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04|07|07

Institute of Economic Affairs: Working Lunch - Unelected and unaccountable? The role of the regulator in setting public policy

Peter Phillips

Regulation has existed for as long as governments have interfered in private actions: that is, for ever. For centuries most regulators had simple jobs: government passed them responsibility for enforcing limited objectives, perhaps a trade guild policing quality of goods. In the nineteenth century another kind of regulator emerged to limit undesirable side effects of the market, like poor safety controls. Both types exist today: like trading standards or the Health & Safety Executive.

But since the privatisations of the 1980s and 90s, two new types of regulator have emerged.

The first is well understood: economic regulators controlling prices and investment levels for privatised utilities like water and energy. Their task seemed straightforward – making monopoly providers more efficient and promoting competition.

But the second – like Ofcom - is a new breed. These regulators have responsibilities which embrace areas previously reserved for government.

Some regulators who make public policy judgements operate within tight parameters. In setting interest rates, the Monetary Policy Committee operates with clear targets. NICE decides which treatments should be available on the Health Service according to a defined methodology trading off cost against improvement in collective quality of life.

But others - like the Financial Services Authority and Ofcom - have much wider discretion. Ofcom has two principal duties – to further the interests of consumers, and to further the interests of citizens.

Furthering consumer interests is about making markets work better: like promoting competition or ensuring consumers can make informed choices.

But furthering citizen interests is about promoting a better society: maybe making sure citizens are protected or have access to services they need to participate in society. Pursuing these kinds of goals takes us deep into public policy.

In tackling such issues, Ofcom has a lot of discretion – if citizen and consumer interests conflict, statute says we must resolve the issue in the manner we think best in the circumstances. It’s up to us.

Why did government and Parliament decide to pass such broad powers to an unelected body?

I think there are four reasons:

• Expertise: in communications, technology and commercial models are changing fast, so specialist knowledge is needed to keep up
• Speed: an independent agency is able to respond faster than a traditional government organisation
• Long term perspective: big investments can take many years to pay back. If companies are to invest appropriately, they need long term regulatory clarity which is easier when not governed by the electoral cycle.
• Objectivity and openness: it is easier for non-political bodies to take a strictly evidence-based, analytical approach and to be transparent and consultative about areas with many competing public policy interests

But there are risks too:

• Independence arguably means less accountability or mandate. Ofcom is accountable to Parliament, Select Committees and the National Audit Office – but not directly to the public.
• The risks of any protected monopolist whether plc or regulator – high handed behaviour or complacency.
• The constraints to power through Parliamentary statute may mean lack of common sense flexibility

What does our experience reveal about whether the benefits outweigh the risks? I want to touch on three different aspects of our public policy

The first area is public policy work where we have some powers - but many levers remain for government.

Take public service broadcasting. In some of the biggest issues – like the future of commercial public service broadcasting - we play an advisory role. For example we concluded long-term competition to the BBC is needed in supplying public service content. But ultimately, it’s for Government and Parliament to decide whether we’re right, and if so, how it should continue to be achieved.

I think these types of policy areas typically pose few questions. Unlike Civil Service advice to ministers which is usually confidential, ours is public, transparent and therefore contestable.

Let’s move onto my second group: public policy designed to move from a monopoly to a competitive market.

The interests of citizens are often best served by promoting competition. From a poor start a few years ago, the UK now has higher broadband availability and take-up than the USA, Japan, Germany, France and Italy. That enables say new ways of accessing public services. And it’s been achieved through expertise and a long term perspective culminating in the undertakings BT signed up to two years ago.

A more controversial example is what happens to the spectrum freed up by the switch off of analogue television over the next five years – the digital dividend spectrum. The radio spectrum is a national asset underpinning 3% of our GDP – bigger than the electricity and water industries combined. In the past it’s been allocated directly by government for specific uses. But as the range of possible uses lengthens, the chance of public bodies picking technological winners plummets. So our broad policy direction is to move from command and control of spectrum to a market approach.

The digital dividend is probably the most valuable spectrum freed up for new uses for many years. It has several potential uses which could provide public benefits which a simple auction wouldn’t value. So in deciding how this specific spectrum should be awarded, we needed to take into account the possible public value of the different applications it could be used for and what we should do about them – if anything. But our analysis showed the level of uncertainty around which new services will become available, let alone which services will deliver the most benefits to society, is huge. So the proposal we’ve been consulting on is that Ofcom shouldn’t pick winners but promote competition and innovation – by allowing the market to decide how the spectrum should be used.

Not everyone agrees – which is the point of a consultation. Broadcasters and equipment manufacturers are lobbying for spectrum to be set aside for high-definition TV. They say HD TV would benefit society, but that - in a straight auction - broadcasters would be outbid by richer companies offering more profitable uses.

We are still considering this issue. But there may well be a different solution: within the digital spectrum already awarded to the broadcasters there looks to be enough space to broadcast several HD channels. That could enable the benefits of a market based approach and the prospect of HD TV for all.

Another party which didn’t agree with our consultation were the theatres. They use radio microphones in this spectrum and felt our proposals had insufficient safeguards for them. They – uniquely – had no alternative to their current spectrum, and it was hard for them to form a new market quickly. We listened to their well-founded concerns and recently modified our proposed approach to give them more certainty and a longer period of transition.

In this second group of examples – policies aimed at moving to a competitive market - the benefits we can bring - expertise, speed, a long-term perspective, objectivity, openness - are significant. And the accountability issues seem manageable. In the case of spectrum, the government has retained back-stop powers giving it the option of overruling our decision. But, again, in the interests of transparency such Government direction needs the approval of Parliament. The devolution of these types of responsibility to Ofcom is in my view working well.

My third type of policy area is quite different, those close to the edge of our comfort zone. The best example is food advertising to children.

Government asked us to look at the contribution of food advertising to the problem of childhood obesity. Lots of things affect childhood obesity: education, family income, the availability of sports facilities and so on. Our research showed advertising wasn’t as significant as some others on that list. But it did show a direct link between advertising and children’s preferences which had an effect, through pester power, on what they consumed. Given this evidence and our duties to protect consumers and citizens from harm, we needed to act. We acknowledged the important role parents play in protecting children, but decided that it was in the interests of society for all children to receive a certain degree of protection. So we changed the advertising rules – not just how products are advertised but the volume of advertising too.

In this, different statutory duties for Ofcom were in conflict: our role to protect citizens and our role to maintain and strengthen public service broadcasting.

And we were operating close to the edge of our area of expertise. We knew lots about broadcast advertising, but had no claims to expertise in public health issues. That lack of expertise slowed us down.

And our perspective on this broad and complex issue was narrowed by our statutory remit. We took a different view from the Food Standards Agency. This is understandable – they have their own governing statute and don’t have to worry about the impact of their decisions on broadcasting.

So in summary, I have three broad reflections.

First governments of whatever complexion may well devolve more of this type of public policy to bodies like Ofcom. Why? Because arguably society and the economy are changing faster and becoming more complex.

Second in the examples I’ve shared with you, the new model has been more effective than the previous ones. The loss of direct democratic accountability is OK so long as the job is done well. But we should be cautious. Trust can break down between government and regulator. It has happened before. No regulator should kid themselves they can just hide for ever behind their governing Act.

Which leads me to my final point. I believe the regulator’s main weapon is not force of statute but its reputation. We’ve just surveyed our stakeholders to see what they think of us. I’m pleased a large majority of them have a favourable view of what we do and only a small fraction an unfavourable view. But these results depend on our ability consistently to deliver intelligently, quickly and objectively. It also means having a genuinely independent voice, even though the Treasury signs off our funding and we need effective working relationships with the executive. If we lose our reputation, we won’t keep – or deserve to keep - that public policy role in the long term.

Thank you

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