Government response
1. The Government welcomes the Committee's report
which highlights some of the key issues facing the Office of Fair
Trading over the coming few years. The Committee's views will
inform the strategic planning for the OFT as we strive to maintain
a world-class competition regime and strong and effective consumer
policy in the UK.
Response to Conclusions and Recommendations:
We have set out below our response to conclusions
and recommendations.
THE OFT'S RESPONSE TO THE 2005 NAO REPORT
2. Paragraph 6: We commend the OFT for its response
so far to the NAO's criticisms. As witnesses noted, it is too
soon to make a balanced assessment of whether these criticisms
have been fully addressed, but we are encouraged by the evidence
of progress we have seen. Therefore we also welcome the fact that
the NAO will be revisiting the work of the OFT after April 2008.
3. The Government and the OFT welcomes the Committee's
commendation of its response to the 2005 NAO report on the OFT's
competition enforcement work. The NAO report recognised the OFT's
achievements during a period of dramatic change in the legal environment.
4. The OFT has accepted all of the NAO recommendations[1],
and in conjunction with its internal change programme, has worked
on implementing them. The NAO recommendations, where efficient
to do so, have been implemented across the OFT, rather than just
in the area of competition enforcement. For example, in line with
the NAO recommendation that the OFT increase transparency on its
selection of competition cases for investigation, the OFT is currently
consulting on criteria explaining how it prioritises all its work,
including consumer and markets.
5. The OFT made radical changes to its structure
in order to meet the challenges it faces more effectively and
ensure it is a more focused, strategic and coherent organisation.
A key aspect of this new structure is that project and enforcement
work are now grouped together in three sector-focused market groupings
covering goods, services, and infrastructure & knowledge economies.
6. The OFT has an objective to achieve direct financial
benefits for consumers of five times its cost to the taxpayer
over the next three years. The OFT has drawn up a series of aims
to help meet this: delivering high impact outcomes, being a centre
of excellence and intelligence, working in partnership, and building
its internal capability.
SALARY AND OTHER CONSTRAINTS:
7. Paragraph 7: We share the concerns of OFT management
over the lack of flexibility available to it in rewards packages.
As the UK's principal competition authority, the OFT needs to
employ talented individuals to do its job. We recommend that the
Department of Business, Enterprise and Regulatory Reform undertakes
a review of the effect that the greater market power of Ofcom
in attracting staff could be having on the effectiveness and balance
of the overall UK competition regime.
8. The OFT, like many other Government institutions,
competes with other Government institutions and the private and
third sector to attract highly qualified staff in a competitive
market.
9. While the Government imposes necessary restrictions
around the rewards package that the OFT can offer their staff,
there is some flexibility available for the OFT to target pay
increases to areas or specialities where they most need to retain
or attract staff.
MERGER REFERRAL THRESHOLD
10. Paragraph 9: While the broad thrust of this
new approach appears sensible, we have some concerns that smaller
markets or competition in local areas could be neglected under
the merger referral proposals. Although there is provision for
referrals below the £10 million level in some circumstances,
it will be necessary to ensure that this does indeed happen, and
we recommend that the OFT continue to keep this matter under review
once new guidelines have been adopted.
11. The OFT's Guidance describes those circumstances
where it may decide not to refer a merger below a certain size
(the 'de minimis' threshold) to the Competition Commission (CC)
because the costs involved in such a reference would be disproportionate
to the likely anti-competitive effects arising from it.
12. However, the Guidance does not provide a 'carte
blanche' for anti competitive mergers below a certain size. The
Guidance describes certain circumstances whereby the exception
to the duty to refer may not be appropriate notwithstanding that
the merger falls below the 'de minimis' threshold.
13. For example, the OFT will not consider the exception
to the duty to refer to be appropriate where the total impact
of the merger in terms of consumer harm is likely to be particularly
significant, such as mergers to monopoly in markets without prospects
for new entry, or mergers that increase the risk of cartel behaviour
where there is already evidence of collusion.
14. In addition, the exception may be less appropriate
where a reference would have important precedent value, and/or
a substantial portion of the likely detriment is suffered by vulnerable
consumers.
15. In cases where the exception to the duty to refer
may be applicable, the OFT will consider whether any of these
'clawback' provisions should apply, and therefore whether - notwithstanding
the size of the merger - the merger's potential adverse effects
outweigh the costs and burden to the parties of a reference to
the CC such that a reference is justified.
16. The Guidance is intended to strike a careful
balance by protecting UK consumers from the risk of harm posed
by anti-competitive mergers without imposing disproportionate
costs on taxpayers and business, especially in relation to small-scale
issues.
17. The approach reconciles the OFT's broader goals
of making smaller markets work well for consumers and avoiding
undue burdens on taxpayers and business. The OFT wants the merger
regime to encourage efficient merger activity while discouraging
the acquisition of market power even in smaller markets that,
in aggregate, contribute a great deal to UK productivity and consumer
welfare.
18. Paragraph 10: Set against the need to maintain
the right to make merger referrals where needed, it is important
to ensure that the OFT bears in mind the costs to companies of
a full referral. Wherever possible the OFT should seek to resolve
smaller and less strategically significant merger proposals itself,
using, where necessary, its powers to seek undertakings. From
the evidence given to us, we are confident that the OFT understands
this difficult balancing act, but we believe it is an issue the
organisation must keep at the forefront of its thinking.
19. The OFT will seek to resolve smaller mergers
through the application of its exception to the duty to refer
markets of insufficient importance.
20. The OFT will, where appropriate, seek to accept
undertakings in lieu of reference to the CC, and will adopt this
approach in all cases, small or large.
21. The OFT's remedy policy allows it to accept undertakings
in lieu of reference where the competition concerns raised by
the merger and the remedies proposed to address them are clear-cut,
and those remedies are capable of ready implementation.
22. It is for this reason that undertakings in lieu
of reference have typically been used in merger cases where a
substantial lessening of competition arises from an overlap that
is relatively small in the context of the merger, for example
a few local markets affected by a national merger. It is worth
noting, however, that some mergers raise substantial competition
concerns for which there are no clear-cut remedies, and so the
OFT has no option but to refer the merger to the CC, and this
applies to mergers of all sizes, small or large.
CODES OF PRACTICE:
23. Paragraph 12: We see codes of practice as
potentially beneficial to the consumer, but are concerned about
the apparent lack of incentive for companies to take part. As
codes are voluntary while being intended to go beyond legal minima,
the successful operation of a code will largely rely on goodwill
within an industry, and good working relationships between that
industry and the OFT. The case of the ABTA code has denied consumers
in the travel market the extra confidence that an approved code
could give and is an unfortunate precedent for the Codes of Practice
system as a whole, but there appears to be no obvious solution
to the difficulties.
24. The OFT agrees that because the Consumer Codes
Approval Scheme (CCAS) is a voluntary scheme it can promote the
benefits of CCAS participation but it cannot force code sponsors
to join.
25. However, the benefits of participation are clear.
The incentives for business participation are that the scheme:
assists customers to identify trustworthy businesses to buy from;
provides a powerful marketing tool for participating businesses;
provides businesses with a competitive edge by developing best
practice; and assists businesses to attain and retain customers.
26. The OFT published an independent report entitled
'Review of impact on business of the Consumer Codes Approval Scheme'
(October 2006[2]). The
report concluded that over half of current members of an OFT approved
code reported the benefits outweighed the costs with only three
per cent saying the burden was greater than the value added.
27. The OFT have six fully approved codes. A further
six codes are at Stage Two (evidence gathering phase) with the
potential to double the number of approved codes within a year.
A further 12 codes are at Stage One (core criteria approval phase)
with the potential to again double the number of approved codes
within two years.
28. The sectors the fully approved codes are in are
very important areas of consumer spending: homes; new cars; car
servicing and repair; energy; credit; and healthcare.
29. The OFT recognises the Committee's disappointment
expressed in relation to ABTA's withdrawal from CCAS and hope
that in time a solution can be found.
30. The OFT is currently exploring ways to demonstrate
the added consumer benefits of CCAS that other non-CCAS codes
lack. However, if a code does not meet the CCAS core criteria,
it will not qualify for approval under CCAS.
31. The success of CCAS is founded on the challenging
and rigorous criteria and evidence gathering processes that CCAS
requires. While progress to expand the number of codes within
CCAS may appear slow, the number of approved codes is growing
and all the approved codes are proving to be robust and effective
in protecting and promoting consumer interests.
CONSUMER DIRECT:
32. Paragraph 13: We believe the delivery mechanism
chosen, with eleven different contractors, will take careful management
to ensure consistency. We therefore call on the OFT to work with
consumer groups to assess whether there are significant inconsistencies
of service, and if so, to address them.
33. Each Consumer Direct (CD) centre adheres to a
strict performance and quality regime which is tied to standards
set by the central OFT team. The OFT operations team - who closely
monitor the quality of CD service - includes three performance
and quality officers who visit each of the centres every six weeks
to ensure key performance indicators are being adhered to and
that the quality of the service is maintained. Recently an additional
three people have been appointed to monitor the quality of calls
through a call and data entry review.
34. The OFT is currently compiling a membership list
and terms of reference for a Stakeholder Forum which will bring
together trading standards and consumer representatives to input
into important decisions.
35. The Forum will assist in improving overall CD
service by raising issues and offering solutions to the CD team
and referring items that cannot be resolved by the Forum to the
National Strategy Group.
36. The Forum will provide feedback on areas of interest
or concern to the OFT CD team in order to further the service's
objectives and to ensure that stakeholders' needs and expectations
are met where possible.
37. Paragraphs 15 and 16: In a previous Report
we noted the unwelcome uncertainty caused by the proposals to
abolish Postwatch in the middle of a major series of local consultations
on the future of the post office network. This uncertainty is
unhelpful both for the staff of Postwatch and for the efficacy
of the consultation process.
38. In the longer term, we share the concerns
raised by the OFT and consumer groups regarding the risk that
an over-ambitious timetable and potential under-resourcing could
lead to a poorer service for customers under the new arrangements.
The Government must ensure that the OFT is provided with sufficient
resources to enable Consumer Direct to handle the increase in
consumer contact (600,000 to 1 million calls, in addition to the
1.7 million existing contacts in 2006-07), and the Government
must ensure that a 'second-tier' service comparable with the existing
one continues to be available, either through the new National
Consumer Council or by enhancing the Consumer Direct service.
In either case it is vital that new NCC and Consumer Direct work
effectively together; other consumer organisations should not
find themselves being called on to take the strain unless this
is the stated aim of the Government and proper planning is made
for such a change.
39. The Government notes the committee's concerns
about the timetable for the establishment of the new National
Consumer Council. The Council will now be fully established on
October 1st 2008 which allows sufficient time for effective preparation
for the new body itself, for Consumer Direct, for industry and
the sector regulators, Ofgem and Postcomm who have duties under
the CEAR Act 2007. The timing also ensures that Postwatch's principle
role in the public consultation to support the Postal Network
Restructuring Programme can be discharged. Ministers gave assurances
during the passage of the CEAR Bill that steps would be taken
to ensure the integrity of this aspect of Postwatch's work when
considering timing of implementation. Detailed planning will
ensure the programme can be fully completed.
40. The Government is in discussion with Consumer
Direct about all aspects of the work to deliver advice to consumers
in the energy and postal services markets including resources.
It is intended that the new National Consumer Council will be
established in shadow form in January 2008 and will work closely
with Consumer Direct to ensure that consumers, especially the
most vulnerable, receive appropriate help and advice. The Regulators
are also working closely with industry to ensure that their customer
complaints handling is improved. Ofgem and Postcomm will consult
on the standards they will set for consumer complaints handling.
In addition, under the new system, consumers will, for the first
time, be able to seek redress from industry Ombudsman schemes.
29 January 2008
1 The NAO report made several recommendations on prioritisation
and resourcing of OFT's casework; case management in terms of
timescales, cost and quality control; and measurement and communication
of the OFT's achievements. Back
2
http://www.oft.gov.uk/shared_oft/Approvedcodesofpractice/oft870.pdf
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