Do the UK regulatory agencies provide taxpayer value?

Marketing

Centre for Marketing Working Paper

2004

This paper questions the extent to which the economic regulatory agencies provide value for money for the taxpayer. Over the last twenty years, they have grown in number, roles and costs to the point where their purposes may seem to have become confused. Originally they were temporary institutions to maintain proxy competitive markets whilst introducing true competition. Since 1997, they have been given a variety of social and quality control roles. By 1997, 11 regulatory agencies had been created, excluding related consumer monitoring groups. Since then, some new regulators have been established by the Labour government but the more important trend is the consolidation into larger units, such as OFCOM, and their new much wider remit spanning consumer affairs and information and educational matters. Examples of this trend include OFCOM, launched as a consolidated regulator for the communications and broadcasting sectors, which started work in January 2004. All these regulatory bodies, along with the cluster of statutory consumer panels established in recent years, form part of government. The paper excludes, except by way of comparison, wholly voluntary regulators such as the Advertising Standards Authority and business regulation in general. After reviewing the development, activities, costs, staffing, criticisms and plaudits for the offices of regulators, the paper identifies the key areas for clarification: · Consumerist groups have become competitive with the regulators and should be cut back to advising the supplier boards. · Regulators should not be responsible for vague goals well beyond their resources or remit, e.g. universal financial education by the FSA · Demands for “accountability”, which turned out to mean reporting to Ministers, have compromised independence. Regulation should not be responsible for major initiatives or social policy but policing their original economic role to protect consumers. They should answer to parliament. Policy is for government departments and the appellate system belongs to the courts. · The other major area for the newer regulators (OFCOM, FSA) is product quality. This should not be a matter for government but returned to the industries once they have convinced government that the new arrangements would have teeth. Two alternatives are presented. The more radical closes all regulators as soon as they have completed their, perhaps accelerated, task of bringing in competition apart from a small “Fair Trading Authority” modelled on the OFT but more selective in the number and depth of hypothesised transgressions it investigates. The less radical reverts, in essence, to the situation in 1997 with regulators reduced in size and scope and comparable with those in France and Germany. The more radical would improve Taxpayer Value by about £494m p.a. and the less radical by about £329m. However, this analysis of the costs of regulators takes no account of the benefits from these offices. This is because the regulators do not report any such benefits and we therefore have no data. It is remarkable that these expanding functions are so blind to the benefits for the taxpayer. The FSA’s annual report, for example, gives no indication of what “success” means nor what measures identify progress toward that success. The measure of success for the original regulators was clear enough: to establish competitive markets and leave the stage. OFTEL having nearly reached that point should be planning its demise but instead it is preserved for posterity within OFCOM. Consideration of benefits prompts a fundamental review of how the roles of the offices of the regulators have changed. Today the regulators, notably the FSA, no longer have the development of competitive markets as their primary goal. They see themselves as police forces, if not gaolers, with permanent responsibilities to protect consumers and pursue the interests of government. This is a serious shift of orientation and almost certainly negative for GDP. One might wonder if the regulators have forgotten that free market business profits provide the wealth and the taxes for the country as a whole. Reverting to sector regulators, even with smaller budgets, would not achieve the re-orientation required to drive towards wealth creation. By contrast, a single Fair Trading Authority, as distinct from a super-regulator, could intervene only in cases of uncompetitive or unfair practices. Near-monopolies would still need to obtain approval for prices until their markets are competitive but that should be the dominant objective.

Centre for Marketing

04-902

Centre for Marketing Working Paper

No