Techniques of Regulation

TECHNIQUES OF REGULATION

READING

Ramsay chap 3* (there’s more here than you need and pp 119-128 are the most relevant, but you might as well read it all).

Cartwright chap 2*

G Howells “The Potential and Limits of Consumer Empowerment by Information” (2005) 32(3) Journal of Law and Society 349*

Howells and Weatherill pp 51-76.

Cranston chaps 8, 9 and 12.

FURTHER/ADVANCED READING

There is quite a lot of literature that you could peruse if you were so inclined. See, for example:

Ogus Regulation chapters 7 (information regulation); 8 (standards) and 10 (prior approval). (These are not focused on consumer law, but are very good examinations of forms of regulation).

Hadfield, Howse and Trebilcock “Information Based Principles for Rethinking Consumer Protection Policy” (1998) 21 JCP 131. (a very good article which might have gone in the list above).

Whitford “Structuring consumer protection legislation to maximise effectiveness” (1981) Wisconsin Law Review 1018-1043 (a bit dated and US focused, but interesting).

Better Regulation Executive and National Consumer Council Warning: Too Much Information Can Harm (Final Report, November 2007).

HM Government A Better Deal for Consumers: Delivering Real Help Now and Change for the Future (Cm 7669) July 2009.

INTRODUCTION

If we are thinking about how we should deal with a consumer problem, we need to consider what the tools, or techniques, of regulation are. Law-makers will generally have a choice of techniques, though remember that a lot of the UK’s consumer law now comes from Brussels, and the UK authorities may be limited in what they can do. Regulators, such as enforcement authorities, will generally have their powers set out by Legislation, but they will have a choice of regulatory approaches (when to warn, when to prosecute etc). Furthermore, the Government appears minded to broaden the powers regulators have, particularly when it comes to what we might describe as sanctioning. The Government has done this for some areas (by passing the Regulatory Enforcement and Sanctions Act 2008, although this does not cover consumer law) and has set out some of its ideas for consumer law enforcement in its White Paper HM Government A Better Deal for Consumers: Delivering Real Help Now and Change for the Future (Cm 7669) July 2009.

Any attempt to divide up the techniques of regulation is likely to be imperfect. The approach I have taken gives you, I hope, a flavour of some of the main choices available.

PRIOR APPROVAL

The essence of prior approval is that a regulatory agency or similar body is given the power to screen out and exclude suppliers who fail to meet minimum standards. Ogus notes the following characteristics of prior approval by licensing:

·  Licences are issued before the regulated activity takes place

·  The quality of all those engaged in the activity has to be assessed to see if they meet minimum standards

·  The conditions of the licence typically involve minimum and uniform standards

·  The ultimate sanction of prohibiting the occupation or activity is particularly severe

·  The administrative costs are high

·  Significant welfare losses arise if the system is used for the anti-competitive purpose of creating barriers to entry.

Licensing is the most interventionist form of regulation, and it is generally assumed that prior approval should be used only in limited circumstances because of the risks involved with its use. Here are some strengths and weaknesses that you might like to consider:

STRENGTHS OF PRIOR APPROVAL

·  It gives considerable power to the regulator

·  It allows potential harm to be tackled at an early stage

·  It gives consumers confidence

·  It may be effective as part of an enforcement strategy

RISKS OF PRIOR APPROVAL

·  It can be used for protectionism

·  It can increase costs for traders which is passed on to consumers

·  It can reduce innovation

·  It can lead to inappropriate decisions by regulators

·  It can be expensive to run with the cost being paid by the taxpayer

·  It can lead to moral hazard

Chapter 12 of Cranston is helpful in giving a picture of some of the areas where prior approval is used, and chapter 10 of Ogus contains some excellent discussion. In what types of situation do you think prior approval might be an appropriate regulatory technique?

Think about the strengths and weaknesses of prior approval as a way of protecting consumers. In what situations, if any, do you think it offers the best form of regulation?

STANDARDS

Standards are minimum duties imposed upon traders, either by the criminal or the civil law. The term is often used to refer to minimum quality for products agreed by standardisation bodies. The main types of standards are specification standards and performance standards, although Ogus argues that there is also a separate category known as target standards. He defines them as follows:

“A specification (or input) standard…compels the supplier to employ certain production methods or materials, or prohibits the use of certain production methods or materials.”

A performance (or output) standard requires certain conditions of quality to be met at the point of supply, but leaves the supplier free to choose how to meet these conditions”.

A target standard prescribes no specific standard for the supplier’s processes or output, but imposes criminal liability for certain harmful consequences arising from the output”.

(Ogus Regulation p 151).

Think about the advantages and disadvantages of these different types of standards. Do standards offer advantages over other forms of regulation? It is helpful to think about specification standards as an illustration of some of these issues:

STRENGTHS OF SPECIFICATION STANDARDS

·  Certainty

·  Consistency

·  Ease of Assessment

WEAKNESSES OF SPECIFICATION STANDARDS

·  Discourage Innovation

·  Inflexible

·  Can be used anti-competitively

Compare these with other types of standard, and also with other forms of regulation such as prior approval and information regulation. When should each be used to protect consumers?

The creation of criminal offences might also be classified as a type of broad standard (Cranston describes these as standards), but they are a different form of standard from those discussed above. Likewise, the requirement under the Sale of Goods Act that goods be of satisfactory quality is also a form of standard, albeit, again a different type. It is important to think about the number of different ways in which a term like “standards” can be used.

One area where standards have become very important is in that of unfair commercial practices. We will be looking at the Unfair Commercial Practices Directive when we examine the protection of economic interests later.

INFORMATION REMEDIES

Note that much of the literature on consumer protection theory has focused on the topic of information regulation. As well as the literature mentioned above, there is a mass of articles to which I can refer anyone who is interested.

There are two main types of information regulation: we can require specific information to be provided (disclosure), or prevent misleading information from being provided.

DISCLOSURE

Disclosure regulation can be seen as helping the market to function by ensuring that valuable information is supplied. We see disclosure regimes in relation to a number of areas. Examples include consumer credit, product safety, food labelling and recycling. There are sometimes mandatory disclosure requirements warning about the risks attached to products. Sometimes, these tell us how to avoid hazards in using the products. In other occasions, they tell us about the largely unavoidable hazards in products, for example tobacco. How valuable are these requirements? They are critiqued in the Report of the Better Regulation Executive and National Consumer Council Warning: Too Much Information Can Harm (Final Report, November 2007).

Is information regulation enough? What would you think of a law which allowed dangerous products to be sold provided they were clearly labelled as being so? Would it depend on what the product was? Remember the problems of externalities here. Can we rely on the market to disclose information or does the Government have to step in? If the market was unregulated, what kind of information might we not get? Are there particular groups of consumers who may be put at risk by an emphasis on disclosure?

Even if we believe that insisting on disclosure is not enough by itself, this does not mean that disclosure has no role to play. There may be areas where information is the best way of protecting consumers. The Government said in its White Paper, Modern Markets: Confident Consumers:

“Good, reliable information information is essential if consumers are to make the right choice. They need to know the price and the quality of competing products. In many cases they need to know whether they are safe, the quantity is accurate and the meaning of contract terms (including the costs of add-ons and the nature of guarantees).” [para 3.1].

Is there anything else that consumers need to know?

Strengths of Disclosure

·  Helps the market to function

·  Respects choice

·  Encourages care

·  Relatively cheap

Weaknesses of Disclosure

·  Does not deal with externalities – it primarily protects the recipient

·  Relies too much on the consumer – will the consumer use it?

·  The most vulnerable may not be protected

·  Impossible to set at an ideal level – who understands and acts on it? (note Wilhelmsson here and the idea of the “information paradigm”)

·  It doesn’t address problems of access – it’s no use giving information if there is no choice in practice.

·  Some information is difficult to communicate. Note the idea of “the market for lemons” (Akerlof)

·  Danger of Information Overload.

Think about the reasons why the market might not provide information that the consumer would want. We looked at that when considering the context and aims of consumer law.

Most of the literature about disclosure concentrates on disclosure of product characteristics e.g. ingredients, cost etc. Are there other issues that might be important e.g. standing of the provider (relevant for banks, perhaps). Also, where is the line to be drawn between information and education? The White Paper A Better Deal for Consumers: Delivering Real Help Now and Change for the Future (Cm 7669) argues for:

·  A New Consumer Rights Publicity Campaign;

·  Improving Access to Information and Advice; and

·  Better Information for Consumers in Specific Situations

(White Paper pp. 66-74).

A further issue to consider is whether there may be indirect duties of disclosure. For example, Article 7(1) of the Unfair Commercial Practices Directive states that a commercial practice shall be regarded as misleading if:

“in its factual content, taking account of all its features and circumstances and the limitations of the communication medium, it omits material information that the average consumer needs, according to the context, to take an informed transactional decision and thereby causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise.”

If it’s a contravention to omit material information that the consumer needs, does this mean that there is a general duty to disclose? We’ll talk about this in more detail later.

INFORMATION REMEDIES AND COOLING OFF PERIODS

Another possible regulatory technique is to require the trader to allow the consumer to cancel an agreement within a certain time. For example, the Consumer Protection (Cancellation of Contracts Concluded Away from Business Premises) Regulations 1988 provide consumers with a 7 day cooling off period during which they can cancel contracts that are covered by the Regulations. Similar provisions are found in the Consumer Credit Act 1974, and the Distance Selling Regulations 2000. Howells and Weatherill argue that “the right of cancellation can be seen as an extension of the policy of ensuring that the consumer makes a fully informed choice.” (Howells and Weatherill p 376). Cooling off periods are frequently contained in legislation that also makes provision for disclosure.

The Consumer Rights Directive is likely to lead to increasing use of cooling off periods.

INFORMATION REMEDIES AND BEHAVIOURALISM

One of the main debates in consumer law (and in law and economics/behavioural sciences literature) is about behavioural economics. We mentioned this when looking at the reasons for regulation. Some research in this area suggests that people tend to make bad decisions, rather than the rational decisions that neo-classical economists think they should, and that there may be specific reasons for this.

Possible categories are:

·  Hyperbolic Discounting;

·  Over-optimism;

·  Framing Effects;

·  Availability and Anchoring;

·  Information Overload;

·  Fairness;

·  Emotions

One possible conclusion to draw is that people are not very good at making what might be seen as “objectively” good decisions and that recognition of this might lead us to move away from disclosure-based remedies which rely upon consumers making their own choices. This is discussed in the article by Howells above. Do we pay too much attention to information regulation such as disclosure? If so, what are the alternatives?

REGULATING FALSE AND MISLEADING INFORMATION

There is a general consensus that supplying false information should be prohibited, particularly where there is fraud. In the words of Cayne and Trebilcock: “the community will not and should not tolerate dishonesty, whatever the economic consequences of preventing it” (D Cayne and MJ Trebilcock “Market Considerations in the Formulation of Consumer Protection Policy”). Controlling misleading (as opposed to false) information is more difficult, as we will see later. What happens if a statement is only misleading to unusually credulous consumers? Might there be distributive justifications for tackling such statements anyway? Think about the different types of consumer mentioned by Wilhelmsson. These range from the fully informed consumer to the consumer without choices. Does the image we have of consumers dictate the appropriate standard for the law? Some of these points will be developed in our discussion of the Unfair Commercial Practices Directive.

CERTIFICATION

The main way of addressing information deficits is through disclosure. An alternative is to use certification. This is where a product is given some kind of kitemark (for example, the CAT standard for financial products, or the Trustmark Scheme for traders, or “Scores on the Doors” for food hygiene). This gives the consumer an indication of its quality or terms without resorting to detailed disclosure. Is this better than disclosing lots of detailed information?