The cost-benefit analysis (CBA) strand of the N2+2 review included two elements. One was a report by National Economic Research Associates (NERA) on CBA methodologies. The other was a report by John Howell & Co (JHC) on embedding CBA more deeply in the FSA. Both reports are available on the right hand side of this page.

Both reports highlight the substantial achievements we have gained for the quality of our CBA output and the international reputation we have earned in this area. But we recognise that we must build upon the progress we have made and take on board insights from external experts. We are grateful to both NERA and JHC for their thoughtful and incisive analysis and recommendations. We have as a result committed immediately to the following:

 

NERA report

We will:

  • Engage practitioner and consumer stakeholders on CBA issues at a very early stage in the policy making process in all cases where it is possible to do so;
  • Adopt NERA's new guide to ex ante CBA in FSA training on CBA;
  • Use NERA's criteria for ex post CBA to identify the most valuable ex post CBAs that we can undertake, with specific projects of this kind to be selected under the same governance arrangements as apply to the FSA's rule-making initiatives.

In addition, we recognise that cumulative CBA, in the pure sense of the term, is in practical terms impossible. This reflects the extreme difficulty of modelling, with any reasonable certainty, what the net cost-benefit effect of regulation on UK's financial services markets would now be like, compared with a position prior to regulation. We will therefore:

  • Identify the most valuable projects of the types suggested by NERA as substitutes for a full cumulative CBA, with the selection of specific projects being made under the same governance arrangements as apply to our rule-making initiatives. These projects may include surveys of firms and consumers about the overall impacts of regulation and mapping between market failures and regulation.

 

JHC report

Our action plan is set out for ease of reference under the recommendations made by JHC.

 

Recommendation 1

CBA should be seen to enjoy full Top Management sponsorship, including endorsement and monitoring of its routine use.

  • In publishing this response to the report, our senior management team fully endorses use of CBA. It will continue to ensure that, absent powerful reasons to the contrary, divisions:

    • apply market failure analysis (MFA) and high-level CBA to possible interventions before any significant resources are committed to developing proposals; and

    • use CBA as an integral part of the policy making process to illuminate policy choice

  • Our Regulatory Policy Committee (RPC) will continue to expect to see evidence of the use of CBA as described above and, the RPC will requisition an internal report on the use of CBA at six-monthly intervals.

 

Recommendation 2

FSA should take action to embed firmly use of CBA as a means of organising and conducting analysis of issues as policy is developed.

  • See actions under 1. above.

  • Our commitment to CBA will be reflected in all relevant personal objectives, including those of senior management and everyone else involved in policy development.

  • We will implement the recommendations of NERA's report on CBA methodology, as explained above.

  • Our Business Risk Assurance Division will check that incentives for use of CBA throughout the organisation are effective.

 

Recommendation 3

There should be clear lines of responsibility for the conduct of CBA, confirmed and enforced by top and senior management.

  • See action on personal objectives under recommendation 2 above.

  • Lines of responsibility will be clarified and documented in revised versions of our internal process documents. Overall responsibility for the conduct and quality of CBA will remain with the areas responsible for the underlying policy and the role of the microeconomics team as the setter of standards and source of advice and challenge for CBA will remain. But:

    its staff will be attached to each new policy proposal from inception as an integral part of the policy development team (rather than as someone to be consulted ad hoc);

    its staff will undertake complex CBA on behalf of policy divisions, reflecting concern that some CBAs may be technically difficult and are unlikely to be tackled successfully by people without advanced CBA skills.

 

Recommendation 4

The use of CBA should be appropriately resourced to ensure that there are enough well qualified staff available to conduct CBA.

  • To make the above developments feasible, additional resources will likely be required in policy divisions and the microeconomics team. This will be addressed in the forthcoming budget round.

  • Learning and Development Plans for policy staff will factor in the need for CBA and economics training.

  • External courses for CBA and MFA will be identified to strengthen and deepen policy makers’ skills.