The UK’s independent regulators are again under fire from politicians. The City Minister, Bim Afolami, has criticised ‘overbearing and interfering regulators’ and called for the next government to seek cross-party support to ensure ‘regulators think about economic growth as well as the safety and soundness of the market’.
I had two immediate reactions to this story, one as a former political strategist and one as a former regulator.
As a former political strategist, I couldn’t help notice how unusual Mr Afolami’s wording was. Normally, when a minister talks in the middle of an election campaign about what the next government should do, they frame it in terms of a pledge that they intend to implement after they win. It is a sign of the despondency among Conservative ministers that Mr Afolami thought he could not credibly talk in these terms, and so instead his comments are framed as a piece of advice to an institution of which he does not expect to be part after the election.
And as a former regulator, I know many old colleagues will be concerned about what feels like another assault on their independence. When senior staff at the regulators read comments like these, the assumption is generally that the politicians are in the wrong. After all, regulators are supposed to be staffed by experts and their independence is provided for by statute. If politicians intervene, this must surely mean they are (illegitimately) putting short-term political considerations above the regulator’s expert analysis of the long-term good. And in doing this aren’t they (illegitimately) acting contrary to Parliament’s intention when it made the regulator independent?
Having seen the regulator versus politician tension from both sides, I thought I’d try to explain how it feels from the politicians’ standpoint, and what I think can be done about it.
There are two things that tend to worry ministers about regulatory bodies over which they have limited control. The first is that the regulator will pursue an agenda that runs counter to the government’s objectives. The second is that, even if the regulator and the government share the same objectives, the regulator might pursue them incompetently and in doing so expose the government to political risk.
Mr Afolami’s concerns about the FCA fall into the first category. He wants to prioritise attracting inward investment into the UK but he fears that the FCA is prioritising consumer protection and that it is doing so to such an extent as to deter investment.
The current crisis involving Thames Water falls into the second category. The government and Ofwat (and most of the rest of us) agree on the need for more investment and clean water while keeping bills as low as possible. But Thames Water’s environmental performance and the prospect of financial failure are sufficiently big problems that, even if decision-making formally sits with Ofwat, the government cannot ignore them because voters will hold them accountable if things go wrong.
I think regulators often underestimate the importance of politicians’ concern about policy divergence. The reason the regulators were originally given a degree of independence was because ministers recognised there might be occasions when their own short-term and long-term interests might diverge – or be perceived by investors as likely to diverge – and so they were willing to bind their hands and give power away in order to resolve a ‘time inconsistency’ problem. (See here for a more detailed explanation of this.)
Inevitably, therefore, there would be occasions when a regulator might take a decision differently from a minister. Ministers could live with these individual unpopular decisions because they saw regulatory independence as a way to achieve a broader long-term objective.
But what if the regulator is not helping the government address a tension between short- and long-term interests? What if the regulator is actually pursuing a different long-term objective, as Mr Afolami clearly believes is now the case?
That is an unsustainable position for a regulator to be in. Since the creation of the first UK economic regulators in the 1980s, I can think of no case in which they have consistently pursued an agenda over time that conflicted with the policy of the government of the day. When the Thatcher and Major governments favoured liberalisation and deregulation, that is what the regulators did. When the last Labour government wanted a greater focus on social and environmental objectives, regulators came round to that too. Under the subsequent coalition and Conservative governments, the lack of consistent political objectives has given the regulators greater freedom to pursue their agendas, but the challenge has not gone away. If regulators diverge too much from the government’s agenda, ministers have several tools to help bring them to heel: appointments, funding, scrutiny and legislation.
But this is not simply about realpolitik. There are also reasons of principle why regulators should be wary of pursuing a different long-term agenda from that of the elected government. Ofwat is not the United States Supreme Court. There is no constitutional principle in the UK of regulatory independence. The relevant constitutional principles, instead, are of parliamentary sovereignty and ministerial accountability. For a regulator to be constituted as a ‘non-ministerial government department’, exercising powers for which ministers cannot be held accountable by parliament, is rightly very unusual. The powers should be tightly drawn and carefully exercised.
A large part of the responsibility here falls on ministers. At times they give the impression that they want regulators to ease the burden on businesses, but then when a scandal emerges they ask why the regulators aren’t being tougher. If ministers are going to give regulators multiple competing objectives without offering clear and consistent guidance on how those objectives should be prioritised, they cannot then complain when regulators make the prioritisation choices themselves.
But regulators have a responsibility too. Where they are forced to make trade-offs between competing objectives, they should explain publicly how they will do this, so that if policymakers have a problem with the approach, they can make the necessary changes to legislation or guidance.
In conclusion, politicians are right to worry that regulators might pursue different policy objectives from the government. But this situation usually arises when the government fails to set clear and consistent objectives for the regulator in the first place. The government can address the issue by providing greater clarity on how the various policy objectives should be prioritised. Where the government fails to do so, the regulator can help by being transparent on how it will prioritise the objectives. This then puts the responsibility back on the government, either to accept that the regulator will exercise its own discretion in prioritisation, or to provide greater clarity so that the risk of policy divergence is reduced.
