Recommendation 18

HM Government Acknowledged

The government notes this recommendation. The regulators have regular meetings and discussions with their existing stakeholder panels, in which most major policy and regulatory proposals are presented for comment at an early stage. As part of this, the existing panels can and sometimes are asked for early, qualitative comment on cost- benefit analysis. However, industry respondents to the October 2020 FRF Review consultation expressed concerns that the regulators’ analysis focuses overly on the expected benefits of intervention and underplays the costs to individual firms and the wider market. Some consumer groups, on the other hand, felt that CBA was overly concerned with the cost to firms, and disregarded quantifying benefits. There were also concerns expressed regarding the rigour and scope of the regulators’ CBAs. The government recognises the significant concerns around CBA expressed by respondents and proposed establishing CBA panels in the November 2021 FRF Review consultation to address these concerns. Given the technical nature of CBA, the government considers that a new, specialized CBA Panel can play an important role in improving the production of regulators’ CBA. The government also considers that it can increase stakeholders’ confidence that there is regular, independent input into the regulators’ CBA. Consultation respondents expressed overwhelming support for enhanced external challenge as a way to improve the quality of the regulators’ CBA. They considered that, under either of the options set out in the consultation, a CBA panel would help to improve regulators’ CBA. The government notes the Committee’s recommendation on when the panel should provide comment. There was a clear preference amongst respondents to the consultation for a CBA panel which provides comment pre-publication to ensure that rules are brought forward for consultation with robust CBA. However, a number of respondents argued that the panels should have the opportunity to comment on CBA both pre- and post- publication, as post-publication comment would allow for a more holistic review of CBA methodology. Having considered these views, the Bill will enable the CBA panels to provide comment both pre-publication of individual consultations on rules, subject to a materiality threshold, and post-implementation of a rule change. The government recognises there may be instances where it would be disproportionate for a regulator to consult with the CBA Panel before it publishes a consultation. Clause 40 of the FSM Bill, which requires the regulators to set up and consult the CBA panels, includes provision for the relevant regulator to set criteria determining when consulting with the CBA panel pre-publication would be disproportionate. To manage the resource burden, the regulators will be required to publish a CBA framework, which will specify, amongst other things, when the CBA Panel does not need to be consulted before publication of an individual consultation. The government does not agree that the proposed CBA panels would impact the independence of the regulators. As with the existing panels, the final decision on whether to address comments from a CBA panel will be for the relevant regulator, and subject to the regulator’s usual internal decision-making processes.