The big fines bring the QCs to the yard
Last December I spoke at a conference on data, technology, and protecting vulnerable consumers. These are edited notes of my presentation.
I argued that data openness is a good thing, but probably won’t help vulnerable consumers that much.
Instead, vulnerable consumers should be protected by industry specific regulation, or by improved consumer protection law.
I suggested that industry specific regulation should sometimes accept that markets weren’t working and intervene strongly to replace the market mechanism, at least for consumers considered vulnerable.
But I felt that strong consumer protection law would be a more effective way to look after the mass of consumer interests — both vulnerable and engaged.
To make strong consumer protection law work, though, the enforcers will have to be well resourced. Because QCs are expensive: they’ll help you, but they’ll have to charge.
Issues for data and technology in consumer markets — portability and supporting vulnerable consumers
So I used to work at the Office of Fair Trading, 10 years ago now, responsible for both consumer protection and competition enforcement in professional services. I now consult with Fingleton here in London, and strangely enough work part-time for the Egyptian Competition Authority in Cairo… that’s a slightly different issue.
Back at the Office of Fair Trading I led the Unfair Terms test case against banks’ unauthorised overdraft charges, which alleged that the charges were unclear, uncontrollable and excessive, and therefore unfair. We essentially proposed a de facto price cap to protect the vulnerable consumer since the terms would become fair if the price was reduced. So that’s 10 years ago now, and I think it raised very similar issues to what we talk about at the moment in terms of vulnerability and price caps.
Now, the Unfair Terms case was frustrated at the Supreme Court where Lady Hale, who is something of a national hero for some these days, opined that her hairdresser of all people could understand these charges and therefore she didn’t understand why anybody else couldn’t. She didn’t really see what the problem was, and the case was rejected at that point.
I tell this story because I think it has two very relevant issues for what we’re talking about at the moment.
The first one is that the big fines bring all the QCs to the yard (check out the list on page 2 of the judgement). The banks who levied the unauthorised charges were on the hook for tens of billions of pounds. There was a lot of money at stake and there were a lot of QCs in the room. They’ll help you, but they will have to charge. And I think this is important — you need to get the plumbing and the finance right for the consumer changes that are being proposed. I’ll talk about this later.
The second is, she was definitely on to something about the tension between protecting the vulnerable consumer and rewarding or incentivising the engaged consumer, such as her hairdresser. I don’t think it’s a necessary tension, but it often is described that way (the CMA’s excellent discussion of the Loyalty Penalty deals with this issue very well). For example, I note that in the introduction of the default energy price cap that Ofgem estimated switching might decrease by 30% as a result of protecting vulnerable consumers.
Now, that’s a lot, and the topic of this panel is meant to be data portability and supporting vulnerable consumers. I’m massively in favour of open data, and think it can bring a huge amount of benefits to engaged consumer. It can give them the weaponry of data that the firms currently have, and hopefully can create new products in the process. But I don’t think it’s going to do much to protect the vulnerable consumer. And I think for people who feel like the consumer-protection ship is sinking, all this data openness stuff just feels a bit like rearranging the deck chairs. And I have some sympathy for them.
So I think sometimes as regulators we should have the courage of our convictions and look at a market and say, actually this market doesn’t seem to be working and rather than creating some incredibly elaborate shadow puppetry where we nudge consumers in one direction and nudge firms in the other direction, maybe we should bite the bullet and just regulate.
The directory enquiries intervention by Ofcom was along that line, where they just said we’re just going to set the price, though I would say I’m not completely convinced that £3.60 for 90 seconds of call is a cost reflective price…
But the real challenge is, can we empower or protect the vulnerable consumer without harming those market mechanisms that we think will be delivering efficiency and innovation for the rest of the consumer base? I don’t think it is necessarily a trade-off.
There are two ways that we can try and do that.
The first is to try and, if you like, insulate the vulnerable consumers from the empowered consumers. It looks like a number of these markets have essentially split, they’ve ended up in a separating equilibrium between engaged and disengaged. We’re concerned a lot about price targeting, can we do some better policy targeting and try and target our policies for those separate markets?
One option is of course to offer basic Bank accounts, basic broadband services, but that doesn’t seem to be that successful so far. Another idea is perhaps that you put time limits on your interventions. The default tariffs might only kick in after someone has been disengaged for, say, 5 years, trying to isolate the engaged from the disengaged consumer.
Or, instead of focusing on outcomes or consumers, there is a more radical option, which is what I’m most excited about, of trying to put the onus back on to businesses not to adopt practices that are predicated on taking advantage of consumer vulnerability.
One of the reasons why we took the Banks’ test case was because we thought it was a business practice predicated on profiting out of consumer vulnerability. And for me the potential beefing up of consumer protection law really is the best route to do that. At the moment I think most people would agree that consumer protection law has very little deterrent value, because there’s very little punishment. The idea of having large punishments is very attractive.
But this brings me back to my first point, which is if you’re going to be fining firms 10% of relevant turnover for behaving unfairly, as the proposals suggest, the stakes in the game are going to be increased by orders of magnitude. So let’s make sure we get the plumbing right and also the resources in place to make sure that it doesn’t fail.
Because those first few cases will probably set the tenor of how the law will work. And if those first few cases consist of stretched out and dis-coordinated consumer protection agencies against the full might of every QC in the Temple, which is what they will do, then I think they will not succeed.
Q&A
Q: Should we move away from focusing on competition as an end in itself, and move towards regulators more directly intervening to set market outcomes?
A: I think the simple answer is no. The concern, as I understand it, is that because competition between firms can sometimes be competition at how well they can do “bad” things, like taking advantage of vulnerable consumers, that promoting competition is also a bad thing because we will be promoting competition in bads and therefore we should regulate.
And I just don’t think that’s correct. I think the purpose of both consumer protection and competition enforcement, if it’s done right, is to block off as much as you can, the ability of firms to compete on the bads, forcing that competition into the goods. And I think that’s the middle ground and you know: “don’t it always seem to go, you don’t know what you’ve got till it’s gone?“
The thing with Adam Smith’s invisible hand is it’s invisible and so it’s quite hard to see the benefit of it until you get rid of it. The downsides are far more visible and my worry is that this kind of like measurement bias that economists are often accused of is in the policy space as well. So I think there’s a middle ground where you can achieve your objectives without jumping to outcome regulation in most situations. But in some extreme cases I think you do have to make that jump and that’s where I think we agree in some areas.
Q: Do you think disruptive entry can solve the problem of vulnerable consumers?
A: I mean, I really struggle with this question of how much disruption can really change the markets because as I understand it, in all the markets identified in Citizens Advice super complaint, customer acquisition costs are really high. They average about £200 as I understand it, and that’s for the customers that they are acquiring and you kind of think the marginal cost for acquiring those disengaged customers is going to be even higher than that.
So you’re going to have to have an innovation in your product that is really serious to be able to start biting chunks out of those customer acquisition costs. So are there going to be disruptions of that scale?, I don’t know, it doesn’t feel like it, unless your disruption’s actually in the customer acquisition itself, but most of the disruptions we’ve talked about involve people already being online, already engaging with price comparison websites. I mean obviously if I knew how to bring those acquisition costs down so I wouldn’t be sitting here, I’d be running a company to do this and I’d be making lots of money in the market. So it’s very hard to predict, but it does seem like customer acquisition is such a difficult challenge that I’m personally pessimistic.
Q: Is there a space for function specific regulation where consumers are vulnerable, like in will writing?
A: I agree, with one caveat. I used to do oversight of legal regulation for a while, and you need to make sure that the regulation does not become a rent creating barrier for the people who have that protection. And I think sometimes people see the rent creating barrier and want to throw away the protection and that is going too far in the market orientated way. You can keep the protection role and remove the rent creating barriers and I think the Solicitors Regulation Authority been doing a good job of that.
