A genuine innovation in capitalism: big fines for treating consumers unfairly
The UK is likely to be the first country to introduce legislation that imposes the same fines on firms who treat their customers unfairly as firms that treat their competitors unfairly.
This sounds like a small thing, but if done right it could be a genuine innovation in how we regulate the processes of capitalism. This is much needed at a time when process regulation is under threat, and politicians on all sides demand regulation of outcomes.
However, with all big changes there are risks. If done badly it could become little more than a random business tax.
Consumer protection is back in the limelight…
Next year, in the UK, it looks like we’re to see a genuine innovation in capitalism: the elevation of consumer protection law to the same strength as competition law. Specifically, that if a firm breaks consumer law they will be liable for fines of up to 10% of their turnover.
For the first time in a developed economy, firms are going to have the same regulatory incentive to deal as fairly with customers as they already do to deal fairly with competitors.
This might not sound like a big deal, but it is. While consumer protection, such as weights & measures legislation, is a necessary foundation to getting capitalism off the ground it has recently languished as something of a policy and enforcement backwater. Competition law gets multi-billion euro fines, economist front pages and NYT editorials. But despite practices of some major firms feeling like naked scams, the best consumer protection can muster is some weak injunctions that are poorly complied with.
There’s a simple reason for this: money. If a firm breaks competition law, the fines can be astronomical. Not only does this serve as a deterrent for the firm, but enforcing, defending and arguing over that level of fine creates an ecosystem of academics, policy-makers, lawyers, economists, outriders, journalists, lobbyists, and conferences. And this ecosystem helps keep the policy relevant and powerful as governments change and economies evolve.
…where it might help rehabilitate modern capitalism…
If successful, the law will both protect consumers and enhance competition by levelling the playing field between firms. Firms that compete in “goods” such as innovation and efficiency, will no longer be undermined by those that compete in “bads” such as how best to exploit consumer biases and vulnerabilities.
It is particularly appealing, in these times of market cynicism, that the law will help competition in a way that is clearly and manifestly in the interest of consumers.
Consumer law is designed to prevent business practices that are predicated on abusing consumers’ bargaining and informational weaknesses compared to firms. Actions that are likely to be covered include:
- Misleading information that would cause consumers to change their behaviour. This includes omission of information, or choosing to highlight or deprecate information. This could be highly relevant to debates over whether consumers are sufficiently informed about their use of services online.
- Contracts or agreements that lead to an unfair balance of rights and responsibilities between consumers and firms. This could be highly relevant to cynical actions by firms engaging in auto-renewal, such as insurance firms.
…but it needs to be done with care.
If a super-powered consumer law is not well designed or applied it will become no more than a random business tax — doing little to change behaviour but a lot to increase business risks and costs. Even worse, with fines as high as 10%, it could become a tool for cynical extraction of the profits of firms who are unfavoured by the state.
The long-promised White Paper on the law, due in the new year, will have details.
But I see five challenges. Get them right, and the UK can be in the forefront of a new innovation in regulated capitalism. Get them wrong, and we risk further eroding competitiveness and productivity in the UK.
- “Fairness” is central to much consumer law, but is a slippery word that means many things to different people. Without far clearer guidance than currently available of what “fairness” does and does not mean, the law will be unpredictable and therefore of little use.
- At present, much of consumer law does not apply to services provided without financial consideration. So it does not apply to the use of, say, Facebook. But much of the current debate about consumer empowerment is online. It would be a missed opportunity for consumer law not to apply in such instances, though ensuring it does so without double-jeopardy with data protection law is a challenge.
- Enforcing a new law with high fines against well-resourced adversaries is a difficult and expensive business. The consumer enforcement community in the UK is committed and experienced. But it is also poorly funded and poorly organised. Without the right foundations and funding, the law is unlikely to be well enforced, and the resulting jurisprudence is likely to be unhelpful.
- There is a risk that stronger consumer law raises quality and price, perhaps aiding the well off but harming those with a lower ability to pay, and harming competition in the process. It is important that the agencies responsible for consumer enforcement and policy represent the interests of all consumers — both actual and potential. It may be sensible for central government to provide their Strategic Steers, which give guidance about the direction that regulators should go in, to the information commissioner, competition regulator, consumer protection agencies, and sectoral regulators at the same time, and from the same unit of government.
- Allowing fair-dealing firms standing to take cases against badly behaving competitors could significantly increase private enforcement, reducing the burden on public enforcement. Though such standing would have to be provided in a way that prevented cynical use of the law as a competitive strategy.
So, I’m looking forward to the consumer white paper in the new year. I hope it protects consumers from informational and cognitive disadvantages, but doesn’t engage in too much paternalism about what is, and is not, a “good” choice. I also hope it gives sufficient detail for courts, agencies, and advisors to quickly determine what is, and is not, unlawful.
Though it may not seem like it, it is a major change in the law. I hope the new administration takes its time and ensures the legislation is well written and succeeds in both protecting vulnerable consumers and making markets work better for everybody.