AI in regulatory decision making – is it the end of the world?

September 27, 2023

In November the UK will be hosting the first global summit on the regulation of AI at Bletchley Park. The recent growth of programs such as ChatGPT has prompted much debate around standards for the creation and deployment of artificial intelligence, and even concerns about the future of humanity. But what about the deployment of AI tools by governments and regulators?

Algorithms have been deployed in certain areas of public law decision-making for significantly longer than ChatGPT has been available, but there is a question as to whether the potential benefits and pitfalls of this use – and in particular the use of advanced systems – have been sufficiently debated or whether this issue has simply flown under the radar. Research conducted by Herbert Smith Freehills showed that only 5% of UK consumers are unconcerned about the growing presence of AI in everyday life. Regulated entities may tend to agree if they turn their minds to the issue.

With advanced AI tools expected to become embedded in widely used software, the operation of AI and algorithms will surely contribute more and more to governmental and regulatory decisions. High value decisions, such as on key procurement projects, subsidies, or development consent for large developments, are unlikely to be wholly made by AI tools at least for the moment, but they are likely to be used as part of the process.

The risks of large language models such as ChatGPT have been debated in the past few months, with high-profile examples of hallucinations, where the model confidently describes events that do not exist. These risks and others demonstrate that the use of AI in public sector decision making is not without its issues. It is vital that those issues are acknowledged, understood and managed to ensure key public law principles for the protection of those dealing with public bodies continue to be upheld.

How AI is already being used, and how might it be used going forward

Algorithms are sets of rules that turn inputs into outputs: for instance, an algorithm might take a transaction as its input, and assign it a risk of being fraudulent as its output, depending on various data points about the transaction. Advanced AI programs use algorithms aimed at becoming more effective at performing the task at hand. When used in the regulatory context, the algorithm or AI program is generally not the sole decision-maker – it is used at a stage in the process, or to guide decision-makers towards areas where their impact may be greater.

AI has clear advantages for often under resourced regulators. Algorithms give regulators an opportunity to marshal the large volumes of data they amass. The FCA processes over 1 billion transactions every month in Market Oversight. Its web scraping techniques, aimed at spotting potential harm, scan approximately 100,000 websites every day. Both the FCA and the CMA have data lakes, parts of which are then used by their respective algorithms. The CMA’s DaTa unit provides AI tools for its merger review teams to aid document review, including tools which indicate how likely it is that a document is about competition-related topics, and one which indicates whether a document discusses activity that is within the UK. AI is therefore already embedded as a regulatory tool that is important to enable regulators to fulfil their public functions efficiently.

Regulators around the world are increasingly using AI to address the particular challenges they face. In Denmark, public procurement represents 14% of GDP and 24% of the Danish government’s total expenditure. The Danish Competition and Consumer Authority has created a tool called Bid Viewer, to assist it to screen for potential cartels in public procurement bids. The tool appears to be able, for instance, to flag where companies may have agreed geographical areas where they will not bid against each other, where firms alternate having the lowest bid between each other, and where two organisations simply do not enter procurement exercises against each other. Such analyses could, on their face, have been completed by a well-resourced team without using such tools, but the tools are likely to have made such analyses quicker, and guide analysts towards situations more likely to be of interest to the regulator.

Another example of the use of AI comes from food hygiene inspections. In 2022, the Food Standards Agency piloted the use of an algorithm to predict the food hygiene rating of an establishment that was awaiting its first rating. The aim was to allow inspectors to prioritise for first inspection those newly opened establishments that were predicted to have low ratings.

It is easy to see how this type of tool could be adapted elsewhere as regulators deal with increased demands and constrained resources. For example, an algorithm could prioritise certain businesses for increased regulatory scrutiny where they are predicted to be more likely to have issues with compliance. But it is also easy to see the potential pitfalls of such an algorithm. If trained on a database of past enforcement actions, it could become infected with biases based on the regulator’s past decision-making. Companies could become the equivalent of a restaurant opening where previous restaurants did not clean their kitchens properly – not doomed by association, but subject to heightened scrutiny by association. The management time and the effect on reputation of dealing with a regulatory investigation can be considerable, even where those investigations close at an early stage with no adverse findings. Issues could become self-perpetuating: an algorithm with a tendency to recommend businesses from a particular country for further scrutiny, then leads to more enforcement cases being opened, which leads to the algorithm recommending further firms from that country for scrutiny.

Considerations for decision-making bodies

There are numerous practical considerations for decision-making bodies to ensure that AI is used in a way that is compliant with public law duties. One is ensuring that how the algorithm generates each result is documented in a transparent way. In the House of Commons Science, Innovation and Technology Committee’s recent interim report on the governance of artificial intelligence, they counted this among their twelve challenges of AI Governance and referred to it as the Black Box challenge. This is a concern of the Key principles for an alternative AI white paper, signed by a range of NGOs, which states as its first principle that transparency must be mandatory. The transparency that the NGOs advocate for is transparency to those subject to or impacted by decisions – at a bare minimum, people should know AI is being used in their situation and how decisions are being made. Without transparency there can be no accountability. Transparency will enable the decision-makers to spot issues with an algorithm at alpha or beta stage, and allow for routine quality control once the algorithm is live. If the algorithm’s rationales for its output make little sense, or show evidence of bias (another of the twelve challenges highlighted by the House of Commons Committee), changes can be made. It should enable decision-makers to show a clear, documented process in the event of challenge.

Decision-makers will be well used to documenting the reasons for decisions, but they will need to consider all steps of the process and whether algorithms were used at any stage. For instance, AI may be able to summarise large volumes of information, and this or similar tools could be used as part of document review exercises. If the program inadvertently only summarises the first 50 pages of a 100-page document, missing out key sections, this is likely to feature heavily in any subsequent challenge by way of regulatory appeal or judicial review. A transparent, documented process would make it easier for decision-makers to spot the error before any final decision is made.

Ensuring that algorithms document their process should help to minimise the risk that there is a disconnect between how decision-makers think an algorithm is generating results, and how it is actually doing so. A witness statement explaining that while the decision-maker had thought that the program was operating in one way, but that it was in fact operating in quite another, may fail to convince a judge some way down the line that the decision is sound. The same problem can of course arise with human decision-makers – one colleague believes that another has reached their view using a certain process, and in fact their colleague has taken a different approach. But it is more acute when algorithms are used, as it may be difficult to piece together later the factors behind a decision that was not documented at the time, because you cannot, generally, conduct a witness interview with an algorithm.

In time, if AI programs are eventually used to make substantive decisions, a whole host of other issues will need to be addressed. Would that constitute improper delegation or fettering of discretion for example? Where a piece of legislation mandates certain factors to be taken into account, how can that be guaranteed and evidenced? Does procedural fairness include a right to some form of human involvement in a process? How can a regulator demonstrate a decision was rational if they do not themselves understand exactly how it was made? These and other considerations – which could also arise in relation to steps in regulatory processes before substantive decisions are made – should be balanced against practical benefits and properly debated before widespread substantive use of AI takes place in the regulatory field.

Considerations for those subject to decisions

There are equally practical considerations for those on the receiving end of a decision from a public body, and the current lack of transparency highlighted by NGOs causes issues for organisations considering challenging any regulatory action against them. The Algorithmic Transparency Recording Standard, launched earlier this year, gives government departments the option to disclose how they are using algorithms. This is a relatively low bar in terms of transparency. In the absence of the kind of transparency which NGOs seek in the use of AI in government, those preparing for or considering challenging a regulatory decision may need to consider carefully which questions to ask the relevant public authority to extract the right information, and may need to remind public bodies of their duty of candour.

In engaging with decision-makers, organisations should think through how different types of AI, and different datasets, may affect decisions. Inconsistencies in a dataset can have magnified effects. An example would be separate entries in a dataset for every year of a past multi-year investigation into a particular business, where similar investigations against others are entered only once. The algorithm then treats these as three separate investigations into the business, and flags it as having persistent issues with compliance. Those using the data are not aware of the issue, and decisions are flawed as a result. It will be increasingly important for legal teams to know what datasets might be relevant, how they were put together, and to interrogate how those datasets are being used by public authorities in decision-making.

One practical point is that if organisations can get a sense of what algorithms will be used in the process, this can inform their preparation. If programs will be used to summarise documents, and those programs are available as part of generic office software, consider running documents through those programs prior to submission to check that key points are reflected in the summaries.

All these issues have heightened relevance in the regulatory context, where courts traditionally show significant deference to the decision making of an expert and experienced regulator. If in fact key aspects of that decision making are conducted by an AI program, businesses may argue that the same margin of discretion and hands-off approach cannot be justified.

Conclusion

Amongst the wave of negative press that AI has recently faced, it is important to recognise the considerable opportunities for regulators if algorithms are used well. They can make decision-making teams more productive, and focus limited resources on areas of highest impact. Certainly many of those facing regulatory action would welcome quicker and more efficient regulatory investigations if AI can assist with aspects such as document review. But the particular risks for public bodies using algorithms must be addressed. Transparency and the possibility of bias are chief among them given the importance in public law of independent, impartial and reasoned decision making which allows organisations to understand the decision against them at least in enough detail to know whether or not there is something to challenge. Those subject to decisions should be alert to the kinds of issues that algorithms can cause, and willing to pursue tailored and specific lines of inquiry. When on the receiving end of an unwelcome letter from a regulator, a company’s first thought is unlikely to be “maybe an algorithm has been trained on flawed data” or “maybe a key part of our material was never read by decision-makers“, but perhaps its second or third thought should be.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Professional Support Consultant
+44 20 7466 2998
James Wood
James Wood
Senior Associate
+44 20 7466 2306
Daniel de Lisle
Daniel de Lisle
Associate
+44 20 7466 2596

Welcome to the Future: AI offers a window into the UK’s evolving regulatory environment

May 16, 2023

How to regulate an emerging sector is always an interesting question to which there can be many answers based on the various models of regulation. The UK’s regulatory environment for artificial intelligence (“AI“) is poised for significant evolution, and in this post we consider whether the somewhat unconventional approach proposed by the Government may provide some insight into the future of regulation in other areas.

Proposals for regulating AI – a centrally co-ordinated principles based approach

On 29 March 2023, the Government’s Department for Science, Innovation and Technology published its White Paper on a “pro-innovation approach to AI regulation” (the “White Paper“) (available here), which seeks stakeholder views on the Government’s proposed new AI regulatory framework. For a discussion of the substantive issues see our TMT Notes blog post.

In terms of the regulatory approach:

  1. The Government proposes to introduce five “cross-sectoral principles” (the “Cross-Sectoral Principles“) for existing regulators to have regard to when dealing with AI issues, intended to “guide and inform the responsible development and use of AI“.
  2. Initially, the principles will be issued on a non-statutory basis and applied by regulators within their remits, primarily through guidance. A new statutory duty may subsequently be introduced, which would require regulators to have due regard to the Cross-Sectoral Principles.
  3. The way that regulators apply the Cross-Sectoral Principles when introducing new guidance or other measures, as well as when conducting investigations and enforcement action, should be informed by existing law and regulations. This includes human rights and equality legislation, as well as general public law principles such as rationality and procedural fairness.

The White Paper recognises that AI technologies are advancing rapidly and that “a complex patchwork of legal requirements” currently applies to AI, creating difficulties for businesses. The White Paper explains that regulators also face difficulties, because “some AI risks arise across, or in the gaps between, existing regulatory remits“.

Rather than introducing a new, AI-specific regulator, the Government proposes to introduce a centrally co-ordinated regulatory approach across existing regulators, under the banner of “cross-cutting, principles-based regulation“.

At the heart of the proposed new framework are five Cross-Sectoral Principles, namely:

  • safety, security and robustness;
  • appropriate transparency and explainability;
  • fairness;
  • accountability and governance; and
  • contestability and redress.

Under the Government’s proposals, regulators would “be expected to apply the [Cross-Sectoral Principles] proportionately to address the risks posed by AI within their remits, in accordance with existing laws and regulations“.

The Government envisages playing a central co-ordinating role, including through the production of “central regulatory guidance“. The White Paper indicates that this central regulatory guidance would, amongst other things, encourage initiatives such as guidance being jointly produced by different regulators, and aim to prevent the Cross-Sectoral Principles from hindering innovation.

The potential introduction of a new statutory duty

The Government does not propose to incorporate the Cross-Sectoral Principles into statute in the initial stages of the new framework. However, it anticipates that it will eventually pursue the enactment of a statutory duty for regulators to “have due regard” to the Cross-Sectoral Principles. The enactment of such a duty would aim to “strengthen and clarify regulators’ mandates“, and could encourage an increased willingness to take enforcement action amongst some regulators.

The continuing relevance of existing law and regulations

Irrespective of whether the proposed statutory duty is enacted, regulators will be expected to continue taking account of existing law as they develop guidance or other measures. Some of the Cross-Sectoral Principles have close parallels with existing law; for example, the White Paper recognises that the application of the Cross-Sectoral Principle of “fairness” by regulators should “include consideration of compliance with relevant law and regulation“, including the Human Rights Act 1998 and the Equality Act 2010. Regulators will therefore be required to have regard to these and other existing legislative requirements, as well as to public law principles more generally, when decision-making, including when conducting consultations, issuing guidance and conducting investigations and enforcement action.

What does this tell us about the future of regulation?

The approach proposed for AI differs significantly from the traditional model of a specific regulator as part of a detailed statutory regulatory scheme applying to a particular area, or even from models of self-regulation. It also departs significantly from the comprehensive and centralised framework proposed in the EU. The reasons given for this emphasise the need for flexibility and agility in the rapidly moving world of AI. AI is, of course, not the only area where developments often outpace law and regulation, and those arguments could apply equally well in other contexts and sectors. Indeed, this approach does appear to be part of a broader trend towards the use of policy and guidance, emphasising higher level principles and the attractiveness of being nimble, over detailed legislation. It also chimes with the Government’s recent policy paper on ‘Smarter regulation to grow the economy‘ which looks at reducing regulatory burdens to drive economic growth and boost innovation, and in which the view is expressed that “governments too often reach for the lever of regulation first, when other ways to improve and safeguard outcomes are available“.

As always, flexibility comes with its downsides. There is an obvious risk, when tasking multiple regulators with providing guidance in their own areas, of inconsistency or indeed of certain matters falling between the gaps due to a lack of clarity as to who takes ultimate responsibility for a specific issue. Concerns have already been expressed by the Information Commissioner’s Office over precisely how regulators would be expected to interact with the central regulatory guidance, and over funding and co-ordination more generally. Consistency across sectors may be particularly difficult to achieve under this model.

This approach also lacks the certainty and predictability that businesses are used to in other regulatory spheres. The very point of “nimble” guidance is presumably that it can be changed at a moment’s notice, leaving businesses at risk of spending disproportionate time and money trying to comply with ever-shifting standards. Often when a new policy is announced by the Government we are told that the devil will be in the detail, but here there is to be no such detail, or what there is will be in non-statutory guidance only. That leaves businesses, and indeed regulators, seeking to use the high level principles to fill in gaps where no specific guidance applies. Needless to say, those two groups of organisations are not always going to interpret and apply high level principles in the same way. Further, it is unclear how enforcement will operate if standards are only contained in non-binding guidance, although the Government has emphasised its expectation for regulators to act proportionately and in a way that does not stifle innovation.

There are also broader constitutional implications about such heavy reliance on guidance, not least the lack of Parliamentary scrutiny. A more practical concern is that essential procedural safeguards for businesses in this regulatory space may not be guaranteed in the way they are in comprehensive statutory schemes.

One potential consequence of pursuing this avenue may be a greater reliance on general public law principles to fill the gaps when things go wrong. Where a regulator fails to act in a way which is incompatible with its public law duties, then it will be open to businesses and other stakeholders to challenge the regulator’s decisions or actions by way of judicial review. Judicial review may therefore play a significant role, for example in ensuring procedural fairness is upheld in circumstances where there is no set procedure laid down in legislation. Judicial review can also police how regulators use guidance, ensuring that relevant guidance is taken into account but not applied blindly and inflexibly.

It will certainly be interesting to see how this regulatory experiment works and whether, after some time, the Government decides to revert to more traditional statutory intervention. If the system works well, and is welcomed by both businesses and regulators for cutting red-tape and encouraging innovative and collaboration, that may well herald a new approach in other sectors.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Professional Support Consultant
+44 20 7466 2998
Antonia Smith
Antonia Smith
Senior Associate
+44 20 7466 2550

Court of Appeal advocates a practical approach for regulators faced with non-compliant legal systems

December 1, 2022

In R. (on the application of SSE Generation Ltd) v Gas and Electricity Markets Authority (GEMA) [2022] EWCA Civ 1472, the Court of Appeal allowed the appeal and cross appeal brought by the Gas and Electricity Markets Authority (“GEMA“), and SSE Generation Limited (“SSE“), respectively, in the context of amendments made to an energy code.

Key Points

  • A regulator seeking to bring a non-compliant legal system into compliance with the law may have an element of discretion as to managing that transition, such that brief periods of non-compliance may be permitted by the courts.
  • If there is a conflict between a private law contract, such as the Connection and Use of System Code (“the Code“), and the statutory duties of a relevant regulator, the latter will prevail. A public law decision maker cannot prevent itself from complying with its statutory duties by entering into, or approving, an inconsistent contract.
  • Despite having power to rectify errors in legislation, the court will not repair such errors if there is a complex and uncertain regulatory environment where the legislative intent cannot be certain and will be wary of straying into judicial legislation.

Background

The appeals concerned GEMA’s decision on a modification to the methodology for setting transmission charges payable to network operators by electricity generators using the network in Great Britain (“the GEMA Decision“). In the GEMA Decision, the modification of the Code: (i) required a methodology to be adopted for the setting of charges which was not compliant with the relevant law but which was intended to constitute an interim position pending a fresh decision which would be legally compliant; and (ii) adopted a definition of the expression “congestion management” which meant that the costs attributable to the management of “congestion” on the transmission system within Great Britain were not taken into account when calculating limits on the transmission charges which could be levied.

Following the GEMA Decision, one affected electricity generator, SSE, brought a statutory appeal to the Competition and Markets Authority (“CMA“) which upheld the GEMA Decision. Consequently, SSE sought judicial review of the CMA’s decision. The High Court held that it was unlawful for the CMA to approve the GEMA Decision endorsing the imposition of unlawful charges, even as an interim measure. However, it upheld the CMA and GEMA’s decision that the only congestion management costs falling outside the exclusion for ancillary services were those relating to the management of congestion on interconnectors between EU member states (see our blog post on this case here).

There were therefore two appeals against the High Court’s judgment:

  1. The first appeal was brought by GEMA in relation to its power to adopt interim “stop gap” measures, which include non-legally compliant components in respect of a modification to the Code (“Issue I“).
  2. The second cross appeal was brought by SSE concerning the meaning of “congestion management” costs (“Issue II“).

Judgment

The Court of Appeal (Green LJ giving the leading judgment) allowed both the appeal by GEMA on Issue I and the cross appeal by SSE on Issue II.

Issue I

Issue I concerned the powers and duties of a regulator when confronted with a system which is not compliant with the law but where the regulator then seeks to bring the system into compliance, which may be a complex exercise that cannot be done immediately.

There is a statutory duty on GEMA to both comply with the law and ensure compliance by its regulated community. The existence of a duty does not, however, preclude the decision maker also having a discretion as to how to go about ensuring compliance; the two are not mutually exclusive.  In managing that transition from non-compliance to compliance, the court concluded that the judge erred in ruling that GEMA’s staged approach was unlawful. It was implicit in the judge’s reasoning that there was no discretion or power for GEMA to do anything more than demand immediate observance, even if this was impossible to achieve in any realistic and practical sense, and left the state of observance with the law in a worse situation. To prohibit the interim stage upon the basis that it reflects a degree of temporary (diminishing) non-observance, as the judge did, begs the question of what regulators are meant to do in a case such as the present in order to meet their statutory duty.

The court concluded that under the relevant legislation GEMA had power as to how it went about performing its duty to secure compliance with the law. This power came with a relatively broad margin of judgment or discretion in identifying a solution to turn non-compliance into compliance.

It was also important to bear in mind that the Code is a private law contract. The facts of the case suggest that the Code is capable of hindering the discharge by GEMA of its statutory duty.  However, in light of the fundamental principle of public law that a decision maker cannot prevent itself from complying with its statutory duties by entering into, or approving, an inconsistent contract, the Code cannot take precedence over the duty of GEMA to ensure timely compliance with the law. Insofar as there is a conflict between the Code and the statutory duties of GEMA, the latter will prevail.

Therefore, GEMA is not bound by the Code when it comes to taking the steps necessary to ensure compliance with the law, and, if the Code is an impediment to proper enforcement it is either inoperative and GEMA should deploy other powers at its disposal to give effect to its duty, or it needs to amend the Code, or both.

Issue II

Issue II was about the meaning of the phrase “congestion management” and whether the costs of managing certain aspects of network congestion must be taken into account in the calculation of transmission charges.

Upon the expiry of the post-Brexit implementation period, the relevant EU measure (“the 2019 Regulation“) was translated into EU retained law. Whilst purporting not to change anything, the drafter of the EU retained law, instead of using the definition of “congestion” in the 2019 Regulation, used a definition from a 2009 repealed version of that regulation (“the 2009 Regulation“) whilst also noting that this reversion was not intended to bear a meaning differing from the 2019 Regulation. There were discrepancies between the 2019 definition and 2009 definition of “congestion” which, if applied, would risk creating market distortions.

Despite detailed consideration the court found the legislative approach “baffling” in light of the general rule of legislative drafting, that a measure should not be amended unless it is intended to convey a change of meaning. The court concluded that the definition of “congestion” in the EU retained law reflected an error which lies in the assumption made that the new 2019 definition was not intended to bring about any substantive change to that in the old, repealed, 2009 Regulation. In other words, the legislature had not intended to define “congestion” in narrow terms linked to congestion on international interconnectors.

Lord Justice Green also noted that despite the court having powers to correct errors in legislation, it will always ensure, to the greatest extent possible, that the legislative intent is fulfilled and should only undertake legitimate purposive interpretation and not stray into judicial legislation. The court noted that here the task would involve seeking to replicate the exercise of a statutory power conferred upon the Minister in a complex and uncertain regulatory environment and in an area of relations between Great Britain, Northern Ireland and the EU which is currently beset with political complications. Therefore, the court concluded, with some hesitation, that it was best to leave it to the Secretary of State to make any changes that were considered necessary to achieve the stated present purpose of the measure of EU retained law.

The court also considered a procedural issue concerning the admissibility of the views of officials in London and in Brussels on the meaning of the 2019 Regulation. The court noted that the views of officials do not fall within the class of documents traditionally treated as admissible as a guide to legislative intent. Views of officials do not necessarily represent the views of responsible Ministers or the institutions that employ them and play no part in the legislative process. To take them into account would be inconsistent with the principles upon which purposive interpretation operates.

Comment

The judgment in this case, despite being concerned with a specific legislative regime in the energy sector, raises broader issues of importance across public law.

The Court of Appeal’s practical approach to the impossible situation the regulator found itself in shows that a degree of flexibility and common sense often needs to accompany the strict legal analysis. This will be welcomed by regulators.

This judgment is also notable as it shows the court’s apprehension towards using its power to correct errors in legislation when the error is related to a complex and uncertain regulatory environment. This will be particularly relevant in the case of EU retained law where, as the court itself explained, “the legislature pushed through literally thousands of complex and highly technical measures, overwhelmingly in subordinate legislation, in record time and invariably with but scant Parliamentary scrutiny of the detail, in order to meet the deadline for the end of the post-Brexit implementation period“.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066

Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465

Jasveer Randhawa
Jasveer Randhawa
Professional Support Consultant
+44 20 7466 2998

Administrative Court dismisses judicial review challenge of FOS “mortgage prisoner” decision

October 10, 2022

The post below was first published on our Banking Litigation notes blog.

The Administrative Court has dismissed an application for judicial review of a decision by the Financial Ombudsman Service (FOS) in the context of a complaint against a lender by an individual borrower who claims she is trapped in her mortgage (a so-called “mortgage prisoner”): Mortgage Agency Service Number Five Ltd, R (On the Application Of) v Financial Ombudsman Service Ltd [2022] EWHC 1979 (Admin). In this case, the court found that the FOS did not accept jurisdiction over complaints which were out of time and there was no other basis for challenging the final decision of the FOS.

The result demonstrates the court’s reluctance to interfere with the wide remit of the FOS to consider a complaint by reference to what is “fair and reasonable in all the circumstances of the case” (s.228 of the Financial Services and Markets Act 2000 (FSMA)). In particular, the court recognised that it is for the FOS to decide the parameters of the complaint when considering whether it will accept jurisdiction over it. The court also acknowledged the FOS’s wide discretion to consider the background and context to complaints found to be within its jurisdiction.

The judgment therefore reflects the court’s usual approach of giving significant latitude to the judgment of specialist decision-makers in judicial review. The court indicated that it is only if the Ombudsman makes an error in reaching a final determination that there might be a basis for action.

The case is considered in more detail below.

Background

The claimant (MAS5) is a mortgage lender which is part of the Co-operative Bank, and which currently owns the mortgage of Mrs Gwendolyn Davies, the Interested Party to the claim.

In October 2018, Mrs Davies made a complaint to MAS5 about the fairness of the interest rates charged under her mortgage, and subsequently escalated her complaint to the FOS in December 2018.

The FOS decided that it would be able to investigate the complaint about the interest rate that MAS5 applied to Mrs Davies’ mortgage from October 2012 (i.e. for the six years prior to the initial complaint made by Mrs Davies, in accordance with Rule 2.8.2 in Chapter 2 of the “DISP Dispute Resolution: Complaints” section of the FCA Handbook (DISP)). As part of this investigation, the FOS confirmed that it would review the history of Mrs Davies’ mortgage from the time it reverted onto the standard variable mortgage rate in January 2009.

MAS5 applied for judicial review of the FOS’s decision to consider the rates applied to the mortgage prior to October 2012, on the ground that this decision was an error of law and goes back further than the jurisdiction of the FOS permits (i.e. more than six years before the complaint was made in October 2018).  MAS5 did not challenge the decision of the FOS to investigate the complaint about the interest rate applied to the mortgage from October 2012.

Decision

MAS5’s application for judicial review was dismissed. The key elements of the decision were as follows:

  1. FOS entitled to identify the parameters of the complaint. The court stated that it is for the FOS to decide what the complaint is and whether it will accept jurisdiction over it. In the court’s view, the FOS had clearly both: (a) identified the complaint as it was understood; and (b) stated which parts the FOS would, and would not, accept jurisdiction over.
  2. FOS did not accept jurisdiction for time-barred complaints in this case. The court found that the jurisdiction the FOS accepted was, exclusively, to consider complaints about interest charged after October 2012, and the proposed consideration of interest variations before October 2012 was firmly set as background or context only. Accordingly, there was no basis for challenging the FOS’s final decision on the basis that it accepted jurisdiction over complaints which were out of time.
  3. FOS has broad discretion to consider background to complaint. The court emphasised the broad discretion of the FOS under s.228 FSMA and DISP 3.6.1R to decide what it will take into account when deciding what is “fair and reasonable in all the circumstances of the case”. In the court’s view, the FOS was entitled to consider the background to the complaints within its jurisdiction, including the setting of the prevailing rate. The FOS’s decision as to what it would take into account was not irrational or unlawful.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066

Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465

Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998

Ariel Wiebe
Ariel Wiebe
Associate
+44 20 7466 3844

Public Law Project: Judicial Review Trends and Forecasts conference 2021

September 29, 2021

We are delighted to be supporting the Public Law Project again in running its annual Judicial Review Trends and Forecasts conference. This year the conference will take place as a week of online seminars on the theme of ‘accountability and the constitution’.

The sessions will begin on Monday 18 October, and will include a keynote speech by the Rt Hon Suella Braverman MP QC, Attorney General. Andrew Lidbetter, Nusrat Zar, Jasveer Randhawa and James Wood of Herbert Smith Freehills will be among the other speakers.

Sessions will run from Monday 18 October – Friday 22 October. Topics covered include:

  • Top Public Law Cases of the Year
  • Judicial Review of the Regulators
  • Judicial Review and justice during the pandemic
  • Interveners and third parties in Judicial Review

For full event details and to purchase your tickets please visit the Public Law Project website: JR Trends and Forecasts 2021: Accountability and the Constitution – Public Law Project

If you have any further queries or special requirements, please contact the PLP Events Team at: events@publiclawproject.org.uk

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
James Wood
James Wood
Senior Associate
+44 20 7466 2306

Public Law Podcast: Regulatory Disputes in the Consumer Sector

March 25, 2021

Businesses who deal with consumers will generally wish to have a good relationship with Government, regulators and other public authorities. However, there are times when a company’s interests are such that they come into conflict. At those times companies may wish to consider how that conflict might be resolved if it were to reach court. Last June, we created a guide to Regulatory Disputes in the Consumer Sector. This guide is designed for businesses that interact with consumers, for example, selling products to the public direct or through retailers, who might have to consider how to proceed when regulatory matters become contentious, and indeed those who work at regulators themselves.

The guide collates a number of significant cases from recent years to demonstrate how administrative law principles work in practice within this sector. However, since we published the guide, there have been additional and significant developments, in particular due to the impact of the UK leaving the EU. Andrew Lidbetter, Jasveer Randhawa and Hannah Lau have therefore recorded a podcast giving an update on the post-Brexit landscape and other important developments, to build on the guide.

This podcast can be listened to on SoundCloud, Apple and Spotify and don’t forget to subscribe to the channel to receive updates on future episodes.

In addition, the June 2020 guide can be viewed by clicking the following link: Regulatory Disputes in the Consumer Sector England and Wales – June 2020.

Please feel free to contact us using the details below.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
Hannah Lau
Hannah Lau
Associate
+44 20 7466 2314

Climate change and the role of regulators

February 4, 2021

In November 2020, the government announced an ambitious ten-point plan to boost green jobs and reach net-zero. The plan was a recent recognition at a national-level of the pressing need to combat climate change. It addresses an expansive set of topics: from offshore wind to walking and cycling; from carbon capture to finance. The proposals suggest regulatory changes in respect of nuclear power, buildings and finance form part of the plan.

The Climate Change Committee expects that businesses will be the primary drivers of the net-zero emissions target and provide the majority of investment required for the green transition. Therefore, any new regulations and regulatory action in this area must take into account the reality for businesses and consumers. This will provide the most effective means of switching to low-carbon solutions in circumstances where businesses are expected to be significant contributors to reach net-zero.

We have prepared a paper focusing on the extent to which regulators are currently obliged to take into account climate change policy when making decisions to better inform businesses of the direction of travel in this area. We provide an overview of the general legislative landscape in respect of climate change, considering whether and how regulators are impacted by that high-level legislation. We then consider the variety of tools that regulators are using in respect of climate change in the energy, transport, finance and construction sectors.

Please click here to read our paper on these issues.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
Shameem Ahmad
Shameem Ahmad
Associate
+44 20 7466 2621

Tribunal holds that regulator must take proactive steps to investigate impact of COVID-19

December 3, 2020

In JD Sports Fashion plc v Competition and Markets Authority [2020] CAT 24, the Competition Appeal Tribunal (“CAT”) quashed the Competition and Markets Authority’s (“CMA”) final report on the Phase 2 investigation into the completed acquisition by JD Sports Fashion plc (“JD Sports”) of Footasylum plc (“Footasylum”) on the basis that the CMA had not sought to inform itself sufficiently on the impact of the coronavirus pandemic on the relevant market, the merging parties and their competitors and suppliers, resulting in the CMA having insufficient evidence for its conclusions.

Key points

  • The CAT’s decision re-iterates that a regulator may be under a positive duty to take proactive steps to conduct further enquiries and ensure they have robust evidence on which to base their decisions, particularly in relation to a matter the regulator has explicitly indicated should be taken into account.
  • A regulator cannot escape its duty to make informed decisions based on reliable evidence merely by reason of the fact that it is administratively constrained or that evidence already available to it is speculative or unreliable.

Facts

JD Sports and Footasylum are both UK-based retailers of sports-fashion footwear and clothing, conducting sales through their stores and online.

In 2019, JD Sports acquired Footasylum in a £90m deal. The CMA’s Phase 1 investigation concluded that the merger had the potential to remove one of JD Sports’ closest competitors, resulting in a worse deal for customers, through higher prices, reduced product ranges or lowering in service quality.

In September 2019, the CMA announced that it would refer the acquisition for a Phase 2 investigation unless suitable undertakings in lieu (“UILs”) were offered. JD Sports informed the CMA of its refusal to offer the UILs demanded.

In May 2020, the CMA published its final report, concluding that the merger would result in a substantial lessening of competition (“SLC”) in the retail supply of sportswear and footwear apparel in the UK. The CMA decided that only a full divestiture of JD Sports and Footasylum would avoid a SLC.

In reaching its decision, the CMA acknowledged that the coronavirus outbreak was clearly impacting the sports-fashionwear and footwear markets, but did not see evidence to suggest that either of the parties was more negatively impacted by COVID-19 relative to each other or to other market actors. It also did not consider that COVID-19 would reduce materially the extent to which Sports Direct and Footasylum are close competitors, or decrease the probability that the merger would result in an SLC.

However, taking into account the real economic pressures brought about by COVID-19, the CMA tempered its remedies process by not including overly prescriptive conditions for divestiture and by allowing for an extension of the divestiture period beyond the usual six months. In June 2020, JD Sports made an application under section 120 of the Enterprise Act 2002 for a review of the CMA’s decision on three grounds, alleging that:

  • Ground 1: the CMA erred in law and/or acted irrationality in the manner in which it conducted its assessment of the aggregate constraints posed by suppliers and retail rivals on the combined JD Sports-Footasylum group and of whether the merger was likely to result in a SLC.
  • Ground 2: the CMA erred in law and/or acted irrationally in excluding COVID-19 from the counterfactual of Footasylum’s competitive constraints, in particular by failing to seek more information from the principal suppliers and Footasylum’s primary lender.
  • Ground 3: the CMA failed, inter alia, to provide adequate reasons and made irrational findings in concluding that the ability and incentives of suppliers (in particular Nike and Adidas) to increase their direct-to-consumer (“DTC”) operations were not so significant as to disadvantage or sufficiently discipline the merged entity.

Section 120(4) states that in determining such an application, the CAT shall apply the same principles as would be applied by a court on an application for judicial review.

Judgment

On the first ground, the CAT dismissed JD Sport’s argument that the CMA erred in the manner in which it conducted its assessment of aggregate constraints and the likelihood of a SLC. The CAT noted that the CMA had very substantial evidence on which to base a reasonable decision relating to the aggregate effects of the competitive constraints and the question of SLC, and provided substantial reasons for its assessment.

The CAT reiterated in considering this ground that where there is a rationality challenge against a merger decision of the CMA, the hurdle which the applicant has to overcome is a high one and that the CAT must be wary of a challenge which is “in reality an attempt to pursue a challenge to the merits of the Decision under the guise of a judicial review.”

On the second ground, the CAT ruled that the CMA acted irrationally in that it came to conclusions as to the likely effects of COVID-19 that were of material importance to its overall decision, without having the necessary evidence from which it could properly draw those conclusions.

Although the CMA was acting within its wide margin of appreciation in finding that the evidence it had received from the applicants and third parties was insufficiently robust to form a view on the possible or likely effects of COVID-19, the CMA’s decision not to conduct further enquiries with suppliers or Footasylum’s primary lender to see if sufficiently reliable evidence had become available prior to the publication of the final report was found to be irrational. The CMA’s decision not to conduct further enquiries was rooted in administrative constraints and the perceived futility of searching for reliable and specific evidence. However the CAT considered that it had “closed its mind to the possibility that robust information on possible impacts was available”.

The decision was also irrational judged against the CMA’s own COVID-19 guidance, which required the impacts of the COVID-19 outbreak to be factored into the substantive assessment of a merger where appropriate. The guidance mirrored the general obligation in relation to conduct of CMA investigations to ensure that there is a sufficient basis for decisions in light of the totality of the evidence available, including evidence of some probative value on the basis of which the CMA could reasonably reach the conclusion it did.

The CAT concluded that the CMA, faced with uncertainty about the impact of the pandemic, failed to make reasonable inquiries, as they were required to do. Although the CMA has a wide margin of appreciation concerning its assessment of the predictive value of the information it received, that did not absolve the CMA from ensuring that it had sufficient information available before it made predictive judgments. JD Sports’ challenge in this regard did not therefore concern the quality or correctness of the CMA’s judgement in its assessment of the relevant information. It was that the CMA had not sought to inform itself sufficiently in order to exercise its judgement.

On the last ground, the CAT reached a similar conclusion. It found that the CMA had failed to investigate fully whether, and to what extent, COVID-19 would strengthen the suppliers’ DTC offer as a result of consumers shifting towards online shopping. As with the second ground, the CMA did not have the necessary evidence from which it could properly draw such a conclusion.

It is worth noting that the CMA has applied for permission to appeal the ruling.

Comment

In the context of uncertainty surrounding the longer term impact of COVID-19, it is perhaps understandable that the CMA took the view that the evidence available to it was too generalised and speculative to shed light on its regulatory assessment.

However, this decision makes clear that public bodies must have sufficient evidence on which to base their decisions. This arises from the well-established principle of administrative law that a decision maker has to ask himself the right question and take reasonable steps to acquaint himself with the relevant information to enable him to answer it correctly (known as the Tameside duty). In circumstances where sufficient information has not been provided by third parties, particularly in relation to a matter the regulator has explicitly indicated should be taken into account, the public body may be required to take proactive steps to conduct further enquiries in order to reach a rational decision. Falling short of this obligation to ensure that their decisions are properly based on evidence provides scope to challenge the findings of a public authority decision maker.

However, as with other irrationality heads of challenge, the court will not interfere with a regulatory decision lightly and will not intervene simply because it considers that further enquiries would have been sensible or desirable. A judicial review on this ground will generally only be successful if no reasonable authority could have been satisfied on the basis of the enquiries made that it possessed the information necessary for its decision. This case must therefore be viewed in its particular context of attempting to assess the impacts of COVID-19.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998

Court of Appeal upholds regulatory judgment in technical field

September 24, 2020

Recently, the Court of Appeal gave its decision in R (Cotter) v NICE [2020] EWCA Civ 103. The case challenged a decision by NICE which made it harder for a patient to obtain a particular medicine than would have been the case had NICE taken a different approach.

Background

The Claimant sought judicial review of NICE’s decision to assess the use of Kuvan to treat phenylketonuria (“PKU“) under the Health Technology Appraisal (“HTA“) procedure instead of the Highly Specialised Technology (“HST“) procedure. Under the HTA Procedure NICE will only recommend a health technology for use in the NHS if it will not cost more than £30,000 for each Quality Adjusted Life Year whereas under the HST procedure, NICE will recommend a drug costing up to £100,000 per QALY gained. Therefore, the test for a favourable recommendation is easier to satisfy under the HST procedure because a drug can be less cost effective than under the HTA procedure. However, the Court of Appeal agreed with the High Court that NICE was entitled to assess whether Kuvan should be recommended on the NHS using the HTA procedure.

The HST Procedure is reserved for highly specialised technologies which meet seven criteria set out in a document entitled ‘Interim Process and Methods of the Highly Specialised Technologies Programme‘ issued by NICE in April 2017 (the “2017 Guidance“). NICE determined that four of the seven criteria set out in the 2017 Guidance were satisfied but three criteria referred to below were not satisfied. Since the requirement under the 2017 Guidance was that all the criteria needed to be satisfied for appraisal under the HST procedure, NICE concluded that Kuvan should be assessed under the HTA procedure.

The Claimant’s case was that all seven criteria were satisfied in the case of Kuvan and the decision to use the HTA procedure was therefore unlawful. At first instance the Court concluded that the application of the guidance to the particular facts was a matter for the judgment of NICE and was susceptible to challenge only on irrationality grounds. The judge concluded that the criteria required the exercise of expert judgment and the use of expert knowledge and that there is always a high threshold for irrationality cases. The Court of Appeal agreed with this general approach. However, its interpretation of Criterion 1 and 2 in the 2017 Guidance and their application to the facts was different.

Grounds of Appeal and Court of Appeal’s Decision

The Claimant had five grounds of appeal.

Ground 1 – The statutory context

The Claimant argued that the judge had failed to have proper regard to the statutory context. While Males LJ accepted that it was necessary to have regard to the statutory context, he found that once it is conceded that not all technologies falling within the definition of “highly specialised health technologies” have to be appraised under the HST procedure, NICE was entitled to establish criteria to determine which health technologies should be appraised under that procedure and that the seven criteria set out in the 2017 Guidance were lawful. He saw no scope for any refutable presumption in interpreting the Guidance that all the health technologies intended for use in the treatment of rare or very rare diseases should be appraised under the HST procedure.

Ground 2 – The objective interpretation

The Claimant argued that the judge had failed to recognise that interpretation of the Guidance was an objective matter to be determined by the Court but the Court of Appeal found that the judge had not fallen into that error.

Ground 3 – “the target patient group is distinct for clinical reasons” (Criterion 2)

The Court held that PKU sufferers who are responsive to Kuvan are distinct from PKU sufferers who are not responsive and that this distinction was clinical. The fact that the licensing application recognised that not all patients with PKU would respond to Kuvan, allowed a degree of judgment to the treating physician, so that the drug was only prescribed to those who are responsive to it and this did not detract from the conclusion that patients who were responsive could be regarded as a distinct group for clinical reasons. Therefore, whilst the Court of Appeal did not reach a final decision on the point, the better view was that Criterion 2 was satisfied in the present circumstances.

Ground 4 – “the technology is expected to be used exclusively in the context of a highly specialised service” (Criterion 4)

The Court of Appeal accepted NICE’s argument that the reference to highly specialised service in Criterion 4 had a specific meaning and was distinct from “highly specialist” in the context of NHS terminology. The primary readership of the 2017 Guidance was expert decision-making groups together with medical professionals and persons engaged in the pharmaceutical industry. When viewed in this context, reference to “highly specialised service” in Criterion 4 is a reference to a service which is not only commissioned nationally by NHS England but is listed in the Highly Specialised Services List.

Ground 5 – “the target patient group … is so small that treatment will usually be concentrated in very few centres in the NHS” (Criterion 1)  

The Court found that given the decision made on Criterion 4, there was no need to decide whether this criterion had been applied properly, though if Criterion 1 had been decisive, it would probably have been necessary to remit this issue to NICE so that a decision could be made on the correct legal basis.

The Court finally suggested that all of the criteria for appraisal of a “highly specialised health technology” under the HST procedure should be set out in plain language so that it is readily understood by patients and those caring for them.

Conclusion

The case is therefore an example of a patient seeking to use judicial review to make a medicine more freely available by seeking to require NICE to adopt a different procedure but also demonstrates that a Court will not lightly find that a regulator such as NICE has misapplied the statutory criteria. In this case the difficulty for the claimant was that they needed to show that NICE had been wrong on three out of seven criteria. The Court of Appeal was inclined to agree on one or two of those three but was not persuaded on all three.

 

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
Sanam Zulfiqar Khan
Sanam Zulfiqar Khan
Senior Associate
+44 20 7466 2014

COVID-19: Pressure Points: Regulatory tolerance in an age of COVID-19 – Can regulators revise concessions they have offered?

July 6, 2020

In the latest episode of our public law podcast, Andrew Lidbetter, Nusrat Zar and Anna Eliasson discuss the scope for regulators to go back on concessions they have suggested to those they regulate.

In doing so, they look at the nature of these statements; how they might amount to obligations; when they can be frustrated; and three key things businesses can do to preserve their positions.

 

Listen to the latest episode on SoundCloud, Apple and Spotify and don’t forget to subscribe to the channel to receive updates on future episodes.

We will continue to develop insights to keep you abreast of legal issues arising from COVID-19 that are affecting your business now and those you may face next. You can find further resources on our COVID-19 Hub.

We welcome feedback so please do contact us (using the details below) if you’d like to discuss any of the topics in this podcast or to suggest topics for future episodes.

Andrew Lidbetter
Andrew Lidbetter
Partner
+44 20 7466 2066
Nusrat Zar
Nusrat Zar
Partner
+44 20 7466 2465
Jasveer Randhawa
Jasveer Randhawa
Of Counsel
+44 20 7466 2998
Anna Eliasson
Anna Eliasson
Senior Associate
+44 20 7466 2620