Supplementary memorandum submitted by
the Office of Fair Trading
INTRODUCTION
1. OFT is the UK's competition and consumer
authority. We aim to take action to protect the process of competition
in order to maximise consumer welfare, and to stop malpractice
in consumer transactions. We also investigate markets where competition
appears not to be working well, and scrutinise government proposals
for competition purposes. Our expertise is therefore in competition
and consumer enforcement and advocacy, rather than rule making
more generally. We endeavour to coordinate our actions with the
sectoral regulators who are responsible for the proper working
of specific markets in the UK, including financial services, but
they operate independently from us. Our response is framed in
this context. Annexed are replies to those questions which it
is therefore appropriate for us to answer.
2. Although we are not a regulator in the
full sense of the term,[81]
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.
3. OFT is responding to the economic crisis
actively playing its role to encourage confidence in the markets
by
— acting to safeguard competition, which
in turn drives long term productivity growth and competitiveness;
and
— using the range of tools available to
us to ensure consumers receive a fair deal and engage in markets
without being ripped off.
4. In order to carry out our functions effectively
it is sometimes both necessary and proportionate to place requirements
upon businesses—to comply with those laws ultimately aimed
at ensuring overall economic well being both at the individual
and the macro level. Regulation is sometimes essential for markets
to function well for consumers and nor should we underemphasise
the importance of a consistent and clear framework of consumer
and competition enforcement both for long-term business investment
and decision making.
STRATEGIC APPROACH
5. As outlined in our earlier Memorandum
provided to the Committee, the OFT believes the economy is best
served by vibrant competition in open and well functioning markets.
In responding to current economic developments we consider it
essential that any policy response is correctly targeted and that
government, in designing regulations, effectively applies the
framework for competition considerations, including the potential
impact on businesses that choose to enter a market.
6. It is vital to maintain a strong legal
framework as the basis for fair competition between firms. Competition
policy needs to ensure that anti-competitive behaviour is deterred,
while being sufficiently flexible to allow beneficial agreements
to go ahead. For instance, many beneficial cooperation agreements
aimed at delivering efficiencies and consumer benefits, including
those pursued under an industrial activism agenda, will be permissible
under competition law.
7. Targeted government intervention can
help support markets to increase growth and benefit consumers—markets
cannot always do it on their own. But government needs to assess
any long-term negative effects on competition and minimise them.
For example, this means doing proper impact assessments on new
policies, and considering whether there are alternative ways of
achieving the intended policy effect in a way which distorts competition
less.
ADVOCACY FOR
COMPETITION AND
CONSUMER POLICY
8. We see the need for better engagement
with and greater transparency for business. There is also a need
for greater advocacy to government policymakers and the wider
public. We want to work with the Government to develop a strategic
approach to meeting key challenges in policy and enforcement.
9. At a time when there is growing realisation
of the need for joined-up regulatory frameworks (for example in
the financial sector), competition and consumer policy needs to
respond.[82]
Market studies are also increasingly being used by competition
authorities as a means of advocacy, including making recommendations
to government for regulatory or policy change to reduce state
restrictions on competition.[83]
10. We have also been involved in wider
advocacy work. Some of this has related to specific issues where
government actions or regulations have an effect on markets. For
example we have a role in overseeing the competition assessment
of all new policies as part of the Impact Assessment process.
In addition, we have increasingly developed our "framework"
advocacy, explaining the continuing role and importance of competition
and consumer policy. This is often via public outlets (speeches,
press pieces), but also through working with other government
policymakers (eg through the cross-government Competition Forum).
Our financial services strategy is a good example of advocacy,
where we have been engaged with the Financial Services Authority,
HM Treasury and others in raising competition issues alongside
government's other policy objectives.
11. Achieving our objectives in partnership
remains part of the OFT's Vision. For example, we work in partnership
with Local Authority Trading Standards Services in our consumer
protection work. We are working with the Competition Commission
making improvements to our processes for market investigations.
We are committed to ensuring that the competition regime:
— Is responsive, timely and minimises financial
burdens—for example through reducing duplication and faster
decision making
— Makes optimal use of resources and expertise
— Makes the best use of public money by
being efficient and cost effective
— Provides consistency in policy and approach
and
— Is strong, robust and independent, and
continues to be a world leader in the competition and consumer
field.
NEW CHALLENGES
12. The OFT believes it is well placed to
meet the challenges of the economic crisis by using its competition
and consumer protection tools to build trust in markets and choice.
Specifically, the Digital Britain initiative offers the OFT the
opportunity to reflect on its functions, on what we have done
and how we can contribute more effectively, in particular as regards
enforcement, jurisdiction, legislation and policy. For example,
the OFT has a role in ensuring that fraudsters and free-riders
do not harm the incentives of businesses to make the right investments
in innovation. The interim report has also served to highlight
our desire to build our IT competence in e-consumer protection.
ANSWERS TO
THE LIST
OF QUESTIONS
1. Does the complexity of financial markets,
the global nature of the financial system and the corporate and
personal incentives in financial institutions make the financial
services sector unique? Does the regulatory response in the financial
services sector have wider implications for the regulatory reform
agenda?
Financial markets are atypical in a number of
ways including complexity, systemic risk and the speed of innovation.
This does not mean that we should be complacent about potential
failings of regulation in other areas, but it does mean that it
is dangerous to extrapolate from financial markets to the experience
of regulation across markets as a whole.
The crisis in the financial markets and the
global recession have raised questions and generated debate in
some quarters about reliance on markets and competition to provide
for optimum outcomes, and the roles of competition and regulation
in markets. This may be partly a debate about market theory but
it also raises very practical issues for consumers in terms of
trust and confidence in markets and in business. Consumers may
now more rigorously question what they are buying, who they are
buying from, on what terms, and whether they are buying wisely
and safely (as regards quality, delivery and payment).
We continue to believe that open markets and
competition provide the best outcomes for consumers in most markets.
This does not mean no regulation at all—there is a need
for a regulatory framework in order for markets to operate effectively.
We see competition and consumer law as providing such a framework.
Ultimately we do not think that government should
move away from acting only where there is a clear need for external
intervention, and from ensuring that costs and benefits of any
new regulations have been properly evaluated. Regulators need
to be nimble in their application of the tools at their disposal
to ensure they are used to best and most appropriate effect in
the current environment.
3. Is "risk-based" regulation fine
in theory but flawed in practice? What is required to make it
work effectively? What are the risks of risk-based regulation
itself?
"Risk based regulation" can mean a
number of things, depending on the sector, the legal framework
and the risk model employed. At its core is the simple idea of
deploying regulatory resources where they are most needed, but
its implications and implementation vary hugely. In the regulation
of financial markets—particularly regarding wholesale markets
and prudential regulation—the principles and practice of
risk-based regulation will be very different from, for example,
its application to the enforcement of consumers' rights in shops
on the High Street. Lessons drawn from one sector may not be applicable
in another.
At the OFT we use a set of prioritisation principles
to focus our efforts and resources on deterring and influencing
behaviour that poses the greatest threat to consumer welfare.
Our interventions are intended to protect consumer welfare and,
in the process, drive higher productivity growth. The prioritisation
principles are not mandated by any statutory provision, but are
contained in guidance drawn up and published by the OFT after
public consultation.[84]
The current principles include factors such as: the likely effects
of the intervention on consumer welfare, the strategic significance
of a matter, the likelihood of a successful outcome, and the OFT's
resources.
The principles are starting points which are
not adhered to mechanically; they are illustrative rather than
exhaustive, and other factors are considered where relevant. The
advantage of applying these principles is that they give the exercise
of the OFT's discretion a framework in which to enable consistency
of approach, and to avoid the OFT's effectiveness being reduced
through diversion of resources to lower impact investigations.
If an agency with limited resources attempts to cover everything,
regardless of risk, then it covers little or nothing effectively.
The principles are intended to be sufficiently flexible to apply
consistently regardless of economic conditions. They may be changed
after future consultation, if necessary and appropriate.
A decision by the OFT to close a case having
reference to the prioritisation principles does not preclude OFT
from subsequently investigating the matter, for example if it
should reassess the evidence that has been presented, should further
facts come to light or should its priorities change.
We take a risk-based approach when applying
the statutory provisions of the Consumer Credit Act 1974 which
controls businesses in their dealings with consumers, rather than
economic or prudential aspects of credit markets. Our model is
based on our experience of 30 years of licensing.
Regulatory failure in this context is not apparent.
Gaps in the regulatory framework were addressed by Parliament
in the passage of the CCA06 which allows for more effective
regulation. This has been demonstrated by a number of high impact
actions over the last year, for example the OFT-imposed conduct
requirements on Citifinancial Europe plc after its terms and conditions
had wrongly claimed it did not share joint liability for overseas
credit card transactions. Under the requirements Citi will invite
those consumers who feel they may have been misled, and think
they have a claim, to contact them. The OFT also imposed requirements
on 1st Credit Ltd requiring the company to improve its debt collection
practices—including requiring it to refrain from issuing
statutory demands to consumers warning of bankruptcy where it
is unlikely that proceedings will be initiated.
4. What are your organisation's views on the
future role of principles-based regulation? Should it in future
always be combined with specific rules to avoid uncertainty? Are
there areas in which you see principles-based regulation actually
being extended in the face of current thinking? The FSA has expressed
an intention to move toward more outcomes-focused regulation.
What is your view of that and of what it actually means in practice?
There is a place for both principles-based regulation
and more prescriptive regulation. For example, the Consumer Protection
from Unfair Trading Regulations 2008 ("CPRs") contain
high-level prohibitions on misleading and aggressive trading practices,
and so they can be said to be principles-based, but there is also
an annex list of 31 specific practices banned in all circumstances.
Where principles-based regulation is employed, it is important
that there is sufficient clarity as to what adopting the principles
means for businesses in practice. This means the provision of
supporting guidance illustrating the necessary standards of behaviour.
Without this, there is too much scope for businesses to misinterpret
what the regulator considers constitutes adherence. Using the
same example, the OFT and BERR have jointly published illustrative
guidance on the CPRs.
During the OFT's current consultation on irresponsible
lending guidance for the Consumer Credit Act, a number of business
consultees have indicated that they favour "mixed guidance"—principles
based guidance with prescription where this would be considered
helpful and appropriate—for example in clarifying what would
be required of lenders with regards to providing "adequate
explanations" as to potential risks and benefits to potential
borrowers in advance of granting loans.
Under the Competition Act, the OFT publishes
general guidance and information setting out how it will apply
competition law in practice; and the OFT's website contains further
information about the Competition Act, including a register of
decisions adopted by the OFT and sectoral regulators.
The Competition Act as originally enacted provided
a system of notification of agreements (and conduct) to the OFT
for guidance or a decision as to whether the Competition Act was
being infringed. This approach was abolished in 2004 as a
result of the adoption of the EC Modernisation Regulation. As
regards cooperation agreements, for example, businesses must now
conduct their own "self-assessment" of the application
of competition law and any exemptions. Since this self-assessment
regime has entered into effect there has been nothing to suggest
that this is causing difficulties in practice.
The OFT may offer confidential informal, non-binding,
guidance to undertakings on the application of competition law
on an ad hoc basis. In specific cases that raise novel or unresolved
questions of law, it may be possible to obtain fuller written
guidance from the OFT in the form of an Opinion. However, this
will be exceptional. The OFT will consider a request for an Opinion
only where certain criteria are fulfilled.
5. Is the Government implementing a coherent
and intelligent approach to addressing the regulatory issues in
the financial services sector? How can the Government guard against
the media and public pressure to "get tough"—and
consider the changes needed to the regulatory framework in a way
that avoids a knee-jerk reaction? How does the UK's response in
changing the financial services regulatory framework compare with
other countries?
An appropriate balance needs to be achieved
between providing effective consumer protection and ensuring businesses
and markets can operate without being fettered by undue burdens.
Introducing a number of well intended new consumer protection
initiatives at one time risks a potentially negative impact on
businesses and the operation of markets—and ultimately a
restriction in consumer choice. Before any intervention, there
should be sound evidence of—and intelligence about—problems
and detriment. Lack of confidence on the part of consumers can
result in calls for increased regulation, but we think it is necessary
to avoid any short-term fix. The OFT firmly believes that regulation
or re-regulation must not limit competition on the supply side
beyond that which is essential for prudential and financial stability
reasons. That said, it is more imperative than ever that consumers
are afforded appropriate levels of protection during the economic
downturn. The current focus needs to be on maintaining and giving
effect to existing regulatory protections. Some problems (for
example those relating to debt management, irresponsible lending,
or the increased risk of certain kinds of scams) can be tackled
using consumer protection measures, whereas others may require
competition enforcement interventions
The OFT, like all responsible regulatory bodies,
is committed to proportionate forms of enforcement and regulatory
intervention in line with the Regulators' Compliance Code—and
as such, should not be susceptible to external pressures to take
inappropriate or disproportionate action. There are also internal
safeguards build into OFT procedures which would prevent the OFT
taking any such inappropriate actions eg the adjudication and
subsequent appeals process open to estate agents and credit businesses
subject to formal "fitness" actions by the OFT.
Earlier this month, as part of our wider financial
services strategy we announced our plans to launch a review into
the consumer credit sector. This review was prompted by the turbulence
in the global financial markets which has affected the availability
of credit, lending criteria as well as patterns of demand, consumer
risk ratings and sector segmentation. We want to examine the nature
of these changes, their impact on the market and how consumers
are affected. The review will focus on unsecured consumer credit
(which is a major market with gross loan advances for unsecured
consumer credit totalling around £200 billion in 2007)
and want to consider issues such as consumer behaviour and decision
making, the degree of transparency in pricing, how risk-based
pricing operates and whether the right incentives are in place
for suppliers to provide the right products for customers.
We are currently consulting on scope and will
launch in the summer. This review sits alongside our ongoing consumer
credit work which seeks to ensure that consumers are afforded
appropriate levels of protection during the current downturn.
For example draft guidance on second charge lending is currently
out to consultation following a government review of arrears and
repossession policies and practices in the second charge sector.
6. What will be the implications of more intrusive
regulation, if that is what emerges from the current reviews of
the financial services sector? Do you see this as being in conflict
with the objectives of the better regulation agenda?
The current debate serves to strengthen the
relevance and importance of competition and consumer regimes that
are robust, coherent, cohesive and modern —which means equipped
to deal with technological change and responsive to the needs
of consumers in dealing with them and the issues that they raise.
Such regimes need to enable timely, effective and proportionate
interventions where necessary in response to changing needs. They
also need to allow the use of new or different, flexible tools
to resolve problems and deter infringements while fostering compliance
and influencing and changing behaviour, both on the supply and
the demand sides.
7. Is there an inherent tension between the
Government's aim to support business and the need to respond to
the financial crisis? Do the principles of better regulation still
hold good?
We refer you to the comments in our Memorandum
at paragraphs 7-11.
8. Do Government and regulators have the necessary
skills, expertise and understanding to regulate effectively? What
if anything is lacking—is it the lack of management capacity,
sector expertise or enforcement resources? Would more intrusive
or more effective regulation require greater resources?
There is a need to respond flexibly to changing
circumstances, in particular those caused by the economic downturn.
New risks to consumers and businesses are likely to come from
the economic downturn and the interventions we use to address
these problems may also need to change. We need to be ready for
these changes before they happen and are organising our work accordingly,
so that we can react quickly. So far our responses have included:
— delivering quickly in response to emerging
events, such as our study of the sale and rent-back market, in
which consumers were getting a poor deal on releasing the equity
in their houses;
— regular and consistent use of our prioritisation
principles—balancing impact and strategic significance against
risk and resources— to ensure that our portfolio provides
the optimum return for the investment ; and
— shifting our resources to anticipate
problems related to the downturn—for example in our work
on consumer credit and financial services, cartels and scams.
While we are being more flexible in the deployment
of our resources and seeking to apply effective prioritisation
principles, some changes in legislation have led to a requirement
for increased resources. For example, the OFT is able to meet
the new requirement to assess the credit competence of applicants
for consumer credit licences wishing to engage in high risk credit
activities only by adopting an effective partnership approach
with our enforcement colleagues in local authority trading standards
services throughout the United Kingdom. A significant advantage
of adopting a more supervisory regulatory approach in our regulation
of consumer credit businesses is that it has facilitated our developing
a better understanding of our licensed population and more knowledge
and expertise about these sectors.
9. Does Government need to collect better
information to better understand the complexities of the sectors/markets
they regulate?
The effectiveness of risk-based regulation depends
on the quality of the information and intelligence that underpins
it. The features of markets fluctuate (and consequently so do
associated levels of risk) and if the regulator does not respond
and adapt its approach at the same speed then its focus will be
misaligned with the risk profile in the market. We take an intelligence
led-approach to monitoring markets incorporating horizon scanning
and one of our objectives is to be a centre of intelligence and
excellence, sharing with others appropriately.
10. How can Government and regulators ensure
that regulations achieve their intended objectives and deliver
the desired outcomes? How could the current approach be improved?
Is sufficient thought given to enforcement and compliance and
the capacity of Government bodies to implement regulations? What
can be done to raise standards in the design of regulations?
Government departments need to work closely
with front-line bodies during the process of drafting (and negotiating)
new European and UK regulations. This involvement helps to ensure
that practical difficulties and opportunities are identified and
resolved as early as possible. A good example of this in practice
would be the implementation of the Unfair Commercial Practices
Directive where long-term involvement of the OFT by BERR (then
DTI) in the early discussions in Brussels led to a great deal
of UK-focused content in the Directive, and also helped prepare
both organisations for the complex processes of transposition
and engagement with other UK stakeholders including the advertising
sector, Trading Standards and other bodies, all of whom were deeply
affected by the radical shake-up of UK consumer protection legislation
engendered by the Directive.
Alongside the "downturn" issues it
is also important to maintain ongoing scrutiny of new policy developments.
We do this, for example, through our oversight of competition
assessments that have to be carried out by policymakers where
there is likely to be a significant market impact. And we also
think about long-term issues: for example we have published work
on the design of environmental product standards, which will be
a live issue for the foreseeable future.
12. What might now be the future of the regulatory
reform agenda? What are your views on the fact that regulatory
budgets are not to be adopted and on the proposed alternatives?
The regulatory reform agenda has two main limbs,
corresponding to its roots in the 2005 Hampton and Arculus
reports respectively. The Hampton report, focusing on enforcement
and inspection, especially at local level, has already been taken
forward extensively, via the Hampton implementation review process,
the Macrory and Anderson reviews, and substantial statutory changes.
The entrenchment in law of principles of good regulation and the
Regulators' Compliance Code, the creation of the LBRO and the
Primary Authority system changes to regulatory sanctions, and
introduction of a new duty under Part 4 of the Regulatory
Enforcement and Sanctions Act for regulators to review their activities,
have all happened since the beginning of last year. In our view
they represent major safeguards for the future against unnecessarily
burdensome enforcement.
The government's regulatory budgeting proposals
were designed particularly to take forward its programme for reduction
of administrative burdens and had more relevance to central government
departments and to rule-making regulators, as distinct from enforcers.
It was proposed that regulatory budgets should not be compulsorily
applied to statutorily independent authorities. The OFT has particularly
limited and specialised regulatory functions which do not enable
it to act as a significant source of administrative burdens on
business generally.
We believe that it is very important that new
and existing regulations are scrutinised objectively on the basis
of clear market failure. Government regulations can continue to
impose barriers to market development, and leave consumers worse
off. In this sense, we think the regulatory reform agenda continues
to play very important role.
Having said this, it is a good time to step
back and think about what the ultimate objectives of better regulation
should be and it is important that better regulation does not
just focus on incumbent businesses. From the OFT's perspective,
we would like to see greater focus also on the impact of regulation
on: i) potential new entrant businesses, and ii) consumers. Both
of these groups can be under-represented in debates over regulation,
but are key to the way that markets work in practice.
May 2009
81 See Appendix 1 to the OFT Memorandum to the
Committee 27 February 2009. Back
82
An example of this is the International Competition Network's
Advocacy Working Group, co-chaired by the OFT and Russia's Federal
Antimonopoly Service. As part of this work, in January we hosted
a teleseminar on "Competition Advocacy in an Economic Downturn",
in which we highlighted the need for advocacy in the current climate
and presented recommendations on how to maximise the impact of
competition advocacy. Back
83
Within the ICN Advocacy Working Group we are leading a project
which is surveying and evaluating member countries' experience
in this area. The project will promote convergence, and will consider
the scope for outlining best practice in relation to a number
of aspects of the conduct of market studies. Back
84
http://www.oft.gov.uk/advice_and_resources/publications/corporate/general/oft953 Back
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