Consumer Rights Bill

Written evidence submitted by Energy UK (CR 27)

Introduction 

1.1. Energy UK is the trade association for the energy industry. Energy UK has over 70 companies as members that together cover the broad range of energy providers and supplies and include companies of all sizes working in all forms of gas and electricity supply and energy networks. Energy UK members generate more than 90% of UK electricity, provide light and heat to some 26 million homes and last year invested £10billion in the British economy.

1.2. Energy UK strongly believes in promoting competitive energy markets that produce good outcomes for consumers. In this context, we are committed to working with Government, Parliament, regulators, consumer groups and our members to develop reforms which enhance consumer confidence, trust and effective engagement. At the same time, Energy UK believes in a stable and predictable regulatory regime that fosters innovation, market entry and growth, bringing benefits to consumers and helping provide the certainty that is needed to encourage investment and enhance the competitiveness of the UK economy.

1.3. These high-level principles underpin the following response which reiterates a number of points made to the BIS Committee in its inquiry, particularly concerns around the move to US-style ‘class actions’

2. Executive Summary

2.1. Energy UK supports the aim of the Draft Consumer Rights Bill ("the Bill"). We agree that helping consumers understand their rights when things go wrong will empower them to engage with markets with confidence, driving improvements in price and customer service. We also support the aim of reducing regulatory burdens for businesses, since this will reduce costs, barriers to entry and growth.

2.2. Energy UK considers that, in general, the Bill meets these aims. We welcome the consolidation of the complex architecture of consumer law into a simpler and more accessible framework, and the new incentives to ensure that contract terms are transparent and prominent.

2.3. There are a number of concerns around the Government’s proposal to introduce an opt-out collective actions regime for competition law, where private "representatives" can take alleged infringements to the Competition Appeals Tribunal (CAT) on behalf of a group of consumers that are automatically included in the lawsuit unless they actively opt out. We believe that it will have damaging consequences for consumers and make the UK a less attractive place to do business.

2.4. Energy UK and a number of other organisations have made strong representations to Government highlighting the risk that the opt-out collective actions regime is subject to abuse and leads to US-style class-actions, causing huge unnecessary costs to business without benefiting consumers as well as being contrary to the European principle that collective actions be based on an opt-in regime. Government clearly shares this fear, and has built in what it sees as sufficient protections to prevent this from happening. As it now seems unlikely that the Government will remove the provisions around opt-out collective actions from the Bill entirely, we would urge the Government to provide reassurance on record in Parliament that the opt-out provisions will be reviewed if there is evidence that the system is being abused in the way that is feared. Allowing an abusive regime to continue would be damaging to perfectly legitimate business, vexatious for customers and costly for all involved, the Government should ensure that it provides powers to stop this from happening should it occur. Further detail on how these provisions should be caveated is provided in paragraph 3.4.

2.5. These concerns are based on the following beliefs that opt-out CATs are not appropriate:

a) They are unnecessary. The energy sector is highly regulated and already has a competition law enforcer in Ofgem.

b) They are prone to abuse, imposing both direct costs and risk premiums on business, which will ultimately be passed onto consumers.

c) They will undermine, and not complement, public law enforcement by substituting private financial interests with public interest duties.

d) They will not empower consumers. They will empower lawyers and funding companies. Improved information on opt-in actions would be a better solution.

e) They will deter legitimate business activity, potentially constraining innovation and efficiency.

f) They could be the start of a slippery slope towards the US-style class actions and litigation culture that BIS fears. There will inevitably be pressure from beneficiaries of collective actions to remove safeguards and expand beyond competition law.

g) It runs counter to the European Commission’s recommendation that "collective redress systems should, as a general rule, be based on the "opt-in" principle" [1] .

2.6. As a separate issue, Energy UK agrees that a specialist competition tribunal should be able to hear stand-alone private competition law cases, as well as follow-on cases, provided that the litigants are single individuals or companies, or a collective action is opt-in.

2.7. Energy UK supports the "redress" and "compliance" categories of the "enhanced consumer measures" that the courts will be able to impose on companies that have breached consumer law. However, we believe that the "choice" category should be removed from the Bill. Whilst we support reforms that enable consumers to choose between providers of goods and services more effectively, we do not think that the courts have the expertise to intervene in markets in this way, risking distortions of competition and unintended consequences. These activities should be left to sectoral regulators.

3. Opt-out collective actions

3.1. As stated above, Energy UK supports the principle of redress. Energy companies have shown their willingness to admit responsibility when they make a mistake, and take corrective actions. Energy UK has supported the introduction of several statutory and voluntary redress mechanisms over the past few years. Some examples are listed in 2.3 and 2.4 above. However, Energy UK opposes the Government’s proposal to introduce an opt-out collective actions regime for competition law.

3.2. Opt-out collective actions will have damaging consequences for both energy consumers and businesses without bringing the intended benefits. To provide further detail, Energy UK opposes the introduction of opt-out collective actions for a number of reasons explained below:

a) They are unnecessary. Ofgem, the sectoral regulator for the energy industry, is an enforcer of competition law and consumers and their representatives are able to notify Ofgem if they are suspicious of illegal activity. Introducing a new private litigation route (in addition to the High Court) seems to imply that there are breaches being left unprosecuted by Ofgem; there is no evidence to suggest that this taking place. It also creates a duplicate enforcement regime for companies which could lead to confusion and uncertainty.

b) As experiences from the United States and Australia illustrate, opt-out collective actions or "class actions" are prone to abuse, with lawyers and funding companies taking advantage of a company’s potential ruin (via huge aggregated costs) to coerce them into settling unmeritorious cases. This will impose both direct costs and risk premiums on businesses, which will ultimately be passed onto consumers. The US Institute for Legal Reform has specific examples of abuse in the US and Australia.

c) Ofgem, as the energy sector’s competition law enforcer, is a statutory body with a duty to act in the public (consumers’) interests. Representatives in private opt-out collective actions have no such duty; they are acting to further their own financial interests. This is not necessarily a problem in itself. What is a problem is that those involved in the case "representatives" are often divorced from the majority of the people that they are representing (since they are automatically opted-in). Therefore, not only can opt-out collective actions run counter to the public interest, they can run counter to the interest of the bulk of consumers supposedly represented.

d) Consumers encompassed by any opt-out collective action are not "empowered"; the exercise of an individual’s rights is transferred to another party without the person’s explicit consent, and in many cases without their knowledge. This does not happen with opt-in collective actions, where a person exercises a positive choice. Energy UK supports a regime where informed consumers decide to opt-in, and in this regard encourages better dissemination of information about opt-in collective actions.

e) The introduction of opt-out collective actions will make businesses fear expensive lawsuits filed against their legitimate activities. This is likely to make them highly risk averse, which could stifle innovation and efficiency, failing to bring important benefits to consumers that would otherwise be realised.

f) Currently, BIS is proposing to restrict opt-out collective actions to the field of competition law. However, given how lucrative these lawsuits have proved elsewhere, we would expect those who consider themselves potential "representatives" to lobby the UK Government to extend collective actions to other areas of law. If the Bill was passed in its current form, this extension would become a much easier "sell" owing to the creation of a precedent. We therefore urge the Government not to open the door to unnecessary, coercive, costly and disempowering litigation.

3.3. If the Government does proceed with the introduction of opt-out collective actions for competition law, then Energy UK agrees that safeguards should be put in place to prevent US-style class actions. Those safeguards that BIS has proposed include –

a) Certification by the CAT that the case is suitable for opt-out;

b) Proceedings to be initiated only by representatives authorised by the CAT;

c) Maintaining the loser pays rule;

d) No treble damages; and

e) No contingency fees (ie damages based agreements to be unenforceable).

3.4. Energy UK supports all of the above safeguards. However, we believe that additional safeguards are required. We would ask the Committee to consider the following suggestions –

a) The CAT should be obliged to consult before making Tribunal rules in respect of collective proceedings. Clause 31 of Schedule 7 to the Bill allows the Tribunal to make provision for a number of matters including but not limited to: "the factors which the Tribunal must take into account in deciding whether a claim is to be brought in collective proceedings" and "the factors which the Tribunal must take into account in deciding whether to authorise a person to act as a representative in collective proceedings". Whilst Energy UK has no reason to doubt the competence of the CAT in producing such rules, we note that the Bill provides it with considerable discretion in areas which might normally be deemed policy. We therefore suggest that the CAT is obliged to consult on the rules and/or BIS issues some guidance on the direction it would like the CAT to take, which itself should be subject to consultation (as BIS has done with its draft steer to the Competition and Markets Authority.

b) Third-party funding of collective actions should be prohibited because they further alienate the supposedly-represented consumers by becoming a collaboration between the funder and the lawyer. The extra resources and ability to subsidise new cases with previous payments (being serial litigants) also allows claims to be pursued regardless of merit. The only protection in the Bill is that actions must be initiated by a proposed representative who must subsequently be authorised by the CAT. The Government should go further and explicitly preclude third-party funding.

c) Any unclaimed damages should not be provided to the Secretary of State’s charity of choice (as provided within Schedule 7, Clause 6 of the Bill); doing so would provide a windfall to a party that has not suffered harm. Damages may go unclaimed for many reasons, including an overestimate by the Tribunal, claimants having insufficient proof of harm or claimants considering the award insufficiently material to claim. In any of these scenarios, the unclaimed damages should be returned to the company which paid them; Energy UK believes that this should be the default arrangement. Indeed, the possibility of sums going unclaimed is a compelling argument against an opt-out regime, whereby an illusion of compensation disguises a needlessly inefficient deployment of capital.

d) There should be no restrictive time limits imposed for the resolution of cases. Energy UK would be extremely concerned at the inclusion of any "fast-track" provisions in the Bill. Competition law cases are inherently complex; due process is essential in any system of justice.

3.5. Energy UK understands from BIS’ Impact Assessment that the CAT has previously handled an average of 2.25 cases a year. We are concerned that the provisions for opt-out collective actions could lead to a dramatic increase in its case load, potentially with damaging knock-on effects on its other work including regulatory appeals.

3.6. As a separate issue, Energy UK agrees that a specialist competition tribunal should be able to hear stand-alone private competition law cases, as well as follow-on cases, provided that the litigants are single individuals or companies, or a collective action is opt-in. We are unsure whether the most appropriate body would be the CAT or Competition and Markets Authority (CMA), and would urge the Committee to inquire about the Government’s rationale for its choice of the CAT.

March 2014