Memorandum submitted by the Office of
Fair Trading
SUMMARY
The Office of Fair Trading believes that the
economy is best served by vibrant competition in open and well
functioning markets; however, sometimes regulation is essential
for markets to function well for consumers. It is a priority for
the OFT to emphasise to government and to business the importance
of a consistent and clear framework of consumer and competition
enforcement for long-term business investment and decision making.
Thus we act to safeguard competition, which in turn drives long
term productivity growth.
In our operation as a non-Ministerial Government
Department, we aim to comply with the principles of better regulation
across our work, ensuring that our actions are risk-based, targeted
and proportionate. We believe that any unnecessary costs on business
can only detract from benefits to consumers and the wider economy.
In responding to current economic developments,
it is essential that any policy response is correctly targeted
and that the Government, in designing new regulations, effectively
applies its framework for the consideration of competition aspects,
including the potential impact on businesses that might chose
to enter a market.
INTRODUCTION
1. The Office of Fair Trading (OFT) welcomes
this opportunity to respond to the Regulatory Reform Committee
Inquiry into Themes and Trends in Regulatory Reform. We have focused
our comments on the following areas:
— How does the Government balance the need
for an effective regulatory framework with the commitment to improve
the conditions for business success?
— What are the implications of recent economic
developments?
— In the design of new regulations, is
sufficient emphasis given to competition issues?
— Is there sufficient consideration of
how regulations will be implemented?
2. Given the OFT's specific role and functions,
we have emphasised the following points in our response:
— The role of competition in the regulatory
framework and in creating conditions for business success
— The OFT's response to recent economic
developments
— The design of effective regulations and
consideration of competition issues
— The implementation of new regulations
— Consumer regulations: compliance and
enforcement
3. In Appendix I we have outlined the relationship
between the OFT's various functions and the regulatory reform
agenda. Appendix II is a recent speech by John Fingleton, OFT
Chief Executive, entitled "Competition policy in troubled
times" which sets out how the OFT is responding to the changing
priorities of the recession. Appendix III is a list of recommendations
made in light of the OFT's work on Market Studies.
OFT'S MISSION
AND FUNCTIONS
4. The Office of Fair Trading (OFT) is the
UK's competition and consumer authority.[40]
Our mission is to make markets work well for consumers. We do
so through a range of functions, including:
— enforcement of competition and consumer
law and merger control
— researching and publishing market studies
— making market investigation references
to the Competition Commission
— advising government and carrying out
wider advocacy work
— encouraging industry codes and self-regulation
— promoting business and consumer education
— supporting the provision of advice to
individual consumers via Consumer Direct.[41]
5. In most of our work we do not act as
a regulator within the meaning of the Legislative and Regulatory
Reform Act 2006, although we do so in our work on consumer enforcement,
consumer credit licensing and anti-money laundering supervision.
We do not make rules or regulations but use the framework they
give to make targeted interventions to make markets work well.
Appendix I provides a summary of the relationship between the
OFT's various functions and the regulatory reform agenda.
6. We seek to ensure that we comply with
the principles of better regulation across our work, ensuring
our actions are risk-based, targeted and proportionate. We aim
not to impose unnecessary costs on business. When regulation puts
undue burdens on business the costs are passed on to consumers
and therefore we believe a consumer-focused approach is a good
one for determining the proportionality of regulation and enforcement.
THE REGULATORY
FRAMEWORK AND
CONDITIONS FOR
BUSINESS SUCCESS
7. The Committee has asked us to consider
how the Government balances the need for an effective regulatory
framework and improvements to the conditions for business success.
Our view is that the economy is best served by vibrant competition
in open and well-functioning markets, which are in turn driven
by empowered and confident consumers. It is a priority for the
OFT to emphasise to government and to business the importance
of a consistent and clear framework of consumer and competition
enforcement for long-term business investment and decision making.
Thus we act to safeguard competition, which in turn drives long
term productivity growth. Markets optimise consumer welfare only
when they are working well, and the OFT's job is to promote the
process of competition and good standards of consumer protection
such that markets can deliver value efficiently.
8. The UK competition regime—in particular
market studies and market investigation references—can also
be used to solve problems and ensure and demonstrate that markets
are publicly accountable. In this way the regime is capable of
building certainty and public confidence in markets. For example,
a market investigation reference in the groceries market[42]
and a market study in the homebuilding market[43]
have provided an independent review of the evidence and usefully
set aside concerns that weak competition was a problem in these
markets.
RESPONDING TO
RECENT ECONOMIC
DEVELOPMENTS
9. We recognise that, while recent years
have witnessed growing public confidence in the ability of competitive
markets to deliver positive outcomes, the credit crunch and the
recession risk damaging that confidence. Recession is potentially
hostile towards competition policy: the less visible and less
immediate costs of restricting competition can look more attractive
to policy-makers faced with a range of unpalatable options.
10. We need to ensure that today's solutions
do not inadvertently become tomorrow's problems. Policies to relax
competition in the US in the 1930s and in Japan in the 1990s arguably
added to the duration of the recession in both countries. It is
essential that any policy response to current economic events
is correctly targeted. If we mistake regulatory failure for market
failure, we risk undermining the source of much of the wealth
creation that came from the opening of markets to competition.
11. In a recession, the types and areas
of intervention which best achieve our mission may change and
we need to be able to respond quickly to changing priorities.
We consider that this regime is sufficient to deal with current
challenges, and that we are well positioned to respond to those
challenges. The guiding aims in our response to the economic downturn
are set out in a recent speech by John Fingleton, OFT Chief Executive,
which is attached as Appendix II.
THE DESIGN
OF EFFECTIVE
REGULATIONS: COMPETITION
ISSUES
12. The OFT has a particular interest in
monitoring the competition impact of new regulations put in place
by Government. This is encompassed by Section 7 of the Enterprise
Act 2002, which gives the OFT a power to advise government and
other public bodies on competition and consumer issues. But the
OFT has no direct powers to change regulations. The onus is on
the Government to make whatever changes are needed to address
the competition issues associated with regulations.
13. Impacts on competition should be a major
concern for government in designing new regulations. Some degree
of regulation is essential in order for markets to function, to
protect consumers, and in some cases to deliver wider policy objectives.
But regulation can also restrict competition, making markets less
efficient, and leading to outcomes which are worse for consumers
and limit economic growth. Regulations can have this effect, for
example, by restricting entry to a market (say through introducing
a licensing scheme or raising entry costs), or by limiting the
scope for competition between firms (say by placing restrictions
on prices).
14. The Committee has asked whether Government
understands business interests sufficiently in order to design
effective regulations. From a competition perspective, it is important
that Government policy reflects and takes account of the full
range of different business interests (as well as those of consumers).
While better regulation typically focuses on overall burdens to
business, competition concerns arise in the main where regulatory
burdens impact differently on different businesses. In particular,
in looking at competition effects we need to think about impacts
on new entrants and innovative approaches as well as existing
businesses. Concerns might also arise where a regulation imposes
proportionately greater costs on smaller businesses which might
have the potential to grow to challenge the larger incumbent businesses.
Regulations that restrict competition are generally in the interests
of incumbent businesses—because they reduce competitive
pressure on incumbents. Therefore the fact that some businesses
are in favour of a regulation does not necessarily mean that it
has a benign impact on competition.
15. More generally, it should be noted that
incumbent producer interests are generally articulated more strongly
than those of consumers, whereas it is consumer welfare that is
paramount and policy making must take that into account.
16. The Committee has also asked whether
Government gives sufficient emphasis to competition issues in
designing new regulations. We believe that there is a sound framework
in place through the Impact Assessment process, but that it is
not always applied effectively in practice.
17. Under the framework overseen by the
Better Regulation Executive (BRE), all new regulations must be
accompanied by an Impact Assessment. This includes a specific
Competition Impact Assessment. Where regulations can be expected
to have a significant impact on competition, policymakers need
to carry out a detailed analysis of that potential competition
effect. The OFT produces detailed guidance on how to carry out
the assessment[44]
and provides advice to policymakers where there are complex issues
or significant competition effects. We believe this is a helpful
framework to ensure that competition implications are considered.
It is also in line with international best practice, for example
as demonstrated in the OECD competition assessment toolkit[45]
which is very similar to that used in the UK.
18. In practice however, we are not convinced
that competition assessments are always carried out in full, or
given sufficient weight in the overall impact assessment alongside
other policy considerations. This concern goes wider than Impact
Assessments themselves, to the overall process of policy making.
A major difficulty is that competition impacts of policies can
be hard to predict, and the costs may not be immediately obvious.
In contrast, the benefits of a regulation (for example in terms
of greater direct protection for consumers) tend to be easier
to predict.
19. An example of a case where competition
effects may have been given insufficient weight is pharmacy reform.
In 2002 the OFT published a market study recommending liberalisation
of the control of entry restrictions on new pharmacies. The OFT
argued that supply was being held back, and that this was limiting
innovation and quality of service, and imposing costs on consumers
(ie pharmacy patients). The OFT's recommendations were not accepted,
largely because of concerns about the impact on patient access
and on the viability of small pharmacies. However, the Government
allowed some exemptions from the control of entry regulations,
eg for pharmacies opening for longer than 100 hours per week.
Subsequently there has been strong growth in pharmacy provision
taking advantage of the 100 hours exemption. An evaluation
by the Department of Health in 2005 suggested that this greater
competition had been beneficial for consumers, and has by-and-large
not had the negative impacts on access or survival of small pharmacies
that were feared at the time. The OFT continues to believe that
further liberalisation would be beneficial for consumers, and
that the limited liberalisation that has happened to date has
demonstrated the benefits of competition to consumers. A list
of the recommendations from the OFT's Market Studies is at Appendix
III.
IMPLEMENTATION OF
NEW REGULATIONS
20. As set out in Appendix I, the OFT does
not itself design legislation or regulations, but works closely
with the Department of Business Enterprise and Regulatory Reform
(BERR) when new legislation is being developed. The development
of the Consumer Credit Bill is a good example of where the OFT
was consulted extensively and input expertise to BERR during the
development of the Bill. The BRE/NAO report, Effective inspection
and enforcement[46]recognised
this.
21. When new legislation reaches the stage
of practical implementation, the OFT takes care to consult with
business and other stakeholders on guidance and detailed arrangements.
In preparing for implementation of the Consumer Protection from
Unfair Trading Regulations 2008, a fundamental change in consumer
protection law, we worked at European and domestic levels to build
understanding of the likely legal meaning of the Unfair Commercial
Practices Directive, and thus to explain and understand its likely
impact on stakeholders. With BERR (then DTI) we engaged with a
core stakeholder group on the production of illustrative guidance.
The group included the Confederation of British Industry, British
Retail Consortium, Advertising Association, Advertising Standards
Authority and Federation of Small Businesses, as well as other
enforcers and consumer groups, and the Better Regulation Executive
as an observer. We first discussed the scope, content and structure
of the guidance document, and then went on to share draft versions
at each subsequent meeting. A final session was held to agree
as much of the text as possible. The guidance was published jointly
by BERR and OFT in draft form for a wider public consultation
and then in final form on implementation in May 2008.
22. In developing our approach to our new
supervisory duties on anti-money laundering, we tailored guidance
to smaller firms, and proposed to inspect riskier businesses more
frequently. We drew on the experience of other supervisory authorities
to inform our approach and consulted with industry working groups
throughout.
23. We have a current project covering irresponsible
lending (implementing the irresponsible lending part of the Consumer
Credit Act section 25 fitness test). We have started with
a 12 week consultation on the scope of the project itself.
During this we had bilateral meetings with all main stakeholders
and spoke at 5 conferences on the subject. After making our
decisions on the scope of the project we have moved to the investigation
and analysis phase and are holding a series of workshops and roundtable
discussions with all stakeholder groups to get their views on
what the OFT should consider to be irresponsible lending under
the Consumer Credit Act and how we should deal with it, amongst
other issues. We will fully consult on the final guidance.
CONSUMER REGULATIONS:
COMPLIANCE AND
ENFORCEMENT
24. We believe that most businesses want
to treat their customers fairly and to comply with the consumer
protection law that the OFT enforces. We aim to enable and encourage
them to do so, and to take enforcement action only where there
is no better route to securing compliance. Enforcement action
is used to protect consumers, and particularly vulnerable consumers,
from rogue traders, unfair commercial practices and other instances
where businesses disregard their legal obligations. Formal enforcement
interventions are used in relation to specific practices outlawed
in consumer legislation and require a course of action by reference
to that legislation.
25. In December 2008 we published our
updated Statement of consumer protection enforcement principles[47]
which sets out our approach to compliance and enforcement. It
complements our prioritisation principles and explains how our
choice of compliance and enforcement tools is aligned with the
principles of better regulation.
26. We encourage business compliance by
ensuring businesses have clear, targeted and timely information
and guidance on legal requirements relating to our functions,
and especially on changes to those requirements. Staff across
the OFT work closely with businesses and business groups to identify
their needs and consider how best these needs can be met in terms
not only of the content of information provided, but also of presentation
and means of dissemination. We pay particular attention to the
requirements of smaller businesses, and following requests from
some stakeholders, we are currently producing a short document
explaining the Business Protection from Unfair Trading Regulations
2008, which implement the amended Comparative and Misleading Advertising
Regulations.
27. Alongside our statutory consumer enforcement
powers, we also employ a number of tools which promote self regulation
and stronger consumer confidence and empowerment. We provide incentives
to improved trading practice: we rely, where appropriate on "established
means"[48]
as a way of dealing with consumer complaints about, for example,
misleading advertising and have consulted about how to extend
our network of "Compliance Partnerships". We target
enforcement activity in line with our prioritisation principles
towards cases of high detriment. Under the prioritisation framework
we have first to consider whether the OFT is the most appropriate
body to deal with the issue. Implicitly, this requires us to think
about what else might be done to address the issue and this includes
consideration of what other body might be able to take speedy,
effective action to stop the harm to consumers.
28. We promote the voluntary adoption of
good trading practice through our Consumer Codes Approval Scheme
(CCAS).[49]
Where appropriate we encourage higher standards when using tools
other than enforcement such as guidance and training, and in particular
through our Codes scheme. The CCAS represents a means of giving
businesses an incentive to go beyond the basic requirements of
the law. It rewards those who adopt best practice, giving them
a competitive edge in attracting and retaining customers. However,
when providing advice and guidance, we distinguish between what
is necessary to meet statutory obligations and what is desirable
for the purposes of achieving improvements above the minimum required
by law.
February 2009
40 The OFT was established in its current form-an independent
non-ministerial government department headed by a Board and funded
by the Treasury-under the Enterprise Act 2002 Back
41
The OFT is unable directly to take up complaints on behalf of
individual consumers. Further information on Consumer Direct can
be found at consumerdirect.gov.uk Back
42
Market Investigation into the Supply of Groceries in the UK, available
at www.competition-commission.org.uk/inquiries/ref2006/grocery/index.htm Back
43
Homebuilding in the UK available at http://www.oft.gov.uk/advice_and_resources/resource_base/market-studies/completed/home1 Back
44
http://www.oft.gov.uk/shared_oft/reports/comp_policy/oft876.pdf Back
45
http://www.oecd.org/dataoecd/15/59/39679833.pdf Back
46
http://www.berr.gov.uk/files/file45359.pdf
p.16 Back
47
http://www.oft.gov.uk/shared_oft/reports/consumer_protection/oft964.pdf Back
48
Established means are bodies able to act in place of OFT in encouraging
compliance with the consumer protection Regulations. We are consulting
on ways in which we can extend the reach of established means
to aid compliance with the CPRs see http://www.oft.gov.uk/shared_oft/consultations/oft1043con.pdf Back
49
www.oft.gov.uk/oft_at_work/consumer_initiatives/codes/publications/£named3 Back
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