Look out for the consumers: competition law, behavioural economics and consumer law reform

December 2014 | EXPERT BRIEFING | COMPANY LAW

financierworldwide.com

Businesses have long heard how it is all about consumers: regulators have a duty to regulate in the interest of consumers (sometimes consumers and citizens) and competition law enforcement is driven by a wish to ensure that markets work well for consumers. Yet, consumers are rarely in a position to make their views known to the regulators and the competition authorities, either because they lack the expertise or the time to reply to lengthy consultations, or because frankly they lack the critical mass to be heard. Even associations of professionals have sometimes difficulties in making themselves heard by the authorities. Another branch of law, consumer protection, traditionally deals with sheltering consumers from some wrongdoing by businesses, whether by way of imposition of unfair terms in contracts, or to ensure that products are fairly represented, or against aggressive or misleading selling. At present, consumer rights are protected (in the UK alone) through 12 separate pieces of legislation, sometimes overlapping. The enforcement powers are to be found across 60 pieces of legislation and are fragmented among different authorities. This makes it difficult to access and enforce consumer protection legislation.

Businesses could therefore be excused for not bringing their full attention to what is happening in Europe and in the UK in the matter of consumer rights, but they would do well to take notice. Consumers are taking centre stage, due to the combined effect of an increased awareness on the part of regulators and authorities about behavioural economics; a desire to make it possible for consumer associations to bring actions for damages against competition law infringers; and the new Consumer Rights Bill going through Parliament in the UK. This time, it is for real.

Let’s start with behavioural economics. If the increased focus on behavioural economics leads to more regulation and less enforcement of the competition rules, businesses will feel the consequences. The notion that increased competition results in benefits to consumers is supported by a body of empirical and theoretical studies showing the positive effects of competition on welfare. However, behavioural economists acknowledge that consumer behaviour can and often does go against the assumption that consumers rationally maximise their own utility, making the best choices for themselves. The behavioural biases of consumers may create or strengthen market power in what would otherwise be a competitive market, affecting competition, but may not be included in a competition analysis. Consumers have a tendency to stick with their existing products, for example, do not shop around enough, or search based on the most critical product characteristics, and do not switch to better offers. This is particularly true in the case of complex products such as financial products and it is no coincidence that the ascendance of behavioural economics in the UK has coincided with the creation of the Financial Conduct Authority. Retail financial products such as pensions or share investments are inherently complex for most average consumers, and can be abstract with complicated charging structures.

The question then becomes whether regulation can work better than competition law, as the latter will not necessarily address the underlying biases. This leads to a tension between protecting consumers via restricting (or controlling) their choices or via protecting their rights to choose. It goes without saying that policy changes that would restrict choice at the outset are risky and may lead to repercussions for businesses and indeed for consumers. Consider for example the so-called ‘Bill Shock’ regulation in the US. Since 2013, the Federal Communications Commission (FCC) requires US carriers to alert consumers when they approach and exceed usage limits within mobile phone price plans for voice, text and data, to avoid the ‘Bill Shock’ that would otherwise occur. Bill Shock Regulation goes some way towards consumer paternalism which (on the plus side) could solve the problems biases create. Some economists are critical, however, and say bill-shock regulation helps the naive at the expense of the attentive.

The advent of an online economy has its own implications for businesses and for consumer protection. At a recent conference organised by UCL in London, Florencia Marotta-Wurgler of the New York University School of Law presented a paper on ‘Consumer Behaviour and Disclosure in On-line Contracts’. The author found some disturbing evidence that, in the market for online software, hardly anyone reads the fine prints when purchasing services online. Even those who clicked on the End User Licence Agreement (EULA), in the sample in question, spent at most 94 seconds reading it. Meanwhile, the contracts become longer and less clear and, not surprisingly, the changes made over time favour the sellers. Consumers do not noticeably react to increased accessibility – what is costly is reading the terms, not accessing them. Even if they read the contracts, do consumers understand what they read? And moreover, in the online world, what could they do if they wished to change the terms of the contract? When the only option is to walk away after having spent time researching a purchase, then perhaps the most rational answer is indeed not to read the fine print in the first place. This poses a formidable task to the competition authorities in terms of what to do, if anything.

One of the priorities for the Competition and Markets Authority in the UK is to understand competition in online markets. On the one hand, online information and search tools help consumers identify and compare competitive offers. On the other hand, this challenges traditional business models and markets. This issue was recently emphasised when the Competition Appeal Tribunal found against the CMA in the Skyscanner case: the judges remitted the matter to the CMA with an injunction to consider properly the role of meta search sites in lowering information costs, a result that cannot be welcome by the traditional businesses involved in the alleged anticompetitive behaviour in the market for hotel bookings. In some markets, the intervention of the CMA has resulted in increased online transparency. After the investigation on payday loans, for example, the CMA proposed measures to allow for online price comparisons on accredited price comparison websites. This should reduce the search costs. At the same time, consumers are not entirely trusted to make their own decisions. The FCA will impose a price cap on the cost of payday loans by 2 January 2015.

Therefore the first area to consider is whether we are heading towards something that could be termed ‘consumer paternalism’ on the part of the authorities. The second area for consideration is the increased prominence granted to consumers and associations of consumers in the pursuit of damages claims. One of the main obstacles to the development of collective actions for damages in the UK is that currently only Which? can take forward a group or collective action and only on an ‘opt-in’ basis, meaning that only consumers who actively join the collective action can benefit from any damages. Consumers must also provide evidence of eligibility prior to becoming part of the class (the certification of the class is a major obstacle, particularly when they purchased the product several years earlier). The Consumer Rights Bill in the UK aims to introduce a limited opt-out collective action regime: if certain safeguards are complied with, claimants will be automatically included into the class unless they actively decide to opt-out. Further, any representative group or trade association could take forward an action.

The Bill represents a step forward in the direction of more consumer action against the infringers of the competition rules and positions the UK to become a forum of choice for collective actions for damages in Europe. This is so even though every country in Europe will also introduce more consumer friendly rules for collective actions as a result of the implementation of the European Damages Directives.

Thirdly and finally, the Bill also tightens up the existing consumer protection law, especially as regards descriptions of goods and services and unfair contractual terms. Protection from unfair contract terms has long been on the agenda for consumer policy. It may not be optimal for all consumers to read all the terms and conditions; rather, it would be more efficient if it can just be assumed that (left unread) these terms are ‘fair’ as a default. The Bill requires terms to be transparent and prominent. Transparent terms need to be expressed in plain language and where applicable in legible form. Terms must be prominent, so as to allow the average consumer to be aware of them. The average consumer is the “well informed, observant and circumspect consumer”. Given the difficulties described above about terms in contracts for online transactions, it is doubtful whether this provision goes far enough to ensure that the terms are in fact fair to consumers, but the Bill streamlines the existing legislation and to this extent it is to be welcomed.

Enforcement of these rights is also strengthened. The Bill introduces new powers for public law enforcers (broadly this category comprises Trading Standards, the CMA and the sectoral regulators) by allowing them to apply to the civil courts to seek redress for consumers who have been disadvantaged by breaches of consumer law. This includes seeking remedies from traders who have breached consumer law.

The conclusion can only be that consumer concerns are now taking centre stage. Companies should be aware of increased vulnerability to consumer claims and would be wise to be proactive, by assessing their contractual terms and their practices before regulatory intervention or a claim oblige them to do so.

Emanuela Lecchi is a partner at Watson, Farley & Williams LLP. She can be contacted on +44 (0)20 7814 8427 or by email: elecchi@wfw.com.

Emanuela Lecchi

Watson, Farley & Williams LLP