The state of the water industry demonstrates the failure of regulation. March, London, 3 November 2024. Photo Workers.
The ongoing failure of regulation in the water industry poses a fundamental question about the governance and accountability of industries and utilities in Britain: how, and in whose interest, are they regulated?
The current Labour government assumes zero responsibility for any business failure. Instead, it points to previous Conservative administrations. But a study of the role of an earlier Labour government reveals the rot at the heart of regulation. It was never intended to succeed.
Following Thatcher’s handing over of publicly owned utilities including all ten water and sewerage authorities for England in the late 1980s, regulators were put in place to assure the public that these precious assets were in safe hands.
But it was Gordon Brown, the then Labour Chancellor, who oversaw the most far-reaching review of regulatory bodies. It was published in 2005 with the telling title Reducing administrative burdens: effective inspection and enforcement.
Self-policing
This signalled a decisive shift away from control by law enforcement to self-policing by business. Brown himself described this policy shift as “not just light touch but a limited touch”. Truly a case of the poacher being designated gamekeeper.
The profligacy and venality of the water companies is a matter of public record. Even more egregious is the failure of the regulator, in this instance Ofwat, to hold these companies to account. The House of Lords, in its 2023 report on failures in water and sewerage regulation, mockingly titled The affluent and the effluent, put its finger on the problem.
It said “The Government has failed to engage sufficiently with the sector and its regulators. The Government and regulators, including Ofwat and the Environment Agency have not approached the key issues facing the sector in a joined up way, including reducing water pollution and securing future supply.”
The outrage of water consumers and the spirited campaigns of anglers, swimmers and other water sports enthusiasts have kept the misdeeds of these companies in the spotlight. From the regulators nothing but weasel words.
If the future and wellbeing of a precious basic commodity like water can be treated with such contempt, can we be sure that the regulation of other vital resources is in safe hands? There are over 90 regulatory bodies in Britain, with a budget between them of over £4 billion, covering areas such as education, healthcare, financial institutions, social care organisations, transport, agriculture, food and many others. Too many don’t stand up to scrutiny.
The energy market is a case in point. In December 2010 there were ten domestic suppliers. The regulator Ofgem introduced the price cap, designed supposedly to encourage competition and downward pressure on prices. This encouraged new suppliers into the market, so much so that by 2018 there were 70 of them.
Quick profits
With an eye on quick profits, many lacked the expertise or acumen to secure a permanent foothold in this volatile market. The rapid rise in wholesale gas prices in 2021 and 2022 resulted in 29 of these firms collapsing, affecting four million households, at a cost to consumers of £2.7 billion.
A National Audit Office report in 2022 found that Ofgem had failed to adequately monitor the viability of many of the new entrants to the energy market, and their instability led to their collapse. Taxpayers had to pay billions for the government to bail out the collapsed energy firms.
That same “light touch” regulation lay at the heart of the 2007-2008 financial crisis, the most severe economic crash since the depression of the 1930s. The chaos began in the USA where loosely regulated banks gave high risk loans to people with a low credit rating.
When those people entered the housing market with too-easily acquired finance, this created a housing bubble. Eventually, and inevitably, this burst when many people were subsequently unable to afford the payments on their loans. The financial chaos which ensued swiftly spread to Britain because of the interconnectedness of global financial markets.
In Britain as in the USA, banks pursued quick profits, giving out risky loans and investing in high risk financial products without due diligence. The fallout was dramatic. Northern Rock, which had famously borrowed extensively from wholesale markets to finance its mortgages rather than relying on customers’ deposits, ran out of cash when those same markets stopped lending.
The government, through the Bank of England, spent billions to prevent its collapse. And billions more on the partial nationalisations of Royal Bank of Scotland and Lloyds Bank to keep them afloat.
Of course, in the government’s eyes it was unthinkable that the banking system should appear reckless and shaky. So it was propped up at the cost of jobs, savings and homes of so many people. In 2009, Chancellor Alistair Darling was compelled to reveal that the cost of bailing out the banking system brought about the largest budget deficit in British history.
In the aftermath, the Financial Services Authority, the regulator which was looking the other way when those British banks were spending so recklessly, was ditched in 2013. It was replaced by the Financial Conduct Authority and the Prudential Regulation Authority, but the Bank of England, which has overarching responsibility for the conduct of the banking industry, escaped censure or change.
Burden?
Politicians, business leaders and their tame journalists often lament the excessive burden of regulation which they say inhibits investment and stifles growth. And it is true that unnecessary bureaucracy can be an obstacle to progress. But all too often, when businessmen and financiers talk about wanting less regulation they mean no regulation. They want total control – to determine what is appropriate and what is not, what is safe and what is not.
‘“Light touch” regulation lay at the heart of the 2007–2008 financial crisis…’
The Grenfell Tower inquiry, which should have been completed in short order with huge fines and prison sentences for those responsible, eventually demonstrated the consequences when proper regulation is rendered “light touch”. We should be demanding not more regulation but better regulation with real, effective power.
An example of a regulator which does its job well is the Adventure Activities Licensing Authority (AALA), now an arm of the Health and Safety Executive. AALA is responsible for ensuring that outdoor activity centres offering climbing, caving, water sports and other potentially hazardous activities to young people employ well qualified staff with appropriate supervision.
Schools and other organisations can be assured that a centre with a current AALA licence is a safe place for their children to be. AALA arose following a Lyme Bay canoeing tragedy in 1993, when four teenagers drowned as a result of inadequate, negligent supervision at an outdoor centre.
Despite the successful prosecution of the company and the centre manager, the government at the time was reluctant to legislate for tighter regulation of the outdoor industry until people of the area, including the parents of the children who died, demanded change, and pressed their local MP to bring a Private Members’ Bill.
This resulted in the formation of AALA, which issues licenses to outdoor centres and individuals offering activities to young people. Centres are inspected regularly and failure to show compliance with agreed standards leads to loss of license. Not league tables such as Ofsted’s, but active monitoring and prompt corrective action when required. We need more such regulators, who enforce to meet public need, not what business seeks to get away with.