Regulators – should they try to prevent problems or just collect the fines?

Today we hear that Network Rail faces a large fine from the Rail Regulator for its failure to complete the engineering works to its network on time over Christmas and the New Year period. A few days ago we heard that Ofgem had fined national Grid £41.6 million for its behaviour towards pre payment meter consumers. These are presented as good news stories, designed by the government and its regulatory quangos to prove they feel our pain and are standing up for us, the overcharged and under-served long suffering public.

We should ask is this approach makes any kind of sense? Making large companies – one a monopoly and one a former nationalised monopoly – pay large fines does not help the customers for the past problems. All those who have had to pay a lot for their gas, and all those who had their travel disrupted by Network Rail a couple of months ago, will draw no immediate benefit or relief from knowing these two companies have been fined. In the case of Network Rail the position is worse. Much of the money they spend comes from the taxpayer, so ultimately any large fine imposed on them will come from the same source. It is a circular movement of cash from the taxpayer to Network Rail, and from network Rail back to the taxpayer in the form of payments to a taxpayer financed quango. The taxpayer still ends up paying for the regulator, but his or her money is routed through Network Rail so there are larger handling charges. If any money is to pass it should be from the offending company to the customer that has suffered. The problem in the rail case is anyone could claim to have wanted to use the cancelled trains.

The defence for these large fines is presumably that the senior managers of these organisations will not let them happen again. I am not so sure. If the senior managements’ own bonus payments were removed because they had made serious mistakes, that might concentrate their minds in future. The impact of a fine which causes a day or two’s embarrassment in the press for a large organisation that will be used to a mixed press may not have the same benign effect.

Is there an alternative to such an approach? I think a good referee is one who tries to keep the game flowing, not someone who takes a delight in every minor infringement so the can be the centre of attention and drive as many players off as possible. Good rugby referees these days are constantly shouting advice to the players to try to prevent them breaking the many and complex rules. Only if a player flouts the referee’s clearly stated understanding of the state of the game will there be a penalty. That makes for a more interesting spectacle for the fans.

In the National grid case the regulator found against a series of long term contracts National grid had entered with five of the six main energy suppliers in that market. Given the amount of information Regulators now expect, and given the number of people the Regulator now employs, why couldn’t the Regulator have advised them before signing that these contracts would be unacceptable? Or noticing them after signing, why couldn’t the Regulator have said then that they wanted them modified, and given the industry a little time to do so before coming in with heavy handed intervention?

In the railway case, the travelling public would prefer lower fares than an industry having to pay a heavy fine out of the money the taxpayer gives the industry. The Regulator needs to think through how much of a penalty a fine is on a wholly owned subsidiary of the taxpayer, used to seeking taxpayer money for much of its costs.

The idea of imposing heavy fines to show who is boss has spread to the EU. Their Competition Commissioner has just succeeded in a case which has led to a large fine for Microsoft. At least that is a fine on a private sector competitive business, where the pain is felt by shareholders. Clearly there was a strong difference of opinion between the company and the EU over what is an acceptable practise when selling popular and state of the art computer software.

We live in the age of the regulator. In the two UK cases the government appears pleased that unpopular outcomes – rising gas bills and a shortage of train services – have led to large fines on the offending companies. Consumers would be happier if a solution to the underlying problems could be found. Large fines are not going to make taxpayers and customers feel better off, because they are not going to be better off. It is time the government thought again about the scope and style of regulation, to see if regulators could become better referees, keeping business flowing within the rules rather than waiting for the offences and then coming down like a ton of bricks.

It’s the same thing these days in the money markets, where a movement of the Governor’s eyebrows used to ensure the old clearing banks took appropriate action to avoid stresses and strains. The modern “reformed” Bank of England no longer uses the eyebrows in the same way, so we ended up with a run on a bank for the first time in more than a century.

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8 Comments

  1. Posted February 28, 2008 at 10:15 am | Permalink

    Apropos nothing, I have today apologised to my wife for failing to remember our anniversary and fined myself £1,000 to teach me a lesson. My wife cannot help but wonder if there is any point in me fining myself, if I collect the fine and suffer no net fiscal penalty.

  2. Posted February 28, 2008 at 11:57 am | Permalink

    Network Rail's top directors are to receive performance bonuses worth more than half their salaries, even though nearly one in five trains continues to run late. The organisation's employees, on the other hand, will receive a bonus equivalent to less than 5 per of salary, and directors seem to think this is right. Rail workers are ten a penny and don't work hard enough. Trebles all round.
    To top this farce off. The Commons Public Accounts Committee said the Department for Transport had not been able to provide any explanation to justify the extra cost of funding the infrastructure operator through the private markets rather than with direct public-sector financing.
    Edward Leigh, the Tory chairman of the committee said there was no explanation of how private-sector lenders could force Network Rail to justify this extra cost He said 'At present, the bottom line for taxpayers is that they are having to provide cover for private-sector lenders to no obvious public advantage'
    Dogma, and jobs for the boys no doubt then?
    I have to agree with you John, fines are not the answer as the taxpayer pays them. The same as the polluter pays principle that ultimately the customer pays the fine. Not a problem if you are a rich customer. Or maybe not even a customer as you are so rich you live abroad and don't have to put up with high cost and bad service. Who sanctions these payments to directors? themselves?
    What is needed is not a regulator, but good and just laws as well as regulations. Competition cannot really exist in these industries. In the utilities, state owned industries must not believe their luck. Buying up British utilities and over charging their customers in some sort of fix. Whilst having the advantage of being state owned, and presumably state subsidised in their own countries. Didn't anyone see that one coming?

  3. Posted February 28, 2008 at 12:42 pm | Permalink

    John, I have emailed you in the past on this very topic.

    It seems we, as a nation, have become obsessed with fines. Every piece of legislation seems to have a fine attached. On our local news channel last night, we saw two features, one about seat belts and one about mobile phones. The bottom line was that, two or three police officers were at the side of the road basically collecting fines at the rate of thirty pounds a go. We see in the local paper that several police officers were at the side of a road in Bracknell collecting speeding fines at the rate of forty pounds a throw. Whilst it is true to say that speeding, non wearing of seat belts and using mobile phones while driving are against the law, why does it seem the police constantly target this type of tax collecting crime rather than investigating the type of crimes, such as burglary and muggings, that we all fear more? Could it be that money is not so easily raised? Anyone that has been burgled knows that often the police don't even turn up; you are just given a crime report number to give to your insurers.

    With regard to the regulators, I agree that it is sheer madness to have one publicly funded body fining another publicly funded body….So why do we as a nation put up with it? Are we all stupid?

    The "event" that really rammed it home for me was the shooting at Stockwell tube. The publicly funded police were investigated by the publicly funded 'Elf'n'safety quango, these reported to the publicly funded CPS who prosecuted the publicly funded Met Police through the publicly funded court system who then issued a fine….Kerching…There goes Nanny's till again….How much money and at what cost to the taxpayer is swilling around and around within our Stalinist state in the public sector in fines, awards and funding?
    The problem is that whenever a member of the Stepford front bench announce a record fine, they look so pleased with themselves, are we too thick to see that actually we are fining ourselves which, in the case of a fined NHS trust hospital, must come off the hospital's budget and thus affect front line services I.e. Money to treat you and I in hospitals.

    I feel the EUSSR were wrong to fine Microsoft, they were merely protecting their product….They are successful because they provide something the public want….Obviously, success is unacceptable in a Stalinist state. It seems that often a regulator saying, “They can easily afford it”, justifies the hefty fines It is another tax on success. Before the current fine them culture came in to fashion, the preferred method of a Labour government was the “Windfall” tax. Same thing really; just a different label.

    I personally think, this fine them culture is just the natural progression from the compensation culture….Are we too thick to see that every time we sue for compensation, the lawyers make a fortune, the insurers have huge costs, mostly legal fees, and these are passed on to we the customers in the form of huge premiums….When we receive our couple of quid compensation do we think that we have really won? The winners are the lawyers, they have probably made ten times as much in fees, we are the losers as we will pay higher and higher premiums, the insurers will just pass this new expense on to us.

  4. Posted February 28, 2008 at 1:20 pm | Permalink

    John,

    I think a super correction mechanism would be if the fines imposed were always forced to be paid to the injured party (usually Joe public) and not to the Treasury.

    As it stands a 'fine' just goes to the Treasury. If your rail service is a joke then the fine benefits you precisely nothing. It helps Alisatair Darling. It's stealth tax.

    If the fine was obliged to be paid equally to all season ticket holders then the voting public would feel directly that the regulators were on their side.

    Maybe you'd like to sponsor a private bill through the House!

  5. Posted February 29, 2008 at 12:50 am | Permalink

    Fines, like legislation, are another tool which the government seemingly believes can be used as a magic panacea to control all sorts of outcomes.

    Fines for motorists have increased exponentially, are the roads any safer? of course not. All fines imposed by the state from late tax returns to recalcitrant utitlity companies should be ringfenced in a special fund. This should then be used to subsidise various activities (not of the pious, social engineering, Millenium Dome variety) that everyone can enjoy. I guarantee the government would then lose its appetite for this lazy management device in a nanosecond.

  6. Posted February 29, 2008 at 8:31 am | Permalink

    What would happen if the railways were completely freed up to run themselves with no government money, no government interference and no regulator? And no heavy tax on operators either.
    There would, actually, be competition – from people in cars and from air traffic.
    Are there no people left who could make money out of such a situation? With road traffic congestion and the cattle market in the air, I personally would welcome a good train service, and I know you would from your past posts.
    It was the EU, (wasn't it?), that caused the divorce between the operating companies and the track they ran on (Railtrack) under John Major. That is what Christopher Booker said at the time, anyway.
    If any independent company ran the railways like this mob, they would soon go out of business. And the invisible hand might have a go instead.

  7. Posted February 29, 2008 at 11:56 am | Permalink

    Had similar thoughts myself. I suspect the answer is the fines are for show, to deceive the electorate that something is being done.

    That would at least be consistent with the New Labour mode of operation.

    Perhaps Gordon Brown will set up a review of the issues inviting **insert the name of the person and organisation who's credibility he is borrowing here and he can hide behind** to undertake a wide ranging study, saying that he does not want to prejudge the review of inaction.

  8. Posted March 1, 2008 at 12:48 pm | Permalink

    Man in a shed, in particular, is right. However other areas, outside massive fines for massive state businesses by equally massive state regulators have been touched upon.

    I think I would simply remind you that this is but one tiny aspect of the whole disease which impedes every part of the productive sector. At all levels, the government interferes with our businesses to make it increasing impossible to get anything done. And then when something goes wrong, your fault or not, the regulators are there to come down upon you like the proverbial tonne of bricks. The answer is to make a huge bonfire of quangos and regulations and save the taxpayer money, say about 10% of GDP. But then you know all about this……….

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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