In this e-bulletin we focus on the new Statutory Regulators' Compliance Code and those provisions of the Legislative and Regulatory Reform Act 2006 which relate to regulatory functions. The Code was issued in December 2007 together with the Legislative and Regulatory Reform (Regulatory Functions) Order 2007, which defines "regulatory functions" for the purposes of the Act. The obligations in the Act and the Code will (with effect from 6 April 2008) apply to a number of regulators together with Ministers and local authorities in respect of certain regulatory functions. They will not, however, apply to the major economic regulators (Ofgem, Office of Rail Regulation, Ofwat, CAA, Postcomm and Ofcom).
The Act requires affected regulators to comply with the Better Regulation Executive's five principles of good regulation (namely that regulatory activities should be carried out in a way which is transparent, accountable, proportionate and consistent, and should be targeted only at cases in which action is needed). The Code of Practice then sets out slightly more detailed principles to which regulators are required to have regard. Failure to comply with the Act and/or Code of Practice may constitute grounds for judicial review.
The Legislative and Regulatory Reform Act 2006
The Act, which came into force on 8 January 2007, is in 2 parts. Part 2 relates to regulatory functions and is intended to put on a statutory footing the regulatory principles developed by the Better Regulation Task Force (now known as the Better Regulation Executive) and the recommendations of the 2005 Hampton report Reducing Administrative Burdens: Effective Inspection and Enforcement. The key provisions are found in sections 21 and 22, which taken together have the following effect.
- Any person must, when exercising a relevant regulatory function (as to which see below) have regard to the five principles of good regulation referred to above.
- Any person must, when exercising a relevant regulatory function have regard to any code of practice issued by a Minister relating to the exercise of regulatory functions in determining any general policy or principles by reference to which the person exercises the function.
- Any person must, when exercising a relevant regulatory function which is a function of setting standards or giving guidance generally in relation to the exercise of their regulatory functions, have regard to the code of practice.
Although the Act has been in force for some time, until the making of the Legislative and Regulatory Reform (Regulatory Functions) Order, the regulatory functions to which these duties apply had not been specified so it was not clear what their impact would be.
(1) Precedence of other requirements
The obligations referred to above are subject to "any other requirement affecting the exercise of the regulatory function". This means that where, for example, a regulator has been created by a statute which itself contains provisions relating to the way in which its regulatory functions are to be exercised, such provisions will take precedence.
(2) Definition of "regulatory functions"
Under section 24, the regulatory functions to which the obligations apply are to be specified in an order. The Order sets out the relevant functions in a schedule which is divided into 4 parts.
Part 1 lists a number of statutory regulators, including the Civil Aviation Authority, Environment Agency, Financial Services Authority, Gambling Commission, Health and Safety Commission, Health and Safety Executive, Office of Fair Trading, Pensions Regulator and Registrar of Companies. Whilst in general the listed regulators are subject to sections 21 and 22 in relation to all of their regulatory functions, in the case of some regulators certain functions are excluded. For example, the OFT is listed but only "other than [in respect of] any regulatory function under competition or merger law".
Part 2 further defines "regulatory functions" by reference to a list of enactments which are divided into groups according to subject matter. For example, under the heading "Water" there are listed a number of pieces of primary and secondary legislation including the Water Act 2003. Any regulatory functions exercisable by a Minister under those enactments are subject to the duties set out in the Act.
Part 3 relates specifically to regulatory functions exercisable by local authorities and, like Part 2, lists enactments grouped by subject matter. Finally, Part 4 includes regulatory functions exercisable by local authorities pursuant to secondary legislation made under the European Communities Act 1972 in relation to food hygiene, food standards and animal feed.
(3) Exclusion of specific regulators
By virtue of section 24 (5) of the Act, certain regulators may not be included within the scope of any order specifying regulatory functions. These are the Gas and Electricity Markets Authority, the Office of Communications, the Office of Rail Regulation, the Postal Services Commission and the Water Services Regulation Authority. The rationale for excluding these regulators from the scope of the Act is that they were not within the scope of the Hampton Report, whose recommendations the Act is intended to implement. However, in any event these regulators are required by other, sector-specific legislation to adhere to the good regulation principles.
The Statutory Regulators' Compliance Code
As noted above, the Code of Practice must be taken into account by any relevant person (i) when determining any general policy or principles by reference to which the function is exercised; and (ii) when setting standards or giving guidance generally in relation to the exercise of the regulatory functions. The purpose of the Code is to "promote efficient and effective approaches to regulatory inspection and enforcement which improve regulatory outcomes without imposing unnecessary burdens on business…and other regulated entities."
The statutory duty to have regard to the Code means that the regulator must take into account its provisions and give them due weight in developing policies or principles or in setting standards or giving guidance. That said, a regulator will not be bound to follow a provision of the Code if it properly concludes that the provision is either not relevant or is outweighed by another relevant consideration. Any decision to depart from the Code should be properly reasoned and based on material evidence.
The Code sets out a number of specific obligations grouped under the following headings – these are summarised below.
- Economic progress – this requires regulators to consider the impact of their interventions on economic progress and to keep their activities under review with a view to minimising regulatory burdens, particularly for small regulated entities.
- Risk assessment – this relates to the need to conduct proper risk assessments in order to identify where resources should be targeted. Risk methodologies must be kept under review.
- Advice and guidance – regulators must provide general information, advice and guidance to make it easier for regulated entities to understand and meet their obligations.
- Inspections and other visits – these must be justified and targeted on the basis of risk assessment. Where 2 or more inspectors, whether from the same or different regulators, undertake planned inspections of the same entity, there should be arrangements in place to minimise burdens on that entity, for example through data sharing.
- Information requirements – regulators must balance the need for information with the burdens that entails for regulated entities. Data sharing is encouraged where it is practicable, beneficial and cost effective.
- Compliance and enforcement actions – regulators should reward good levels of compliance. When considering formal enforcement action, they should where appropriate discuss the circumstances with those suspected of a breach and take these into account when deciding on the best approach. Clear reasons should be given for any action.
- Accountability – there should be effective consultation and feedback opportunities to enable continuing cooperative relationships with regulated entities and interested parties.
It will be interesting to see what the practical effect of Part 2 of the Act and the Code of Practice will be. In many cases, affected regulators may well consider that they already comply with the better regulation principles. They may also already act in accordance with some or all of the obligations set out in the Code. It should in addition be remembered that the duties set out in sections 21 and 22 of the Act are subject to any other requirements affecting the exercise of the regulatory function.