House of Commons - Regulatory Reform Committee

Themes and Trends in Regulatory Reform - Regulatory Reform Committee Contents

Memorandum submitted by Which?

1. INTRODUCTION

1.1 Which? is an independent, not-for-profit consumer organisation with around 700,000 members and is the largest consumer organisation in Europe. Which? is independent of Government and industry, and is funded through the sale of Which? consumer magazines, and books.

1.2 Thank you for the opportunity to respond to this consultation document. We welcome the decision of the Committee to conduct this investigation. It is important that at this time of significant upheaval in many of our most essential markets that we give careful consideration to the impact that these events will have on our economy and society in the future.

2. KEY POINTS: SUMMARY

2.1 We have set out our views on the specific questions asked in the terms of reference in the body of this document however, as requested, we provide a short summary as follows:

2.2 General

— It is our view that an overly simplistic, or overly negative approach, to regulation is unhelpful and is based on a misconception of what regulation is and why it exists.

— Whilst regulation is often perceived of as activity that restricts behaviour or prevents certain activities, in reality it should be seen as setting the enabling framework that supports the efficient allocation of resources in society.

— Regulation is a wide ranging concept and describes a variety of different activities. Not all of these are of direct relevance, or concern to consumers or consumer organisations. We are primarily interested in the laws and regulations that support well-functioning markets.

— A well functioning market will be one in which responsible businesses compete profitably whilst providing goods and services to their customers in a safe, fair and transparent manner.

— In some cases, such as health and education, achieving this can mean the state itself is the primary supplier. In others, particular features or failures will mean that some form of additional targeted intervention is necessary.

— Even the most open markets will operate against a backdrop of common protections such as competition or contract law.

2.3 Implications of economic downturn

— There is growing acceptance that many of the assumptions that free market economics are based on are partial. In particular, the long held view that markets are efficient and that consumers are rational, self-interested actors.

— A key conclusion that we draw is that it is not sensible, or indeed safe, to take an overly ideological approach to regulation, specifically that the driving objective should be for it to be minimised as an aspiration.

— There is likely to be a new consensus that regulation should be fit for purpose and should adequately deal with specific problems or risks.

— A second area of concern relates to competition law. In particular, that ignoring competition law in the face of recessionary forces could be damaging to the economy in the long-run.

2.4 Targeted response to the regulatory framework

— It is necessary to be clear about when regulation is appropriate. Decisions on whether to regulate and what form it should take should be based on understanding the problem, including robust detriment analysis and an assessment of the alternatives and possible unintended consequences.

— We have identified a number of circumstances in which regulatory intervention may be appropriate, including: monopolies; anti-competitive conducts; information imbalances; and poor quality or mis-selling.

— Because the costs of regulation are likely to be passed on to consumers, and because statutory regulation is likely to be the most expensive and least flexible way of regulating, we will often support alternative approaches such as self-regulation before recommending statutory regulation.

— One key concern that we have is that too much regulatory analysis makes estimates of the costs but does not do justice to the benefits.

— One important point to note about the nature of regulation is that much consumer facing regulation is actually codified good practice and that a lot of regulation is in reality not additional cost to business.

— It is also important to recognise good practice and the benefits of removing regulations where they are not necessary.

3. GENERAL COMMENTS

3.1 Regulation can be an emotive subject. It frequently has negative connotations and is often perceived as simply an attack on business and something to be avoided at all costs. We would accept that to some extent the need to regulate represents a failure. However, it is also our view that taking an overly simplistic, or an overly negative approach, to regulation is unhelpful and is based on a misconception of what regulation is and why it exists.

3.2 Regulation has been defined as sustained and focused control exercised by a public agency over activities that are valued by a community. In this way, regulation can be thought of as all types of deliberate state influence over economic or social behaviour. Regulation can comprise specific sets of commands (a common perception of regulation) as well as many wider modes of influence such as economic incentives, contractual powers, advice, education and information provision.

3.3 In considering regulation therefore, it is important to bear in mind that whilst regulation is often perceived of as an activity that restricts behaviour or prevents certain activities, in reality regulation should be seen as setting the enabling framework that supports the efficient allocation of resources in society. Judgments about the need for regulation should be seen similarly and should be judged on a case by case basis.

3.4 As we have outlined above, regulation is a very wide ranging concept and is in fact a catch all for a whole variety of different activities. Not all of these are of direct relevance, or concern to consumers or consumer organisations. For example, an analysis of the British Chambers of Commerce's burdens barometer (which lists the key regulations affecting UK business) shows that, of the 77 regulations listed, less than 10 relate directly to consumers. The regulatory issues that would appear to generate the bulk of business costs relate largely to employment law, and as such are not primarily consumer issues. As such, it is important that we draw attention to the aspects of regulation that are of primary concern to consumer's lives.

3.5 The economic and social structures that exist in modern society comprise a complex interlinking package of mechanisms for delivering a very wide variety of goods and services to its citizens. The primary participants in these structures are the producers and consumers of these goods and services and the state. In many circumstances, markets are considered to be the most efficient tools for bringing producers and consumers together and allowing the optimal allocation of resources.

3.6 This is a view that we share. An effective market will be one in which responsible businesses compete profitably whilst providing goods and services to their customers in a safe, fair and transparent manner.

3.7 Whilst we support such markets as a useful means of allocating resources in society, we also recognise that it is rarely sufficient for markets to operate outside of a system of behavioural or moral norms. For this reason, even the most open markets will operate against a backdrop of common protections such as competition law, contract law or protection from unfair commercial practices. However, this is not always sufficient and it is the role of the state to correct market failures or promote the wider public interest where the market is not able to deliver socially optimal outcomes.

3.8 In some cases, such as health and education, this can mean the state itself is the primary supplier. In others, particular features or failures will mean that some form of targeted intervention is necessary. However, whatever their specific nature, these regulatory tools should be seen as the bedrock that allows healthy competition, in which good businesses thrive and bad businesses are driven out.

QUESTIONS

1. What are the implications of recent economic developments (for example, the economic downturn; credit crunch and problems within the financial sector) for the design and delivery of the regulatory reform agenda, including risk-based regulation?

4.1 In order to give a considered answer to this question, we believe it is important to consider the economic downturn and the financial crisis separately. The economic downturn has had, and is likely to have, wide ranging implications for the way in which our economy, and indeed our society, is managed. In contrast, the problems in the financial sector are likely to have a much more narrow impact on the way in which we approach the regulation of the financial services sector.

Consumer views on the economy

4.2 By way of background, Which? has recently conducted some consumer research to ascertain what consumer's views are about both the downturn and the financial crisis. Some of the key findings are as follows:

4.3 Firstly, there appears to be a mood amongst consumers that it is the job of the Government to take action to change the economic climate. 49% of people believe that the Government are best placed to take action to change the economic climate for the better.

4.4 Secondly, there appears to be a sense that many of the required reforms will require Government to do this using fairly interventionist measures. Specifically:

— 84% of people believe that the banking system needs to be reformed to avoid a repeat of the recent crisis;

— 83% believe there should be a legal maximum rate of interest that can be charged on credit cards and loans;

— 77% of people believe that banks shouldn't be allowed to lend home buyers more money than their house is worth (ie 100%+ mortgages).

4.5 More widely, there has been a serious breakdown in trust between consumers and the banking sector. One particularly striking observation is that 37% of people do not trust banks to act in the best interests of the economy.

Limitations of free markets

4.6 The economic downturn is currently at the forefront of the political agenda and it is as yet extremely uncertain what the final impact will be. However, there are a number of observations that can be made at this stage. One particularly important issue that appears to have arisen is the dangers that can arise if an overly ideological approach is taken to the regulation of markets, particularly financial markets. The prevailing sentiment in terms of regulation of the financial sector was one that assumed that financial institutions are to an extent self-regulating and would behave in a manner that maintains their own stability. The evidence from the crisis however, would suggest that this view is not entirely correct.

4.7 Financial institutions have shown themselves unable to manage the risks on their own balance sheets, let alone behave in a manner that preserves the stability of the whole system and the economy. Recent comments from Alan Greenspan, the former Chairman of the Federal Reserve, illustrate the newly prevailing sentiment that this view that financial markets can self-regulate has now proven itself to be flawed. In testimony to the House of Representatives Committee on Oversight and Government Reform he is quoted as saying "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

4.8 An analysis of the reasons for this market failure is the subject of considerable contemporary debate and this will continue over the comings months. However, some indication of where the key flaws lie were set out in a recent speech by the Executive Director for Financial Stability at the Bank of England, Andrew Haldane. In particular, he highlighted misaligned incentives and moral hazard. Explaining this, he reported conversations he had had with senior bankers that revealed that there "was absolutely no incentive for individuals or teams to run severe stress tests and show these to management. First, because if there were such a severe shock, they would very likely lose their bonus and possibly their jobs. Second, because in that event the authorities would have to step-in anyway to save a bank and others suffering a similar plight."[15]

4.9 Recent comments from the Chairman of the Financial Services Authority (FSA), Lord Turner of Ecchinswell, suggest that the way in which that regulator will operate in the future will change significantly, away from "light" touch regulation towards a more interventionist approach. In evidence to the Treasury Select Committee, he is quoted as saying: "All the pressure on the FSA was not to say why aren't you looking at these business models, but why are you being so heavy and intrusive, can't you make your regulation a bit more light touch" … "I think (the FSA's actions were) a competent execution of a style of regulation and a philosophy in regulation which was, in retrospect, mistaken".

4.10 In addition to these comments on the failures of financial markets to self-regulate, there also seems to be a growing understanding that many of the wider assumptions that free market economics are based on are partial. In particular, there is an increased questioning of the view that markets are efficient and that consumers are rational, self-interested actors. The impact of this can be seen in some of the work that the OFT have done recently on consumer remedies in which they highlight the impact that behavioural characteristics have on the effectiveness of remedies.[16]

4.11 In practical terms, the specific changes that will come out of this will vary, and will depend on the specific market that is being addressed. However, a key conclusion that we believe should be drawn is that it is not sensible, or indeed safe, to take an overly ideological approach to regulation, specifically that the driving objective should be for it to be minimised as an aspiration. Instead, there is likely to be a new consensus that regulation should be fit for purpose and should adequately deal with the specific problems that can be observed as well as the risks that can be found in any given system.

Competition Law

4.12 A second area of concern relates to the implications of the ongoing recession for competition law. One of the most high-profile outcomes of the recent crisis was the merger of the two large high street banks, Lloyds TSB and HBoS. In order to do this, concerns about the implications that the merger would have on competition in the sector were over-ruled. The OFT conducted a stage one merger analysis. It was their view that the merger did qualify for referral to the competition commission for further scrutiny and that there were no remedies available at that stage that would appear to address their concerns. We also raised our concerns about the potential for a significant weakening of competition for mortgages and current accounts as a result of the merger.

4.13 We understand that the merger was allowed for reasons of public interest on the basis of financial stability but we also note the recent comments by the Chief Executive of the Office of Fair Trading, John Fingleton, in which he warned about the dangers of protecting inefficient businesses. Whilst he also acknowledged that intervention to rescue the financial system from systemic collapse can be crucial, he did highlight the problems of extending a similar approach too widely:[17]

"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. Policies to relax competition in the US in the 1930s and in Japan in the 1990s arguably added to the duration of recession in both countries. Learning from history and the robust economic evidence linking competition to productivity growth, we need to ensure that today's solutions do not inadvertently become tomorrow's problems."

4.14 In this context it is worth noting the importance that the Treasury itself places on the ability of a strong competition framework to raise economic productivity. In November 2007, the Treasury set out in some detail exactly how much benefit competition can bring. They highlighted the fact that between 2000 and 2006-07, the competition authorities generated direct consumer savings of at least £870 million. They also highlighted further work by the OFT which suggests that competition enforcement action also has a significant deterrent effect producing additional benefits to consumers that may be at least a futher £600 million per year.[18]

2. How does the Government balance the need for an effective regulatory framework—providing the necessary benefits and protections—with the commitment to improve the conditions for business success?

3. How might a proportionate and targeted response to improving the regulatory framework in the wake of the financial crisis be made? What lessons are there for the wide regulatory reform agenda?

Why do we need consumer facing regulation?

5.1 The relationship between business and the consumer is frequently an uneven one. To some extent this has always been the case but in some senses, with the advent of the large corporation in the late 19th and early 20th century and the industrialised economy more generally, the imbalances have become more profound. This change in the institutional nature of a business, alongside changes in the role of the state, both fed on and drove rapid technological and social developments through the 20th century. Products and services, and the tools used by producers and sellers to reach the consumer, have become more sophisticated at the same time as consumers are increasingly expected to take responsibility for more complex purchasing decisions (such as pensions) that have significant consequences.

5.2 These developments have increased both the amount of information and, in some cases, the selective or "asymmetrical" way information is given to, or used by, consumers. In particular the greater complexity of the consumer society has meant that many individuals are ever further away from having "perfect" information. These information deficiencies and asymmetries mean consumers have greater uncertainty and face increased risk in their purchases. In other markets, consumers can also be vulnerable to exploitation, bad practice, poor quality products and mis-selling.

5.3 In light of these concerns, regulation, in all of its different forms, has an important role to play in protecting consumers, by correcting market failures and ensuring balance in the relationship between business and the consumer. It should be remembered that ultimately consumers drive markets and regulation is not about Government attacking business but it is about setting the framework for well functioning markets in which good businesses can thrive and bad businesses are driven out.

When is it appropriate to regulate?

5.4 It is necessary to be very clear about when regulation is appropriate and, if it is, what form it should take. It also means recognising good practice and the benefits of removing regulations where they are not necessary. We have previously set out a number of circumstances in which some form of regulatory intervention may be appropriate. These are as follows:

— Exceptional market conditions and macro economic considerations prevail, such as a failure of competition, monopolies or natural monopolies and incomplete markets. This includes circumstances in which there are universal service obligations or price controls. An example of a natural monopoly would be the water industry.

— A few suppliers dominate the market or make anti-competitive conducts (either tacitly or in more serious cases by agreement) which reduce competition and consumer choice—this includes information gaps, lack of tariff transparency and barriers to switching. In more extreme cases it could include direct price fixing or predatory pricing.

— There are pronounced information imbalances, knowledge or skills between those who provide services and consumers, which in turn means that it is difficult for consumers to make an informed choice. Many areas of retail financial services highlight these problems.

— There is significant detriment/harm or potential detriment/harm for consumers as a result of incompetence, poor quality or mis-selling. Numerous financial services products, such as endowments or payment protection insurance (PPI), are examples of this.

— Goods or Services have a significant impact on people's lives and markets won't deliver—possibly because of "free riders" (eg defence or security services) or because of moral hazard (eg health services).

— Competition alone will not deliver essential services to a socially desirable level or delivers them in an unbalanced way. Examples of this range widely but could include private pensions or postal services to remote rural areas. Fuel poverty.

5.5 A good estimate of the scale of the problems facing the UK consumer has been provided by the Office of Fair Trading (OFT) in their recent report into consumer detriment. The OFT define consumer detriment as a measure of the financial losses suffered by consumers as as a result of unsatisfactory purchases of goods and services. They published a report in April 2008 that calculated the overall cost to UK consumers of revealed detriment in the prior 12 months was £6.6 billion.[19]

4. How could the Government improve its capability to regulate in a proportionate and effective manner?

6.1 In representing the consumer interest across a huge range of different markets, we are frequently called upon to propose or comment on ways of remedying consumer problems and this often involves some form of regulatory solution, albeit in some cases this could be something as simple as basic information provision. In light of the fact that most regulatory cost is likely to ultimately be borne by consumers as a result of cost pass through, there is no value in imposing regulations that cost more than the benefits they produce. Such a circumstance would be a clear example of regulatory failure.

6.2 We have discussed above the circumstances in which we believe that targeted intervention can be justified above. We also have a series of observations about how to judge whether regulation is proportionate and what constitutes effective regulation.

Should we regulate?

6.3 If any of the conditions that might justify an intervention exist then our approach will be to conduct a detriment analysis to determine whether the problem identified is significant enough to merit intervention. This analysis will comprise an analysis of the costs of not regulating in terms of the detriment or potential detriment (ie the benefits of regulation). This can then be compared against the costs of regulation to determine the appropriate response.

6.4 One key concern that we have is that too much regulatory analysis makes estimates of the costs but does not do sufficient justice to the questions of benefits.

6.5 A recent example of this can be seen in the consultation document issued by BERR in 2008 that looked at reform of consumer law. Whilst we supported many of the aims of this piece of work to streamline existing provisions, we were concerned by the emphasis that was placed on costs as against benefits. For example, the document stated that consumer law imposes costs of £1.25 billion per year. However, there is no comment on whether this is high or low relative to other regimes or other countries. There is also no evidence given about what the benefits of this regime are in terms of potential detriment and consumer protection. A similar problem exists in its statements on consumer credit legislation. This is estimated to impose a cost on the credit industry of about £250 million a year but again there is no attempt to quantify the benefits.

6.6 Quantifying the benefits of regulation is difficult but work has been done in this area and one particularly useful contribution was made in an Oxera study commissioned by the FSA in 2006.[20] This piece of work gives a methodological approach to identifying the dimensions along which financial services regulation delivers benefits by improving outcomes in the market. Having identified what should be measured, the framework is extended to discuss how the types of benefit can be measured.

6.7 Two recent examples of interventions that we have called for in which we have made an estimate of the benefits of regulation should help illustrate this point.

6.8 In 2006, we started campaigning against the level of unauthorised overdraft charges. It was our observation that the level of charges (up to £38 per incident) were too high and therefore constitute a breach of the Unfair Terms in Consumer Contract Regulations (UTCCR). In order to make the case, we provided an estimate of detriment of £4.7 billion annually, which was based on the average amount of each charge and the reported incidence of charges.

6.9 In 2007 we issued a super-complaint to the OFT about the way in which credit card companies calculate interest charges. We calculated that the top 20 credit card providers use 12 different methods to apply interest charges to their customers' accounts, making at least £400 million a year in the process. We estimated consumer detriment on the basis of different user scenarios established by our market research. Our analysis benchmarked issuers' interest calculation methods against the cheapest method offered by one of the top 20 credit card issuers.

What does good regulation look like?

6.10 As described, our decision as to what form a regulatory intervention should take will necessarily be based on a detriment analysis and an assessment of the benefits and weaknesses (including unintended consequences) of implementing different solutions.

6.11 The purpose of any intervention is to provide a framework whereby the relationship between businesses and consumers can be brought into balance. This will usually be done by seeking to alter the prevailing behavioural or moral norms. This can be done through rules and much consumer protection law takes this form. However, it can also be done through measures that either give businesses incentives to act or empower consumers to drive change through their own actions. In some cases, rules might be necessary but central to our approach is a conviction that good regulation will ideally focus on providing incentives for firms to compete more intensely.

6.12 As stated, statutory regulation can take a variety of forms ranging from simple disclosure requirements to a comprehensive licensing system and any recommendation will need to give careful consideration to what is the most appropriate form. A judgment about this will depend on the nature of the market, the results of any detriment analysis and an assessment of the alternative approaches.

6.13 From our perspective, a primary consideration is to base our views on the purpose of interventions on the consumer principles which are:

— Access;

— Choice;

— Consumer influence and representation;

— Quality;

— Information and education;

— Redress;

— Safety; and

— Value for money.

6.14 The relative importance of each of these will vary according to the individual circumstances at hand but examples of the ways in which we could apply these principles include recommending the establishment of a compulsory Ombudsman scheme as a way of providing consumer redress or using information remedies to encourage consumer choice or increases in switching.

6.15 One important concern that we have is that there is a significant amount of regulation in existence that does not have clearly defined objectives. This can often lead to problems later on in determining whether or not regulation has been successful. In order to improve this, an area of work that would benefit from more study would be to look at how to set criteria for benchmarking the quality of laws and assessing the effectiveness and value of existing and new laws. This should have a focus on outcomes and post remedy appraisal.

Self-Regulation

6.16 Because the costs of regulation are likely to be passed on to consumers, and because statutory regulation is likely to be the most expensive and least flexible way of regulating, we will often support lighter touch forms of intervention such as self-regulation before recommending statutory regulation. The Advertising Standards Authority and their Codes of Practice are an example of a long-standing self-regulatory approach that we have supported. However, there are occasions when we conclude that all other approaches have failed and/or the detriment is so high that only statutory regulation is likely to comprise a workable solution.

Public Service Regulation

6.17 In addition to consideration of markets, it is also important to note that regulation is frequently necessary in many public services and delivery by relevant professions, local and central government and other agencies. In broad terms, the aims of regulation in these situations will be the same—ie to prevent or remedy consumer harm. However the exact way in which regulation is approached can differ in some respects.

Principles Based Regulation

6.18 In terms of the nature of regulation, as well as determining the broad type of regulation, and level of state involvement, there are also important debates to consider about the style of regulation that is to be used.

6.19 One very influential change in regulatory practice in recent years has centred on a shift in emphasis from regulation based on prescriptive rules towards an approach that is centred more on setting regulatory principles or desired outcomes and then allowing firms discretion about exactly how they meet these objectives. Two recent and high profile examples of this new approach are the Financial Services Authority's Treating Customers Fairly (TCF) initiative and the EU initiated Unfair Commercial Practices Directive, which has recently been implemented in the UK through the Consumer Protection Regulations.

6.20 Which? has taken a cautious approach to principles based regulation. We acknowledge that focussing on outcomes is important, however we do have some reservations. We are concerned about the lack of clarity that this sort of approach offers both for firms and for consumers. This has become evident in the case of TCF where only 13% of firms met a recent deadline for having management information systems in place to test whether they are treating their customers fairly. We are also concerned that in practice a lack of clarity will mean that many interpretations will only become clear through court proceedings and that there will therefore be an over-reliance on case law that then becomes a de facto rule.

6.21 There may be a feeling amongst some firms that principles based regulation can lead to higher compliance costs because it will lead to firms being risk averse and therefore overcompensating.

Information Provision

6.23 One particularly important area to consider in the context of consumer facing regulation is information provision. It is our view that information provision needs to be looked at from a balanced perspective. There is little doubt that many consumer problems relate to information asymmetries. As a result of this there is definitely a place for using information based remedies to address these problems. However, it must be done carefully. Too much information, and/or information presented in a poor way, can actually do more harm than good and we would certainly be in favour of less information where appropriate. However, more important, and the real objective here, should be to ensure that the information that is provided is the right information in the best format. Examples of using information in a good way would include: summary boxes for credit cards, traffic light labelling for nutrition labelling and scores on the doors for hygiene ratings for food businesses.

Regulation as good Practice

6.24 One important point to note about the nature of regulation is that much consumer facing regulation is actually codified good practice and that a lot of regulation is in reality not additional cost to business. This was the conclusion of a major study done in 2006 by Deloitte for the FSA and the Financial Services Practitioners Panel. This study looked at three sectors (corporate finance, institutional fund management and retail investment and pensions advice) and drew a number of conclusions about the nature of the regulation in those sectors. In particular, it noted that "much of what regulation requires is good business practice".[21]

6.25 The Deloitte study particularly highlighted the importance of examining incremental cost not total cost—ie the costs of regulation that are over and above what would have been done by the firm in the normal course of business.[22]

6.26 In an extension of this point, the study found that whilst the costs of implementing a regulatory change can often be material, once they are embedded in firms behaviour then the incremental costs are generally seen as quite limited. One implication of this is that once a firm has incurred the cost of implementing a process to comply with a regulatory rule, it typically forms the view that the process is one that, in part, forms a useful function and would be maintained even if the rule that drove the change was to be removed.

6.27 A separate study done for the FSA at the same time by Real Assurance Risk Management suggests that for many businesses, it is changes to requirements that are the problem rather than the requirements themselves. (page 7—point 2.10).[23]

Deregulation where necessary

6.28 We have already made the point that taking an ideological approach to regulation, especially if it is centred on a blanket approach to removing regulation, can be risky. However, there are certainly instances in which removing regulation rather than adding regulation can be beneficial. A recent example of where we have acted to seek deregulation as a solution to a market failure is in the case of our recent supercomplaint on Scottish Legal Services. In this, we have argued that existing structures that place strict controls on how legal professionals in Scotland are allowed to practice and how consumers can access legal representation can hinder market innovation, restricts consumer choice and may lead to higher prices. This now appears to be well on the way to a more open and competitive sector.

6.29 In addition to the work that the UK Government have done on regulation, it is also important to take into consideration the importance of the EU Institutions in any consideration of regulation. In particular, this is because of the volume of domestic legislation that is originated in the EU. In the consumer policy sphere recent high profile directives include the Unfair Commercial Practices Directive, the Consumer Credit Directive and the Markets in Financial Instruments Directive. All of these will have a significant impact on the regulatory framework that affects UK consumers.

6.30 Whilst many EU directives can have a beneficial impact by providing additional protections, there is also risk. This is particularly evident in cases where a maximum harmonisation approach is adopted that can in turn lead to a reduction in existing domestic protection. In broad terms, we would prefer to see EU regulations follow a minimum harmonisation approach but at a high level. This would allow the UK consumers to benefit from the single market but for additional protections to be adopted where appropriate.

5. Whether there is a coherent package of regulatory measures for improving the conditions for business success; and how regulatory reform initiatives fit into wider Government support

6. Does Government understand businesses sufficiently to design effective regulations? Is sufficient emphasis given to small businesses and competition issues?

7.1 We have already explored a series of issues that relate to these questions and to a large extent, it is not the role of a consumer organisation to articulate the requirements of the business community. However, we would like to re-iterate the importance that we would place on the benefits to both consumers and businesses of genuinely competitive markets that are often only possible when supported by a strong competition enforcement regime and ancillary regulatory frameworks.

7.2 We would also like to highlight the importance that we place in the current environment of improving the trust that consumers have in the businesses they deal with for the efficient operation of markets in the future. This is particularly true in relation to the financial services sector.

Behavioural Economics

7.3 In addition to the need to understand businesses in order to design effective regulations, we would like to accentuate the importance of understanding consumers to achieve the same objective.

7.4 A key area of importance has been a notable shift in much economic theory towards regulatory approaches that take account of observations of actual consumer behaviour as opposed to theoretical models based on "rational" self-interested consumers. This has manifested itself in a number of ways, such as the recent interest in concepts such as "libertarian paternalism" or "nudging". This involves encouraging people to make choices by leading their decision making whilst ensuring that no options are closed off. A good example of a system based on this approach would be the current proposals for a National Pensions Savings Scheme (Personal Accounts), based on an opt out rather than an opt in mechanism. It is anticipated that this will dramatically increase the number of participants whilst ensuring that people are not actually forced to do anything against their will.

7.5 We have watched developments in this area with interest and have supported some specific initiatives such as the proposals for Personal Accounts. Going forward, we will continue to take behavioural factors into account in our policy making, not least because it has long been our observation that consumer behaviour does not always match predictions based on theoretical models.

7. Is there sufficient consideration of how regulations will be implemented, including an appropriate focus on compliance and enforcement issues?

Importance of focus on outcomes

8.1 Which? continues to support the move to principles-based regulation, but only if that can be proven to deliver better consumer outcomes. There should be an emphasis on solving the problems that initiated the need for regulations rather than just seeing them as a tick box exercise. Regulators (or legislators) should actively review the effectiveness or success of regulations and not be afraid to make further changes if detriment remains.

8.2 We believe that regulators should take a risk-based approach. Proper cost-benefit analysis should be conducted and rules should stay in place where there is a significant likelihood of consumer detriment or where the removal of rules could reduce clarity about what consumers can expect from the firm. Any industry guidance on how to interpret what principles mean should be drafted in consultation with consumer groups and should include appropriate protection for consumers.

8.3 Market testing of regulations before implementation is also key to ensuring that they are effective, targeted and relevant to the problem at hand.

8.4 We also believe that there is a considerable risk in removing the prescription of regulations without more robust enforcement being in place to provide a deterrent against firms exploiting less intrusive regulation. The regulator cannot simply create principles and regulations and hope that firms comply with them—it needs to put incentives in place to ensure compliance.

Naming and Shaming

8.5 Over recent years there has been an increased focus amongst regulators on the link between regulation and transparency with a considerable body of evidence to support the view that disclosure of information about company performance can act as a useful regulatory tool. Whilst this is the case, there is a difference of opinion amongst different regulators about the exact importance of disclosure and "naming and shaming" in practice.

8.6 At one end, the Advertising Standards Authority uses this approach as its primary sanction by publishing weekly adjudications of the cases it looks at on its website. At the other end, we are currently lobbying the Financial Services Authority to make much more use of naming and shaming in its dealings with regulated firms. It has long used a defence of commercial confidentiality to resist publishing more data. However there are encouraging signs of a shift in approach in its current consultation on transparency as a regulatory tool in which it is indicating that it may in future publish more information on complaints.

March 2009