of departments, and a lack of effective collaboration between regulators, business, the consumer and the Government—have resulted in regulatory burdens costing the wealth of the nation tens of billions of pounds annually. We cannot ignore that—and I was particularly fascinated by the history lesson given to us by the noble Lord, Lord Skidelsky. As I discovered when I was Minister for Regulatory Reform, the long and short of it is that we love regulation. This House and the other place are designed to create regulations; that is what we are—we are legislators, and we are here to make regulations. I found it very difficult—as I am sure my predecessors did and my successor will, which is why I wish him so much success—to get my hands around the regulatory structures and reduce regulatory burdens, to make them more meaningful and effective. However, in light of this, I ask the Government for their view of the growth objective, which the noble Lord, Lord Hunt, mentioned at the beginning of the debate. We have not heard much about it during this debate, but it was introduced and recently confirmed to cover a whole raft of regulators. Frankly, it is central to how we believe that we need to proceed with regulatory actions. My first main question is whether the Minister will continue to commit the Government to the principle that regulation must always be proportionate and effective and that regulators must adhere to the growth objective passed into law earlier this year as a requirement for them to bear in mind when managing their affairs. It is clear from both the report and several consultations undertaken by the Department for Business and Trade—as well as from many good comments, some of them made by the noble Baroness, Lady Finn, in her excellent speech—that the entire regulatory landscape is confusing, with overlapping duties and a lack of clarity about those duties, layered over generations. Regulators are also often unsure of their relationship with government, so will the Minister confirm that her Government will take action to simplify and measure regulators’ duties? That has come up time and again, particularly in this report. Will the Government work to provide better assessment of the regulators themselves, as called for in this report, and work hard to ensure that strategic steers and better accountability to Ministers—and ultimately to Parliament, as the noble Baroness, Lady Taylor, raised—are now built better into the system. That was covered by a number of Peers, including the noble Lord, Lord Cromwell, and the noble Baroness, Lady Kidron. In my work, and clearly identified by this report, are issues surrounding the work of regulators. If we are to innovate and grow our economy—the noble Baroness, Lady Kidron, and the noble Lord, Lord Holmes, made a strong series of points about the importance of AI—and if we are effectively to police the market to ensure proper consumer safety, the people who lead and staff these regulators must have proper qualifications in monitoring. With this in mind, will the Government properly assess the competency of the regulators and ensure that they have the resources necessary to carry out their functions? That includes timely appointments of boards, where we would agree that Parliament should also have more effective opportunities for scrutiny and oversight. Too often, the cry is for more regulation or, on the other hand, deregulation. People used to come up to me and whisper furtively, “I’m so glad you’re Regulation Minister, let’s get rid of all regulation”. Other people would confront me in the passages here and come right up to me and say, “What are you doing? We need more regulation”. It is completely ridiculous—a bonfire of red tape, or whatever it may be, in reality has nothing to do with the quantum of regulation, more or less, and everything to do with the culture of regulation and how regulators themselves undertake their work. We heard a great deal about the failure of regulation in the water sector from many noble Lords today, but clearly that has nothing to do with a lack of regulation. The process of water companies to establish pricing now runs to more than 20,000 pages. It clearly has to do with the lack of clarity regarding the objectives, often a lack of expertise in the regulator and a belief in checking boxes rather than looking at proper outcomes, with a view that the regulator has only a limited role to play in making the sector function effectively and does not look closely enough at how to make it a success for consumers and the economy more broadly. To respond to these issues, and indeed many of the points raised in the report, the last Government issued a White Paper entitled Smarter Regulation, which was mentioned by the noble Lord, Lord Hunt. I have a copy here, signed by the team. It followed on from the now well-established smarter regulation framework, which, by the way, I assume that the Government have no plans to deviate from, and the context of which was the introduction of the growth mandate mentioned. In this document, there were 10 key principles designed to make the regulatory environment more effective. To point to a few, they were: clear guidance; transparency and accountability; the need to avoid unnecessary risk aversion; proportionality; and a focus on being highly pro-innovation, as the noble Lord, Lord Holmes, raised. All were absolutely central. They also included: far better collaboration between regulators; much better engagement with business and citizens, which is important regarding regulation as a service; a real focus on skills and capabilities; and more understanding of how regulations are applied at local levels, which will be particularly relevant in planning reform. I have a simple question for the Minister, if I may. Is this White Paper still a feature of the Government’s ambitions? How will the Government build on this important work? To some extent, some of the problems highlighted in this debate stem from the original work of departments in issuing directions and drafting new regulations. If we had more or better analysis of the cost of regulations, and assessment as to the impact on regulatory activity in business, we would be in a far better place than we are today. This brings me to the work of the Regulatory Policy Committee, headed by the very able Stephen Gibson. The work of this body has been too narrowly defined and its resources too thin to enable it really to aid Parliament to monitor the cost of regulations as well as the actions of regulators. There is talk of a super-regulator; this may actually be a very good compromise answer to that conundrum. We thoroughly support a review of this body, to increase its effectiveness, and I hope the Government will continue to ensure that its impact assessment processes continue to be a central feature of their own legislative process. In summary, will the Minister tell the House how she will comply with the response to the committee’s extra paper? Additionally, will the Government commit to continuing the work started by the White Paper on smarter regulation, especially when it comes to more funding and investigatory powers for the Regulatory Policy Committee, higher expectations on regulators to foster innovation, provide better service to business and collaborate more effectively with each other. Finally, will this Government, with all their commitment to economic growth, give proper credence to the process of the better regulatory framework and the now established principle of smarter regulation? I very much look forward to hearing from the Minister on these points and those raised in the excellent report under discussion today.

20:28:00

My Lords, I am very pleased to respond on behalf of the Government. I thank my noble friend Lord Hollick for tabling today’s Motion and congratulate him on the report of the Industry and Regulators Committee. As others have said, the report is a fine swansong for his very able period as chair of the committee. I am also grateful to other members of the committee and other speakers for their insights and remarks on this important topic. I am grateful to the noble Lord, Lord Skidelsky, for giving us a very short but important history lesson. It is important that we remember the context which started this whole process, through the natural monopolies that were created and the forced need for external oversight. What a journey we have been on from those days to where we have got to today, with all the complications of regulation that we are now confronting. This Government welcome views on how we best improve the performance and accountability of UK regulators and the frameworks to which they operate. This will support our ambition to build a pro-innovation, pro-worker, pro-wealth creation economy. I am therefore grateful to the committee for conducting its inquiry and producing this report, which focused on concerns about the functioning of the relationship between regulators, government and Parliament and made recommendations spanning issues across the regulatory landscape. I have heard messages from noble Lords today which echo many of the issues in the report: for example, the need for a review of regulator duties, with a view to streamlining duties and objectives and providing clear priorities; the need for strategic steers in how regulators handle any political and distributional trade-offs in implementing their duties; more attention to the skills and resource needs of regulators in the context of what they are being asked to achieve; the need for measures to support accountability, including a definitive list of UK regulators; and a greater emphasis on performance reporting from regulators, with metrics linked to outcomes. As the noble Lord, Lord Johnson, quite rightly identified, a formal government response was published in May 2024 as a supplementary document to the White Paper, Smarter Regulation: Delivering a Regulatory Environment for Innovation, Investment and Growth. This response proposed a number of non-statutory reforms to the regulatory landscape and worked towards addressing some of the recommendations in the committee’s report. However, I have to say that the response was written some time ago, and since then a new Government have been formed, so I think it is important to say that we will need to consider afresh our approach to all these issues. I should also say that I know that noble Lords will want to press me on the specifics of our reform agenda, but I hope they will understand that, at this stage, I am able only to outline a direction of travel; we are still working on a lot of the detail. However, what I can say is that the Government are determined to kick-start economic growth, working with industry and businesses to deliver economic opportunity. This of course needs to be supported by the right regulatory frameworks that foster competition, innovation and investment. Central to this will be a focus on ensuring high-quality regulation, both in terms of improving existing regulations and, where the bar is met, delivery of any new regulations necessary to support the Government’s missions. In addition to the interest from the committee and the comments we have heard today, noble Lords will know that there have also been numerous well-researched publications on regulatory reform led by a number of think tanks, including Progressive Britain. They too have set out concerns and recommendations on the performance and accountability of independent regulators. All of this is invaluable work in shaping the Government’s next steps. It goes without saying that regulators play a crucial role across almost all sectors of the economy, including the oversight of essential services and infrastructure; medicines and healthcare products; workplace safety; and the environment and financial services. Their work is seen and felt by consumers, businesses and the environment—by everyone. It is only right that we continue to evaluate how our regulators are functioning and drive improvement where needed to support our economic growth mission. In response to the noble Baroness, Lady Finn, and the noble Lord, Lord Clement-Jones, the Government of course have a critical role to play in setting that strategic direction and the outcomes that they want to see regulators deliver, so issuing strategic guidance in a consistent way is key to that delivery. The noble Lord, Lord Clement-Jones, and others asked about publishing a list of the UK regulators, with their responsibilities and their oversight. The White Paper proposed that a register be published, and we are considering how to take that proposal forward. The noble Lord, Lord Clement-Jones, the noble Baroness, Lady Finn, and others asked about getting the best possible people on boards. Many of these are regulated by the Commissioner for Public Appointments, but we are determined to reduce delays and improve those processes. I think we could all identify with the experience of the noble Lord, Lord Teverson, when he illustrated the problems that he encountered. The noble Lords, Lord Hunt of Wirral and Lord Johnson of Lainston, asked about and emphasised the growth agenda. The Government recognise the importance of well-performing and accountable regulators in our mission to kick-start economic growth. This is reflected in our plans to launch a new industrial strategy to build a more resilient economy, while ensuring that we have the right regulatory environment to go for growth at every opportunity. Regulators reporting on their performance will continue to play an important part, and the Government will set out their overall plans on performance to help deliver that growth agenda in due course. A number of noble Lords, including my noble friend Lord Hollick, stressed the importance of independence. The Government recognise the important role of regulatory independence, particularly in technical areas where outcomes depend on long-term decisions that sit outside of traditional political cycles. We know this is valued by businesses, investors and wider stakeholders. At the same time, we know that regulators differ in their degree of operational and policy independence, and that there is a role for government in providing that strategic direction and ensuring that regulators operate to the right duties. As noble Lords have argued, we must be alive to mission creep, and ensure that regulators’ duties are focused on what matters to business and to citizens. We are alive to the importance of these issues for all stakeholders. Indeed, the Department for Business and Trade’s call for evidence, which has been referred to, and which ran from October 2023 to January 2024, has informed our understanding of these regulatory issues and the specific concerns of industry. The call for evidence received over 200 responses from a diverse range of voices, including businesses, consumers and industry groups, academia and regulators themselves. Respondents recognised the many positives in the UK regulatory system, that it is broadly well-structured and that it is well-regarded internationally. However, they also set out some specific concerns that are helpful to the committee’s understanding of these issues. These points have been reiterated today—for example, the difficulty that businesses and others face in understanding the different roles and remits of the different regulatory bodies and how they interact with government; the accumulation of regulatory duties over time, which can dilute regulatory purpose and give rise to trade-offs which are implied rather than explicitly addressed; and the need for effective strategic steers from government to regulators on how to handle those trade-offs in their duties, particularly for decisions that verge on the political, such as normative and distributional issues. This Government are determined to further understand and tackle these issues head-on. This includes pro-actively engaging with regulators to understand the issues they face and identify where the greater scope for improvement lies. This will also include identifying areas where the costs of regulation, particularly when viewed in the round, may be too high and burdensome for businesses. This includes both how regulations are designed, as well as how they are implemented. In response to my noble friend Lady Taylor, we absolutely understand the need for regulators to have those clear duties and objectives, particularly in the light of the piecemeal accumulation of duties which has occurred to date. We will take a mission-driven approach to improving the UK regulatory regime. This means improving existing regulations and working actively with regulators to support their performance and accountability, the frameworks that they operate to, and, crucially, the candour with which they explain their decisions. It means ensuring there is a shared understanding of objectives, and working with regulators to ensure that they have a skilled and capable workforce, alongside an efficient appointments process for independent boards. The noble Baroness, Lady Kidron, quite rightly raised the issue of raising skills, particularly in technology and AI. I absolutely understand and concur with her concerns. As part of this work, we want world-leading regulatory structures in driving technology and innovation, with, for example, a clear understanding of the potential role that artificial intelligence can play. In that regard, I agree with my noble friend Lord Chandos and the noble Lord, Lord Holmes, that AI has a huge role to play, but we have to get the regulation right. So, as per our manifesto, we will introduce binding regulation on the handful of companies developing the most powerful AI models. More broadly, we are acutely aware of the need to support innovative businesses working in a fast-growing, fast-changing field such as AI and quantum computing, so that they can navigate the regulatory landscape effectively. This will be the principal focus of the regulatory innovation office, led by the Department for Science, Innovation and Technology. This was a key manifesto commitment, and we are pressing ahead to deliver on it over the coming weeks and months. A number of noble Lords, including my noble friends Lord Hollick and Lord Berkeley and the noble Lord, Lord Holmes, questioned the role of the regulatory innovation office. It is important to clarify its future role. It is part of the overall solution but will not be the independent statutory oversight body recommended by the committee. As part of the Government’s mission-driven vision for regulatory reform, the activities of the regulatory innovation office will sit alongside wider cross-cutting work on improving regulatory performance and accountability led by the Department for Business and Trade, and it will work closely to deliver on the Government’s priorities with the Department for Science, Innovation and Technology. A number of noble Lords, including the noble Lord, Lord Cromwell, raised the interests of stakeholders. We are acutely aware of the importance that stakeholders place on understanding roles and responsibilities across government, with clear points of contact to address their regulatory concerns. I reassure the House that the Government will take a joined-up approach to regulatory reform across departments and will clearly communicate this to stakeholders. More broadly, we are in the process of developing a clear regulatory reform agenda that addresses all the issues I have outlined in my speech and which noble Lords have highlighted today. This agenda will be set out in more detail in due course. However, we are clear that these reforms must have a real, lasting and positive impact on business and everyone who interacts with the regulatory system and UK regulators. It is important that we get this right and deliver the high-quality reforms that are needed. This will be the best way to support the growth mission and deliver the right outcomes for individuals, households, businesses and the environment. A number of noble Lords illustrated the failures of regulation in a number of different sectors, and Ofwat, as has been well discussed, is a good case in point. My noble friend Lord Hollick described it as arising from a catastrophic underinvestment, and the noble Baroness, Lady Jones, well illustrated how the regulator lost its way in maintaining water quality standards. She also rightly mentioned the need to listen to wider voices when we are putting forward the direction for regulators. The Water (Special Measures) Bill will deliver our manifesto commitment by putting water companies under tough special measures by strengthening regulation. Similarly, as my noble friend Lady Taylor illustrated, the Office for Students was given too many conflicting spheres which prevented it fulfilling its effectiveness. We would not want to repeat that issue in the future. Before I turn to other points made in this debate, I acknowledge the Grenfell report that was published this week and take this moment to honour those who lost their lives and the many who were injured and extend my deepest sympathy to the bereaved and to the broader Grenfell community affected by this tragic event. I echo the sentiments expressed by the Prime Minister, who apologised on behalf of the state in a Statement to the House of Commons on 4 September. There is no doubt that it represents, in part, a failure of regulations at that time. This Government are committed to carefully considering the inquiry’s findings and recommendations to ensure that a tragedy like this can never happen again. There will of course be opportunities for more in-depth debate on the inquiry’s report in due course. Turning back to the context of this debate, I hope that I have picked up most of the points that have been made. I would be happy to meet with the noble Lord, Lord Ashcombe, to discuss the UK captive regime and perhaps could recommend HMT Ministers joining that discussion as well. If I have missed other noble Lords’ questions, I will write to them. I noted the report’s remarks on the previous Government’s engagement, or perhaps lack of engagement, with the committee, and I reassure your Lordships that this Government look forward to engaging in a bipartisan fashion with the committee and in a very positive way with noble Lords as we take this vital work forward. I personally have a huge respect for the work of the committee and look forward to working with it in future. In conclusion, I believe we are broadly on the same page, not only in the report but in this debate, and I hope that in due course noble Lords will see the full evidence of the seriousness with which we are taking these issues and our determination to modernise the regulatory landscape to achieve better outcomes. I therefore commend this report to noble Lords.

20:45:00

I thank noble Lords for their contribution today. I think it has been a very good debate. There is clearly a strong appetite to be a good and effective watchdog, or guide dog, and I believe that some of the points that have been made and some of the recommendations from the committee will considerably assist this House to fulfil the duties that it clearly wants. It is hopeful that my noble friend the Minister said that she is looking at everything afresh. When she does that, I hope she will be able to return to the House and explain how it is that we will be helped to hold the regulators to account and how clarity and transparency will be ensured. Without those fundamental reforms, we shall be back having the same debate in two or three years’ time. The fact that the previous Minister was otherwise occupied and could not come to see us should be taken as a very clear point that we need serious engagement from the Government about how we can improve the regulatory regime and the performance of regulators in this House, to the benefit of the protection of our citizens and for better regulation for those businesses and sectors that, frankly, need to have a lighter but more effective burden on them to stimulate growth. These are big issues, they are important issues and, when the Minister looks afresh, hopefully she will be in a position to come forward to explain how they are to be addressed in a practical way over the next period.

Motion agreed.

House adjourned at 8.48 pm.