Ensuring business protects the consumer
27 March 2009
On Wednesday 11th March I attended an OFT event titled Business Leadership in Consumer Protection. The event focused on the role that self regulation has to play in protecting consumers. The OFT has launched a consultation on self regulation.
What makes self regulation work? The ASA was clear that self regulation was successful in its sector (except in broadcasting where it has co-regulatory powers with Ofcom) because the industry knows that as well as being signatories to the ASA advertising codes, the UK has consumer protection laws that the OFT can utilise to take action against misleading advertising. This acts as a strong deterrent, as does the knowledge that the sector is under scrutiny by politicians. There are also good economic incentives for the industry to coalesce around self regulation. That being: they can spread the cost of self regulation across the sector rather than end up as an individual company in court facing costly litigation. The ASA did give the OFT a cautionary note: that if it does not sanction and sanction transgressors quickly the effect of it being a deterrent is greatly weakened.
From an international perspective, Mary Engle, Acting Deputy Director, of the US Bureau of Consumer Protection, said she is in favour of self regulation because: it is flexible; quick to implement; it did not consume large amounts of budgetary resource; and importantly had the buy-in of industry. This last fact is particularly important because it removes the need for a long consultation process and the time required to introduce legislation. The success of self regulation in the US can be seen in the changes to fast food advertising, and the decline in sales of adult rated games, to minors. In both instances politicians and the Bureau of Consumer Protection waived the big stick and industry came together to avoid formal legislation.
So what of Ofcom's self regulatory work? Kristina Glushkova explained how Ofcom looks to identify the most appropriate approach to address specific issues in the communications market. It doesn't favour one approach over another but looks to identify whether self, co, or formal regulation is most likely to succeed. In December 2008 Ofcom published a statement that sets out this approach, which can be found here: http://www.ofcom.org.uk/consult/condocs/coregulation/statement/. The following steps are what Ofcom takes to understand what the industry incentives and the market conditions are for a given situation and therefore what approach should be taken:
- Collective incentives to solve the problem?
- Likely solution in the best interests of citizens and consumers?
- Individual incentives not to participate?
- Likelihood of "free-riding"?
- Can clear objectives be established?
Ofcom pointed to the success of the Independent Mobile Classification Body (IMCB) as a self regulatory scheme, and that self regulation for mobile mis-selling was inappropriate due to a conflict of incentives on companies to comply with such a scheme.
But there are other businesses who are interested in seeing self regulation succeed. The Carpet Foundation represents over a 1000 independent carpet retailers in a market that is not dominated by a small number of competitors but by many. By joining and adhering to the Foundation's scheme - part of the OFT's Consumer Codes Approval Scheme (ACCAS) - retailers are allowed to use an OFT logo that acts as a hallmark of customer quality helping people purchase with confidence.
Presenting a consumer perspective Steve Brooker of Consumer Focus was clear that self regulation only works in certain markets and taking a historical perspective its use is declining. He pointed to the end of self regulation for solicitors and medical staff and to the failure of self regulation in the second-hand car market. In this last instance self regulation was inappropriate in this sector because there are numerous retailers that are unable to be corralled together - there was also a failure of enforcement. Where he believed self regulation can work is when an industry is made up of a ‘smallish' number of players and when Government or regulators threaten more draconian measures.