Memorandum by the National Consumer Council

1. Summary

1.1The main points in our submission are as follows:

  • While there has been some progress as a consequence of regulation, such as increased switching levels in most markets, the culture of many markets has not fundamentally changed. Too many consumers are still being let badly down and there remain substantial issues to tackle.
  • In order to achieve the step change in market practices which is needed, regulators must adopt a consistent consumer focus in all their activities and reconsider their approach to the job of regulation. We are witnessing the welcome emergence of a new style of regulation, typified by The Financial Services Authority’s Treating Customers Fairly initiative, which is moving away from prescriptive rules set by the centre to a more sustainable approach where culture change is driven from the bottom-up.
  • As part of this new style of regulation, regulators should do more to engage people directly in decisions that affect them, for example by using deliberative research techniques. Regulators should also harness consumer power to help them manage markets more effectively.Consumers could usebusiness compliance and performance information held by regulators to inform their purchasing decisions, providing an incentive for business to toe the line and driving competition by switching away from companies with a track record of letting their customers down.
  • Differences between the consumer and public interests tend to be overstated. People do not see their roles as consumers in purely self-interested or transactional terms. Regulators should take a broader view of the consumer interest otherwise the consumer voice will be excluded from issues that affect people collectively, such as access to essential services.

2. Answers to questions

Introductory remarks

2.1The Committee has called for evidence on a large number of broad questions. We have prioritised our answers to those issues most relevant to consumers. Keeping in spirit with the Committee’s own approach to the subject, our submission attempts a high-level analysis of the key issues, using examples to illustrate our points where appropriate.

2.2The National Consumer Council (NCC) has led the consumer contribution to regulation matters over many years. This work has included developing consumer-focused regulatory principles, influencing the creation of our main regulatory institutions and promoting the interests of consumers in key regulatory decisions. A summary of this work is provided in an Appendix.

2.3The inquiry has chosen to focus its attention on economic regulators. While we recognise that the Committee has to find some way of dividing up a wide-ranging and heavily populated regulatory landscape, this approach inevitably produces some artificial distinctions. Most regulators have a direct or indirect impact on the functioning of markets and each use a variety of tools (both economic and non-economic) to carry out their work. It is important that this inquiry will help all regulators to learn from each other through sharing best practice, rather than just benefit those with a predominantly ‘economic’ remit.

2.4Finally, once it has completed this inquiry, at some future stage we hope the Committee will turn its attention to professional regulation where many interesting changes are taking place, not least in health and legal services.

Question 1: How do regulators interpret their statutory remit? Do they set themselves aims and objectives that take their work beyond fulfilling their statutory obligations? And, if so, why?

2.5Regulators should have a clear strategic vision about what they want to achieve and be prepared to try new techniques to achieve it. The traditional style of regulation is a top-down prescriptive approach based on the setting and enforcement of rules. However, we are slowly witnessing the welcome emergence of a new style of regulation, typified by the Financial Services Authority’s Treating Customers Fairly initiative, which insists that companies’ senior management take responsibility for driving change throughout their business. This principles-based approach puts the emphasis on bottom-up cultural change to improve business practices instead of ever-larger volumes of detailed rules. As well as reducing red tape, a focus on outcomes makes it easier for everyone to keep sight of the overall purpose of regulation.

2.6How regulators choose to interpret their remits also influences the nature of their regulatory interventions. Rather than to always stand at arms length, regulators should be prepared to ‘get their hands dirty’. A good example was the approach taken by the Office of Fair Trading to prompt and broker a solution on the issue of payment systems, where the industry was unable to arrive at an acceptable solution on its own.

2.7The question also highlights the importance of getting the statutory objectives right from the beginning. Legislation creating regulators normally includes consumer and competition objectives as a matter of course, but the emphasis given to these objectives varies, for example the Food Standards Agency has a clear mandate to put consumers first. Younger regulators benefit from more recent thinking in regulatory best practice, for example more recent legislation includes a ‘consumer education’ objective which older regulators do not have.

2.8Getting the objectives right is not enough on its own, however. Regulators need to properly understand the consumer interest when identifying problems and developing remedies and also give sufficient weight to the views of consumers when making regulatory decisions. There are some recent examples where regulators have lacked a sufficiently strong consumer focus:

  • The Competition Commission found that the store card market was not competitive, but its proposed remedies - warnings about cheaper credit and better APR information on customer statements - didn’t get to the heart of the problem and will do little to lower charges.
  • Ofcom failed to go far enough in banning all junk food advertising aimed at children before the 9pm watershed, despite widespread support for such a move from consumer groups, health campaigners and others. Seventy per cent of children’s viewing time is outside children’s airtime and Ofcom’s proposed ban won’t catch the programmes like Coronation Street that are the most popular with under-16s.
  • Ofgem approved a weak ombudsman scheme developed by the energy industry despite warnings from energywatch. It has not set any performance requirements and companies have been given three months to resolve disputes before customers may contact the ombudsman. Further, Ofgem does not require companies to operate with effective internal complaint handling procedures.

Question 8: What is the most appropriate definition of the ‘public interest’ in respect of the activities of economic regulators? Is there a divergence between consumer interests and wider societal concerns encompassed by the term ‘public interest’?

2.9The public and consumer interests can differ, but these differences should not be overstated. The consumer interest is often too narrowly perceived in terms of individualistic notions of consumption. People do not see their roles as consumers in purely self-interested or transactional terms, as the current shift towards more sustainable consumption behaviour proves. Further, people judge regulators by the impact their work has on their daily lives and make no conscious reference to distinctions between the consumer and public interest.

2.10A narrow view of the consumer interest also sits at odds with work carried out by consumer groups in the UK, EU and internationally on issues that affect people collectively, such as access to essential services. For example, the division Ofcom makes between citizen and consumer interests unduly restricted the proper scope of its Consumer Strategy, which excluded the consumer voice from issues of disadvantage, such as Digital Switchover, Universal Service Obligations and media literacy. The distinction is erroneous because it fails to take account of the role markets play in creating exclusion.

Question 9: Have regulators been effective in protecting consumers from firms abusing their dominant positions in markets and restricting practices between firms that reduce competition? Have regulators successfully promoted the ability of consumers to switch firms at reasonable cost and without undue restrictions?

2.11The UK has the essential competition laws and institutions in place to enable the advancement of an effective competition regime. Over the years, we have criticised the competition authorities in specific cases, for example when they have suggested weak remedies to tackle market problems, including a tendency to leave failing market structures intact. Some recent interventions are more encouraging, however, for example the robust stance on bank charges taken by the Office of Fair Trading and the Competition Commission’s report on home credit following the NCC’s supercomplaint.

2.12We welcome the new ways of working being developed by the competition authorities. For example, the Office of Fair Trading has recently restructured so it can better integrate consumer and competition policy into its analysis of imperfect markets. The competition bodies are also now showing increased willingness to build behavioural economics – which seeks to understand how consumers actually behave rather than focus on how the ‘rational consumer’ should behave – into their analysis and regulatory actions.

2.13With respect to switching, detailed research evidence collected by the NCC (attached to this submission) has shown that overall switching levels have increased by 152 per cent between 2000 and 2005. Switching levels have risen considerably in the energy, fixed telephony and mortgage markets. However, in some areas, such as banking and fixed telephony, switching levels are still very low, and switching levels in the insurance market have slightly decreased.

2.14Although our research findings paint a broadly positive picture, in many markets switching is largely the preserve of the young and wealthy. Further, a large proportion of consumers still seem to be unaware of the benefits of (or, worse, the possibility of) switching, or think the financial benefit of switching is outweighed by the time and effort it takes to do so. We also identified barriers to switching which make it difficult for consumers to exercise their power in the market place, including: lengthy and cumbersome switching procedures, early exit charges, ‘confusion marketing’ (a bewildering choice of ever-more complex products making comparison difficult), long-term deals and the technical incompatibility of equipment.

2.15There are encouraging signs of increased switching in most markets, but regulators need to do more to tackle the remaining obstacles to switching and should remain vigilant to the emergence of new switching barriers. There is also a tendency for some regulators to place too much reliance on switching as a signal that a market is competitive. First, if pricing is unclear and products complex, price differentials and subsequently switching can occur over a long period of time, without the market becoming more competitive. Second, if companies coordinate their behaviour to keep prices high, the market will not be competitive, regardless of switching levels. Thirdly, high switching levels can conceal undesirable activities, such as misselling and market churning.

Question 11: What research have regulators commissioned into the public interest(s) they serve, amongst the industries they regulate and those industries’ customers? What use have they made of any such research?

2.16Regulators should have the means to listen, understand and give sufficient weight to consumer interests in their decision-making. They should develop effective, sensitive and properly resourced ways for achieving this consumer focus consistently. In addition to carrying out consumer research, there should be formal mechanisms, such as consumer panels, to take proper account of consumers’ interests. A number of alternative approaches may be used, however. For example, the Ofcom Consumer Panel has developed a toolkit to help Ofcom and other regulators assess whether they have identified and addressed consumer interests in forming and implementing policy.

2.17In addition to using standard research techniques, regulators should also embrace new methods that enable regular direct dialogue with consumers. Consumers are better able to take tough decisions and follow complex issues than some regulators give them credit for. Regulators are beginning to use different methods like deliberative research, which enable a more sophisticated understanding of consumer views on complex policy areas than is possible with simpler, more traditional research models such as omnibus surveys. For example, NCC recently brought together policymakers, regulators, enforcers and consumers in a collaborative dialogue about weights and measures legislation, so that all the key players could for the very first time hear each others’ views and develop a common agenda about what is and isn’t needed. Most participants demanded greater openness from regulators in future, and called for much more public engagement in regulatory decisions affecting their everyday lives.

Question 12: What scope do sectoral and functional regulators have to improve economic performance either within specific markets or the wider UK economy.

2.18We support the overall direction of the Department of Trade and Industry’s Consumer Strategy which places the emphasis on creating the conditions for empowered consumers to fuel business growth by driving competition. Ultimately, business is responsible for offering an appropriate standard of goods and services. However, regulators also have a key role to play, for example by providing consumers with the means to make informed purchase decisions, ensuring compliance and promoting effective redress mechanisms.

2.19In overall terms, while we have seen some progress in some markets in recent years, unfortunately the culture of many markets, including in former public utility monopolies, has not fundamentally changed. Too many consumers are still being let badly down and there remain substantial issues to tackle, such as misselling, switching barriers and poor complaint handling standards.

2.20To achieve the step change in market practices which is necessary for consumers to drive business growth, there needs to be a renewed consumer focus in regulation, in which consumers are placed at the heart of regulatory decision-making and regulators use the consumer interest as a framework for assessing what is and isn’t working. Further, returning to our earlier theme, regulators need to reconsider their approach towards how they practice the job of regulation. The working methods of regulators should have as their core aim changing underlying attitudes and culture as the principal way of modifying business behaviour.

2.21Our recent pamphlet, regulation and reputation, highlights an opportunity for regulators to use the publication of information on business compliance and performance records as a regulatory tool. Regulators generally take an overly cautious interpretation of their legislation and keep most information under wraps. For example, consumers cannot find out what our regulatory institutions already know about how broadband providers compare on performance, which financial firms fail to respond to consumer complaints within the statutory time period, the names of the most complained-about solicitor firms, or details of builders formally warned by trading standards about their conduct.

2.22If this information was published, consumers would no longer have to take unnecessary risks by choosing suppliers with a history of poor performance. Greater transparency would also provide an incentive for business to comply with the rules and focus the minds of regulators on achieving consistency. Further, it would also enable regulators to harness consumer power to help them manage markets effectively. As the growth of switching demonstrates, consumers’ sensitivity to price and quality promotes efficiency and improvement, regulating firms by spurring them on. With access to independent information about the compliance and performance records of businesses, consumers can help to drive competitionand reduce the need for regulation by moving away from companies who let their customers down.

About the National Consumer Council (NCC)

The NCC makes a practical difference to the lives of consumers around the UK, using its insight into consumer needs to advocate change. We work with public service providers, businesses and regulators, and our relationship with the Department of Trade and Industry – our main funder – gives us a strong connection within government. We conduct rigorous research and policy analysis to investigate key consumer issues, and use this to influence organisations and people that make change happen. Check for our latest news.

29 January 2007

Appendix - The National Consumer Council’s recent work on regulation

The NCC has led the consumer contribution to regulation policy over many years. We have pioneered new thinking about regulation and influenced regulatory policy in practical terms by shaping our regulatory institutions and devising regulatory solutions to problem markets.

Policy Ideas

We have developed some core principles on regulation policy in a series of ‘fresh thinking’ pamphlets (enclosed with this submission) that challenge the status quo in consumer policy, drawing on the NCC’s unique insights to advocate new ways of thinking.