Select Committee on Constitution Minutes of Evidence


Memorandum by the National Consumer Council

SUMMARY

  1.  Sector-specific statutory regulation is necessary to promote the interests of consumers in energy, communications, water and financial services.

  2.  The statutory objectives of regulators should be consumer-focused and clear. The respective roles of regulators and government, in relation to achieving social goals in particular, should be transparent.

  3.  Sector-specific consumer bodies, if well-resourced and with appropriate statutory powers, can have a vital role in holding regulators accountable for their performance.

INTRODUCTION

  4.  The National Consumer Council (NCC) is an independent consumer policy expert. We were set up by government in 1975 to champion the interests of consumers—especially those who are disadvantaged. More consumer-focused regulation is one of our main goals. We have conducted consumer research and lobbied on behalf of consumers in utilities and financial services for many years. So we welcome the opportunity to provide a consumer perspective for this inquiry.

  5.  This response identifies the main reasons why regulation is necessary, and why regulators, rather than government, are best placed to regulate. We note recent improvements in regulation, but then raise potential concerns about the relationship between regulators and government. Finally, we set out ideas on how regulators can be made accountable to the Government, Parliament and consumers.

  6.  This inquiry is very broad, so while examples are briefly cited, our response is necessarily broad also. Clearly, the Financial Services Authority (FSA) in particular, but also Ofgem, Ofwat, Oftel and the new communications regulator, Ofcom, have quite different objectives set out in the enabling legislation, and they perform different functions. We can provide further material, if required by the Committee.

THE CASE FOR REGULATION

  7.  We do not believe there is a case for ending the role of the regulators in financial services or utilities (as raised in question 2 of the call for evidence). Given the risk of consumer detriment in the markets under consideration, there is a need for sector-specific regulation. A reliance on general competition and consumer protection legislation only would not provide sufficient protection for consumers from mis-selling of pensions or excessive telephone bills, to take just two basic examples.

  8.  Regulators devise rules directed at shaping conduct or controlling behaviour in some way. They then put the machinery in place to enforce those rules. Regulation should set out how to achieve public policy goals, as defined by government. So any assessment of regulators should start from analysis of these goals. We can then assess whether the arrangements are in place to ensure that the roles of regulators are clear, and that regulators are accountable for their performance.

  9.  The main reasons to regulate on behalf of consumers are to:

  10.  prevent abuse of market power—Suppliers that have market power—either individually or collectively— must be prevented from engaging in anti-competitive practices. Otherwise, they may exploit the lack of alternative choices for consumers by increasing prices. This type of regulation can include price control mechanisms, as still required to regulate aspects of the network utilities. Competition law is inadequate where the market structure is such that effective competition is not viable—the national grid and the water pipeline network are natural monopolies, for example;

  11.   extend choice by promoting competition—Sometimes tough regulatory action is needed to develop competition, in addition to relying on the capacity of generalist ex post competition bodies. This could involve facilitating fair access to incumbent networks by new entrants, or making it easier for consumers to switch suppliers. Rules requiring number portability for telephones, and restructuring of the gas industry are two examples. Economic regulators (such as Ofcom) with concurrent competition law powers to the Office of Fair Trading (OFT), can also use these to foster competition;

  12.   facilitate informed consumer decision-making—In some markets, it is particularly difficult for consumers to understand and compare alternative options and make informed choices. This is sometimes exacerbated by incomplete, incomprehensible, and far-from-impartial information provided by firms. Regulation is needed to ensure the provision of accurate and accessible information to consumers. The FSA has recently announced changes to its product disclosure rules, which it uses to require firms to provide comparable information on charges. The FSA also devotes resources to information initiatives, such as comparative tables and factsheets;

  13.   protect consumers from unsafe purchases and unfair practices—Consumers need protection from goods which are either financially or physically `unsafe', and where information is not enough to provide adequate protection. The `Know Your Customer' requirements on financial services advisers aims to prevent mis-selling of unsuitable products. Minimum standards of water quality are required by the Drinking Water Inspectorate. Rules prohibiting misleading marketing practices by energy and telecoms companies are increasingly necessary. Consumers also need protection after purchase in circumstances where there is an ongoing relationship with a supplier. Sanctions to limit interruption to supply of gas and electricity are examples.

  14.   provide redress when things go wrong—If consumers are able to enforce their rights, the signal to the supplier is that conduct in breach of rules will not go unpunished. If court action is slow or unaffordable to consumers, that signal cannot be given. Hence the need for low-cost alternative dispute resolution systems, such as the Financial Ombudsman Service, or complaints-handling by energywatch;

  15.   ensure access to essential services—In some circumstances, even a fully competitive market will not ensure that all consumers have access to essential services. Sometimes regulation is needed to achieve broader social goals, if suppliers are unable or unwilling to provide at an affordable price. For instance, energy companies are required to make supply available on reasonable requests and water disconnections are banned. Consumers with particular vulnerabilities (related to income, age, learning or physical disabilities, for example) need special protection. Prudential regulation by the FSA seeks to protect consumers from systemic failure of the banking sector;

  16.   provide fair protection of the interests of future consumers—Regulators also sometimes have a role in intervening in markets to ensure future consumers will have access to essential services. The costs of producing goods and services should reflect the environmental costs of their production. For example, regulation requires water companies to reduce waste of water through leaks.

THE CASE FOR A REGULATOR

  17.  While there are clear reasons to regulate on behalf of consumers, Government departments could in theory perform these functions. However, the NCC believes there are a number of strong arguments for sectoral regulation to be conducted at arms-length from government:

    —  a regulator can take a longer view than a politician concerned with re-election;

    —  a regulator is less likely to face pressure to change price caps for political ends;

    —  a regulator can bring together, under a single roof, roles formerly performed by several government departments and organisations;

    —  a regulator can develop the expertise and focus necessary to address the complexity of the issues which arise in the sector;

    —  a regulator with statutory objectives, functions and powers can be more transparent and accountable than government departments;

    —  a regulator can improve standards by providing guidance and promoting best practice, and by publishing information and educational material for consumers; and

    —  resources for regulation can be `ring fenced' and are less subject to short-term volatility.

LEGISLATIVE IMPROVEMENTS

  18.  Recent and current legislation establishing regulators has included a number of welcome, high-level features. This can improve their regulatory performance, accountability and capacity to promote the consumer interest:

  19.   more coherent regulation—By establishing the FSA, Ofgem and Ofcom, the government has brought together predecessor statutory and self-regulatory bodies with overlapping, and sometimes inadequate, regulatory responsibilities. This provides a platform for more coherent, effective and transparent regulation;

  20.   consumer-focused objectives—The Utilities Act 2000 and the current Water Bill and Communications Bill, set out clear regulatory objectives to protect the interests of consumers. We also welcome explicit duties on the utility regulators to have regard to the interests of disadvantaged groups, such as the disabled, or those on low-incomes;

  21.   enhanced consumer representation—Sector-specific, independent consumer organisations have a vital role in holding regulators accountable for their performance. Energywatch and the Financial Services Consumer Panel have been established, and stronger bodies in water (Consumer Council for Water) and communications (Communications Consumer Panel) are forthcoming;

  22.   board governance—Enhanced internal checks and balances, and greater accountability, are provided for by the shift from an individual to a board governance structure in utility regulation. The Water Services Regulatory Authority will shortly replace the current Director General of Water Services, for example.

RELATIONSHIP BETWEEN GOVERNMENT AND REGULATORS

  23.  The NCC has identified difficulties that can arise with regard to the relationship between government and regulators.

  24.   Lack of clarity on respective roles—Where there are social objectives in a sector, it can be unclear whose responsibility it is to set them and achieve them. Tackling fuel poverty, or extending access to financial advice, are current examples where the regulator has an important role. But government action is still critical if consumers' needs are to be met, and there may be an over reliance on the capacity of regulators and the market. Problems can also arise where regulatory responsibilities in related areas are not allocated in a co-ordinated way. For example, from 2004, the FSA will regulate the selling of some, but not all, types of equity release products.

  25.   Possible tension between government policy and regulatory objectives—Sometimes the pursuit of regulatory objectives may be perceived as an obstacle to current government policy priorities. For example, the current government emphasis on increasing pension saving by relaxing regulation of advice on stakeholder pensions, may conflict with FSA rules to protect consumers from mis-selling. The setting of a price cap for stakeholder pensions by the Treasury also raises questions about transparency and accountability. It is not clear if this division of responsibilities works as well as it might.

  26.   Multiple regulatory objectives may conflict—Regulators may struggle to strike a balance between objectives where they conflict. For example, the utility regulators' duty to promote competition, if interpreted as a reason to deregulate, could conflict with their duties to protect disadvantaged consumers. The recent weakening of price regulation in telecommunications, following some extension in competition, has been premature and potentially detrimental to consumers on low incomes. There may be a case for cross subsidy between consumers. This should however be transparent and justified on the grounds of fairness, effectiveness and minimising inefficiencies.

ACCOUNTABILITY TO GOVERNMENT AND PARLIAMENT

  27.  The role of the regulator should be clear, and it should be accountable for its performance. The Government should:

    —  remain responsible for public policy and overall strategy in the sector (including EU and other cross-border issues);

    —  set out clearly a small number of regulatory objectives in primary legislation;

    —  set out clear lines of responsibility and accountability between government and regulator, where the latter has social and environmental objectives;

    —  consider areas where there are overlapping responsibilities between regulators and departments, and review whether they need reallocating;

    —  observe boundaries between itself and the regulator and avoid `behind the scenes' pressures;

    —  ensure that the regulator has adequate resources, both monetary and human; and

    —  regularly assess whether the regulator is achieving its regulatory objectives, including consultation with consumers representatives and the industry.

  28.  The NCC would also welcome an enhanced role for Parliament in the accountability of regulators. If regulation had been left with a government department, it would hold the relevant minister to account, so it is important to develop other mechanisms. The aim should be to establish the effectiveness of the regulator in fulfilling its statutory duties, and identify the key issues arising in the regulated sector.

  29.  Parliamentary accountability appears fairly haphazard, with House of Commons select committees occasionally questioning the regulators. We suggest parliamentary committees could develop a rigorous mechanism for carrying out this task. They could conduct research, and seek written and oral evidence from consumer representatives and the regulated industry. More regular Parliamentary debates could offer additional scrutiny, perhaps following publication of annual reports. The occasional scrutiny of the National Audit Office might also be expanded.

ACCOUNTABILITY TO CONSUMERS

  30.  The transfer of responsibilities from government to regulators does create a need to ensure proper lines of accountability to those for whom it regulates. The regulator should ensure it does not become remote from consumers, is in touch with the consumer experience, and acts on their behalf. It can do this a number of ways:

  31.   Sector-specific consumer representative bodies—We strongly support the development of consumer councils or panels in the relevant sectors—the NCC has long argued these bodies are needed. They should have statutory powers and duties, a focus on disadvantaged consumers, access to information, the right to challenge the regulator's decisions, freedom of action and control over their own budgets. They need sufficient resources to do their job effectively;

  32.   Regular consultation with consumers—Regulators should allocate resources and devise a strategy for regular consumer engagement. NCC research (RSGB's General Omnibus Survey for November 2002) found that 46 per cent of consumers wants Ofcom regularly to consult a panel of ordinary consumers about its work. Consumer bodies will always be far less well resourced than industry lobbies, so efforts should be made to make it easier for consumer groups to input into decision-making. The FSA now sets out clearly any issues of relevance to consumers at the front of its consultation documents, as requested by the Financial Services Consumer Panel. This is a welcome initiative, and could be copied by other regulators. By contrast, recent Ofwat and Oftel price control consultation documents have been unclear and inaccessible, with overuse of industry jargon;

  33.   A programme of market research—The regulators should commission their own consumer research and market intelligence. A comprehensive strategy and action plan to do this should be developed. Regulators should use information gathered from consumers to assess whether they are responsive to their needs. This should include assessing complaints statistics and opening up avenues of communication with consumers;

  34.   Openness and access to information—Companies can be unwilling to disclose to consumer bodies information they consider to be commercially confidential. The regulator must find ways to ensure consumer bodies are not cut off from information they need. It must also maintain a presumption of transparency in its communication with the public. We are currently lobbying for changes to the Water Bill which is too restrictive in relation to the rights of the Consumer Council for Water to access and publish information on company performance. This legislation is more restrictive in this regard than the public interest test of the Freedom of Information Act 2000;

  35.   Regulatory profile with consumers—Regulators should have a wide-ranging communications strategy, which does not merely rely on a website. They can also act as providers of information which consumers find hard to collect from competing suppliers. The FSA publishes comparative tables of product prices, but not all consumers have access to them, as they are internet-based and are not widely promoted;

  36.   Tough action to protect consumers—Regulators should develop strategies to protect proactively the interests of consumers. Excessive bureaucracy and legalism should be avoided where tough enforcement action is necessary. An example is the time it took the FSA to consider the dangers of so called `precipice bonds'. Financial journalists had warned against them for some time before the FSA put out its own warning. Meanwhile, challenging price caps are necessary on the water industry to ensure a fairer share of efficiency gains between shareholders and consumers, than was the case following the early post-privatisation price reviews. Price controls are being prematurely relaxed in energy and telecoms, in the absence of effective competition;

  37.   Avoid `regulatory capture'—The regulator should be aware of the danger that staff recruited from the regulated industry could be less-than-objective in their approach. It must seek to develop a culture in the organisation that matches the objectives of the regulator. Regular interchange of staff between regulators and consumer bodies could have a positive effect;

  38.   Right of appeal for consumer groups? —Utility regulators are potentially subject to Competition Commission scrutiny and over-rule for their decisions. For example, the recent decision made by Oftel to cap the excess prices charged for calls to mobile phone networks (`call termination charges') was appealed by the companies. The NCC used this opportunity to successfully argue the case for regulation due to market failure. But we note consumer groups do not have an equivalent right of appeal for regulatory decisions, and suggest this deserves consideration.

James King

National Consumer Council

Annex

RELEVANT NCC PUBLICATIONS

Setting price limits for 2005-10: framework and approach—response to Ofwat's consultation, 2003.

Meeting basic needs—funding universal access to essential goods and services, 2002.

Involving consumers in communications: case study for the Involving Consumer project, 2002.

Involving consumers: everyone benefits, 2002.

Plugging in the panel: the next steps in representing consumers in communications, 2001.

A blueprint for consumer councils, 2000.

Financial Services and Markets Bill—response to the Treasury's consultation on the draft Bill, 1999.

The Financial Services Authority—A consumer view on the scope and objectives of the new financial services regulator, 1998.

The Future for Utility Regulation—response to the government's green paper on utility regulation, 1998.

Regulating the Public Utilities—a submission to the DTI review of utility regulation, 1997.

 




 
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