Review of Regulatory Funding. A report prepared for the Information Commissioner s Office

Transcription

1 Review of Regulatory Funding A report prepared for the Information Commissioner s Office June 2013

2 Project Team David Caplan and Prabhat Vaze About Belmana Belmana specialises in the delivery of research using statistical and economic analysis to support evidence-based policy and practice. Founded by Prabhat Vaze and David Caplan in 2012, Belmana brings extensive analytical experience and a deep understanding of the public policy context. Belmana Ltd, 39 to 41 North Road, London, N7 9DP info@belmana.co.uk Acknowledgements We are grateful for comments on this work from staff at the Information Commissioner s Office throughout the study and from ICO participants in a workshop on 1 May 2013 and a presentation on 11 June. We also thank those who took part in the surveys for this study. This report has primarily been prepared using documents in the public domain, which have then not been verified with the organisations. Responsibility for the contents of this report remains with Belmana. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office i

3 0. Table of Contents 0. TABLE OF CONTENTS 1 1. EXECUTIVE SUMMARY 3 The ICO's funding 3 Regulatory funding models 3 A framework for assessing regulatory funding models 3 Funding options 4 Preferred funding approach 4 ICO policy decisions 5 2. BACKGROUND TO THE PROJECT AND REPORT STRUCTURE 6 Introduction 6 The Information Commissioner' Office 6 Funding 6 This project 6 3. REGULATORY FUNDING MODELS 8 Introduction 8 Possible approaches 8 Current trends in funding 13 Conclusions ASSESSING THE SUITABILITY OF REGULATORY FUNDING MODELS 16 Introduction 16 High level principles for regulatory funding 16 Six assessment criteria 17 Conclusions 21 Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 1

4 5. ASSESSMENT OF FUTURE FUNDING OPTIONS FOR THE ICO 22 Introduction 22 Assessment approach 22 Assessing the current approach 22 High level architectures 22 Charging approaches DPA and PECR 26 Charging approaches FoI and EIR CONCLUSION AND RECOMMENDATIONS 37 Introduction 37 Preferred models 37 Recommendation 40 LIST OF ABBREVIATIONS USED IN THE REPORT 43 SELECTED BIBLIOGRAPHY 44 APPENDIX 1 METHODOLOGY 45 Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 2

5 1. Executive Summary The ICO's funding 1 The ICO is currently funded by a combination of grant-in-aid and a statutory notification fee paid by those on the Data Protection Register. Grant has fallen recently and the ICO believes that further cuts will reduce the effectiveness of their service. The notification fee is at risk when a new European Regulation is introduced. With this background the ICO is looking to identify an alternative funding mechanism that will give security of income whilst supporting their regulatory objectives. Regulatory funding models 2 Our study of the funding models of 21 regulators and complaint handlers has found that the vast bulk of regulatory funding is derived from levies and charges paid by regulated bodies and from government grants. The basis for levies and fees varies greatly between regulators but size of organisation and sector are common features of many schemes. Complaint handlers sometimes charge case fees to the subjects of complaints. Two organisations within the study retain financial penalties charged to those who break the rules. 3 Three key trends in regulatory funding emerged in the research: Grant-in-aid is declining for almost all grant funded regulators; Regulators are moving to increase the contribution of regulated bodies; and Regulators are seeking to increase the contribution paid by those who cost most to regulate the polluter pays model. A framework for assessing regulatory funding models 4 We have developed a framework for the assessment of regulatory funding models. There is little guidance from government or academic literature on who should pay for regulators. But the Treasury do say that regulated bodies should fund their regulators. However, in practice many different models have developed each with their own benefits and costs. 5 In discussion with the ICO, we have developed a framework for assessing different funding approaches using the following criteria: 1. Supporting operational independence; 2. Delivering adequate funding; 3. Supporting delivery of regulatory objectives; 4. Scalable and react to changing demands; 5. Maintain the confidence of those providing the funding; and 6. Deliverable from an operational, political and legal perspective. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 3

6 Funding options 6 We tested a range of funding options using these criteria and concluded that: Any regime involving grant funding has fundamental weaknesses in terms of delivering adequate funding, responding to changes in demand and supporting delivery of regulatory objectives; A fee based funding mechanism can be designed to include a range of incentives to improve compliance with the requirements of a regulatory regime; For the ICO, a funding structure based on a split between public and private sector is preferable to one based on a split between data protection and freedom of information activities; Annual levies, case fees and charges for regulatory activities focused on a single organisation would appear to offer the best combination of ways of raising revenue. Preferred funding approach 7 We believe that the best funding model for ICO will have the following components: All funding will be derived from bodies within the regulatory regime; A mix of annual recurrent charge (levy) and charges for individual activities, split roughly 70/30; Private sector organisations to pay a data protection levy dependent on their size and sector; Public sector organisations to pay an information rights levy dependent on their size and sector; Levies to be subject to discount for those organisations who demonstrate they have systems in place to comply with the regime requirements; A range of charges including a case fee paid by those who are the subject of data protection and freedom of information complaints; A fee for freedom of information complaints paid by the complainant under certain limited circumstances; and The costs of regulatory action including investigations to be passed on to those found to be in breach of the law. 8 Implementation of this approach will require: A mechanism for calculating and collecting levies and charges; High quality information on costs within ICO; Development of an approach for handling appeals against charges; and A secure legal basis. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 4

7 ICO policy decisions 9 The ICO needs to answer a set of policy decisions before making further progress. These include: 1. What funding regime does the ICO want to introduce including the balance between levies and one-off charges? 2. What should be the split between levies and charges? 3. Does the ICO want to have separate approaches for public and private sectors? 4. Which activities should be charged to regulated organisations? 5. Should the ICO introduce a complainant fee for continuing investigations of little public interest? 6. Does the ICO want to retain all or a proportion of civil monetary penalties? 7. Does the ICO want to introduce a form of accreditation or kite mark and reduce the level of fees charged to organisations which meet these standards? Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 5

8 2. Background to the project and report structure Introduction 10 In this brief chapter, we give the background to the project including a brief description of the functions of the ICO and its funding arrangements. We also describe the objectives of the project and the structure of the project and this report. The Information Commissioner' Office 11 The Information Commissioner is the UK's independent public body set up to promote access to official information and to protect personal information. The Information Commissioner s Office (ICO) regulates and enforces the Data Protection Act (DPA), the Freedom of Information Act (FoIA), the Privacy and Electronic Communications Regulations (PECR) and the Environmental Information Regulations (EIR). 12 These acts and regulations cover a very wide range of organisations across both the public and private sector. The DPA regime covers all organisations controlling personal data and so includes both private and public sectors. PECR relates to electronic marketing communication and handling other forms of electronic communication. The FoI and EIR regime applies primarily but not exclusively in the public sector. Funding 13 The ICO currently has two main sources of funding. Organisations that control personal data are currently required to notify the ICO and are entered on a register. The ICO charges a statutory notification fee to those on the register of 500 for large organisations and 35 for smaller bodies. Notification fee income can, by law, only be spent on DPA activities. Total income from this source is around 16 million. 14 The ICO also receives grant-in-aid to finance its FoI activities. The level of grant has declined from 5.5 million in 2009/10 to 4.0 million in 2013/14 with further falls projected. 15 The ICO is concerned about the sustainability of both sources of income. It believes that further cuts in the FoI budget will lead to a less effective regulatory service. A current draft European Regulation puts the future of the notification fee at risk meaning alternative sources of funding will be required. In its current form, the Regulation would also significantly increase the regulatory burden. This project 16 The ICO is looking for ways to secure a more sustainable way of financing its activities with fewer constraints, to secure the effective delivery of its statutory obligations and achieve better value for money across the range of its functions, including potentially any new functions that Parliament might impose. It procured a project with the following objectives: Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 6

9 to consider future funding options for the ICO, and to recommend the preferred option. 17 In its tender documents the ICO identified the following key features of a funding regime: Ensuring independence. Providing adequate funding. Allowing for budgeting and expenditure commitments to be profiled for more than 12 months at a time. Providing those regulated with a simple mechanism for making financial contributions (eg fee collection). Contributing financially to effective regulation (eg polluter pays or higher costs for organisations that break the rules). Keeping the costs of administering the regime to a minimum Proving a sustainable solution for several years. Providing the flexibility to fund new powers or responsibilities that the ICO might be required to deliver. Project approach and this report 18 Belmana Ltd successfully tendered for the project. The project involved the following key stages: 1. Review of existing funding mechanisms; 2. Assessment of the costs and benefits of these approaches; 3. Assessment of other possible funding methods; and 4. Worked up options for the future funding of ICO. 19 The project included a detailed review of the funding mechanisms for a range of regulators and complaint handlers in both the public and private sector. The key findings from this review are described in chapter 3. Chapter 4 describes in detail the assessment framework which was developed within the project. This framework is applied to a range of options in chapter 5. The final chapter presents a preferred option explaining some of the issues which might arise in its implementation. The chapter also sets out some key policy questions for the ICO to answer. 20 A fuller description of the project methodology is given in appendix 1. Appendix 2 provides details on the funding regimes of the organisations whose approaches were studied. Appendix 3 includes the detailed assessment of the full range of options against the evaluation criteria. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 7

10 3. Regulatory funding models Introduction 21 This chapter describes the range of regulatory funding models which are currently in use. It begins with a brief discussion of the possible models, then describes the approaches which are used in practice and identifies some current trends in funding. 22 Most of the information underpinning this chapter has been derived from a review of documents published by or about 21 regulators or complaint handlers. The participants were chosen primarily to demonstrate a range of funding mechanisms and covered both private and public sectors. Most organisations were UK based, but two international information rights regulators were included. 23 Key sources of information included organisational websites, annual reports and guidance documents. Published information has been supplemented by discussion with the bodies in a small number of cases. For each organisation, the information was collated in a common pro-forma. The completed pro-formas are included in Appendix 2 as is the full list of bodies. Possible approaches 24 There are a limited number of possible sources of funding. These include: Regulated bodies themselves; Government; Customers, clients or consumers of regulated bodies; and Other income. 25 Funding from regulated bodies would include annual fees and levies or charges. Government can provide grant funding, justified by regulation acting in the public interest. In theory at least, customers of regulated bodies could pay for example by an explicit fee. Other income sources would include interest receipts and payment for services such as training material and publications. 26 The following sections describe the application of these approaches in a range of organisations. Payments by regulated bodies 27 Of the 21 bodies studied, 14 derived part of their income from payments by regulated bodies and it was the only source for 8 of these. The type of payments identified include application fees registration fees levies direct cost recovery for activities Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 8

11 case fees penalties. 28 These payments can be broken down into two broad categories: levies and fees. A levy is a recurrent charge payable by all (or most) organisations within a regulatory regime. A charge relates to a particular piece of regulatory activity such as investigating a complaint or carrying out an inspection. In practice many schemes are hybrids drawing on different approaches. 29 Table 3.2 at the end of this chapter shows in tabular form the funding mechanisms which are in place for each organisation studied. Table 3.3 shows the proportion of income generated by each of the main funding schemes. Box 1: The Care Quality Commission: a strategic approach to charging The Care Quality Commission (CQC) is the regulator for health and social care in England. Following well documented concerns about the effectiveness of its regulatory regime, the CQC has developed a new business strategy which requires increased resources. The CQC is aiming to move to a model where the vast majority of its income is derived from regulated bodies by 2015/16. However, in 2013/14 grant-in-aid is expected to make a greater contribution to increased costs than charges. In 2012, the CQC consulted on its regulatory fees. In this consultation, the Commission identified six guiding principles: Demonstrate fairness and proportionality; Reflect costs; Promote compliance; Make fees simple; Be transparent; and Be evolutionary and visionary. The CQC has said that it is looking at the potential to reduce fees to providers for a range of reasons including displaying behaviours indicating collaboration in the quality agenda. It has added that incentives require careful design and testing and will not be introduced quickly 1. Levies 30 Levies are set in different ways. In some cases, such as some bodies in the Financial Conduct Authority's regime, the nuclear industry and the Post Office, the levy is set at the cost of regulation. In other cases, the regulatory cost is shared in proportion to other factors. Examples are given in table 3.1 overleaf. 1 CQC Fees Consultation, September 2012 Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 9

12 31 In some cases, the value of the levy is linked to the cost of regulation with the cost being apportioned using the levy indicator. In other cases, the levy is explicitly linked to the risk associated with an organisation. For example, the Pensions Ombudsman scheme costs more for members of certain types of scheme. The Legal Ombudsman explicitly looks at the past performance of a firm before setting the levy. Table 3.1: Examples of levies Organisation Basis for levy ASA Fixed proportion of spend different rates for direct marketing and advertising CQC Tenancy deposit scheme Legal Ombudsman Financial Ombudsman and FCA Pensions Ombudsman OfGem ICO PhonePayPlus Different approaches for different types of providers including turnover number of locations number of service users/registered patients Fee per tenant variable according to landlord's membership body. No claims discount Complaints history Indicators of volume by sector. The two schemes are related but sometimes use different indicators for levy calculation Number of scheme members by type of scheme Numbers of customers by sector Two tier annual registration fee based on size Fixed fee with exemptions for charities plus proportion of payments to network operator Ombudsman Service Fee for scheme membership depending on sector and, sometimes, size. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 10

13 Charges 32 Some regulators and complaint handlers charge explicit fees. The most common form of fee is a case fee for handling complaints which is levied on an organisation which is the subject of a complaint. For example, the private sector Ombudsman Service generates abut 60 per cent of its income from case fees. These are charged regardless of outcome. The Legal Ombudsman scheme includes the provision for refund of fees if the complaint is not upheld and the company has adequately investigated the original complaint. This scheme generates only around 1 per cent of its costs through case fees. The box on the Financial Ombudsman shows more information for their scheme. Box 2: The Financial Ombudsman Service: coping with an increased workload The Financial Ombudsman Service handles complaints across the full range of financial services including banking, insurance, financial advice and pawn broking. The Service is funded entirely by the organisations within the remit. The FOS's workload has increased considerably in recent years, primarily as a result of the high volume of complaints about payment protection insurance (PPI). This increase in workload has led to a commensurate increase in the organisations budget from million in 2011/12 to million in 2013/14. The FOS has a mixed funding model including a levy and case fees, with the majority of costs covered by the case fee. For 2013/14, the funding model has the following elements: A levy set differently for different industry blocks. Deposit takers pay a flat fee for each account holder, insurers pay a fixed percentage of premiums and fund managers are charged a flat fee; Case fees are charged at a rate of 550 after the first 25 complaints which are handled without charge; A supplementary case fee of 350 for PPI cases which are referred to the Ombudsman again the first 25 referrals are not charged; and Group fees which cover the cost of handling the complaints against the four largest banking groups. Fines and other charges for breaches 33 Some regulatory regimes include provision for fining organisations that breach the regime requirements. Often these fines are passed straight to HM Treasury and not retained by the regulatory body. However there are exemptions. 34 PhonePayPlus is the regulator for premium rate phone services. In their scheme, the regulator retains penalties and administration fees associated with the fine. This income stream covers around a quarter of the scheme costs and is used to reduce the levy paid by scheme participants. The discount on the levy resulting from retention of fines is published and transparent. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 11

14 35 The Health and Safety Executive recently introduced a fee for intervention, designed to cover the costs of regulatory action following material breaches of the rules. This scheme is described in box 3 below. Box 3: Health and Safety Executive The Health and Safety Executive is the national independent watchdog for work-related health, safety and illness. Its principal funding streams are grant-in-aid and charges, most of which are set on a cost recovery basis. In October 2012, the HSE introduced a fee for intervention (FFI). FFIs are charged to organisations which have committed a material breach of health and safety law and are designed to cover the costs of inspection, investigation and taking enforcement action. The fee is set an hourly rate of 124 for the HSE staff involved. In 2013/14, the FFI was expected to raise 31 million to 39 million. However, the Treasury capped the amount the HSE could retain at 17 million with any excess passing to the Treasury. In its first six months of operation, the FFI has raised a total of 2.7 million with an average value, per invoice, of Government grants 36 Thirteen of the bodies in the study received some form of government grant and it was the only source for seven organisations, including the Office of the Australian Information Commissioner. Grants are applied in different ways, generally following normal government funding arrangements. One exception to this approach is the Parliamentary and Health Service Ombudsman, which reports directly to Parliament and has a four year settlement. In recent years, almost all grant-funded bodies have suffered from budget cuts. Funding from customers of regulated bodies 37 We found little evidence of regulatory funding coming directly from the customer. The one significant example was the Irish Information Commissioner who is required to levy a fee of 150 for non-personal freedom of information complaints. This fee, which was imposed by the Irish Government in 2003, has delivered very little income - 5,350 in The Irish Information Commissioner has also commented that the level of fee for making an [EIR] appeal to my Office is discouraging potential appellants 3. Other sources of income 38 Similarly, other sources of income are not common. However, the HSE does raise around 5 per cent of its costs through sales including publications and training. 2 The First 6 Months of Fee for Intervention, HSE Board Paper, 26 June Commissioner for Environmental Information, Annual report 2011 Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 12

15 Current trends in funding 39 From our research we have identified key trends in funding. First, grantin-aid is reducing for almost all organisations. This is unsurprising given current trends in spending on public administration but it gives regulators a significant challenge to deliver their services with fewer resources. 40 Second, some regulators are increasing the proportion of costs paid by regulated bodies. For example, CQC and HSE have both recently introduced additional or higher charges. 41 Thirdly, there is a move towards putting the regulatory burden on those who drive the costs. This is particularly evident for the FOS, the CQC and HSE. Conclusions 42 There is a range of different potential funding mechanisms. In practice, government and regulated bodies are the principal sources of funding with a wide variety of different approaches used. Where regulated bodies pay for regulation, levies and other recurrent annual fees are widely used. The base for the levies varies according to organisation but many take account of the cost of regulation or the perceived regulatory risk of an organisation. Charges are also used with case fees providing the most common model. Other sources of income tend to be an almost insignificant component of regulatory funding models. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 13

16 Table 3.2 Summary of funding mechanisms Regulated Government Complainant Other body Body Reg Fees Appl fees Levies/Licence fees Case fees Fines etc Grant-inaid ICO X X Advertising Standards X Authority Care Quality Commission X X Dispute Service Ltd/ Tenancy Deposit Scheme X Financial Conduct Authority X X Financial Ombudsman Service X X Health and Safety Executive X X X X Information Commissioner for Ireland X X Legal Ombudsman X X Local Government X Ombudsman Ofcom X X Office of the Australian Information Commissioner X Ofgem X X Ofsted X X Ombudsman Service X Parliamentary and Health X Service Ombudsman Passenger Focus X Pensions Ombudsman X PhonePayPlus X X X Scottish Information X Commissioner The Adjudicator's Office X Fees Sales of goods and services Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 14

17 Table 3.3 Approximate shares of income by source (per cent) Body grant-in-aid Levies and fees Case fees Fines etc Other ICO Advertising Standards Authority Care Quality Commission Dispute Service Ltd/Tenancy Deposit Scheme Financial Conduct Authority Financial Ombudsman Service Health and Safety Executive Information Commissioner for Ireland Legal Ombudsman Local Government Ombudsman Ofcom Office of the Australian Information Commissioner Ofgem Ofsted Ombudsman Service Parliamentary and Health Service Ombudsman Passenger Focus Pensions Ombudsman PhonePayPlus Scottish Information Commissioner The Adjudicator's Office For this scheme full financial details are not available. Some income is drawn from other sources. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 15

18 4. Assessing the suitability of regulatory funding models Introduction 43 This chapter introduces a framework for assessing the suitability of funding mechanisms. It begins with a discussion of high-level principles and then identifies six criteria which can be used to assess models. For each criterion, we give a description and a set of questions which can be used to test whether a particular approach meets the criteria. High level principles for regulatory funding 44 This section discusses, at a high level, possible principles for a regulatory funding model. There are only a limited number of sources of regulatory funding. These include Government, regulated bodies and consumers of the goods and services produced by the regulated bodies. 45 For different types of regulation, where benefit accrues is important in determining the funding structure. The main beneficiary of regulation may be a customer or individual firm. When the principal activity of the regulator is complaint handling, the complaint may result from some failure in providing a service. In this case, it would seem appropriate that the costs should fall, directly or indirectly, on the customer or on the company possibly depending on whether a complaint is upheld. Of course, customers may pay indirectly for complaint handling through higher prices. 46 In other cases, there are, in addition to benefits for the customer, wider societal benefits. For example, the economy requires a prudently managed financial services industry suggesting that the regulatory burden should, at least in part, be met through taxation. However, regulated companies also benefit from regulation in that they are allowed to operate and, presumably, profit as a result. This would imply that regulated bodies should contribute. 47 Treasury Guidance, however, suggests the burden of regulatory funding should fall on regulated bodies. It says 4 Compulsory levies, eg licences to operate charged by statutory regulators, or to support industry specific research foundations, are normally classified as taxation. Such licences are justified in the wider public interest and not to provide a beneficial service to those who pay them. The Treasury may allow such bodies to retain the fees charged if this approach is efficient and in the public interest. As with other fees and charges, levies of this kind should be designed to recover the full costs of the service provided. If the legislation permits, these costs can include the costs of the statutory body, eg a 4 Chapter 6, Managing Public Money, H M Treasury 2007 Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 16

19 regulator could be empowered to recover the cost of supervision as well as registration to provide a licence. It may be appropriate to charge different levies to different kinds of licensees, depending on the cost of providing the licence. 48 This suggests that the Treasury thinks that the optimal funding model is full cost recovery from regulated bodies. Importantly, the guidance notes that it may be appropriate to charge different levies where costs vary. This implies that models where the costs fall most heavily on those who cost the most to regulate are considered desirable. This supports a move to a polluter pays model. Conclusion 49 There are economic and practical justifications for a range of funding models. In practice different approaches are used across regulatory bodies reflecting different views of who should fund regulation. As noted in the previous chapter, there is move to full cost recovery from regulated bodies. But this trend does not cover all bodies. Many public sector regulators remain grant funded with no indication of any changes in the near future. Additionally, there are bodies like the Competition Commission and the Office of Fair Trading that also remain grant funded. 50 Perhaps the best conclusion to be drawn is that the Treasury favours cost recovery from regulated bodies but other approaches are not excluded. Weighting costs on those whom it costs more to regulate is also seen as appropriate. For an individual regulator, different factors will drive different approaches to funding. Six assessment criteria 51 In discussion with the ICO and from our research we have identified the following six criteria for assessing regulatory funding models: 1. Supporting operational independence; 2. Delivering adequate funding; 3. Supporting delivery of regulatory objectives; 4. Scalable and react to changing demands; 5. Maintain the confidence of those providing the funding; and 6. Deliverable from an operational, political and legal perspective. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 17

20 52 The following sections discuss each of these criteria. 1. Supporting operational independence The funding model should not have undue influence on the operations and strategic choices of the regulator. 53 In order to gain the confidence of both regulated bodies and those who benefit from regulation, a regulator must operate and be seen to operate independently. From our research, there is little evidence that the funding model has a significant impact on an organisation s ability to act independently governance models are much more significant in meeting this objective. However, the funding model may lead to doubts about the independence of a regulator which may lead to lack of confidence in the regulator's actions. 54 The key questions this raises are: Does the funding mechanism raise questions with the public, customers or industry about the independence of decision-making? Does the level of funding that the regulator receives depend on the regulatory actions taken by that regulator? Does the funding mechanism affect the way that the regulator sets its priorities? 55 For public sector organisations, there is always a risk of a perception of interference. Ministers may make key appointments, including Chairs of Board and Chief Executives. And funding levels and mechanisms may also require Ministerial approval. However, this does not mean that Ministers or others directly influence the operations and decisions taken by the regulator. It is the governance structures of the regulator together with a degree of transparency in decision-making which help maintain confidence in the operational independence of bodies. 2. Providing adequate funding The funding model provides sufficient resources for the body to deliver its statutory duties. 56 To be an effective regulator, a body must have sufficient resources to deliver its organisational objectives whilst meeting appropriate quality expectations. Additionally, the funding mechanism would, ideally, allow sufficient certainty for the regulator to plan its business over the medium term perhaps three to five years. 57 The key questions this raises are: Taking a view over a three to five year period, does the funding model provide sufficient resources for the regulator to carry out its key regulatory activities? Does the funding model provide sufficient stability to allow financial planning over a three or more year time horizon? Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 18

21 58 A regulator clearly requires adequate resources to do its job. However, that does not mean that they do not have a responsibility to be as efficient as possible. Additionally, at a time of public spending cuts, and irrespective of the funding mechanism, many regulators will have the same challenge as other bodies to meet their objectives whilst reducing their expenditure. 3. Support delivery of regulatory objectives The funding mechanism supports the delivery of regulatory objectives by providing incentives for compliance. 59 A well-designed funding mechanism can support the delivery of regulatory objectives. Such a mechanism could provide incentives for regulated bodies to comply with rules governing their behaviour. For example, organisations with good track records could pay lower levels of fees than those with poorer past performance. Additionally, the regulatory burden could fall most on the biggest polluters - those who require regulatory action. At the highest level, a funding mechanism could drive improvements in performance at the system level by rewarding all participants in a sector for improved performance. 60 By contrast, a poorly designed system could act against wider regulatory interests. For example, imposing charges for advice from the regulator may act as a barrier to seeking advice leading to lower levels of compliance. A funding system that supports delivery of regulatory objectives should also reduce the overall regulatory cost, as the volume of regulatory action should decline as a result. 61 The key questions this raises are: Does the funding mechanism provide incentives for compliance with the regulatory regime? Does the funding mechanism allow for a positive working relationship between the regulator and the regulated to raise levels of compliance? 62 A poor funding mechanism could potentially lead to organisations being less likely to comply with the requirements of a regulatory regime. This could mean that there is an increase in the total of regulatory costs as regulatory action would be required to compensate for the compliance failures. 4. Scalable and reacts to changing demands The funding mechanism allows changes in the level of funding as the costs of regulation vary. 63 Over time, there may be changes in the scope and scale of activities carried out by a regulatory body requiring some agility and flexibility in funding. For example, there may be a large increase in the number of complaints that have to be investigated or a duty to carry out more inspections. Regulatory frameworks may change requiring more and different Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 19

22 activities. Ideally, a funding mechanism will allow for a change in the level of funding as the costs of regulation vary. 64 The key question this raises is: Is there a mechanism to change the level of funding as the requirements on the regulator change? 5. Maintain the confidence of funders The funding model transparently links the costs of regulation to the sources of funding. 65 Those who fund a regulatory regime are likely to have an expectation that their contribution is used for the efficient delivery of appropriate activities. This suggests a need for some level of transparency in any fee setting mechanism. Additionally, the system should not have excessive levels of cross-subsidy between different groups of bodies or sectors. For example, private sector providers should not subsidise those in the public sector. 66 The key questions this raises are: Is there a demonstrable relationship between the sources of funding and regulatory activities? Is there cross-subsidy between different groups of regulated bodies? Does the funding system allow the regulator to demonstrate its value for money? 67 The ability to demonstrate the relationship between funding and activities is unlikely to be achieved by the funding mechanism alone. The regulator is likely to need adequate internal systems both to support the setting of funding and to demonstrate their value for money. 6. Deliverable The funding mechanism can be delivered operationally at proportionate cost, is acceptable to both sponsors and regulated bodies and be lawful. 68 Any funding system must be deliverable. This criterion covers a very wide range of possible factors including operational, political and legal dimensions. For example, information needed to calculate any levies or charges must be available. Additionally, the cost of running a funding system should be proportionate to the amounts involved for both the regulator and those making payments. The system must be acceptable to both political sponsors and to those subject to regulation. And, of course, the regulator must act within its powers in setting any fees or levies. 69 The key questions this raises are: Does the regulator have the capacity and information to operate the funding scheme? Are the costs of operating the system proportionate to the money being raised? Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 20

23 Is the system (likely to be) acceptable to sponsors and regulated bodies? Is the system lawful? 70 This is a wide-ranging criterion with multiple dimensions. It may be that changes to internal systems are needed to make a system deliverable from an operational perspective. The potential for gaining acceptance from sponsors and regulated bodies is likely to be increased if there is a meaningful consultation exercise with a final scheme taking account of the views of stakeholders. In abstract, it is hard to assess the political acceptability of any approach implying that the introduction of new fees and charges will require careful handling and consultation. Conclusions 71 This chapter has introduced a framework for assessing a regulatory funding regime. At the highest level there are conflicting arguments as to who should bear the cost. Treasury Guidance and current trends suggest a move towards the cost of regulation being met by those who are regulated with the greatest contribution coming from those who cost the most to regulate. However, in some circumstances, grant funding seems to be preferred. 72 At a more detailed level, six assessment criteria have been identified. It may not be possible to find a funding mechanism that meets all requirements. But a systematic review of approaches using this framework will help identify suitable mechanisms alongside actions which can be taken to strengthen implementation. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 21

24 5. Assessment of future funding options for the ICO Introduction 73 This chapter describes and assesses a range of possible funding approaches for the ICO. We describe a range of approaches to charging and assess these for suitability using the framework introduced in the previous chapter. We draw conclusions on the best options including noting some steps that will be needed to implement the preferred approaches. Assessment approach 74 Our assessment approach was based on the six criteria set out in the previous chapter. The process involved giving a score for the funding model or mechanism for each of the six criteria using a relatively simple four point scale with the following definitions: 3 clearly meets criterion 2 meets major part of criterion 1 meets small part of criterion 0 fails to meet criterion 75 We have then drawn conclusions about the appropriateness of an approach by reviewing the score. We have not calculated a single score for each approach. Not all of the criteria have equal weight and any single summary rating could mask information that could inform a decision on taking an approach forward. In particular, our discussions with senior staff in the ICO suggested that the criteria relating to delivering adequate funding and supporting delivery of regulatory objectives were most important in the ICO context. 76 Scores for each option are in tables 5.1 to 5.3. The full assessments including some narrative are included in Appendix 3. Assessing the current approach 77 To provide a test of the assessment framework and to establish a baseline, the ICO's current funding regime was assessed. The regime is clearly deliverable at fairly low cost and, at least at present, delivers sufficient funding. There are also few areas in the system that causes questions about the independence of the organisation. However, the system is not scalable, in that an increase in demand for FoI work does not lead to an increase in the funds for that work. There is an opacity in the arrangements which may lead to a loss of confidence. The funding system does very little to support the delivery of regulatory objectives. High level architectures 78 At the highest level, there are a number of possible options for the funding model. At one extreme, all funding could be grant-in-aid. At the other end of the continuum, the funding model could be based entirely on fees and charges. Five different models have been reviewed: Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 22

25 1. All grant-in-aid, where all financing is derived from government grant 2. Charging for DPA work and grant to support FoI 5 work 3. Charging fees for private sector and grant to support all work in public sector whether DPA or FoI 4. Charging regimes for private sector and public sector work designed to cover all costs 5. Charging regimes for DPA and FoI work designed to cover all costs. 79 In the following sections, we discuss each of these approaches and assess how well they meet the evaluation criteria. Table 5.1 shows, for each of these models, the scores when assessed against the criteria. All grant-in-aid 80 This model would involve moving to a fully grant funded model. Such a model would have the advantage of administrative and operational simplicity. However, it fails to deliver on almost any other criterion. In the current public spending environment, such an approach would probably result in significant pressure on ICO's budget, potentially leading to a decrease in the quality of service. Any changes in demands would be unlikely to be met by increased resources. The model would not support meeting regulatory objectives, as there would be no incentives in the system to drive compliance. Finally, there would be no transparent link between income and spending, potentially weakening confidence in the funding model. 81 A variation on the grant-in-aid model has been suggested where the ICO's funding would be set for a number of years in advance without the risk of change. This model would be similar to those for organisations such as the Parliamentary and Health Service Ombudsman and the UK Statistical Authority. Such a model would give the ICO more certainty for its financial planning. However, there would be no exemption from public spending pressures and the other weaknesses in a grant-funding model would remain. Charge for DPA, grant for FOI 82 This approach is similar to the current arrangements in that the DPA work streams would be funded by charges and FoI work would remain funded by grant. However, the nature of the charging regime for DPA work could vary considerably and consist of a number of different types of charge. The options for charging are considered later in the chapter. 83 Our assessment of this model, unsurprisingly, closely matches the assessment of the current arrangements. However, depending on the detailed design, this system could be an improvement. In particular, the DPA charging regime could support the ICO's regulatory objectives and could be more closely linked to activities supporting transparency and confidence. Some greater scalability could also be brought into the DPA regime. However, the 5 FoI is used to cover all work under the FoI and EIR regimes and DPA covers both DPA and PECR. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 23

26 weaknesses caused by grant funding for FOI work remain with an absence of scalability and risks to the organisation's effectiveness if grant funding is reduced. Charge for private sector, grant for public sector 84 This model gives another way of splitting the costs between fees and grant with grant being paid to cover the costs of FoI and DPA within the public sector. The main reason for considering this approach is that it would remove the administrative costs of one part of the public sector charging another. Reducing the administration costs make this model quite deliverable both operationally and in policy terms. However, it increases the dependence on grant-in-aid leading to a lower score on adequacy of funding and scalability. This model does little to drive delivery of regulatory objectives or to increase confidence in the funding mechanism. Separate charging regimes for private and public sector 85 Under this approach, there would be a charging regime for DPA within the private sector and a separate regime for the public sector to cover both DPA and FoI. For private sector organisations 6, this approach would be identical to any of the other approaches for charging for DPA work. For the public sector, there would be a single relationship between ICO and relevant bodies covering the wider information rights agenda. This model would potentially, also reduce transaction costs. 86 Taking the model as a whole, this could be designed to ensure adequate funding and with a charging regime that reacts quickly to changes in demand. Incentives for compliance can be built into the design for charging. It would be possible to link activities to charges, strengthening confidence in the funding mechanism. This model could be politically attractive but will be unpopular with those who have to pay fees which are currently covered by grant. 87 Moving to a fee funded model is likely to increase the level of scrutiny of the way in which ICO spends its income. Therefore, ICO would need to ensure that it has a robust approach to measuring both its own costs and effectiveness. Separate charging regimes for DPA and FoI work 88 This model is very similar to the previous approach but making the division between FoI and DPA charges. As with the previous approach, charges can be set to ensure that the ICO has adequate funding. The detailed funding arrangements could also be designed to react to changing demand and to support delivery of regulatory objectives. Operational delivery will depend on the details of the charging regime. Politically, this approach is 6 There are a small number of private sector organisations who are subject to the FoI or EIR regime. For this model, such organisations could be considered as part of the public sector. Similarly, those public sector organisations which are not covered by FoI or EIR could be considered as part of the private sector. Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 24

27 likely to be more acceptable to sponsors than to regulated bodies. Costs of operating the system might be marginally higher than having a single system for the public sector. Table 5.1: Assessment scores for high level models Option Current arrangements Independent Adequate funding Support regulation Scalable Confidence Delivery All grant-in-aid Charge DPA, grant FoI Charge private sector grant public Charge private sector and public sector Charge for DPA and for FoI High level architecture conclusions / / / /3 3 2/3 2/3 2/3 2 2/3 3 2/3 2/3 2/3 1/2 89 Any model which includes grant funding appears to have fundamental weaknesses. Primarily, although such a model might currently deliver adequate funding, public spending constraints may increase pressures on the organisation making it harder to deliver an effective regulatory service. Grant funding is also fixed and does not vary with demand. Therefore, any increase in demand for services will not be met, at least in the short term, by increased resources - potentially reducing the quality of service. Grant funded models are at least simple to administer and have low operational costs. However, such models cannot be used to support meeting regulatory objectives there can be no incentives built into the funding system to drive compliance or improvement. 90 There is little variation between any of the models in our assessment of supporting operational independence. This mirrors our finding from the research which suggested that governance was much more important that the precise funding regime in ensuring independent decision making. The current ICO model seems to be effective and there is no reason, from a funding perspective, for change. 91 The weakness of grant models would suggest that a fully fee funded model is most appropriate for the ICO. With careful design, this type of model can ensure that the organisation has sufficient resources to deliver an Belmana Review of Regulatory Funding: A report to the Information Commissioner s Office 25