Archived Threads - June 2008
The role of the customer in regulated services
CHEFs 19th June 2008
In June, we considered how well the regulators in industries that are natural monopolies – like water and rail transport – are protecting the interests of the customer compared with more competitive markets. Our speakers were Allan Asher, Chief Executive of the soon-to-be-disbanded energywatch, and Professor Martin Cave, Director, Centre for Management under Regulation, Warwick Business School.
Allan, who has had many years’ experience as a competition lawyer and advocate, including a recent stint with the Consumers’ Association, did not pull his punches. Looking at the way people are cajoled or even hounded into switching energy suppliers, he felt that consumers are not given enough information to make informed choices and that some apparently innovative new services turn out to be ‘toxic’. His view is that the role of the regulator should be to equip consumers to act on their own behalf where they can and to act on behalf of consumers where they can’t. There should be rights for the consumer to litigate. At present, the hand of regulation is too light and Ofgem could be doing more to ensure the competitive energy markets continue to deliver benefits to all British energy consumers. For a more detailed presentation of Allan’s views, see his paper ‘Who really cares for the consumer in regulated industries?’
Martin Cave took as his starting point the stated Australian regulatory aim of ‘furthering the long term interests of end users’. Some conflicts of interest between supplier and customer are inter-generational, caused by investment decisions made many years before. Others may stem from lack of regard for the customer. But furthering the consumer’s long term interests should be at zero cost, so that there is benefit to consumers without damage to suppliers and without cross-subsidising something else. Similarly, there should be a balance between consideration for consumers and returns to investors. If achieving these balances should require a cross-subsidy, this is a matter for government.
In discussion with the CHEFs audience, three main themes emerged in the comments made: the role of the regulator in ensuring both efficient delivery and investment, aspects of vigorous competition and the need to consider social inequality. ‘Sclerotic’ industry codes made things difficult for new entrants to the market. Capital is a constraint in what are effectively state run industries. Investment was seen to stem from a mixture of greed and fear, and monopolies don’t feel the fear. Others pointed out that, in the water industry, the regulatory régime has delivered investment where the private sector might not have done it on its own and it has shown its teeth in exacting fines for lack of performance.
Vigorous competition can result in confusion for the consumer when offerings are not easily comparable. The fact that it is hard to work out whether it is worth switching energy suppliers is illustrated by the number – around 20% – who actually end up with a worse deal. The ‘customer’ has a whole range of different needs, depending on personal circumstances, but social exclusion does not come under the regulators’ powers. How far should the regulator be expected to go?
There is a dilemma at the heart of regulation to which we are likely to return: how does a regulator devise incentives for organisations to ‘do the right thing’ in the sure expectation that the results will be as intended?
Financial services regulation – more of the same or not?
CHEFs 17th July 2008
The July seminar considered the fitness for purpose of our financial regulatory régime. Its actions and those of the industry it regulates have been questioned by the Treasury Select Committee, by Which? and even by the FSA’s own consumer panel. Given the arrival of a new chairman at the FSA and the recent problems it has faced, we thought it was timely to consider whether it might learn from the experience of other régimes, especially those which have more explicit economic principles underpinning them.
Clare Spottiswoode, formerly Director General of Ofgas and now acting as Policyholder Advocate for customers of Norwich Union, introduced the topic. In her new role, Clare has come face to face with the FSA over the intricacies of with-profits financial products and of the associated inherited estates. In this corner of the financial sector, competition is not strong.
Clare defined an economic regulator as ‘an organisation which is designed to bring the greatest wealth to the economy’, through effective competition supported by regulatory rules to protect the consumer when that fails. Then, she evaluated the FSA against this definition. The Financial Services and Markets Act broadly follows the concepts of the Utilities Acts, but the FSA does not have a specific duty to promote competition and has no powers to set price controls. Although the Acts encourage regulators to ‘do the right thing’ by not being bound by precedent, in her experience, the FSA has a tendency to look backwards. It lacks the sort of healthy tension – and exposure of those tensions - that generally exists between the economic and the health and safety regulators in the utility sector; there is no separation of the prudential from other regulatory aspects in the FSA. It does not demonstrate economic thinking and tends not to pay regard to common financial principles. Financial Services, after all, are a very broad industry and individuals in the FSA have to cover a wide range of offerings. And if it is hard enough for customers to weigh up energy deals, just think how much more difficult it is for them to distinguish between financial products!
CHEFs attendees felt that the FSA evidenced a confusion between prudential and economic regulation and that it had grown so big that it would be a ‘hard ship to turn around’. Its own, large rule-book goes against the principles of the Act but to some extent this is due to the constraints of EU legislation. The with-profits suppliers were thought to be producer-centric, having grown out of guilds. While there are some good examples from other regulatory régimes (for example Ofcom is trying to apply economic thinking to broadcasting), none of them is an ideal model for the financial sector.
Clare left us with some tough questions for the FSA: what are its vision and its purpose, and are its culture and operations suited to deliver them?
The sponsors’ series
Some of our clients have elected to sponsor events that run in parallel with CHEFs and tackle subjects of particular interest to them. You may wish to join our group of sponsors to explore areas that are rising up your own agenda.
There are a number of subjects in the pipeline for our series of roundtable discussions. In July, we will be examining leadership capabilities in regulated industries – is there an imminent skills gap here? Later in the year, we will consider the alignment of political and investor interests in environmental matters, first from a government perspective and then exploring the opposition view. And we will be looking at innovation in regulated industries: what does the term mean in that context, does it vary across sectors and what is the impact on it of regulation?
Over to you!
We are keen to hear what you think of the themes introduced in Threads and what other areas you think we might explore. Please contact Ann Bishop.