The Competition and Markets Authority is wrong to be cross with consumers who do not switch supplier.
Law makers turn to it to solve a vast array of public policy headaches, and I’m afraid poor old competition law is showing the strain. It’s no surprise, then, that those charged with firing competition law’s silver bullets sound stressed.
Today the banking sector provides an example of this. Last week it was energy. The Competition and Markets Authority (CMA) investigations into the operation of the banking and energy markets had an exasperated tone. The CMA sounded cross – with consumers.
It even has a set of graphics instructing consumers to mend their wicked ways. 'SMEs, you are not chained to one bank! Shop around,' thunders one. 'HELP YOUR FAMILY & FRIENDS TO SWITCH AND SAVE,' intones another, related to energy.
As the capital letters, breaking into bold type, indicate, the CMA's exasperation was most clearly on show in its energy sector inquiry.
Here (I paraphrase, though only slightly) we have a product that comes from multiple suppliers in an indistinguishable form. But the market doesn’t deliver value for money through ‘competition’, because consumers refuse to shop around. As a result, consumers are penalised, rather than rewarded, for loyalty.
Consumers, it would seem, are asleep on the job. They need to be woken up by competitors having an enhanced ability to – well, deluge them with more stuff. Can the providers not just be told to behave better?
The answer for the most part is, apparently not – the range of products and services on offer can’t be made easier to understand without reducing consumer choice (which is notionally bad for the market-enervating side of ‘competition’; the argument is made even more strongly in relation to banking).
Competition law, it’s worth saying, remains sound on some of its key planks. Cartels are illegal, and ‘state aid’ rules are largely right in seeking to prevent viable businesses being killed off by politically motivated subsidies that other countries put in place to prop up ailing industries. Abuses of a dominant position may be imperfectly policed, but the risk of action has positive effects.
But when it comes to energy and banking, the demands placed on competition law come unstuck. Irritatingly, consumers exhibit traits of extreme stasis – just 3% of individuals obliged the CMA by changing their bank last year.
Forcing people to behave in a predictable, self-interested way is not just difficult – it is often impossible. Economists recognised this in the 1930s – so why don’t policymakers?
The answer is that consumer-driven competition looks alluringly cheap. The annual budget of the CMA is £69m, which includes functions such as merger inquiries.
If you actually have to make businesses behave right, as the Financial Conduct Authority is charged with doing, the bill increases (seven-fold, in the case of the FCA).
The consumer-power fiction, then, allows businesses to argue for poorer policing of their activities. And it enables policymakers to insist they have a way to keep prices low and spending on regulation down – savings they pretend they will spend on nurses and doctors.
The only problem with this competition law ideal is that it doesn’t actually work.
One option stands a better chance of working. That is to make companies in markets that remain a cause for concern (energy and banking certainly tick this box) more easily liable to consumers for overcharging.
This is an idea that policymakers shy away from, because it conflicts with another carefully crafted fiction – the idea that we have a claimant culture gone mad.
Consider this, though: those charged with policing competition law currently issue fines (the CMA cites £46m of fines across energy, banking and legal services) – money which consumers affected by misconduct saw not a penny of.
It’s not that ‘law’ doesn’t have an answer to the CMA’s frustrations – rather it has at least one that it cannot use.
Eduardo Reyes is Gazette features editor