Select Committee on Treasury Written Evidence


Memorandum submitted by the Office of Fair Trading

INTRODUCTION

  1.  This memorandum is submitted in advance of OFT's appearance on 6 June 2007 before the Treasury Select Committee's enquiry: Financial inclusion follow-up—saving for all and shorter term savings products.

  2.  The memorandum describes the role of the OFT, the advice it provided to the DTI in December 2006 following the collapse of Farepak, and the work it is now engaged in following the recommendations made by Brian Pomeroy in his "Review of Christmas savings schemes".

ROLE OF THE OFT

  3.  The OFT's mission is to make markets work well for consumers. Our goal is for competitive, efficient, innovative markets where standards of consumer care are high, consumers have choice and are empowered and confident about making choices, and where businesses comply with consumer and competition laws but are not disproportionately burdened by Government regulations, or restricted and harmed by market abuse. We achieve this goal by using tools within the consumer and competition law regimes which enable us to look at all aspects of markets to ensure that they are working well for consumers.

  4.  Our role following the collapse of Farepak has been to advise DTI on the policy options available for protecting vulnerable consumers who are most at risk of losing their money when a company fails in the way that Farepak did. We have no role in regulating savings schemes but have a direct role in helping to ensure consumers are well informed and able to make informed and rational selections of products and services. Empowered and well informed consumers will then act as a positive stimulus to competition. OFT undertakes powerful awareness and education programmes and coordinates an alliance of consumer education partners. This is the key part of our work going forward on the follow up to Farepak.

ADVICE TO DTI

  5.  In November 2006, following the collapse of Farepak, the Minister of State for Trade, Investment and Foreign Affairs asked that OFT work with the DTI and the FSA to look at the regulatory framework and consider options to address the issues raised. OFT provided advice including a contribution from the FSA on 14 December 2006. No single recommendation was made given the short timescale within which the advice was provided but it was suggested that the best options for consumers appeared to relate to reform of company law by moving consumers up the list of creditors and improving consumers' rights to take representative actions. We did not favour regulation of the hamper industry or of prepayments generally.

Company law reform

  6.  Consumers are not as well placed as others to judge the risks involved when making prepayments to a business and often receive relatively little from the distribution of assets by the administrators in the event of company failure. Moving consumers up the list of creditors would transfer the risk from consumers to other existing creditors such as institutional lenders who are more likely to be able to make judgements on the viability of a business. We acknowledged that changing the order could affect the terms under which they provide finance. However, this would represent a market based substitute for regulation.

  7.  Enhanced duties on directors in respect of using consumers' prepayments could potentially lead to directors being found personally liable if they have misused consumers' money and lead ultimately to more money being made available to the administrators for distribution. We also suggested strengthening the position of consumers in terms of their right and ability to take representative actions where potentially money is available, possibly through directors' personal liability.

Regulation of all prepayments made by consumers

  8.  We did not consider this to be a viable option. Many businesses depend on prepayments to provide working capital and some might not be able to start up if the compliance costs were too great. It is extremely likely that the costs of any regulation would ultimately be passed onto consumers in the form of higher prices. We therefore considered the costs would be disproportionate.

Specific regulation of the hamper industry

  9.  We were not satisfied that there was a clear case for regulating the hamper scheme business model specifically, whether by bringing these products within the FSA's regime, or otherwise. This is partly because of difficulties in targeting regulation at the specific products (hampers, vouchers, and other goods) but also because such a response to the Farepak collapse would ignore the risks to consumers of business failure in other sectors where significant prepayments are taken.

  10.  The business model used by the hamper scheme industry carries significant risks for consumers. However, based on what we found in our brief analysis, we felt it would be extremely difficult to put protection in place. The need for working capital was a significant problem and insurance or bonding would be costly given the risks now associated with the market. Prescriptive regulation would be unattractive to the agents and costly to consumers. Defining exactly what was to be covered in order to prevent either evasion or unintended consequences could be problematic. We also considered whether businesses (other than regulated savings schemes providers) should be prohibited from holding consumers' money for longer than a certain period. However, any legislation would need to ensure that the everyday use of prepayments in other sectors of the economy remain untouched.

  11.  If any of these options were to be explored further, we recommend a detailed cost benefit analysis be carried out. Any regulatory option would impose costs on business and therefore on consumers.

EDUCATION PROGRAMME

Background

  12.  On 23 March 2007 HMT and DTI asked us to run a £1 million consumer education campaign and we agreed. We intend to get the most effective outcomes for consumers for this spend by combining targeted consumer education initiatives with national PR and advertising. This approach will be more effective in terms of sustained consumer benefits.

  13.  Our strategy has two main strands:

    a.  to inform and educate people who lost money from the collapse of Farepak to help them understand what options are available to them to save for this Christmas; and

    b.  to carry out a consumer education programme that will help consumers to choose the most appropriate short term saving vehicle for their needs.

Target audience

  14.  We have examined the target audience by talking to the individuals and organisations that have a good knowledge of the drivers that inform consumer behaviour in this area. This will ensure our campaign will have credibility with our audience and will be absorbed.

  15.  As the Pomeroy Report described, people who use hamper schemes are making sensible decisions from their perspective. The apparent benefits can outweigh the disadvantages such as loss of interest on the money saved. Our aim is to encourage those wishing to save for Christmas to look at the features of hamper schemes and alternative options and to empower them to make decisions that are better for their particular circumstances.

Campaign/education programme

  16.  Our campaign and consumer education programme is called "Save Christmas" and will begin with a national launch on 1 June. The launch will disseminate information showing the options for short term savings for Christmas this year. We will use printed materials, PR, a press event and the networks described below to push the information out to our target communities.

  17.  We are working closely with others to disseminate messages and later to develop and deliver consumer education materials with them. These include the DWP "Now let's talk money" campaign, Citizens' Advice, the Trading Standards Service, Advice UK, ABCUL and LACORS amongst others, as well as specifically local groups.

  18.  The programme will also involve in-depth consumer education work delivered locally by organisations that have face-to-face contact with our audience supported by local and national PR and advertising. This will roll out sequentially to regions and nations across the UK focusing where there were major concentrations of Fairpak victims. We are building links with community groups, media and the voluntary sector in each area and—combined with our national partners' links—we will work with them to deliver in each separate region/nation. This will begin with Scotland in the summer, and be followed by other regions between July and December. This phased roll out of tailored education materials[17] will be preceded by a campaign launch in each area.

  19.  These materials will continue to do their job within communities after our campaign has finished and will be fully evaluated.

  20.  The campaign will end in late November/early December with a national PR and advertising push. This will reiterate and reinforce the messages at a time when consumers are deciding how they will save for Christmas 2008.

COMPETITION IN THE HAMPER SCHEMES MARKET

  21.  We examined the competition position briefly in the advice we provided to the Minister in December 2006. We did not have time to collect detailed information but noted certain features of the market. Consumers value the convenience and informality of the home collection system through agents who are usually family members or friends. Social and cultural factors are very important to them together with the idea that the money has been put out of reach. We noted that supermarkets offered Christmas savings schemes and might possibly be able to attract customers through the use of agents. We also recognised that supermarkets would not necessarily offer the convenience of hamper schemes particularly in rural areas. At the time of providing the advice the information we received suggested that consumers were unlikely to turn to bank savings schemes if hamper schemes were unavailable and would be attracted to local schemes run through pubs and clubs.

  22.  In considering competition issues further we are considering primarily the effects of the merger between Park Group and Home Farm Hampers. We have received some preliminary information from Park Group and have issued an Invitation to Comment notice, distributed by Reuters Regulatory News Service and the OFT's web site, inviting interested third parties to comment on the merger. We will, in addition, be carrying out targeted third party enquiries. The consideration of the merger will, inevitably, require an investigation into the "hamper market", how it operates, what (if any) alternatives are available to consumers and the effect of the merger upon competition. The investigation of this merger should help inform how we would then take forward any further consideration that might be required.

  23.  The OFT's administrative target is to process a merger to a decision within 40 working days. This suggests an outcome towards the second half of June although the administrative clock can be "stopped" if the parties delay in providing required information.

June 2004







17   These materials could include short films to show at community meetings, self-help leaflets, speaking notes, PowerPoint presentations, web links and so on. They will be customized for each specific region/nation. Back


 
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