Consumer Theories of Harm: An Economic Approach to Consumer Law Enforcement and Policy Making 9781509916856, 9781509916887, 9781509916863

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CONSUMER THEORIES OF HARM It has long been thought that fairness in European Consumer Law would be achieved by relying on information as a remedy and expecting the average consumer to keep businesses in check by voting with their feet. This monograph argues that the way consumer law operates today promises a lot but does not deliver enough. It struggles to avoid harm being caused to consumers and it struggles to repair the harm after the event. To achieve fairness, solutions need to be found elsewhere. Consumer Theories of Harm offers an alternative model to assess where and how consumer detriment may occur and suggests solutions to prevent it. It shows that a more confident use of economic theory will allow practitioners to demonstrate how a poor standard of professional diligence lies at the heart of consumer harm. The book provides both theoretical and practical examples of how to combine existing law with economic theory to improve case outcomes. It also shows how public enforcers can move beyond the dominant transparency paradigm to an approach where firms have a positive duty to treat consumers fairly and to shape their commercial offers in a way that prevents consumers from making mistakes. Over time, this ‘fairness-by-design’ approach will emerge as the only acceptable way to compete.

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Consumer Theories of Harm An Economic Approach to Consumer Law Enforcement and Policy Making

Paolo Siciliani Christine Riefa and

Harriet Gamper

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2019 Copyright © The authors severally 2019 The authors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2019. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Siciliani, Paolo, author.  |  Riefa, Christine, author.  |  Gamper, Harriet, author. Title: Consumer theories of harm : an economic approach to consumer law enforcement and policy making / Paolo Siciliani, Christine Riefa, Harriet Gamper. Description: Oxford [UK] ; Chicago, Illinois : Hart Publishing, 2019.  |  Includes bibliographical references and index. Identifiers: LCCN 2019021097 (print)  |  LCCN 2019021909 (ebook)  |  ISBN 9781509916870 (EPub)  |  ISBN 9781509916856 (hardback) Subjects: LCSH: Consumer protection—Law and legislation—European Union countries.  |  Great Britain. Consumer Rights Act 2015.  |  Consumers—Legal status, laws, etc.—European Union countries.  |  BISAC: LAW / Consumer.  |  BUSINESS & ECONOMICS / Economics / Theory. Classification: LCC KJE6577 (ebook)  |  LCC KJE6577 .S57 2019 (print)  |  DDC 343.407/1—dc23 LC record available at https://lccn.loc.gov/2019021097 ISBN: HB: 978-1-50991-685-6 ePDF: 978-1-50991-686-3 ePub: 978-1-50991-687-0 Typeset by Compuscript Ltd, Shannon

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For Louis and for Oriana

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PREFACE Consumer Theories of Harm is the sum of a multi-disciplinary approach to consumer policy and enforcement. It joins up the work of Paolo Siciliani, an ­economist by training and competition law specialist, Christine Riefa, an academic lawyer specialising in consumer law, and Harriet Gamper, a consumer policy specialist whose career spans a number of enforcement bodies. The book offers, through the economic framework it presents, a novel way of assessing consumer harm. Consumer theories of harm are an alternative model to assess where and how consumer detriment may occur. The book takes an all-round approach, looking at both the demand and the supply side, and reflects on the use of consumer and competition law to tackle consumer detriment. It uses knowledge of the market dynamics at play in consumer markets to devise tools that can not only repair harm after the event, but also help deter the harmful conduct in the first place. The book takes a practical outlook, and offers ‘real’ and impactful solutions that can be implemented at minimal cost. It does not advocate an overhaul of consumer and competition laws, but rather the maximisation of the use of the tools already available, albeit with a change in focus and some modifications. The book is the fruit of a conviction in all its authors that fairness should be engrained in our markets and societies. Fairness should be by design and not the reserve of the few ‘super-consumers’ able to take their case to court or relinquished to public enforcers to be reclaimed after the event. The authors wish to express their thanks to Hart Publishing and their excellent team, to Walter Merricks for reviewing the draft and to Adam Howard. The views expressed in this book are those of the authors and do not ­necessarily reflect the views of their employers. Paolo Siciliani, Christine Riefa, Harriet Gamper London, 27 January 2019.

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TABLE OF CONTENTS Preface������������������������������������������������������������������������������������������������������������������������� vii List of Abbreviations������������������������������������������������������������������������������������������������� xiii List of Figures and Tables��������������������������������������������������������������������������������������������xv Table of Cases����������������������������������������������������������������������������������������������������������� xvii Table of Legislation���������������������������������������������������������������������������������������������������� xxi 1. Introduction�������������������������������������������������������������������������������������������������������������1 I. The Search for Fairness��������������������������������������������������������������������������������1 II. Origins of Theories of Harm in Competition Law�����������������������������������2 III. Using Theories of Harm in Consumer Law – A Natural Evolution�������6 A. Complementarity of Consumer and Competition Law������������������7 B. Positive Spill Over Effects��������������������������������������������������������������������9 C. Latent Consumer Theories of Harm and Counterfactuals in Consumer Law�������������������������������������������������������������������������������10 IV. Harnessing the Use of Economics in Consumer Law����������������������������11 V. Contents�������������������������������������������������������������������������������������������������������15 2. The Limitations of Consumer Law in Tackling Consumer Harm�������������������16 I. Introduction�������������������������������������������������������������������������������������������������16 II. Limitations in the Use of Information as a Mainstream Transparency Approach�����������������������������������������������������������������������������18 III. Limitations of the Definition of the ‘Average Consumer’ Used as a Reference Point for Protection�������������������������������������������������24 IV. Implementation of the ‘Average Consumer’ Standard under the Unfair Commercial Practices Legislation�����������������������������������������29 V. Protecting ‘Vulnerable’ and ‘Disengaged’ Consumers���������������������������37 A. The Vulnerable Consumer�����������������������������������������������������������������37 B. The Disengaged Consumer���������������������������������������������������������������40 VI. Limitations Found in Unfair Terms Legislation�������������������������������������42 VII. The Enforcement Framework in the UK�������������������������������������������������50 A. Public Enforcement of Consumer Law��������������������������������������������50 B. Enhanced Consumer Measures under Schedule 7 of the CRA 2015����������������������������������������������������������������������������������51 C. Private Enforcement of Consumer Law������������������������������������������52

x Table of Contents 3. The Limitations of Competition Law in Tackling Consumer Harm���������������56 I. Introduction�������������������������������������������������������������������������������������������������56 II. Ex-Post Enforcement against Exploitative Abuses����������������������������������59 A. Tackling Exploitative Abuses of a Dominant Position under Article 102 TFEU (Chapter II CA 1998)������������������������������59 B. Tackling Parallel Adoption of Unfair ‘Exploitative’ Conducts under Article 101 TFEU (Chapter I CA 1998)��������������67 III. The Case for a Holistic Approach under an Ex Ante Administrative Market Regime������������������������������������������������������������������68 IV. The Enforcement Framework in the UK��������������������������������������������������71 A. Ex Ante Enforcement: Market Studies and Investigations Powers���������������������������������������������������������������������������������������������������71 B. Private Enforcement of Competition Law���������������������������������������75 4. The Economic Framework Underpinning Consumer Theories of Harm������78 I. Introduction�������������������������������������������������������������������������������������������������78 II. Consumer Surplus���������������������������������������������������������������������������������������80 A. Behavioural Biases Affecting Consumer Surplus����������������������������81 B. Consumer Uncertainty Regarding Product Quality and Price Can be Exploited by Unfair Traders��������������������������������85 III. The Economic Case for Intervention in Consumer Markets�����������������92 A. The Fallacy of Trust in Markets���������������������������������������������������������92 B. Consumer Learning����������������������������������������������������������������������������96 C. The Unravelling Principle����������������������������������������������������������������102 D. Distributive Effects and Substantive Fairness��������������������������������104 IV. Concluding Remarks���������������������������������������������������������������������������������105 5. Archetypal Consumer Theories of Harm���������������������������������������������������������109 I. Introduction�����������������������������������������������������������������������������������������������109 II. The Scam�����������������������������������������������������������������������������������������������������112 A. Blind Trust������������������������������������������������������������������������������������������113 B. Only Unfair Firms Will be Active���������������������������������������������������114 C. Maximum Financial Detriment������������������������������������������������������115 III. The Lemon��������������������������������������������������������������������������������������������������117 A. The Risk of an ‘Adverse Selection’ Spiral����������������������������������������119 B. The Risk of Drift towards CToH 1 ‘The Scam’�������������������������������120 C. Self-Regulation (and its Opportunistic Exploitation)������������������122 IV. The Shock����������������������������������������������������������������������������������������������������124 A. The Risk of Drift towards CToH 2 ‘The Lemon’ and CToH 1 ‘The Scam’�������������������������������������������������������������������������������������������125 B. Different Types of Consumer Detriment���������������������������������������126 C. The Use of Misleading Practices Might be Widespread���������������128

Table of Contents  xi V. The Subsidy�������������������������������������������������������������������������������������������������130 A. Types of Consumer Detriment��������������������������������������������������������132 B. Possible Widespread Cross-Subsidisation of Sophisticated Consumers�����������������������������������������������������������������������������������������133 VI. Concluding Remarks���������������������������������������������������������������������������������135 6. Applying CToHs – Case Studies������������������������������������������������������������������������137 I. Case Study on the CMA Market Inquiry into Retail Energy���������������137 A. Background����������������������������������������������������������������������������������������137 B. The Economics of Confusopoly������������������������������������������������������141 C. The Distributive Effects and Mapping against the CToHs�����������145 D. Routes for Enforcement��������������������������������������������������������������������148 II. Case Study on Bank Current Accounts and Savings Accounts�����������150 A. Background����������������������������������������������������������������������������������������150 B. The Distributive Effects and Mapping against the CToHs�����������156 C. Routes for Enforcement��������������������������������������������������������������������158 III. Case Study on Claims for Compensation in the Airline Industry������160 A. Background����������������������������������������������������������������������������������������160 B. Mapping against the CToHs������������������������������������������������������������163 C. Routes for Enforcement��������������������������������������������������������������������165 IV. Case Study on Allocated Airline Seating������������������������������������������������166 A. Background����������������������������������������������������������������������������������������166 B. Mapping against the CToHs������������������������������������������������������������168 C. Routes for Enforcement��������������������������������������������������������������������171 V. Case Study on Fertility Add-Ons�������������������������������������������������������������173 A. Background����������������������������������������������������������������������������������������173 B. Mapping against the CToHs������������������������������������������������������������175 C. Routes for Enforcement��������������������������������������������������������������������176 7. Fairness by Design: The Introduction of a Positive Duty to Trade Fairly����179 I. Introduction�����������������������������������������������������������������������������������������������179 II. Justifications for Adopting a More Prescriptive Standard of Conduct for the Protection of Consumers�����������������������������������������180 A. Consumer Protection is Anchored into Paternalism�������������������180 B. Pursuing a Standard of Substantive Fairness���������������������������������181 C. A More Prescriptive Standard of Consumer Protection is in Line with Relational Contract Theory������������������������������������184 III. Introducing a Positive Duty to Trade Fairly�������������������������������������������187 A. Creating an Implied Term to Trade Fairly in Consumer  Contracts��������������������������������������������������������������������������������������������188 B. Shaping an Obligation to Trade Fairly under the UCPD  and the CPRs��������������������������������������������������������������������������������������192 C. General Clause in Action: Tackling Failures to Disclose  a Price Disadvantage�������������������������������������������������������������������������202

xii Table of Contents IV. The Impact of a General and Positive Duty to Trade Fairly�����������������206 A. Flexibility of the Duty to Trade Fairly��������������������������������������������206 B. A Future-Proof Duty to Trade Fairly����������������������������������������������207 C. Cost-Effectiveness of the Duty to Trade Fairly������������������������������208 V. Conclusion��������������������������������������������������������������������������������������������������209 Bibliography���������������������������������������������������������������������������������������������������������������210 Index��������������������������������������������������������������������������������������������������������������������������221

LIST OF ABBREVIATIONS ADR

alternative dispute resolution

B2C

business-to-consumer

BEIS

Department for Business, Energy & Industrial Strategy

CA

Competition Act 1998

CAA

UK Civil Aviation Authority

CAT

Competition Appeal Tribunal

CMA

Competition and Markets Authority

CMC

claims management company

CPRs

Consumer Protection from Unfair Trading Regulations 2008

CRA

Consumer Rights Act 2015

CRD

Consumer Rights Directive 2011/83/EC

CToHs

Consumer theories of harm

FCA

Financial Conduct Authority

FIIC

free if in credit

FSMA 2000

Financial Services and Market Act 2000

HFEA

Human Fertilisation and Embryology Authority

MIR

Market Investigation Reference

OFT

Office of Fair Trading

ORR

Office of Rail and Road

PCA

personal current account

T&Cs

terms and conditions

TFEU

Treaty on the Functioning of the European Union

xiv List of Abbreviations UCPD

Directive 2005/29/EC on unfair commercial practices

UCTA

Unfair Contract Terms Act 1977

UTCCD

European Directive 93/13/EEC on unfair terms in consumer contracts

UTCCRs

Unfair Terms in Consumer Contracts Regulations 1999

LIST OF FIGURES AND TABLES Figures Figure 4.1: Consumer surplus����������������������������������������������������������������������������������80 Figure 4.2: Loss in consumer surplus due to inflated consumer willingness to pay�����������������������������������������������������������������������������������83 Figure 4.3: Loss in consumer surplus due to increase in search costs����������������84 Figure 4.4: Types of product characteristics based on quality uncertainty��������91 Tables Table 5.1: Table 5.2: Table 5.3: Table 5.4:

Summary of CToH 1 – ‘the scam’������������������������������������������������������116 Summary of CToH 2 – ‘the lemon’����������������������������������������������������123 Summary of CToH 3 – ‘the shock’�����������������������������������������������������129 Summary of CToH 4 – ‘the subsidy’��������������������������������������������������135

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TABLE OF CASES European Cases Case 89/85 A Ahlström Osakeyhtiö and others v Commission of the European Communities [1993] ECR I-01307������������������������������������������������������������������������68 Case C-446/07 Alberto Severi v Regione Emilia-Romagna [2009] ECR I-08041�������������������������������������������������������������������������������������������������������������36 Case T-342/99 Airtours plc v Commission [2002] ECR II-2585�������������3, 65–67, 70 Case C-26/13 Árpád Kásler, Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt ECLI:EU:C:2014:282�����������������������������������������������������������������������������������������������36 Case C-415/11 Aziz v Caixa D’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) ECLI:EU:C:2013:164������������49, 165–66 Case C-109/17 Bankia SA v Juan Carlos Marí Merino, Juan Pérez Gavilán, María de la Concepción Marí Merino [2018] ECR I-0000�������������������������������196 Case C-413/06 P Bertelsmann AG and Sony Corporation of America v Independent Music Publishers and Labels Association (Impala) [2008] ECR I-04951����������������������������������������������������������������������������������������� 64, 66 Case C-177/16 Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra – Latvijas Autoru apvienība’ Konkurences padome (AKKA/LAA) [not yet published] ECLI:EU:C:2017:689�����������������������������������61 Case C-63/97 BMW v Ronals Karel Deenik [1999] ECR I-905�����������������������������195 Opinion AG J Kokott, in Case C-95/04, British Airways plc v Commission [2007] ECR I-2331��������������������������������������������������������������������������������������������������57 Case C-195/14 Bundesverband der Verbraucherzentralen und Verbraucherverbände – Verbraucherzentrale – Bundesverband e.V. v Teekanne GmbH & Co KG ECLI:EU:C:2015:361���������������������������������������������29 Case C-279/98 P – Cascades SA v Commission of the European Communities ECR 2000 I-09693���������������������������������������������������������������������������63 Case C-435/11 CHS Tour Services GmbH v Team 4 GmbH [2013] ECR I-0000������������������������������������������������������������������������������������������������30, 193–94 Case 178/84 Commission of the European Communities v Federal Republic of Germany (Beer Purity) [1987] ECR I-01227����������������������������������������������������20 Case C-99/02 Criminal proceedings against Linhart and Biffl [2002] ECR I-9375, para 32������������������������������������������������������������������������������������������������27 Case C-239/02 Douwe Egberts NV v Westrom Pharma NV and Christophe Souranis, carrying on business under the commercial name of ‘Etablissements FICS’ and Douwe Egberts NV v FICS-World BVBA [2004] ECR I-07007������������������������������������������������������������������������������������������������28

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Table of Cases

Joined Cases T-183/02 and T184/02 El Corte Inglés v Office for Harmonisation in the Internal Market (Trade Marks and Designs) (‘Mundicolor’) [2004] ECR II-00965�����������������������������������������������������������������������������������������������36 Cases C-220/98 Estée Lauder Cosmetics GmbH & Co OHG v Lancaster Group GmbH [2000] ECR I-00117������������������������������������ 27, 33, 202 Case C-362/88 GB-INNO-BM v Confédération du commerce luxembourgeois [1990] ECR I-00667����������������������������������������������������� 20, 26, 202 Case C-252/07 Gerolsteiner Brunnen GmbH v Putsch GmbH [2004] ECR I-691��������������������������������������������������������������������������������������������������196 Case C-228/03 Gillette Company and Gillette Group Finland Oy v LA-Laboratories Ltd Oy [2005] ECR I-02337�������������������������������������������������195 Cases C-236/08 to C-238/08 Google France and Google [2010] ECR I-0000������������������������������������������������������������������������������������������������ 29, 35, 196 Case C-210/96 Gut Springenheide GmbH and Rudolf Tusky v Oberkreisdirektor des Kreises Steinfurt [1998] ECR I-4657��������������� 21, 25–27, 33, 35 Case C-85/76 Hoffman-La Roche & Co v Commission 1979 ECR 461, [1979] 3 CMLR 211������������������������������������������������������������������������������������������ 57, 62 Case C-342/13 Katalin Sebestyén v Zsolt Csaba Kövari [2014] ECR I-0000��������199 Case C-453/10 Jana Pereničová and Vladislav Perenič v SOS financ spol sro ECLI:EU:C:2012:144�������������������������������������������������������������������������������������� 36, 195 Case 48/69 Imperial Chemical Industries Ltd v Commission of the European Communities [1972] ECR I-00619������������������������������������������������������������������������67 Case T-464/04 Independent Music Publishers and Labels Association (Impala, association internationale) v Commission of the European Communities [2006] ECR II-2289�������������������������������������������������������������������������65 Intel (case 37990) Commission Decision D(2009)3726 [2009] OJ C227/13�����������5 Case T-286/09 Intel Corp v European Commission (not yet published) ECLI:EU:T:2014:547�������������������������������������������������������������������������������������������������6 Case T-20/02 Interquell GmbH v Office for Harmonisation in the Internal Market (Trade Marks and Designs) (‘Happydog’) [2004] ECR II-1001������������36 Case C-356/04 Lidl Belgium GmbH & Co KG v Etablissementen Franz Colruyt NV [2006] ECR I-08501�������������������������������������������������������������� 28–29, 32 Case C-342/97 Lloyd Schuhfabrik Meyer & Co GmbH v Klijsen Handel BV [1999] ECR I-03819������������������������������������������������������������������������������������������������35 Case C-540/08 Mediaprint Zeitungs- und Zeitschriftenverlag v Österreich-Zeitungsverlag GmbH [2010] ECR I-10909���������������������32–33, 195 Case C-204/88 Ministère public v Jean-Jacques Paris [1989] ECR-04361�������������202 Case C-415/11 Mohamed Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) [2013] ECR I-0000����������������������������199 Case C-388/13 Nemzeti Fogyasztóvédelmi Hatóság v UPC Magyarország Kft ECLI:EU:C:2015:225���������������������������������������������������������������������������������������������193 Case C-373-90 Nissan [1992] ECR I-00131�������������������������������������������������������������202

Table of Cases  xix Case C-44/01 Pippig Augenoptik GmbH & Co GK v Hartlauer Handelsgesellschaft mbH [2003] ECR I-3095������������������������������������������������ 27–28 Case C-558/08 Portakabin BV v Primakabin BV [2010] ECR I-06963�����������������196 Case 120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (cassis de Dijon) [1979] ECR I-00649������������������������������������������������������������ 20, 25 Case T-310 Schneider Electric SA v Commission [2002] ECR II-4071����������������������3 Case T-5/02 Tetra Laval v Commission 2002 ECR [2002] ECR II-4381�������������������3 Opinion AG J Kokott, in Case C-8/08 T-Mobile Netherlands BV and Others [2009] ECR I-4529����������������������������������������������������������������������������������������������5, 57 Case C-281/12 Trento Sviluppo srl and Centrale Adriatica Soc coop arl v Autorità Garante della Concorrenza e del Mercato ECLI:EU:C:2013:859�������� 200 Case 27/76 United Brands v Commission [1978] ECR 207, [1978] 1 CMLR 429������������������������������������������������������������������������������������������ 60, 63 Case C-146/16 Verband Sozialer Wettenberg eV v DHL Paket GmbH ECLI:EU:C:2017:243�����������������������������������������������������������������������������������������������21 Case C-470/93 Verein gegen Unwesen in Handel und Gewerbe Köln eV v Mars GmbH [1995] ECR I-01923�������������������������������������������������������������� 26, 202 Case C-430/17 Walbusch Walter Busch GmbH & Co K v Zentrale zur Bekämpfung unlauteren Wettbewerbs Frankfurt am Main eV ECLI:EU:C:2019:47�������������������������������������������������������������������������������������������������20 Case 261/81 Walter Rau Lebensmittelwerke v De Smedt PVBA [1982] ECR I-03961����������������������������������������������������������������������������������������������������������������������20 Case C-304/08 Zentrale zur Bekämfung unlautern Wettbewerbs eV v Plus Warenhandelsgesellschaft mbH [2010] ECR I-00217����������������������������������������195 UK Cases Abbey National Plc & Ors v The Office of Fair Trading [2009] 2 WLR 1286, [2009] EWCA Civ 116������������������������������������������������������������������������������������������151 Bashin v Hrynew [2014] SCC 71�������������������������������������������������������������������������������190 Bolam v Friern Hospital Management Committee [1957] 1 WLR 582, 2 All ER 118�������������������������������������������������������������������������������������������������������������17 Bott & Co Solicitors v Ryanair DAC [2018] EWHC 534 (Ch)�������������������������������162 Bowerman v Association of British Travel Agents Ltd, Times 24 November 1995, [1996] CLC 45����������������������������������������������������������������������25 D&G Card Ltd v Essex Police Authority [2015] EWHC 2145 (Ch) para 196�������191 Director General of Fair Trading v First National Bank [2001] UKHL 52��������������������������������������������������������������������������������������������������������� 48, 198 Dorothy Gibson v Pride Mobility Products Ltd [2017] CAT 9����������������������������������76 Dunnett v Railtrack plc [2002] EWCA Civ 303���������������������������������������������������������54 Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL)�������������������������189 Emerald Supplies Ltd v British Airways plc [2010] EWCA Civ 1284�����������������������55

xx Table of Cases Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd Pfizer Inc and Pfizer Limited v Competition and Markets Authority [2018] CAT 11�������61 Grace v Black Horse Ltd [2014] EWCA Civ 1413������������������������������������������������������54 Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576�����������������������54 Hamsard 3147 Ltd v Boots UK Ltd [2013] EWHC 3251 (Pat)������������������������ 190–91 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433������������������������������������������������������������������������������������������������� 45, 189 L’Estrange v F Graucob Ltd [1934] 2 KB 394������������������������������������������������������������206 Lloyd’s Rep [1993] 2 194 (CA) 196����������������������������������������������������������������������������191 MSC Mediterranean Shipping v Cottonex Anstalt [2016] EWCA Civ 789�����������190 OFT v Officers Club [2005] ECHC 1080���������������������������������������������������������������������34 OFT v Abbey National Plc & 7 Ors [2008] EWHC 875 (Comm), [2008] 2 All ER (Comm) 625������������������������������������������������������������������������ 45, 151 OFT v Foxtons Ltd [2009] EWHC 1681 (Ch)������������������������������������������������������������46 OFT v Purely Creative Industries [2011] EWHC 106 (Ch), [2011] ECC 20�����������34 OFT v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch)�������� 46, 197 OFT (Respondents) v Abbey National plc & Others (Appellants) [2009] UKSC 6, [2009] 3 WLR 1215���������������������������������������������������151–52, 198 PGF II SA v OMFS Co 1 Ltd [2013] EWCA Civ 1288����������������������������������������������54 R v X Ltd [2014] 1 WLR 591��������������������������������������������������������������������������������������197 Seals and Seals v Williams [2015] EWHC 1829 (Ch)�����������������������������������������������54 Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB)�������������������������������������������������������������������������������������������� 190–91 Yam Seng is Emirates Trading Agency v Prime Mineral Export Private Ltd [2014] EWHC 2014�����������������������������������������������������������������������������������������������190 Walford v Miles [1992] 2 AC 128�������������������������������������������������������������������������������189

TABLE OF LEGISLATION European Legislation Council Resolution 19 May 1981 on a second programme of the European Economic Community for a consumer protection and information policy [1981] OJ C131/1�����������������������������������������������������������������������������������������19 Council Resolution 23 June 1986 concerning the future orientation of the Policy of the Community for the protection and promotion of consumer interests [1986] OJ C167/1��������������������������������������������������������������19 Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit [1987] OJ L42/48����������������������������������������22 Council Directive 90/88/EEC of 22 February 1990 concerning consumer credit [1990] OJ L61/14������������������������������������������������������������������������������������������22 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts [1993] OJ L95, 29–34�����������������������������11, 19, 42, 45, 47 Directive 97/7/EC of 20 May 1997 on the protection of consumers in respect of distance contracts [1997] OJ L144, 19–27�������������������������������������20 Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights, and repealing Regulation (EEC) No 295/91 (Text with EEA relevance) – Commission Statement [2004] OJ L46, 1–8������������������������������������������������������������������������������160 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC [2004] OJ L145/1����������������������������������������������������������������23 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council (‘Unfair Commercial Practices Directive’) (Text with EEA relevance) [2005] OJ L149, 22–39�������������������������������������������������������������������������� 8, 10, 19, 21, 29–39, 42, 107, 112, 149–50, 172–73, 177–78, 187–89, 192, 193–97, 199–203, 205, 209

xxii Table of Legislation Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community, which sets out a number of legal obligations relating to the way prices for flights are displayed [2008] OJ L293, 3–20������172 Council Directive 2008/48/EC of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC [2008] OJ L133/66���������������������������������������������������������������������������������������������������������������23 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings [2009] OJ C45, 7������������������������������������������������������61 Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council (‘Consumer Rights Directive’) (Text with EEA relevance) [2011] OJ L304, 64–88���������������������������������� 8, 20, 43 Treaty on the Functioning of the European Union [2012] OJ C326, 47–390������������������������������������������������������������������ 7, 30, 57, 59–70, 74, 76 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 Text with EEA relevance [2014] OJ L60/34����������������������������������������������������������������������������� 23–24 UK Legislation Unfair Contract Terms Act 1977���������������������������������������������������������������������������������42 Competition Act 1998������������������������������������������������������������59–60, 62–63, 66–68, 76 Unfair Terms in Consumer Contracts Regulations 1999���������������42, 45, 47–48, 74, 151–52, 187, 192 Financial Services and Market Act 2000�����������������������������������������������������72–73, 152 Enterprise Act 2002�������������������������������������������������������8, 51, 69, 72–75, 138, 152, 159 Consumer Protection from Unfair Trading Regulations 2008������������ 10, 16, 30, 34, 37, 50–51, 54, 74, 107, 112, 149–50, 166, 172–73, 177–78, 187, 192–94, 197, 202 Legal Aid, Sentencing and Punishment of Offenders Act 2012������������������������������53 Enterprise and Regulatory Reform Act 2013������������������������������������8, 72–73, 75, 140 Consumer Rights Act 2015����������������������������������������������������� 8, 11, 16–17, 36, 42–45, 47–52, 74, 76, 107, 127, 189 Domestic Gas and Electricity (Tariff Cap) Act 2018������������������������������������� 140, 149

1 Introduction I.  The Search for Fairness This book is about the search for fairness. Fairness is defined in the Cambridge Dictionary as the quality of treating people equally or in a way that is right or reasonable. In the Oxford Dictionary, fairness is the impartial and just treatment or behaviour without favouritism or discrimination. Fairness is a term normally associated with justice. It is also at the core of consumer law. Consumer law is about the search for fairness in the protection of consumers throughout their interactions with businesses. For many years, it has been thought that fairness would be achieved by relying on information as a remedy and expecting the average consumer to ensure that businesses are kept in check. But it is our position that the way consumer law operates today promises a lot but does not deliver enough. It struggles to avoid harm being caused to consumers and it struggles to repair the harm after the event. To achieve fairness, solutions need to be found elsewhere. To date, those put forward have not worked properly. Worse, they have in some instances created perverse situations, where fairness is assessed more on procedural than substantive grounds. Relying on consumer theories of harm (CToHs) to achieve fairness in businessto-consumer relationships feeds into two mainstream arguments: the need to rethink consumer law1 and improve upon the neoclassical economic model on the one hand, and the development of a Better Regulation Agenda,2 seeking to streamline legislation, on the other. Efforts are underway at both the European and national levels to ensure that the adoption of laws does not simply increase red tape but yields balanced and proportionate results. Consumer theories of harm provide an alternative model that uses economics to guide policy responses and enforcement intervention. Using economics in the application of consumer law yields many benefits. It can be used to make consumer 1 See, eg G Howells, C Twigg-Flesner and T Wilhelmsson, Rethinking EU Consumer Law (Abingdon, Routledge, 2017); C Willett, ‘Re-theorising consumer law’ (2018) 77 Cambridge Law Journal 179. Note that similar scholarship exists in the field of competition law. See, eg R Classen and A Gerbrandy, ‘Rethinking European Competition Law: From a Consumer Welfare to a Capability Approach’ (2016) 12 Utrecht Law Review 1; JE Stiglitz, ‘Towards a Broader View of Competition Policy’ in T Bonakele, E Fox and L Mncube (eds), Competition Policy for the New Era – Inside from the BRICS Countries (Oxford, Oxford University Press, 2017). 2 European Commission, Better Regulation for Better Results – An EU Agenda, COM(2015) 215 final (Brussels, 2015) 10; European Commission, ‘Better Regulations Guidelines’, Staff Working Document, SWD(2017) 350 (Brussels, 2017) 6.

2  Introduction law more effective and help bypass the limitations currently inherent in the legal framework itself and the enforcement mechanisms of consumer and competition law. Besides this, the application of the four theories of harm developed in chapter five will provide a blueprint for the detection of practices that cause detriment, even if the law does not necessarily come to regulate them. As a result, CToHs can act as a ‘call to action’. Any practices that fall within one of the four theories can be considered unfair and the cause of detriment. As a result, they would require attention. This may be either from the legislator, because the current legal system does not yet have the tools to protect consumers, or via the prioritisation of enforcement by regulatory bodies. In the former case, using the CToHs would help adopt legislation that is justified on economic grounds and help bolster the impact assessment that is normally conducted at proposal stage as part of the Better Regulation Agenda.3 In this latter case, the application of the theories of harm and the use of the economic principles that lie within them will help enforcers build more convincing cases. It is our view that many recent cases where enforcers have seen disappointing results may have unfolded differently if they had been analysed using the model we provide.4 Overall, and perhaps beyond the remit of this book, CToHs can offer a solution to the general lack of trust in markets exhibited by consumers. The biggest social dividend to be gained from the application of CToHs may be that the formulation of a duty to trade fairly for traders (as developed in chapter seven), supported by an economic rationale, would force a holistic rethink rather than smaller corrections around the edges, which are often sector-specific. CToHs stand firmly for the defence of a more social approach to consumer protection. They advocate the adoption of a more prescriptive standard of conduct for traders, but they do so whilst still embracing mainstream tools and rationale. Before entering the crux of the matter, in this introduction we reflect on the origins of theories of harm and demonstrate that using theories of harm in consumer law, whilst novel, is only a natural evolution. Finally, we show how harnessing the use of economics in consumer law will bring with it many improvements.

II.  Origins of Theories of Harm in Competition Law Theories of harm have been used in a variety of fields of law as a way to conceptualise and consider the harm one suffers as the result of a practice. They can be traced 3 C Riefa, ‘The REFIT Process in the Area of Consumer Protection: Odds Stacked Against Consumers’ in E van Schagen and S Weatherill (eds), Better Regulation in EU Contract Law: The Fitness Check and the New Deal for Consumers (Oxford, Hart Publishing, forthcoming). 4 In this respect, Stephen Weatherill also regards EU consumer law against unfair commercial practices as being capable of protecting consumers efficiently, provided that enforcers offer more sophisticated arguments to support their claims: see S Weatherill, ‘Who is the Average Consumer?’ in S Weatherill and U Bernitz (eds), The Regulation of Unfair Commercial Practices under EC Directive 2005/29 (Oxford, Hart Publishing, 2007) 138.

Origins of Theories of Harm in Competition Law  3 in tort law,5 trademark law6 and competition law. To date, however, they have not been used in the application of consumer law. Theories of harm, as we intend to use them in the consumer sphere, find their roots in competition law. There, they have developed, over the last 15 years or so, as a way to establish a rigorous standard of proof, which is seen to have improved competition law enforcement through the adoption of a more economic approach.7 A theory of harm in this context is an economic framework of conditions and incentives proving that not only competitors, but also, ultimately, consumers will suffer detriment if the disputed conduct is allowed to either go ahead or continue. For example, a theory of harm in competition law requires that a demonstration be made of the way in which a restrictive agreement might distort competition to the detriment of consumers or how a proposed merger may result in higher prices and/or lower quality if allowed to proceed. To make such a demonstration, it is essential to build a case for what would have happened if the agreement did not exist. This is what competition lawyers call the ‘counterfactual’.8 Theories of harm started to develop after a number of cases where the decisions of the European Commission were quashed on appeal9 by the Court of First Instance (now the General Court). Around the turn of the millennium, under the leadership of Competition Commissioner Mario Monti,10 the European Commission shifted its approach towards considering not only the ability firms had to act anticompetitively, but also their incentive for doing so, by relying on robust economic theoretical insights. In practical terms, the shift towards a more economic approach was aimed at reforming the prevailing formalistic approach, whereby certain practices were held to be per se illegal merely on the basis that the alleged conduct conformed to a particular ‘form’, rather than on the basis of its likely effect on competition and, ultimately, consumer welfare.11 Nowadays, a ‘form’-based approach is still 5 See SR Perry, ‘Harm, History, and Counterfactuals’ (2003) 40 San Diego Law Review 1283. 6 M McKenna, ‘Testing Modern Trademarks Law’s Theory of Harm’ (2009) 95 Iowa Law Review 63. 7 This reform programme is labelled the modernisation of EU competition law, of which the adoption of a more economic approach was a key plank: see C Gauer, L Kjolbye, D Dalheimer, E De Smijter, D Schnichels and M Laurila, ‘Regulation 1/2003 and the Modernisation Package Fully Applicable Since 1 May 2004’ (2004) 2 European Commission’s Competition Policy Newsletter http://ec.europa.eu/ competition/publications/cpn/2004_2_1.pdf. 8 In tort law, Perry argues that harm is a setback to an interest and involves a comparison between two states of affairs. The compensation that can be obtained for the harm can be assessed using two different techniques. The first involves looking at the difference between the states of affairs historically, ie comparing what has happened with the situation that prevailed before. It presupposes a worsening in the situation of the subject. The other focuses on what would have happened in the absence of the practice – a technique called the ‘counterfactual’, where the comparison focuses on what has happened by reference to what would have happened. See Perry (n 5). 9 Case T-342/99 Airtours plc v Commission [2002] ECR II-2585; Case T-310 Schneider Electric SA v Commission [2002] ECR II-4071; Case T-5/02 Tetra Laval v Commission [2002] ECR II-4381. 10 See L-H Röller, ‘Economic Analysis and Competition Policy Enforcement in Europe’ in PAG van Bergeijk and E Kloosterhuis (eds), Modelling European Mergers: Theory, Competition Policy and Case Studies (Cheltenham, Edward Elgar Publishing, 2005) http://ec.europa.eu/dgs/competition/economist/ nma.pdf. 11 See L-H Röller and O Stehmann, ‘The Year 2005 at DG Competition: The Trend towards a More Effects-Based Approach’ (2006) 29 Review of Industrial Organization 281.

4  Introduction ­ revalent for so-called ‘hardcore’ cartel infringements such as price fixing, where p per se illegality is fully justified on the basis of both theoretical analysis and past experience, leaving no room for doubt that these practices are highly detrimental. However, with respect to other types of practices, the way enforcement unfolded started shifting12 towards an ‘effects’-based economic approach, because there are often perfectly plausible and legitimate rationales underpinning a firm’s motivations to adopt particular behaviours. This is predominantly the case with respect to so-called vertical restraints, such as when a manufacturer and a retail distributor agree on exclusively dealing with each other to the exclusion of competitors. Exclusive agreements of this kind are motivated by the mutual desire to develop a partnership that can improve efficiency, although it necessitates undertaking irrecoverable investments (such as training sales staff on the technical specification of a new product line so that they can offer advice that is valued by clients). At the same time, exclusive agreements make the parties vulnerable to each other’s potential opportunism, given that the investment has no alternative use. Enforcement against this type of practice should be based on a cogent theory of harm that reduces the risk of making a costly false conviction that, as a result, could deter firms from entering into beneficial agreements. A finding of infringement requires establishing that the anticompetitive effects are likely to be stronger than any potential pro-competitive effect. To this end, the use of economic theory allows the enforcer to develop propositions as to what firms may be capable and willing to do, given the constraints posed by the foreseeable reactions of competitors, customers and other relevant economic agents, such as suppliers and potential new entrants. These theoretical propositions must, of course, be consistent with the facts of the case. Ultimately, it must be argued that the alleged conduct would be detrimental to consumers because of a combination of higher prices, lower quantity and poorer quality (which can also encompass a variety of products and future improvements driven by innovation). Therefore, under EU competition law, a more economic approach under the modernisation agenda had the effect of restricting the scope of what was considered an infringement.13 It put the onus on enforcement authorities to produce 12 For a detailed history of the more economic approach, see R Podszun, ‘Introduction’ in Josef Drexel, W Kerber and R Podszun (eds), Competition Policy and the Economic Approach (Cheltenham, Edward Elgar Publishing, 2011); AC Witt, The More Economic Approach to EU Antitrust Law (Oxford, Hart Publishing, 2016). 13 By contrast, the use of theories of harm in the realm of trademark law seems to have allowed for the overexpansion of trademark owners’ rights, by expanding the scope of what could be seen as an infringement. Trademark protection started out as a means to protect an indicator of source for similar products. But this protection quickly morphed to expand beyond origin stricto sensu (ie being the producer of the goods) to apply to goods produced by third parties but marketed under a particular brand. It also developed to apply where the mark was on non-competing products on the assumption that consumers would infer from the diversification of commercial brands that products bearing a mark – even products with a very remote connection – could emanate from the brand itself, and thus lead to confusion. See McKenna (n 6). Whilst the interests of the trademark owner and the consumer are often aligned, it is not always the case. Counterfeit products offer a case in point. Consumers who buy fake goods expecting the real article suffer alongside the right owner from the misleading practice.

Origins of Theories of Harm in Competition Law  5 coherent theories of harm to articulate why an alleged practice would harm consumers by causing a reduction in their surplus.14 This approach, focused on welfare, is often portrayed in contrast to the so-called ordoliberal approach whereby competition law is an instrument for the preservation of the competitive structure of the market, rather than being exclusively concerned with consumer welfare and, thus, the protection of consumers from exploitation. Under ordoliberalism, competition rules are not designed only or primarily to protect the immediate interest of consumers, but to protect the structure of the market and thus competition as such (as an institution), so that consumers also benefit indirectly.15 Therefore, under the ordoliberal tradition, there is wider scope for intervention.16 In the Intel case,17 the European Commission adopted a more economic approach for the first time. The case concerned an allegation that the dominant firm foreclosed its only rival by granting retroactive loyalty rebates to key computer manufacturers and retailers in order to maintain its position as exclusive supplier. In its Intel decision, the Commission devoted some 150 pages to the economic analysis of the ‘as efficient competitor’ test. Under this test, competition law would be breached if a competitor with the same costs as the defendant would have to set below-cost prices in order to entice the targeted customers to switch at least part of their purchases.18 However, the Commission concluded that this was only one possible way to demonstrate the capability to foreclose and that it was not a requirement for finding an abuse. The General Court agreed with this interpretation, sticking with the formal approach19 and reinstating the old formalistic case law under which the Commission is not required to demonstrate However, many consumers actively seek cheaper status symbols. On this point, see C Riefa, Consumer Protection and Online Auction Platforms, Towards a Safer Legal Framework (Farnham, Ashgate, 2015) 178. Accordingly, many buy counterfeit versions of luxury goods and ‘the purchase of fake goods is becoming ingrained in society as an acceptable behaviour, especially amongst the younger segments of society’: see eg PwC, ‘Counterfeit Goods in the UK: Who is Buying What and Why?’ (October 2013) www.pwc.co.uk/assets/pdf/anti-counterfeiting-consumer-survey-october-2013.pdf. In those cases, although the right owner may be harmed, the consumer is not. Yet, in trademark law, there has been a tendency to allow right owners to use consumer confusion as a means to expand their rights and effectively use trademark law as a protectionist measure. In many cases, where goods using similar marks do not compete, trademark law can curtail the practice when in fact consumer confusion and harm are not present. 14 For more on the notion of consumer surplus, see section IV.B. 15 Opinion of AG J Kokott in Case C-8/08 T-Mobile Netherlands BV and Others [2009] ECR I-4529, para 71. 16 D Zimmer, ‘On Fairness and Welfare: The Objectives of Competition Policy’ in CD Ehlermann and M Marquis (eds), European Competition Law Annual 2007: A Reformed Approach to Article 82 EC (Oxford, Hart Publishing, 2008). 17 Intel (case 37990) Commission Decision D(2009)3726 [2009] OJ C227/13. 18 ibid, paras 1002–576. 19 For an opinion in support of this ruling, see W Wils, ‘The Judgment of the EU General Court in Intel and the So-Called “More Economic Approach” to Abuse of Dominance’ (2014) 37 World Competition: Law and Economics Review 405. For a detailed analysis of this judgment and the following one by the CJEU, see I Lianos, V Korah and P Siciliani, Competition Law – Analysis, Cases & Materials (Oxford, Oxford University Press, 2019) ch 8.

6  Introduction that the alleged conduct is likely to foreclose a hypothetical equally efficient rival and therefore be detrimental to consumers.20 However, the CJEU annulled the judgment by holding that the General Court was wrong to dismiss the defendant’s criticisms of the Commission’s economic analysis regarding the likely foreclosure of an equally efficient competitor.21 It instructed the General Court to look again, this time considering all of the ‘applicant’s arguments seeking to call into question the validity of the Commission’s findings concerning the foreclosure capability of the rebate concerned’.22 This decision is seen by many as a vindication of the more economic approach23 in competition law enforcement, although the practical significance of the judgment is debated.24 Regardless, the embrace of economic analysis in competition law has become mainstream.

III.  Using Theories of Harm in Consumer Law – A Natural Evolution If the improvement the use of stricter scrutiny brings to competition law enforcement is obvious, it may be less clear, at this stage, how the development of theories of harm could benefit consumers and the enforcement of consumer law. Ironically, theories of harm in competition law rest on demonstrating that detriment to competitors will, in turn, translate into detriment to consumers. They are therefore focused on consumer welfare. Yet, while beneficial to consumers, at least in principle, theories of harm are not a concept consumer lawyers are normally familiar with. It is our contention that applying theories of harm in consumer law will have a positive impact on consumer law enforcement and ultimately bring about a higher standard of consumer protection, in the same way that their development in competition law is seen to have had a positive impact on consumer welfare. This is for a number of reasons. First, the operation of consumer and competition law are intimately linked and thus solutions in one area are portable to the other (albeit with some modifications). Secondly, consumer theories of harm are a useful vehicle for improving consumer law enforcement because they can operate in the existing legal framework with only minimal changes necessary. This is primarily because theories of 20 Case T-286/09 Intel Corp v European Commission (not yet published) ECLI:EU:T:2014:547. 21 Case C-413/14P, ECLI:EU:C:2017:632. 22 ibid, para 141. 23 See, eg N Petit, ‘Analysis and Reflections Intel and the Rule of Reason in Abuse of Dominance Cases’ (2018) 43 European Law Review 728. 24 See, eg JS Venit, ‘The Judgment of the European Court of Justice in Intel v Commission: A Procedural Answer to a Substantive Question?’ (2017) 13 European Competition Journal 172; R Podszun, ‘The Role of Economics in Competition Law: The “Effects-based Approach” after the Intel judgement of the CJEU’ 7 (2018) 2 Journal of European Consumer and Market Law 60.

Using Theories of Harm in Consumer Law – A Natural Evolution  7 harm already exist in consumer law, albeit in latent forms only. As a result, the leap from current enforcement practices to the use of theories of harm can be seen as a natural evolution rather than a revolution. Finally, the way economic theories have developed and started to be used in consumer law (notably behavioural economics) indicate that the use of consumer theories of harm, which are essentially underpinning intervention by using economic evidence, ought to offer a fairly straightforward transition towards a more effective enforcement system for consumer rights. Moving towards the greater use of economics in policy making and enforcement is the direction of travel.

A.  Complementarity of Consumer and Competition Law Competition law and consumer law are separate subject areas, but they share common origins as well as objectives. Both disciplines, in their own ways, seek to ensure that the marketplace is fair. Cseres explains that ‘it has long been recognised that competition law and consumer protection are mutually reinforcing disciplines’.25 Indeed, strong consumer protection can also be a protection for traders against unfair competition26 and vice versa. In spite of this complementarity, the prevalent idea has been that consumer protection is ‘subservient’ to competition law, and competition law is ultimately the superior vehicle for the protection of consumers. This is rooted in history, but is still predominant today.27 Indeed, laws on competition predate any laws on consumer protection. Much of what has evolved to be classed as consumer law today first developed under the guise of unfair competition. In the USA, for example, it is established that the intent of the FTC Act 1914 (which establishes the Federal Trade Commission) was to make the ‘consumer who may be injured by an unfair trade practice of equal concern before the law as the merchant injured by the unfair methods of a dishonest competitor’.28 In the UK, the Molony Committee on Consumer Protection, formed in 1959, was charged to consider and report what changes needed to be made to legislation to protect consumers with the intent to provide a foundation for policy making in consumer law. Ramsay explains that the ‘philosophy of the Committee was that competition and market forces were the best protections 25 See J Vickers, ‘Economics for Consumer Policy’ (2003) British Academy Keynes Lecture www.thebritishacademy.ac.uk/sites/default/files/pba125p287.pdf; KJ Cseres, Competition Law and Consumer Protection (Alphen aan den Rijn, Kluwer Law International, 2005) 1. 26 See Howells et al (n 1). 27 This is despite the fact that under the Treaty on the Functioning of the European Union (TFEU), consumer protection has its own article (Art 169) that seeks to promote consumers’ interests. This is an article in its own right, not a subobjective of the provision on competition. 28 As cited by Federal Trade Commission, Policy Statement on Unfairness, 17 December 1980 www.ftc.gov/public-statements/1980/12/ftc-policy-statement-unfairness. Original document, 83 Congr Rec 3255 (1938), comments of Senator Wheeler.

8  Introduction for consumer interests although they understood the dangers of change in the structure of the marketplace’.29 Still according to Ramsay, the ‘Thatcher government generally saw competition as the best consumer policy and did not favour extensive consumer regulation’.30 The trend continued in the late 1990s and early 2000s, when a number of reforms focused on empowering consumers.31 Howells notes that the interesting feature of the Empowered Consumers consultation is the explicit link it makes between consumer empowerment and a healthy economy. It states bluntly that ‘our consumer policy will therefore be aimed at making competition more effective.’ Thus the rationale for consumer protection becomes in part the health of the economy, rather than merely the protection of the consumer.32

Today, consumer protection policy in the UK has heavily been influenced by EU consumer law, as well as the prevailing policy agenda of the incumbent government. Currently the approach is based around improving the accessibility of the law and enhancing competition.33

To put things in context, the EU is also largely driven by an agenda focused on competition. For example, Directive 2005/29/EC on unfair commercial practices (UCPD) aims to achieve a high level of consumer protection, but also to improve competition in the market. Alongside this, one of its main goals is to increase the smooth functioning of the internal market. Recital 4 of the Consumer Rights Directive 2011/83/EC (CRD) reminds the reader that the directive seeks to guarantee that the right balance is struck between the protection of consumers and the competitiveness of enterprises. In the UK, the ‘biggest overhaul of consumer rights for a generation’, the Consumer Rights Act 2015 (CRA), also continues to put the emphasis on competition. It sets out to promote growth through confident consumers driving innovation and more competitive markets.34 Besides, the Competition and Markets Authority (CMA), created under the Enterprise and Regulatory Reform Act 2013 to replace

29 I Ramsay, Consumer Law and Policy – Text and Materials on Regulating Consumer Markets (3rd edn, Oxford, Hart Publishing, 2012) 3. 30 ibid 9. 31 See, eg Department for Trade and Investment, Modern Markets: Confident Consumers (London, 1999) https://webarchive.nationalarchives.gov.uk/20040722015139/www.dti.gov.uk/consumer/whitepaper/ – leading to changes to consumer law and the introduction of the Enterprise Act 2002. See also the 2004 consultation on the future of consumer policy, Department for Trade and Industry, Extending Competitive Markets: Empowered Consumers, Successful Business (London, 2004). 32 G Howells, ‘The Potential and Limits of Consumer Empowerment by Information’ (2005) 32 Journal of Law and Society 350. 33 C Riefa and C Willett, ‘Enforcement and Effectiveness of Consumer Law in the UK’ in H-W Micklitz and G Saumier (eds), Enforcement and Effectiveness of Consumer Law (New York, Springer International Publishing, 2018) 673. 34 UK Government, ‘Biggest Overhaul of Consumer Rights in a Generation’, press release, 27 March 2015 www.gov.uk/government/news/biggest-overhaul-of-consumer-rights-in-a-generation.

Using Theories of Harm in Consumer Law – A Natural Evolution  9 the Office of Fair Trading,35 is charged with enforcing both competition law and consumer law. It has a statutory duty to promote competition to the benefit of consumers.36 Out of seven functions, only one is dedicated to enforcing consumer protection legislation,37 the rest being focused on competition enforcement (including the powers to undertake market studies and market inquiries that we will explore in chapter three). Finally, the Government Consumer Green Paper on Modernising Consumer Law published in April 2018 explains clearly that competition should be central to the approach taken to modernise consumer law. There is, however, a recognition, absent in previous years, that ‘competition should drive the best deals, but no one should be exploited if they lack the time or capacity to engage and the vulnerable should be protected’.38 Applying CToHs would enable less reliance on competition law enforcement. Instead of tensions between consumer and competition law, we ought to move towards a system where they work on an equal partnership rather than one remaining subservient to the other. Through the use of CToHs, resources can be best allocated to the enforcement authority most able to protect consumers and repair the harm caused. This is especially important in those cases where prompt intervention under consumer law can prevent the issue from deteriorating to the point where not even competition enforcement would suffice to restore a fair market outcome. In turn, more reliable consumer enforcement ought to help develop a general duty to trade fairly, shaping markets for the future and lessening the need for competition enforcement, that is, thanks to the fact that the presence of more confident and assertive consumers empowers competition on the merits.

B.  Positive Spill Over Effects Advocating for the use of CToHs is not without controversy. The expansion of the use of consumer law as a means to ensure that consumers’ welfare is better protected may be seen as an assault on neighbouring disciplines, especially competition, contract and tort law. Indeed, as consumer law expands its realm, other legislative provisions that would traditionally have been used to find a remedy to consumer problems may see their scope decrease. The use of CToHs may have spill-over effects. However, spilling over will not be counter-intuitive to consumer lawyers. Consumer law was built up by small and incremental expansion. It has sometimes 35 UK Government, ‘New Competition Authority Comes into Existence’, press release, 1 October 2013 www.gov.uk/government/news/new-competition-authority-comes-into-existence. 36 Enterprise and Regulatory Reform Act 2013, s 25(3). 37 CMA, ‘Towards the CMA’ CMA1 (London, 2013) annex B https://assets.publishing.service. gov.uk/government/uploads/system/uploads/attachment_data/file/212285/CMA1_-_Towards_the_ CMA.pdf. 38 Department for Business, Energy & Industrial Strategy (BEIS), Modernising Consumer Law, Consumer Green Paper (London, 2018) 5 www.gov.uk/government/consultations/consumer-greenpaper-modernising-consumer-markets.

10  Introduction been constructed as an exception to the common law.39 It is also now used to influencing other disciplines. The increasing impact consumer law has on contract and tort law is well documented.40 In practice, the impact of CToHs on other fields is nothing to be wary of. It should assist in improving the way consumers are protected. In part, this is because the standards of proof and other mechanisms required to be able to obtain redress tend to be complicated, and are not tangible or straightforward for consumers to use. The upshot is that private enforcement on the consumer side remains timid and unable to truly affect the way businesses behave. By contrast, relying more heavily on public enforcement and bolstering it through the use of CToHs will help consumers in situations where they are unlikely to be able to access individual remedies in practice. As explained in chapter three, it will also assist in restoring fair outcomes with respect to those market configurations where competition law enforcement might not be an option (so-called ‘gap cases’). A more economic approach to consumer law can help identify situations where a more expansive use of consumer law is most called for. It leaves the way consumer law applies in other situations untouched. In the absence of the total rethink and redesign of consumer law rules that many consumer scholars are calling for, the use of CToHs is a practical outlook that can offer a path towards tangible and impactful solutions.

C.  Latent Consumer Theories of Harm and Counterfactuals in Consumer Law Theories of harm are not identified as such in consumer law, but this does not mean that they do not exist. They are often latent (although typically in an embryonic form) in the legislation. It is therefore our view that using CToHs to assist in consumer enforcement is simply a natural progression and not a big leap into the dark. Indeed, according to the UCPD and the Consumer Protection from Unfair Trading Regulations 2008, which transposed it into UK legislation, the general test for unfairness consists of extrapolating what the consumer would have done ‘but for’ the commercial practice he or she is subjected to. If the behaviour would have remained unchanged, then the law does not sanction the practice. It is not unfair. The judge thus needs to explore this counterfactual to conclude how the practice affected the consumer’s behaviour.41 39 Ramsay (n 29) 136. 40 For example, Durovic showed that while the UCPD is without prejudice to contract law rules, it has in effect forced some modification. See M Durovic, European Law on Unfair Commercial Practices and Contract Law (Oxford, Hart Publishing, 2016). 41 For more on the application of the regulations, see the Office of Fair Trading and Department for Business Enterprise and Regulatory Reform, Consumer Protection from Unfair Trading Regulations 2008 Guidance (London, 2008) https://assets.publishing.service.gov.uk/government/uploads/system/ uploads/attachment_data/file/284442/oft1008.pdf.

Harnessing the Use of Economics in Consumer Law  11 Exploring unfair contract terms legislation also provides for some useful reading in the search for consumer theories of harm. Under Directive 93/13/EEC on unfair term in consumer contracts and according to section 62(4) CRA, ‘a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer’. As a result, the judge must explore this counterfactual and evaluate the imbalance in the rights and obligations of the parties. If the harm caused to the consumer by the presence of the term in the contract is not of sufficient magnitude, the term will not be unfair. The counterfactual is established by first reviewing which terms can be assessed for fairness, then examining those terms within the context of the contract as a whole. In all those situations, judges are already versed in using ‘but for’ tests and effectively dealing with counterfactuals. At present, however, the way the analysis is conducted relies on the judge taking a view based on the available evidence. Currently, this does not tend to rely on much, if any, economic analysis, as is the case in competition law.

IV.  Harnessing the Use of Economics in Consumer Law It has long been recognised that ‘economic analysis of consumer transactions can identify consumer protection problems and offer useful guidelines for the development of appropriate policy responses’,42 and act as a reliable trigger to public enforcement. Neoclassical economics is the prevalent belief that the individual pursuit of self-interest is also optimal from a societal perspective. This economic theory rests on a set of strong but abstract assumptions: individuals seek to maximise their utility from consumption based on a set of constant and consistent preferences, and knowing all the relevant information regarding the quality and price of available products. As firms (traders) seek to maximise their profits, competition to sell to well-informed and rational consumers will drive prices down to the corresponding costs of production so that the largest possible quantity of products is sold by the most efficient firms (thus achieving both allocative and productive efficiency). Accordingly, as explained in more detail in chapter four, public intervention in markets should be confined to situations of ‘market failure’, where this ideal outcome of ‘perfect competition’ cannot be achieved. Joshua Wright and Douglas Ginsburg explain: Indeed, within the model of ‘perfect competition,’ economic agents do not make mistakes or commit errors of any kind. Sellers are homogenous. Transaction and 42 GK Hadfield, R Howse and MJ Trebilcock, ‘Information Based Principles for Rethinking Consumer Protection Policy’ (1998) 21 Journal of Consumer Policy 133.

12  Introduction information costs, including the costs of processing information required to make economic decisions, are zero. It follows that resources instantaneously flow to their highest valued use. That these assumptions are counterfactual is not a critique of price theory. After all, the model of perfect competition was not designed for the purpose of describing the competitive activities of economic agents. Indeed, as Harold Demsetz has pointed out, the neoclassical model has little to say about competitive activities at all and is better described as a model of ‘perfect decentralization.’ The purpose of the model was to demonstrate the relative efficiency of decentralized allocation of resources. With the academic battle over the relative virtue of market versus governmental allocation of resources largely settled by the 1950s, economists devoted their efforts to extending the neoclassical framework to explain real-world phenomena observed in markets.43

Neoclassical economics has underpinned the development and operation of both consumer and competition law (and the economic regulation of markets in general), albeit to different extents. In consumer law, economic theories have historically played a limited role. The use of economics first focused on drawing attention to the potential failures of government regulation.44 There was, and in many regards there still is, a strong belief that the question of the allocative efficiency should be left to the market rather than to state regulation.45 Nevertheless, consumer law developed on the premise that there was an imbalance between consumers and businesses, and that it was primarily information asymmetry that caused this difference in bargaining powers. As a result, legislation focused on trying to address this imbalance and cultivated information as a remedy. In European consumer law, where consumer protection goals are ‘subservient’ to the realisation of the internal market, the information paradigm quickly became a powerful shortcut for fixing markets. But it did so with very limited overt economic analysis and input. As the use of economics evolved, the economics underpinning the development of consumer law have, until quite recently, orbited around using information based on a ‘rational’ consumer following the dominant neoclassical model and tended to disregard behavioural insights. As put by the OECD: Behavioural economics is generally understood as the incorporation of psychological insights into the study of economic problems. Behavioural insights often involve multidisciplinary research in fields such as economics, psychology, neuroeconomics and marketing science to understand consumer behaviour and decision making.46

43 JD Wright and DH Ginsburg, ‘Behavioral Law and Economics: Origins, Fatal Flaws, and Implications for Liberty’ (2013) 106 Northwestern University Law Review 1033. 44 Ramsay (n 29) 136. See, eg S Peltzman, ‘The Effects of Automobile Safety Regulation’ (1975) 83 Journal of Political Economy 667; S Peltzman, ‘Towards a More General Theory of Regulation’ (1976) 19 Journal of Law and Economics 211. 45 See Cseres (n 25) 178. 46 See OECD, ‘Use of Behavioural Insights in Consumer Policy’ (Paris, 2017) www.oecd-ilibrary.org/ industry-and-services/use-of-behavioural-insights-in-consumer-policy_c2203c35-en.

Harnessing the Use of Economics in Consumer Law  13 Both the courts and the legislator have been guilty of disregarding behavioural insights, instead favouring consumer protection methods based on the assumption that information is good in all its forms and regardless of volume. Accordingly, the mainstream approach under European consumer law is to make sure that consumers are provided with all the relevant information needed to make fully informed purchasing decisions. Under this ‘information paradigm’, remedial intervention is primarily aimed at restoring conditions of transparency by both removing false and misleading marketing statements and requiring the disclosure of relevant but omitted information. According to Micklitz et al: Nowadays, the consumer legal system is saturated with information duties, duties that tend to produce high costs for suppliers and also inundate the legal system. The result is an ever-growing enforcement deficit. The supplier faces difficulties in providing all the relevant information and there is significant debate regarding the value of this information provision, particularly concerning the extent to which it actually enhances the consumer decision-making process.47

This regulatory model, however, largely persisted with neoclassical economics, which understands consumers as not only fully rational agents, but also blessed with unlimited computational bandwidth. In fact, information overload is now plaguing the consumer protection system, a testament to how neoclassical economic theory has permeated policy making. The situation has reached saturation, however, and there is a pressing need to look very carefully at the way consumers are effectively protected and act to redress the balance.48 Consumer law has been based on a fundamental dichotomy between two contrasting paradigms for intervention. The mainstream approach sees consumer policy as instrumental to empowering assertive consumers to shop around and, hence, driving efficient market outcomes. Under these circumstances, minimal intervention is needed to prevent deceptive marketing statements or frauds, and to make it easier for consumers to switch supplier. This ‘informed consumer’ paradigm (that we explore in chapter two) is often criticised for setting a standard of consumer protection that is too low, in particular, because it is postulated on an idealistic view of how consumers ought to behave and dismissive of the fact that in reality consumers are far from optimal decision makers. It is removed from reality. Behavioural economics has started to influence policy making and bring some corrections to the neoclassical model. They do not assume the consumer to be rational, but rather easily distracted and systematically swayed by behavioural biases. As a result, behavioural economics calls into question the assumption that consumers will learn from their mistakes. Behavioural economics has its merit, but it is not the economic theory that underlines our CToHs. Instead, we prefer to rely on the theory of ‘bounded rationality’, introduced by Herbert Simon around the middle of last century (thus predating the advent of 47 HW Micklitz, LA Reisch and K Hagen, ‘An Introduction to the Special Issue on “Behavioural Economics, Consumer Policy, and Consumer Law”’ (2011) 34 Journal of Consumer Policy 271. 48 See BEIS (n 38).

14  Introduction behavioural economics),49 where consumers are seen as subject to computational limitations but are nevertheless rational. They shop around until they find an offer that provides them with at least some aspiration value level. Beyond this point, consumers reckon that the expected benefit from costly extra search would not pay off. Therefore, this is described as ‘satisficing’ behaviour, as opposed to the ‘maximising’ postulation under the neoclassical rational choice theory, whereby consumer searching is effortless. From a normative point of view, this bounded rationality endorses a stronger standard of consumer protection as consumer detriment is not the result of their behavioural shortcoming. It is rational to use a rule of thumb, rather than enter into a costly (in both time and effort) search for information. In addition, from a practical point of view, we believe that by relying on mainstream economic concepts, the analytical framework developed in this book is more accessible and predictable than when relying primarily on behavioural economics. The CToHs provide a framework to map the ways in which consumer harm occurs. They adopt a 360 degree approach to understand consumer detriment and thus fill a gap in economic analysis. Indeed, looking at the shortcomings of competition law, Rhonda Smith and Stephen King explain: Neo-classical economics tend to assume away most of the relevant issues that underlie consumer choice because of its focus on the behaviour of firms. Further, because the exercise of consumer choice is necessary to ensure that markets work efficiently and effectively, assuming consumer choice is exogenously determined means that the theory of markets that underpins competition policy is incomplete. This is because, for example, it cannot adequately explain why in certain circumstances consumers fail to exercise the option to switch between suppliers. On the other hand, behavioural economics, supported by experimental economics, is providing important insights in this area, but do not consider, at least not in any detail, how firms may respond to consumer behaviour.50

CToHs address this discrepancy and look at market configurations and practices from the viewpoints of both the supply side (the fair and the unfair firm) and the demand side (the consumer). The consumer side is subdivided, looking at how both sophisticated and naïve consumers respond. Sophisticated consumers are more or less equivalent to the ‘average consumer’ concept that consumer lawyers are accustomed to. The naïves closely resemble consumers who are in vulnerable situations. Our views are also informed by both competition law and consumer law. Because consumer theories of harm look at all of those aspects and offer a rationale for the way they operate in tandem with one another, they offer a route to 49 H Simon, ‘A Behavioural Model of Rational Choice’ (1955) 69 Quarterly Journal of Economics 99; H Simon, Administrative Behavior: A Study of Decision-Making Processes in Administrative Organization (2nd edn, New York, Macmillan, 1957). 50 R Smith and S King, ‘Does Competition Law Adequately Protect Consumers?’ (2007) 28 European Competition Law Review 412, 420.

Contents  15 a more reliable understanding of retail markets which should foster better policy making and enforcement. In order to create a consumer protection framework that is both adaptive and responsive to consumer needs, it is necessary to rethink the key notions that underpin the workings of consumer law and policy making. In addition, it is essential to devise a framework under which consumer enforcement can be reliably engaged. Much has been made of economics in policy making, but scholars have not yet truly connected with how to bring economics to consumer law enforcement. This is what our CToHs and this book proposes to do. It suggests that the movement towards a more economic approach to policy making in consumer law ought to expand to enforcement and defines the parameters under which this can effectively be achieved.

V. Contents The book adopts a multidisciplinary approach. It draws on law and economics, but also, where required, on literature further afield. It combines knowledge and understanding of consumer protection from an academic as well as a practitioner’s point of view. Because national consumer and competition laws are heavily mapped out in EU law, the book spans both the UK and EU law. However, the content of this book, and in particular the CToHs, can apply in any jurisdiction. The use of CToHs will be all the more pressing in countries where there is no market regime in place (under the realm of competition law). Throughout we have used the expression ‘Consumer Theories of Harm’ rather than ‘theories of consumer harm’. This is because under competition law, the expression ‘theory of harm’ contains an implicit reference to consumer harm, typically flowing from business-to-business practices. In other words, in competition law and enforcement there can only be theories of consumer harm. Our focus is instead on theories of harm flowing from business-to-consumer practices and impacting on consumers. This is why we chose the expression ‘consumer theories of harm’, so as to differentiate our scope from the broader one under competition law. The book starts with showing the substantive deficiencies of both consumer law (chapter two) and competition law (chapter three) and their enforcement. In chapter four we explore the analytical economic framework underpinning the CToHs, which are laid out and explained in chapter five. Chapter six is devoted to the application of the CToHs to a series of case studies. Guided by the economic and legal evidence uncovered, chapter seven explores the creation of a general and positive duty to trade fairly. This, we conclude, is the way forward to be able to ensure fairness in consumer markets.

2 The Limitations of Consumer Law in Tackling Consumer Harm I. Introduction In the EU and the UK, a vast legal framework is available to protect the interests of consumers carving out a number of rights devised to protect them from physical and economic harm. Despite the promises of consumer law, consistently high levels of consumer detriment are caused by defective goods and services and unfair contract terms.1 Figures from the OFT dating back to 2008 placed the level of consumer detriment relating to problems with goods and services at around £6.6 billion.2 Recent estimates show a steep upward trend. The Citizens Advice Consumer Detriment report,3 based on data gathered from consumers in 4200 interviews, explains: Overall, the estimated value of consumer detriment in the UK in 2015 was at least £22.9 billion (after deducting compensation) or £446 per adult UK resident, ­amounting to 2% of consumer spending. The online survey results suggest this figure could be potentially higher.4

In the UK, contract law – that is, sales law and unfair terms rules – now contained in the Consumer Rights Act 2015 (CRA 2015) and the Consumer Protection from Unfair Trading Regulations 2008 (CPRs), are the primary tools to address economic loss (with which this book is primarily concerned). While the legislation currently in place goes some way to offer protection, it has many limitations. It does not address all situations where consumers may suffer primary economic harm, let alone secondary harm. Secondary harm may consist in time needed to deal with obtaining redress, days off work, etc. Lost earnings from consumer detriment

1 See C Willett, ‘Re-theorising Consumer Law’ (2018) 77 Cambridge Law Journal 181. 2 Department for Business, Innovation and Skills, Enhancing Consumer Confidence by Clarifying Consumer Law, Consultation on the Supply of Goods, Services and Digital Content (London, 2012) para  5.54 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_ data/file/31350/12-937-enhancing-consumer-consultation-supply-of-goods-services-digital.pdf. 3 Citizens Advice, ‘Consumer Detriment, Counting the Cost of Consumer Problems’ (London, 2016) www.citizensadvice.org.uk/Global/CitizensAdvice/Consumer%20publications/Final_ConsumerDetriment_ OE.pdf. 4 ibid 4. The data is based on 1600 face to face interviews and 2600 conducted online.

Introduction  17 were estimated to be to the tune of £7.2 billion in 2015, while the cost of time lost amounted to an estimated £5.1 billion.5 The Citizens Advice Consumer Detriment report showed that in some instances where compensation was obtained, it was not sufficient to cover other consequential losses suffered as the result of the primary harm.6 Around £9 billion in compensation was awarded in 2015. This was less than 30 per cent of the costs incurred on average.7 One of the reasons why the law is unable to protect all consumers is that enforcement mechanisms, either public or private, rely on breach of statutes or common law violations. Nevertheless, the legal framework as it stands is not always able to catch all types of behaviours and market failures because of the way the law is articulated or interpreted. For example, the way the quality standards for services were devised in the CRA 2015 offers a case in point. According to Willett,8 it is not enough for consumers to establish a defective outcome. The business usually escapes responsibility unless the consumer demonstrates that the business’s process did not follow standard business practice.9 The fault standard provides limited consumer protection. Where consumers cannot establish fault in the business’s process, potentially high levels of consumer economic detriment will go unremedied. The consumer theories of harm developed in this book show that harm is still experienced by consumers and should be tackled irrespective of the fact that the legal framework provides a clear route to remedy or redress. The rationale for intervention should not simply be based on whether or not the law condemns a particular behaviour or result, but on the economic harm actually suffered by consumers. This is the point where economics takes the driving seat. This chapter explores the main limitations consumer law faces in addressing consumer detriment. The main gaps in protection are currently found either in statutes or as a result of policy and case law interpretation of key concepts. Indeed, the main deficiencies of the consumer protection system stem from: (i) the overuse of information as a transparency approach; (ii) the definition of the average consumer used as a reference point for protection and a lack of protection for vulnerable and disengaged consumers; and (iii) more specific gaps in statute coverage, in particular in the way unfair terms are controlled. The last section of this chapter provides an overview of the enforcement framework in the UK to highlight that the tools of enforcement are also largely responsible for consumer detriment going unchecked. Indeed, access to justice for consumer disputes continues to be problematic in the EU and in national law. 5 ibid 27–37. 6 ibid 9. The report quantified the direct monetary costs borne by consumers experiencing problems: the value of any time required to fix the issue (time costs) and the compensation received. The calculations subtracted costs (direct and time) from the compensation received to give a comprehensive picture of consumer detriment. 7 ibid 33. 8 Above n 1. 9 Bolam v Friern Hospital Management Committee [1957] 1 WLR 582, 2 All ER 118.

18  The Limitations of Consumer Law in Tackling Consumer Harm This is often because, although consumers may be entitled to some compensation, they do not take the necessary steps to obtain it. This may be because consumers perceive court proceedings to be expensive, time-consuming and burdensome, or result in an uncertain outcome due to their adversarial nature (in the UK). For some consumers, those elements are too great an obstacle. Therefore, many do not even try to seek redress. For others, it is the absence of knowledge of their rights that is responsible for redress apathy.10 The latest government data also confirms that consumer dispute resolution outside of courts (known as alternative dispute resolution – ADR) is confined to a narrow category of users: predominantly middle-aged males on an average income above £20,000.11 This leaves most consumers without a remedy and thus having to shoulder the cost of their loss.12

II.  Limitations in the Use of Information as a Mainstream Transparency Approach Information as a tool can have many advantages. It is the most cost-efficient way to date to bridge information asymmetries in business-to-consumer transactions. Well-designed disclosures can provide useful information and be effective in influencing behaviours in a positive way.13 However, the consensus is that mandatory disclosures have by and large failed.14 Consumer law and policy have been over-reliant on the information paradigm. It is used in much of the legislation designed to protect consumers in all spheres of legislative and policy intervention (national, EU and international level). Information as a regulatory technique grew to influence much of the EU policy and other regional frameworks. It has also been embraced by international institutions.15

10 See C Riefa, Consumer Protection and Online Auction Platforms, Towards a Safer Legal Framework (Farnham, Ashgate, 2015) 148. 11 Department for Business, Energy and Industrial Strategy, Resolving Consumer Disputes, Alternative Dispute Resolution and the Court System (London, 2018) 14 www.gov.uk/government/publications/ resolving-consumer-disputes-alternative-dispute-resolution-and-the-court-system. 12 Although, in some cases, it may actually make economic sense not to act, because the cost of going to court is more expensive than what the consumer stands to gain and greater than the initial loss. See, eg a claim for excessive surcharges before they were banned in the UK in C Riefa, ‘EU Payment Surcharges Rules Lacking Teeth: Evidence from Empirical Studies in the Control of Surcharges in the EU and UK Travel Industry’ (2018) 3 European Law Review 341, 350. 13 See, eg O Bar-Gill, ‘Information and Paternalism’ in A Kemmerer, C Mollers, M Steinbeis and G Wagner (eds), Choice Architecture in Democracies, Exploring the Legitimacy of Nudging (Oxford, Hart Publishing, 2017). 14 See, eg O Ben-Shahar and CE Schneider, More Than You Wanted to Know – The Failure of Mandated Disclosure (Princeton, Princeton University Press, 2016). It is worth noting that Bar-Gill (n 13) argues that mandated disclosure can be effective as long as it is designed keeping in mind that the targeted consumer is typically imperfectly rational and biased. 15 See, eg UNCTAD, United Nations Guidelines for Consumer Protection (Geneva, 2016) https:// unctad.org/en/PublicationsLibrary/ditccplpmisc2016d1_en.pdf; with reference to appropriate disclosures, see OECD, Toolkit for Protecting Digital Consumers – A Resource for G20 Policy Makers

Limitations in the Use of Information  19 The information paradigm underlines transparency as the main method of consumer protection.16 It assumes that, armed with information, consumers are able to make informed choices and make adequate comparisons between products. When that is the case, markets are more efficient because consumers can vote with their feet and favour better products and traders. With this goes the recognition that the information provided needs to be reliable,17 provided in a timely manner and be accessible to consumers. Thus, the law guards against the ‘excess’ of information. For example, the European Directive 93/13/EEC on unfair terms in consumer contracts (UTCCD) ensured that terms, even core terms setting out the price for the product concerned, can be assessed for fairness if they are not clearly and intelligibly communicated. In addition, Directive 2005/29/EC on unfair commercial practices (UCPD) provides a framework for all information to not mislead consumers (either by action or omission). But those rules are by and large insufficiently applied to rid contracts and transactions of poor practices. Besides, even when all the information disclosed to consumers is above board, information still remains an imperfect vehicle for empowering consumer to make rational choices (as we will explore in chapters four and five). EU consumer law started out preferring ‘information provision over interventionist norms, both in legislation and in case law’.18 This is partly because it has been easier to find agreement on information obligations amongst EU Member States than on more interventionist rules and enforcement practices. Information is also a less intrusive method, and was favoured by the CJEU even before the creation of a stand-alone basis for consumer policy in European law. Case law concerning free movement of goods came to recognise labelling as the best way to defend consumers’ interests whilst being the least restrictive

(Paris, 2018) www.oecd.org/internet/consumer/toolkit-for-protecting-digital-consumers.pdf. The G20 Consumer International Recommendations also focus on disclosure (www.consumersinternational. org/what-we-do/digital/g20-consumer-summit-2017/). Recommendation 4, on disclosure and transparency, puts some emphasis on information being of ‘practical use to consumers’, an aspect that does not always feature in legislations around the world where providers are required to provide information to consumers enabling them to make informed choices. To that end, the information provided should enable an average consumer to quickly acknowledge and understand critical information. Critical information ought to be delivered through notification of anything that may go beyond consumers’ expectations, user-friendly presentation and language, and minimal length of disclosure, as well as give consumers the ability to compare pricing and functionality. 16 G Howells and T Wilhelmsson, ‘EC Consumer Law: Has It Come of Age?’ (2003) 28 European Law Review 370. For a more recent account of EU Consumer policy and the role of information see G Helleringer and A-L Sibony, ‘European Consumer Protection Through the Behavioural Lens’ 23 (2017) 3 Columbia Journal of European Law 607. 17 See Council Resolution 19 May 1981 on a second programme of the European Economic Community for a consumer protection and information policy [1981] OJ C131/1; Council Resolution 23 June 1986 concerning the future orientation of the Policy of the Community for the protection and promotion of consumer interests [1986] OJ C167/1. 18 G Howells, ‘The Potential and Limits of Consumer Empowerment by Information’ (2005) 32 Journal of Law and Society 349, 351.

20  The Limitations of Consumer Law in Tackling Consumer Harm on trade.19 Furthermore, in GB-INNO-BM,20 the CJEU confirmed that consumer information is one of the principal requirements of consumer protection. Information was elevated from a ‘method’ to a ‘right’ in the Treaty of Amsterdam in 1997.21 Today, the use of information is a method that is applied in all aspects of consumer protection, from food labelling and the utilisation of dangerous products to financial services. Research has shown that any human being’s cognitive capacity is limited to handling seven pieces of information at any one time.22 Yet, the amount of information consumers are expected to grapple with under EU consumer law is far higher.23 While there is some lenience regarding the format and the point at which the information needs to be delivered, depending on the medium used, the volume of information is a compulsory requirement of consumer protection law. In Walbusch Walter Busch,24 the opinion of the Advocate General clarified that the application of Article 8 does not relieve the advertiser from also having to provide consumers with all the information required under Article 6(1) at a later stage, thus confirming that the information burden under Article 8 is only changed rather than really lessened, a view endorsed by the CJEU. Similarly, in 19 In Case 120/78 Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (cassis de Dijon) [1979] ECR I-00649, Case 261/81 Walter Rau Lebensmittelwerke v De Smedt PVBA [1982] ECR I-03961 and Case 178/84 Commission of the European Communities v Federal Republic of Germany (Beer Purity) [1987] ECR I-01227, the CJEU decided that German consumer choice should not be restricted by the exclusion of beers that did not conform to beer purity laws. Instead, consumers in the German market should have a choice. Information on the content of the beer was a regulatory technique that was less restrictive than a ban. The intended result was that the informed consumer could exercise choice according to his or her preferences rather than have their choice confined by governmental intervention. 20 Case C-362/88 GB-INNO-BM v Confédération du Commerce Luxembourgeois [1990] ECR I-667. 21 J Stuyck, ‘European Consumer Law after the Treaty of Amsterdam: Consumer Policy in or beyond the Internal Market’ (2000) 37 Common Market Law Review 367 argued that it was seen as undoubtedly the most fundamental specific consumer right. 22 G Miller, ‘The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information’ (1956) 63 Psychological Review 81. 23 For example, Art 4 of Directive 97/7/EC on distance selling listed no less than nine pieces of information to be communicated to the consumer. This information needed to be combined with the information requirements contained in the Electronic Commerce Directive, Directive 2000/31/EC. Besides, the ‘almost inflationary use of information duties’ (according to JK Winn and J Haubold, ‘Electronic Promises: Contract Law Reform and e-Commerce in a Comparative Perspective’ (2002) 27 European Law Review 574) continues because the overlap between information obligations in the two directives was not totally resolved by the Consumer Rights Directive. In fact, Directive 2011/83/EC retains a right to information (Arts 5 and 6) as a cornerstone of the system of protection, augmenting the already long list of information to 20 items, depending on circumstances. Directive 2002/65/EC on distance marketing of consumer financial services pushes the over-reliance on information to the extreme, with no fewer than 21 pieces at pre-contractual stage and up to 40 pieces of information in total, depending on certain circumstances. In the area of payment services, a similar inflationary trend is observed in the application of second Payment Services Directive, Directive 2015/2366/EC. 24 In Case C‑430/17 Walbusch Walter Busch GmbH & Co K v Zentrale zur Bekämpfung unlauteren Wettbewerbs Frankfurt am Main eV ECLI:EU:C:2019:47, the Advocate General was of the opinion that the lighter information requirements under Art 8 only apply when the method of communication is limited by its very nature (as would be the case on a phone screen) and not because of a design choice on the part of the advertiser.

Limitations in the Use of Information  21 Verband Sozialer,25 the CJEU concluded that the information itself was always ­necessary, but that the space limitations of the medium may warrant a relaxation of the rules. The CJEU left it to national courts to examine, on a case-by-case basis, first, whether the limitations of space in the advertisement warrant information on the supplier being provided only upon access to the online sales platform and, secondly, whether, so far as the online sales platform is concerned, the information required by Article 7(4)(b) of [the UCPD] directive is communicated simply and quickly.26

The use of information provisions seems to be ‘too readily favoured as they appear to offer a win–win solution without thorough examination of whether they are likely truly to deliver the desired outcomes’,27 a defect highlighted by Howells over 10 years ago. Part of the problem with such emphasis being placed on information requirements is that a high level of literacy is required for this approach to be successful,28 and it therefore rests on an imperfect standard. Much of ­European consumer policy is indeed built on the notion of the average consumer, who is ‘reasonably well-informed, reasonably observant and circumspect’.29 But the reality is quite distinct, as we will explore further below. ‘Consumers are a heterogenous bunch’30 and differ widely in their ability to digest and apply information. Behavioural economists have also debunked the myth that, faced with information, consumers will make the best choices for themselves.31 In general, according to the theory of bounded rationality, people face limitations in their capacity to assimilate complex information, so it may be rational for consumers not to engage with all of the information provided. In spite of this evidence, the stronghold of information, borne out of an overzealous embrace of neoclassical economics, is far reaching. For example, the European Parliament Resolution of 22 May 2012 on a strategy for strengthening the rights of vulnerable consumers32 recognises that the notion of an ‘average consumer’ lacks the flexibility needed to adapt to specific cases and sometimes does not correspond to real-life situations. It notes that a focus on information and education ‘may be insufficient to protect vulnerable consumers, since their

25 Case C-146/16 Verband Sozialer Wettenberg eV v DHL Paket GmbH ECLI:EU:C:2017:243. 26 ibid para 32. 27 Howells (n 18). 28 V Mak and J Braspenning, ‘Errare humanum est: Financial Literacy in European Consumer Credit Law’ (2012) 35 Journal of Consumer Policy 307. 29 Case C-210/96 Gut Springenheide GmbH and Rudolf Tusky v Oberkreisdirektor des Kreises Steinfurt [1998] ECR I-4657, [37]. 30 G Howells and S Weatherill, Consumer Protection Law (2nd edn, Farnham, Ashgate, 2005) 5. 31 See, eg O Bar-Gill, Seduction by Contract: Law, Economics and Psychology of Consumer Contracts (Oxford, Oxford University Press, 2012); Howells (n 18); R Baisch and RH Weber, ‘Investment Suitability Requirements in the Light of Behavioural Findings’ in K Mathis (ed), European Perspective on Behavioural Law and Economics (Cham, Springer International Publishing, 2015). 32 [2013] OJ C 264 E/11.

22  The Limitations of Consumer Law in Tackling Consumer Harm vulnerability may originate from their difficulty in accessing or assessing the information given to them’. It also highlights that many consumers’ vulnerability results precisely from their lack of assertiveness and comprehension of the information they receive or of the options available, or from their lack of awareness of the existing complaint and redress schemes, and that these barriers grow in the case of cross-border consumption and door-to-door sales, including online crossborder commerce. Yet ironically, the suggested cure for the lack of understanding of the information provided to vulnerable consumers is even more information to be delivered by the Commission, the Member States and national authorities via information and education initiatives.33 The limitations of information as a paradigm are unfortunately exacerbated the higher the stakes get for the consumer. In this regard, financial services also offer a fertile ground for illustrating how information may fail to help consumers make rational choices but continues to be pushed as the method of choice. Many financial instruments use standardised information sheets and other ­transparency tools.34 However, there are many examples of cases where consumers fail to make ‘good’ financial decisions. The evidence points to a number of biases, including heuristics35 and over-optimism. Indeed, information requirements do not deal with the fact that consumers often do not take notice of the information provided due to lack of time, and the way in which the information and choices are being presented can be used to direct consumers towards a desired outcome. Consumers tend to be over-optimistic about their ability to avoid risk and tend to believe information which supports their own viewpoint and ignore information that does not.36 Their assessment of financial products is also reliant on their levels of financial literacy.37 Despite recognition at the EU level that consumer cognitive abilities are imperfect, information (complemented by education) remains the vehicle of choice.38

33 Note that businesses were also required ‘to promote and develop self-regulatory initiatives to reinforce the protection of vulnerable consumers’ rights, ensure that they have access to better and clear information and develop practices that enhance all consumers’ capacity to understand and assess an agreement’. 34 This is the case, for example, with Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit [1987] OJ L42/48, which required provision of the credit agreement and the annual percentage rate (APR) (Art 4). See also Council Directive 90/88/EEC of 22 February 1990 concerning consumer credit [1990] OJ L61/14, which introduced a harmonised method of calculating the APR. 35 See CR Sustein, C Jolls and R H. Thaler ‘A Behavioural Approach to Law and Economics’ (1998) 52 Stanford Law Review 1471. 36 See Howells (n 18). 37 See Mak and Braspenning (n 28) 309. See also the study by A Zokaityte, ‘Financial Literacy and Numeracy of Consumers and Retail Investors’ (2016) 11 Capital Markets Law Journal 405. 38 For example, European Commission, Report on the Operation of Directive 87/102/EEC (Brussels, 1995) 27 notes that ‘Community measures should prevent phenomena such as over-indebtedness through consumer information and education’. See also European Commission, Report on Implementation of Directive 2008/48/EC (Brussels, 2014) 17–20, which acknowledges that the use of APR only helps

Limitations in the Use of Information  23 For example, Directive 2008/48/EC on consumer credit introduced a more stringent transparency regime39 but did not change the status quo, nor signal a shift to responsible lending, where the onus is on the supplier to ensure consumers are protected against the risks of the products they are offering.40 Similarly, although the Mortgage Credit Directive 2014/17/EU took on board some of the evidence regarding the limitations of information as a method of protection, it persists in reproducing the main transparency tools, albeit with some improvements based on behavioural experiments.41 This, however, illustrates the dangers of a policy no longer led by the information paradigm but replaced by behavioural economics as the main driver. Information is simply improved. Nevertheless, there will be many consumers who, despite the reformed transparency tools being available, will still struggle to make the right decision and suffer economic detriment as a result. By following behavioural economics as a new paradigm, the risk is that consumers who are not able to make any sense of the information, even after it has been calibrated to take into account human nature, will be stigmatised and penalised. There is no remedy in law to assist them because they were equipped with the ‘adequate’ information prescribed by law and rubber stamped by behavioural economists, and thus it is their error if they take on mortgage credit they ought to have shied away from. Indeed, it is telling that Article 6 of Directive 2014/17/EC emphasises responsible a consumer that is sufficiently financially literate and that levels of financial literacy as well as awareness remain. Yet despite this, the proposed solution is to consider further activities to increase awareness. 39 Council Directive 2008/48/EC of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC [2008] OJ L133/66. The directive requires, for example, that the lender explain the pre-contractual information provided, the essential characteristics of the products proposed and the specific effects they may have on the consumer, including the consequences of default in payment by the consumer (Art 5), although it remains for the consumer to make this determination, on the basis of ‘adequate information’. It advocates the use of a Standard European Consumer Credit Information Sheet focused on the quality of the information and its timeliness (Art 4; Recital 19). See also obligations under Art 5(1)(g), (m) and (o). 40 On this point, see P Rott, ‘Consumer Credit’ in N Reich, HW Micklitz, P Rott and K Tonner (eds), European Consumer Law (2nd edn, Cambridge, Intersentia, 2014) 197–238. Note that there is no obligation to lend responsibly in the directive, although Recital 26 discusses responsible lending. In any event, the measures continue to be aligned to the information paradigm: ‘Those measures may include, for instance, the provision of information to, and the education of, consumers, including warnings, about the risk attaching to the default on payment and to over-indebtedness.’ The only obligation resting on the lender is to proceed with a creditworthiness of the consumer under Art 8, but the directive does not specify what consequences should be attached to lack of creditworthiness. Compare this with the Markets in Financial Instrument Directive, Directive 2004/39 [2004] OJ L145/1. Art 19 imposes upon investment firms the requirement that they ask clients or potential clients to provide information regarding their knowledge and experience in the investment field relevant to the specific type of product or service offered, to enable the investment firm to assess whether the investment service or product envisaged is appropriate for the client. If the investment firm considers, on the basis of the information received, that the product or service is not appropriate to the client, the investment firm should warn the client. 41 Directive 2014/17/EU of 4 February 2014 on credit agreements for consumers relating to residential immovable property [2014] OJ L60/34, Recital 44 on the creation of a European Standardised Information Sheet containing more personalised information.

24  The Limitations of Consumer Law in Tackling Consumer Harm borrowing, yet does not contain corollary obligations of responsible lending,42 beyond an assessment of creditworthiness.43 In conclusion, the use of information as a mainstream transparency approach does not protect consumers adequately. Behavioural economics has gone some way to show the limitations of such an approach and provides some improvements to it. However, as a normative standard, behavioural economics does not change the course of consumer protection per se. Instead, it maintains the basic framework whereby to achieve efficient market outcomes consumers must be empowered to ‘vote with their feet’. Proponents of behavioural economics argue that, for example, traditional transparency remedies such as disclosure rules shall be market tested to make sure consumers will actually be receptive to the new information provided. The overarching idea is to assist biased consumers whilst not thwarting sophisticated ones by restricting their choice set. Behavioural economists do not call for a major shift in the paradigm or the end of information, but simply for its rationalisation. In our view, here lies the major deficiency of a behavioural approach. It is not going far enough. Because it is based on experiments and testing consumer groups to determine how best to nudge them in the right direction, it risks always being one step behind and, as is currently the status quo, leaving gaps in the areas where detriment is felt by consumers and intervention is required. By contrast, understanding consumers’ limitations through the prism of bounded rationality offers a more powerful rationale for moving away from a systematic use of information. Accordingly, an interventionist approach is called for with the aim of assisting consumers. This would take the form of a more prescriptive standard of conduct, which could include mandatory rules of substance, such as minimum quality standards or fitness tests to prevent mis-selling of risky products, or, as we suggest in this book, the introduction of a positive duty to trade fairly (discussed in chapter seven).

III.  Limitations of the Definition of the ‘Average Consumer’ Used as a Reference Point for Protection Both EU and UK consumer law today use the ‘average consumer’ as a main reference point. It is a benchmark that is not per se defined in any legislation, yet has permeated all areas of consumer protection. Consumer benchmarks are used … to determine the expected behaviour of consumers. The benchmark applied has important consequences for the level of protection

42 Any real discussion on imposing responsible lending obligations is deferred in Art 45 under the title of ‘further initiatives on responsible lending and borrowing’. 43 Directive 2014/17/EU, Art 18. That assessment, however, is tighter than it was under Directive 2008/48/EC, and Art 18(5)(a) indicates that credit can only be granted ‘where the result of the creditworthiness assessment indicates that the obligations resulting from the credit agreement are likely to be met in the manner required under that agreement’.

Limitations of the Definition of the ‘Average Consumer’  25 that is offered to consumers and for the degree to which intervention in the market is possible.44

The ‘average consumer’ benchmark therefore plays a pivotal role in the way the legislation in place comes to assist consumers who have suffered detriment or to prevent this detriment from occurring. It is well documented that consumer law seeks to protect the weaker party, albeit one that bears little resemblance to the consumer that national laws were trying to defend at the outset. EU consumer law now only shields a consumer that resembles the ‘homo economicus’ posited under the neoclassical rational choice theory,45 thus setting a standard far higher than originally anticipated.46 Indeed, the average consumer is a hypothetical consumer who is ‘reasonably well informed, reasonably observant and circumspect’.47 This is principally because the roots of the definition of the ‘average consumer’ are not in consumer protection but in trade protection – more specifically, in the free movement of goods. Here lies one of the main reasons why the applicable standard is failing. The concern of the courts when elaborating on who the average consumer may be was about ensuring that no unnecessary barriers to trade could be erected. Free trade was and, in many cases, remains central to the motivation of the courts. Much of the case law is aimed at discouraging Member States from adopting measures that would be too protective of their local producers. As a result, it was advantageous for the CJEU to paint a portrait of consumers that are not easily misled, so as to be able to suppress national rules that were over-protective of consumers and impeded trade.48 In Cassis de Dijon,49 44 BB Duivenvoorde, The Consumer Benchmarks in the Unfair Commercial Practices Directive (Cham, Springer International Publishing, 2015) 229. 45 See, eg WH van Boom, A Garde and O Akseli, ‘Introduction’ in WH van Boom, A Garde and O Akseli (eds), The European Unfair Commercial Practices Directive – Impact, Enforcement Strategies and National Legal Systems (London, Routledge, 2016). 46 See, eg the Molony Report on Consumer Protection, Hansard, HL Vol 244, cols 605–25 (14 November 1962), which highlighted that the fact that there was an imbalance between consumers and suppliers was due to evolving methods of manufacture, distribution and merchandising. It noted that products had involved in such way that consumers were ill equipped to understand the technicalities involved in making informed choices. The report indicates that ‘when confronted with the need to make a choice between different models of such goods the consumer is incapable of intelligent discrimination’. The report saw the consumer as a vulnerable individual. It notes that the consumer ‘finds it beyond its power to make a wise and informed choice and is vulnerable to exploitation and deception’. Contrast this with Bowerman v Association of British Travel Agents Ltd Times 24 November 1995, [1996] CLC 45, which considered that the ‘ordinary member of the public as he steps down from the Clapham Omnibus, enters the travel agency and reads the notice’. The case assumes the notice is read in full but ‘without curiosity or pedantic analysis of every nuance of its wording but ordinary care to be expected of the average customer who is applying money they could not easily afford to lose’. 47 Gut Springenheide (n 29) para 31. 48 By contrast, when looking at trademark case law, one finds a more realistic definition of the consumer, because in these cases, the CJEU is looking to protect the interests of trademark owners against third-party use. As a result, being able to demonstrate that the consumer is misled (more easily than would have been the case had the question been about free movement) is useful because it grants trademark holders a higher level of protection. 49 Rewe-Zentral (n 19).

26  The Limitations of Consumer Law in Tackling Consumer Harm for ­example, the CJEU considered that a ban on the sale of French blackcurrant liqueur in Germany denied consumers choice and the opportunity to sample products made according to other national traditions (ie foreign products). According to the court, consumer protection could be achieved by labelling the origin and alcohol content, trusting consumers to make adequate choices. In GB-Inno-BM, the court also stressed the role of information as an adequate method of protection for ‘normally aware consumers’.50 Thus, local rules that restricted the information that could be disclosed in cross-border advertising were contrary to free movement rules. Of particular interest in this case was the position of the Confédération of Commerce Luxembourgeois, which had requested that the distribution of advertisements in Luxembourg by GB-Inno-MB, a Belgian supermarket chain, be stopped in their existing form. The law in Luxembourg prohibited the disclosure of a previous price in a promotion claiming a price reduction. The reason for the rule stemmed from the fact that consumers would be unable to check the previous price in any event, and that the disclosure of a previous price might exert excessive psychological pressure on the consumer.51 The CJEU refused to be persuaded by the argument, claiming that a rule which looked at removing access to information for consumers could not be justified, since information was one of the principal requirements of consumer protection under community law.52 Ultimately, the court was motivated by the desire to prevent Member States from dictating rules that would oblige businesses to draft separate marketing campaigns – since these would be barriers to trade rather than truly designed to ensure consumers were not misled or put under pressure to purchase. From this milestone, the conception of the consumer evolved, raising the expectations of how consumers ought to behave. In Mars,53 the court stated that ‘reasonably circumspect consumers may be deemed to know that there is not necessarily a link between the size of publicity markings relating to an increase in a product’s quantity and the size of that increase’.54 The court’s focus was on avoiding a costly barrier to trade had Mars been obliged to repackage all Mars bars to be sold in this territory. Instead, and while it was undisputed that the wrapper was misleading, the court disregarded what consumer detriment there could be by using a reasonably circumspect consumer as its benchmark. The definition of consumer as we know it today was crystallised in the case of Gut Springenheide.55 The national court wanted to know how to define the consumer to use it as a standard to assess if the description of packs of eggs was misleading. Gut marketed eggs ready packed under the description ‘six grain – 10 fresh eggs’. Each pack contained a leaflet explaining the merits of this feed for 50 Above n 20, para 12. 51 ibid para 11. 52 ibid para 18. 53 Case C-470/93 Verein gegen Unwesen in Handel und Gewerbe Köln eV v Mars GmbH [1995] ECR I-01923. 54 ibid para 24. 55 [1998] ECR I-4657.

Limitations of the Definition of the ‘Average Consumer’  27 the quality of the eggs, but the leaflet did not explain that in fact the six grains were only 60 per cent of what the hens were being fed. The CJEU sided with a defined normative test based on the legal interpretation and directed national courts to ‘to take into account the presumed expectations which it evokes in an average consumer who is reasonably well informed and reasonably observant and circumspect’.56 However, the CJEU did not rule out the possibility of using an objective test anchored in statistical analysis to form an opinion. Indeed, the Court explained that: where the national court has particular difficulty in assessing the misleading nature of the statement or description in question, it may have recourse, under the conditions laid down by its national law, to a consumer research poll or an expert’s report as guidance for its judgement.57

The Court also explained that the national court may find it necessary to order such a survey, to determine in accordance with its own national law, the percentage of consumers misled by a promotional description or statement that in its view would be sufficiently significant in order to justify where appropriate banning its use.58

After Gut Springenheide, many other cases came to endorse this standard, placing extremely high expectations on consumers.59 For example, in Adolf Darbo, the CJEU expected that consumers were versed in pollution levels in food ingredients and the composition of foods.60 It argued that the presence of pectin in a jam described as ‘naturally pure’ did not mislead consumers because the additive was included in the list of ingredients,61 and consumers were expected to use common sense and know that garden fruit was inevitably exposed to a certain degree of pollution.62 Although the court did admit that the jam contained pollutants, it saw no problem with claiming that the use of ‘naturally pure’ is not misleading,63 adding that ‘even if it is assumed that, in certain cases, consumers might be unaware of that fact and thereby be misled, that risk remains minimal and cannot therefore justify a barrier to the free movement of goods’.64

56 Gut Springenheide (n 29) para 37. 57 ibid. 58 Ibid para 36. 59 This definition of the average consumer was followed in Case C-220/98 Estée Lauder Cosmetics GmbH & Co OHG v Lancaster Group GmbH [2000] ECR I-117, paras 27 and 30; Case C-44/01 Pippig Augenoptik GmbH & Co GK v Hartlauer Handelsgesellschaft mbH [2003] ECR I-3095, para 55; Case C-99/02 Criminal proceedings against Linhart and Biffl [2002] ECR I-9375, para 32. 60 Case C-465/98 Verein gegen Unwesen in Handel und Gewerbe Köln eV v Adolf Darbo AG [2000] ECR I-02297. 61 ibid para 22. 62 ibid para 27. 63 ibid para 33. 64 ibid para 28.

28  The Limitations of Consumer Law in Tackling Consumer Harm In Douwe Egberts,65 assessing a claim that coffee had slimming virtues, the CJEU concluded that the general prohibition in national law was contrary to the free movement of goods and that, instead, national law ought to assess if a statement is possibly fraudulent on a case-by-case basis, taking into acco­ unt the ‘presumed expectations of the average consumer’.66 Advocate General G Geelhoeld explained that: [The] reference point of the average consumer presupposes that before acquiring any product (for the first time), a consumer will always take note of the information on the label and that he is also able to assess the value of that information. It seems to me that a consumer is sufficiently protected if he is safeguarded from misleading information on products that he does not need to be shielded from information whose usefulness with regards to the acquisition of use of a product he can himself appraise.67

He added: So long as the information concerned is correct, it must be assumed that the average consumer who is reasonably well informed, and reasonably observant and circumspect will be capable of forming an opinion of the products advertised without his economic and health interests being harmed.68

The expectations placed on the average consumer from the CJEU and Advocate General Geelhoeld ‘seem to reflect desired consumer behaviour, irrespective of how the average consumer actually behaves’.69 Similarly, in the Pippig Augenoptik, the CJEU explained that ‘[the average consumer is] capable of knowing the actual price difference between the products compared and not merely the average difference between the advertiser’s prices and those of its competitors’.70 Note, however, the difference in approach in Lidl Belgium.71 The discount chain Lidl referred to the preliminary ruling in Pippig Augenoptik in contesting the fact that comparative advertising from a local competing discounter was limited to average prices (rather than including separate comparisons for each of the products sold within the corresponding range). The CJEU ruled that to agree to such a requirement would not only affect the very practicability of such advertising methods (for the advertiser), but also be impractical for consumers if they do not possess the skills required to verify the accuracy of the advertised claim.72 Under such circumstances, the court considered that it was incumbent on the 65 Case C-239/02 Douwe Egberts NV v Westrom Pharma NV and Christophe Souranis, carrying on business under the commercial name of ‘Etablissements FICS’ and Douwe Egberts NV v FICS-World BVBA [2004] ECR I-07007. 66 ibid paras 43–46. 67 [2004] ECR I-07010, para 54. 68 ibid paras 78–79. 69 Duivenvoorde (n 44) 50. 70 Pippig Augenoptik (n 59) para 82. See the discussion in P de Jong, ‘Comparative Advertising in Europe’ in J Phillips (ed), Trade Marks at the Limit (Cheltenham, Edward Elgar Publishing, 2006). 71 Case C-356/04 Lidl Belgium GmbH & Co KG v Etablissementen Franz Colruyt NV [2006] ECR I-08501. 72 ibid paras 70–73.

Implementation of the ‘Average Consumer’ Standard  29 advertiser ‘to have verified the details and the feature in question as to their accuracy’.73 The difference in the Court’s expectations in Lidl Belgium regarding the capability of the average consumer to verify the accuracy of a price comparison rests in the degree of complexity of the data that needs to be gathered and processed in the respective cases.74 Nevertheless, in Teekanne, the CJEU ruled against the misleading use of labelling of a foodstuff and methods used for the labelling from giving the impression, by means of the appearance, description or pictorial representation of a particular ingredient, that that ingredient is present, even though it is not in fact present and this is apparent solely from the list of ingredients on the foodstuff ’s packaging.75

In particular, the CJEU found that ‘the list of ingredients may, even though correct and comprehensive, not be capable of correcting sufficiently the consumer’s erroneous or misleading impression that stems from such labelling’.76 In summary, there is a predominant mismatch in the case law of the CJEU between the ability of the average consumer and reality. The standard has been artificially inflated to fit free movement of goods doctrine, without much regard to the harm consumers may in fact suffer as a result. This puts too much ­emphasis on consumer self-reliance to find out whether the information provided is ­trustworthy.77 Nevertheless, more recent case law appears to be calling into ­question the mainstream characterisation of the ‘average consumer’ (a point we return to in section IV below). This is not only the case when conforming to the neoclassical standard is especially complex and technically demanding (as in Lidl Belgium), but also when it is (unreasonably) time consuming (as in Teekanne, given the prominent use of labelling).

IV.  Implementation of the ‘Average Consumer’ Standard under the Unfair Commercial Practices Legislation The crystallisation of the ‘average consumer’ standard first used to develop free movement of goods doctrine into the benchmark for consumer protection in 73 ibid para 74. 74 On this point, see Joined Trademark Cases C-236/08 to C-238/08 Google France and Google Inc et al v Louis Vuitton Malletier et al [2010] ECR I-02417, para 121(1), where the court acknowledges: ‘the proprietor of a trade mark is entitled to prohibit an advertiser from advertising, on the basis of a keyword identical with that trade mark which that advertiser has, without the consent of the proprietor, selected in connection with an internet referencing service … in the case where that advertisement does not enable an average internet user, or enables that user only with difficulty, to ascertain whether the goods or services referred to therein originate from the proprietor of the trade mark … or, on the contrary, originate from a third party.’ 75 Case C-195/14 Bundesverband der Verbraucherzentralen und Verbraucherverbände – Verbraucherzentrale – Bundesverband eV v Teekanne GmbH & Co KG ECLI:EU:C:2015:361, para 44. 76 ibid para 40. 77 See C Willett, ‘Fairness and Consumer Decision Making under the Unfair Commercial Practices Directive’ (2010) 33 Journal of Consumer Policy 247.

30  The Limitations of Consumer Law in Tackling Consumer Harm general took place through its inclusion as a benchmark in the operation of the UCPD. It also found its way into national legislation as the UCPD is a maximum harmonisation directive removing any options for Member States to deviate from the standard agreed at EU level.78 Accordingly, the concept of average consumer also became the key element of the general unfairness test in the application of the CPRs in the UK.79 This gist of the UCPD is enshrined in the ‘grand’ general clause (Article 5(2) UCPD; Regulation 3(2) CPRs), which prohibits unfair commercial practices that contravene the requirements of professional diligence and materially distort, or are likely to materially distort, the economic behaviour of the average consumer with regard to the product. The general unfairness clause was introduced to provide a safety net in order to make this framework directive future-proof;80 therefore, it should only be applied to close regulatory gaps.81 There is no doubt that the concept of the average consumer is the key element of the general unfairness test. This is because both the standards of professional diligence (with its constituents of honesty and good faith) and material distortion must be ultimately benchmarked against the notion of the average consumer.82 The architecture of the UCPD is completed with two specific sub-general clauses addressing misleading (Articles 6 and 7 UCPD; Regulations 5 and 6 CPRs) and aggressive (Articles 8 and 9 UCPD; Regulation 7 CPRs) practices, plus a detailed list of 31 blacklisted commercial practices (Annex 1 UCPD; schedule 1 CPRs). These provisions are all self-standing offences, meaning that there is no need to argue a violation of professional diligence required under the more demanding general clause,83 nor would it be necessary to rebut the argument put forward by the defendant that it complied with that requirement.84 However, as put by Willett, 78 The legal basis for the UCPD had to be the internal market provision of Art 95 TEC (now, Art 114 TFEU) in order to achieve full harmonisation. The Recitals in the preamble to the directive refer to the consumer protection dimension of the internal market in Art.153 TEC, but Art. 153(5) TEC (now Art 169(4) TFEU) limits consumer initiatives to minimum harmonisation: see H Collins, ‘Harmonisation by example: European laws against unfair commercial practices’ (2010) 73 Modern Law Review 89. 79 Alongside the general category of average consumer, there are two additional sub-categories: (i) the average consumer of a targeted group (Regulation 2(5)(b) CPRs); and (ii) and the ‘vulnerable’ consumer (Regulation 2(5)(a) CPRs). 80 See G Abbamonte, ‘The Unfair Commercial Practices Directive and its General Prohibition’ in S Weatherill and U Bernitz (eds), The Regulation of Unfair Commercial Practices under EC Directive 2005/29 (Oxford, Hart Publishing, 2007) 21. 81 See HW Micklitz, ‘Unfair Commercial Practices and Misleading Advertising’ in Reich et al (n 40) 95. 82 See I Ramsay, Consumer Law and Policy: Text and Materials on Regulating Consumer Markets (Oxford, Hart Publications, 2007) 286; Micklitz (n 81) 87; Willett (n 77). On how the interpretation of the average consumer standards is determinative of the level of consumer protection, see R Incardona and C Poncibò, ‘The Average Consumer, the Unfair Commercial Practice Directive and the Cognitive Revolution’ (2007) 30 Journal of Consumer Policy 21; F Gómez, ‘The Directive on Unfair Commercial Practices: A Law and Economics Perspective’ (2006) 2 European Review of Contract Law 4; WH van Boom, ‘Price Intransparency, Consumer Decision Making and European Consumer Law’ (2011) 34 Journal of Consumer Policy 359; J Trzaskowski, ‘Behavioural Economics, Neuroscience, and the Unfair Commercial Practices Directive’ (2011) 34 Journal of Consumer Policy 377. 83 See Micklitz, (n 81) 85. 84 Case C‑435/11 CHS Tour Services GmbH v Team4 Travel GmbH ECLI:EU:C:2013:574.

Implementation of the ‘Average Consumer’ Standard  31 ‘the concept of unfairness under this general clause should accommodate, in a coherent manner, the aggressive and misleading practice concepts’.85 Arguably, this shall be particularly the case when the sub-general clauses are applied to contentious cases.86 This pivotal role may explain why the definition of the average consumer was hotly contested at the time of its adoption and continues to be so. Yet, the difficulty stems from the fact that the average consumer is not defined in Article 2 of the UCPD and is also not defined in national law. As a result, ‘the inability of one group to secure its definition of average consumer in the directive means that the inevitable political choice in determining the application of these standards is conferred on the courts’.87 We have already seen why this is problematic, given that the CJEU’s main view of consumers is anchored in free movement of goods doctrine and the preservation of the internal market. To some extent, adopting a concept already in place could have had some benefits. Collins pointed out that ‘the concept of the “average consumer” … seems sufficiently precise to achieve a high level of uniformity, because the legislators have sensibly built on and articulated further the notions developed originally by the CJEU, rather than starting afresh’.88 But uniformity does not necessarily mean an adequate level of protection for consumers. As the benchmark made the transition from free movement of goods doctrine to consumer protection instrument, it would have been rational to see the standard shaped in ways that would prove more protective of the consumer. Many academics had indeed criticised the standard.89 However, at EU level, the use of the average consumer benchmark in the UCPD did not prompt any real changes in the way the test was envisaged and ought to be applied. The European Commission stressed that ‘the test is based on the principle of proportionality’ and that ‘the average consumer under the Directive is not somebody who needs little protection because he/she is always in a position to acquire available information and act wisely on it’.90 Instead, ‘[t]he Directive adopted this notion to strike the right balance between the need to protect consumers and the promotion of free trade in an openly competitive market’.91 In the application of the average consumer standard in the context of the UCPD, the average consumer is still not misled easily because the standard is still 85 See Willett (n 77). 86 ibid. 87 Ramsay (n 82) 286. 88 Above (n 78) 100. 89 For Howells (n 18), the adopted standard is above that of a real consumer. Trzaskowski (n 82) believes that the concept is a normative abstraction derived from economic fiction, and Incardonna and Poncibo (n 82) argue that the prevailing neoclassical standard requires consumers to achieve an overly demanding standard of rationality and information without dedicating much attention to the real functioning of consumer behaviour. 90 European Commission, Commission Working Document – Guidance on the Implementation of the Directive 2005/29/EC on Unfair Commercial Practices (Brussels, 2009) 23. 91 ibid 24.

32  The Limitations of Consumer Law in Tackling Consumer Harm expected to perform in enabling free trade and competition rather than focusing on protecting consumers. As a result, in Mediaprint, Advocate General Trstenjak explained that ‘the consumer is considered, from the viewpoint of Community law, to be capable of recognising the potential risk of certain commercial practices and to take rational action accordingly’.92 She added: the average consumer, nowadays is aware, as a rule, that advertising and sales promotions in a free market economy not only attempt to win over customers by the price and quality of the product, but promise a number of additional benefits. These may be of an emotional nature, such as, in the case of advertising, the feeling of freedom and independence or membership of a certain social group, or additional benefits with a completely economic value, such as bonuses. It is therefore logical to leave it to such a reasonably well-informed and reasonably well observant and circumspect consumer within the regulatory framework defined by Community law to decide whether to purchase a product on the basis of the advertised advantages or because of its quality or even its low price.93

The arguments taken into account by the Advocate General rest heavily on the reliance that the consumer is empowered and that too much protection via a ban on the use of bonuses, as was the case, would be seen as patronising consumers.94 The wording is strong. Yet, in the application of the standard, the case law of the CJEU allows some room for manoeuvre and so does the UCPD. The standard of the average consumer as defined to date is unnecessarily harsh and a softening of the expectations placed on consumers is perfectly possible.95 Besides, the wording adopted in Recital 18 UCPD is conducive of the adoption of a different level of expectations. It states: It is appropriate to protect all consumers from unfair commercial practices … In line with the principle of proportionality, and to permit the effective application of the protections contained in it, this Directive takes as a benchmark the average consumer, who is reasonably well informed and reasonably observant and circumspect, taking into account social, cultural and linguistic factors, … The average consumer test is not a statistical test. National courts and authorities will have to exercise their own faculty of judgment, having regard to the case-law of the Court of Justice, to determine the typical reaction of the average consumer in a given case.

The average consumer test is not clearly defined as a normative one (a subjective test based on the opinion taken by the court) or a positive one (an objective

92 Case C-540/08 Mediaprint Zeitungs – und Zeitschriftenverlag GmbH & Co KG v ‘Österreich’Zeitungsverlag GmbH [2010] ECR I-10909, Opinion of Advocate General Trstenjak, para 103. 93 ibid para 104. 94 ibid para 105. 95 We have already seen this was the case, for example, in Lidl Belgium (n 71) and Teekaane (n 75), although those cases did not concern the application of the UCPD.

Implementation of the ‘Average Consumer’ Standard  33 test anchored in statistical analysis, for example). In this respect, the European Commission guidance on this thorny issue of interpretation relies extensively on paragraph 29 of the Opinion of the Advocate General Fennelly in Estée Lauder, most notably:96 The approach is thus not statistical. Market surveys may, in certain cases, be of assistance, although it must be remembered that they are subject to the frailties inherent in the formulation of survey questionnaires and often subject to diverging interpretation as to their significance. Accordingly, they do not absolve the national court from the need to exercise its own faculty of judgment based on the standard of the average consumer as defined in Community law.97

In both Gut Springenheide and Estée Lauder, the CJEU ultimately left it to the national courts to decide whether to rely on statistical evidence if they so wished.98 As a result, the use of statistical evidence is neither necessary nor sufficient, but is admissible alongside the normative (hypothetical) test. It is therefore possible to incorporate some behavioural analysis into, or recognise bounded rationality in, the way the average consumer test is applied, if the judges wish to do so and if it can assist in the protection of consumers. Indeed, these rulings should merely be read as aiming to preserve the prerogative of national courts to discharge their burden of proof without facing the risk of rebuttals based on the use of statistical evidence; that is, that either the evidence relied upon by the court is flawed or that the evidence produced by the defendants should be taken into account by the court. Accordingly, it could be argued that the average consumer standard is a normative one, unless the national courts decide to rely also on factual evidence if they see fit.99 However, in the context of the UCPD, Mediaprint marked a harshening of the benchmark in line with the neoclassical paradigm. At the national level, at least in the UK, policy makers and courts have so far mainly followed the EU model. For example, the joint report by the Law Commission and the Scottish Law Commission endorsed a normative definition of the average consumer: The concept of the average consumer is used widely across European Union law. The European Court of Justice (ECJ) has set a robust standard: one must judge the practice from the viewpoint of a hypothetical consumer who is ‘reasonably well informed, reasonably observant and circumspect. The ECJ has emphasised that national courts should exercise their own judgment: the test does not depend on statistical evidence of how consumers actually behave. The test posits a consumer who is critical and rational.

96 European Commission (n 90) 28. 97 [2000] ECR I-0117. 98 Gut Springenheide (n 29) para 35; Estée Lauder (n 59) para 30. 99 In the context of the application of the test to misleading actions, according to Micklitz (n 81) 94, ‘if a minority of consumers have been misled, then the effect of the prohibition needs to be balanced against the principle of free movement of goods and services and often it needs to be restricted’.

34  The Limitations of Consumer Law in Tackling Consumer Harm This has been criticised as being unrealistic, given that consumers often make decisions based on emotional factors.100

In spite of these criticisms, national case law also sided with this interpretation. In OFT v Purely Creative Industries,101 Briggs LJ explained that the notion of average consumer in English law substantially reproduces the European definition. According to him, the judge must presume that the consumer is sufficiently informed, observant and circumspect. This is because the UCPD exists to protect consumers that are taking reasonable care of themselves rather than the ignorant, the negligent or the consumer in a hurry.102 He also added that, generally speaking, the EU jurisprudence encourages the court to conduct that exercise so far as possible without recourse to statistical or other expert evidence about typical consumer behaviour, or even the evidence of particular consumers. Moreover, in Recital 18 of the UCPD there are further qualifying references to ‘social, cultural and linguistic factors’ that can assist in varying the levels of expectations placed on consumers. Note that these factors are not included in the national implementation of the directive in the UK (CPRs).103 Nevertheless, the judgment in OFT v Purely Creative Industries104 bypasses this problem as it makes reference to Recital 18 of the UCPD and focuses on the fact that the notion of average consumer adopted by the EU is not a statistical test.105 Rather, the national judge and national authorities must exercise their own judgement to determine the typical reaction of a consumer on a case-by-case basis.106 But the judge usefully noted that it is also possible to take into account other factors, such as social, cultural or linguistic factors.

100 See Law Commission and Scottish Law Commission, Consumer Redress for Misleading and Aggressive Practices (London and Edinburgh, 2012) paras 2-31–2-32 www.scotlawcom.gov.uk/files/ 7813/3276/1409/rep226.pdf. 101 [2011] EWHC 106 (Ch), [2011] ECC 20. 102 ibid para 62. 103 Regulation 2(2) states: ‘In determining the effect of a commercial practice on the average consumer where the practice reaches or is addressed to a consumer or consumers account shall be taken of the material characteristics of such an average consumer including his being reasonably well informed, reasonably observant and circumspect.’ 104 OFT v Purely Creative (n 101). 105 The use of statistical tests and their merits has already been considered in UK law in OFT v Officers Club [2005] ECHC 1080, which decides a case under the previous legislation on misleading advertising. Officers Club was selling clothes at a 70% discount. The advertisement for the discount was erroneous because the prices had not been maintained for a sufficient period of time before the discount was applied. The court explained that a report on the perception of consumers could not be used as proof that consumers were not misled. The decision also explained that it is for the judge – and not a third party, even an expert – to define the notion of consumer that is protected by the law (para 146). This is a mechanism borrowed from ‘passing off ’ in intellectual property case law in the UK. In this decision, the consumer had been defined as ‘reasonable and ordinary’, a standard much less stringent that the current EU average consumer test. In OFT v Purely Creative (n 101), the court said that national judges must exercise their own judgement to determine the typical reaction an average consumer may have on a case-by-case basis (para 63). In this exercise, it is possible to take a number of factors into account. 106 OFT v Purely Creative (n 101) para 63.

Implementation of the ‘Average Consumer’ Standard  35 An alternative standard is also available in EU case law. Trademark laws, in particular, rely on the average consumer to assess the likelihood of confusion and the distinctiveness of trademarks, but adopt a more realistic stance. Ironically, the origins of the benchmark are also found in Gut Springenheide. In Lloyd Schuhfabrik, a case concerning the interpretation of Article 5(1)(b) (likelihood of confusion on the part of the public) of Directive 89/104/EEC on trademarks, the court made a direct reference to Gut but immediately qualified the application of the test. It explained: the average consumer of the category of products concerned is deemed to be reasonably well-informed and reasonably observant and circumspect … However, account should be taken of the fact that the average consumer only rarely has the chance to make a direct comparison between the different marks but must place his trust in the imperfect picture of them that he has kept in his mind. It should also be borne in mind that the average consumer’s level of attention is likely to vary according to the category of goods or services in question.107

The EC Guidance on the UCPD108 clearly acknowledges the link between the CJEU case law in trademarks and the UCPD. It explains that the case law can be applied by analogy to the concept of the average consumer in this directive.109 It also points to national case law that has applied this standard to the use of misleading and aggressive commercial practices in the promotion and supply of electricity in Italy, after the liberalisation of the market. Arguably, the European Commission took a rather narrow view by arguing that: The Italian administrative court found that in the electricity market, the transition from a monopoly to a liberalized market not only altered the relationship between offer and demand, but had also increased the knowledge gap between consumers and traders. The court considered that, in such a context, the average consumer (i.e. somebody who is, in principle, reasonably well informed on the market conditions) could not be expected to have or gain the necessary knowledge or information to fill such a gap. Essentially, the court took into account the fact that, in the electricity retail market, the average consumer had not yet adapted to the new market situation and that the reasonable level of knowledge one could expect from the average consumer had to be fixed accordingly.110

According to the European Commission, this shows how the average consumer’s level of attention is likely to vary according to the category of goods and services in question, especially to the extent that the length of time for which a liberalised market has been in operation is an objective factor that might affect the expectations of the reasonable average consumer. The Commission also provided

107 Case C-342/97 Lloyd Schuhfabrik Meyer & Co GmbH v Klijsen Handel BV [1999] ECR I-03819, para 26. See also Google France (n 74). 108 European Commission (n 90) 25. 109 ibid. 110 ibid 27.

36  The Limitations of Consumer Law in Tackling Consumer Harm supporting arguments to the idea that the degree of novelty of a market mechanism can temporarily justify the departure from the neoclassical standard for the average consumer, citing relevant trademark case law.111 Despite the fact that the Commission is willing to acknowledge the limitations of consumers’ ability to compute information, this has not yet taken hold as a main normative value in the application of the UCPD. Yet we have seen that the UCPD itself is fully equipped to enable a variation in the expectations placed on the consumer. If anything, the importance of improving the construction of the ­‘average consumer’ standard is underscored by the observation that this benchmark is applied to other areas of law. Specifically, the average consumer standard has spilled over – first, into the application of the blacklist of the UCPD, where it is not normally required to pay attention to the ‘average consumer’ test. For example, in Wind Tre and Vodafone Italia,112 the CJEU ruled that the practice of selling SIM cards on which internet browsing and voicemail services are preloaded and preactivated could be classified as ‘inertia selling’, banned under Point 29 of Annexe I of the UCPD because it requires ‘demanding immediate or deferred payment for … products supplied by the trader, but not solicited by the consumer’. In doing so, it made reference to Recital 18 and the need to consider the practice from the viewpoint of an average consumer. Secondly, the benchmark is being applied in relation to other Directives,113 although it is not a formal requirement of their operation. Willett had predicted that the average consumer test could be used in the assessment of the fairness of contract term, a step undertaken by the CJEU in Pereničová and Perenič.114 In Kásler,115 also regarding unfair terms, the CJEU concluded that, to assess the method used to calculate repayments in a foreign currency in a mortgage: It was for the referring court to determine whether, having regard to all the relevant information … the average consumer … would not only be aware of the existence of the difference, generally observed on the securities market, between the selling rate of exchange and the buying rate of exchange of a foreign currency, but also be able to assess the potentially significant economic consequences for him resulting from

111 See, eg Joined Cases T-183/02 and T-184/02 El Corte Inglés v Office for Harmonisation in the Internal Market (Trade Marks and Designs) [2004] ECR II-00965, para 68; Case T-20/02 Interquell GmbH v Office for Harmonisation in the Internal Market (Trade Marks and Designs) [2004] ECR II-1001, para 37; Case C-446/07 Alberto Severi v Regione Emilia-Romagna [2009] ECR I-08041, para 62. 112 Cases C-54/17 and C-55/17 Autorità Garante della Concorrenza e del Mercato v Wind Tre SpA and Vodafone Italia SpA ECLI:EU:C:2018:710. 113 In the UK, the ‘average consumer’ standard is now incorporated into s 66(5) of the CRA 2015, which applies to the control of unfair terms. 114 C-453/10 Jana Pereničová and Vladislav Perenič v SOS financ spol s r o ECLI:EU:C:2012:144. See also B Keirsblick, ‘The Interaction between Consumer Protection Rules on Unfair Contract Terms and Unfair Commercial Practices: Pereničová and Perenič’ (2013) 50 Common Market Law Review 247. See further C Willet, Fairness in Consumer Contracts (Farnham, Ashgate, 2007) 114, who, at an earlier stage, indicated the potential use of the average consumer test in relation to the fairness of terms. 115 Case C-26/13 Árpád Kásler, Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt ECLI:EU:C:2014:282.

Protecting ‘Vulnerable’ and ‘Disengaged’ Consumers  37 the application of the selling rate of exchange for the calculation of the repayments for which he would ultimately be liable and, therefore, the total cost of the sum borrowed.116

Using the standard of the average consumer raises the bar and expectations placed on the consumer and his ability to navigate the terms. The judgment does not rest solely on transparency, but also requires that the consumer be able to assess the consequences. In light of the complexity of the degree of novelty of the term (and the financial matter in general) concerned, lenders should be under a duty to make crystal clear to consumers the extent to which the mechanism in question would be onerous. In this respect, it is noteworthy how the court referred to ‘the promotional material and information provided by the lender in the negotiation of the loan agreement’ as relevant contextual background. In light of the case law we have reviewed, it is not at all certain that national courts would conclude that the onus ought to have been on the lender. Yet, had the lender provided adequate warning as to the foreseeable financial implications of the contested term, it would have arguably been extremely difficult for the lender in question to successfully conclude the sale.

V.  Protecting ‘Vulnerable’ and ‘Disengaged’ Consumers In the case law reviewed above, there is no concern for a consumer that would deviate from this standard of the reasonably well-informed, observant and circumspect. Yet, there is growing acknowledgement not only that vulnerable consumers may require a different type of assistance, but also that some consumers who may otherwise conform to the definition of an average consumer have become disengaged, resulting in detriment.

A.  The Vulnerable Consumer The notion of vulnerability is enshrined in law. For example, under section 3(4) of the Communications Act 2003, OFCOM (the UK Office of Communications) must have regard, in performing its duties, to (i) the vulnerability of children and others whose circumstances appear to OFCOM to put them in need of special protection; and (ii) the needs of persons with disabilities, the elderly and those on a low income. The UCPD and its implementation through the Consumer Protection from Unfair Trading Regulations 2008 in the UK also take vulnerabilities into account. However, the text of Article 5(3) of the directive (and its implementing regulations in the UK) is limited to mental or physical infirmity, age and credulity, although its remit was broader in the initial proposal.

116 ibid

para 74.

38  The Limitations of Consumer Law in Tackling Consumer Harm That is not to say that the UCPD could not be effective in protecting a larger base of vulnerable consumers. Indeed, according to Recital 19, the types of vulnerabilities highlighted in the legislation are only indicative and new ones may be taken into account. The European Commission Guidelines confirm that the text can cover a wide range of situations, although it is not certain this would be the interpretation that a court would give to the UCPD.117 In any event, not all vulnerabilities could be considered in all circumstances because the UCPD also carries some limits as to who it is prepared to offer protection to. Article 5(3) UCPD states (emphasis added): Commercial practices which are likely to materially distort the economic behaviour only of a clearly identifiable group of consumers who are particularly vulnerable to the practice or the underlying product because of their mental or physical infirmity, age or credulity in a way which the trader could reasonably be expected to foresee, shall be assessed from the perspective of the average member of that group. This is without prejudice to the common and legitimate advertising practice of making exaggerated statements or statements which are not meant to be taken literally.

From the wording, it is notable that a number of obstacles exist. First, the vulnerable consumer that can gain protection needs to be part of a group that is clearly identifiable. This, according to Duivenvoorde, may prove to be a significant barrier to the application of the benchmark.118 Besides, that group needs to be particularly vulnerable, not just vulnerable. In addition, the use of the word ‘only’ is puzzling; it is not clear if it means that only vulnerable consumers need to see their behaviours affected by a practice. The result of such an interpretation would be to withdraw protection if, alongside one of the vulnerable groups, a consumer who is not deemed to belong to that group is also hurt by the practice, even if the consumer may belong to another vulnerable group.119 Finally, the last hurdle to protection is that the trader could reasonably foresee that harm would be caused by the practice. Consumers are vulnerable for a range of reasons. For example, consumers may be at greater risk of vulnerability because of some aspects of a market, their own physical or non-physical characteristics, or a combination of those. Any consumer can become vulnerable, and vulnerability may not be a permanent state.120 For example, consumers may be vulnerable regarding financial services because they are unable or find it difficult to service existing debt, at least temporarily.

117 European Commission (n 90) 29. Note, however, that it transpires from documents and scholarly reading that many seem to adopt a literal interpretation of Art 5(3) and would regard the list of vulnerabilities as exhaustive. Recitals in a directive do not have legal standing, although they are an aid to interpretation, and it is therefore possible to adopt a literal interpretation limiting the types of vulnerabilities caught by the UCPD. The question has not yet been tested in front of the CJEU. 118 See Duivenvoorde (n 44) 25. 119 ibid 26, which poses the question eloquently: ‘if a commercial practice affects people with a mental infirmity, but also the elderly, does that mean that neither is protected?’. 120 On vulnerability being a dynamic concept, see, eg F Ippolito and S Iglesias Sánchez, Protecting Vulnerable Groups: The European Human Rights Frameworks (Oxford, Hart Publishing, 2015) 1.

Protecting ‘Vulnerable’ and ‘Disengaged’ Consumers  39 ­ onsumers may also find themselves at risk of vulnerability due to the time at C which they access the market. For example, consumers may be looking for legal advice at times of stress because of bereavement or divorce, which impacts on their ability to choose and interact with a lawyer. In utilities, low income, age or lack of access to the internet may translate into a vulnerability because these consumers may find it more difficult to switch supplier, gain a good deal or make meaningful comparisons (for example, because comparisons are often only accessible online). Personal attributes such as physical disabilities or non-physical (possibly even ‘hidden’) attributes such as autism, dementia or anxiety may impact on a consumer’s ability to, say, access public transport (eg buses and trains), move through an airport or cope with disruption if it occurs. It is important to note that consumers at risk of vulnerability are overall less likely to be able to represent their own interests and are at greater risk of suffering detriment, and the impact of any detriment suffered is likely to be greater. Yet, the UCPD’s conception of vulnerability stays clear of socio-economic considerations and simply focuses on a narrow set of personal characteristics (age or credulity and mental or physical infirmity). The UCPD does not seem to envisage vulnerability spanning from key indicators such as income, education, race or ethnicity, nor does it concern itself with vulnerabilities that are market driven or may find their source elsewhere. However, there is clear evidence that such factors do play a major role in consumers experiencing detriment. For example, in the 1960s, Caplovitz showed how people from a disadvantaged background in the USA were consistently charged more for goods and services, in effect paying a poverty penalty.121 The European Commission report on consumer vulnerabilities across key markets found that this is sadly also the case in the EU, where low-income consumers are regularly put on more expensive tariffs for services because of the limited payment methods available to them, or they do not have access to mainstream financial services, steering them to more expensive credit.122 This report fits into the evolving literature on consumer vulnerability and moves beyond strict personal characteristics (age, gender, locality, education and language)123 by considering an ever-growing range of socio-economic factors, as well as looking at how external elements may create, influence or reinforce vulnerabilities. It considered behavioural drivers (trust, credulity, impulsiveness, attitude to risk, computational abilities); market-related drivers (being unable to read terms and conditions, not comparing deals from providers, not knowing contract conditions, not reading or understanding communications from providers); 121 D Caplovitz, The Poor Pay More (New York, Free Press, 1967). For a more recent account of the situation in the USA showing that little has changed, see E Mierzwinski, ‘Colston E Warne Lecture: Consumer Protection 2.0 – Protecting Consumers in the 21st Century’ (2010) 44 Journal of Consumer Affairs 581. 122 European Commission, Consumer Vulnerability across Key Markets in the European Union (Brussels, 2016) 319 https://ec.europa.eu/info/sites/info/files/consumers-approved-report_en.pdf. 123 ibid 169.

40  The Limitations of Consumer Law in Tackling Consumer Harm access (use of the internet); and situational drivers (difficulty in making ends meet or having friends in this situation, long-term sick or disabled, employment status). As a result of its findings, the study put forward a more exhaustive definition of vulnerable consumers: A consumer, who, as a result of socio-demographic characteristics, behavioural characteristics, personal situation, or market environment: • • • • •

is at higher risk of experiencing negative outcomes in the market; has limited ability to maximise their well-being; has difficulty in obtaining or assimilating information is less able to buy, choose or access suitable products; or is more susceptible to certain marketing practices.124

Cartwright also developed a framework to identify where vulnerabilities are liable to exist in the financial services sector. They are organised around a number of elements, namely: information, pressure, supply, redress and impact ­vulnerabilities.125 For our part, we prefer to refer to ‘vulnerable’ purchasing situations because all consumers are prone to biases that can be exacerbated by the vulnerabilities discussed above. Regrettably, no matter how consumer vulnerabilities are defined or conceptualized, they continue to play an integral part in consumers experiencing economic detriment that the law is not yet well equipped to address.

B.  The Disengaged Consumer The European Commission report on consumer vulnerability in key markets identified the ‘disengaged’ as a category of consumers. It discusses, albeit briefly, consumers that are disengaged from markets in that they fail to read terms and conditions, fail to be aware of their contract conditions or do not read communications received from their providers. Being disengaged in this sense is conceptualised as a vulnerability that can be mitigated by improving engagement.126 In addition, consumers have been called ‘disengaged’ because they fail to shop around and secure a better deal. For example, in the UK, consumers who switch energy suppliers normally pay £300 less a year than those who do not. Customers switching bank accounts can save on average £92.127 As the result of a Competition and Markets Authority (CMA) investigation, the UK energy sector regulator

124 ibid 169. 125 See P Cartwright, ‘The Vulnerable Consumer of Financial Services: Law, Policy and Regulation’, www.nottingham.ac.uk/business/businesscentres/crbfs/documents/researchreports/paper78.pdf. 126 European Commission (n 122). 127 See CMA, Energy Market Investigation, Final Report (London, 2016) https://assets.publishing. service.gov.uk/media/5773de34e5274a0da3000113/final-report-energy-market-investigation.pdf.

Protecting ‘Vulnerable’ and ‘Disengaged’ Consumers  41 Ofgem is trialling a disengaged customer database aimed at helping customers on the more expensive standard energy tariff who have not switched for three years or more.128 However, the disengaged consumer is the victim of his or her prior belief that there is no point in shopping around because every trader is similarly bent on treating consumers unfairly. The disengaged consumer does not necessarily have to conform with the traditional socio-demographic profile (ie relatively uneducated, low income, old, with disabilities etc). For example, what transpired from the CMA’s market inquiries into retail energy129 is that the disengaged consumer corresponds to how the mainstream consumer behaves, with the majority not switching because they do not think it worth their while to make the effort to search for a better deal. Disengagement does not, in fact, necessarily come from the consumer themself, but from the dysfunction of the market. Yet, the terminology of being ‘disengaged’ places the blame at the consumer’s door. For example, Alex Chisholm, a previous CMA chief executive, delivered a speech in which he describes consumers as ‘sleepers’, ‘underactive’, ‘healthy but sleepy’, ‘able but inactive’.130 All implying that the consumer is at fault. Chisholm goes even further and asks: ‘if apparently the consumer can’t be bothered, should we be?’131 Thankfully, the answer given in the speech is yes, but it is in relation to competition policy, where low levels of consumer engagements are combined with strong market positions for the incumbents. The view is therefore not necessarily framed to protect consumers. In fact, Chisholm explains: ‘One way of characterising this low consumer engagement problem is as a market failure in which under-active consumers, by not exercising choice, impose negative externalities on other consumers from the consequential weakening of competition.’132 This approach is underwhelming to say the least. This came out quite clearly in the retail energy market inquiry (discussed in detail in chapter six), where the CMA Inquiry Group concluded that consumers are under a collective duty to shop around.133 Not much care is apparently given to the fact that businesses are not behaving fairly towards their customers and that they ought to have a duty to do so (as we advocate in chapter seven). Instead, the expectation is that businesses try to engage their customers, but this is without any guarantees that it will have the desired effect. The stridency is because the disengaged consumer is not limited to a tiny proportion of struggling consumers who might be in need of extra protection 128 See Ofgem, Ofgem Disengaged Customer Database (London) www.ofgem.gov.uk/consumers/ household-gas-and-electricity-guide/how-switch-energy-supplier-and-shop-better-deal/ofgemdisengaged-customer-database. 129 CMA (n 127). 130 Alex Chisholm, Why ‘Sleepers’ Can’t Always Be Left to ‘Sleep’ (London, UK Government, 2016) www.gov.uk/government/speeches/alex-chisholm-on-consumer-engagement-in-a-digital-world. 131 ibid. 132 ibid. 133 CMA (n 127).

42  The Limitations of Consumer Law in Tackling Consumer Harm (such as the vulnerable consumer); they sometimes represent the majority. The mainstream approach is to rely on behavioural economics to explain this widespread inertia. However, the category of disengaged consumer does not necessarily require recourse to behavioural insight. Indeed, it is a perfectly plausible outcome for Bayesian updating consumers not to shop around. This is because those consumers are actually perfectly rational. As they are subject to limited resources (time, effort), they form their expectations on the basis of past experiences in order not to waste their resources. In situations where traders tend to behave unfairly, the emergence of disengaged consumers should not be surprising. The key issue is that consumer law and its pivotal construct of the ‘average consumer’ is too focused on the bilateral relationship between the trader and the consumer, failing to investigate whether there are rival traders that instead treat consumers fairly. When enough fair traders are readily available, the normative construct of an average consumer would be positively justifiable. The consumer could just shop around, bar a few who, for various reasons, such as some personal vulnerability factors, may not be able to do so. In those circumstances, the UCPD framework and its limited conception of vulnerabilities could be adequate. However, in practice, this is not the case, notwithstanding that consumer law has an element that already looks at the broader market context. Indeed, the notions of professional diligence and good faith are tools that could be utilised to contextualise what can be expected of consumers in a particular market. However, practitioners have so far failed to expand the enforcement of consumer law to tackle the issue of disengaged consumers by hinging on the market concepts of professional diligence and good faith.

VI.  Limitations Found in Unfair Terms Legislation Having considered unfair commercial practices, we now consider unfair contract terms legislation, and its limitations in tackling consumer detriment. According to section 62(4) CRA 2015, ‘a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer’. As a result, the judge must explore the imbalance in the rights and obligations of the parties. If the harm caused to the consumer by the presence of the term in the contract is not of sufficient magnitude, the term will not be unfair. The way this section is put into operation is by first reviewing which terms can be assessed for fairness. Until the introduction of the CRA 2015, unfair terms were governed by two statutes: the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contract Regulations 1999 (UTCCRs). The UTCCRs found its origin in the UTCCD and was solely focused on business-to-consumer contracts. By contrast, the UCTA applied to all contracts, including business-to-business contracts. The two statutes overlapped somewhat, making their application quite difficult, especially because the test for unfairness used in each was different.

Limitations Found in Unfair Terms Legislation  43 In 2005, a joint report by the Law Commission and the Scottish Law Commission recommended that a single harmonised regime replace the two cohabiting statutes.134 This report was revisited in 2012,135 following further reforms under way at European level. The European Commission proposed to introduce a new instrument to reform the consumer acquis, the Consumer Rights Directive, from which the CRA 2015 derives. The initial project included a reform of the 1993 Directive on unfair terms. Political complications meant that the Consumer Rights Directive abandoned changes to the unfair terms regime. However, the UK took the opportunity of the implementation of the Consumer Rights Directive to finally introduce a reformed regime for unfair terms in the UK. One of the main deficiencies of the unfair term regime is that it starts from the premise that competition and market pressures will lead to the right outcomes for consumers and that therefore what needs to be controlled is effectively the transparency and prominence of terms. If a term is clear, it will not be assessed for fairness. The legislation leaves out terms that pertain to the price and main subject matter of the contract, because enabling the judiciary to review those was perceived as encroaching too far on the freedom of contract. Woodroffe also notes that a ‘consumer cannot allege unfairness merely because he has made a bad bargain’,136 explaining why the law carries an exemption in the first place. There is reluctance, therefore, to move fairness beyond procedure and into substantive judgements. Core terms were carved out for this very reason, yet the notions of price and subject matter remain quite difficult to define. The unfair terms regime rests on the idea that consumers should not be surprised by the terms that apply to their relationships with the trader. However, as most terms in a contract are contained in what is called ‘small print’, surprise can never be ruled out. Besides, there is plenty of evidence to show that in fact consumers do not read terms.137 The Law Commission noted: We think that the exemption should distinguish between terms which are subject to competition and those which are buried in ‘small print’. Where consumers know about the terms proffered by traders, they are able to take them into account in their choices: the law should not seek to protect consumers from the consequences of their own decisions. By contrast, consumers rarely read ‘small print’. ‘Small print’ is a concept instantly understood by consumers in their daily lives. It is not just about font size. It is also marked by poor layout, densely phrased paragraphs and legal jargon. Often simply labelling a hyper-link as ‘terms and conditions’ is sufficient to ensure that most

134 Law Commission and Scottish Law Commission, Unfair Terms in Contracts (London and Edinburgh, 2005) www.lawcom.gov.uk/project/unfair-terms-in-contracts/. 135 Law Commission and Scottish Law Commission, Unfair Terms in Consumer Contracts: A New Approach? (London and Edinburgh, 2012) www.lawcom.gov.uk/app/uploads/2015/06/unfair_terms_ in_consumer_contracts_issues.pdf. 136 G Woodroffe, C Twigg-Flesner and Chris Willett, Woodroffe & Lowe Consumer Law and Practice (10th edn, London, Sweet & Maxwell, 2016) 197. 137 See, eg Bar-Gill (n 31).

44  The Limitations of Consumer Law in Tackling Consumer Harm consumers do not read the document. We think that all small print terms should be assessable for fairness.138

This proposal was adopted in the CRA 2015. Section 64 CRA 2015 states: (1) A term of a consumer contract may not be assessed for fairness139 under section 62 to the extent that – a. It specifies the main subject matter of the contract, or b. The assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it. (2) Subsection (1) excludes a term from an assessment under section 62 only if it is transparent and prominent.

Much therefore rests on the definition of what a transparent and prominent term is. Transparency is achieved, in part, by the use of plain and intelligible language and legibility.140 Prominence is measured by reference to the ‘average consumer’. Section 64(4) explains that ‘A term is prominent … if it is brought to the consumer’s attention in such a way that the average consumer would be aware of the term’. There may lie a major deficiency of the Act, inasmuch as the ‘average consumer’ is singularly referred to the attribute of prominence but not transparency. This may prevent recourse to the interpretation given by the CJEU in Kásler (discussed above), whereby the requirement of transparency should not be limited to legibility, but should also allow the average consumers to fully comprehend the foreseeable effect of the term in question. It is debatable whether this stronger protection could be achieved under the prominence requirement. In this respect, it is worth noting that the Guidance to the CRA 2015 explains that consumers should be able to see and understand terms that could disadvantage them.141 The Law Commission was also in favour of taking into consideration the place of terms in the assessment of transparency and prominence. As a result, it supported that a reasonable consumer ought to be aware of terms even if they have not read the full contractual document. This is a reasonable stance, since behavioural research clearly shows that consumers do struggle with terms

138 Law Commission and the Scottish Law Commission, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills (London and Edinburgh, 2013) 10, www.lawcom. gov.uk/project/unfair-terms-in-consumer-contracts/. 139 Unless the term is in fact contained in pt 1 of sch 2, ie the grey list. In this case, a term relating to a core term would be subject to an assessment of fairness. This is the case, for example, with terms enabling the trader to determine the price or subject matter of the contract after the consumer is bound by it (CRA 2015, s 64, para 14). 140 CRA 2015, s 64(3). 141 See CMA, ‘Unfair Contract Terms Explained’, CMA37(a) (London, 2015) para 28 https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/450410/Unfair_ Terms_Explained.pdf.

Limitations Found in Unfair Terms Legislation  45 and conditions,142 and it flows from bounded rationality that they may consider it is not worth the effort. Studies have also found that consumers who have read the terms continue to have incorrect interpretations of the contract terms, due to over-optimism and as a result of various biases.143 This possibly hints at the fact that transparency and prominence are two sides of the same coin, and that it is not really possible to consider a term transparent if the consumer does not also know of it. Recital 20 of the UTCCD explains that consumers should have an opportunity to examine all terms, and that some terms are considered unfair because the consumer is not able to review them. For example, schedule 2, part 1, paragraph 10 of the CRA 2015 refers to ‘a term which has the object or effect of irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract’. As a result, the operation of the CRA 2015 rests on the premise that all terms should be transparent. When it comes to core terms, the Guidance explains that the requirement of transparency is supplemented by an additional condition of prominence.144 That is not to say that prominence is never required for other terms. Prominence as a standard is reminiscent of the way case law on incorporation of terms operated. Indeed, the CRA 2015 is understood to build upon established case law under which the more unusual the term, the more prominent it will need to be.145 Before the reform, the seminal judgment by the UK Supreme Court in the bank test case highlighted how limited the reach of the UTCCRs could be, with its emphasis on procedural fairness rather than substantive fairness per se.146 In OFT  v Abbey National plc,147 the issue of core terms and their exemption from unfairness review was tackled with far too much emphasis on the impact that this would have on banks rather than on consumers. According to the Law Commission, the Supreme Court failed to protect consumers against unfair surprises in addition to procedural failing, such as referring the case to the CJEU and taking a purposive approach, which would have

142 See Consumers International, The Internet of Things and Challenges for Consumer Protection (London, 2016) 43 www.consumersinternational.org/media/1292/connection-and-protection-theinternet-of-things-and-challenges-for-consumer-protection.pdf; MG Faure and HA Luth, ‘Behavioural Economics in Unfair Contract Terms: Cautions and Considerations’ (2011) 34 Journal of Consumer Policy 337; Bar-Gill (n 31). 143 See, eg MD Grubb, ‘Overconfident Consumers in the Marketplace’ (2015) 29 Journal of Economic Perspective 9. 144 See CMA (n 141) paras 18–20. 145 See Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433; D Barry, E Jenkins QC, C Sumnall, B Douglas-Jones and D Lloyd, Blackstone’s Guide to The Consumer Rights Act 2015 (Oxford, Oxford University Press, 2016) 109. 146 The OFT had to drop a protracted investigation into the fairness for unauthorised fees for personal current accounts after the UK Supreme Court ruled that such an inquiry was outside its ­jurisdiction within the meaning of Regulation 6(2) of the UCCTRs: see the case study on personal current accounts in ch 6, s II for more detail. 147 [2009] UKSC 6.

46  The Limitations of Consumer Law in Tackling Consumer Harm been beneficial to consumers.148 Surprisingly, the Supreme Court argued that the terms setting up allegedly excessive fees for unauthorised overdrafts were indeed core (ie relating to the adequacy of the price and thus excluded from the unfairness test under Regulation 6(2)(b)) because these price terms constituted a material source of revenue for banks – that is, notwithstanding the fact that users were charged exorbitant interest rates. It seems questionable whether the outcome would differ much under the new ‘prominence’ test. This is because, as we will explain in our case study on the subject in chapter six, those vulnerable consumers who are mostly reliant on this expensive form of short-term credit did not respond positively to the introduction of message alerts warning about the imminent move into unarranged overdraft. Prior to the case reaching the Supreme Court, the High Court had found that the clauses in contracts that related to bank charges for unpaid items, paid items where insufficient funds are available and overdraft excess fees were all outside the scope of Regulation 6(2) on core terms and could thus be controlled for fairness. The Court of Appeal rejected the appeal unanimously, confirming the findings at first instance because Regulation 6(2), which carves out an exception, ought to be interpreted restrictively. The banks appealed this decision and the Supreme Court sided with them, considering that the charges were in fact part of the price or remuneration. It is important to note that, in this case, the wording of the clauses in question was deemed by Andrew Smith J to be in plain and intelligible language except for some relatively minor aspects. The courts took a different view in OFT v Foxtons Ltd.149 This case concerned the commission that estate agents were charging landlords, not simply on finding an initial tenant, but on renewal of the tenancy agreement or on sales commissions. Mann J decided that renewal and sales commissions were not core terms and that, as they had also been drafted in obscure language, some were too vague or hidden within the document and could therefore be tested for fairness. By contrast, in OFT v Ashbourne Management Services Ltd,150 Kitchin J considered that a clause in a gym membership under which the consumer is instructed that he ‘must pay the monthly membership subscription’ for a minimum membership period was a core term because ‘it defines a period during which the member is entitled to use the facilities of the gym club and in return must pay a particular monthly subscription’.151 Nevertheless, the judge ruled that this did not preclude assessing the term in question for fairness with respect to other aspects not strictly related to the description of the main subject matter.152 That is to say, Kitchin J opted for a narrow interpretation of the exclusion under Regulation 6(2)(a) of the



148 See

Barry et al (n 145) 109. EWHC 1681 (Ch). 150 [2011] EWHC 1237 (Ch). 151 ibid para 152. 152 ibid para 153. 149 [2009]

Limitations Found in Unfair Terms Legislation  47 UTCCRs, in line with what Lord Walker JSC did with respect to Regulation 6(2)(b) in the bank test case.153 In this respect, it is important to point out that the judge referred to ‘the average consumer to whom these agreements are targeted’ as the relevant benchmark for the fairness assessment.154 The concern in this case was that Ashbourne, a company that provides management services to gym clubs, recommended the use of minimum membership periods in order to take advantage of the over-optimism by new members in terms of their future usage of the gym facilities, thus operating as a ‘trap’.155 The judge considered that this type of assessment was not precluded as it relates to the consequences to members of early termination in light of the minimum membership period (ie not part of the main subject matter of the contract).156 Further hurdles await the presumption that a term is not deemed core or is sufficiently obscure to warrant an assessment of fairness. Under section 62(4) CRA 2015, a term is unfair ‘if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer’. This is the test that applies to unfair terms. In this sense, it is from this test that the judge must build a counterfactual. There are two main elements that require attention: significant imbalance and good faith. Significant imbalance is based on the concept of substantive unfairness. Yet, it is a necessary but not sufficient condition for a finding of unfairness. It will still be required to argue that the trader acted contrary to the requirement of good faith, an element linked to procedural unfairness considerations. Hugh Collins argued that [the UTCCD] does not require consumer contracts to be substantively fair, but it does require them to be clear. Clarity is essential for effective market competition between terms. What matters primarily for EC contract law is consumer choice, not consumer rights.157

Stated otherwise, whilst the UTCCD is aimed at correcting an imbalance between the bargaining positions of the trader and consumer, it is not designed to protect consumers from entering into disadvantageous contracts.158

153 ibid. 154 ibid para 162. 155 ibid para 173. 156 ibid para 175. 157 H Collins, ‘Good Faith in European Contract Law’ (1994) 14 Oxford Journal of Legal Studies 229, 238. 158 See Law Commission and Scottish Law Commission (n 100) paras 7.12–7.14. As put by Advocate General Trstenjak in her Opinion in Case C-484/08 Caja de Ahorros [2010] ECR I-04785, para 40, ‘Directive 93/13 does not go so far as to put an end altogether to the parties’ freedom to arrange their own affairs … The consumer is not to be protected generally against entering into a disadvantageous transaction. Rather, he is deemed to be adequately protected, with regard to the main subject-matter, through competition.’

48  The Limitations of Consumer Law in Tackling Consumer Harm The key judgments were given by Lord Bingham and Lord Steyn in First National Bank:159 The requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the customer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or [the like]. Good faith in this context is not an artificial or technical concept … It looks to good standards of commercial morality and practice. [Regulation 5(1) of the UTCCRs] lays down a composite test, covering both the making and the substance of the contract, and must be applied bearing clearly in mind the objective which the regulations are designed to promote [ie improving the functioning of the single market and protecting consumers in that market].

Lord Steyn further clarified that ‘Any purely procedural or even predominantly procedural interpretation of the requirement of good faith must be rejected’.160 In addition, Lord Steyn added that The directive and the regulations must be made to work sensibly and effectively and this can only be done by taking into account the effects of contemplated or typical relationships between the contracting parties. Inevitably, the primary focus of such a pre-emptive challenge is on issues of substantive unfairness.161

That is to say, substantive unfairness can raise a presumption of procedural ­unfairness.162 Therefore, significant imbalance and good faith are separate, yet connected, requirements. To be unfair, the imbalance must be practically significant, but a finding of unfairness does not require proof that a term has already caused actual harm. The fairness assessment is concerned with rights and duties, and therefore its focus is on potential, rather than actual, outcomes. A term may be open to challenge if it could be used to cause consumer detriment even if it is not presently being used to produce that outcome in practice. It is questionable if terms that have more propensity for actual harm should be sanctioned more harshly. Currently, the legislation provides for the unfair terms to be void and essentially struck out of the contract, which will continue to exist in their absence as far as possible.163 It may, however, be possible to imagine that sanctions could be increased and include damages if a term has already caused damage. The issue here would be to be able to quantify the damage.

159 Director General of Fair Trading v First National Bank plc [2001] UKHL 52, para 17. 160 ibid para 36. 161 Above n 159, para 33. 162 R Bradgate, R Brownsword and C Twigg-Flesner, The Impact of Adopting a General Duty to Trade Fairly (London, Department of Trade and Industry, 2003) 43. 163 CRA 2015, s 67.

Limitations Found in Unfair Terms Legislation  49 In Aziz,164 the CJEU provided guidance on the meaning of ‘good faith’ that takes a broader approach. It directed the national court to consider whether the business ‘dealing fairly and equitably with the consumer’ could reasonably assume that the consumer would have agreed to the term had the contract been negotiated on equal terms. Section 62(5) CRA 2015 requires the fairness of a term to be assessed taking into account: (i) the nature of the subject matter of the contract; (ii) all the circumstances existing when the term was agreed; and (iii) all the other terms of the contract or any other contract on which it depends. Using this spectrum of factors allows the Act to operate in a way that protects those whose circumstances make them vulnerable to exploitation or pressure, at the time they actually sign or otherwise agree to a contract. However, the assessment of fairness only considers circumstances that existed when the term was agreed, not those arising later. In conclusion, the main change introduced in the test for unfairness under the CRA 2015 is the introduction of a ‘prominence’ test alongside the transparency test calibrated against the ‘average consumer’ benchmark. This indicates that procedural fairness, in line with the neoclassical information paradigm, is still pretty much the predominant analytical framework, whilst acknowledging that consumers are not omniscient.165 Therefore, the legislation remains limited in the assistance it can offer consumers. Arguably, if this augmented transparency test is interpreted as requiring traders to ‘educate’ the average consumer about the detrimental effect of potentially disadvantageous terms, the exploitative terms may be removed without the need for any intervention. Notwithstanding, it is hard to see how this new augmented transparency requirement could make a real difference where exploitative terms are predominant across traders. Furthermore, when a sizeable minority of disengaged consumers continue to be exposed to unfair terms, with the risk that they are therefore subject to a worsening treatment by traders who struggle to extract revenue from a shrinking base of exploitable customers, more intrusive intervention will be required to cap the exploitation of vulnerable consumers subject to persistent, worsening and concentrated levels of detriment.

164 Case C-415/11 Mohamed Aziz v Caixa d´Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) ECLI:EU:C:2013:164. 165 In this respect, the Law Commission and Scottish Law Commission (n 134) para 3.24 typified the consumer as rational, but busy: ‘ the legislation assumes that consumers are rational economic actors, who when presented with the right information make good decisions over what to buy. The problem is that consumers are busy – or “time poor”. They do not have time to read and understand all the small print, especially when that small print is made difficult to read and complex to understand.’ As the report pointed out, this normative standard is far from recent: see quote at para 3.9 from Lord Reid in Suisse Atlantique, dated 1967 (‘In the ordinary way the customer has no time to read them, and if he did read them he would probably not understand them. And if he did understand and object to any of them, he would generally be told he could take it or leave it. And if he then went to another supplier the result would be the same’).

50  The Limitations of Consumer Law in Tackling Consumer Harm

VII.  The Enforcement Framework in the UK Consumer law enforcement takes many forms, but it can, broadly speaking, be divided between private and public enforcement. All forms are useful, even though they have a distinct focus and purpose. Private enforcement is focused on enforcing consumer rights, and is driven by the consumer that has suffered the detriment. It is therefore necessarily limited, especially where no clear mechanism for collective action is in place. Public enforcement is driven by consumer protection preoccupations, in that it focuses on the collective interests of consumers, but it does not necessarily follow that individual consumers will benefit directly from such intervention.166 The public and collective nature of the enforcement means that it remains limited, because it has to prioritise those areas where the most consumers may benefit or where there is a greater risk of harm. Nevertheless, high-profile public enforcement has the potential to set clear precedents and, thus, corresponding expectations that can apply to traders in general. This is particularly so if there are reputational repercussions from being ‘named and shamed’ by the public authority. However, in contrast to the enforcement of competition law, public enforcement of consumer law does not allow for the imposition of fines as a way to boost (financial) deterrence and thus its effectiveness.167

A.  Public Enforcement of Consumer Law The main enforcers of consumer law in the UK are the CMA and sectoral regulators. Their powers are completed by Trading Standards at the local level. The main pieces of legislation that lead to a form of public enforcement are the CPRs and the CRA 2015 (provisions on unfair terms in particular).168 The regulatory framework wherefrom enforcement powers are derived was simplified by the CRA 2015. Part III of the Act rationalised enforcement powers shared between local enforcers (such as Trading Standards) and other regulators.169 The details of the investigatory

166 See C Andrews, Enforcement of Consumer Rights and Protections (London, LexisNexis, 2015) 1, explaining that consumers may benefit directly in some situations, eg in criminal proceedings where a compensation order is made or other enhanced redress is available. 167 In this respect, it is worth noting that CMA is calling for new powers to be able to impose fines for breaches of consumer law: see CMA, Tackling the Loyalty Penalty – Response to a Super-complaint Made by Citizens Advice on 28 September 2018 (London, 2018) para 9.7.A.2 https://assets.publishing.service. gov.uk/media/5c194665e5274a4685bfbafa/response_to_super_complaint_pdf.pdf. 168 Other legislation, especially that focusing on product safety and food safety, is also heavily reliant on public enforcement mechanisms. 169 Department for Business, Innovation and Skills, Enhancing Consumer Confidence through Effective Enforcement, Consultation on Consolidating and Modernising Enforcement Powers (London, 2012) 18 www.gov.uk/government/uploads/system/uploads/attachment_data/file/31534/12-543-enhancingconsumer-confidence-effective-enforcement-consultation.pdf.

The Enforcement Framework in the UK  51 powers of the various enforcers are contained in schedules 5 and 6 CRA 2015. The powers are accessed via part 8 of the Enterprise Act 2002 (EA 2002). In recent years, there has been a growing focus on the need for individual recompense for individual wrongs in the consumer area,170 leading to regulatory changes and the inclusion of rights of private action in areas that used to be the preserve of public enforcers. For example, the Consumer Protection (Amendment) Regulations 2014 introduced a right of private action to the CPRs, in the form of a right to unwind the contract, a right to get a discount and a right to claim damages.171 However, any right of private redress has limitations, and access to justice for consumers remains in any event a difficult issue.

B.  Enhanced Consumer Measures under Schedule 7 of the CRA 2015 The most recent changes to consumer law have seen the introduction of enhanced consumer measures (ECMs) under schedule 7 of the CRA 2015, amending part 8 of the EA 2002. The measures are open to all public enforcers under part 8 EA 2002, which includes the CMA, local trading standards authorities and other sectoral regulators. The measures can be used to address both domestic and community infringements. Under sections 217–19 EA 2002, where a court makes an enforcement order or accepts an undertaking under part 8, it may also attach ECMs to such an enforcement order or undertaking, and where an enforcer obtains an undertaking, such an undertaking can also include ECMs. These measures seek to broaden the types of order that can be obtained in civil courts172 and fall under three categories according to section 219A EA 2002: redress, compliance and choice. Under section 219B(a) and (b), the ECMs can only be used where they are just and reasonable. This is assessed by taking into account the likely benefit of the measures to consumers, the costs likely to be incurred by the business subject to the enforcement order or undertaking and the likely cost to consumers of obtaining the benefit of the measures. The redress measures are aimed at giving consumers their money back. Redress measures can only be used where consumers have suffered loss173 and not to prevent it proactively, although there is no minimum or maximum amount of loss at which the measures kick in. Compared to the market regime (discussed in chapter three), these measures are attractive because they provide redress to consumers already harmed. There are, however, some key limitations. The cost to the business of putting a redress scheme in place should be proportionate,

170 Andrews

(n 166) 4. 27(e)–(g). 172 Department for Business, Innovation and Skills (n 169) 3. 173 ibid 9. 171 Regulation

52  The Limitations of Consumer Law in Tackling Consumer Harm that is, it is unlikely to be more than the losses suffered by consumers. This does not include the administrative costs of putting the scheme in place,174 although this cost also needs to be reasonable. As a result, the measures are limited to actual loss and do not offer damages to consumers (although those could still potentially be recovered through a separate action). Nevertheless, this mechanism can be a useful measure, especially to assist with small losses or for more vulnerable consumers who might be unlikely to pursue their case in the courts of their own accord. Where redress to individuals is not viable or proportionate (for example, because consumers cannot be identified or can only be identified at a disproportionate cost) an ECM can require a trader to make a payment ‘in the collective interests of consumers’ (for example, to a consumer charity).175 Compliance measures are designed to prevent or reduce the risk of further breaches of the law. They are preventative measures and focus on improving operational aspects. For example, measures may include requiring employing a member of staff to supervise particular aspects, employing a compliance officer or improving staff training, with a view to avoid any repeat of the breach.176 The last type of measure focuses on consumer information about a business’s past behaviours. It is premised on the idea that ‘enabling consumers to see whether a business has broken the law and what action they have taken to put right any detriment caused will enable consumers to make better informed purchasing decisions’.177 Measures such as ordering the publication of actions taken to remedy breaches on websites or in store can act as an incentive to consumers to switch providers, as well as for businesses to follow the law. However useful the ECMs may be in principle, it is anticipated that firms will frequently contest their proportionality (probably at the earliest stage), which may act as a brake on the use of those measures. At the same time, in practice, it is likely that enforcers and traders will often negotiate their way to an informal conclusion and agreed course of action.178

C.  Private Enforcement of Consumer Law Private enforcement demonstrates even further restrictions. According to Riefa, It is the public perception that court proceedings are expensive, time-consuming and burdensome. They also result in an uncertain outcome due to their adversarial nature. For some consumers those elements are too great an obstacle. Many do not try to seek

174 ibid 14. 175 C Riefa and C Willett, ‘Enforcement and Effectiveness of Consumer Law in the UK’ in H-W Micklitz and G Saumier (eds), Enforcement and Effectiveness of Consumer Law (Cham, Springer International Publishing, 2018) 691. 176 Department for Business, Innovation and Skills (n 169) 23. 177 ibid 24. 178 Riefa and Willett (n 175) 692.

The Enforcement Framework in the UK  53 redress. For others it is the absence of knowledge of their rights that is responsible for redress apathy.179

By and large, the latest government data also confirms that consumer dispute resolution is confined to a narrow category of users: predominantly middle-aged males on an average income above £20,000.180 The Woolf reforms and the Jackson reforms effectively cut legal aid for consumer disputes altogether181 and displaced those disputes towards ADR. Users of ADR processes are also taken from this narrow pool. In addition, the research confirmed that users’ educational attainments tend to be high, with two-thirds of respondents holding a degree-level qualification or higher.182 Thus, apathy seems to be most prominent amongst subcategories of consumers that may be especially vulnerable and most in need of the assistance of the legal system to obtain redress. Further obstacles include the fact that small claims decisions are not publicly available. What this means in practice is that consumers, who do not need representation in the small claims court, are unable to find out how disputes in similar areas have been interpreted and resolved by county courts. This is a clear obstacle to access to justice, especially where businesses may be better equipped to deal with, and have more knowledge of, the court system and the way judges perceive particular pieces of legislation. In addition, the push towards ADR compounds the ‘repeat player’ effect, whereby businesses are more likely to have better insights into the workings of the ADR body or the county court for small claims and their application of consumer legislation since decisions reached through ADR processes may not always be published either.

(i)  The Role of the Civil Practice Rules and ADR Consumer claims are subject to the Pre-action Conduct Practice Direction and the Civil Practice Rules, part 3. Since 2015, part 3.1(m) of the Civil Practice Rules has enabled the court to take steps towards or make an order for the purpose of managing the case and furthering the overriding objective, including hearing an early neutral evaluation, with the aim of helping the parties to settle the case. The court is duty bound to consider whether non-court dispute resolution is appropriate. The court can also direct that proceedings be adjourned to give parties time to obtain information, advice and consideration of non-court solutions, as well as

179 Riefa (n 10) 148. 180 Department for Business, Energy and Industrial Strategy (n 11) 14. 181 Funding for consumer cases is very limited. See the Legal Aid, Sentencing and Punishment of Offenders Act 2012, s 9, sch 1, supplemented by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Amendement of Sch 1) Order 2013 and Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Amendement of Sch 1) (advocacy exceptions) Order 2014. 182 Department for Business, Energy and Industrial Strategy (n 11) 15.

54  The Limitations of Consumer Law in Tackling Consumer Harm go through the process.183 Case law has now confirmed that judges can give early neutral evaluations.184 The change in procedural rules ‘mark[s] the increasing importance which the courts are prepared to place on ADR, recognising that ADR may not offer “justice” but that it does, by a process of cooperation and perhaps of negotiation, offer a “reasonable solution”’.185 In Grace v Black Horse Ltd,186 the court noted: This is already a case in which the parties’ efforts and expense has been seriously disproportionate to the amounts at stake. The parties are therefore firmly encouraged to pursue mediation or some other form of alternative dispute resolution to resolve their remaining differences.187

There is a clear danger in being led by efficiency when it comes to consumer cases. Many cases will be of a value that may not justify the cost of litigation, and thus consumers may be encouraged to seek alternative settlements rather than pursue matters in court. From an economic standpoint, it looks like the odds are stacked against consumers as, in addition to typically low value claims, the cost implications of declining to use ADR188 or even failing to respond to an invitation to participate in ADR189 can be quite severe, as the winning party may fail to recover their costs.190 In addition, a recent study found that the impact of using ADR or court processes on trader practices differed. Where the courts were used, traders were more likely to change their business practices, whereas where ADR was used, traders tended to improve their customer service provision.191

(ii)  Group Litigation and Collective Actions Consumers do not currently have any meaningful way to aggregate their claims under consumer law. While opt-out collective actions exist for the enforcement of competition law, the same is not available for breaches of consumer law. In the UK, under current procedural rules, claims that can be conveniently dealt with at the same time can be heard jointly or consolidated, but still require all claimants to bring their own claims. Another alternative is the use of group litigation orders (GLOs), which enable cases that give rise to common or related issues of fact or law to be managed together under specific procedural rules, namely, the Civil Practice Rules, part 19 and practice direction 19B. In GLOs, common 183 CPRs 3.3 and 3.4. 184 Seals and Seals v Williams [2015] EWHC 1829 (Ch). The case highlights that judges can express ­provisional views in the course of a hearing and that is not dependent on the consent of the parties (at para 7). 185 Andrews (n 166) 215. 186 [2014] EWCA Civ 1413. 187 Ibid para 54. Source: Andrews (n 166) 215. 188 Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576. 189 PGF II SA v OMFS Co 1 Ltd [2013] EWCA Civ 1288. 190 Dunnett v Railtrack plc [2002] EWCA Civ 303. 191 See Department for Business, Energy and Industrial Strategy (n 11).

The Enforcement Framework in the UK  55 issues are identified and lead cases selected.192 The issues to be tried must not be particular to each defendant. GLOs require individuals to opt in and actively participate in the action. The Civil Practice Rules are vague on how to organise the finer details of an action and rules concerning GLOs’ conduct are ‘drafted in a very light-handed manner’ according to Rachel Mulheron.193 This means that GLOs are primarily used for high-value disputes and are not appropriate for aggregating a number of small-value economic losses. In addition, Civil Practice Rules, part 19.6 enables the use of representative actions where more than one person has the same interest in a claim. The outcome of the case will be binding on all persons represented in the claim. The permission of the court is necessary to enforce the decision in favour of or against parties that are not parties to the claim. However, this way of grouping claims is relatively rare, especially since the finding in Markt & Co Ltd v Knight Steamship Co Ltd, in 1910, that individuals with different contracts and individual damage claims cannot be aggregated within a common representative action. Although the requirement has been relaxed in recent cases, representative actions are still no substitute for a modern ‘class action’.194 The notion of ‘same interest’ was defined in Emerald Supplies Ltd v British Airways plc.195 In this case, Emerald Supplies, a flower importer, brought an action as the representative of all direct and indirect claimants who had suffered damage as a result of an alleged air cargo cartel. The court held that the class must share the same interests at all stages of the proceedings and not just at the date of the judgment at the end. This seriously restricted the ability of claimants to use collective actions. In conclusion, the private enforcement of consumer law faces many practical challenges, not least that its access is more heavily curtailed for vulnerable ­consumers.196 As a result, it is important to bolster public enforcement if a higher standard of consumer protection is to be achieved. To this end, the more recent case law from the CJEU offers some hope that the interpretation of the pivotal ‘average consumer’ standard can be more subtle than under the historical approach rooted in the expectation that consumers ought to act as posited under the neoclassical rational consumer paradigm. The next chapter explores whether competition law can be relied upon to achieve a higher standard of consumer protection, especially in problematic markets where a poor standard of professional diligence prevails across rival firms, a state of affairs which tends to induce widespread customer disengagement.

192 Andrews (n 166) 225. 193 R Mulheron, ‘Some Difficulties with Group Litigation Orders – and Why a Class Action is Superior’ (2005) 24 Civil Justice Quarterly 40. 194 ibid. 195 [2010] EWCA Civ 1284. 196 For example, in addition to the problems highlighted above, legal aid is not available for consumer disputes.

3 The Limitations of Competition Law in Tackling Consumer Harm I. Introduction Having considered the limitations of consumer law and its enforcement in the previous chapter, we now move on to consider the limitations of EU and national competition law. The dominant market-based paradigm portrays consumer protection as complementary (if not subordinate) to competition policy, where demand-side interventions are typically aimed at reducing consumer search and switching costs. The increased responsiveness of ‘informed consumers’ shall therefore provide the market discipline needed to make sure that competitive rivalry works well in the interest of consumers.1 This consumer welfare model was part of the modernisation reform of European competition law during the early 2000s. This is what underpinned pursuing a ‘more economic’-based approach to enforcement, aimed at maximising economic efficiency as opposed to protecting less-efficient competitors.2 The ‘more economic’ approach to intervention is often contrasted with the idea of ‘freedom to compete’ and the standard requiring dominant firms to behave ‘as if ’ they are subject to competition.3 Under the ordoliberal analytical framework, competition law is seen as an instrument for the preservation of the competitive structure of the market, rather than being exclusively concerned with consumer welfare, and thus the protection of consumers from exploitation.4 The following

1 See, in this sense, M Waterson, ‘The Role of Consumers in Competition and Competition Policy’ (2003) 21 International Journal of Industrial Organization 129; J Vickers, Economics for Consumer Policy, Proceedings of the British Academy (London, OFT, 2004); F Gómez, ‘The Directive on Unfair Commercial Practices: A Law and Economics Perspective’ (2006) 2 European Review of Contract Law 4; M Armstrong, ‘Interactions between Competition and Consumer Policy’ (2008) 4 Competition Policy International 97. 2 See, eg I Lianos, ‘Some Reflections on the Question of the Goals of EU Competition Law’ in I Lianos and D Geradin (eds), Handbook on European Competition Law: Substantive Aspects (Cheltenham, Edward Elgar Publishing, 2013). 3 See C Ahlborn and C Grave, ‘Walter Eucken and Ordoliberalism: An Introduction from a Consumer Welfare Perspective’ (2006) 2 Competition Policy International 197. 4 See P Akman, ‘Searching for the Long-Lost Soul of Article 82EC’ (2009) 29 Oxford Journal of Legal Studies 267.

Introduction  57 quote from the opinion of Advocate General Kokott in British Airways is emblematic of this approach to competition law enforcement: [Article 102] forms part of a system designed to protect competition within the internal market from distortions. Accordingly, Article [102 TFEU], like the other competition rules of the Treaty, is not designed only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such (as an institution), which has already been weakened by the presence of the dominant undertaking on the market. In this way, consumers are also indirectly protected. Because where competition as such is damaged, disadvantages for consumers are also to be feared.5

More recently, there has been a renaissance of ordoliberal thoughts, in particular among US-based scholars, and renewed criticism of the predominant consumer welfare standard that developed under a ‘more economic’ approach to competition law. The concern is that the ‘more economic’ approach is seen as accommodating the pursuit of market dominance by giant online corporations such as Amazon through alleged predatory commercial strategies to oust competitors by offering low prices and a high standard of customer service at terms that are suspected to be unsustainable in the long run.6 In contrast, it is advocated that antitrust enforcement should also be guided by other public considerations, such as the welfare of employees, suppliers and stakeholders in general, and distributional concerns, including the ability of smaller (independent) firms to survive.7 This is so even if consumer welfare is not maximised as a result (ie prices may be higher). A more nuanced approach, however, is to understand that the use of unfair commercial practices can also be detrimental to those competitors keen to treat consumers fairly. This is so to the extent that adopting unfair practices risks triggering a race to the bottom, whereby rival firms feel compelled to match the behaviour or risk losing revenue. Under these circumstances, consumer protection interventions are instrumental in maintaining effective competition by preserving firms’ incentives to compete on the merits,8 by striving to offer the best value-formoney and superior customer care. Another approach, albeit subtler, is to see treating consumers fairly as a key quality dimension that firms ought to compete on, with the aim of building a

5 Opinion of Advocate General J Kokott in Case C-95/04, British Airways plc v Commission [2007] ECR I-2331, para 68. See also, for a similar formulation in the context of Art 101 TFEU, Opinion Advocate General J Kokott in Case C-8/08 T-Mobile Netherlands BV and Others [2009] ECR I-4529, para 71. 6 LM Khan, ‘Amazon’s Antitrust Paradox’ (2017) 126 Yale Law Journal 710. 7 See LM Khan, ‘The Ideological Roots of America’s Market Power Problem’ (2018) 127 Yale Law Journal 960; M Steinbaum and M Stucke, The Effective Competition Standard: A New Standard for ­Antitrust (New York, Roosevelt Institute, 2018). 8 Case C-85/76 Hoffman-La Roche & Co v Commission 1979 ECR 461, [1979] 3 CMLR 211, para 91, where unlawful conduct is described as the ‘recourse to methods different from those which condition normal competition on the basis of transactions of commercial operators, [and] has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition’.

58  The Limitations of Competition Law in Tackling Consumer Harm lasting reputation for superior customer care and service. In this sense, the observation of a poor standard of professional diligence among rival firms may indicate that lack of competition is the root cause of the prevailing low standard. Therefore, intervention under competition law aimed at unlocking competitive rivalry would be instrumental in pursuing a higher standard of consumer protection. However, consumers may have, over time, lost trust in the belief that markets are working for their benefits, as a result of past negative treatment. Therefore, many will no longer be sufficiently engaged to be responsive to firms’ genuine attempts to change course. Under these circumstances, a more forceful style of regulatory intervention based on fair treatment would be justified. Indeed, the current CEO of the UK Competition and Markets Authority explains: The third and final theme is the extent and nature of intervention by regulators and other bodies charged with protecting consumers, to incentivise firm behaviour. There may be a potential role here for further principles-based regulation, which has the advantage of avoiding the need for complicated, prescriptive rules and can therefore generate changes relatively quickly and flexibly. For example, through its ‘Treating Customers Fairly’ principle, the FCA seeks to ensure that all regulated firms conduct their business in a way that will help customers get fair treatment. The FCA has highlighted key outcomes it would expect to see from businesses putting the principle into practice, rather than prescribing how it should be assessed and implemented. This allows businesses to uphold regulatory requirements in a way that works for them whilst also setting a standard against which the regulator may enforce. A related consideration is the effect of reputation as a driver for firm behavior … What is the role for regulators to play in enhancing reputational incentives? What does it look like? How far does it go? We know from the consumer Green Paper that there is Government support for regulators to play a role in incentivising firms to support consumers, and particularly the vulnerable, by drawing on reputational risk.9

The archetypal consumer theories of harms (CToHs) fleshed out in chapter five deal with scenarios where consumers are at risk of being exploited. The alleged unfair practices under consideration ultimately entail an increase in the price paid and/or a reduction in the quality of the product purchased (including the quality

9 A Coscelli, ‘Addressing the Challenges that Vulnerable Consumers Face’, speech delivered on 25 September 2018 www.gov.uk/government/speeches/addressing-the-challenges-that-vulnerableconsumers-face. See also A Coscelli, ‘Regulation and Competition Enforcement – A Combined Approach’, speech delivered on 7 September 2018 annual Fordham Competition Law Institute conference www. gov.uk/government/speeches/fordham-competition-law-institute-annual-conference-2018-keynotespeech (‘[O]ne of the priorities set out in our Annual Plan for 2018/2019 is ensuring that markets can be trusted. Consumers drive competition when they have the ability and confidence to exercise informed choices. This is particularly the case in digital commerce, where new business models that could benefit consumers will only grow if they are trusted and used by consumers. Consumers are wary of new technology and if they put their trust in and are let down by one company in an emerging sector, they are likely to be less willing to adopt the products of other start-ups in the same or related sectors. We will therefore be focusing some of our consumer protection work in the next year on conduct which could damage consumer trust’). It is intriguing to compare this approach to the one endorsed by the previous CEO of the CMA, Alex Chisholm, as reported in the previous chapter, section V.A.

Ex-Post Enforcement against Exploitative Abuses  59 dimension of customer care). Consumer detriment results from the fact that the price–quality ratio of the product in question is worsened compared to a counterfactual scenario where the alleged practice does not take place. In other words, we deal with unfair practices that, ultimately, can be deemed to be exploitative. Under European and national competition law, the archetypal exploitative practice is to raise prices at supra-competitive levels well above the level that would have prevailed under normal competitive conditions (ie labelled ‘excessive prices’). Accordingly, it is important to explore how those and other alleged exploitative practices are handled under competition law. We will see that, because competition law tends to think of intervention only from the viewpoint of the supply side, it can often miss the mark when it comes to protecting consumers. Specifically, we first look at ex post enforcement of the two provisions against abuses of a position of market dominance and anticompetitive agreements. Next, we assess the case for ex ante intervention under the UK market regime, whereby the Competition and Markets Authority (CMA), alongside concurrent competition (sectoral) regulators,10 can launch market studies and investigations aimed at imposing remedies rather than fines. Finally, the last section provides a brief overview of the broader framework for enforcement and points to the main structural deficiencies that result in consumers still experiencing some detriment.

II.  Ex-Post Enforcement against Exploitative Abuses In this section we investigate exploitative abuses under, respectively, Article 102 and Article 101 TFEU. In the UK, those provisions were implemented in the Competition Act 1998 (CA). The effectiveness of ex post enforcement of competition law rests on raising deterrence (thanks to the ability to impose heavy fines), but it struggles to bring order to the markets in so-called gap cases.

A.  Tackling Exploitative Abuses of a Dominant Position under Article 102 TFEU (Chapter II CA 1998) The aim of Article 102 TFEU11 (section 18 CA 2018) is to prevent a firm with, or a group of firms jointly holding, a dominant position in the relevant market

10 Under the UK concurrency regime, sectoral regulators, such as those for the energy, water, fi ­ nancial and communication sectors, are given ex post competition law power. The main exception is ex ante merger control, which remains the exclusive competence of the CMA. For more detail, see CMA, ‘“Baseline” Annual Report on Concurrency – 2014’, CMA24 (London, 2014) part A https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/299782/CMA24.pdf. 11 Art 102 states: ‘Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. [s18, CA 1998 – is limited to affecting trade in the UK.]

60  The Limitations of Competition Law in Tackling Consumer Harm from adopting practices deemed to be anticompetitive, preventing other firms from thriving and thus exerting a competitive restraint (ie anticompetitive foreclosure).

(i)  Excessive Prices Article 102(a) TFEU (section 18(2)(a) CA 1998) explicitly prohibits the imposition, directly or indirectly, ‘of unfair purchase prices or unfair trading conditions’. This provision prohibits excessively high prices.12 From a policy perspective, it is generally argued that enforcement against alleged excessive prices is justified only under special circumstances, namely when there are high entry barriers (so that incumbent firms are not under threat) and market power is not the result of past successful innovation. This is because the identification of what constitutes excessive prices is fraught with difficulties in working out a proper competitive benchmark. Therefore, intervention leading to a wrong conviction on the basis that a firm practices high pricing may risk chilling the incentives to compete by investing in innovation.13 In United Brands, the CJEU set out a twofold test to assess whether a price is abusive in that ‘it has no reasonable relation to the economic value of the product’. It should be shown that (i) the price–cost margin is excessive; and (ii) the price imposed ‘is either unfair in itself or when compared to competing products’.14 These are cumulative conditions. To tackle the second element, the CJEU further advanced the so-called ‘yardstick competition’ method, whereby the alleged excessive prices shall be benchmarked against suitable comparators, such as other prices charged by the dominant firm or prices charged by other firms for similar products.15 In this respect, the CJEU clarified that the enforcement authority should rely on a variety of such benchmark Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 12 See, eg DS Evans and AJ Padilla, ‘Excessive Prices: Using Economics to Define Administrable Legal Rules’ (2005) 1 Journal of Competition Law and Economics 97, 98; P Akman, ‘Exploitative Abuse in Article 82EC: Back to Basics?’ (2009) 11 Cambridge Yearbook of European Legal Studies 165. 13 See P Akman and L Garrod, ‘When Are Excessive Prices Unfair?’ (2011) 7 Journal of Competition Law and Economics 403; M Motta and A de Streel, ‘Excessive Pricing in Competition Law: Never Say Never?’ in A Fredenberg and N Strand (eds), The Pros and Cons of High Prices (Kalmar, Swedish Competition Authority, 2007). 14 Case 27/76 United Brands v Commission [1978] ECR 207, [1978] 1 CMLR 429, paras 250–52. 15 For a detailed summary of the relevant case law, see European Commission, ‘Submission to the OECD Working Party No 2 on Competition and Regulation’, DAF/COMP/WP2/WD(2011)54 (Brussels, 2011) http://ec.europa.eu/competition/international/multilateral/2011_oct_excessive_ prices.pdf.

Ex-Post Enforcement against Exploitative Abuses  61 comparisons, as no single method is perfect and thus sufficient on its own.16 In addition, the Court also recognised the need to establish the persistent nature of excessive prices.17 It is worth emphasising that an ‘exploitative abuse’ – that is, a ‘conduct which is directly exploitative of consumers’ (as would be abusive pricing) – is not covered by the Guidance on the Commission’s enforcement priorities.18 At the time the Guidance was adopted, the then antitrust Commissioner, Neelie Kroes, explained: ‘it is wise in enforcement policy to give priority to so-called exclusionary abuses, since exclusion is often at the basis of later exploitation’.19 However, the enforcement guidance also states that ‘the Commission may decide to intervene in relation to such conduct, in particular where the protection of consumers … cannot otherwise be adequately ensured’.20 In addition, the European Commission also signalled that intervention may be justified when the existing position of dominance was acquired as a result of exclusionary conduct as opposed to a superior product offering. Since Article 102 TFEU only applies to alleged exclusionary abusive conduct by firms that are already dominant, the acquisition of a position of dominance through an alleged exclusionary practice would fall outside its scope. This is therefore what is known as a ‘gap case’. Hence, enforcement against the resulting high prices once the alleged firm has become dominant might be the only way to protect consumers.21 Arguably, the reticence to control exploitative abuse may be a reflection of the lack of judgments emanating from European courts. As put by Advocate General Wahl, ‘Admittedly, the Court of Justice has not ruled out that prices might be banned for being exploitatively high, but there is no case law in which the Court has actually found a particular price being exploitatively high’.22 Similarly, As would appear evident from the Scandlines decision, the Commission seems reluctant to strike down what might be perceived as unfair prices. Indeed, if the reasoning of

16 The importance of this approach found recent confirmation in the fact that on 7 June 2018, the UK Competition Appeal Tribunal (CAT) quashed the CMA’s enforcement decisions against pharmaceutical firms Pfizer and Flynn for charging allegedly excessive prices for their epilepsy drug. In detail, the CAT criticised the CMA for failing to properly evaluate the drug’s economic value and sufficiently analysing the prices of comparable products, which contradicted the allegations of unfairness. Moreover, the CAT ruled that the CMA should not have ignored an argument put forward by the defendants that their price could be deemed to be fair under one test and proceed instead to finding an abuse solely on the basis of an alternative test. Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd Pfizer Inc and Pfizer Limited v Competition and Markets Authority [2018] CAT 11. 17 Case C-177/16 Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra – Latvijas Autoru apvienība’ Konkurences padome (AKKA/LAA) (not yet published) ECLI:EU:C:2017:689. 18 European Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings [2009] OJ C45, 7. 19 As quoted in Akman (n 4). 20 European Commission (n 18). 21 ibid para 7. 22 N Wahl, ‘Exploitative High Prices and European Competition Law – A Personal Reflection’ in A Fredenberg and N Strand (eds), The Pros and Cons of High Prices (Kalmar, Swedish Competition Authority, 2007) 62.

62  The Limitations of Competition Law in Tackling Consumer Harm the Commission is correct, it would seem practically impossible to strike down a price which is not higher than the monopoly price.23

Specifically, Advocate General Wahl emphasised the Commission’s reliance on demand-side, non-cost-related factors to establish whether there is a reasonable relationship between the price and the economic value of the product or service concerned (ie whether the price is unfair). Arguably, any transacted price could be justifiable on the basis of demand-side, non-cost factors because, by definition, the customer has ultimately accepted to pay it. In this respect, General Court Judge van der Woude once argued that Article 102(a) TFEU is of a subsidiary nature in that the concept of fairness is a notion of last resort.24 Consequently, the normative principle of fairness should only prevail where the competitive process has ceased to play its welfare-creating role, and where abstention (which remains the customer’s only choice) is not considered as a realistic choice. More recently, there has been a resurgence of cases against allegedly excessive prices, in particular in the pharmaceutical sector.25 According to Commissioner Vestager, there can be cases where intervention may be justified by the lack of competition due to the fact that ‘noone else is interested in coming in to the market, because there isn’t enough demand for the [product in question] to make it worth their while’.26 Reliance on Article 102(a) TFEU (section 18(2)(a) CA 1998) is problematic for at least two reasons. First, this enforcement route requires the finding of a position of dominance in the relevant market. This has invariably meant an individual dominant position, meaning that an individual firm can permanently increase prices (decrease product quality), thus ‘behav[ing] to an appreciable extent independently of its competitors, its customers and ultimately of the consumers’.27 In the market configurations analysed under the CToHs in chapter five, the adoption of unfair (exploitative) practices is typically a stratagem deployed to extract more revenue having failed to do so by competing fairly (in the sense of openly and transparently). In other words, the reliance on unfair (exploitative) practices suggests that the firm in question is in fact not in a position of market dominance. 23 ibid 61. More explicitly (ibid 51): ‘If it is logical and expected from an economic point of view that the market conditions, that is the competitive conditions, have an influence over the market price it would seem natural to expect a monopolist to charge the monopoly price. Interfering with such a pricing policy would be tantamount to interfere with dominance as such. So then, when is a price excessively high?’ 24 M van der Woude, ‘Unfair and Excessive Prices in the Energy Sector’ (2008) 2 European Review of Energy Markets www.eeinstitute.org/european-review-of-energy-market/erem6-article-van-der-woude. 25 For example, the European Commission opened an investigation into the pricing of five cancer drugs by Aspen Pharmaceuticals: see, European Commission ‘Commission Opens Formal Investigation into Aspen Pharma’s Pricing Practices for Cancer Medicines, press release, 15 May 2017 http:// europa.eu/rapid/press-release_IP-17-1323_en.htm. 26 See M Vestager, ‘Protecting Consumers from Exploitation’, speech given at the Chillin’ Competition Conference, Brussels, 21 November 2016 https://ec.europa.eu/commission/commissioners/2014-2019/ vestager/announcements/protecting-consumers-exploitation_en. 27 Case 85/76 Hoffmann-La Roche v Commission [1979] ECR 461, para 38.

Ex-Post Enforcement against Exploitative Abuses  63 Indeed, it can often be the case that the use of unfair (exploitative) practices is motivated by a desire to escape the pressure of intense competitive rivalry. This is particularly the case when the firm in question is in a weaker competitive position, so that consumer exploitation through unfair practices is seen as a way to compensate for a comparative competitive disadvantage. This, in turn, entails that, notwithstanding the fact that consumer exploitation may well be widespread across the relevant market, firms might not be able to extract what could be deemed to be excessive profits. Therefore, this is the second reason why the use of Article 102(a) TFEU would not normally constitute a viable enforcement strategy.

(ii)  Exploitative Abuse of Collective Dominance The enforcement of Art 102 TFEU (section 18 CA 1998) requires the demonstration of the existence of a position of collective dominance underpinned by tacit collusion, and an exploitative abuse of that position. In respect of the abuse, the mainstream line of argument seems to be that the ability to raise prices above competitive levels in a parallel fashion, albeit not excessively, is inherent in the nature of collective dominance and, thus, not ipso facto an abuse. As Richard Whish put it, ‘here the abuse would lie not in the parallelism of the prices, but in their level’.28 Accordingly, the finding of an exploitative abuse of collective dominance would be as challenging as under the United Brands test for excessive prices exercised by a single firm. This interpretation is deeply flawed in our view. Provided that a tacit collusive agreement is not only sustainable, but also detectable – that is to say, distinguishable from normal competitive conditions – collectively dominant firms should not be allowed to benefit from a de facto immunity from an offence which members of an explicit cartel would not enjoy. Indeed, the argument that the alleged cartel agreement has not led to an increase in prices has been thoroughly rejected not only as a line of defence against a finding of liability, but also as a mitigating factor for the purpose of calculating the ensuing fine.29 By the same token, it should be possible to establish that parallel adoption of exploitative unfair practices is in breach of Article 102 TFEU to the extent that it is underpinned by tacit collusion, regardless of whether it resulted in excessive profits earned by the alleged colluding firms. This leads us to exploring the notion of tacit collusion and allied collective dominance. When the use of unfair exploitative practices is common across rival firms, as opposed to a single dominant one, it is reasonable to ask whether this

28 R Whish, Competition Law (6th edn, Oxford, Oxford University Press, 2009) 566. See also FE Mezzanotte, ‘Tacit Collusion as Economic Links in Article 82 EC Revisited’ (2009) 30 European Competition Law Review 137. 29 Case C-279/98 P Cascades SA v Commission of the European Communities [2000] ECR I-09693.

64  The Limitations of Competition Law in Tackling Consumer Harm alignment of conduct is the result of what would amount to an anticompetitive collusive agreement. This question is justified because rival firms may decide not to pursue a comparative competitive advantage by instead treating consumer fairly and thus not only attracting consumers who are dissatisfied with the prevailing poor standard of professional diligence across the market, but also building a lasting reputation for being trustworthy, which, in turn, should contribute to improved customer retention. Collusion can be considered to be a ‘paradigmatic exploitative offense’,30 in that a group of rival firms ‘substitute coordination for the risks of competition on the understanding that collusion pays more than competition’.31 The prospect of enforcement against collusion under competition law differs widely depending on whether there is evidence of communication between the alleged colluding firms with a view to reaching an agreement to coordinate commercial conducts. No evidence of unfairly excessive prices is required to substantiate the existence of overt collusion (a cartel offence). Instead, the core of the investigation is devoted to proving the allegation that the firms concerned have communicated with each other in order to collude. By contrast, when collusion is tacit, the prospect of ex post enforcement is unrealistic. This is because of the so-called ‘oligopoly problem’. It is extremely difficult for antitrust authorities to discriminate between collusive and non-collusive outcomes solely on the basis of what looks like parallel conduct – that is, in the absence of any compelling evidence of contacts between the alleged colluding firms.32 Indeed, the European Commission excluded collective dominance abuses from the scope of its Guidance on the Commission’s enforcement priorities, in what is interpreted as a signal of the Commission’s reluctance to use Article 102 TFEU to tackle tacit collusion.33 This policy stance reflects the fact that, to date, there have been no Article 102 TFEU infringement decisions in which a position of collective dominance has been found on the basis of tacit collusion alone, that is, in the absence of any other structural or contractual link. This is notwithstanding the fact that in Sony/BMG the CJEU indicated that this is within the reach of current case law.34

30 E Fox, ‘What Is Harm to Competition? Exclusionary Practices and Anticompetitive Effects’ (2002) 70 Antitrust Law Journal 371. 31 Quoted from FE Mezzanotte, ‘Using Abuse of Collective Dominance in Article 102 TFEU to Fight Tacit Collusion: The Problem of Proof and Inferential Error’ (2010) 33 World Competition 77. 32 For a detailed discussion, see P Siciliani, ‘Should We Act Ex-Post against Tacit Collusion – and How?’ (2014) 5 Journal of European Competition Law and Practice 294. 33 Above (n 18), para 4. It is worth keeping in mind that this is in contrast to the previous DG ­Competition staff discussion paper, where the DG Competition staff endorsed the application of Art 102 TFEU (then Art 82 TEC) to oligopolistic conduct that is not accompanied by agreement or concerted practice: see B Hawk and G Motta, ‘Oligopolies and Collective Dominance: A Solution in Search of a Problem’ in EA Raffaelli (ed), Antitrust between EC Law and National Law (Brussels, Bruylant, 2008) 65. 34 Case C-413/06 P Bertelsmann AG and Sony Corporation of America v Independent Music Publishers and Labels Association (Impala) [2008] ECR I-04951, paras 117–23.

Ex-Post Enforcement against Exploitative Abuses  65 Under established case law, to substantiate the existence of a position of collective dominance in the form of tacit collusion, it must be proved that the alleged colluding firms present themselves or act as a collective entity. In the absence of any structural links between the firms, the General Court (then the Court of First Instance) confirmed in Impala35 that the finding of a collective entity is aligned to the threefold Airtours test.36 In this test, the following must be cumulatively established: (i) the capacity, on the part of the colluding firms, to mutually observe their conduct and to identify any deviant conduct; (ii) the presence of incentives to refrain from deviating from the common conduct against the threat of credible and effective punishment strategies; and (iii) the absence of market restraints, meaning the absence of power on the part of competitors and consumers to react to the negative effects of coordination. The Airtours test is shaped around the so-called ‘folk theorem’, an economic theory that sets out the condition underpinning the stability of tacit collusion in a ‘prisoner’s dilemma’ game setting. In a prisoner’s dilemma, firms have a unilateral incentive to deviate from the common course of exploitative conduct (ie undercutting rival firms charging monopolistic prices). However, firms also reckon that sticking to collusion is preferable because the prospect of losing future higher profits (resulting from joint monopolisation) if they were to break up the collusion (caused by deviation) more than offsets the current gains from deviation. Notwithstanding the assimilation of the legal test for a finding of tacit collusion under Article 102 TFEU with the Airtours conditions (focused on the existence of a credible retaliatory mechanism), it has been observed that ‘the most effective [retaliatory] mechanism is one where the mere prospect of retaliation is so effective that no actual deviation occurs’.37 Therefore, the requirement to prove the existence of a specific retaliatory mechanism and its deterrent effect should be relevant only insofar as there is evidence of past deviations from the common course of conduct.38 This is in line with Impala, in which the General Court considered the adoption of a less stringent interpretation of the Airtours criteria when applied ex post: It follows that, in the context of the assessment of the existence of a collective dominant position, although the three conditions defined by the Court of First Instance in Airtours v Commission, paragraph 45 above, which were inferred from a theoretical analysis of the concept of a collective dominant position, are indeed also necessary, they may, however, in the appropriate circumstances, be established indirectly on the basis of what may be a very mixed series of indicia and items of evidence relating to the 35 See Case T-464/04 Independent Music Publishers and Labels Association (Impala, association internationale) v Commission of the European Communities [2006] ECR II-2289, para 251. 36 See Case T-342/99 Airtours plc v Commission [2002] ECR II-2585, para 62. 37 See AJ Padilla and R O’Donoughue, The Law and Economics of Article 82 EC (Oxford, Hart Publishing, 2006) 158. 38 See G Aigner, O Budzinski and A Christiansen, ‘The Analysis of Coordinated Effects in EU Merger Control: Where Do We Stand after Sony/BMG and Impala?’ (2006) 2 European Competition Journal 311, 329.

66  The Limitations of Competition Law in Tackling Consumer Harm signs, manifestations and phenomena inherent in the presence of a collective dominant position. Thus, in particular, close alignment of prices over a long period, especially if they are above a competitive level, together with other factors typical of a collective dominant position, might, in the absence of an alternative reasonable explanation, suffice to demonstrate the existence of a collective dominant position, even where there is no firm direct evidence of strong market transparency, as such transparency may be presumed in such circumstances.39

The General Court further suggested, with regard to apparent parallel conduct, that ‘a finding of a common policy over a long period might, in certain circumstances and in the absence of an alternative explanation, suffice to demonstrate the existence of a dominant position’.40 In the subsequent appeal, the CJEU further qualified this approach: The investigation of a pre-existing collective dominant position based on a series of elements normally considered to be indicative of the presence or the likelihood of tacit coordination between competitors cannot therefore be considered to be objectionable of itself. However … it is essential that such an investigation be carried out with care and, above all, that it should adopt an approach based on the analysis of such plausible coordination strategies as may exist in the circumstances.41

In particular, the CJEU argued that ‘the assessment … should not be undertaken in an isolated and abstract manner, but should be carried out using the mechanism of a hypothetical tacit coordination as a basis’.42 In conclusion, the odds of establishing an offence for excessive prices under Article 102 TFEU (section 18 CA 1998) are slim. Aside from the fact that such conduct is unlikely to sanctioned as an abuse, the legal test used to establish the existence of a position of collective dominance is fraught with difficulties. The General Court indicated that it could be sufficient to rely on the observation of parallel prices persistently above competitive levels. However, this line of inquiry may be quite challenging to pursue, given the difficulty in identifying proper competitive price benchmarks.43 Nevertheless, it is worth noting that the General Court did not refer to excessive prices, but merely to prices above competitive levels. Ultimately, though, in the absence of evidence of deviation followed by retaliation, it might not be possible to reconcile the two conflicting interpretations of the observed parallel conduct across alleged firms: the plaintiff ’s argument that the future loss of collusive profits motivates the adherence to the collusive pact is in contrast to the defendants’ counterargument that parallel conduct is already

39 [2002] ECR II-2585, paras 251–52. 40 ibid, para 254. 41 Bertelsmann (n 34) para 129. 42 ibid, para 126. 43 See AJ Padilla, ‘Should Profit Margins Play a More Decisive Role in Horizontal Merger Control?’ (2018) 9 Journal of European Competition Law & Practice 260.

Ex-Post Enforcement against Exploitative Abuses  67 consistent with competitive rivalry, given that the incentives to deviate would otherwise be too strong.44 This indeterminacy would not arise, however, with respect to the market configurations analysed under the CToHs. This is because the collusive and competitive outcomes would differ, with rival firms being aligned to the common adoption of unfair practices in the former scenario but not in the latter. This is in contrast to the classic case of price parallelism, whereby the competitive and collusive outcomes are very hard to tell apart. Therefore, instead of a contentious and ultimately inconclusive inquiry into the existence of a credible retaliatory mechanism (as dictated by the second limb of the Airtours test), the problem boils down to assessing whether firms have a (unilateral) incentive to depart from a common unfair course of conduct in order to build a lasting reputation for superior customer care. The CToHs in chapter five provide an analytical framework to pursue this line of inquiry.

B.  Tackling Parallel Adoption of Unfair ‘Exploitative’ Conducts under Article 101 TFEU (Chapter I CA 1998) In light of the difficulties described above, it is important to explore whether enforcement against the parallel adoption of an exploitative unfair conduct could be more straightforward. Article 101 TFEU (section 2 CA 1998) tackles alleged anticompetitive agreements and, more to the point, concerted practices. In Dyestuff, the CJEU defined concerted practices as ‘a form of coordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical cooperation between them for the risk of competition’.45 The Dyestuffs and Wood Pulp judgments by the CJEU are normally referred to as relevant case law supporting the view that parallel conduct does not amount, in itself, to a concerted practice under Article 101 TFEU. Paragraphs 65–67 in Dyestuffs are particularly illustrative: By its very nature, then, the concerted practice does not have all the elements of a contract but may inter alia arise out of a coordination which becomes apparent from the behaviour of the participants. Although parallel behaviour may not itself be identified with a concerted practice, it may however amount to strong evidence of such a practice if it leads to conditions of competition which do not respond to the normal conditions of the market, …. This is the case especially where the parallel behaviour is such as to permit the parties to seek price equilibrium at a different level from that which would have resulted from 44 See Siciliani (n 32); P Siciliani, ‘Refusal to Supply and Collective Dominance: Closing the Gap in Art 82?’ (2009) 54 Antitrust Bulletin 683. 45 Case 48/69 Imperial Chemical Industries Ltd v Commission of the European Communities [1972] ECR I-00619, para 64.

68  The Limitations of Competition Law in Tackling Consumer Harm competition, and to crystallise the status quo to the detriment of … free choice by consumers of their suppliers.

With regard to Wood Pulp,46 the key insight from this judgment is that, more often than not, practices that have the potential to facilitate coordination may nevertheless have been adopted for other commercial purposes that are perfectly legitimate, rather than with the aim of distorting competition. Therefore, it is incumbent on the plaintiff to dismiss the existence of any plausible explanation for the parallel course of conduct observed in the market concerned.47 To establish the existence of concerted practice solely on the basis of circumstantial evidence, such as the uniform adoption of an alleged facilitating practice, but in the absence of evidence of reciprocal contact through direct or indirect communication, the plaintiff is required first to refute the existence of plausible alternative explanations. In this respect, it should be relatively straightforward to rule out the existence of alternative legitimate explanations for treating consumers unfairly, so that the parallel adoption of unfair commercial practices ‘leads to conditions of competition which do not respond to the normal conditions of the market’. The challenge, though, would be in establishing that, by doing so, the alleged firms have ‘knowingly substituted practical cooperation between them for the risk of competition’. This is equivalent to establishing that the strategic interaction between rival firms must conform to that of a prisoner’s dilemma, whereby firms may have a unilateral incentive to deviate from the common exploitative unfair course of conduct, but prefer to stay aligned in order not to lose the future stream of collusive profits. Accordingly, this enforcement approach under Article 101 TFEU (section 2 CA 1998) is basically equivalent to an unorthodox one under Article 102 TFEU in terms of strategy and burden of proof.

III.  The Case for a Holistic Approach under an Ex Ante Administrative Market Regime As outlined above, the scope for intervention under Articles 102 and 101 TFEU (chapters I and II CA 1998) would be restricted to those cases that conform to the strategic configuration of a prisoner’s dilemma, whereby firms have a unilateral incentive to deviate from the prevailing poor standard of professional diligence in order to pursue a lasting competitive advantage.

46 Case 89/85 A Ahlström Osakeyhtiö and others v Commission of the European Communities [1993] ECR I-01307. 47 See, in this sense, Whish (n 28) 554; J Faull and A Nikpay, The EC Law of Competition (Oxford, Oxford University Press 2007) 213–14.

Holistic Approach under an Ex Ante Administrative Market Regime  69 However, there are many market configurations where treating consumers unfairly is the dominant strategy. It would not pay off to do otherwise.48 This can in theory be the case where treating consumers fairly entails educating them about how they can avoid repeating past mistakes. This entails the risk of seeing these de-biased customers switch to a rival firm still keen on exploiting other consumers’ mistakes in order to benefit from the resulting cross-subsidisation.49 More concretely, the existence of a unilateral incentive to pursue a lasting competitive advantage by treating consumers fairly ultimately requires that consumers are sufficiently engaged to be responsive to such an attempt. This may be challenging when the persistent low standard of professional diligence has led consumers to become increasingly disengaged and distrustful of firms in general, as is the case in many consumer markets. Therefore, these cases fall into a substantive gap under EU and national competition law. Enforcement to improve competition is unavailable to protect consumers. In this respect, in the UK, under chapter 1 of part 4 of the Enterprise Act 2002 (EA 2002), concurrent competition authorities can make a market investigation reference (MIR) to the Competition and Markets Authority to do a thorough assessment of a market (or a group of markets) where competition is not working well. We discuss this market regime more fully in section IV, so limit our comments here to framing how this tool could assist in tackling ‘gap cases’. Note that two of the case studies discussed in chapter six will also cover the use of MIR powers by the CMA in the retail energy and banking sectors. The use of MIRs enables the imposition of concrete remedies in cases where intervening under competition law would not be appropriate, and provided that there is a reasonable chance that appropriate remedies will be available. Therefore, this subsidiary regime is not based on deterrence via steep fines for firms found to be in breach of competition law. Instead, it is based on the identification of proportionate remedies to address persistent market failures without a finding of liability under competition law.50 48 In this sense, see D Currie (then Chairman of the CMA), ‘The Case for the British Model of Independent Regulation 30 Years On’, The Currie Lecture, Cass Business School, 21 May 2014 www.gov. uk/government/speeches/the-case-for-the-british-model-of-independent-regulation-30-years-on: ‘while markets represent the most effective way to organise complex and dispersed economic activity, markets do not always work well. This may be because there are impediments, such as entry barriers, to competition. It may also be because competition takes a malign form, with businesses competing to gouge, rather than serve, customers.’ 49 For more on this market configuration, see CToH 4 ‘the subsidy’ in ch 5. 50 See J Fingleton (then CEO of the OFT), ‘The Future of the Competition Regime: Increasing Consumer Welfare and Economic Growth’, speech at the Law Society Competition Section Annual Conference, 25 May 2011, 12–13: ‘The MIR regime, which is almost unique internationally, can to some extent be seen as a legacy of a period when the UK lacked a modern infringement-based competition regime of the kind that has been adopted across Europe and internationally … However, the approach to deterrence through enforcement and sanctions has emerged internationally as a ‘superior standard’ … Yet the MIR tool remains valuable to address the gaps that enforcement can’t reach.’ See also A Coscelli and A Horrocks, ‘Making Markets Work Well: the UK Market Investigations Regime’ (2004) 10 Competition Policy International 24.

70  The Limitations of Competition Law in Tackling Consumer Harm The following quote from the original MIR guidance addresses the ‘gap cases’ issue: Oligopolistic markets in which firms engage in apparently parallel behaviour while falling short of actually concerting their actions (often referred to as tacit collusion) present a more complicated issue. The [concurrent competition authority] recognises that EC case law has confirmed that the concept of collective dominance may be applicable in these circumstances, which would bring the conduct involved within the ambit of CA98. But this case law does not at present cover all types of coordinated parallel behaviour that may have an adverse effect on competition. Indeed, the judgement of the Court in the Airtours case appears to limit the applicability of the concept of collective dominance. Market features that can lead to adverse effects on competition in an oligopolistic market can be wider than the conditions that the case law has found to be necessary for collective dominance, that is, for oligopolists successfully to engage in tacit collusion. Furthermore, what qualifies as an abuse of collective dominance is under developed in the case law. For these reasons a market investigation reference will be able to address wider competition concerns than could be addressed by a CA98 case and might, therefore, be a better way of proceeding.51

We have already explained that the traditional view of demand-side consumer protection enforcement and policy is that it is complementary (if not subordinate) to supply-side competition law enforcement and policy. However, there are clearly circumstances where the latter ought to be seen in a relationship of subsidiarity to the former. When rival firms are refusing to compete by treating consumers fairly, notwithstanding the general dissatisfaction of consumers with the poor standard of professional diligence, competition authorities will have to be willing to step into uncharted territory from the perspective of the existing relevant case law to apply Articles 101 and 102 TFEU successfully (and/or their national equivalent provisions). Enforcement against an individual firm, albeit in a dominant position, would probably prove too arduous, given the emphasis on profitability under the limited case law on alleged excessive prices under Article 102 TFEU. As a result, remedial intervention under the MIR regime still represents the best available option to close the substantive gap. However, this regime, although available in the UK, is not available to all enforcers in the EU. In any event, using MIR still leaves the gap open with respect to scenarios where the adoption of unfair commercial practices is not (yet) widespread enough to warrant the launch of an investigation. As a result, for the so-called gap cases in competition law, the most viable option is to pursue a higher standard of consumer protection under consumer law. As explained later on, in chapter five, to do so may also have an important pre-emptive property. Using consumer law would prevent a race to the bottom, whereby the use of unfair practices becomes increasingly common, potentially reaching the point where treating consumers unfairly is the only 51 OFT, Guidance about the Making of References under Part 4 of the Enterprise Act (London, 2006) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/ file/284399/oft511.pdf.

The Enforcement Framework in the UK  71 dominant course of conduct. In other words, targeted early intervention under consumer law (pushing to adopt adequate standards of professional diligence in the relevant market) may spare enforcers from more challenging market-wide interventions at a point where consumers have lost trust in the belief that the market is working well for them.

IV.  The Enforcement Framework in the UK The CMA assumed its role as the UK’s primary competition and consumer agency in April 2014. In doing so, the CMA brought together most of the powers and responsibilities of the now-abolished Competition Commission and the Office of Fair Trading (OFT). The CMA has a UK economy-wide competition remit, overseeing the promotion of competition with the aim of making markets work well for consumers, businesses and the economy. Among its competition powers, the CMA is responsible for: (i) investigating mergers between firms which could restrict competition; (ii) investigating where there may be breaches of UK or EU prohibitions of anticompetitive agreements and abuses of dominant ­positions; (ii) conducting market studies and investigations in markets where there may be competition and consumer problems that do not generally involve any firms (or individuals) breaching UK or EU competition law; (iv) bringing criminal proceedings against individuals who commit cartel offences; and (v) cooperating with concurrent sector regulators, and encouraging them to use their competition powers.52 We first continue to explore market powers and ex ante enforcement tools before assessing the merits of private enforcement mechanisms in protecting consumers from harm.

A.  Ex Ante Enforcement: Market Studies and Investigations Powers In the UK, under the market investigations regime, the CMA can impose remedies to fix market failures without the need to first establish firms’ liability for breaches 52 The concurrent sector regulators are: the CAA (Civil Aviation Authority), in respect of air traffic services and airport operation services; Ofcom (Office of Communications), in respect of communications (telecommunications, broadcasting and postal services); Ofgem (Gas and Electricity Markets Authority), in respect of electricity and gas in Great Britain; the FCA (Financial Conduct Authority), in respect of financial services and the Payment Systems Regulator in respect of inter-bank payment transfer systems (from April 2015); Monitor, in respect of healthcare services in England; the ORR (Office of Rail Regulation), in respect of railway services; Ofwat (Water Services Regulation Authority), in respect of water and sewerage services in England and Wales; and the NIAUR (Northern Ireland Authority for Utility Regulation), in respect of electricity, gas, and water and sewerage services in Northern Ireland.

72  The Limitations of Competition Law in Tackling Consumer Harm of either competition or consumer laws.53 Market investigations break the traditional lines between ex ante and ex post regulation and broaden the competition authorities’ power to include ‘market engineering’.54 Part 4 of the EA 2002 sets out the powers available for market investigations. Market investigations are detailed investigations into whether there is an adverse effect on competition in a given market.55 Investigations were partly reformed by the Enterprise and Regulatory Reform Act 2013 (ERRA 2013), primarily with regard to the institutions able to conduct the investigations. The ERRA 2013 transferred all powers and responsibilities to the CMA from the pre-existing OFT and Competition Commission. To ensure separation between the two stages of decision making, which now rests entirely within the CMA, specific procedural safeguards are in place.56 The CMA is also able to conduct market studies. Market studies are ‘examinations into the causes of why particular markets may not be working well, taking an overview of regulatory and other economics drivers and patterns of consumer and business behaviour’.57 According to the OECD, such studies are a good way to develop the link between consumer policy and competition policy.58 Market studies are often used as a first step before deciding if a market investigation is necessary as per section 5 EA 2002,59 although they are not a prerequisite to undertaking a market investigation.60 Some of the powers granted to the CMA in this area are also held by other sectoral regulators. For example, the Financial Conduct Authority (FCA) has some relevant powers under the EA 2002 and the Financial Services and Market Act 2000 (FSMA 2000).61 The FCA has the power to conduct market studies and make a market investigation reference to the CMA for full investigation, pursuant to section 234(E) and (C) FSMA 2000. Market studies can be carried out to consider the extent to which a matter in relation to the acquisition or supply of financial

53 See Coscelli and Horrocks (n 50). 54 See T Indig and MS Gal, ‘New powers – new vulnerabilities? A critical analysis of market inquiries performed by competition authorities’ in J Drexl and F Di Porto (eds), Competition Law as Regulation (Cheltenham, Edward Elgar Publishing, 2015). 55 CMA, Market Studies and Market Investigations: Supplemental Guidance on the CMA’s Approach (London, 2014, revised in 2017) 20 www.gov.uk/government/publications/market-studies-andmarket-investigations-supplemental-guidance-on-the-cmas-approach. 56 Notably, the roles taken by the OFT and the CC are split between the Markets and Merger Directorate of the CMA board and the CMA panel groups. 57 CMA (n 55) 2. 58 OECD, Market Studies (Paris, 2008) 7 www.oecd.org/daf/competition/sectors/41721965.pdf. 59 See OFT, Market Studies: Guidance on the OFT Approach (London, 2010) www.gov.uk/government/ publications/how-market-studies-are-conducted. 60 See CMA, Market Investigation References (London, 2014) www.gov.uk/government/publications/ market-investigation-references. 61 According to ss 1B–D FSMA 2000, the FCA has two objectives: the consumer protection objective is to secure an appropriate degree of protection for consumers. The competition objective is to promote effective competition in the interest of consumers in the markets for regulated financial services and certain services provided by an investment exchange.

The Enforcement Framework in the UK  73 services in the UK has or may have effects adverse to the interests of consumers,62 and assess the extent to which steps can and should be taken to remedy, mitigate or prevent any such adverse effects in accordance with section 130(A)(2) EA 2002.63 The FCA can also make a request to the CMA to consider whether a feature, or combination of features, of a market in the UK for financial services may prevent, restrict or distort competition in connection with the supply or acquisition of any financial services in the UK or a part of the UK.64 The CMA itself can initiate investigations following complaints received by competitors or information uncovered by Parliamentary committees. In addition, a number of designated consumer bodies can launch ‘super-complaints’ under section 11(1) EA 200265 prompting action from the CMA or relevant sectoral regulator, that then has 90 days to respond and explain steps to be taken or reasons for not following up. For example, under section 234(C) FSMA, a designated consumer body may make a super-complaint to the FCA that a feature, or combination of features, of a market in the UK for financial services is, or appears to be, significantly damaging the interests of consumers.66 Super complaints to both the CMA and the sectoral regulators have been useful in a number of instances. For example, in 2005, a super complaint by Citizens Advice to the FCA led to unravelling the PPI scandal. In 2011, a super complaint to the OFT regarding card surcharging at the initiative of Which? led to changes in the law and the way card charges could be imposed.67 And in 2015, a super complaint to the Office of Rail and Road (ORR) led to changes to the way rail compensation is advertised and paid out.68 Initial responsibility for market studies and market investigation references lies with the CMA’s board. When the CMA’s board decides that a market investigation reference is to be made, the CMA’s chair will constitute a Market Reference Group. Section 130A EA 2002 (introduced by the ERRA 2013) requires the publication of a market study notice, which contains information on the scope of the study, its duration and the period during which representation can be made by stakeholders (section 130A(3)). The notice is important because it triggers some statutory 62 FCA, Market Studies and Market Investigations References, a Guide to the FCA’s Powers and Procedures (London, 2015) 4 www.fca.org.uk/publication/finalised-guidance/fg15-09.pdf. 63 ibid. 64 FSMA 2000, s 234H. 65 OFT, Super-complaints: Guidance for Designated Consumer Bodies (London, 2003) www.gov.uk/ government/publications/how-consumer-bodies-can-make-super-complaints. 66 ibid. Similar, albeit more limited, powers are granted to sectoral regulatory bodies such as Ofgem and Ofcom: see CMA, Tackling the Loyalty Penalty: Response to a Super-complaint Made by Citizens Advice on 28 September 2018 – Annex F: Legal Framework (London, 2018) https://assets.publishing. service.gov.uk/mwg-internal/de5fs23hu73ds/progress?id=oRIeX9mKKy9G5GxAu7MWCihUKEp4X 7igf7xfOLr1PG0,&dl. 67 See C Riefa, ‘EU Payment Surcharges Rules Lacking Teeth: Evidence from Empirical Studies into the Control of Surcharges in the EU and UK Travel Industry’ (2018) 43 European Law Review 341. 68 See ORR, Office of Rail and Road Super-complaint Response Report: Which? Super-complaint – Compensation Arrangements in the Market for Passenger Rail Services (London, 2016) http://orr.gov.uk/ info-for-the-public/rail-compensation-super-complaint.

74  The Limitations of Competition Law in Tackling Consumer Harm upper limits and acts as the formal date from which the CMA can start exercising its investigatory powers. Section 174 describes the available powers, which include the power to request information as well as formal notices to attend a specified place to give evidence. The CMA has six months to decide whether or not to take any further action and a total period of 12 months to publish the report. Market studies can also result in taking undertakings rather than proceeding with market investigations,69 all of which must be explained in the report. Under section 131(1) EA 2002, a market investigation reference may be made by the CMA where it has Reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom.

Similar powers are granted to the FCA, as explained above. Section 131(2) defines what a ‘feature of a market’ is. It includes the structure of the market concerned or any aspect of that structure; any conduct (whether or not in the market concerned) of one or more than one person who supplies or acquires goods or services in the market concerned; or any conduct, relating to the market concerned, of customers of any person who supplies or acquires goods or services. This therefore directly enables intervention to address problems that can stem from aspects of consumer behaviour,70 including decision processes and searching/switching costs. Market investigations are therefore able to address conduct that classic competition policy is unable to address, since no prohibited conduct is necessarily identified. Conduct also includes any failure to act (whether intentional or not) and any other unintentional conduct as per section 131(3) EA 2002. Market investigations are also able to assist consumers in cases where consumer policy might be unable to do so. Both the Protection from Unfair Trading Regulations 2008 and part 2 of the Consumer Rights Act 2015 (CRA 2015), which replaced the Unfair Terms in Consumer Contracts Regulations 1999, requires some element of unfair conduct on the part of the supplier in order for any powers to be granted in the pursuit of the conduct. However, in a market investigation context, the competition authority is not required to show that the adverse effects are in any way linked to the conduct (whether fair or otherwise) of firms.71 Several types of references can be made, depending on the features and markets targeted (ordinary or cross-market references, as well as references made by the

69 CMA (n 55). 70 See C Ahlborn and D Piccinin, ‘Between Scylla and Charybdis: Market Investigations and the Consumer Interest’ in BJ Rodger (ed), Ten Years of UK Competition Law Reform (Dundee, Dundee University Press, 2010) 181. 71 ibid. The authors note that it is often the case that where consumers are inert or wrongly perceive search or switching costs to be high, there will be some aspect of firms’ behaviour that aggravates or exploits the problem.

The Enforcement Framework in the UK  75 Secretary of State raising public interest issues).72 Cross-market references were introduced by the ERRA 2013, and can be carried out in collaboration with sectoral regulators. Although they are likely to remain very rare, they will be relevant where features do not fit neatly within one market and in instances where there are recurring sources of consumer complaints or identified detriment that have the potential to affect competition adversely across numerous distinct markets (for example, the sale of secondary products at particular points of sale). The CMA panel has 18 months from the date of a market investigation reference to investigate and reach a conclusion (with one possible extension of six months if necessary). The types of remedy imposed can vary. Where deficiencies in a market are found, the CMA has a duty to remedy adverse effects under section 138 EA 2002 (as modified by the ERRA 2013). To do so, it can impose a wide range of measures, from conduct rules to structural separations (ie divestments). The remedial measures can also include making recommendations for a change in regulation or new legislation. From the date of publication of the final report, the CMA has six months to ensure the implementation of any remedies (with a possible additional four months). The market regime has some obvious advantages. It enables the pursuit of consumer policy on a scale well beyond what is possible under the various consumer protection powers conferred to sectoral regulators under unfair commercial practices and unfair contract terms legislation. Consumer law normally only grants powers to prevent particular instances or categories of unfair behaviour from continuing to take place.73 However, it does not generally allow regulators to fine traders for past breaches, which would incentivise compliance in the first instance. The market regime, nevertheless, has a limited reach, as the CMA and other sectoral regulators have limited resources and must therefore prioritise their efforts. Besides, not all Member States of the EU have a market regime in place, although this tool is developing rapidly or is being revived.74 In the absence of this administrative function, it would fall on the consumer protection authority to step up by imposing a higher standard of consumer protection. As explained in more in detail in the next chapters, we believe that this can be achieved by adopting a holistic approach to the assessment of consumer detriment and looking at whether markets can self-correct.

B.  Private Enforcement of Competition Law Enforcement of EU and national competition law traditionally takes place via public enforcement. This is notwithstanding the fact that consumers have the right 72 CMA (n 55) 14. 73 See Ahlborn and Piccinin (n 70). 74 Indig and Gal (n 54) 90 cite Norway, Spain and Poland as examples where market investigations existed but were dormant.

76  The Limitations of Competition Law in Tackling Consumer Harm to bring litigation to privately enforce competition law infringements from which they suffer, independently from any public enforcement actions. In the UK, the CRA 2015 came to broaden the jurisdiction of the Competition Appeal Tribunal (CAT) to hear stand-alone competition claims as well as introduce collective proceedings.75 Those changes are focused on making it easier for consumers to obtain redress. The changes are procedural rather than amendments of substantive competition law. A ‘person’ who has suffered loss or damage as a result of an infringement decision or an alleged infringement of the prohibitions76 can bring either a follow-on action or a stand-alone claim in front of the CAT.77 The CAT also has the power to grant injunctions. Follow-on actions use an infringement decision as the basis for claiming damages. They can offer a useful route to consumers to gain a remedy to the harm they suffered. Stand-alone actions, however, do not require any predetermination of the presence of anticompetitive behaviour, but do require the party that brings the claim to prove the infringement (as was the case previously when they were heard by the High Court). Here lies the biggest obstacle to their use, notwithstanding that those actions will not be of any use in gap cases. The CRA 2015 introduces collective actions and an opt-out collective settlement mechanism. Collective actions ought to enable consumers who have suffered small losses, that would not otherwise justify court action, to group their claims. Prior to the changes to the CRA 2015, the CAT could already hear opt-in collective actions, but these had not hitherto been successful as a mechanism for seeking redress for consumers. Indeed, the opt-in device is too great an obstacle to consumers taking part. For example, Which? brought an action against JJB Sports for selling replica football shirts under cartel conditions. The company had been fined by the OFT for the practice. Which? estimated that 1 million shirts were sold, but only 600 consumers reportedly joined the collective action. The case settled out of court. The use of an opt-out mechanism should, in theory, enable collective actions to act as a restorative mechanism, notwithstanding that the first follow-on action of this kind was rejected by the CAT in 2017.78 The action used a decision from the OFT finding infringements of chapter I CA 1998 in the setting of recommended retail prices in the sale of mobility scooters as its basis for the claim. The claimant had herself bought such a scooter. The CAT established that the action could be used for conduct taking place before their introduction, but rejected the claim on the basis that the proposed basis for quantifying consumer losses did not stand up to scrutiny.

75 CRA 2015, sch 8. 76 The prohibitions include anticompetitive agreements (including cartels) under ch 1 CA 1998; abuse of market power (and mergers) under ch 2 CA 1998; and prohibitions for infringement of EU competition law under Arts 101(1) and 102 TFEU. 77 CRA 2015, s 47A. 78 Dorothy Gibson v Pride Mobility Products Ltd [2017] CAT 9.

The Enforcement Framework in the UK  77 In any event, should an action be successful, consumers harmed by the practices ought to be able to obtain a remedy if they come forward at the distribution stage. If they do not, the damages are nevertheless imposed and distributed to a charity prescribed by order. This should act as a deterrent, notwithstanding consumer apathy for joining the claim or lack of knowledge that the claim exists. In conclusion, we have seen that competition law may offer some relief to consumers, but it has many limitations, in particular when it comes to tackling abusive pricing. While private enforcement of competition law is available, its design is not conducive to consumers taking action. Besides, and similarly to the situation under consumer law, enforcement of competition law will rest primarily on the initiative of public authorities for the foreseeable future, with the market regime particularly relevant to addressing concerns in retail markets. Accordingly, the CToHs developed in the next two chapters will be particularly useful at spurring a more assertive style of public enforcement with the aim of achieving a higher degree of consumer protection and setting appropriate conduct expectations in line with a positive duty to trade fairly.

4 The Economic Framework Underpinning Consumer Theories of Harm I. Introduction The public enforcement of consumer protection rules is primarily aimed at making sure that consumers are treated fairly and not exploited by firms. This entails that consumers are not misled by firms, so that they have the confidence to make wellinformed choices. Confident consumers are, in turn, believed to be instrumental in maintaining a healthy competitive process whereby those firms that best satisfy consumer needs can thrive. Conversely, consumer protection enforcement also indirectly protects compliant firms from firms that instead resort to unfair practices and contract terms (later on, simply practices), thus preserving the former’s incentives to compete on the merits.1 Consumer protection and competition policy can therefore be seen as ­complementary.2 This is particularly the case when consumers generally lack experience of shopping around (such as in recently liberalised industries),3 or lack expertise and familiarity with the product in question (for example, professional services which are not purchased repeatedly, such as conveyancing). In other words, the process of competition rivalry is undermined when consumers lack the confidence to vote with their feet. Therefore, a high standard of consumer protection is an essential enabler of robust competition. Under this mainstream approach, consumer policy intervention often takes the form of disclosure requirements, aimed at providing consumers with all the information they would need to make a well-informed decision. However, we have seen – notably in chapter two – that it is now widely accepted that this mainstream

1 See CMA, ‘Consumer Protection: Enforcement Guidance’, CMA58 (London, 2016) para 2.2 www.gov.uk/government/uploads/system/uploads/attachment_data/file/546521/cma58-consumerprotection-enforcement-guidance.pdf. 2 See J Vickers, ‘Economics for Consumer Policy’, British Academy Keynes Lecture (2003) www. thebritishacademy.ac.uk/sites/default/files/pba125p287.pdf. 3 See the reference to the ‘infant consumer’ argument in M Armstrong, ‘Interactions between Competition and Consumer Policy’ (2008) 4 Competition Policy International 97, 131.

Introduction  79 transparency approach often proves to be ineffective,4 because (some) consumers fail to either take the information into consideration or change the way they go about purchasing the product in question. The standard explanation for these shortcomings is that consumers are systematically affected by behavioural biases, whereas disclosure remedies were typically designed with the neoclassical ‘rational consumer’ standard in mind, that is, consumers are expected to be able to access, assess and act on the ­information made available through intervention.5 However, it is our view that consumer biases ought to be thought of as a symptom rather than the root cause of the failure, in that they are typically triggered by consumer disengagement and general distrust towards firms. In response to these circumstances, the recent trend in consumer policy is to favour a more forceful style of intervention aimed at directly constraining the extent to which consumers can be exploited (for example, by imposing price caps).6 That is to say, the mainstream approach seems to have transitioned from a framework where consumer protection was complementary to competition policy to a less idealistic approach, where consumer protection can provide a ‘backstop’ and substitute competition-oriented interventions that failed to address persistent consumer detriment.7 In this chapter, we present the economics underpinning the consumer theories of harm (CToHs) that will be articulated in chapter five. This chapter is meant to help the reader who is not an economist by training and offers a useful reminder to those who are. First, we introduce the fundamental concepts needed to appreciate why consumers may fail to make well-informed decisions (biases, product attributes and verification costs), and how this can translate into consumer detriment (ie a reduction in the consumer surplus). The rest of the chapter discusses the economic arguments in favour of (and against) public intervention aimed at increasing the standards of consumer protection. The concepts discussed in this 4 See A Fletcher, The Role of Demand-Side Remedies in Driving Effective Competition – A Review for Which? (London, Which?, 2016) https://www.regulation.org.uk/library/2016-CCP-Demand_Side_ Remedies.pdf. 5 See OFT, ‘What Does Behavioural Economics Mean for Competition Policy?’, OFT1224 (London, 2010) http://webarchive.nationalarchives.gov.uk/20140402182927/http:/www.oft.gov.uk/shared_oft/ economic_research/oft1224.pdf. 6 See Department for Business, Energy and Industrial Strategy (BEIS), Modernising Consumer Markets – Consumer Green Paper (London, 2018) https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/699937/modernising-consumer-markets-green-paper.pdf. 7 In the UK, this type of intervention is possible under the market investigation regime, under which the CMA can impose remedies to fix market failures without the need to first establish firms’ liability for breaches of either competition or consumer laws. See A Coscelli and A Horrocks, ‘Making Markets Work Well: the UK Market Investigations Regime’ (2004) 10 Competition Policy International 24. In particular, when such a market regime is not available, it would be beneficial for the consumer protection authority to step up to the challenge by imposing a higher standard of consumer protection, as the competition watchdog would be essentially toothless, given that this type of market configuration arises typically in the absence of a position of individual dominance or without the need for an anticompetitive agreement among rival firms. As is explained in more detail in ch 5, we believe that this can be achieved by adopting a holistic approach to the assessment of consumer detriment, basically by looking at whether markets can self-correct.

80  The Economic Framework Underpinning Consumer Theories of Harm chapter will be needed to fully understand the various CToHs in chapter five, and to analyse the extent to which there are grey areas between them. This will help us appreciate how a market configuration could drift from one CToH to another, usually entailing a worsening of consumer detriment.

II.  Consumer Surplus Economists typically use the loss in ‘consumer surplus’ as a measure of financial detriment to consumers. Consumer surplus is a measure of the economic welfare that is gained from purchasing and consuming goods and services. Consumer surplus is calculated by aggregating the differences between what individual consumers are willing to pay to secure the product in question (demand) and what they actually end up paying (market price). Consumer willingness to pay is inferred by drawing a demand schedule showing how sales grow as price falls.8 Those concepts are best presented pictorially. In Figure 4.1, the consumer surplus is the area below the demand curve and above the price paid. When the price is lower, the demand is in theory larger. When the price goes up, demand tends to shrink. In Figure 4.1, the loss in consumer surplus brought about by a price increase is represented by the trapezoidal area (in red),9 whereas the triangular area (in blue) represents the remaining consumer surplus. Figure 4.1  Consumer surplus Price

CS

Loss in CS Demand Quantity 8 There are two main reasons why the demand is downward sloping: (i) at an individual level, consumers normally attach a lower value to the consumption of an additional unit as their needs are progressively saturated (eg a second ice cream); and (ii) at an aggregate level, consumers differ in their valuation of the first unit of consumption (healthy types would prefer a smoothie). 9 It is worth pointing out that, from a competition point of view, it is the triangular component of the trapezoidal area, the area subtended by the quantity reduction, that constitutes the key trigger for intervention, as it represents a net loss of trade benefits (labelled deadweight loss), whereas the remaining rectangular component represents a redistribution of surplus from consumers to firms. For a discussion, see GJ Werden, ‘Antitrust’s Rule of Reason: Only Competition Matters’ (2014) 79 Antitrust Law Journal 713.

Consumer Surplus  81 This analytical framework relies on rational choice theory (ie the fundamental assumption that the observation of consumers’ decisions allows the inference of their true interests, their well-informed preferences for the product in question).10 Alas, consumers not only have to contend with their own limitations, such as limited ability to absorb and analyse potentially complex information and lack of personal experience, but can also fall victim to attempts by firms to mislead them into believing their commercial offer constitutes a better deal than it actually is. To this end, firms can take advantage of a number of biases that cloud the consumer’s ability to make well-informed decisions that reflect their true preferences.11

A.  Behavioural Biases Affecting Consumer Surplus Consumers are subjects to a large number of biases in decision making. First of all, consumers may be unwilling to make a decision in the first place. Inertia may result from a preference for inaction, also called the ‘path of least resistance’.12 Another explanation may be ‘omission bias’.13 It has been found that people prefer inaction to action and react more strongly to adverse outcomes resulting from an action than inaction. This may further be explained by the theory of ‘loss aversion’,14 whereby people are more sensitive to losses than gains, so may be afraid to act in case they incur losses as a result. Another shortcut is related to ‘anchoring’,15 whereby consumers start from a reference point and then make insufficient adjustments as further information is considered, therefore misestimating the value of the final offer. A similar effect may be due to an ‘endowment effect’,16 where people place a higher value on something they own, or imagine they own, and therefore demand more to give up an object than they would be willing to pay to acquire it. 10 This assumption that revealed preferences coincide with normative ones is a central tenet of neoclassical rational choice theory, which is relied upon by economists to assess market outcomes. For a critique on drawing inferences on consumer welfare based on ‘revealed preferences’, see J Beshears, JJ Choi, D Laibson and BC Madrian, ‘How Are Preferences Revealed?’ NBER Working Paper No 13976 (Cambridge, NBER, 2008) www.nber.org/papers/w13976. 11 For a systematic review, see FCA, ‘Applying Behavioural Economics at the Financial Conduct Authority’ Occasional Paper No 1 (London, 2013) www.fca.org.uk/publication/occasional-papers/ occasional-paper-1.pdf. 12 See, eg JJ Choi, D Laibson, BC Madrian and A Metrick, ‘Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance’, NBER Working Paper No 8655 (Cambridge, NBER, 2002) www.nber.org/papers/w8655. 13 See, eg J Baron and I Ritov, ‘Reference Points and Omission Bias’ (1994) 59 Organizational Behavior and Human Decision Processes 475. 14 See, eg D Kahneman and A Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’ (1979) 47 Econometrica 263; D Kahneman and A Tversky, ‘Loss Aversion in Riskless Choice: A ReferenceDependent Model’ (1991) 106 Quarterly Journal of Economics 1039; T Odean, ‘Are Investors Reluctant to Realize Their Losses?’ (1998) 53 Journal of Finance 1775; P Heidhues and B Köszegi, ‘Competition and Price Variation When Consumers Are Loss Averse’ (2008) 98 American Economic Review 1245. 15 D Kahneman and A Tversky, ‘Judgment under Uncertainty: Heuristics and Biases’ (1974) 185 Science 1124. 16 D Kahneman, J Knetsch and R Thaler, ‘Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias’ (1991) 5 Journal of Economic Perspectives 193.

82  The Economic Framework Underpinning Consumer Theories of Harm Consumers may fail to correctly estimate their future needs. This may be due to ‘overconfidence’,17 whereby people are likely to overestimate their future usage or overestimate their ability to predict their future usage. In this respect, ‘overextrapolation’18 is where consumers make predictions based on a small number of observations; whereas with ‘projection bias’,19 people fail to realise that their current feelings and preferences may change in the future. Finally, under ‘hyperbolic discounting’ (also known as ‘present bias’),20 people tend to put too much weight on the prospect of an immediate reward. This, in turn, may be the result of lack of willpower, and the ensuing issues with self-control and ability to commit on future courses of conduct. The exploitation of these various biases with the aim to mislead consumers has an effect on the demand curve. It can artificially shift the demand curve outwards, because the willingness of the affected consumers to pay is erroneously inflated. Yet, as shown in Figure 4.2, this shift can cause a material loss in consumer surplus even if the price stays the same.21 Under these circumstances, the observation of consumers’ choices may not provide a reliable proxy for their true preferences. Therefore, in order to assess the magnitude of the consumer detriment, the task is to conceive what decisions would have been made had consumers been aware of being the victim of a firm’s

17 See U Malmendier and G Tate, ‘CEO Overconfidence and Corporate Investment’ (2005) 60 Journal of Finance 2661; A Sandroni and F Squintani, ‘Overconfidence, Insurance, and Paternalism’ (2007) 97 American Economic Review 1994; MD Grubb, ‘Selling to Overconfident Consumers’ (2009) 99 American Economic Review 1770. 18 See M Rabin, ‘Inference by Believers in the Law of Small Numbers’ (2002) 117 Quarterly Journal of Economics 775; Kahneman and Tversky (n 15); A Tversky and D Kahneman, ‘Belief in the Law of Small Numbers’ (1971) 76 Psychological Bulletin 105. 19 See G Loewenstein, T O’Donoghue and M Rabin, ‘Projection Bias in Predicting Future Utility’ (2003) 118 Quarterly Journal of Economics 1209; M Conlin, T O’Donoghue and TJ Vogelsang, ‘Projection Bias in Catalog Orders’ (2007) American Economic Review 1217. 20 See D Laibson, ‘Golden Eggs and Hyperbolic Discounting’ (1997) 112 Quarterly Journal of Economics 443; T O’Donoghue and M Rabin, ‘Doing It Now or Later’ (1999) 89 American Economic Review 103; T O’Donaghue and M Rabin, ‘Optimal Sin Taxes’ (2006) 90 Journal of Public Economics 1825; B Madrian and DF Shea, ‘The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior’ (2001) 116 Quarterly Journal of Economics 1149; S DellaVigna and U Malmendier, ‘Paying Not to Go to the Gym’ (2006) 96 American Economic Review 694; RH Thaler and S Benartzi, ‘Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings’ (2004) 112 Journal of Political Economy 164; B Köszegi and P Heidhues, ‘Exploiting Naivete about Self-Control in the Credit Market’ (2010) 100 American Economic Review 2279. 21 The effect would tend to be larger under a classic upward sloping supply curve (ie firms require higher prices to produce larger quantities at higher prices), so the new intersection between the inflated demand and the supply curve entails a price increase, besides the quantity increase pictured in the graph. It could be argued that there can be an offsetting effect if firms benefit from scale economies, whereby the cost of producing an additional unit of output falls so that the supply schedule slopes downward. Under these circumstances, the price can actually fall as the quantity sold increase (due to the shift of the demand curve) in line with the decreasing cost of production. However, the quantity expansion would correspond to overconsumption, thus still causing a material loss in consumer surplus: see OFT, ‘Advertising of Prices – Harm and Efficiencies, Annex C’, OFT1291c (London, 2010) 19–21 http://webarchive.nationalarchives.gov.uk/20140402173025/http://oft.gov.uk/shared_oft/ market-studies/AoP/Annexe-C.pdf.

Consumer Surplus  83 Figure 4.2  Loss in consumer surplus due to inflated consumer willingness to pay Price

CS p Loss in CS

Inflated demand True demand Quantity

attempt to mislead them, perhaps by exploiting their limitations and triggering their biases. This will inherently be a matter of judgement and will depend on the specific circumstances of the case. However, the description of this counterfactual can be facilitated by considering the different choices and preferences of consumers:22 • Active choices: what would have been the decision with a default-free setting, or absent the use of misleading practices? • Asymptotic choice: to what extent do decisions taken by experienced purchasers differ? • Aggregated revealed preferences: in some instances, individual consumers may make better decisions if they are informed about the aggregate choices of their peers. • Self-reported preferences: in many cases, decision makers report that they know what they should do but nevertheless fail to implement that action because of lack of self-control. • Informed preferences: to what extent would the decisions taken by trained/ educated decision makers differ? Inflating consumer willingness to pay is not the only possible effect of firms’ attempts to take advantage of consumers’ biases and limitations. Consumers may just be made less aware of, and therefore less responsive to, better alternatives because of firms’ attempts to conceal and obfuscate what is on offer. This can be done, for example, through the use of hidden charges and complex tariffs. The use of these practices tends to increase a consumer’s search costs. Higher search costs

22 The

following classification is taken from Beshears et al (n 10).

84  The Economic Framework Underpinning Consumer Theories of Harm allow firms to increase their prices in the knowledge that the threat from rivals’ price undercutting is less severe. This is because consumers are less inclined to shop around, perhaps due to the mistaken impression that every firm is doing the same. In aggregate terms, this effect can be depicted as an outward shift of the demand curve, with a clockwise rotation due to the weakened price sensitivity of consumers (Figure 4.3).23 Figure 4.3  Loss in consumer surplus due to increase in search costs Price

CS p Loss in CS

Quantity

These two effects – inflation of consumer willingness to pay and increase in consumer search costs – can often be combined. An intuitive way to think about these effects is to consider an analogy with advertising.24 Broadly speaking, there are two types of advertising campaigns depending on their main purpose:25 (i)  informative advertising, conveying information about prices and technical information about product performance; and (ii) persuasive advertising, aimed at raising and maintaining brand awareness and loyalty. Both marketing instruments are aimed at boosting demand for the firm in question, but they do this through opposite channels. Whilst the former can intensify consumers’ awareness and responsiveness to price cuts,26 the latter is aimed at reducing price sensitivity by strengthening a perception of (often intangible) quality. The use of persuasive advertising is typically rather expensive, which is why it can actually provide a signal of good quality. The assumption here is that the firm in question believes in its enduring reputation for high quality and is willing 23 In economics parlance, the demand has become more inelastic in that an increase (decrease) in price causes a smaller decrease (increase) in quantity. 24 See OFT (n 21) 3–4. 25 For a detailed discussion, see K Bagwell, ‘The Economic Analysis of Advertising’ in M Armstrong and R Porter (eds), The Handbook of Industrial Organization, vol 3 (Amsterdam, North-Holland, 2007). 26 This would correspond to an anticlockwise rotation of the demand curve, meaning that demand is more elastic.

Consumer Surplus  85 to make an upfront sunk investment which may take a long time to recover. By contrast, the use of unfair practices, whilst being relatively inexpensive, can also expand the demand faced by the firm in question whilst dampening consumers’ price sensitiveness. However, if detected, the use of unfair practices can damage the reputation of the brand. This is why it is typically the least competitive firms in the market that are more inclined to resort to unfair practices in order to reduce the competitive disadvantage faced against more efficient rivals. In this sense, the use of misleading practices is unfair not only towards consumers, but also towards rival firms, thus potentially weakening their incentives to continuously strive to better their commercial offering.27

B.  Consumer Uncertainty Regarding Product Quality and Price Can be Exploited by Unfair Traders In almost all the cases where consumers fall victim of an unfair practice, the root cause is the uncertainty faced by the consumer before the purchase regarding the quality and prevailing price of the product sold.28 When this is the case, consumers are said to be facing an information asymmetry. In general terms, any such informational issue can be viewed in terms of costs and efforts for the consumer to detect the quality or price of a product attribute. Depending on the type of goods or services, it may be more or less difficult to assert quality. Economists classify products in three categories: search, experience and credence. All have attributes that ought to lead to different regulatory responses. These attributes can be classified as follows:29 • Search attributes. For these attributes, there is a low verification cost before purchase. The buyer can in principle ‘shop around’ by simple inspection. The reputation of the seller is not important because the quality of the good can be assessed in situ. A search attribute is any aspect of quality which is publicly accessible (for example, the size and colour of a pair of shoes). • Experience attributes. There is a high verification cost before purchase, as quality can only be truly asserted after purchase while the consumer experiences 27 In economics parlance, the use of misleading practices can exert a negative externality on rival firms. 28 We are primarily concerned with what economists describes as vertical quality differentiation, where every consumer agrees on the same relative ranking from low (basic) to high (superior) quality. That is, everyone prefers superior quality at the same price. In this respect, as explained in Armstrong (n 3), ‘[t]he term “quality” can be interpreted very broadly and encompasses hidden charges in the small print, unexpected exclusions in insurance contracts, and so forth’. 29 This classification and the following table are adapted from ES Andersen and K Philipsen, ‘The Evolution of Credence Goods in Customer Markets: Exchanging “Pigs in Pokes”’, www. researchgate.net/profile/Esben_Andersen/publication/267402623_The_evolution_of_credence_ goods_in_customer_markets_exchanging_%27pigs_in_pokes%27/links/5450b28c0cf201441e938b9a/ The-evolution-of-credence-goods-in-customer-markets-exchanging-pigs-in-pokes.pdf.

86  The Economic Framework Underpinning Consumer Theories of Harm the product. The information gathered after consumption can therefore be useful in case of repeat purchase (for example, the leather is fit for wear).30 By contrast to search attributes, experience attributes are only privately accessible through consumption. • Credence attributes. There are high verification costs both before purchase and after consumption. As a consequence, the buyer has to rely on third-party judgements or on the seller’s credentials (for instance, through a quality control certification, eg ‘Made in Italy’). Consumers cannot, for example, easily verify that tablets truly deliver on their health claims. Many professional services also fall into this category. There are a few caveats that need to be mentioned about the way that product attributes operate. First, consumers do not buy ‘attributes’, but products whose overall quality is determined by a bundle of, potentially, many different characteristics. Therefore, it is not always possible to neatly classify a product as a search, experience or credence good. Instead, it is more useful to think of products as being ‘laden with’31 search, experience and credence quality attributes.32 Secondly, the analysis is complicated by the consideration that the cost of verification may vary across consumers. This is particularly relevant to search characteristics, in that the consumer might fail to evaluate all the relevant characteristics that are in principle observable before purchase, typically because they are not prominently advertised. This is the case, for example, of contract terms given in small print.33 Under these circumstances, the presence of (potentially numerous) non-salient search characteristics might be perceived by the consumer as credence quality attributes. Thus, the consumer takes them for granted as long as nothing bad happens. Indeed, with credence attributes, there is no means of testing the product before purchase and the consumer has to rely on other signals or proxies for quality to make a decision. This does not necessarily entail that the consumer’s purchasing decision is affected by some idiosyncratic cognitive or behavioural bias. It is simply that a consumer faced with the cost of processing information may, rationally, decide

30 In other words, a search attribute is any aspect of quality which is publicly accessible, whereas experience attributes are only privately accessible through consumption. 31 See MR Darby and E Karni, ‘Free Competition and the Optimal Amount of Fraud’ (1973) 16 Journal of Law and Economics 67. 32 For example, when choosing a university course, the search costs before purchase are normally low (a simple check of the range of courses suffices). However, to choose a university to study at, the cost to the student to verify the quality of teaching will be high before the purchase, but significantly lower after consumption (providing that the student attended classes). The credence element in a university degree is the increase in employability. Search costs will be high both before and after consumption, because it is hard to assess if the university degree is directly responsible for the employment obtained. The exercise is even more convoluted because other factors will also be at play (degree classification, university’s reputation, state of the employment market at the time of entry, etc). 33 For a formal modelling of this argument, see M Armstrong and Y Chen, ‘Inattentive Consumers and Product Quality’ (2009) 7 Journal of the European Economic Association 411.

Consumer Surplus  87 not to gather and process all the information that is in principle observable before purchase. This is because of the belief that the expected benefits from extra searching are lower than the corresponding costs.34 In those cases, it actually makes economic sense for the boundedly rational consumer not to verify the information or search further, as we now explain.

(i)  Reasons Why Boundedly Rational Consumers Do Not Search Further As consumers normally find it costly to search and process information, they will search (for extra information) only up to the point where the expected benefits from the extra searching more than offset the corresponding costs. Therefore, at some point, consumers may reckon that it is no longer worth their while to keep shopping around. This could be the result of any of the following three lines of reasoning: • consumers expect that there are other consumers with a lower cost of searching (or simply more diligent) to put pressure on firms not to adopt exploitative practices. This type of free-riding on others’ search efforts may backfire, of course, if all consumers make the same assumption;35 • consumers expect that firms care about their reputation, which would be put at risk if the consumer were to discover later on that the firm in question inserted, for example, an exploitative contract term buried in the small print. Where repeat purchases from satisfied customers are an important source of revenue and/or where a disgruntled customer could damage the reputation of the brand, for example, through social media or feedback reviews,36 this self-correction mechanism would justify not performing the extra searching; or • consumers expect that all firms resort to the same unfair practices, so it would be pointless to do any costly extra searching.37 These widespread expectations might become self-fulfilling, to the extent that it becomes a dominant strategy for firms to do exactly that in the knowledge that consumers will not walk away

34 In this sense, see SI Becher, ‘Asymmetric Information in Consumer Contracts: The Challenge That Is Yet to Be Met’ (2008) 45 American Business Law Journal 723. In economics, this aspect is described as the consumer being ‘boundedly rational’: see L Garrod, M Hviid, G Loomes and C Waddams Price, ‘Assessing the Effectiveness of Potential Remedies in Consumer Markets’, OFT994 (London, OFT, 2008) 47 http://competitionpolicy.ac.uk/documents/107435/107584/oft994.pdf?version=1.0. 35 See Armstrong (n 3) 114. 36 Another important channel is expert reviews provided by consumer representative bodies and other media outlets dedicated to consumer issues. 37 In economics, this is the so-called ‘Diamond paradox’, after P Diamond, ‘A Model of Price Adjustment’ (1971) 2 Journal of Economic Theory 56. Diamond argued that, even when firms sell identical products, they will set monopoly prices so long as all consumers face search costs, even arbitrarily small ones. For an intuitive explanation, see Garrod et al (n 34) 25.

88  The Economic Framework Underpinning Consumer Theories of Harm in any case. In practice, though, the plausibility of this puzzling outcome rests on the strong assumption that no firm is willing or able to effectively signal its intention to treat customers fairly and therefore build a lasting reputational competitive advantage. Whatever the source of their apathy, consumers behave as satisficers rather than maximisers because it is in fact efficient, given ‘the access to information and the computational capacities that are actually possessed by organisms, including man, in the kinds of environments in which such organisms exist’.38

(ii)  Role of Updated Belief in Minimising Losses of Consumer Surplus Consumers update their beliefs over time on the basis of past experiences,39 including those reported from other sources that have been deemed reliable. Accordingly, the risk of a drift due to widespread free-riding may be contained as consumers realise that their prior belief was too optimistic and that they had better do the searching themselves, in order to avoid being exploited in the future. This, in turn, would restrain firms’ incentive and ability to exploit consumers. In contrast, falling victim to unfair practices because of the expectation that all firms resort to the same unfair practices would corroborate the prior belief that the use of exploitative practices is widespread, thus further weakening the incentives to shop around for a better deal. As a result, firms’ incentives and ability to treat consumers unfairly can vary greatly depending on the types of prior belief held by consumers. When consumers update their behaviours on the basis of past experience, some attributes that started out as credence attributes can be downgraded to search attributes. For example, some characteristics of goods or services can be considered as latent credence attributes40 in that, although it may not influence the consumer’s decision to buy at first, it might later emerge as an important element that the consumer ought to have been aware of. This is because as long as nothing bad happens, consumers have no reason to update their beliefs with respect to these characteristics. However, when an incident related to a latent quality attribute occurs, this characteristic will become salient for future purchasing decisions. To the extent that after the event the consumer can take precautions by simple inspection before repurchase, this quality attribute will evolve from being a latent credence characteristic to being a manifest search characteristic. For example, limited contractual coverage in an insurance policy may be a credence attribute the first time the consumer contracts insurance but, once a claim has failed on this basis, the consumer will remember to check this element and observe it prior to purchase.

38 H

Simon, ‘A Behavioural Model of Rational Choice’ (1955) 69 Quarterly Journal of Economics 99. rational choice theory, economists describe this process as Bayesian updating. 40 See Andersen and Philipsen (n 29) 4. 39 In

Consumer Surplus  89 Similarly, a product attribute can pass from being a latent credence characteristic to being a manifest experience characteristic. This will be the case when the consumer encounters difficulties in claiming on an insurance policy due to the insurer’s use of vexatious delaying tactics.

(iii)  The Dangers of ‘Bundled’ Credence Goods for Consumer Surplus So far, the discussion of credence attributes and credence goods has been based on the assumption that consumers at least know what they actually want or need as posited by rational choice theory. When this is not the case, the seller will typically know more about consumers’ wants and needs than the consumers themselves. Under these circumstances, even if consumers can actually observe the benefits they derive from the consumption of the product purchased, they cannot judge whether they have been sold the correct type or quality based on their needs.41 This leaves consumers particularly open to abuse by traders and thus to the risk of harm. The products in this category are called ‘bundled credence goods’, with reference to the two sequential stages in the purchasing decision of: (i) ‘diagnosis’ of consumers’ needs through expert’s advice; and (ii) corresponding provision of the previously diagnosed ‘treatment’. A typical example is repair services for a car. While the consumer may be able to drive safely after repairs, he or she will not be able to assess if all the works carried out were necessary. Similarly, for a taxi ride in a new city, the passenger can observe the time and the distance travelled to reach the desired destination, but will not be able to tell whether the taxi driver has taken a circuitous route. The purchasing decision will be even more challenging when the consumer cannot control the quality of the product consumed – that is, the type of ‘treatment’ is not verifiable. With bundled credence goods, consumer detriment can be due to the risk of overcharging or the risk of mistreatment (either under or over). For example, when buying a new laptop, consumers may not know what level of performance is right for their (future) needs. As long as they do not experience a quality breakdown (because the usage profile is within the actual performance range supported by the purchased product), they might not even be able to tell whether the overall quality was actually in line with what they believe they paid for. This would be the case, for example, where the rest of the components that make up the computer are of a lower quality than the few salient components consumers based their decision on. As a result, in addition to the risk of overcharging, the lack of diagnostic expertise combined with the lack of verifiability of the claimed quality of the treatment received gives rise to a risk of under- or

41 For a detailed review, see U Dulleck and R Kerschbamer, ‘On Doctors, Mechanics, and Computer Specialists: The Economics of Credence Goods’ (2006) 44 Journal of Economic Literature 5.

90  The Economic Framework Underpinning Consumer Theories of Harm over-treatment. Consumers may be sold something that is either inadequate or excessive for their needs.42 This explains why strong regulatory interventions implementing strict quality standards and levels of professional diligence are warranted when the consequences of mistreatment (in particular, under-treatment) can be severe. Under these circumstances, it is the consumer’s task to pay attention to those attributes that are reasonably observable, such as search and experience attributes, in the knowledge that regulatory intervention is hopefully taking care of the unobservable credence attributes.43 In general, though, the following conditions tend to prevent consumer detriment: • verifiability prevents overcharging. In the peculiar case of ‘bundled credence good’, this means that consumers can observe and verify the ‘treatment’ that has been provided by the seller without knowing whether that was the right ‘treatment’ to start with;44 • liability prevents under-treatment. For example, firms often include extended warranties or return policies in case of dissatisfaction in order to signal high quality.45 However, there are cases where this is difficult in practice, and failure to fix the problem is not a perfect signal of under-treatment;46 and • The risk of over-treatment is more difficult to guard against. Unless consumers obtain an independent diagnosis, they will not be able to detect it, because the (over-)treatment has fixed the problem.47 In addition, consumers should pay attention to quality signals, such as the exhibition of trust marks underpinned by an accredited industry code of conduct or

42 Firms’ incentives to either under- or over-treat depend on how much profit is made on either type of fraud. 43 For example, the UK Competition and Markets Authority made a distinction between ‘quality of service’ – described in terms of experience attributes, such as response time, open hours and regular updates – and ‘quality of advice’ – where consumers too often rely on outcomes as the only observable proxy for quality – in the provision of legal services, indicating that consumers should be expected to be able to confidently shop around with respect to the former: see CMA, Legal Services Market Study – Final Report (London, 2016) 65 https://assets.publishing.service.gov.uk/media/5887374d40f0b6593700001a/ legal-services-market-study-final-report.pdf. 44 For example, one of the tips to keep in check the opportunistic incentives of car repair mechanics is to ask for the original components that have been replaced, in order to be able to inspect whether they needed replacing at all. This could work even if it is actually a bluff, as long as the service provider at least suspects otherwise. 45 This type of remedy can also be effective with respect to experience goods. 46 See Dulleck and Kerschbamer (n 41): ‘For instance, an insufficiently repaired item may work for some time and problems may develop later on. To mitigate the under-treatment problem in such a situation the liability needs to cover a longer period. But during this longer period the item may stop working for reasons unrelated to the expert’s behaviour. Also, an extended liability period introduces a moral hazard problem on the consumers’ side in situations where the eventual performance of the product depends not only on the expert’s but also on the consumer’s behaviour.’ 47 Often, though, the diagnosis and treatment stages are basically tied when treatment providers insist on performing their own diagnosis first, in that it is claimed that those done by others cannot be trusted.

Consumer Surplus  91 issued by a standard-setting organisation.48 This, however, is somewhat tantamount to blind trust, in the sense that it is not usually practicable for the individual consumers to personally verify these quality credentials objectively.49 As a result, consumers implicitly delegate the activity of distrusting to some independent (typically public)50 institution that has the resources to either monitor compliance or deter non-compliance.51 Figure 4.4  Types of product characteristics based on quality uncertainty ‘Bundled credence good’ – i.e. experts’ advice

Is the quality of the ‘treatment’ observable?

Yes No

No

Do consumers know about their needs?

No

Is quality determinable after consumption?

Yes

Is the product quality attribute determinable before purchase by simple inspections?

No

Probabilistic – i.e. quality break-down Yes

Yes

Is the search quality characteristic actually taken in consideration before purchase?

Credence attribute – e.g. ‘ethical’ characteristics of the production process

No

‘Manifest’ experience attribute – e.g. refund/ return policy

Experience attribute – e.g. quality of teaching in further education (skills) training ‘Latent’ credence attribute – e.g. software/hardware compatibility Quality break-down

Yes

(‘Manifest’) Search attribute – e.g. visible fat of a pork chop

When quality and price are uncertain, they can offer a fertile ground for unfair traders to deploy their tactics. A good understanding of economic principles underlining the treatment of search, experience and credence goods can, however, help in devising appropriate regulatory responses. The decision tree in Figure 4.4 48 See OFT, ‘The Economics of Self-Regulation in Solving Consumer Quality Issues’, oft1059 (London, 2009) http://webarchive.nationalarchives.gov.uk/20140402161708/www.oft.gov.uk/OFTwork/ publications/publication-categories/corporate/general/. 49 These types of self-regulatory mechanism rest on similar arguments underpinning the use of ‘dissipative’ (persuasive) advertising, where the costs to gain and keep the trust mark are high enough that the firm in question will want to remain active for long enough to cover the sunk costs. 50 See the reference to ‘institutionalised distrust’ later on in this chapter. 51 Other quality signals, such as celebrity (or social influencer) endorsements, are more contentious, unless the person in question really cares about risks to his/her personal reputation.

92  The Economic Framework Underpinning Consumer Theories of Harm provides a reasoned summary of how to think through the various types of sources of information asymmetry that are likely to be at the root of consumer harm and helps identify the type of attributes at play leading to identifying the correct regulatory response.

III.  The Economic Case for Intervention in Consumer Markets Broadly speaking, regulatory intervention is justified by the presence of a failure of the market to deliver benefits to participants and the belief that the chosen course of corrective action can be effective in either removing the cause of the identified problem or mitigating the resulting detriment to society. As explained above, the presence of information asymmetries is the key source of market failures relevant to consumer protection interventions. In this respect, in order to convincingly make a case for intervention, it is necessary to articulate why the market will fail to self-correct. This is because the received wisdom is that public intervention is less effective at eradicating consumer detriment than relying on the natural tendency of markets to self-correct. However, markets can fail to self-correct due to a number of factors (either taken in isolation or in combination): • trust in the market is absent, or at least not as strong as it should be. We argue that, in fact, intervention is essential to prevent loss of trust, customer inertia and consumer disengagement from setting in as a result of having been unfairly treated in the past; • consumer learning, whereby having fallen victim to an unfair practice in the recent past makes consumers more circumspect to the risk going forward, can be ineffective; and • the effects of the ‘unravelling principle’, whereby firms have an incentive to disclose information about their product without any legal intervention, are limited. Besides, remedial intervention ought to be justified on grounds of substantive fairness when there is evidence of distributive effects, whereby a certain type of consumer may benefit from the shortcomings of another.

A.  The Fallacy of Trust in Markets Fairness refers to the way consumers are treated by firms. This concept is mirrored by the question as to whether consumers should place trust in firms. Indeed, the idea that consumers should be able to trust firms is, generally speaking, a fallacy. It is no secret that there is a lack of consumer trust in the way retail markets work in general, in particular in the aftermath of the 2007/08 global

The Economic Case for Intervention in Consumer Markets  93 financial crisis.52 We argue that in fact intervention is essential to prevent loss of trust, customer inertia and consumer disengagement from setting in as a result of having been unfairly treated in the past. In marketing literature, consumer trust is considered the key relational attribute in the continuous provision of sophisticated services.53 Notwithstanding the various definitions on the essence of trust,54 there appears to be a consensus around the fact that there are two main components of trust: credibility, which depends on the buyer’s belief that the supplier has the required expertise to carry out its role effectively and reliably; and benevolence, based on the buyer’s belief that the supplier will act on the basis of intentions that are beneficial to the buyer himself.55 Benevolence can be further described as the ‘intention to accept vulnerability based upon positive expectations of the intentions or behavior of another’.56 In this respect, there are two opposing approaches regarding the conceptual nature of this component. On the one hand, benevolence is considered an affective attribute of trust, based on feelings and emotions.57 On the other hand, the trustor’s willingness to be vulnerable may be due to the perception of the absence of opportunism. Hence, benevolence is conceptualised as a cognitive attribute of trust.58 This ambivalence can be explained by considering how trust is formed. Lynne Zucker argued that trust is produced in a number of ways,59 two of which are particularly relevant to analysing the role of trust in the context of businessto-consumer transactions.60 The first is labelled ‘process-based trust’. It is the

52 For example, the European Commission’s Consumer Market Scoreboard has been tracking 40 retail markets based on key indicators, such as trusting that sellers comply with consumer protection rules, comparability of offers, the choice of retailers/suppliers, the extent to which markets live up to consumer expectations and the degree to which problems encountered in the market cause detriment. According to the European Commission, ‘[w]hile the overall trust in markets has followed a positive trend since 2010, the report reveals that only 53% of consumers trust that businesses in the services sectors comply with consumer rules. For goods, the figure is slightly higher at 59%. Consumer trust in services and goods’ markets has not improved compared to the 2016 scoreboard.’ See European Commission, ‘2018 Consumer Markets Scoreboard: Trust of Europeans in Services Still Needs Improvement’, press release, Brussels, 12 October 2018 www.europa.eu/rapid/press-release_IP-18-6085_en.htm. 53 See, eg LL Berry, ‘Retailers with a Future’ (1996) 5 Marketing Management 38. 54 For a review, see DM Rousseau, SB Sitkin, RS Burt and C Camerer, ‘Not So Different After All: A Cross-Discipline View of Trust’ (1998) 23 Academy of Management Review 393. 55 This definition was first developed by S Ganesan, ‘Determinats of Long-Term Orientation in Buyer–Seller Relationship’ (1994) 58 Journal of Marketing 1, later referred to by PM Doney and JP Cannon, ‘An Examination of the Nature of Trust in Buyer–Seller Relationships’ (1997) 61 Journal of Marketing 35. 56 Rosseau et al (n 54) 395. 57 See DJ McAllister, ‘Affect- and Cognition-Based Trust as Foundations for Interpersonal Cooperation in Organizations’ (1995) 38 Academy of Management Journal 24. 58 See RC Mayer, JH Davis and FD Schoorman, ‘Including versus Excluding Ability from Definition of Trust’ (1996) 21 Academy of Management Review 339; Doney and Cannon (n 55). 59 LG Zucker, ‘Production of Trust: Institutional Sources of Economic Structure, 1840–1920’ (1986) 8 Research in Organizational Behavior 53. 60 The remaining mode is labelled characteristic-based trust, which is built around persons sharing similar social and cultural backgrounds.

94  The Economic Framework Underpinning Consumer Theories of Harm cumulated result of a record of prior exchanges and can be reflected in the reputation of an organisation. The second is defined as ‘institutional-based trust’ (also called ‘system trust’).61 It ‘generalises beyond a given transaction and beyond specific sets of exchange partners’,62 and relies on social and institutional mechanisms that provide and enforce general codes of conduct – for example, societal forms regarding conflict management and cooperation. In this sense, this latter form of trust-building can compensate for the lack of the former.63 Process-based trust can be further subdivided according to the scope as well as the degree of interdependence in the relationship, which can in turn depend on the relationship’s history and stage of development.64 At one end of the scale, ‘calculus-based’ or ‘deterrence-based trust’65 is posited on rational choice theory. It involves the perception that negative intentions are absent, because any breach of trust by the trustee would be met with costly sanctions (ie termination) by the trustor. Further, deterrence-based trust can also entail the perception of positive intentions, where trustworthiness can be signalled by credible information provided by others (ie reputation) or by certification.66 At the other end of the scale, ‘relational trust’ can evolve from repeated interactions to the point where emotion enters into the relationship and identification with the service provider is emphasised.67 Accordingly, benevolence can be thought of as an evolving attribute. Initially based on the conjecture that there is an absence of negative intention, it can potentially be strengthened by an affective belief thanks to the presence of positive intentions. However, with regard to business-to-consumer relationships, deterrence-based trust remains the predominant explanation, notwithstanding the length of the ongoing relationship.68 This is particularly so for basic consumer services such as utilities, telecoms and retail finance because the degree of interdependence is low while the level of standardisation is high. Indeed, from the consumer’s perspective, the reassurance that the service provider of their choice will not behave opportunistically is more than adequate in these circumstances. However, deterrence-based trust may not in fact be ‘trust’ at all.69 Instead, it corresponds to a low degree of distrust, where the cost of not fulfilling the trustor’s

61 See N Luhmann, Trust and Power (Chichester, Wiley, 1979). 62 Zucker (n 59) p 63. 63 See SP Shapiro, ‘The Social Control of Impersonal Trust’ (1987) 93 American Journal of Sociology 623; SB Sitkin, ‘On the Positive Effect of Legalization on Trust’ in RJ Bies, RI Lewicki and BH Sheppard (eds), Research on Negotiation in Organizations (Greenwich, JAI Press, 1995). 64 Rosseau et al (n 54) 398. 65 See PS Ring and AH van de Ven, ‘Structuring Cooperative Relationships between Organizations’ (1992) 13 Strategic Management Journal 483; D Shapiro, BH Sheppard and L Cheraskin, ‘Business on a Handshake’ (1992) 8 Negotiation Journal 365. 66 See B Barber, The Logic and Limits of Trust (New Brunswick, Rutgers University Press, 1983); Doney and Cannon (n 55). 67 McAllister (n 57). 68 Rosseau et al (n 54) 395. 69 ibid.

The Economic Case for Intervention in Consumer Markets  95 expectations is high and the involvement between the parties is limited in the first place.70 From this point of view, trust is not a control mechanism, but a substitute for control that reduces transaction costs in complex relationships.71 This line of argument calls into question the proposition that consumer trust is desirable in the first place. This is an interesting point because much of the EU legislative agenda and national reforms in consumer law are based on trying to improve consumer trust in markets and have underpinned regulatory reforms. The other contextual factor in which trust becomes relevant is the presence of risk. Risk refers to the perceived probability of loss and the uncertainty as to whether the trustee will act appropriately in order to minimise it.72 To the extent that the consumer can observe whether the trader is able to provide the service reliably (ie displays credibility, the other essential component of trust), there seems to be no efficiency justification for why consumer-facing firms should invest in becoming trusted partners at all in the absence of any risks. In other words, to pretend that consumers must have trust in markets is a fallacy, because what they really need is simply not to distrust service providers in general. In this sense, Lewicki et al73 coined the expression ‘institutionalised distrust’. Similarly to deterrence-based trust, it is a control mechanism whereby distrust is escalated at an aggregate level, allowing for the delegation of distrust activities to public authorities. That is to say, institutionalised distrust is intensified when control activity left to consumers proves to be an ineffective control mechanism. To understand why, it is necessary to look at the source of the risk perceived by consumers. Normally, trust refers to the trader’s ability and good intentions to act in the interest of consumers when dealing with exogenous sources of risk that may be out of the trader’s control. This is radically different from a situation where the perceived risk of potential loss is due to the trader’s opportunism. In such a case, it would not be at all sensible to rely on the firm’s good intentions to mitigate the perceived risk. The problem is not one of consumers’ unwillingness to rely on firms’ benevolence when in a vulnerable situation, but that they are put in a vulnerable (purchasing) situation as a result of firms’ unfair commercial practices. Knowing this, consumers might become frustrated over time and, as they adapt their expectations based on past negative experiences, ultimately lose confidence in their (collective) ability to discipline firms based on the implied

70 See RJ Lewicki, DJ McAllister and RJ Bies, ‘Trust and Distrust: New Relationships and Realities’ (1998) 23 The Academy of Management Review 438. 71 See OE Williamson, ‘Calculativeness, Trust and Economic Organization’ (1993) 30 Journal of Law and Economics 131. For example, there would indeed be a different relationship forming between a consumer and, say, a childcare provider or doctor, where the relationship would be more dependent on relational trust. 72 Rosseau et al (n 54) 395. 73 Above (n 70).

96  The Economic Framework Underpinning Consumer Theories of Harm threat of switching in case of unfair treatment. Frustration and loss of confidence are negative affective attributes. The prevalence of generalised consumer distrust in a market should therefore provide, perhaps counter-intuitively, an opportunity to pursue a lasting competitive advantage by developing a reputation for treating customers fairly, helping to cement the strongest form of relational trust based on positive affective attributes. Arguably, in the absence of this (supplyside) self-corrective mechanism, public intervention is indeed required (ie thus relying on institutionalised distrust), whereby the deterrence-based control mechanism is escalated at an aggregate level through public enforcement against distrusted firms. We strongly argue that prompt intervention is essential to prevent customer inertia and consumer disengagement from setting in as a result of being treated unfairly in the past. That is to say, far from learning from past mistakes, being subject to unfair treatments might become self-perpetuating to the extent that consumers become less active and responsive. They disengage. This is particularly problematic where the belief that firms are keen to induce and exploit consumer mistakes is projected over the generality of firms (including those not intent on treating consumers unfairly) and possibly with negative spill-overs to other markets. As a corollary, a higher standard of consumer protection would tend to make consumers more confident and, thus, embolden them to be more assertive and active. This is in stark contrast to the fallacious argument that public intervention might induce consumers to be less alert and circumspect, and thus more subject to exploitation in the future due to a lack of learning (see section B below).74 Failing to intervene promptly would ultimately lead to more intrusive types of intervention aimed at protecting disengaged consumers by directly dictating commercial parameters, such as with a price cap. Inevitably, these types of intervention come with a higher risk of unintended consequences as the competition process is superseded altogether. In other words, public enforcement aimed at a positive duty to treat consumers fairly can be instrumental in maintaining healthy competition whereby firms have confidence in the fact that the provision of superior customer care and service will be rewarded by consumers.

B.  Consumer Learning Resistance to intervention in markets is often based on the idea that market participants on both the demand and supply sides would normally be incentivised to change their course of conduct in order to improve their own outcome and, as a

74 In economic parlance, this outcome is described as a ‘moral hazard’, in the sense that consumers opportunistically prefer to rely on public intervention rather than exerting an effort themselves in order to prevent being subject to unfair treatment.

The Economic Case for Intervention in Consumer Markets  97 result, collectively overcome the market failure thereof. Specifically, this dynamic self-correction mechanism typically rests on two mutually reinforcing lines of arguments: • on the demand side, it is argued that a high standard of consumer protection might induce consumers not to be reasonably well informed and circumspect, thus making it easier for firms to treat them unfairly;75 and • on the supply side, the lack of reasonably well-informed and circumspect consumers weakens firms’ incentives to compete on the merits, by rejecting the use of unfair practices and proactively signalling their intention to treat consumers fairly, thus putting unfair firms on the spot. However, consumer learning is imperfect and should thus prompt a choice between a number of possible policy responses.

(i)  Consumer Learning is Imperfect Resistance to intervention in consumer markets thus derives from the idea that a moderate level of unfairness is necessary to preserve the incentives for consumers to be diligent and for firms to differentiate from rivals by building a reputation for treating consumers fairly. Alas, consumer learning is hardly a panacea. First, consumers who fall victim to unfair practices might not even realise it. For example, a consumer who sees a product on promotional sale in a supermarket would typically be unable to recall whether that particular product was actually priced at a higher price for a long enough period in the past to justify the claim that the current price is a bargain; a consumer who purchased travel insurance that covered European countries might not find out that the scope excluded Slavic countries that are not yet members of the European Union unless the need to submit a claim arises; or a consumer who purchased a new beauty product on the advice of a trusted celebrity over social media might never realise that the celebrity in question had been paid by the firm selling the product.76 Secondly, there might not be any lesson to be learnt even when consumers realise that they have been treated unfairly. This is typically the case when the cost and effort needed to avoid falling victim of similar practices in the future is simply too high. This is particularly so when it is reasonable to believe that the use of unfair practices is widespread among rival firms. For example, even if consumers are aware that they could save money by switching to a cheaper energy tariff,

75 In economics, this is a ‘moral hazard’ argument based on the assumption that consumers find it so costly to diligently shop around that they would rather avoid that cost in the knowledge that external observers will not be able to tell whether the consumers fall victim to unfair practices due to shirking. 76 On this point, see C Riefa and L Clausen, ‘Towards Fairness in Digital Influencers’ Marketing Practices’ 8 (2019) 2 Journal of European Consumer and Market Law 64.

98  The Economic Framework Underpinning Consumer Theories of Harm they might still struggle to identify which alternative tariff to switch to among the several hundreds of different options available. All are very complex on their own accord, and often based on different frames, units of measure and combinations of fees. Unfortunately, price comparison sites are of little help since they are not yet able to provide tailored comparison advice based on specific consumption profiles, which will determine which tariff is more suitable. Thirdly, even if consumers learn how to avoid falling victim of unfair practices in the future, it might not be of much use to them if they are unlikely to have to make the same purchasing decision again. For example, consumers are unlikely to have to write a will more than once in their life. Another classic example is the decision as to how to use one’s pension pot upon reaching retirement age. Finally, there can be situations where those consumers who learn how to avoid falling victim to an unfair practice do not switch to a rival, but prefer to stick with their current firm in order to benefit from the cross-subsidy based on the exploitation of those customers who still fall for the unfair practice. This is often the case when firms compete by setting low headline prices with the hope of charging high (shrouded) add-on fees which can be avoided. One classic example concerns expensive beverages in hotel room minibars. Therefore, lack of consumer learning is not limited to those consumers usually branded as being ‘vulnerable’ (or naïves, in economic parlance) – that is, those who are either particularly gullible or lacking in self-control. In any event, the extent to which naïve consumers – those who make systematic errors of judgement due to various behavioural biases – can learn from past mistakes is not clear-cut.77 With this in mind, we refer to vulnerable purchasing situations rather than vulnerable consumers. This is because much of the vulnerability experienced by consumers in fact derives from informational issues that raise quality and price uncertainty. Moreover, we consider sophisticated (as opposed to naïve) consumers to be those who can see through the vulnerable purchasing situation by detecting, or maybe just suspecting the presence of, the use of unfair practices under normal circumstances. Such consumers, however, do not believe that they can always make fully informed decisions under any circumstance. In other words, although consumers cannot observe all the characteristics of the products they are considering to purchase, they can still try to figure out the incentives available to traders. If everyone acts on this knowledge, the market should, in principle, eliminate some of the incentives for traders’ dishonesty. There are, however, circumstances where this is easier said than done. These are circumstances where anyone would be at risk of being overcome by emotions and thus find it really difficult to behave according to this strategically savvy archetype. For example, consumers having to procure funeral services for a lost loved

77 This is an empirical question about which there is not enough evidence yet to be able to form a consensus view. For a discussion on learning, see O Bar-Gill, Seduction by Contract: Law, Economics and Psychology in Consumer Markets (Oxford, Oxford University Press, 2012).

The Economic Case for Intervention in Consumer Markets  99 one may find it almost impossible to spend time shopping around.78 More subtly, perhaps, consumers considering what type of fertility treatments to opt for may find themselves agreeing to purchase spurious add-ons even if they know that there is little scientific evidence that those extra treatments actually improve their chances of succeeding (‘you never know; as long as there is no risk attached, it is worth a go’). Under these circumstances, the mainstream disclosure remedies are unlikely to be effective.79 Consumers would still find themselves unable to behave rationally due to their extreme situational vulnerability.80 In less extreme circumstances, we consider sophisticated consumers to be strategically savvy, albeit ‘boundedly rational’. Of course, there are also a number of consumers that behave close enough to the ideal standard of the perfectly rational consumer posited under rational choice theory. For example, a corporate lawyer is probably more adept at reading contractual small print rich in technical language than the average consumer. However, these super consumers are plausibly too small a minority to realistically drive higher standards of professional diligence among firms.

(ii)  Policy Options to Correct Imperfect Consumer Learning Rational choice theory has dominated policy interventions. Other theories, such as behavioural economics, have come to challenge the role of rational choice theory as a cohesive and tractable set of normative assumptions that do a good job at producing robust predictions of how real people behave.81 Perhaps counterintuitively, when these new theoretical insights are translated into public policy interventions (to improve decision making and welfare), the predictions derived by rational choice theory models are elevated to the role of normative standard82 in the sense that any intervention should seek to approximate as closely as possible the outcome posited by rational choice theory.83 As a quick reminder, rational 78 See, in this respect, CMA, ‘CMA Investigates Funerals Sector, press release, 1 June 2018 www.gov. uk/government/news/cma-investigates-funerals-sector. 79 See, eg Hannah Devlin and Ian Sample, ‘UK Fertility Regulator to Issue New Rules on Expensive IVF Add-Ons’, The Guardian, 9 July 2018 www.theguardian.com/society/2018/jul/09/uk-fertilityregulator-to-issue-new-rules-ivf-add-ons. 80 For a more detailed discussion, see the case study on fertility add-ons in ch 6. 81 See DW Hands, ‘The Positive–Normative Dichotomy and Economics’ in DM Gabbay, P Thagard, J Woods and U Mäki (eds), Philosophy of Economics (Amsterdam, North Holland, 2012) 228–29. 82 As put by the philosopher Robert Nozick, quoted in Hands (ibid): ‘An elaborate theory of rational action has been developed by economists and statisticians and put to widespread use in theoretical and policy studies. This is a powerful, mathematically precise, and tractable theory. Although its adequacy as a description of actual behavior has been widely questioned, it stands as the dominant view of the conditions that a rational decision should satisfy: it is the dominant normative view.’ 83 See JD Wright and DH Ginsburg, ‘Behavioral Law and Economics: Origins, Fatal Flaws, and Implications for Liberty’ (2013) 106 Northwestern University Law Review 1033, 1059: ‘The appropriate measure of welfare is economic well-being as it would be expressed by the preferences of each individual if he were free of behavioral biases. Thus, the promise of behavioral law and economics lies in its potential to increase economic welfare according to each individual’s “true” preferences. As we have seen, the behavioral literature often appears to assume a reduction in errors is conclusive evidence of a move toward true preferences and hence of an increase in welfare.’

100  The Economic Framework Underpinning Consumer Theories of Harm choice theory assumes that consumers have well-defined and predetermined preferences, and that they will act to best serve those preferences. Accordingly, the use of behavioural economics as a guiding principle for public intervention in consumer markets is aimed at reducing the incidence of systematic judgement errors caused by behavioural biases and thus approximating the optimal outcome posited by true preferences. It is therefore puzzling to read criticisms of this type of intervention on the ground that behavioural economics fails to identify what ‘true preferences’ really are.84 In other words, in order to deny that insights from behavioural economics can provide valid guidance for public policy intervention, critics are willing to strip rational choice theory of any normative value whatsoever in light of irrefutable evidence that consumers’ behaviours systematically depart from the rational-choice standard. Therefore, this line of criticism tends to elevate the decisional autonomy of the consumer as the guiding normative standard, even when in practice it translates into ‘freedom to err’,85 that is, letting consumers make mistakes. Perhaps a more nuanced position is to understand that freedom to err has some redeeming value. This is because consumer learning and the fact that individuals bearing the costs of their own mistakes should ultimately sharpen their decision-making skills. In addition, it relieves the state of the burden of intervening to rectify those mistakes. The more palpable those costs are, the less it should take for consumers to learn from their past mistakes.86 And the misfortunes of those who do not learn will at least provide indirect deterrence for everyone else. It is worth noting, however, that under this albeit more nuanced approach, rational choice theory reclaims its normative standing as the standard of what people ‘should do’.87 As a result, the criticism aimed at corrective interventions guided by behavioural economics must be that they are less effective and/or costlier than a non-interventionist approach. This is the case, it is argued, even when intervention does not unduly restrict choices. Whenever public intervention is advocated to prevent consumers from making mistakes, the spectre of paternalism looms. Paternalism is the interference of a state authority with a person without his consent justified by a claim that the person interfered with will be better off or protected from harm.88 Interference involves some kind of limitation on the freedom or autonomy of the 84 ibid 1060: ‘When the neoclassical economist finds an economic agent’s actual behavior departs from the prediction of his economic model, he suspects the model is to blame; when a behavioral economist observes a gap between actual and predicted behavior, he concludes the agent is acting against his own best interests.’ 85 ibid 1068–70. 86 ibid 1071. 87 In this respect, Hands (n 81) chronicled the evolution of rational choice theory from a conceptual construct that mainstream economics pretended to be devoid of any ethical connotation to one of an ethically normative paradigm. 88 See G Dworkin, ‘Paternalism’, Stanford Encyclopaedia of Philosophy (2010) http://plato.stanford. edu/entries/paternalism/.

The Economic Case for Intervention in Consumer Markets  101 subject interfered with because consent was not given (ie the subject either did not have an opportunity to give consent or even denied it). Under ‘soft’ paternalism,89 intervention is permissible when there is reason to suspect that people are not acting fully voluntarily when making mistakes. The rationale is that we would avoid making mistakes had we been fully informed about the defects in our rationality.90 Intervention under ‘soft paternalism’ should not be aimed at restricting the choice-set available to those interfered with. More sparingly, it should aim to modify the architecture of the choice-set to give prominence to the preferable course of action whilst not ruling out the possibility to select alternative choices that would make the decision maker worse off.91 This subtle approach is known as ‘nudging’.92 Under ‘hard paternalism’, intervention may include removing options rather than nudging in the right direction. The goal of paternalism is to ensure that the targeted individuals are made better off. However, others who bear no responsibility for mistakes being made could be made worse off as a result of the intervention. This is particularly the case, for example, where individuals can learn from past mistakes, so that a self-correction loop may eventually supersede the need for intervention in the first place. Under hard paternalism, detriment to non-targeted individuals may result from a restricted choice-set – for example, a ban on addictive substances harms those who can consume in moderation. By contrast, under soft paternalism, a distributional trade-off can only arise where those made worse off were actually benefiting from (albeit not responsible for) the fact that others were making mistakes before the intervention. For example, frequent gym-goers are crosssubsidised by those who overestimate their attendance and pay for full subscription. When sophisticated consumers benefit from the fact that naïve ones are exploited, the net effect of intervention aimed at protecting the latter in terms of consumer surplus across both categories is often unclear. Hence, intervention is then based on a normative judgement that naïve consumers are worthier of protection. For example, it could be argued that in the case of personal current accounts, where there is a minority of consumers who regularly incur high overdraft charges and thus subsidise free usage of current accounts for those consumers who are regularly in credit, intervention is justified because the former group often has no

89 See C Sunstein and R Thaler, ‘Libertarian Paternalism’ (2003) 93 American Economic Review, Papers and Proceedings 175; C Camerer, S Issacharoff, G Loewenstein, T O’Donaghue and M Rabin, ‘Regulation for Conservatives: Behavioral Economics and the Case for “Asymmetric Paternalism”’ (2003) 151 University of Pennsylvania Law Review 1211. 90 At the same time, under ‘soft paternalism’, people should not be prevented to make mistakes when acting voluntarily and knowledgeably. 91 Stated otherwise, under ‘soft paternalism’, any choice restriction is permissible only with the consent of the individual interfered with – for example, because the individual is aware of lacking selfcontrol and wants to commit himself to the preferable course of action. 92 RH Thaler and CR Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven, Yale University Press, 2008).

102  The Economic Framework Underpinning Consumer Theories of Harm alternative but to make use of overdraft facilities. In this sense, it could be argued that the enforcement of consumer law could contribute to tackling economic inequality by protecting consumers with low incomes. Nevertheless, it is our belief that intervention in these circumstances can also be justified on efficiency grounds. First of all, the prevailing cross-subsidisation of sophisticated consumers at the expense of naïve ones might hamper innovation in product design and consumer service, given that sophisticated consumers will hardly be willing to switch to a different product proposition.93 More speculatively perhaps, to the extent that exploited (but also benefiting) consumers become cynical about the virtues of competition in general, this could contribute to a deterioration of both the degree of consumer engagement and the standards of professional diligence in other markets. The case for intervention to protect naïve consumers is certainly more straightforward in those market configurations where sophisticated consumers suffer from the presence of naïve ones, or in other words, where naïve consumers are protected by sophisticated ones. Here the presence of naïve consumers weakens competitive rivalry, therefore intervention aimed at nudging consumers to behave as sophisticated ones would tend unambiguously to improve aggregate consumer surplus.94

C.  The Unravelling Principle The idea that diligent and responsive consumers are essential to preserve the incentives for firms to disclose all the relevant information needed to make wellinformed decisions is based on the so-called ‘unravelling principle’. It posits that a seller with (private) information about the quality of the product sold will disclose it, rather than being subject to the negative inference that arises from the failure to disclose when one can do so cheaply and credibly.95 Accordingly, to make it difficult for buyers to work out whether the service provided represents good value for money would put the obfuscating firm at a competitive disadvantage 93 Economists use the term ‘dynamic efficiency’ to describe the benefits from innovation over the long term. This is one of the key anticompetitive concerns raised by the UK’s Competition and Markets Authority with respect to the degree of product innovation in the market for personal current accounts: see CMA, Retail Banking Market Investigation – Final Report (London, 2016) paras 145–46, https://assets.publishing.service.gov.uk/media/57ac9667e5274a0f6c00007a/retail-banking-marketinvestigation-full-final-report.pdf. 94 For a formal discussion of both market configurations, see M Armstrong, ‘Search and Ripoff Externalities’ (2015) 47 Review of Industrial Organization 273; P Heidhues and B Kőszegi, ‘NaïvetéBased Discrimination’ (2017) 132 Quarterly Journal of Economics 1019. 95 This theoretical result was shown independently under a monopolistic setting by S Grossman, ‘The Information Role of Warranties and Private Disclosure about Product Quality’ (1981) 24 Journal of Law and Economics 461 and P Milgrom, ‘Good News and Bad News: Representation Theorems and Applications’ (1981) 12 Bell Journal of Economics 380. B Jovanovic, ‘Truthful Disclosure of Information’ (1982) 13 Bell Journal of Economics 36 extended it to markets with an arbitrary number of firms. For an intuitive discussion, see Garrod et al (n 34) 40.

The Economic Case for Intervention in Consumer Markets  103 (in comparison to substitutable products). This is because, in theory, the firm offering the best bargain wants to disclose this information unilaterally rather than be considered of average quality by consumers who lack the information needed to discriminate between poor- and good-quality firms. This, in turn, puts pressure on the next-best-quality firm to also disclose, and so on until only the worst-quality rivals refuse to disclose. The unravelling principle rests on the assumption that information disclosure is not too costly and is seen as credible by consumers. In this respect, one of the worst unfair practices is to lie about the quality of the product offered in order to escape being subjected to the negative inference that would come from either stating the truth or not disclosing at all (for example, a handyman lying about having earned a five-star review from past clients). Besides the direct detriment to consumers who are misled to buy from the firm in question, there is the wider risk that the credibility of firms’ quality disclosures will be undermined in general.96 This would in turn damage the effectiveness of this important self-correction mechanism, thus weakening firms’ incentive to improve their quality in the first place. Note, though, that it would be unreasonable to expect consumers to personally verify the truthfulness of individual disclosures, as it would be far too costly. The unravelling principle does, however, have limited applicability. For example, where sophisticated consumers benefit from the exploitation of naïve ones, firms lack the incentive to change their course of action and build a reputation by disclosing their intention to treat all consumers fairly. This is because firms are fearful that sophisticated consumers (including those de-biased by the disclosure or through learning) would rather switch to a rival firm still intent on exploiting naïve consumers in order to benefit from the same cross-subsidisation.97 More generally, for the incentive to disclose unilaterally to really bite, it must be possible to rank firms’ product offerings according to their relative

96 This is another example of how the use of unfair trading practices can impose negative externalities on rival firms. 97 X Gabaix and D Laibson, ‘Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets’ 121 Quarterly Journal of Economics 505 called this puzzle ‘the curse of education’. M Armstrong and J Vickers, ‘Consumer Protection and Contingent Charges’ (2012) 50 Journal of Economic Literature 477 analysed an extension of Gabaix and Laibson’s model where sophisticated consumers can either protect or exploit naïve consumers depending on whether the ‘shrouded’ price component is sufficiently capped because of, for example, existing law or cultural norms that effectively impose a ceiling. When this is not the case, an increase in the proportion of sophisticated consumers has the paradoxical effect of being detrimental to consumers overall, because whilst the de-biased consumers benefit by being able to find lower prices, previously unbiased consumers will be hit with a price increase in response to the fact that firms have a smaller pool of naïve consumers available to exploit; this is due to the so-called ‘waterbed effect’, under the assumption that in equilibrium firms only just break even. Finally, P Heidhues, B Kőszegi and T Murooka, ‘Exploitative Innovation’ (2016) 8 American Economic Journal: Microeconomics 1 showed that, with a price floor for the transparent headline price instead, firms would be able to earn a positive profit, because there is limited scope for competing away the rents earned by overcharging naïve consumers for the shrouded components.

104  The Economic Framework Underpinning Consumer Theories of Harm price–quality ratio. In contrast, when firms’ products are closely substitutable, firms will anticipate that any competitive advantage resulting from unilateral disclosure will be short-lived in that rivals will promptly be able to catch up. Therefore, if the disclosure is costly – not in terms of the disclosure itself, but because it forces firms to improve or maintain the level of quality for an attribute which beforehand was not salient in the eyes of consumers – firms would be collectively better off without the disclosure.98 In other words, because unilateral disclosure would promptly be matched by rivals, the quality attribute thereof would become a ‘hygiene factor’ – that is, something that is necessary to stay competitive – rather than a source of lasting competitive advantage. Hence, firms’ incentives to disclose unilaterally are undermined from the outset. The self-correction mechanism underpinned by the unravelling principle might not be effective in preventing close competitors from aligning to a poor standard of professional diligence across the board.

D.  Distributive Effects and Substantive Fairness Remedial intervention in consumer markets ought to also be justified on grounds of substantive fairness. The consideration that sophisticated consumers could benefit from the exploitation of naïve ones entails that the alleged unfair practice has a distributive impact among separate groups of consumers. The existence of distributive effects calls into question the substantive fairness of the outcome. In chapter two, we explained that the test for contractual fairness can be articulated along two dimensions: (i) procedural fairness, which requires consumer purchasing decisions to be free and informed; and (ii) substantive fairness, which is concerned with the risk that consumers end up signing up to a disadvantageous deal. Under a neoclassical approach to consumer protection enforcement, the former principle tends to dominate. A finding of substantive unfairness would not normally be sufficient to trigger remedial intervention, unless it is accompanied by a finding of procedural unfairness (although it is admissible that a finding of substantive unfairness could raise a rebuttable presumption of procedural unfairness). This conservative approach has come under increasing criticism. Specifically, it has been argued that remedial intervention would be fully justified in the light of evidence that a particular group of consumers is charged significantly more than the rest (or are provided with a materially lower level of quality whilst being charged similar levels of price) and in the absence of any foreseeable self-corrective mechanism, which would entail that the level of detriment suffered by that particular group of consumers is likely to persist.99

98 In this sense, this scenario could be described as semi-collusive, whereby firms collude on the decision not to compete on the non-appropriable quality improvements but then compete on price. 99 See, eg BEIS (n 6) paras 37–41.

Concluding Remarks  105 Accordingly, a range of factors need to be considered to assess substantive unfairness on the back of evidence of distributive effects.100 These factors and their application will feature prominently in two case studies (retail energy and personal current accounts) developed in chapter six, and we will therefore be brief here. The case for intervention would tend to be stronger when the group of consumers being exploited shows demographic traits that are typically deemed to be strong indicators of a situation of vulnerability, such as a low disposable income, old age or the lack of access to a reliable internet connection.101 In contrast, the case for remedial intervention would be weaker with respect to wealthier consumers whose failure to shop around is due to lack of time and given the materiality of the level of financial detriment (ie compared to the corresponding level of disposable income). In addition, the emphasis on vulnerability can also be seen as a proxy for the presence of engrained behavioural biases which are hard to correct, thus suggesting that the level of consumer detriment is also likely to be persistent. In principle, there could be situations where the consumer’s inability to easily change in order to avoid being exploited is due to a genuine lack of alternative options, that is, irrespective of the presence of behavioural biases. For example, with respect to essential utility services, consumers with a poor credit history might not be able to select a cheaper mainstream tariff that relies on direct debit payment methods. Finally, the case for intervention may be stronger if the product or service concerned is considered to be essential, such as with respect to utilities and retail financial services, compared to products consumers can dispense from.

IV.  Concluding Remarks The use of unfair practices is detrimental not only to consumers, but also to those firms that are committed to treating consumers fairly. This is because the use of unfair practices is aimed at boosting the demand for the firm in question at the expense of its rivals. This boost in demand is the combined result of firms’ attempts to misleadingly inflate consumer willingness to pay for the product in question and/or increase search costs, thus reducing consumers’ propensity to shop around. At its core, the risk of falling victim to unfair selling practices is rooted in consumer uncertainty regarding the accuracy of firms’ claims about the quality of the product or service on offer. The more the overall quality of a product is defined by experience and credence attributes, the more severe the corresponding information asymmetry will be. Nevertheless, search attributes can be equally problematic in a situation of information overload, where consumers can struggle 100 See, eg M Starks, G Reynolds, C Gee, G Burnik and L Vass, ‘Price Discrimination in Financial Services – How Should We Deal with Questions of Fairness?’, Research Note (London, FCA, 2018) www.fca.org.uk/publication/research/price_discrimination_in_financial_services.pdf. 101 For a more detailed discussion on regulatory approach to consumer vulnerability, see the previous section.

106  The Economic Framework Underpinning Consumer Theories of Harm to assimilate large volumes of complex information made available to them to judge whether the product sold represents good value for money. The presence of consumer biases can complicate things further, in particular if firms are engaged in a race to the bottom, where they all seek to exploit naïve consumers. This must be considered problematic even if firms end up competing away these gains from consumers’ exploitation in an attempt to lure naïve consumers with what appear to be very good promotional offers, and also in spite of the fact that sophisticated consumers might actually benefits from this intense pricing rivalry. The argument that public intervention might have unintended consequences in that it undermines the self-correction loop whereby diligent and responsive consumers spur firms to compete on the merits is flawed where consumer learning is ineffective and firms lack the incentives to seek a competitive advantage by building a reputation for treating consumers fairly. The framework presented in this chapter does not include elements of psychological detriment at the individual level that are above and beyond direct financial harm to consumer. However, these aspects are relevant, in particular to the extent that psychological detriment might lead consumers to distrust markets in general. This is described by economists as a negative competitive externality, whereby the misleading conduct of one or more traders negatively impacts on the credibility of others at no cost to the former. On the other hand, psychological detriment may reflect consumer learning, which may be beneficial in the long-term if it allows consumers to become less persuadable. The use of harassment, coercion and undue influence constitute the one major exception to this framework, in that the use of aggressive commercial practices do not hinge upon the consumer committing an error of judgement. There is no mistaken purchasing decision in the first place to learn from. In these cases, therefore, psychological detriment is purely multiplicative of consumer financial detriment. A subtler distinction to draw is where consumer naivety is rooted in some serious cause of vulnerability. Indeed, sometimes consumers may fall into the ‘naïve’ category for reasons that go deeper than simple inattentiveness or over-optimism. When this is the case, it is our strong belief that firms should be under a positive duty not only to abstain from exploiting the ensuing naivety, but also to assist vulnerable consumers in not making a mistake. Over the past few years, there has been a concerted move by many sectoral regulators in the UK to define the ways in which consumers may be vulnerable in a given market, and to encourage firms to develop formal strategies to develop policies and practices to ensure that vulnerable groups are not disadvantaged by the firm’s behaviour.102

102 See, eg FCA, ‘Consumer Vulnerability’, Occasional Paper No 8 (London, 2015) www.fca.org.uk/ publication/occasional-papers/occasional-paper-8.pdf; Ofcom, ‘Consumer Vulnerability’ www.ofcom. org.uk/about-ofcom/what-is-ofcom/consumer-vulnerability; Ofgem, ‘Updating the Ofgem Vulnerability Strategy’ (London, 2018) www.ofgem.gov.uk/system/files/docs/2018/12/cvs_update_-_open_letter.pdf;

Concluding Remarks  107 As already pointed out in chapter two, in section V.1, consumers may be at greater risk of vulnerability in a market due to market features, their own physical or non-physical characteristics, or a combination thereof. Any consumer can become vulnerable at any point, and vulnerability may not be a permanent state. It is important to note that consumers at risk of vulnerability are overall less likely to be able to represent their own interests and are at greater risk of suffering detriment. The impact of any detriment suffered is also likely to be greater, justifying public intervention. A thorny issue, beyond the scope of this book, is whether firms’ positive duty to assist vulnerable consumers should entail that they proactively try to detect them and possibly share intelligence with other providers who might get in contact with the same individuals. In principle, firms could adopt similar techniques to the ones based on ‘big-data’ analytics used to profile consumers in order to improve revenue generation. However, we recognise that the issue of consumer consent is particularly problematic here, as the consumer in question may be unwilling to be exposed as being vulnerable. We have demonstrated that while the dominant view is that markets can self-correct and firms’ rivalry will ensure best outcomes for consumers, the reality does not always match this view. The extent to which reality differs from theory varies depending on the way a market is organised or a practice is rolled out, as well as how consumers react. The archetypal CToHs developed in the next chapter provide an economic model to identify situations where consumers will suffer detriment, irrespective of whether or not the law already offers a solution. Admittedly, the CToHs described in chapter five are unlikely to be of great use to consumer law practitioners in dealing with so-called ‘blacklisted’ practices (UCPD Annex 1; schedule 1 CPRs 2008), and to some extent the contract terms that are presumed unfair under consumer law statutes (Annex of Directive 93/13/ EEC on unfair term in consumer contracts; schedule 2 CRA 2015). This is because in those cases, the law is already fairly well equipped to respond. However, the CToHs will be invaluable when dealing with other allegedly unfair practices and contract terms, whereby a finding of liability must to some extent be based on an assessment that the alleged practice has the potential to cause consumer harm. We have seen that there are also circumstances where sophisticated consumers are not directly harmed by a practice, yet would still be worthy of protection on economic grounds. This is the case, for example, when the presence of the average consumer in a market protects the vulnerable consumer to some extent, but the corollary of this is that the former is indirectly

CMA, ‘Consumer Vulnerability in Digital Markets: Summary of Stakeholder Roundtable (London, 2018) www.gov.uk/government/publications/vulnerable-consumers/consumer-vulnerability-indigital-markets-summary-of-stakeholder-roundtable.

108  The Economic Framework Underpinning Consumer Theories of Harm harmed. In other configurations, average consumers benefit instead from the fact that unfair firms exploit vulnerable ones. We have already seen in chapter three that the market investigation regime and competition law could offer some relief in those situations. However, we believe that, in the absence of a market investigation regime similar to the one in the UK, or when such investigation is not triggered, the application of consumer law, although not straightforward, is nevertheless warranted. To this end, we advocate a more forceful application of consumer law when the economic evidence unpicked by the CToHs outlined in the next chapter requires it.

5 Archetypal Consumer Theories of Harm I. Introduction This chapter sets out the four archetypal consumer theories of harm (CToHs) that we believe together can cover the majority of the cases for intervention in the area of consumer protection. They are the blueprint that enforcers and policy makers can use to guide their intervention. Before presenting the theories, we will formalise the four categories of economic actors that form the cornerstones of any economic analysis: on the demand side, naïve and sophisticated consumers; and on the supply side, unfair and fair firms. Naïve consumers are very gullible and face insurmountable search costs, not only with respect to experience and credence attributes, but also with regard to search attributes, such as prices and main contract terms and conditions (T&Cs). They conform to the mainstream legal definition of vulnerable consumers. However, we have also seen that any consumer can occasionally act naïvely in a vulnerable purchasing situation. This could be due to inattentiveness, inexperience, misplaced trust or a multitude of behavioural biases. The CToHs also consider that naïve consumers may learn from past mistakes, but that is only if they realise they have made one. Sophisticated consumers broadly speaking conform to the legal definition of the average consumer, that is, they are reasonably observant, well-informed and circumspect. They typically fall short of the neoclassical economically rational consumer (the ‘homo economicus’, who has unlimited computational resources and thus faces virtually no search cost). However, they tend to be strategically savvy, in the sense that they can spot, or at least suspect, that firms may have an incentive to behave opportunistically by taking advantage of the fact that consumers may not be fully informed. In other words, sophisticated consumers make up for their bundled rationality (due to physiological computational limitations and ensuing search costs) by being able to read the rules of the game.1 On the one hand, this can include knowing when it is best to seek assistance from expert advisers, which nowadays can often come in the form of online digital solutions. 1 In this sense, see M Armstrong, ‘Search and Ripoff Externalities’ (2015) 47 Review of Industrial Organization 273.

110  Archetypal Consumer Theories of Harm Of course, to the extent that they do so, their decisions shall approximate those of a fully rational customer. On the other hand, it could also entail that consumers draw the reasonable inference that there is no point in committing more time and resources to shopping around because of the commonly shared expectation that firms’ conducts are fully aligned. For the sake of completeness, we should also include a third category of consumer, the ‘super consumer’. This consumer corresponds to the fully economically rational consumer. The ability of sophisticated consumers to make fully informed decisions will approximate those of super consumers most of the time, provided that they are not overloaded with complex information or it is not too costly to gather all the relevant information. However, the fully economically rational consumer is a theoretical construct. Nowadays, it performs a normative role, in the sense that it provides a benchmark of the ideal outcome in a market that is working well for consumers.2 Super consumers might exist, but we suspect that they are typically not very many. As a result, their super rationality is unlikely to dictate firms’ overall conduct. The distinction between fair and unfair firms is subtler in nature. For a start, economic models do not make a distinction between well-intentioned firms and unscrupulous ones. All firms are modelled in the same way in that they balance the opportunistic incentive to exploit naïve consumers at the risk of not selling to sophisticated ones. In other words, in the relevant economic literature, there is no specialisation whereby some firms always resort to unfair practices whilst others prefer to abstain from following suit; they all make use of them, at least to some extent.3 Some of the configurations developed in this chapter are in line with this framework. However, this is not always the case. We believe it is important to think about the interaction between the two categories of firms because the relevant literature does not take into consideration the fact that the decision to resort to the use of unfair practices may entails costs for firms. For a start, they may be found to be in breach of consumer law. In particular, unfair firms are at risk of being found in breach of the requirements of professional diligence and good faith enshrined in the fairness tests in consumer protection laws. More generally, though, another cost may be a lasting reputational damage. This effect is related to the idea that savvy consumers dislike the use of unfair 2 See, eg FCA, ‘FCA Mission: Our Future Approach to Consumers’ (London, 2017) 8 www.fca. org.uk/publications/corporate-documents/our-future-approach-consumers: ‘We regulate for the real world and wherever possible our approach will be based on what we know about how consumers really behave rather than theory. Behavioural research shows us that consumers are not the economically rational “super consumers” research models might assume. We will continue to base our interventions on how individuals in markets behave in practice, rather than just according to theory.’ 3 Technically speaking, in some models firms randomise (ie follow mixed strategies) between, for example, the use of price-obfuscating practices aimed at exploiting naïve consumers and setting prices transparently. Firms have to do so because they cannot tell naïve from sophisticated consumers, and they do not want to let competitors predict, and thus adapt to, their pricing decision. See Armstrong (n 1) for a review of main models. In another class of models, firms adopt the same conduct which can have exploitative elements to various degrees. See P Heidhues, B Kőszegi and T Murooka, ‘Inferior Products and Profitable Deception’ (2017) 84 Review of Economic Studies 323.

Introduction  111 practices, even if not directly affected by them. This is perhaps because they take it as a signal of low quality in that, for example, the corresponding firm feels the need to inflate consumer willingness to pay. Those firms that have less to lose may be tempted to resort to the use of unfair practices in an attempt to bridge their competitive disadvantage to some extent. Under these circumstances, therefore, there could be a partition on the supply side. This can also apply to a scenario where there is no partition among firms to start with, for example, when all firms are engaged in treating consumers unfairly. Under these circumstances, a firm may find it advantageous to depart from the common unfair course of conduct in order to build a reputation for treating consumers fairly, even if doing so means sacrificing some profit in the short term. Therefore, there could be a partition on the supply side even if all firms appear to be aligned in evading their duty of care. With this in mind, the four archetypal CToHs developed in this chapter are as follows: 1.

2.

3.

4.

The scam: where naïve consumers are left at the mercy of unfair firms, and neither sophisticated consumers nor fair firms want to trade in these fake ‘markets’. In the scam, demand is entirely unwarranted and charlatans compete to deceive. Traditional examples include pyramid schemes, fake lotteries and fake prize draws. The lemon: where both sophisticated consumers and fair firms would want to be active in the market, but the presence of naïve consumers and unfair firms might cause both of them to withdraw from the market. This withdrawal from the market would be to the detriment of naïve consumers. There is a risk of an adverse selection spiral. Lemons are mainly about experience or credence goods. Traditional examples include clocked cars, but also repair services. The shock: where both naïve and sophisticated consumers may be faced with the same widespread use of misleading practices, but the former may offer some protection to the latter category of consumers. The presence of naïves induces the adoption of the misleading practices. In those configurations, there should be incentives to de-bias the market (self-correction). Typical examples include reference pricing and restricted liability for faulty goods. The subsidy: where there is a risk that naïve consumers are discriminated against by the generality of traders, with sophisticated consumers benefiting from the exploitation of naïve ones. The market might be stuck in a bad equilibrium. This includes, for example, shrouded add-ons or penalty charges.

The names of the CToHs were chosen to aid differentiation between the theories of harm and help in their daily usage. It is, indeed, more practical to refer to the shock or the lemon than the more long-winded description of all the subtlety such an economic configuration may entail. The names come, however, with the caveat that they are not necessarily fully accurate and, while they are handy shortcuts, they cannot by themselves sum up the analysis that will be necessary to categorise behaviours and market configurations. In addition, as the reader will discover,

112  Archetypal Consumer Theories of Harm the frontiers of each theory are not hermitically sealed. There are too many market configurations and combinations of factors at play to be able to account for them all in neatly contained boxes. As a result, this chapter also shows how practices in one CToH may slide towards another classification. It also helps enforcers in particular to develop a rationale underpinning the selection of one CToH over another. The case studies developed in the following chapter (chapter six) will also help our understanding of how to use the CToHs to their full extent and best advantage. In what follows, we analyse each of the archetypal CToHs in detail. The four scenarios are not mutually exhaustive or exclusive, but they do represent an attempt to cover the majority of the cases for consumer protection intervention. The next chapter investigates the extent to which a particular case appears to fit within more than one CToH, looking at what could trigger a drift from one CToH to another and what that would entail in terms of consumer detriment. The description of each scenario will start from the demand-side perspective (the consumer). We first look at how naïve and sophisticated consumers perceive and react to the practice in question. Whenever possible, the analysis will then shift to the supply-side adjustments among traders triggered by the adoption of the unfair practice and in recognition of consumers’ reactions to it.

II.  The Scam This first CToH refers to situations where, in hindsight, demand for the ‘product’ on offer is entirely unwarranted because the offer in question is worthless or of little value to the consumer who purchased it. In other words, this scenario encompasses the traditional ‘hardcore’ cases for consumer protection intervention primarily covered under the Unfair Commercial Practices Directive and the Consumer Protection from Unfair Trading Regulations 2008 in the UK, namely practices contained in annex 1 UCPD (schedule 1 CPRs) and also the use of harassment, coercion and undue influence (Articles 8 and 9 UCPD and Regulation 7 CPRs on aggressive practices). The practices that fall under the scam scenario may not necessarily be aggressive, but they are similar in terms of consumer (financial) detriment, because consumers end up paying for something the consumption of which does not add any, or only very little, value to them.4 This common feature can be captured by the following counterfactual: If the consumer was given his or her money back, would they still consider purchasing the same kind of product again – ie spending the same amount of money thereon – although from a different firm? 4 We do not consider scams where victims are persuaded to provide their bank details in response to a fake alert from an imposter saying that there has been a breach of security. Another situation not covered is where the victim is misled into paying a fake invoice sent by an imposter claiming to be the trader who genuinely provided a service to the person in question (eg a carpenter). In all these cases, the victim is not actually misled into purchasing something worthless.

The Scam  113 This counterfactual should normally elicit the same negative answers in all the cases considered under this CToH, provided that the consumer has realised that he or she fell victim to an unfair firm. Indeed, a consumer would not be happy to make the purchase again, because he or she not only derived very little (if any) value from the purchase, but also because, in addition to any economic detriment, a sense of powerlessness or psychological detriment is also felt. Using a different firm would not tend to change the view that the product was not worth purchasing again. Prominent examples of this type of deceptive practice include the use of pressure selling techniques, such as doorstep selling or cold-calling, where the sale pitch is unsolicited. Another example is to include in marketing material an invoice or similar document seeking payment which gives consumers the impression that they have already ordered the marketed product when they have not (inertia sales). There can be cases where consumers may still consider purchasing the same product, even after realising that they have been forced or tricked to some degree into purchasing the product in the first instance, albeit perhaps at a lower price after shopping around a bit more. Under these circumstances, the use of pressure selling techniques can be thought of as an unfair practice that discriminates between sophisticated and naïve consumers. The former are able to rebuke the unsolicited approach, whereas the naïves are not. In those situations, and depending on whether consumers falling victim to pressure selling practices end up paying a higher price than they would have paid had they purchased the same product through mainstream distribution channels (for example, the firm’s website), this scenario is better captured by other CToHs. To the extent that consumers end up regretting having purchased the product in question, this case is classified under this CToH.

A.  Blind Trust Except in situations where aggressive commercial practices are used to force the consumer into purchasing, the purchasing decision of a scam victim is normally entirely motivated by blind trust. The seller does not need to provide any objectively verifiable ‘credentials’ to support its quality claims. Indeed, scammers were originally dubbed ‘confidence men’. Their ‘credentials’ may result from the trader’s long-term commitment signalled by the creation of a corporate brand supported by conspicuous advertising, or from independent quality control provided by a third party.5 Prominent examples are fake lotteries, prize draws and pyramid schemes, all of which hinge upon the victim’s credulity (and greed). 5 See M Armstrong, ‘Interactions between Competition and Consumer Policy’ (2008) 4 Competition Policy International 97, para 2.9. Such ‘credentials’ may result from the trader’s long-term commitment, eg as signalled by the creation of a corporate brand supported by conspicuous advertising, or from independent quality control provided by a third party.

114  Archetypal Consumer Theories of Harm A special category is represented by fake credence goods, where the victim uncritically relies on dishonest expert advice.6 This is typically the case with false medical claims, such as with weight loss schemes and miracle cures, but also bogus clairvoyants, psychics or race tipsters. Under these circumstances, the consumer is not only at risk of extreme overcharging, but, potentially, also of under-treatment in the case of ‘bundled credence goods’. For example, with false medical claims, the provision of the fake treatment might prevent the consumer from accessing a proper one.7

B.  Only Unfair Firms Will be Active In all these cases there is an absence of entry and exit barriers. Regarding the former, unfair firms do not have to incur the cost of manufacturing a genuine product or providing a genuine service. They typically rely on relatively inexpensive marketing channels, such as classified ads on local media outlets and direct marketing. Social media has also helped support such scam activity in the more recent past. Moreover, the exclusive reliance of blind trust entails that the reputational mechanism is not at play in these cases, thus further lowering entry barriers. Worse, social media, in many cases, has played into the hands of scammers by creating the impression that other people in close proximity (geographically or relationally) are using the products, thus reinforcing blind trust. Indeed, it is not uncommon for the naïve consumer to not even realise they have fallen victim to a scam. In this case, the naïve consumer would probably answer the counterfactual question above affirmatively. As a result, the corresponding consumer detriment goes undetected. More generally though, scam victims would realise that they have been conned, given that their unrealistic expectations regarding the underpinning quality claims cannot be met – ie the deal was indeed ‘too good to be true’. Therefore, the fact that naïve consumers would either not realise that they had fallen victim to a scam or would not consider purchasing the fake product twice means that the prospect of losing repeat purchases will not exert any discipline on unfair firms. In other words, there does not appear to be any reputation mechanism at play in these cases. Reputation can be an effective self-regulatory mechanism when consumers make repeat purchases themselves or are able to affect the purchasing decisions of others, for example through wordof-mouth recommendations. This is particularly problematic in the case of scams to the extent that the majority of scam victims fail to report what has happened

6 R Spiegler, ‘The Market for Quacks’ (2005) 73 Review of Economic Studies 1113 modelled this scenario. 7 It is worth noting that most of the time the alternative proper ‘treatment’ may simply consist in, for example, a healthier lifestyle, which is not a treatment in the sense that it is not externally provided, but hinges on the ability to commit and exercise self-control.

The Scam  115 to them because they either do not realise it has happened or are too embarrassed to admit it.8 The observation that consumer detriment might go undetected also suggests that scammers may expect to be able to evade liability for failing to meet their quality claims.9 There are no material sunk costs (such as a large advertising budget to raise brand awareness) that would be lost upon exit. This means that there are no exit barriers either. There are therefore only low costs associated with setting up and running the scam or adopting aggressive commercial practices (given that the rest of the business is normally fake).10 Low exit barriers, in turn, would tend to stimulate entry. Therefore, competition among unfair firms to deceive naïve consumers will typically be intense, given that the prospect of high margins would attract a multitude of unscrupulous firms vying for a small pool of naïve consumers. In other words, under this CToH, increased rivalry would tend to worsen the degree of deception. No fair firm would want to be an active market participant under these circumstances, given that the only dominant strategy is to deceive naïve consumers.

C.  Maximum Financial Detriment Under the circumstances outline above, those consumers who fall victim to a scam would face maximum financial detriment in that they end up paying for a product (if there is indeed one) that is worthless. This can be seen as an extreme form of overcharging. This extreme exploitation of naïve consumers is unmitigated because sophisticated consumers are able to recognise and thus avoid scams altogether. As a result, unfair firms lack the incentive to ameliorate their offer in the hope of attracting sophisticated consumers. The absence of sophisticated consumers means that scams do not result in any loss in consumer surplus for this category of consumers. Therefore, to the extent that an increase in the degree of deception, perhaps as a result of intensified competition among unfair firms, would alert more consumers to the risk of falling victim to a scam, and thus persuade them to abstain from even considering buying the product, this may improve the situation on aggregate. This is so to the extent that the heightened exploitation of a shrinking pool of naïve consumers is more than offset by the fact that more consumers succeed in spotting and thus ­eschewing the scam. 8 OECD, ‘Examining Consumer Policy: A Report on Consumer Information Campaigns ­Concerning Scams’, DSTI/CP(2005)12/Final (Paris, 2005) 9, para 3.1. 9 On the other hand, consumers’ naivety may also be due to their expectations that scammers will not be allowed to operate because of perfect surveillance by deputed authorities – ie deterrence raises expectation of high exit barriers. 10 Indeed, dishonest traders may operate serially by setting up and running scams under different ‘brands’ and from distant locations in order to escape liability – ie ‘hit and run’ patterns thanks to low entry and exit barriers.

116  Archetypal Consumer Theories of Harm This shrinking in the pool of naïve consumers that are caught by a scam may also reflect learning from previously misled consumers, who have become sophisticated enough to spot the deceptive use of persuasion techniques. To this extent, although the psychological harm would amplify the personal detriment, it may be beneficial to the consumer in the long run because no more money will be wasted in further mistaken purchasing decisions.11 However, for obvious reasons, this consideration is irrelevant to the use of harassment, coercion and undue influence. Table 5.1 summarises the main features of the ‘scam’ across the four identified categories of actor on the demand and supply sides: naïve and sophisticated consumers, and unfair and fair firms. The table is useful for cases of scam only. That is because it is not appropriate to categorise consumers who are victims of harassment, coercion and undue influence as having been naïve, although we believe that the dynamics on the supply side are similar. Not all elements need be present in each and every scam, but the more elements can be identified, the stronger the presumption that the practice would indeed be classed as a scam. Table 5.1  Summary of CToH 1 – ‘the scam’ The scam: the good sold is non-existent, worthless or of little value • Consumer pays for something which provides little, if any, benefit • Very low barriers to entry and exit, reputation is ineffective • Examples: fake lotteries; pyramid schemes; false medical claims Demand side

Naïves

• Fail to perceive the risk that the product or service on offer might be worthless: ○○ Fail to realise that the product or service on offer is a credence good sold by traders with no credentials ○○ With ‘bundled credence goods’, additional risk of under-treatment • Psychological detriment adds to the financial detriment, but it could lead to learning – ie saving in the long run

Sophisticates

• Do not even consider buying – ie they do not exert protection over naïves • Can identify that the product or service on offer is a credence good sold by a trader that relies exclusively on the use of misleading persuasion tactics and that the bargain offered is too good to be true (continued)

11 In this respect, it is worth pointing out that although scams themselves change over time, the underlying persuasion tactics tend to remain the same.

The Lemon  117 Table 5.1  (Continued) Supply side

Unfair firms

• Compete to deceive naïves • Competitive rivalry might worsen deception • Very low entry barriers and (perception of) very low exit barriers – ‘hit and run’ entry/exit pattern repeatedly under different brands • No reputation mechanism and no incentives to self-regulate

Fair firms

• Have no interest in operating in such fake markets because cheating naïves is the dominant strategy. No negative competitive externality suffered from unfair traders

III.  The Lemon In the previous CToH (the scam), sophisticated consumers would not consider making a purchase once they realised the risk that it may be a scam. Therefore, naïve consumers would not be in a position to benefit from the disciplining effect that would have otherwise resulted from the participation of the former group of consumers. This CToH (the lemon) differs in that sophisticated consumers would consider making a purchase, although not from what is suspected to be an unfair firm. In other words, under this CToH, there are fair firms operating in the market alongside unfair ones that are attempting to mislead consumers. Nevertheless (and contrary to the previous CToH), it would be difficult for even sophisticated consumers to spot the misleading practice before purchase. This does not mean that sophisticated consumers are unaware of the risk of falling victim to misleading conduct; rather, they are unable to perfectly discriminate between fair and unfair traders before purchase. This is because there are high verification costs before purchase with respect to some important credence or experience quality characteristics of the product sold.12 Nevertheless, consumers do not have to rely on blind trust here. There are fair firms committed to staying in the market by developing a reputation, providing full warranties and/or setting up self-regulation initiatives to certify their standards of quality contrary to the way firms operate in a scam. Typical examples of misleading practices encompassed under this CToH are clocking the mileage of used cars and overstating the need for repair services. A recent example is that of fake news – that is, false, often sensational, information disseminated over the internet and social media under the guise of

12 As explained in ch 4, these products or services can be treated as experience or credence goods to the extent that the corresponding quality attributes are among the main determinants of the ­consumption benefits.

118  Archetypal Consumer Theories of Harm news reporting.13 The digitalisation of the media has made it possible to get our news feeds from a variety of media outlets, whereas in the analogue era we tended to rely on only a handful of sources (typically, a couple of TV or radio news outlets and a couple of print media outlets, at most). On the one hand, traditional media outlets have had to adapt to the fact that targeted audiences are less loyal thanks to the greater choice set available online. This transformation has caused a certain degree of polarisation, whereby media outlets have to some extent tilted towards a more partisan and sensationalist editorial tone in order to retain their audiences,14 often relying on social media sources to complement traditional journalistic work. On the other hand, the greater availability of different sources of news coverage has spurred on the adoption of digital platforms aimed at filtering content on the basis of the estimated relevance from the perspective of individual users. This development tends to further incentivise media polarisation by promoting so-called ­‘filter bubbles’,15 whereby individuals are mainly exposed to media content expected to confirm their prior beliefs and existing biases. Against this backdrop, the threat of fake news is more insidious, because it is inserted as part of a mediated news feed comprising items from a wide variety of media sources, each vying for the consumer’s attention by adopting catchy headlines. Of course, the possibility that consumers might be misled into trusting fake news raises concerns for the sustainability of Western democracies that are much more serious than the specific field of consumer protection. Nevertheless, this topical example is useful in helping readers grasp the rationale underpinning this CToH. In particular, it helps explain the idea that sophisticated consumers are unwilling to withdraw entirely from this market, notwithstanding the risk of falling victim to a fraud. This common feature can be captured by the following counterfactual: If the consumer was given his or her money back, would they still consider purchasing the same kind of product again – ie spending the amount of money thereon – although from a different firm? In this theory of harm, the consumers will answer positively, provided that the consumer realises he or she fell victim to an unfair firm. He or she could consider buying the product again, but would inevitably go to another firm. By contrast, in the scam scenario, for which we are using the same counterfactual as a starting point, the consumer would not consider buying the product again. 13 For more details on the responses in the EU, see European Commission, ‘A Multi-dimensional Approach to Disinformation’ (Brussels, 2018) https://ec.europa.eu/digital-single-market/en/news/ final-report-high-level-expert-group-fake-news-and-online-disinformation. For the position in the UK, see Digital, Culture, Media and Sport Committee, ‘Disinformation and “fake news”’ (London, UK Parliament, 2018) www.parliament.uk/business/committees/committees-a-z/commons-select/ digital-culture-media-and-sport-committee/inquiries/parliament-2017/fake-news-17-19/. 14 See, eg N Newman, R Fletcher, A Kalogeropoulos, DAL Levy and R Kleis Nielsen, Digital News Report (Oxford, Reuters Institute, 2017) 38 www.digitalnewsreport.org/. 15 E Parisier, The Filter Bubble: What the Internet is Hiding from You (New York, Penguin Random House, 2011).

The Lemon  119

A.  The Risk of an ‘Adverse Selection’ Spiral Sophisticated consumers are normally well aware that they have to be circumspect and thus sceptical when the seller appears to rely primarily on quality claims (for example, the use of the ‘organic’ label for food) that cannot be promptly verified before and/or after consumption. Yet, in this scenario, sophisticated consumers might not ultimately be able to make a fully informed choice. The more the overall quality of the product in question is dependent on experience and credence quality attributes, the more sophisticated consumers must be circumspect and rely instead on other proxies for quality (such as reputation, the existence of a warrantee scheme or the presence of a trust mark administered by an independent third party). In the absence of any of these solutions, or in case they are not trusted by consumers, detriment can result from a combination of risks, specifically: (i) overcharging, whereby consumers end up paying for a level of quality below what was claimed by the seller; (ii) under-treatment, in that the lower level of quality purchased fails to meet consumer needs and expectations; or (iii) over-treatment, whereby consumers end up paying for a level of quality that is too high (and thus too expensive) relative to consumer needs and expectations. The risk of under-treatment could materialise as a result of a false quality claim (for example, a modelling agency claiming to have lots of contacts within top fashion brands). It could also be due to misleading expert advice that the consumer had to rely on, as in the case with ‘bundled credence goods’, whereby consumers lack the expertise necessary to figure out what level of quality is required to meet their needs (for example, roof repairmen). By the same token, the misleading expert advice may result in over-treatment, in case this strategy turns out to be more profitable for the unfair firm than causing under-treatment (as more hours of work can be billed). Under these circumstances, sophisticated consumers may be unwilling to pay the full price they would have accepted had they been confident that the quality claim made by the seller was indeed accurate. This, in turn, would discourage fair firms from selling high-quality products, given that they will not be able to command a premium price for them. In other words, both consumers and fair firms suffer from the presence of opportunistic unfair firms making misleading quality claims. When the underlying quality attribute is essential to the overall value of the product or service in question, there is a risk that the level of reduction in the willingness to pay by sophisticated consumers is so large that no fair firm is willing to sell at such low prices. Hence, the market might even fail altogether. Economists call this market failure ‘adverse selection’.16

16 Under adverse selection, the seller is unable to credibly signal to the buyer the quality of the product sold. In response, the buyer is unwilling to pay the full price for the stated level of quality, given the risk that the product might be of lower quality than that claimed by the seller. Hence, the seller will

120  Archetypal Consumer Theories of Harm The presence of naïve consumers magnifies the risk of an ‘adverse selection’ spiral. As in the previous CToH (the scam), naivety in this case may take the form of failing to realise that what appears to be a great bargain is indeed too good to be true.17 In other words, naïve consumers involuntarily add to the discounting p ­ ressure faced by fair firms when dealing with circumspect sophisticated consumers. Under these circumstances, naïve consumers are not only subject to under-treatment, but can also be exposed to overcharging if the discount offered is lower than the underlying cost for the quality attribute subject to the misleading quality claim.18 This situation is potentially more problematic than the one already described. This is because unfair firms may also benefit from a presumption of fairness, because they appear to be selling commonly traded products or services. Therefore, it is not only the presence of unfair traders that causes a negative externality on both fair traders and sophisticated consumers; the same can also be said with respect to the presence of naïve consumers.

B.  The Risk of Drift towards CToH 1 ‘The Scam’ Besides falling for bargains that appear too good to be true, a second form of naivety (which in fact goes in the opposite direction) is to rely on the price charged as the only proxy for the underlying quality. As already explained, sophisticated consumers tend to be wary of what appear to be very low prices because they correctly reason that a fair firm would not be able to sustain the level of costs necessary to constantly deliver a good level of quality at those prices. However, they are also aware that to rely on price alone as a proxy for quality would expose them to the risk of extreme overcharging. Hence, sophisticated consumers would tend to be similarly circumspect, and therefore sceptical of a firm that charged what would appear to be fair prices in the absence of any other reliable quality

be unwilling to stock high-quality products knowing that buyers will be unwilling to pay the corresponding price, which in turn will further depress buyers’ willingness to pay. Ultimately, this market could collapse entirely: see GA Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’ (1970) 84 Quarterly Journal of Economics 488. 17 For a theoretical treatment, see M Armstrong and Y Chen, ‘Inattentive Consumers and Product Quality’ (2009) 7 Journal of the European Economic Association 411. 18 As a simple numerical example, let us suppose that the competitive price that a fair firm would be willing to accept is 10 per unit of product. Let us also suppose that the cost corresponding to the experience or credence attribute subject to the misleading claim by the unfair firm is 4. If the unfair firm sets a price of 8, the naïve consumer who believes this to be a genuinely good bargain would not only be exposed to under-treatment, but would also face an overcharge of 2, as the competitive price for a-lower quality product without the quality attribute in question would be 6.

The Lemon  121 credential, such as a solid reputation or the presence of a robust product return or service level guarantee policy.19 Naïve consumers would still be protected by the presence of sophisticated consumers, who would not purchase from firms without reliable quality credential. However, this is the case only to the extent that naïve consumers tend to shop in the same places (both online and via the bricks-and-mortar traditional distribution channel) used by sophisticated ones. If the two group of consumers get decoupled, sophisticated consumers will no longer afford protection to naïve consumers, who might therefore become an easy target for unfair firms. In the absence of fair firms, naïve consumers face the same risk of extreme overcharging described in the previous CToH (the scam), where they are left at the mercy of unscrupulous unfair firm. This risk is particularly prominent when unfair firms can target and isolate naïve consumers, for example, through direct marketing practices such as doorstep selling and cold-calling, that is, where the consumer is most at risk of making a passive choice. The corollary of the argument that naïve consumers might lose the protection that comes from the fact that they shopped in the same places as those frequented by sophisticated ones is that both the latter group of consumers and fair firms are no longer affected by the negative externalities due to the presence of the former group and unfair firms. Nevertheless, in light of the fact that naïve consumers can be singled out by firms, it is not inconceivable that they may try to exploit the naïve consumers unfairly whilst treating the sophisticated consumers fairly. For example, the UK energy regulator fined energy firms for targeting vulnerable consumers with exploitative unfair deals through aggressive doorstep-selling practices20 – all this presumably whilst sophisticated consumers were able to find the best available deals by shopping around, perhaps with the assistance of price comparison websites. Indeed, when the competition between firms is intense, sophisticated consumers could actually benefit to the extent that firms, at least partly, compete away the rents that they are able to extract from the separate exploitation of naïve ones. Accordingly, the current CToH would drift towards a combination of ‘the scam’ scenario with respect to naïve consumers and ‘the subsidy’ (see further below) with respect to sophisticated ones.

19 In this respect, see Armstrong and Chen (n 17), who show that even when uninformed consumers are (strategically) savvy in that they try to infer quality from the level of price (ie they are sceptical of low prices), they are nevertheless at risk of being defrauded when the proportion of uninformed consumers is large. 20 See, eg Ofgem, ‘Ofgem Fines SSE £10.5 Million for Misselling’, press release, 3 April 2013 www. ofgem.gov.uk/sites/default/files/docs/2013/04/sse-press-release_1.pdf.

122  Archetypal Consumer Theories of Harm However, in the majority of cases, the risk involved in treating naïve consumers unfairly would be too high in terms of reputational damage in the eyes of ­sophisticated consumers. Therefore, under these circumstances, the decoupling would take place on both the demand side and the supply side.

C.  Self-Regulation (and its Opportunistic Exploitation) As explained above, in contrast to the ‘scam’, in this scenario there are fair traders willing to adopt self-regulatory mechanisms to signal their quality and avoid an ‘adverse selection’ spiral. There are a number of solutions, from the pursuit of a solid reputation backed by independent third-party reviews or open customer feedback to the adoption of an industry code of conduct aimed at safeguarding consumers from the risk of potential opportunism. In this respect, the use of misleading practices where the unfair firm takes advantage of self-regulatory solutions – for example, by uploading good customer reviews through false identities or falsely claiming to be a signatory of a code of conduct – is particularly egregious. A less obvious example is where the unfair firm manipulates consumer feedback by preventing disgruntled consumers from posting about their negative experiences. For example, the UK consumer law authority (the Competition and Markets Authority, CMA) objected to the fact that Airbnb did not allow guests who cancelled their stay on the day of check-in or during the visit because they were unhappy with the state of the property or the conduct of the host to leave reviews.21 This type of practice tends to undermine the trust that sophisticated consumers place in the solutions voluntarily adopted by firms to mitigate the issues they face due to information asymmetry. Furthermore, the detriment would be amplified to the extent that consumers come to distrust the reliability of these solutions in general, that is, with respect to other markets beset by similar issues. It is worth pointing out that in the absence of an effective self-regulatory solution, and where a market might be at risk of collapsing, the only available alternative might be to have direct public intervention aimed at mandating and policing minimum standards of quality. Such a solution would be costlier to administer than the kind of self-regulatory remedies outlined above. It would also only be justifiable where the product or service in question is considered to be of public value. Therefore, in our opinion, it is very important that consumer authorities prioritise enforcement against this type of misleading practice. Table 5.2 summarises the main features of ‘the lemon’.

21 See CMA, ‘CMA Welcomes Airbnb Guest Review Changes’, press release, 27 July 2017 www.gov. uk/government/news/cma-welcomes-airbnb-guest-review-changes.

The Lemon  123 Table 5.2  Summary of CToH 2 – ‘the lemon’ The lemon: consumers cannot judge quality and traders can mislead • Concerns experience/credence attributes • Such markets may eventually drift towards the first CToH if naïve consumers can be singled out by unfair firms • Examples: clocked used cars; repair services; provision of further educational training; modelling agency services Demand side

Naïves

• Fail to realise that the product sold could be of lower quality than that pretended by misleading sellers: ○○ Tend to be subject to passive choices, blindly trusting the false quality statements ○○ In general, do not adjust their valuation of the product according to risks of ‘adverse selection’ ○○ Are subject to the combined risk of overcharging and either under-treatment or over-treatment • Their presence intensifies unfair firms’ opportunistic incentives to deceive – ie negative consumption externality over sophisticates

Sophisticates • Can second-guess the presence of the misleading practice with respect to the credence/experience quality attribute • Do not rely on blind trust, but look for the existence of reliable quality credentials • Adjust (discount) on average their valuation of the product sold accordingly – ie inducing adverse selection • Are at risk of losing trust in reputation and selfregulation solutions • If the credence/experience quality attribute is a key determinant of the consumption benefits, may avoid buying the product altogether Supply side

Fair traders

• Have difficulty in commanding a premium for high quality – ie problem of adverse selection • Have incentives to self-regulate • Can drop out of the market (or abandon distribution channels where naïves are targeted – ie adverse market segmentation) if the adverse selection spiral makes it unviable to continue trading – ie risk of drift towards CToH 1 (the scam)

Unfair traders

• Opportunistic incentive in passing low quality off as high quality – ie negative competitive externality over fair firms • The outlook to exploit naivety worsens things, in particular, when competition for sophisticated consumer is intense • Perverse incentive to exploit reputation and self-regulation solutions to their advantage – ie negative competitive externality over fair firms. This might cause (sophisticated) consumers’ distrust towards these solutions in general

124  Archetypal Consumer Theories of Harm

IV.  The Shock In this consumer theory of harm, sophisticated consumers can detect the presence of the misleading practice, rather than only second-guess its presence (as was the case in the previous two CToHs). This is because the misleading practice does not hinge upon credence and/or experience quality attributes, but is related to search attributes (such as price and T&Cs), which are in principle verifiable before purchase, although typically at a cost for the consumer (search effort). Therefore, sophisticated consumers can adjust their valuation of the product or service on offer accordingly. In essence, in this scenario, unfair firms frame pricing terms deceptively. There are two possible rationales: (i) inflating consumers’ willingness to pay for the product or service on offer; and (ii) obfuscating the overall price by introducing hidden and opaque charges which are either unavoidable (eg postage & packaging fee) or related to contingent fees which cannot be avoided with certainty (eg excess clause in insurance contracts). Inflating willingness to pay comes primarily in the form of misleading practices before or at the point of sale; obfuscation can also refer to the presence of unfair consumer contract terms (in the form of small print). Although the two rationales can often overlap, a typical example of inflating willingness to pay is the use of false sales promotions. This would be the case, for example, with a promotion offering large discounts off the ‘normal’ price over a limited time period, when in fact the ‘normal’ price was in place only for a very short period before the promotion in question was launched. In addition, during that short period, the products in questions may not be properly displayed, both in terms of physical layout in a ‘bricks-and-mortar’ shop and in an online shopping window. This pattern is repeated frequently, so that what is claimed to be a ‘normal’ price instead constitutes an exception. Consumers may often fail to realise what is going on because the item on sale is not something they would purchase frequently and they are therefore not able to promptly recall prices posted in the past. With respect to obfuscation, an example related to an unfair contract term is where an unfair firm providing an ongoing service reserves the right to change the price charged at any time after a predetermined period, with a very short notice period before the price increase becomes effective, while conversely imposing a long notice period for the consumers to terminate the contract. Another example, this time related to a misleading practice rather than an unfair contract term, is so-called ‘drip pricing’, where the overall price is revealed only towards the end of the purchasing process, when additional charges are added to the headline price initially advertised. When willingness to pay is inflated, the source of naivety is the lack of knowledge of the prevailing valuation of the product or service in question, combined with a lack of circumspection in trusting the false claim that the price offered constitutes a great bargain. Consumers being unaware of the prevailing price could also be due to very high search costs, since it should be relatively straightforward

The Shock  125 for consumers to shop around in order to find out what the typical price for the product in question is. With respect to obfuscation, the source of naivety can be the presence of high search costs (ie the consumer particularly dislikes spending time shopping around), potentially combined (as is the case with drip pricing) with a behavioural bias caused by the so-called ‘endowment effect’. The endowment effect describes situations whereby the consumer is emotionally invested in purchasing the product since they have already made the decision to do so early on in the process, on the basis of the lower headline price.

A.  The Risk of Drift towards CToH 2 ‘The Lemon’ and CToH 1 ‘The Scam’ When the prevailing rationale underpinning the use of deceptive framing practices under this CToH (‘the shock’) is to inflate consumer willingness to pay, it is easy to get confused with CToH 2 ‘the lemon’. This is because unfair firms adopt similar persuasion tactics aimed at misleading the consumer into believing that the offer is a great bargain. The difference lies in the fact that while in the ‘lemon’ scenario the consumer cannot observe the experience or credence attribute affected by the misleading quality claim before purchase, in this case the uncertainty can in principle be solved before purchase, as it is mainly about search characteristics, such as pricing terms and contractual T&Cs. This distinction is not always easy to draw, in particular when the cost of verification of a potentially misleading claim that hinges on a search characteristic is nevertheless material. For example, a firm selling home alarm systems might attempt to deceive a prospective buyer by overstating the risk of burglary in the corresponding area. In principle, the sophisticated consumer should be circumspect about the ‘expert advice’ embedded in marketing material as it might be biased in order to elicit the purchase. This is reminiscent of the information ­asymmetry faced by consumers with respect to ‘bundled credence goods’. Therefore, to the extent that it is reasonably practicable, the sophisticated consumer would want to verify the claim, even if simply by asking for a proper independent source of information. Indeed, the fact that no authoritative and independent source of information was proactively identified in the marketing material in the first place should be reason enough to question the accuracy of the claim thereof. In any case, it may be too cumbersome for consumers to independently verify that claim, for example, because the original crime statistics underlining the claim of a high burglary rate in a particular area are not published by the relevant public authority in an accessible format. This line of argument, however, raises the thorny question of how much effort the sophisticated consumer is supposed to exert under a caveat emptor approach, or whether the seller should be under a duty to properly disclose that type of contextual information.

126  Archetypal Consumer Theories of Harm The risk of consumer harm is more pronounced when the biased ‘expert advice’ is targeted at those categories of vulnerable consumers who are less likely to try to verify the potentially misleading claim (elderly people approached through doorstep selling, for example). Such circumstances closely resemble CToH 1 ‘the scam’, where naïve consumers are at risk of extreme overcharging and/or over-treatment, that is, to the extent that the purchase of a home alarm system is totally unjustified in light of the true (low) burglary rate in the corresponding area.22 In the absence of an independent source, the claim in question is effectively a credence attribute, thus squarely under CToH 2 ‘the lemon’. For example, an estate agent might introduce a new business model where home sellers are charged a fixed fee upfront, which is lower than the contingent percentage-based fee charged by mainstream estate agents when the sale is completed. To compare these two alternatives, consumers need to know what the completion rate is for the firm in question.23 If this information is not available from a trusted source, sophisticated consumers would have to make a guess, perhaps discounting the figure quoted by the estate agent itself. Naïve consumers may instead believe the claim made by the estate agent or be overoptimistic themselves. Therefore, the presence of naïve consumers would allow the estate agent to set a higher fixed rate to be paid upfront, to the detriment of sophisticated ones, who hold more realistic estimations regarding the completion rate.24

B.  Different Types of Consumer Detriment The example above shows that the larger the proportion of naïve consumers, the greater the detriment faced by sophisticated ones. In contrast, the larger the proportion of sophisticated consumers, the lower the detriment suffered by naïve ones. This is because sophisticated consumers will ultimately be charged the same price paid by naïve ones in case of purchase. In this sense, there is no direct price discrimination between the two categories of consumers, notwithstanding traders’ attempt to mislead naïve consumers into (i) believing that they are being offered 22 Another example with less dire consequences is the case where the misleading firm presents statutory rights that are granted under law as a special additional protection offered by the seller due to the confidence he has in his product, eg about returning a purchased good within a certain period in case the buyer is not satisfied. 23 On the one hand, it is possible that the completion rate for the fixed-rate upfront solution is higher to the extent that home sellers are more committed to completing the sale than if they knew they would not be charged in case the transaction fell through. On the other hand, failure to sell may result from the lack of committed buyers. 24 In February 2017, Jefferies, an investment bank, warned against the stock valuation of P ­ urplebricks, an online estate agent that charges home sellers a fixed fee, as opposed to the percentage-based fee charged by mainstream estate agents if a sale is completed. Specifically, the bank argued that the valuation might be too high, given that the success rate (ie the proportion of completed sales) is materially lower than what claimed by the estate agent. In addition, the bank argued that the true completion rate is in line with the rates for mainstream estate agents. See BBC News, ‘Purplebricks Estate Agent Defends Business Model’ (2 February 2018) www.bbc.co.uk/news/business-42915433.

The Shock  127 a better bargain than they are, and/or (ii) focusing only on the headline (salient) price. This means that the price paid by naïve consumers may well be at a competitive level, notwithstanding the fact that they were misled. In this sense, therefore, the presence of sophisticated consumers is beneficial to naïve ones, in that competition between traders to sell to the former category of consumers mitigates against the risk that the latter are exploited. The observation that naïve consumers would ultimately tend to pay similar prices to those paid by sophisticated ones, albeit potentially at inflated levels if they represent a large proportion of the overall demand, does not, however, mean that their level of detriment cannot be higher than for sophisticated consumers. The following counterfactual can help determine the level of detriment: If the consumer was given his or her money back, would they still consider purchasing the same quality product at the same all-inclusive price again? A negative answer to the above question entails that the naïve consumer is at risk not only of overcharging, but also potentially of under-treatment. This can be the case under the first rationale (inflating consumer willingness to pay) when the level of quality purchased turns out to be below what the consumer was aiming for. Specifically, under-treatment occurs when the naïve consumer who lacked the expertise needed to assess the quality of the product purchased relied on a misleading price framing (too high a reference price, for example) as a proxy for quality. This is the case, for example, for a bottle of red wine sold under a misleading price promotion. Under-treatment under the second rationale (price obfuscation) may occur when the overall level of quality depends on the conduct of the firm in question in response to a contingency as specified by a clause buried in the small print. For example, an unfair firm might insert a clause that limits its liability for defective and misdescribed goods. This would normally be in breach of the law that gives consumers the right to expect that any product bought should be as described, fit for purpose and of satisfactory quality (sections 9, 10 and 11 CRA 2015). Not being aware of these rights and lack of assertiveness would expose naïve consumers to the risk of overcharging and under-treatment (relative to the expected quality level of the product bought). As we explained in chapter four, in case of quality breakdown, the negative surprise would turn a latent credence attribute into a manifest search characteristic. This would turn the consumer in question into a sophisticated one in the future (because of consumer learning), unless the costs of verification are prohibitively high. Alternatively, the naïve consumer may be at risk of over-treatment. For example, under the second rationale (price obfuscation), the consumer would not have purchased the observed level of quality at the ‘all-inclusive’ price but would probably have settled for something less upmarket.25 25 In detail, not all naïves will overconsume – only those marginal ones who were already undecided whether to buy the product at the misleading (low) headline price.

128  Archetypal Consumer Theories of Harm It is worth noting that when there are enough sophisticated consumers and strong competition among rivals, both under-treatment and over-treatment can occur in the absence of overcharging, because the (overall) price is nevertheless set at a competitive level.

C.  The Use of Misleading Practices Might be Widespread The possibility that naïve consumers would not proceed to purchase the same product with hindsight suggests that the incentives to adopt these types of misleading practices may be widespread (if not for the deterrence due to the risk of being caught because of a breach of consumer law). On the one hand, sophisticated consumers would still want to go ahead and purchase the good in question. On the other hand, firms may lack the incentive to treat naïve consumers fairly if it meant selling less. Things would differ, of course, if firms anticipated that there could be a cost to the adoption of unfair practices aimed at inflating consumer willingness to pay and/or obfuscating prices due to the reluctance of sophisticated consumers to deal with unfair firms, notwithstanding that they are in principle unaffected. With respect to the inflation of willingness to pay, the use of misleading selling techniques may negatively impact on the trader’s standing (and thus reputation) in the eyes of sophisticated consumers. Those could become indisposed towards the firm in question. This might be so in particular for upmarket or status goods, where the price is generally taken to be a signal of quality. Under such circumstances, sophisticated consumers will refrain from buying from unfair firms and, therefore, will not exert any protection over naïve ones. Taken to the extreme, this scenario is reminiscent of the first CToH (the scam), where naïve consumers might end up being left at the mercy of unfair firms. With respect to price obfuscation, sophisticated consumers come to distrust firms that adopt deceptive framing techniques. This is to the extent that sophisticated consumers reach the conclusion that the extra search effort required to find out what the all-inclusive price is is not worth their while, given that the chances are that the overall price will be uncompetitive in the end. In other words, sophisticated consumers may make the conjecture that those firms care more about exploiting naïve customers rather than competing for sophisticated ones. The consideration that sophisticated consumers may come to distrust firms adopting deceptive price framing techniques opens the opportunity for fair firms to attract them by adopting a no surprise, no quibble marketing strategy which would spare sophisticated consumers the effort to undertake the extra search needed to investigate whether there are hidden fees and extra charges, or whether the advertised promotional sale is genuinely good value. Here, firms not only have the incentive, but also the ability, to win over sophisticated consumers,

The Shock  129 because prices and other T&Cs are generally search characteristics.26 Under these ­circumstances, there may be a split between fair traders competing for sophisticated consumers, but not able to attract naïve consumers as they are misled by unfair traders through deceptive price framing, and unfair traders only able to attract naïve consumers. Therefore, naïve consumers would no longer be protected by the presence of sophisticated consumers on the market. In the absence of fair firms willing to build a reputation for treating consumers fairly by being transparent and thus refusing to align to the common use of deceptive frames, sophisticated consumers might come to the conclusion that there is no point in making the effort to read carefully all the pricing terms and the other T&Cs across all the offers available in the market. This is because the prevailing expectation is that there is little benefit from doing the extra search, only to find that every firm is similarly keen to exploit naïve consumers. Therefore, sophisticated consumers might become ‘disengaged’ and no longer shop around. Under these circumstances, closely related to CToH 2 ‘the lemon’, the majority of consumers face a greater risk of overcharging. Under these circumstances, traditional supply-side policy interventions aimed at stimulating competitive rivalry (by reducing entry and expansion barriers) may be effective in light of the consideration that new firms should have strong incentives to challenge the status quo. Table 5.3 summarises the main features of CToH 3 ‘the shock’. Table 5.3  Summary of CToH 3 – ‘the shock’ The shock: sophisticates can generally spot traders’ attempt to deceive consumers over prevailing prices through the use of framing tactics –– Concerns search attributes –– The shock is felt by naïve consumers who did not detect the unfair practice –– Examples: False sales – naïve consumers believe it is a bargain; Airline online pricing where the full price is revealed at the end of the booking process (drip pricing) Demand side

Naïves

• Fail to realise that the conditions offered are not ‘special’ – ie risk of overcharging and under-treatment • Fail to realise that the expert’s sale advice might be biased – ie risk of overcharging and over-treatment • Fail to realise that there are unavoidable hidden/opaque surcharges • Fail to realise that there are potential hidden/opaque surcharges linked to contingencies that cannot be avoided with certainty • At risk of overconsuming – ie overcharging and over-treatment (continued)

26 As a corollary, traders have the incentives to denounce other traders’ misleading practices and win new sophisticated consumers – ie through comparative pricing.

130  Archetypal Consumer Theories of Harm Table 5.3  (Continued) Sophisticates • Can detect the use of deceptive framing: ○○ Might avoid buying from misleading traders (in particular, for upmarket/status goods) – ie no protection over naïves ○○ Might not buy the product altogether in cased of overstated necessity – ie no protection over naïves • Can detect obfuscation • Purchasing decision based on the ‘all-inclusive’ prices – provides protection over naïves ○○ Unless dealing with hidden/opaque unavoidable surcharge is similar to experience quality attribute, because of: ■■ Search costs (eg time spent on a web-site); and ■■ Low expectations of benefit from extra searching Supply side

Fair firms

• If upmarket/status goods, in particular, there shall be incentives not to use deceptive framing tactics in order to keep selling to sophisticates • If sophisticates can easily find out the full price, there are strong incentives to adopt deceiving pricing frames to compete for naïves • Because of rivalry for sophisticates, prices may be set at competitive levels • If sophisticates do not search for full prices, there should be an incentive to de-bias the market by offering ‘all-inclusive’, ‘no-quibble’ products and attract (distrusting) sophisticates

Unfair firms

• The use of framing tactics to deceive naïves might be widespread • With upmarket/status goods, in particular, prefer to target naïves through the use of deceptive framing, rather than compete fairly for sophisticates • When sophisticates fail to search for full prices, do not grab the opportunity to cater for (distrusting) sophisticates by introducing ‘all-inclusive’, ‘no-quibble’ pricing offers

V.  The Subsidy In this configuration, sophisticated consumers can not only detect the use of deceiving price frames aimed at obfuscating prices by charging hidden or opaque

The Subsidy  131 fees, but also avoid the charges thereof (unlike in CToH 3). This is because the hidden and opaque fees are charged with reference to: 1. Product features and service attributes that are complementary to the consumption of the primary/base good, but which consumers have the option to avoid. This is because these can be purchased from another firm often at a lower price (eg travel insurance), or because they do not have to be purchased at all (eg extended warranties for goods that are cheaper to replace). Such complementary features and attributes are often referred to as ‘add-ons’.27 2. Contingencies that are under the control of the consumer. In other words, these are incidental fees that sophisticated consumers can usually avoid, whereas naïve consumers often fail to do so (eg penalty fee for late repayment, or a charge for carrying excessive luggage). Therefore, in contrast to CToH 3 ‘the shock’, the adoption of deceptive pricing ­operates as a price-discriminating device between naïve and sophisticated consumers. More than in the first two CToHs (the lemon and the scam), here the root cause of consumer naivety can often be the presence of a behavioural bias.28 For example, loss aversion, where the prospect of a gain is valued less than an equally sized loss, can lead naïve consumers to seek insurance against small risks. This is the case, for example, with product warranties for goods that would be cheaper to replace compared to the premiums paid over time. Also, the combination of overconfidence in one’s ability to exercise self-control or correctly estimate future needs and present bias (which causes procrastination) may lead naïve consumers to underestimate the likelihood of incurring avoidable contingency fees over the contract period. This occurs, for instance, with overdraft charges due to the customer’s failure to monitor and control their spending patterns. More prosaically, though, naïve consumers may be merely disinclined to make the extra effort needed to (i) shop around in order to buy the add-on separately or (ii) exercise self-control and monitor future behaviour.29 Given the lack of foresight and discipline of naïve consumers, unfair traders are able to charge high fees. In contrast, sophisticated consumers are not only able 27 See G Ellison, ‘A Model of Add-On Pricing’ (2005) 120 Quarterly Journal of Economics 585; X Gabaix and D Laibson, ‘Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets’ (2006) 121 Quarterly Journal of Economics 505. 28 See MD Grubb, ‘Behavioral Consumers in Industrial Organization: An Overview’ (2015) 47 Review of Industrial Organization 247 for a brief literature review. Note however, that in some circumstances the consumer may not be able to avoid the add-on, not because of behavioural biases or general inattentiveness, but because their personal situation makes the charge almost unavoidable. For example, paying overdraft fees despite monitoring levels of money available in an account because the consumer, possibly on low income, needs to do so in order to pay for essentials (food, utility bill or rent or an emergency replacement of a washing machine). 29 For example, high-income consumers may be time-poor and thus unwilling to do the extra search needed to minimise their bill.

132  Archetypal Consumer Theories of Harm to avoid paying those high fees, but can also benefit from the exploitation of naïve consumers to the extent that unfair firms compete away at least part of the corresponding rents by lowering the ‘headline’ price paid by all consumers.

A.  Types of Consumer Detriment With respect to the level of hidden and opaque fees, naïve consumers are at risk of severe overcharging, given the lack of downward pricing pressure exerted by sophisticated consumers (ie naïve consumers are not protected by sophisticated ones). Nevertheless, as already explained, this can be at least partly offset through discounted ‘headline’ prices for the primary/base good. In any case, naïve consumers pay a higher price overall than do sophisticated consumers. The following counterfactual can help determine detriment: If the consumer was given his or her money back, would they still consider purchasing the same product at the same headline price again – provided that they are able to exercise foresight and self-control? In general, consumers do not face the risk of either over-treatment or undertreatment, in that they would most likely answer affirmatively and still consider buying if they could exercise self-control and foresight. There may be a notable exception to this, however, when discrimination against naïve consumers is based on their mistaken beliefs about their future tastes and needs (due to overconfidence),30 and in particular when it results in over-­ optimism, that is, the over-estimation of future demand. In this case, a consumer who becomes sophisticated will not want to purchase the same product again at the same headline price, given that this corresponds to a consumption profile (and an implied corresponding level of quality) that is too high compared to the expected level of utilisation under reasonable assumptions. This means that, in this case, the naïve consumer would be at risk of over-treatment, while not necessarily at risk of overcharging, in case the price corresponding to the (high) consumption profile was set at a competitive level.31 Gym memberships with a minimum contract period are a typical example, where consumers may systematically overestimate their future usage of the gym facilities. In this case, the imposition of a high penalty or cancellation fee for early termination will discriminate against over-optimistic naïve consumers. There is a possibility that this will benefit those consumers who correctly estimate their attendance insofar as the implicit per-visit price paid by them is lower as a result of intense competition to sign up naïve consumers. Naïve consumers could also incur under-treatment to the extent that they avoid purchasing the add-on at the high price charged by the unfair firm (or opt 30 In this respect, see Armstrong (n 5) 43. 31 This risk of over-treatment is reminiscent of ‘bundled credence goods’, where the consumer lacks diagnostic expertise – with the difference that, in this case, naïve consumers pretend to know what their needs are.

The Subsidy  133 for a lower quantity or quality of the add-on, if possible), although they would have purchased the product separately.

B.  Possible Widespread Cross-Subsidisation of Sophisticated Consumers In general, in the ‘subsidy’, there will be a prevalence of skewed pricing structures among traders, with a low (salient) headline price and hidden or opaque high fees. This may be exacerbated because although sophisticated consumers shop around, they tend to do so focusing mostly on the headline price, disregarding any avoidable hidden or opaque charges. This, in turn, means that firms generally lack the incentives to de-bias naïve consumers. This is because those newly educated sophisticated consumers would not wish to switch to the firm committed to treating consumers fairly (by not charging exploitative hidden or opaque fees), but would prefer to stick with the unfair firm in order to benefit from the very same cross-subsidisation that they were once on the losing side of.32 In other words, the market would be stuck in a bad equilibrium where all firms align to the common unfair course of conduct and sophisticated consumers indirectly benefit from the exploitation of naïve ones. This lack of a self-correction mechanism does not apply, though, if naivety is due to a persistent lack of self-control. In those cases, newly educated sophisticated consumers are aware that they might still incur the incidental charges – ie they become strategically savvy. In this case, a ‘no-quibble’ offer is preferred, given the prospect of expectedly failing to benefit from crosssubsidisation. For example, and with reference to the pricing structures in gym memberships, the ‘no-quibble’ offer will allow the consumer to pay for using a gym on a per-visit basis, provided that the per-visit fee is not set at an excessive level to discourage usage by consumers lacking discipline or motivation. Even better, the firm could set a cap (equal to the fixed period membership rate), so that consumers who are rightly optimistic and use the gym regularly will not be worse off under the per-visit pricing plan than they would have been purchasing the fixed membership. This pricing structure avoids inducing regret in the first place, which might undermine savviness at the time the tariff is chosen. As in the previous CToH (‘the shock’), under these circumstances

32 Gabaix and Laibson (n 27) labelled this paradoxical outcome the ‘curse of education’, in the sense that to de-bias consumers is counterproductive.

134  Archetypal Consumer Theories of Harm the absence of such a de-biasing offer should be considered with suspicion.33 In this case, supply-side intervention to stimulate competitive rivalry may constitute the best approach. A subtler example refers to the case described in CToH 3 ‘the shock’ of an unfair trader inserting a clause aimed at limiting its liability for defective and misdescribed goods. This case may indeed be better described under the ‘subsidy’ CToH. Naïve consumers are at risk of exploitation because either they are not aware that they are entitled to full replacement or a refund or they lack assertiveness. Sophisticated consumers may face the same risk, though their knowledge of their statutory rights is likely to make them inattentive to the risk that the firm may offer only restricted liability. However, sophisticated consumers would most likely make the effort to assert their right for a replacement or a refund. Therefore, this unfair practice can be thought of as a form of price discrimination after consumption, where aggrieved consumers who are not persistent and assertive will bear the losses due to self-serving exculpatory or one-sided clauses.34 Consumers are directly discriminated against after consumption on the basis of their observed degree of assertiveness at the individual level (so-called firstdegree price discrimination), as opposed to the general case of price obfuscation, where consumers are indirectly discriminated against before purchase on the basis of their unobservable degree of attentiveness (so-called second-degree price discrimination). This difference is reflected in the fact that assertive consumers obtain some sort of retroactive rebate after consumption, as opposed to the lower prices for non-compulsory ‘add-ons’ (or the avoidance of penalty charges) before consumption in the general case. The ‘experience’ nature of this quality characteristic suggests that not even sophisticated consumers would be able to tell in advance (ie before purchase) whether the trader will attempt to frustrate them and deny their claims. Moreover, the reputation mechanism might be ineffective, given that the category of aggrieved consumers who would be more likely to cause reputational damage to the unfair trader (ie by word of mouth) are the assertive ones who are being granted a relief.35 Hence, the potential lack of a self-correcting mechanism. Table 5.4 summarises the main features of CToH 4 ‘the subsidy’.

33 As implied in Armstrong (n 5) 15. 34 See SI Becher, ‘Asymmetric Information in Consumer Contracts: The Challenge That Is Yet to Be Met’ (2008) 45 American Business Law Journal 723, who explains that an alternative (non-behavioural) explanation for consumer heterogeneity refers to different degrees of (marginal) utility of income, that is, the cost opportunity that a consumer faces to complain against the unfair trader. See also Ellison (n 27), who argues that consumers with low marginal utility of income (high opportunity costs) will be less likely to challenge the unfair practice. 35 Becher (n 34) explains: ‘Waiving unfavorable contract terms ex post may be more valuable from the firm’s viewpoint, because this act might be conceived by consumers as a “fair,” “honest,” or even “generous” behavior”.’

Concluding Remarks  135 Table 5.4  Summary of CToH 4 – ‘the subsidy’ The subsidy: sophisticates can avoid additional charges that naïves fail to anticipate Examples: contingency payments; penalties; non-compulsory add-ons Demand side

Supply side

Naïves

• Fail to realise that there are avoidable hidden/opaque non-compulsory ‘add-ons’ – do not shop around for outside options – ie risk of overcharging and potentially also under-treatment ○○ Would not switch to a trader that attempted to de-bias them by offering an ‘all-inclusive’, ‘no-quibble’ product • Fail to realise that there are avoidable contingency fees – ie risk of overcharging • Fail to exercise self-control – ie risk of overcharging ○○ Would switch to a trader that attempted to de-bias naïve consumers by offering a ‘no-quibble’ product • Misestimate future consumption profile – ie risk of over-treatment in case of over-optimism ○○ Would switch to a trader that attempted to de-bias naïve consumers by allowing them to switch to per-unit fee in case of over-optimism

Sophisticates

• In general, benefit from the presence of naïves by shopping around only on the basis of the ‘headline’ price – ie cross-subsidisation • Make an effort to find cheaper outside options for the complementary non-compulsory ‘add-ons’ • Make an effort not to incur contingency fees • Do not misestimate their future consumption profile

Fair firms

• There should be the incentives to cater for consumers by offering product to correct for lack of self-control • There should be incentives to cater for consumers by offering product suited to a low-usage consumption profile (to correct for over-optimism)

Unfair firms

• General tendency to lower ‘headline’ prices whilst charging high additional fees • When consumers lack self-control (or misestimating their needs), do not grab the opportunity to cater for their preferences and needs

VI.  Concluding Remarks The CToHs presented in this chapter are meant to provide an intuitive analytical framework to help enforcers and consumer law specialists who are not expert

136  Archetypal Consumer Theories of Harm economists to think about the ways in which consumers can suffer in terms of financial detriment from the adoption of unfair practices. They should also be useful to policy makers to help them reflect on regulatory choices. The four archetypal scenarios are organised by reference to two antithetic couples of economic agents on the supply side and on the demand side. The CToHs provide a framework within which to think through cases where strict form-based liability does not apply. They highlight how harm to consumers that conform to the ‘average consumer’ standard under EU consumer law can occur indirectly as a result of the exploitation of naïve consumers who are neither circumspect nor reasonably well informed and observant. The last CToH also shows that there could be a distributional effect where the ‘average consumer’ benefits from the exploitation of naïve ones. In all these cases, intervention under consumer law is not currently optimal. It would require a shift of focus away from the conceptual category of ‘average consumer’ in favour of an expansive interpretation of the concepts of traders’ good faith and standard of professional diligence. The CToHs highlight where detriment will occur regardless of whether or not the law offers any protection to consumers. Using the CToHs can help convince that intervention is warranted and is, in fact, in most cases, essential to protect consumers. In the rest of the book, we test the consumer theories of harm we have explored in this chapter with real case studies under both consumer law and regulatory intervention. We explore intervention by sector regulators with ex ante consumer powers and by competition authorities with ex post market investigation powers.

6 Applying CToHs – Case Studies In this chapter we present five case studies to illustrate how consumer theories of harm (CToHs) can help develop a robust case for intervention. The case studies cover: • • • •

Retail energy Retail financial services (current and savings accounts) Airlines (claims for compensation and allocated seating) Health (fertility add-ons).

Each case study starts with a brief introductory section setting out the contextual background in terms of what is the main issue and what kind of enforcement action has already been undertaken, if any. In the core section of each case study we apply the CToHs’ analytical framework as developed sequentially in the previous two chapters. In particular, we are keen to highlight under what specific circumstances the factual pattern described in the background section can be framed under different CToHs, and what that entails in terms of corresponding level of consumer detriment and, thus, case for intervention. Finally, in the concluding remarks, we explore potential routes for enforcement.

I.  Case Study on the CMA Market Inquiry into Retail Energy A. Background In a joint statement published on 27 March 2014, Ofgem (the UK energy sector regulator) and the Competition and Markets Authority (CMA; the UK competition authority) confirmed their shared view that the market for the retail supply of electricity and gas was not working well for consumers.1 Three months later, the former asked the latter to embark on a full market investigation under section 131

1 Office of Fair Trading /Ofgem /CMA, ‘State of the Market Assessment’ (London, 2014) paras 1.19–21 www.ofgem.gov.uk/sites/default/files/docs/2014/03/assessment_document_published_1.pdf.

138  Applying CToHs – Case Studies of the Enterprise Act 2002.2 The CMA published its final report in June 2016.3 The CMA concluded that the six largest incumbent firms, which in the first quarter of 2016 cumulatively accounted for 87 per cent of the retail supply of gas and electricity, benefited from the fact that consumers were largely disengaged, and thus unlikely to shop around in order to secure better value for money by switching supplier. This was notwithstanding the fact that there were considerable potential savings available from switching – up to one-fifth of the bill on average.4 However, the two authorities held radically opposing views as to what the main cause of consumer disengagement was. In October 2012, after four years of its own market investigation into the UK retail energy market, Ofgem concluded that: There are a number of factors which limit effective consumer engagement in the energy market. The large number of tariffs and their complexity discourage many from exploring alternative deals. Even the more active consumers can find it difficult to make the right choice. Unlike many other markets, most consumers are on openended, evergreen contracts and rarely, if ever, are prompted to look for a better deal or shown the savings they might make. Also a general lack of trust in the industry, arising from poor consumer experience, means that many consumers have disengaged altogether because they believe there is little to be gained from considering alternative offers.5

In light of this assessment, in 2013, Ofgem used its ex ante regulatory powers in setting and modifying licence conditions to introduce a number of measures aimed at cutting down on the proliferation of tariffs to simplify consumer choices. Most notably, Ofgem imposed: 1. 2. 3. 4.

Restrictions on the number of tariffs: each supplier is allowed to offer to any customer at any time only four core tariffs per fuel, based on the chosen meter type and method of payment. Tariff standardisation: all core tariffs must use a common two-part format, with a (variable) unit rate and a (fixed) standing charge. Information disclosure: consumers are regularly provided with information about the cheapest tariff for them with their current supplier. Automatic switching: any consumer who is on a tariff no longer open to new customers (a so-called ‘dead tariff ’) must be switched to the supplier’s cheapest standard tariff, if cheaper than the current one.

2 Ofgem, ‘Decision to Make a Market Investigation Reference in Respect of the Supply and Acquisition of Energy in Great Britain’ (London, 2014) www.ofgem.gov.uk/sites/default/files/docs/2014/06/ state_of_the_market_-_decision_document_in_ofgem_template.pdf. 3 CMA, Energy Market Investigation – Final Report (London, 2016) https://assets.publishing.service. gov.uk/media/5773de34e5274a0da3000113/final-report-energy-market-investigation.pdf. 4 ibid para 23.6. 5 Ofgem, ‘The Retail Market Review – Updated Domestic Proposals’ (London, 2012) www.ofgem. gov.uk/MARKETS/RETMKTS/RMR/Documents1/The%20Retail%20Market%20Review%20-% 20Updated%20domestic%20proposals.pdf.

Case Study on the CMA Market Inquiry into Retail Energy  139 It is worth observing that, in the aftermath of this intervention, the cumulative market share of suppliers outside of the six largest incumbents increased markedly, from around 3 per cent to 13 per cent at the beginning of 2016.6 Nevertheless, in 2016, the CMA concluded that Ofgem’s intervention worsened the situation and ordered Ofgem to remove the restrictions.7 According to the CMA, the consumers’ lack of engagement was due to the homogeneous nature of gas and electricity; that is, there is an absence of quality differentiation in the context of gas and electricity, which may fundamentally affect the potential for customer engagement in the markets.8 Ofgem’s intervention worsened consumer disengagement in that it constricted firms’ ability to motivate consumers to shop around in response to the introduction of new innovative tariffs and discounts targeted at consumers with different consumption profiles (low-volume users, for example).9 In particular, the CMA relied on survey results to conclude that those who have low incomes, have low qualifications, are living in rented accommodation or are above 65 years old are more likely to suffer from low levels of engagement.10 In this respect, the CMA emphasised the fact that consumers on payment methods different from the mainstream direct debit option were in general less engaged, and thus more likely to be on a relatively more expensive tariff. This was particularly the case for consumers on prepayment methods.11 Accordingly, the CMA decided to impose a price cap limited to prepayment customers (accounting for about 16 per cent of the total customer base).12 With respect to the vast majority of inactive customers (those on standard variable tariffs or default tariffs), the CMA introduced a package of transparency remedies intended to spur shopping around by consumers and competition amongst firms.13 In particular, the CMA mandated the creation of a centralised dataset containing the identities of disengaged customers (those who have not switched for at least three years) which, with their consent, could be interrogated by rival firms and price comparison websites in order to provide, respectively, tailored offers and shopping advice.14 It is worth noting that one of the reasons advanced by the CMA not to extend the price cap to this broader group of disengaged consumers, not even temporarily until the transparency remedy package was fully implemented, was concern that the protection of the price cap might have demotivated this cohort from shopping around,15 thus detracting from the effectiveness of the transparency remedy package. 6 See, CMA (n 3) Figure 8.10, 387. 7 ibid paras 11.48–11.50. 8 ibid para 9.157. 9 ibid para 10.122. 10 ibid para 135. 11 The CMA (n 3) para 105 found that prepayment is not generally a choice on the part of the customer: all customers on prepayment meters must pay by prepayment. Prepayment meters are generally installed where a customer has a poor payment history or in certain types of rented accommodation. 12 ibid paras 11.79–11.84. 13 ibid paras 11.86–11.94. 14 ibid paras 11.62–11.70. 15 ibid para 11.88.

140  Applying CToHs – Case Studies Specific legislation was passed in July 2018 requiring Ofgem to cap standard variable rate and default energy tariffs for all consumers, not simply those on prepayment meters.16 The default tariff cap will be in place from the end of 2018 until 2020, when Ofgem will recommend if the cap should remain on an annual basis up to 2023.17 In practice, this legislative intervention overruled the CMA decision not to extend the price cap beyond the group of consumers on the prepayment method. It is worth pointing out how the CMA’s conclusion was in stark contrast not only with Ofgem’s assessment, but also with the view held by the Office of Fair Trading (OFT), one of its predecessors,18 in 2013. Specifically, the OFT used the neologism ‘confusopoly’ – originally coined by the author of the comic strip Dilbert, Scott Adams19 – to label this peculiar market configuration. The OFT described confusopoly as a situation where firms make price structures or product attributes unnecessarily confusing, thereby making it difficult for consumers to evaluate rival offers. As a result, firms avoid having to compete hard on price. Complexity of product and tariff and lack of transparency around pricing and service quality are all elements that may contribute to the existence of confusopoly. The OFT cited mobile phone contracts, retail energy tariffs and current accounts as examples of this.20 The same striking contrast of opinions was replicated among scholars. On the one hand, Professor Stephen Littlechild provided the analytical framework later endorsed by the CMA.21 Littlechild lamented the fact that tariff variety was no longer considered an indicator that the market in question is functioning well. Indeed, he was puzzled by how regulators could see the proliferation of tariffs as part of the problem, to the extent that the range of tariffs brings harmful complexity, thereby making it more difficult for confused consumers to shop around. Littlechild attributed this change of policy to a misunderstanding regarding the nature of competition. In particular, he maintained that the introduction of complex new tariffs ought to be understood as an attempt to raise consumer engagement rather than suppress it, because complex tariffs are designed to entice otherwise unengaged consumers. Within this framework, reliance on the

16 Domestic Gas and Electricity (Tariff Cap) Act 2018. 17 See UK Government, ‘Victory for Consumers as Cap on Energy Tariffs to Become Law – New Bill Will Protect Millions More Households from Unfair Price Rises’, press release, 19 July 2018 www. gov.uk/government/news/victory-for-consumers-as-cap-on-energy-tariffs-to-become-law?utm_ source=b1c7e946-eb11-4001-a3ad-9f15b6384268&utm_medium=email&utm_campaign=govuknotifications&utm_content=weekly. 18 The CMA was created under the Enterprise and Regulatory Reform Act 2013 by merging the Office of Fair Trading and the Competition Commission. 19 S Adams, The Dilbert Future. Thriving on Business Stupidity in the 21st Century (New York, Harper Business, 1997). 20 UK Regulators Network, ‘Consumer Engagement and Switching’ (London, 2014) paras 4.62–4.67 www.ukrn.org.uk/wp-content/uploads/2016/07/20141217ConsumerEngSwitch.pdf. 21 S Littlechild, ‘The Competition Assessment Framework for the Retail Energy Sector: Some Concerns about the Proposed Interpretation’ (2014) 10 European Competition Journal 181.

Case Study on the CMA Market Inquiry into Retail Energy  141 insights from behavioural economics is seen as too simplistic, in that the impact of consumer learning is not adequately taken into account. On the other hand, Professors Morten Hviid and Catherine Waddams Price saw the exploitation of consumer biases as the least harmful course of conduct available to rival service providers in order to sustain a price–cost mark-up and thus be able to recover their fixed costs.22 The exploitation of consumer biases should be tolerated or even encouraged. This is because in a frictionless market – where consumers can easily shop around for what are basically commoditised services – competition would otherwise revert to a state of cut-throat pricing rivalry where firms get stuck in a war of attrition, enduring losses in the hope that rivals will ultimately exit the market. Hviid and Waddams Price concluded that ‘intervening to remove behavioural biases in the hope of creating a better functioning market might be not only futile, but self-defeating’.23 It goes without saying that confusopoly is a peculiar market configuration. The economics underpinning these opposing views are still a source of debate. They can, however, be placed within the framework of the archetypal CToHs that we have developed. In doing so, we generalise our analysis, as we believe that similar insights can apply to a wider set of markets for services that cater for fundamental requirements of households and can thus be characterised as a ‘necessity good’.24

B.  The Economics of Confusopoly Confusopoly is a market failure where consumers face artificially high search costs, due primarily to the cognitive overload caused by the amount and complexity of information about pricing that needs to be taken into consideration to make a fully informed purchasing decision. Markets beset by confusopoly exhibit common features. On the demand side, utilities, telecommunications and retail finance are all ongoing services purchased infrequently that cater for common basic needs. In economic terms, this means that demand tends to be saturated, that is, any consumer must be attached to a service provider; and that competing alternatives are perceived as close substitutes for each other, meaning that consumers exhibit a low preference for variety.25 On the supply side, oligopoly tends to be the prevailing market structure, with a few large incumbents cumulatively accounting for 70–80 per cent of the market. 22 M Hviid and C Waddams Price, ‘Well-Functioning Markets in Retail Energy’ (2014) 10 European Competition Journal 167. 23 ibid 176. 24 See UK Regulators Network (n 20) paras 8.5–8.10. 25 For example, A Ayal, ‘Harmful Freedom of Choice: Lessons from the Cellphone Market’ (2011) 74 Law and Contemporary Problems 91, 105 argued that in the mobile market, although consumers’ tastes may vary greatly with respect to the type of handset they want, the opposite is true with respect to the choice of the calling plan, where the main objective is to minimise the payment to the chosen mobile network operator whose service is viewed as providing basic connectivity.

142  Applying CToHs – Case Studies Under these circumstances, provided that consumers can easily search among and switch between suppliers, competitive rivalry should ensure an efficient market outcome. Consumers’ assertiveness should spur suppliers to compete strongly on prices in order to win business from each other. Instead, under confusopoly, rival firms avert cut-throat price competition by marketing their offerings in various confusing ways in order to make it more difficult for consumers to shop around effectively. At first glance, these commoditised services ought to be categorised as ‘search goods’, where consumers are able to directly detect the quality and price of a product before purchase by simple inspection. However, obfuscation occurs in effect from apparently innocuous marketing practices, whereby: 1. 2. 3.

pricing and attributes are sliced into different components, bundled in different combinations, and/or framed in different ways (such as multi-part tariffs or partitioned pricing); pricing is contingent specific (ie depending on consumption patterns and/or external events difficult to forecast – eg tracker v fixed tariffs); and services are marketed and priced in a personalised fashion (such as individual discounts or coupons, or loyalty schemes).

This confusing effect is compounded when rival firms adopt different tariff formats and thresholds, thus reducing comparability across firms. Moreover, the relentless proliferation of new tariff plans and changes to current ones requires consumers to review their past choices on a regular basis so as not to miss out on potential savings. The resulting consumer inertia is not necessarily due to some sort of idiosyncratic cognitive or behavioural bias affecting a small set of consumers, but may instead be attributable to a normal reaction where most consumers faced with the high costs of processing information may simply decide not to use all the information that is in theory observable before purchase. This is not to deny that consumers differ in their computational abilities. Some may also be affected by behavioural biases when faced with cognitive overload due to the complexity of information received when making a purchasing decision. That is to say, cognitive overload is not a bias in itself (it is not a systematic error of judgement), but it can trigger many biases as consumers struggle to cope with it. Nevertheless, whilst some consumers may be better able to cope than others, the use of price obfuscation practices would tend to increase the search costs for everyone. The emergence of confusopoly may not have been obvious or deliberate from the beginning. The fact that the use of price discrimination (for example, through a menu of tariffs) would ultimately increase search costs and lead to cognitive overload may not have been evident to firms, at least initially.26 Indeed, the 26 Indeed, the introduction of innovative tariffs was a strategy adopted by new entrants to poach customers away from large incumbents following the deregulation of the sector. As their strategy proved initially successful, large incumbents then matched it by launching their own new tariffs. However, over time, this competitive process led to tariff proliferation.

Case Study on the CMA Market Inquiry into Retail Energy  143 introduction of innovative tariffs was a strategy adopted by new entrants to poach customers away from large incumbents following the deregulation of the sector. As their strategy initially proved successful, large incumbents proceeded to match it by launching their own new tariffs. However, over time, this competitive process led to tariff proliferation. From a monopolist point of view, the use of price discrimination generally works when consumers have different consumption profiles (typically, high and low usage) and/or differ in their willingness to pay for the service purchased. It is often argued that the ability to increase turnover by charging different prices to different consumers is particularly useful when service providers have to recover high fixed (and irrecoverable) costs, incurred to build up the network ­infrastructure,27 for example, but where the ongoing operational costs to serve consumers are relatively low. In addition, the fact that some consumers pay more may allow other consumers to be able to buy the product in question thanks to the resulting lower prices (due to cross-subsidisation). Therefore, as long as the overall number of customers does not shrink (compared to a scenario without price discrimination), the use of price discrimination ought to be considered beneficial from a societal point of view.28 This is particularly the case under oligopolistic price competition, where the use of price discrimination can stimulate competitive rivalry, with firms trying to poach consumers served by competitors through targeted promotional tariffs.29 For example, when firms can identify consumers who are loyal to a rival brand, the use of price discrimination among rival firms based on heterogeneous brand preferences among consumers will tend to reduce prices. Under these circumstances, competitors face a ‘prisoner’s dilemma’, in that they would be collectively better off without the use of price discrimination, but each has a unilateral incentive to adopt it. There are other circumstances where the use of price discrimination under competition can be inconsequential. For example, if two firms have the same information regarding a consumer’s high willingness to pay, neither of them might be able to charge a higher price because of the threat of being undercut by the rival.

27 Besides the canonical example of network services (such as utilities), the same front-loaded cost structure is exhibited in many ‘information goods’ industries, such as the media and the software industry, and, in general, R&D-intensive products, where the ‘first-copy’ costs are substantial and largely sunk. 28 See the discussion in DJ Gifford and RT Kudrle, ‘The Law and Economics of Price Discrimination in Modern Economies: Time for Reconciliation?’ (2010) 43 UC Davis Law Review 1235. In brief, the counterfactual scenario absent price discrimination might be that either the network infrastructure is not viable or that it is viable but does not have the same extensive coverage and/or only has consumers with a high willingness (or, worse still, ability) to pay for access to the service. 29 For two extensive reviews of the literature, see M Armstrong, ‘Recent Developments in the Economics of Price Discrimination’ in R Blundell, W Newey and T Persson (eds), Advances in Economics and Econometrics: Theory and Applications, Vol II (Cambridge, Cambridge University Press, 2006); LA Stole ‘Price Discrimination and Competition’ in M Armstrong and R Porter (eds), Handbook of Industrial Organization, Vol III (Amsterdam, North-Holland, 2007).

144  Applying CToHs – Case Studies However, when competing firms can discriminate on the basis of consumer search costs, those consumers who find it more difficult to compare prices end up being charged a higher price, even if pricing rivalry between firms is strong.30 In this respect, search costs can be artificially raised by firms’ obfuscation tactics deployed in reaction to the adoption of digital comparison tools such as price comparison sites by consumers.31 Indeed, the progression of tariff proliferation in the UK retail energy market coincided with the mass adoption of online shopping.32 Ultimately, from a consumer’s perspective, increasing variety at the service provider level and/or across competing providers is beneficial up to a satiation point. However, increase in variety is immaterial thereafter up to a regret point, and is detrimental after that (when cognitive overload kicks in).33 Consumers would have different thresholds depending on how difficult it is for them to search and compare a large number of available tariffs. In this respect, there are two main types of evidence of consumer confusion. First, there is survey evidence based on consumer questionnaires which attempt to explore how they fared in their past purchasing decisions. Here, typical questions can cover issues such as: how easy (or difficult) it was to compare prices; how long it took to research the market; whether consumers objected to the way prices were framed; whether they were confident that they had made the right choice; whether they would do anything different next time around; and what they would like to see changed to make it easier to choose in future. In this respect, according to the CMA’s own survey results, less than a quarter of respondents shopped around during the last three years and found the process of shopping around to be easy.34 Nevertheless, the majority of respondents claimed that they: would find it easy to find the right energy deal (58 per cent); are confident they would make the right switching decision (70 per cent); and are confident they are on the right energy deal (63 per cent).35 Reliance on opinions (‘stated preferences’) to detect consumer confusion can, however, be problematic. Indeed, respondents might be too embarrassed to admit confusion. Alternatively, they might not be aware of their confusion given that they adopted simplistic rules of thumb to decide which tariff to choose, whilst ignoring the fact that doing so resulted in choosing

30 For a theoretical treatment, see Armstrong (ibid) s 3.2. 31 See, eg S Huck and J Zhou, ‘Consumer Behavioural Biases in Competition’, MPRA Paper No 31794/OFT1324 (London, OFT, 2011) para 3.72 https://mpra.ub.uni-muenchen.de/31794/1/ MPRA_paper_31794.pdf, who observed that when the ability to compare prices improves, ‘firms will offset this reduction in between-store search costs through increasing price complexity within stores, thereby completely neutralising the effect of easier search between stores’. 32 According to data from Eurostat, the proportion of individuals in the UK shopping over the Internet increased from 36% in 2006 to 71% in 2013. 33 See Ayal (n 25). 34 See CMA (n 3) Appendix 9.1: CMA domestic customer survey results (reporting that 36% of respondents shopped around in the last three years and, of these, 67% found the process of shopping around to be easy). 35 ibid para 33.

Case Study on the CMA Market Inquiry into Retail Energy  145 the wrong tariff. In addition, respondents might be overconfident in their compu­ tational abilities. Overconfidence may be the result of a subconscious coping strategy to avoid frustration and regret. This is particularly the case given that to be aware of being on the wrong tariff one would have to compare the market based on their corresponding consumption profile (and, often, specific payment methods). As a result, the same artificial increase in search costs due to tariff proliferation may prevent consumers from becoming aware that mistakes have been made in the first place. Secondly, a potentially superior methodology to detect widespread consumer confusion would be to rely on actual transactional outcomes (revealed preferences), by measuring the extent to which consumers would save by changing tariff (whether sold by the same service provider or a rival). In this respect, whilst the CMA found that, on average, customers of the six large retail energy incumbents were materially overpaying compared to a competitive benchmark, it did not disclose how widely this aggregate financial detriment was distributed or the actual proportion of customers who failed to choose the best tariff.36

C.  The Distributive Effects and Mapping against the CToHs Notwithstanding the clear evidence that consumer detriment might have been fairly broad-based, the CMA focused on the fact that, according to its survey results, ‘vulnerable’ consumers appeared to be faring worse than the mainstream (or ‘average’) consumer. Specifically, the CMA identified low incomes, low qualifications, living in rented accommodation and age as factors increasing the likelihood that consumers would be disengaged.37 The CMA concluded that Ofgem’s intervention was distortive of competition, in that it restrained firms’ ability to compete by enticing rivals’ customers to switch with targeted tariffs. This suggests that the CMA was of the opinion that mainstream consumers would tend to benefit from a large number of tariffs being available, in that it increases their chances of finding a cheaper tariff. The CMA’s view is broadly consistent with CToH 4 ‘the subsidy’, whereby sophisticated consumers benefit from, or at least are not penalised by, the presence of naïve consumers, who instead fall victim to firms’ exploitative practices. This narrative rests, though, on the assumption that firms can separate the two groups of consumers by charging different prices. In this respect, the CMA emphasised the fact that consumers on payment methods different from the mainstream option (ie direct debit) were in general less engaged,38 and thus more likely to be on a relatively more expensive tariff.



36 ibid

paras 10.44–10.50. para 135. 38 ibid para 20.7. 37 ibid

146  Applying CToHs – Case Studies Thus, firms were able to discriminate against naïve consumers by setting higher prices for those who failed to actively select the mainstream payment method, or, worse still, did not have that option to start with (due to poor credit history preventing them from being eligible for direct debit, for example). Under these circumstances, sophisticated consumers would either be unaffected or even benefit from the exploitation of naïve consumers because some of the corresponding rents are at least partly competed away by rival firms lowering prices for directdebit customers.39 Moreover, firms would not have an incentive to educate naïve customers (by making them aware that they can save by moving to better tariff). This is because de-biased consumers may, as a result, instead switch to a different provider that is still intent on exploiting naïve consumers. Perversely, de-biased consumers would most likely want to switch provider in order to benefit from the same kind of exploitation they were previously subjected to, rather than stay and potentially face higher prices than available elsewhere. This is because the fair firm is undercut by unfair firms still intent on exploiting naïve consumers. Whilst it seems uncontroversial that consumers passively using a payment method other than the mainstream option were on tariffs with higher prices, it is also undeniable that the number of tariffs available with the mainstream payment method was very high. Therefore, it is more than plausible to presume that even consumers opting to pay by direct debit were at risk of failing to identify and select the right tariff, thus missing out on potential savings. The CMA finding that all customers of the large six incumbents were (on average) being materially overcharged, compared to a competitive benchmark, is strongly indicative that this was indeed the case. Under these circumstances, some consumers will be better able to cope with tariff proliferation and thus more likely to find a tariff that suits their consumption profile and preferences. Nevertheless, even they would suffer, compared to a counterfactual scenario without tariff proliferation. This is because firms are able to raise price levels in general because there are consumers who instead struggle to compare a high number of complex and different tariffs and thus shop around less.40 Therefore, although active consumers who shop around more tend to find lower prices than inactive ones, the former still end up paying higher prices than

39 This can be the case to the extent that firms benefit from an increase in their customer bases. For example, firms may want to increase the number of (sophisticated) customers in order to benefit from scales economies or opportunities to cross-sell other products. 40 Search costs feature prominently in the literature strand trying to explain the existence of price dispersion for homogeneous goods, ie when the ‘law of one price’, whereby rivals selling a homogeneous good all charge the same price for fear of being undercut, fails to hold. Specifically, consumers are assumed to be split between two opposite types: consumers with search costs who are uninformed about available prices (also labelled ‘tourists’) and consumers with no search costs who have a full grasp of available prices (also labelled ‘locals’). Under these circumstances, price dispersion is the result of the trade-off between the opposing incentives of attracting locals by undercutting rivals and exploiting tourists whilst desisting from selling to locals. For a literature review: see Huck and Zhou (n 31) paras 3.59–3.70.

Case Study on the CMA Market Inquiry into Retail Energy  147 when there are no inactive consumers. As a result, some aspects of confusopoly are more closely in line with CToH 3 ‘the shock’, whereby the presence of naïve consumers negatively affects sophisticated ones. In other words, the presence of sophisticated consumers protects naïve consumers to some extent, as rival firms in general have to balance the opposing incentives of exploiting the latter whilst attracting the former. This assessment rests on the assumption that customers are neatly split between sophisticated consumers, who can gather all the prices effortlessly and accurately, and naïve ones, who are described as basically clueless shoppers choosing at random or not choosing at all (default bias). The more plausible assumption, however, is that consumers have in general to exert some level of effort to compare complex tariffs with different formats. However, consumers tend nonetheless to be shrewd, in that they are circumspect and aware that they are vulnerable to making mistakes due to firms’ attempts to obfuscate prices. As a result, CToH 2 ‘the lemon’ is in fact the most suitable economic theory. This is so to the extent that sophisticated consumers cannot be confident that they are on the cheapest available tariff. In this scenario, pricing is perceived as a ‘credence’, rather than ‘search’, attribute. Hence, the risk is that even sophisticated consumers become disengaged and refuse to shop around, as they have lost confidence in the fact that their costly extra searching will ultimately pay off. In this respect, it is important to consider the adaptive nature of consumer expectations. Consumers would initially want to shop around to try to find the best deal based on their consumption profile. This early phase refers to the effect posited by the CMA, whereby firms have an incentive to introduce new tariffs in order to entice sophisticated consumers. Over time, however, as tariff proliferation escalates beyond the saturation point, consumers might come to believe that every service provider is keen to exploit their confusion, so that it is no longer worth shopping around for a cheaper tariff. Therefore, even sophisticated consumers will become disengaged on the basis of past poor shopping experiences. But this does not mean they are biased. Ultimately, consumers lose trust in their collective ability to discipline the market through their individual purchasing decisions. Under these circumstances, consumer detriment is more widespread, and sophisticated consumers cannot protect naïve ones. This is particularly so given that sophisticated consumers do not have the option to withdraw from the market altogether because of the essential nature of the product purchased.41 Nevertheless, the market could self-correct to the extent that firms have an incentive to distance themselves from the common unfair practice of tariff proliferation and build a reputation for being trustworthy by assisting sophisticated consumers in finding the cheapest tariff they offer. Strategically shrewd consumers would be able to identify and reward firms deviating from the unfair common course

41 This would at least avert the risk of worsening a drift towards CToH 1 ‘the scam’. where naïve consumers are left at the mercy of unfair firms.

148  Applying CToHs – Case Studies of conduct. As a corollary, therefore, under the more plausible assumption that most consumers are not only costly shoppers, but also strategically shrewd, the most robust explanation for the existence and persistence of confusopoly is that firms tacitly coordinate on artificially raising consumer search costs by engaging in tariff proliferation.

D.  Routes for Enforcement The three configurations described are not mutually exclusive. Firms could at the same time both exploit naïve consumers, who fail to actively select the mainstream payment option, and also be able to set higher prices on average for those who manage to do so, but still cannot fully cope with the large number of complex tariffs and different formats. In this case study, CToH 4 ‘the subsidy’ could coexist with either CToH 2 ‘the lemon’ or CToH 3 ‘the shock’. However, CToH 4 is the most likely to prevail because tariff proliferation is found to affect consumers in general, albeit potentially to varying degrees. Regardless of which consumer theory of harm is more likely to prevail, consumer detriment is likely to be widespread, affecting both naïve and sophisticated consumers. However, the scope of consumer detriment would be limited to naïve or vulnerable consumers when the conditions for the ‘subsidy’ (CToH 4) apply, that is, utilising the belief that the vast majority of mainstream consumers can effortlessly shop around regardless of the number of complex tariffs. This is also the only configuration whereby remedial intervention might have a distributive effect, to the extent that the cross-subsidisation of sophisticated consumers thanks to the exploitation of naïve ones is unwound. Therefore, remedial intervention would appear to be strongly justified on fairness grounds for the following reasons:42 (i) the victims of exploitative price discrimination are likely to be consumers with characteristics which might be deemed vulnerable; (ii) the practice in question has persisted for a long time, signalling a lack of both consumer learning on the demand side and self-regulation on the supply side; and (iii) the service in question is considered an essential utility. In dealing with this situation, public authorities clearly did not consider consumer law to be the preferred option for enforcement. This is notwithstanding the fact that both the sector regulator and the competition authority have consumer law enforcement powers and could have used them. In the first instance, the sector regulator used its ex ante licensing powers under the corresponding regulatory statutes; and the CMA relied on a special UK market regime to find solutions. Ultimately, the government had to push through specific legislation in

42 See M Starks, G Reynolds, C Gee, G Burnik and L Vass, ‘Price Discrimination in Financial Services – How Should We Deal with Questions of Fairness?’ (London, FCA, 2018) www.fca.org.uk/publication/ research/price_discrimination_in_financial_services.pdf.

Case Study on the CMA Market Inquiry into Retail Energy  149 order to allow the sector regulator to impose a price cap covering the majority of consumers.43 In our opinion, intervention under consumer law would offer a more viable solution, albeit with some modifications. One route could have been to use Article 7(1)(2) of Directive 2005/29/EC on unfair commercial practices (UCPD) (Regulation 6(1)(3) of the Consumer Protection from Unfair Trading Regulations 2008 (CPRs)), which prohibits misleading omissions.44 It entails a duty to disclose information deemed to be material for an average consumer in order to make an informed transactional decision. In this respect, some guidance as to what constitutes material information can be found in Article 2(i) UCPD (Regulation 6(3) and (4) CPRs). It explicitly includes a duty to disclose material information where the commercial practice qualifies as an ‘invitation to purchase’.45 In particular, it is considered that the consumer always needs to know the main characteristics of the product (Article 7(4)(a) UCPD; Regulation 6(4)(a) CPRs) and either the price or, where the nature of the product is such that the price cannot reasonably be calculated in advance, the manner in which the price is calculated (Article 7(4)(c) UCPD; Regulation 6(4)(d)(ii) CPRs). Unfortunately, this duty to disclose is probably too narrow in scope to be effective under confusopoly. That is because the provision of detailed information about how complex tariffs are set up is very much instrumental to confusopoly. The information is in fact given to the consumer, but it is left to him or her to determine which tariff plan is the most convenient based on his or her needs. As the UCPD and CPRs stand, it is unhelpful that ‘the existence of a specific price advantage’46 (or, better still, a lack thereof or the existence of a price disadvantage) is not explicitly listed among the information deemed to be material in the context of an ‘invitation to purchase’ under Article 2(i) UCPD and Regulation 6(4) CPRs.

43 This is a solution that has been criticised, notably by Dodsworth and Bisping, who worry that the price cap will be detrimental to vulnerable consumers and propose intervention on the regulation of the contractual renewal process instead: T Dodsworth and C Bisping, ‘Energy Price Cap – a Disservice to Consumers’ 8 (2019) 2 Journal of European Consumer and Market Law (forthcoming). For a contrasting opinion, see D. Mantzari and M. Ioannidou, ‘The UK Domestic Gas Electricity (Tariff Cap) Act: Re-regulating the Retail Energy Market’ Modern Law Review (forthcoming). 44 A commercial practice is a misleading omission if it omits, hides or provides in a manner which is unclear, unintelligible, ambiguous or untimely information that the average consumer needs to take an informed transactional decision and, as a result, causes, or is likely to cause, the average consumer to take a transactional decision he would not have otherwise taken. 45 An invitation to purchase is defined as a commercial communication that indicates characteristics of the product and the price in a way appropriate to the means of that commercial communication and thereby enables the consumer to make a purchase. Arguably, this broad definition includes the kind of price advertising consumers search for in order to compare prices, and is therefore relevant to confusopoly. 46 This is one of the pieces of information explicitly listed among the aspects that consumers could be misled about under the provision against misleading actions. That is to say, the law prevents firms from claiming the existence of a specific price advantage when that is not the case but does not require firms to disclose the existence of a genuine price disadvantage compared to another product offered by the same firm (all else being equal).

150  Applying CToHs – Case Studies If a duty to disclose the fact that a particular tariff offered by the same supplier is the cheapest for a particular consumption profile were to be imposed, the market could self-correct. This positive effect on the market, without the need for intervention on the competition side, is a strong argument for introducing a duty to proactively disclose ‘the existence of a specific price advantage’. This could be done either via an amendment to current law reviewing the way misleading omissions operate or, as we recommend, through the use of the existing general prohibition (Article 5(2) UCPD; Regulation 3(3) CPRs). This is based on the assessment that the average consumer is overwhelmed by tariff proliferation and that it is not diligent for firms to add to the complexity. Therefore, this construction would establish a collective underpinning to the duty to disclose by individual firms. In this sense, we are aware that this line of argument would be fairly radical, and to this end we revisit the issue in greater depth in chapter 7, section III.C. However, this approach would give effect to a normative standard of ‘professional diligence’ defined under Article 2(h) UCPD (Regulation 2 CPRs). Specifically, the approach would resist the line of defence that a commercial practice does not contravene the requirements of professional diligence so long as it is common across the market in question, so that consumers would have no reasonable expectations for any better standard of care. Finally, this case study shows that such a general duty to disclose should apply not only at the time of purchase, but also throughout the ongoing relationship with a consumer’s current service provider. Needless to say, a big advantage of applying such a duty is that it would add to the tendency for the market to self-correct and move away from the common use of tariff proliferation. Furthermore, the case for extending the duty to disclose on an ongoing basis is warranted by the broad definition of transactional decision under Article 2(k) UCPD, which specifically covers the decision taken by the consumer, whether to act or to refrain from acting, about whether, how and on what terms to purchase a product. In this sense, consumer law could offer a viable solution where others have failed. The core recommendation to impose a positive duty to trade fairly (which we explore in chapter seven), whereby firms would be held collectively responsible for letting their professional diligence standard fall across the board (ie a race to the bottom), would thus appear the most promising enforcement route in the retail energy sector.

II.  Case Study on Bank Current Accounts and Savings Accounts A. Background This case study rests on a number of interventions detailed below, concerning both current and savings accounts undertaken between 2007 and late 2018.

Case Study on Bank Current Accounts and Savings Accounts  151

(i)  The Bank Test Case (Charges on Unauthorised Current Account Overdrafts) In March 2007, the Office of Fair Trading opened an investigation under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs) into the fairness of the fees charged by the largest banks when customers with a personal current account (PCA) require the use of an unplanned overdraft facility in order to make a payment (whether by standing order, direct debit or using an ATM or debit card). Specifically, the OFT looked at three aspects: (i) whether these fees were sufficiently transparent and predictable for consumers; (ii) whether they were excessive; and (iii) whether they operated fairly, given that these charges were typically borne by a minority of customers. This entailed a degree of cross-subsidisation of the majority of consumers who benefited from the predominant ‘free-if-in-credit’ (FIIC) price structure, whereby there is no charge for the use of a PCA as long as it is not overdrawn. Alongside this public enforcement initiative, there were also a large number of private court proceedings initiated by individual customers. At first instance in April 2008, the high court judge Andrew Smith J ruled in favour of the OFT, thus giving grounds to the OFT to assess those charges against the basic test for unfairness under regulation 5(1) of the UTCCRs.47 This conclusion was confirmed by the England and Wales Court of Appeal in February 2009,48 based on the principle that the typical consumer would not take into account the level of those charges when opening a PCA. This was because the provision of unauthorised overdraft facilities is not part of the essential bargain (that is to say, the typical consumer would not anticipate the need to use unarranged overdraft facilities). Under an FIIC price structure, consumers would typically focus on the fact that banks make a profit by investing the money deposited with them, whilst remunerating deposits at a relatively low interest rate. Accordingly, both courts concluded that an assessment of the fairness of the concerned charges was not precluded by Regulation 6(2) of the UTCCRs, despite this provision being interpreted narrowly as only exempting assessment of the fairness of the balance of the essential bargain between a seller or supplier and a consumer. In November 2009, the UK Supreme Court overturned this judgment49 and rebutted the argument that unauthorised overdraft charges could be deemed to be ancillary and thus not part of the essential bargain. The court argued that, provided that these terms are clearly specified, they ought to be considered to be part of the essential bargain. This was in light of the fact that the revenue accruing from these fees accounted for around 30 per cent of the overall PCA revenue,

47 Office of Fair Trading v Abbey National plc & 7 Ors [2008] EWHC 875 (Comm), [2008] 2 All ER (Comm) 625. 48 Abbey National plc & Ors v The Office of Fair Trading [2009] 2 WLR 1286, [2009] EWCA Civ 116. 49 The Office of Fair Trading (Respondents) v Abbey National plc & Others (Appellants) [2009] UKSC 6, [2009] 3 WLR 1215.

152  Applying CToHs – Case Studies and despite the fact that the majority of consumers do not incur them.50 That is to say, that the charges were part of the main bargain should be obvious, even from the perspective of the typical (‘average’) consumer, by virtue of the corresponding excessive mark-ups.51 Whilst this conclusion was unanimous, the judges were divided as to whether the OFT could have challenged unauthorised overdraft charges on fairness grounds against the common use of a pricing method for reasons other than the adequacy of the overall price (ie with respect to the skewed FIIC price structure). On the one side, Lord Walker not only agreed with Lord Phillips in at least contemplating the possibility of this line of attack, but also invited the UK Parliament to consider whether to amend the UTCCRs to confer a higher degree of consumer protection than the current standard.52 On the other side, strong criticisms came from Lady Hale and Lord Mance,53 who restated the neoclassical mantra that as long as there is transparency (and thus procedural fairness), consumers should not be protected from the risk of signing up to disadvantageous pricing terms.

(ii)  The FCA Cash Savings Market Study In October 2013,54 the UK Financial Conduct Authority (FCA) opened a market study into bank cash savings accounts using its sectoral powers under the Financial Services and Markets Act 2000 (rather than its concurrent competition law powers under the Enterprise Act 2002).55 Around 90 per cent of UK adults hold a saving product, with by far the most popular product being easy access cash savings accounts, whereby deposits are redeemable on demand. In January 2015, the FCA concluded that the six largest banks, which together held less than 70 per cent of all cash savings balances,56 benefited from customer inertia, with 80 per cent of easy access accounts not having been switched in the last three years57

50 ibid para 47. For a detailed discussion of this judgment, see S Whittaker, ‘Unfair Contract Terms, Unfair Prices and Bank Charges’ (2011) 74 Modern Law Review 106. 51 For a critical view, see M Armstrong and J Vickers, ‘Consumer Protection and Contingent Charges’ (2012) 50 Journal of Economic Literature 477. 52 Office of Fair Trading v Abbey National (n 49) para 52. 53 ibid para 93 and paras 112–13, respectively. Lord Neuberger did not comment on this hypothetical scenario. 54 See FCA, ‘Cash Savings Market Study: Terms of Reference’ (London, 2013) www.fca.org.uk/ publication/market-studies/cash-savings-market-study-tor.pdf. 55 In practice, the main difference is that, under Financial Services and Market Act 2000 powers, the FCA does not have to complete the market study within a limited period and can directly impose remedies by changing its rulebook. For more details, see FCA, ‘FG15/9: Market Studies and Market Investigation References – Finalised Guidance’ (London, 2015) www.fca.org.uk/publication/ finalised-guidance/fg15-09.pdf. 56 See FCA, ‘Cash Savings Market Study Report: Part I: Final Findings – Part II: Proposed Remedies’, Market Study MS14/2.3 (London, 2015) para 3.32 www.fca.org.uk/publication/market-studies/ cash-savings-market-study-final-findings.pdf. 57 ibid Figure 12, 45.

Case Study on Bank Current Accounts and Savings Accounts  153 and less than 10 per cent being switched to a different provider.58 Not surprisingly, inertia increased the lower the balance held in the cash savings account,59 indicating that consumers with low balances in their accounts, who accounted for the vast majority of accounts,60 did not think that shopping around was worth their effort.61 As a result, the largest firms could raise and retain cash savings by offering comparatively lower interest rates. In particular, smaller firms offered promotional rates (also known as ‘front-book’ rates) that were almost four times those paid by large incumbents, whereas deposits held in accounts opened for more than five years (‘back-book’ rates) were remunerated at similarly low rates across the board.62 This was evidently the result of the fact that consumers showed a strong preference for passively holding a savings account with the same provider as their current account,63 thus conferring a strong competitive advantage to large PCA incumbents. In addition, the FCA highlighted the fact that there were hundreds of products available on the market and many more that were no longer on sale but still active. However, the FCA noticed that the large firms had started to simplify their product range.64 During the second half of 2015, the FCA tested a suite of disclosure requirements aimed at increasing consumer awareness of the existence of better rates, including through alerts and prompts to shop around issued when the promotional rate period was about to expire. In addition, the FCA tested the use of a return switching form, where customers were sent a letter with an indication of potential gains from switching to the best internal rate (offered by the same provider) and the best competitor rate based on a non-personalised balance example (£5,000). The letter included a tear-off return switching form pre-filled for a switch to the best internal rate, along with a prepaid envelope.65 In the randomised control trials undertaken by the FCA, this proposal came out as the most effective. In the nine weeks following the receipt of the letter, internal switching increased from a baseline of less than 0.5 per cent to slightly above 8.5 per cent, whereas external switching hardly changed.66 In light of these underwhelming results, the FCA decided to go back to the drawing board. In July 2018, it proposed a new set of remedies, no longer aimed

58 See FCA, ‘Price Discrimination in the Cash Savings Market’ (London, 2018) para 2.11, 10 www. fca.org.uk/publication/discussion/dp18-06.pdf. 59 See FCA (n 56) Figure 13, 45. 60 ibid Figure 2, 15. 61 ibid paras 4.65–4.67. 62 ibid Figure 25, 66. 63 ibid para 4.14. 64 ibid 24. 65 See P Adams, S Hunt, C Palmer and R Zaliauskas, ‘Attention, Search and Switching: Evidence on Mandated Disclosure from the Savings Market’, Occasional Paper 19 (London, FCA, 2016) 11–12 www.fca.org.uk/publication/occasional-papers/occasional-paper-19.pdf. 66 ibid Figure 7,20.

154  Applying CToHs – Case Studies at spurring switching activity by customers who persistently exhibited inertia, but instead protecting them by directly restricting firms’ ability to lower backbook rates, for example by imposing a maximum ratio between back-book and front-book rates.67

(iii)  The CMA Retail Banking Market Investigation Largely in parallel with the FCA work, in November 2014, the CMA opened a market investigation into retail banking, primarily covering the provision of current account services to consumers and to small and medium enterprises.68 With respect to PCAs, the CMA noticed that levels of switching were persistently low, at 3 per cent. Low levels of consumer engagement could be the result of the widespread belief that PCAs are, broadly speaking, all the same across the market (lack of quality differentiation). At the beginning of the investigation, the CMA strongly suspected that the predominant FIIC price structure was part of the problem, as the implicit cross-subsidy evident in the lack of upfront fees (as long as there is a credit balance) meant that PCAs were perceived as cheap to run by the vast majority of consumers.69 At the same time, the CMA argued that some consumers could face high search costs because tariffs were too complex, particularly for unarranged overdraft charges. In addition, contrary to general insurance products, such as home insurance, where consumers must renew their product annually, the ‘evergreen’ nature of PCAs means that there are no clear triggers for customers to shop around periodically. Hence, to increase their propensity to switch, consumers ought to be able to conveniently compare alternative tariffs on the basis of their actual usage pattern (in this case, how often they go into overdraft). During the course of the investigation, however, the CMA changed its opinion regarding the extent to which the FIIC price structure was to blame for the lack of competition in the PCA market and for the allegedly unfair cross-subsidy between a minority of consumers who often incur overdraft charges and a majority who maintain a credit balance. Specifically, in its conclusions published in August 2016, the CMA found that consumers with high incomes not only incur the implicit cost due to interest forgone when they maintain a high credit balance, but also, perhaps counter-intuitively, tend to be heavy users of arranged/authorised overdraft facilities (to fund their lifestyle). Consequently, they incur the corresponding fees, although typically at a lower level than for unauthorised overdrafts. Therefore, under the predominant FIIC price structure, it is consumers with the highest income who tend to face the highest cost for their PCAs, whereas it is

67 See FCA (n 58) Table 3. 68 See CMA, Personal current accounts and banking services to small and medium sized enterprises – Decision on market investigation reference (London, 2014) https://assets.publishing.service.gov.uk/ media/545aa20bed915d138000001a/Decision-MIR-Final_14.pdf. 69 ibid para 1.13.

Case Study on Bank Current Accounts and Savings Accounts  155 only those with no overdraft and low credit balances who tend to benefit from cross-subsidisation.70 Accordingly, the CMA decided not to endorse calls for a more draconian intervention aimed at putting an end to the FIIC price structure by either imposing a price cap on overdraft charges or setting a minimum upfront fee for PCAs.71 Instead, it proposed remedies that put most weight on the potential disruptive influence of common data standards for online banking. The CMA required the adoption of an Open Banking Standard by early 2018, aimed at making it convenient for consumers to shop around by relying on price comparison websites, finance platforms and new types of ‘fintech’ solutions where consumers can access multiple products from a single application (so-called ‘aggregators’). There were additional requirements for banks: to display prominently core indicators of service quality and provide this information to intermediaries, and to provide prompts to customers to encourage shopping around and alerts to avoid incurring overdraft charges. With respect to disclosure remedies, the CMA tasked the FCA with running randomised control trials in order to find out which treatment works best.72

(iv)  FCA High-Cost Credit Review Soon after the completion of the CMA market investigation, in November 2016, the FCA opened its own review into the provision of high-cost, short-term consumer credit. In particular, the focus of the review was on the use of overdrafts and, in this respect, the FCA signalled early on, in line with its primary statutory objective of consumer protection, its willingness to consider a more interventionist approach.73 Accordingly, in May 2018, the FCA proposed a number of options 70 See CMA, ‘Retail Banking Market Investigation – Summary of Final Report’ (London, 2016) paras 79–82 https://assets.publishing.service.gov.uk/media/57a8c0fb40f0b608a7000002/summary-offinal-report-retail-banking-investigation.pdf. This distributional analysis found confirmation in the FCA’s own assessment of PCAs profitability: see FCA, ‘Strategic Review of Retail Banking Business Models – Progress Report’ (London, 2018) paras 5.25–5.27 www.fca.org.uk/publication/multi-firmreviews/strategic-review-retail-banking-business-models-progress-report.pdf. 71 See, A Smith (CMA Inquiry Chair), speech given at the British Banking Authority Retail Banking Conference, 30 June 2017 https://www.gov.uk/government/speeches/alasdair-smith-on-competitionand-open-banking: ‘The fact that our report got a rather negative initial reception was probably not a surprise to many people in this room. There’s a justified public perception that the disappointing performance of the UK economy over the past 9 years is a consequence of the financial crisis of 2008 which in turn was caused by poor behaviour by and poor regulation of the banking system. There’s an appetite for retribution, and any proposals for change to the banking market that fall short of that retribution will be badly received. Now one of the reasons for having independent regulators is precisely so that decisions are made on the basis of evidence rather than on the basis of what will win short-term applause. I therefore make no apologies for the fact that we rejected populist prescriptions such as breaking up the big banks or banning the free-if-in-credit (FIIC) current account’. 72 See CMA (n 70) paras 164–77 and 191–201. 73 See FCA, ‘Call for Input: High-Cost Credit Including Review of the High-Cost Short-Term Credit Price Cap’ (London, 2016) paras 3.4–3.5 www.fca.org.uk/publication/call-for-input/call-input-highcost-short-term-credit.pdf.

156  Applying CToHs – Case Studies to constrain price levels for unarranged overdraft fees, similarly to those proposed with respect to cash savings accounts – such as by tying unauthorised overdraft fees to those for authorised overdrafts – but potentially also including a price cap (as a backstop remedy of last resort). This was in response to the finding that bank revenues from charges for unauthorised overdrafts is highly concentrated, with a strong link between unarranged overdraft use and indicators of consumer vulnerability.74 In December 2018, the FCA decided to focus on the most draconian of the remedies previously put forward, by proposing to require banks to fully align the charge for unarranged overdrafts to the charge for arranged ones, thus imposing a uniform price across the two types of credit facility.75 Arguably, this type of remedy goes beyond the imposition of a price cap. In particular, it is worth emphasising that, from the supply-side point of view, the imposition of a uniform price across arranged and unarranged overdrafts would overlook the fact that the two types of borrowers clearly differ with respect to their creditworthiness. It ignores the fact that lenders face different costs in terms of different probabilities that the borrower might not pay the overdraft back.76

B.  The Distributive Effects and Mapping against the CToHs At first view, the CToH most suitable to characterise the market configurations described in the previous section appears to be ‘the subsidy’. This is particularly so with respect to the most severe concern – that a minority of vulnerable consumers who are recurrent users of unauthorised overdrafts are charged excessive fees, which are then at least partly competed away under the FIIC price structure, thus cross-subsidising the majority of consumers who regularly maintain a credit balance on their PCA. However, with respect to both PCAs and cash savings accounts, it is undeniable that disengagement affects the vast majority of consumers, well over and above those typically regarded as ‘vulnerable’. Only a minority of consumers actually do well in terms of not missing out on potential gains by either switching (internally or externally) or changing their consumption profile to better suit their chosen tariff. For example, with respect to PCAs, the FCA found that only around 10 per cent of consumers are actually loss-making for banks.77 Presumably these are consumers

74 See FCA, ‘High-Cost Credit Review: Overdrafts’, Consultation Paper CP18/13 (London, 2018) ch 4 www.fca.org.uk/publication/consultation/cp18-13.pdf. 75 See FCA, ‘High-Cost Credit Review: Overdrafts Consultation Paper and Policy Statement’ Consultation Paper CP18/42 (London, 2018) www.fca.org.uk/publication/consultation/cp18-42.pdf. 76 In this sense, such a remedy would override the standard competition economic principle whereby allocative efficiency is maximised when prices are cost reflective. 77 FCA (n 70), para 5.18.

Case Study on Bank Current Accounts and Savings Accounts  157 who neither use overdraft facilities nor keep surplus funds on their PCA balance (over and above what is strictly necessary not to go overdrawn). Nevertheless, it is also the case that the large majority of consumers who could do better are not losing very much at all when compared to the 10 per cent of consumers who are responsible for generating up to half of banks’ earnings from PCAs (those who are heavy or recurrent overdraft users and/or those regularly keeping high non-interest-bearing balances).78 Arguably, this factual pattern is at least partly because since the 2007–08 financial crisis, interest rates have been kept at historically very low levels, primarily thanks to coordinated interventions by central banks across the global major economies, including the Bank of England.79 Although it is true that the vast majority of consumers were not making the best out of their bank accounts (both PCAs and cash savings), this is plausibly because the expected gain from switching or changing their consumption pattern was not sufficient enough to justify the effort. For example, under the FIIC price structure, consumers may have to transfer funds in and out of their PCAs repeatedly when payments are due in order to minimise the average credit balance maintained. Alternatively, they may have to switch to a different type of account paying a higher deposit rate in return for an upfront monthly fee.80 Similarly, with respect to savings accounts, consumers would have to shop around and switch every 12 or 18 months when the promotional rate period expires, which may not be worth their while, given the small differences in remuneration rates available on the market and the fact that consumers do not normally hold very large saving balances.81 Perhaps more speculatively, consumers could also reason that even if they were to act in large enough numbers, firms would probably react by adjusting their offers in a way that might erode the anticipated gain from switching or changing consumption pattern. Hence, the benefit from the corrective action may turn out to be flimsy.82 This is because firms would otherwise be hit with a broad-based increase in the cost of raising deposits. In summary, consumers can be categorised as follows: (i) a small minority who make the best choice; (ii) a large majority who could do better but reckon it is not worth the inconvenience; and (iii) a small minority who do really badly. Among the last group, there certainly are consumers who ought to do better, in particular 78 ibid para 5.17 and Figure 5.1. 79 For example, the FCA found that non-interest-bearing deposits as a percentage of total sight deposits have increased from around 5% before the financial crisis to over 20% in more recent years: ibid para 3.10. 80 Indeed, the CMA found that such an account, the Santander’s 1-2-3 reward account, was the main beneficiary of the recent switching activity: see CMA, Retail Banking Market Investigation – Final Report (London, 2016) para 5.36 https://assets.publishing.service.gov.uk/media/57ac9667e5274a0f6c00007a/ retail-banking-market-investigation-full-final-report.pdf. 81 See FCA (n 56) para 4.63, 53. 82 Indeed, and with respect to what we highlighted above (n 80), it is worth pointing out that after having successfully acquired a very large number of new customers, Santander more than doubled the monthly fee charged for its 1-2-3 reward account: see B Milligan, ‘Millions of Bank Customers Face Increase in Fees’, BBC News, 11 January 2016 www.bbc.co.uk/news/business-35265467.

158  Applying CToHs – Case Studies high-income consumers who keep large amounts in non-interest-bearing PCAs or still end up being recurrent users of authorised overdrafts and, occasionally, may also go into unauthorised overdraft. With respect to the latter, the type of disclosure requirements through prompts and alerts trialled by the FCA showed some encouraging results in helping consumers avoid unnecessary charges. In addition, these are the consumers who stand to benefit the most from the adoption of ‘aggregators’ aimed at assisting consumers in managing their savings across multiple accounts. Arguably, to the extent that these ‘naïve’ consumers, who do not appear to be typically ‘vulnerable’, succeed in correcting their mistakes, banks would face a material revenue shortfall due to the smaller pool of naïve consumers they can exploit. As a result, prices for the vast majority of consumers who appear to be disengaged but are nonetheless not doing too badly may worsen, as firms struggle to compensate for the revenue loss. For example, the predominant FIIC price structure may be withdrawn altogether. This waterbed effect would be compounded in case of direct intervention aimed at capping prices to protect those ‘vulnerable’ consumers who are repeat users of unauthorised overdrafts and for whom there is little prospect of being successfully nudged into changing their behaviour (because they either are affected by deep-seated biases or lack a concrete alternative). Hence, what was a market configuration best categorised under CToH 4 ‘the subsidy’ would mutate, as a result of remedial interventions, into something more in line with CToH 3 ‘the shock’, whereby naïve consumers could benefit from the presence of sophisticated ones (and vice versa).

C.  Routes for Enforcement We can only speculate on how things will evolve. The waterbed effect may induce at least part of those mainstream disengaged consumers to become more active. This is because the expected positive benefit from switching or modifying their consumption profile would have increased as a result. On the supply side, since firms are no longer able to exploit naïve consumers, they have restored incentives to compete (on the merits) by building a reputation for treating consumers fairly. In contrast, in an alternative, yet less favourable, scenario, consumers remain disengaged and the market in question comes to resemble the configuration depicted in the retail energy case study, whereby consumer detriment becomes broad-based because firms align their conduct to take advantage of widespread disengagement. As explained in that case study, this poor state of affairs ultimately triggered a more extensive and inclusive intervention (led by politicians) to cap prices for the vast majority of consumers, with all the problems this may engender for the market. Hopefully, the implementation of Open Banking will turn out to be truly transformative in aiding consumers to select the best available tariff, adjust their consumption profile and extract the highest utility by minimising the cost of using a PCA and maximising the remuneration of savings. However, there are reasons to be sceptical. In particular, the poor results from the randomised control test for the

Case Study on Bank Current Accounts and Savings Accounts  159 tear-off return switching form run by the FCA showed how relying on consumers to do the ‘right’ thing may just not be the most efficient way to remedy broad-based detriment due to widespread disengagement.83 This issue may be limited to certain products, such as utilities and retail financial services, where consumers have a very low preference for variety and merely aspire to a reliable standard of service quality at an affordable cost. Under these circumstances, better solutions would be found elsewhere. The most viable option may be once again to turn to consumer law. To impose a positive duty to trade fairly (see chapter seven) would bring about tangible improvements. For example, such a duty could encompass requiring firms to automatically put their customers on the best tariff based on their specific consumption profile and could eventually be complemented by direct intervention aimed at protecting consumers against exploitation through excessive prices. With respect to the latter aspect of this recommendation, we believe that this kind of more intrusive intervention should only take place when firms’ unfair exploitative conducts are sufficiently aligned, that is, when consumers lack the option to discipline suppliers by voting with their feet. In this respect, it is worth reporting that Citizens Advice, the UK official consumer representative body, lodged a ‘super-complaint’84 calling on the CMA to launch a cross-sectoral market study to investigate the allegation that disengaged customers who fail to regularly shop around and eventually switch provider end up being charged excessive prices across a number of essential services from mobile and broadband to financial services.85 This ‘loyalty penalty’ is particularly concerning when it affects vulnerable and low-income consumers. In terms of remedies, Citizens Advice concedes that the imposition of price caps or price ratios between front-book and back-book prices may not be as suitable for markets whose products are not as commoditised (eg mobiles) as other essential utilities (such as retail energy services or cash savings accounts). In this case, the complaining consumer representative body advocated for the introduction of ‘principles-based regulation regarding what pricing strategies are permissible, putting the responsibility on companies to judge whether their practices are consistent with treating customers fairly’. This proposal quite clearly amounts to a positive duty to trade fairly of the type we are advocating (see chapter seven). 83 In addition, survey results pictured a very low awareness of Open Banking, in particular among those aged 18–24, that is, the very age cohort supposed to be more inclined to adopt Open Banking: see YouGov, ‘Three Quarters of Britons Haven’t Heard of Open Banking’, 1 August 2018 https://yougov. co.uk/news/2018/08/01/three-quarters-britons-havent-heard-open-banking/. 84 A super-complaint is a complaint made under s 11 of the Enterprise Act 2002 by a designated consumer body that any feature, or combination of features, of a market, or across markets, for goods or services in the UK is, or appears to be, significantly harming the interests of consumers. The competition authority has a duty to publish within 90 days a response to any super-complaint received, stating how it proposes that the complaint be dealt with. 85 Citizens Advice, ‘Excessive Prices for Disengaged Consumers: A Super-Complaint to the Competition and Markets Authority’, 28 September 2018 www.citizensadvice.org.uk/about-us/policy/ policy-research-topics/consumer-policy-research/consumer-policy-research/excessive-prices-fordisengaged-consumers-a-super-complaint-to-the-competition-and-markets-authority/.

160  Applying CToHs – Case Studies In December 2018, the CMA published its response.86 The CMA argued that the issue stems from the fact that many services are paid for through contracts that automatically renew or roll over, often on a higher rate (ie evergreen nature).87 Whilst the CMA recognised that the use of introductory offers (followed by automatic renewal) to acquire new customers can be beneficial, in that it can motivate consumers to shop around, concerns may emerge where this practice is targeted at vulnerable consumers and with respect to essential markets.88 The CMA recommended a bolder use of consumer law to require suppliers to properly notify price increases upon renewal and also to prevent them from making it difficult for consumers to stop auto-renewal by imposing onerous ­procedures.89 The CMA also called for legislative changes to allow them to impose fines for breaches of consumer law (ie in line with competition law enforcement).90 In addition, the CMA acknowledged that there are circumstances where more forceful intervention aimed at capping prices directly is warranted in response to the persistent nature of consumer detriment due to the loyalty penalty. In this respect, the CMA considered the types of remedies discussed in both this and the retail energy case studies, such as: (i) limiting price differences through tying; (ii) requiring suppliers to upgrade inactive customers to their best tariff (ie the cheapest based on the specific consumption profile); and (iii) imposing an absolute price cap.91 However, it is noticeable that the CMA did not consider consumer law as an enforcement option with respect to these more forceful remedies, but instead largely referred to the use of ex ante regulatory powers by corresponding sector regulators (ie setting conduct rules as part of licensing conditions).92

III.  Case Study on Claims for Compensation in the Airline Industry A. Background Under EU law,93 an air passenger whose intra-EU flight is cancelled or is delayed for a specified period beyond its scheduled time of departure is entitled to compensation for the delay or cancellation. The amounts paid out in compensation 86 CMA, ‘Tackling the Loyalty Penalty – Response to a Super-Complaint Made by Citizens Advice on 28 September 2018’ (London, 2018) https://assets.publishing.service.gov.uk/mwg-internal/ de5fs23hu73ds/progress?id=ybiSmi3jL7fMD3kA55UNcN9vcTjtJf5Y3HsVLqVjWfA,&dl. 87 ibid para 10. 88 ibid paras 12. 89 ibid paras 7.58–7.65. 90 ibid para 7.64. 91 ibid ch 8. 92 ibid. 93 Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights, and repealing Regulation (EEC) No 295/91 (Text with EEA relevance) – Commission Statement [2004] OJ L46, 1–8.

Case Study on Claims for Compensation in the Airline Industry  161 are substantial – typically well above what a passenger would have paid for a shorthaul flight with a low-cost carrier.94 The airline can reject a claim for compensation by adducing that the delay or cancellation was caused by ‘exceptional circumstances’, that is, outside its control, such as in case of disruption caused by extreme weather conditions or a strike by air traffic controllers. However, airlines may opportunistically try to evade their liability for compensation by stretching the meaning of what constitutes genuine exceptional circumstances. For example, in July 2018, the regulator, the UK Civil Aviation Authority (CAA), felt compelled to clarify that: When a flight cancellation is caused by strike action by the airline’s employees, the airline is required to pay compensation to passengers in respect of the cancellation of the flight, if it has not warned passengers of the cancellation at least two weeks prior to the scheduled time of departure.95

The CAA also explained that: In the case of the most recent industrial action involving Ryanair, passengers must first submit their claim to the airline and if they are not satisfied with the response, they can seek redress via the approved Alternative Dispute Resolution service.96

In the context of the airline industry, an alternative dispute resolution (ADR) body is an independent third party approved by the regulator, but appointed by the airline on a voluntary basis, that considers the facts and takes a decision that, if accepted by the consumer, is binding on the airline. Once an ADR provider has all the necessary information to consider the claim, ADR bodies should complete their handling of a case within 90 days. Although ADR bodies can charge a small fee (the maximum is currently £25), this must be refunded to the passenger if the ADR body upholds the passenger’s complaint in any way.97 In December 2018, the CAA opened an enforcement action against Ryanair, following the airline’s declaration that financial compensation is not payable under EU rules and its subsequent decision to terminate its agreement with the chosen ADR service provider.98 Regarding the first step, the straightforward option would be to submit a claim for compensation directly to the airline in question, typically through an online standard claim form, on which consumers are requested to provide flight details, such as flight number, date of travel, origin and destination. In the case that the claim is accepted, 94 In this respect, it can be argued that the imposition of high compensation amounts results in strong incentives for airlines to improve their operations in order to avoid delays and cancellations from occurring in the first place. 95 CAA, ‘Statement on Passenger Compensation during the Current Ryanair Strike’, 20 July 2018 www.caa.co.uk/News/CAA-statement-on-passenger-compensation-during-the-current-Ryanair-strike/. 96 ibid. 97 See CAA, ‘Alternative Dispute Resolution – Information for ADR Providers’ https://www.caa. co.uk/Our-work/About-us/Alternative-Dispute-Resolution/. 98 See CAA, ‘UK Civil Aviation Authority Begins Enforcement Action against Ryanair’, press release, 5 December 2018 https://www.caa.co.uk/News/UK-Civil-Aviation-Authority-begins-enforcementaction-against-Ryanair/. As a result, passengers who had made strike-related compensation claims via the ADR in question were advised that these claims were on hold until the outcome of the enforcement action had been decided.

162  Applying CToHs – Case Studies the airline typically pays out by posting a bank cheque, rather than crediting the account used by the consumer to pay for the flight.99 An alternative option would be to rely on the legal representation services provided by a claims management company (CMC), which promises to handle the claim and pay the compensation directly into the consumer’s current account in return for a contingent percentage fee, typically in the range of 25 per cent (ie a ‘no win–no fee’ arrangement). In February 2016, after a spike in claims submitted via CMCs, Ryanair adopted a new policy of dealing directly with consumers in relation to flight disruption compensation claims, thus bypassing the CMCs. In particular, Ryanair started to pay compensation directly to consumers, which forced CMCs to pursue their own clients in order to collect fees. In the past, the compensation had been paid directly to the CMC, which would deduct its contingent fee from the amount paid out by the airline before transferring the rest to their client’s current account. In July 2016, Ryanair amended its general terms and conditions (T&Cs) to reflect this new policy by inserting a clause stating that ‘Ryanair will not process claims submitted by a third party if the passenger concerned has not submitted the claim directly to Ryanair and allowed Ryanair [28 days] to respond’. In response, Bott & Co, a solicitors’ firm acting as a CMC, sued Ryanair in the Chancery Division of the High Court of Justice to protect its interest in fees generated by handling flight delay compensation claims on behalf of Ryanair passengers. One of the arguments put forward by the plaintiff was that the change in Ryanair’s general T&Cs was unfair within the meaning of Article 3 of the Unfair Contract Terms Directive, in particular with respect to paragraph 1(q) of the annex, which targets terms excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy. The first judgment delivered in March 2018 went in favour of Ryanair. The judge decided that the challenged contractual clause, which rules out the recourse to a third party, does not materially exclude or hinder the consumer’s right to take legal action or any other remedy, because the online claim submission procedure set up by Ryanair was reasonably easy to retrieve and straightforward to use. In addition, nothing would prevent the consumer from seeking redress through the relevant ADR body or, indeed, instructing a CMC after having allowed 28 days for a response from Ryanair. In any event, the Court of Appeal confirmed that ‘there is nothing to prevent the passenger instructing Bott at that or at an earlier point, provided simply that the passenger makes its claim initially directly with Ryanair’. Presumably, what the court intended was that Bott could complete the Ryanair claim form in the name of the passenger.100 Nevertheless, the CMC would still be unable to directly collect its fees, thus calling into question the viability of their business model. In addition, it is our view that passengers may have a different interpretation and see in the contractual clause a limitation to their right to use a CMC. 99 The airline may in some cases also provide vouchers or discounts for use against future services with their company, although the customer is not obliged to accept these and can ask for the money. 100 Bott & Co Solicitors v Ryanair DAC [2018] EWHC 534 (Ch), para 132 and Bott & Co Solicitors Ltd v Ryanair DAC [2019] EWCA Civ 143, para 72.

Case Study on Claims for Compensation in the Airline Industry  163

B.  Mapping against the CToHs The ruling seems to be broadly beneficial for consumers. To the extent that submitting a claim directly through the airline’s online procedure entails no more inconvenience than when instructing a CMC, those consumers who are forced to apply directly to the airline will actually be better off, because they will not have to pay the contingent fee. Therefore, only those naïve consumers who would insist on submitting a claim only through a CMC and are thus deterred by the contractual restriction (as they fail to realise that the direct submission procedure is similarly straightforward) are made worse off. Accordingly, this scenario fits the fourth CtoH (‘the subsidy’), because sophisticated consumers, who are willing to rely on the direct submission procedure, benefit from lower (upfront) airline fares as airlines compete away at least part of the rents extracted from naïve customers (by not paying out compensation). However, the judgments outlined above overlooked the consideration that some consumers prefer to rely on CMCs when submitting a claim for compensation, motivated by a desire not only to reduce ‘inconvenience’ costs, but also to increase the prospect of a speedy resolution. Consumers may believe that CMCs’ reputation for adopting an aggressive litigation stance against airlines that refuse to pay out will mitigate the risk that their claim is indeed rejected, in which case they would be forced to take their claim to the appointed ADR and potentially have to wait a m ­ aximum of 90 days to ultimately get their compensation. C ­ onsumers would particularly value this strategic feature when the airline concerned has (rightly or wrongly) a reputation for trying to evade their liability for compensation by opportunistically claiming that the disruption was caused by ‘exceptional ­circumstances’.101 Also, consumers who are particularly ‘time-poor’ might welcome the option to simply instruct a CMC and forget about it until their current account is credited. In addition, limitations on the use of third parties to submit a claim for compensation may forestall the development of innovative business models that adopt a holistic approach to assisting consumers throughout the purchasing process, from pre-sale stages, such as shopping around and booking a flight, to after-sale stages, covering not only the handling of a claim for compensation (where the necessary information would already be stored with the affiliated third party) but also the handling of complaints in general and the provision of feedback and customer reviews. Furthermore, such a holistic approach could extend to other forms of transport (rail or maritime for example) and other types of service altogether (such as utilities, communications and financial services). Sophisticated consumers may still prefer to rely on a third party in order to submit a claim for compensation despite being aware that the direct claim submission procedure provided by the airline in question is reasonably straightforward 101 See, eg T Baker, ‘Flight Compensation and the Airlines That Won’t Pay’, Which?, 1 July 2017 www. which.co.uk/news/2017/07/flight-compensation-and-the-airlines-that-wont-pay/.

164  Applying CToHs – Case Studies to use. From a supply-side perspective, this, in turn, entails that firms should have a unilateral incentive to differentiate their offering by accommodating the use of third parties in order to cater for the preferences of those sophisticated consumers. That is to say, sophisticated consumers would have to care more about being able to rely on an affiliated third party to handle the submission of a claim for compensation in case of travel disruption than about the possibility of paying a (slightly)102 lower price by booking their flight with airlines that ban the use of third parties in order to minimise their compensation pay-outs. Accordingly, this configuration could be best described under CToH 3 ‘the shock’, whereby the presence of naïve consumers – who might give up pursuit if their legitimate claim for compensation unless they are allowed to rely on a CMC – may be detrimental to sophisticated ones as the higher the proportion of naïve consumers the stronger is incentive for the firm to ban the use of third parties, rather than cater for the preferences of sophisticated consumers. The assumption that sophisticated consumers would normally pay attention to how an airline approached the use of third parties is arguably a strong one. This is so to the extent that the eventuality of having to submit a claim for compensation in case of travel disruption is remote enough that the majority of consumers would normally overlook it. This is particularly the case given that, to find out whether the use of third parties is accepted, a consumer would have to read through the airline’s T&Cs – which research has found is unlikely. Therefore, this quality attribute is likely to be treated as a latent credence attribute, and is thus not really taken into consideration until the consumer actually incurs travel disruption. Afterwards, the consumer will be aware of the importance of this aspect of post-sale customer service, so that the quality attribute becomes a salient search attribute. Therefore, there might not be enough sophisticated consumers who are alert to the importance of this feature to provide strong incentives for firms to develop a reputation for a high standard of post-sale customer service by allowing the use of third parties to submit a claim for compensation (and making it easier for consumers to verify this). Under these circumstances, the self-correction mechanism outlined above (based on sophisticated consumers awareness) may not come into play, so the generality of firms will remain aligned in making it difficult for consumers to rely on third parties to handle their claims. Otherwise, if the proportion of sophisticated consumers who care strongly about this quality attribute was high enough, the observation that the generality of firms is aligned in thwarting the use of third parties would suggest that firms are ‘coordinating’ tacitly on a low standard of after-sale customer service in order to minimise their compensation pay-outs. In addition, the lack of quality differentiation due to weak competition would also suggest that firms are not forced to compete away the rent extracted by passing it on to consumers in the form of

102 Arguably, the rent extracted by not having to pay out compensation would translate into a tiny sum when spread across the overall number of flight tickets sold.

Case Study on Claims for Compensation in the Airline Industry  165 lower airline fares (in other words, the waterbed effect is incomplete). It is worth pointing out that this lack of self-correction from the supply side also applies in principle to the case where firms decide to pursue a strategy of quality differentiation by voluntarily committing to pay out compensation automatically without requiring consumers to submit a claim in the first place. At the opposite extreme, if firms do try to differentiate their offer by allowing the use of third parties, because there is a high proportion of sophisticated consumers who care strongly about this quality attribute, there is a risk that some firms will end up specialising in attracting naïve consumers with lower (upfront) flight fares, whilst also delivering a lower standard of customer care by making it more cumbersome and protracted for consumers to obtain compensation in the event of disruption. In turn, travel disruption with the unfair firm may become a more likely event to the extent that the firm in question has a weaker incentive to (increase its costs in order to) improve its operational resilience. This scenario would correspond to a drift towards the first CToH (‘the scam’), whereby sophisticated consumers stay away from unfair firms, thus exposing naïve consumers to the risk of being fully exploited.

C.  Routes for Enforcement As long as sophisticated consumers care, even if only with hindsight, about the ability to rely on a third party, the use of contractual clauses or policies inhibiting their use may be detrimental for naïve consumers, who would be put off from submitting a claim altogether, and for sophisticated ones, who suspect that third parties are more effective in preventing airlines from evading their liability for compensation. Consumer law offers a number of options for intervention. First, targeting the contract term may be an option. Its removal would stop the airlines dictating how compensation may be obtained and let consumers opt for the course of action that may be most valuable to them. However, it is debatable whether requiring consumers to submit a claim directly to the airline (and only have the option to instruct a third party) would be enough to be considered a ‘significant imbalance’ within the meaning of the fairness test under Article 3 of the Unfair Terms in Consumer Contract Directive (and section 63(6) CMA 2015). In that situation, the consumer is not placed in a position that is materially less favourable but, rather, is merely inconvenienced.103 We have also seen that in fact it may be financially beneficial to the consumer to bar the immediate use of CMCs. However, while the imbalance may not be significant in all situations, it could be argued 103 See CMA, ‘Unfair Contract Terms Guidance’ (London, 2015) para 2.16 https://assets.publishing. service.gov.uk/government/uploads/system/uploads/attachment_data/file/450440/Unfair_Terms_ Main_Guidance.pdf (referring to Case C-415/11 Aziz v Caixa D’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) ECLI:EU:C:2013:164, para 68).

166  Applying CToHs – Case Studies that the contractual restriction is ‘contrary to the requirement of good faith’, to the extent that it could reasonably be assumed that a consumer would not have agreed to such a term in individual contract negotiations.104 Besides, the inclusion of the term is possibly based on the calculation that it is one more obstacle for some consumers to clear and hence would decrease the number of claims not only presented, but also to be paid out. Alternatively, consumer law enforcement could come under Article 5 of the Unfair Commercial Practices Directive (Regulation 3 CPRs), which sets out a general prohibition of unfair commercial practices that are (i) contrary to the requirements of professional diligence and (ii) ‘materially distort the economic behaviour with regard to the product of the average consumer’. Regarding the latter, as explained above, there can be configurations where consumers do not have any choice but to book a flight with an airline that is intent in making it difficult to rely on a third party. This is because either the generality of airlines are aligned to this poor commercial practice or the airline in question is the only one operating on the specific route. Ironically, these are the circumstances where intervention is mostly warranted, given the lack of a self-correction mechanism. Therefore, enforcement could be based on a hypothetical counterfactual where the consumer does have a choice to book with an airline that allows the use of third parties. We believe that this construction would help implement a high standard of consumer protection based on a normative approach to the requirement of professional diligence that is in line with the positive duty to trade fairly developed in chapter seven.

IV.  Case Study on Allocated Airline Seating A. Background When booking a flight, consumers are normally presented with a range of noncompulsory add-ons they have the option to pay for alongside the basic ticket for the flight. Hold luggage, food on board and priority boarding are typical examples of this form of partitioned pricing. These service attributes were once bundled together with the ticket for the flight, but with the advent of low-cost carriers, this full-service standard came increasingly under challenge as a mainstream proposition. In particular, for short-haul flights, consumer choices revealed a collective preference for a no-frills proposition at a lower price, whilst keeping the option to upgrade to a higher standard of service quality by, for example, paying an additional charge for a seat with more legroom or in one of the front rows. This form of price discrimination is generally considered benign, as more consumers with low willingness or ability to pay can afford to fly to short-haul destinations.



104 ibid

para 2.24 (referring to Case C-415/11 Aziz, para 69).

Case Study on Allocated Airline Seating  167 Over the last few years, however, airlines have started to charge consumers booking in groups of two or more people for making sure that they can sit together. In this respect, the UK aviation regulator, the CAA, registered a great deal of consumer discontent with this new practice as part of commissioned research asking consumers whether they thought they had been treated in a way that is fair and reasonable in relation to airlines’ terms and conditions. A key finding was that respondents felt that having to pay to choose a seat in advance of the day of the flight was one of the top three most unfair aspects. This was unexpected, as it arose organically through the research – it was not a question that was specifically asked or highlighted to participants.105 In response to this finding, the CAA began a review of allocated seating practices in 2017. Specifically, the regulator carried out a representative survey of recent fliers, as well as opening a consumer survey that allowed those affected by the practice to comment on their experiences. The CAA considered a range of issues, including clarity and transparency of pricing, the effect on consumer engagement with and trust in the market, impacts on consumers with particular needs, safety, and the use of automation and algorithms in the way booking and seat allocation systems are set up and administered. According to the CAA survey findings, consumers resented this practice due to the widespread belief that airlines were purposefully separating people in order to make money. People with accessibility needs and those travelling with children were particularly affected by the practice. Some respondents also raised concerns with potential safety issues, in that evacuation could be impeded if people do not leave via the nearest emergency exist because they are looking for their family/ companions. Whilst the majority of consumers (87 per cent) were aware that airlines might not automatically allocate seats together where possible, almost half of respondents (47 per cent) thought that airlines would do their best to do so in any case. This belief, however, was not corroborated by the CAA findings – it found the chances of being allocated a seat together without buying the add-on vary materially across airlines, from just above 10 per cent up to 35 per cent. This variation was the result of different rules or processes adopted to allocate seats for passengers who did not pay extra. Seats are usually allocated using automated processes such as algorithms. Of the 10 airlines contacted by the CAA, four said that they try to seat groups together wherever possible, using active attributes in their algorithms to do so; another four explained that they do so with respect to passengers travelling with children of up to 11 years old and persons with reduced mobility; whereas one airline explained it does not purposely try to split groups up, but allocation is done by an automated system that depends on which seats are left and have not been pre-allocated prior to check in. Finally, one airline said it assigns

105 CAA, ‘Paid-For Allocated Seating in Aviation: An Update’ (London, 2018) http://publicapps.caa. co.uk/docs/33/CAP1709_Paidfor_allocated-seating_updateOCT2018.pdf.

168  Applying CToHs – Case Studies seats randomly, which arguably makes it almost certain that passengers will be scrambled if they do not pay extra for seat allocation.106 The CAA found that add-on charges are per seat, per journey leg, and can range from as little as £1.99 up to £100 on some long-haul business flights. In addition, airline charges can vary not only between flights, depending, for example, on the route and date of departure, but also within each flight, depending on the location of the seat in the cabin, and over time, depending on demand. In other words, it uses dynamic pricing as a price allocation technique. The CAA estimated the total annual revenue from add-on charges to be in the range of £160 million to £390 million, 45 per cent of which was unwarranted in the sense that consumers would have ended up being sat together anyway.

B.  Mapping against the CToHs One reason consumers may see this practice as being especially egregious is the perception that a downgrade has been engineered in order to extract more revenue (‘hollowing out’). Consumers normally accept that they may have to pay extra for an upgraded version of a product, but in this case respondents to the CAA survey perceived that they were being charged for a downgraded version of the service they used to have. In other words, consumers perceive value based on a reference point, and in this case the reference point is based on being able to sit together, albeit perhaps in economy, with less space. This may be what triggered the perception of unfairness. It could be argued that the same hollowing out product design also applies to other add-ons, such as food and beverages served on board. The difference is that in the case of allocated seating, consumers do not have any alternative. If they want to guarantee that they can sit together, then the fee is unavoidable. In the case of food and beverages, there are alternative options available, such as buying food at the airport before boarding the flight or, for short-haul journeys, eating something before passing through security checks. In other words, this is a case where consumers are not able to learn and self-correct their behaviour to avoid the fee for seating.107 Indeed, it is particularly unsettling for consumers to face uncertainty regarding the likelihood of being separated without paying extra. In this respect, there are two intertwined sources of uncertainty. First, consumers are not generally aware of airlines’ intentions, which are reflected in the rules followed by the algorithm developed to allocate seats. Secondly, consumers have to guess how many of the

106 See, eg J Rogers, ‘How “Random” Is Ryanair’s Seating Allocation?’ (Royal Statistical Society, 2017) https://rss.onlinelibrary.wiley.com/doi/full/10.1111/j.1740-9713.2017.01069.x. 107 If anything, self-learning is likely to push consumers to spend more than they need to, if they want to avoid the stress of not sitting with their party the next time round.

Case Study on Allocated Airline Seating  169 other passengers flying in groups are willing to pay to guarantee that they can be seated next to each other, as the higher that proportion, the lower the number of unallocated seats available and the higher the likelihood of being separated. In light of this feedback loop, there are two opposite scenarios possible based on consumer expectations. On the one hand, if the prior belief among consumers is that not many of them will want to buy the add-on, it is not worth doing so, as past experience shows that the likelihood of being separated will be trivial – provided the airline in question does not adopt a policy of intentionally separating consumers who did not buy the add-on by, for example, allocating seats randomly. On the other hand, if the prior belief is the opposite, buying the add-on looks like a more compelling proposition. The issue is compounded by the fact that consumers cannot observe others’ choices, only their own outcome. This is in contrast to other add-ons with similar feedback loops, such as priority boarding, where consumers can easily verify (at least with hindsight at the gate) whether or not the proportion of passengers paying to step to the front of the queue is too high to be worthwhile. In reality, consumers differ not only in terms of their prior beliefs regarding the proportion of passengers booking in groups who are willing to pay extra to make sure they are seated together, but also with respect to their risk tolerance, which will dictate the point at which they will feel compelled to insure themselves against the risk of being separated. Those consumers who care more about sitting together would typically also be more apprehensive about the risk of being separated, and thus more willing to pay extra, regardless of their prior belief. In other words, the mere fact that airlines allow passengers to choose seats by paying extra may induce them to buy the add-on, that is, to err on the side of caution. Similarly, consumers with a high willingness to pay for the flight in general may be more willing to buy the add-on to the extent that their residual surplus after paying for the basic flight ticket is high.108 On the one hand, these types of consumers could be deemed to be naïve, because they should maintain the prior belief that the risk of being separated without paying extra is low, at least until they have proof to the contrary (because either it happened to them directly or they came to know it had happened to someone else).109 On the other hand, to categorise this type of consumer as naïve seems to be a stretch, in particular with respect to those that are more apprehensive, who are perhaps better described as ‘vulnerable’.

108 For example, the proportion of passengers willing to pay extra on a flight to an up-market tourist destination may be higher than to a tourist destination that is more popular with younger and lowerincome tourists. 109 In this respect, it would be concerning if consumers were to update their beliefs in general, by drawing from past experience across the market, so that the negative event of being separated with one airline on a specific flight is taken as an indication that the risk of this happing again in general is higher than initially expected.

170  Applying CToHs – Case Studies In any case, the status of the described feedback loop between consumers’ individual choices and expectations regarding the risk of being separated determines which of our archetypal CToHs would apply. If the proportion of naïve consumers buying the add-on regardless is sufficiently low, so that the risk of separation faced by sophisticated consumers is also low, CToH 4 ‘the subsidy’ would apply. Here, sophisticated consumers are not only unaffected by the excessively cautious choices made by naïve ones, but can even benefit from the exploitation of naïve consumers to the extent that at least part of the extra revenue raised from add-on fees is competed away to lower prices for basic flight tickets. On the supply side, no airline would want to de-bias naïve consumers by, for example, disclosing that the likelihood of being separated is low, in the knowledge that de-biased consumers would rather switch to unfair firms still intent of exploiting naïve consumers in order to benefit from lower prices for basic ticket flights (provided that there is a competition on that specific route). If there are higher proportions of naïve consumers, sophisticated ones would start to be negatively affected. This is so given the ensuing uncertainty regarding the actual risk of being separated, and thus the risk of overestimating that likelihood, which would result in paying extra unwarrantedly. This configuration may be inherently unstable to the extent that consumers’ expectations can tip in either direction. In this case, CToH 2 ‘the lemon’ seems more appropriate. Here, the presence of naïve consumers is detrimental to sophisticated ones. This is because sophisticated consumers are unable to fully verify the accuracy of the opaque quality claim (ie the insurance value of the add-on), notwithstanding the fact that they are alert to the risk that the claim is misleading. However, on the supply side, firms may have an incentive to differentiate their commercial proposition by reassuring sophisticated consumers about their good intentions, as reflected in the policy adopted to allocate unallocated seats among consumers who did not buy the add-on, or, indeed, by removing the add-on in the first place. Finally, there is a point where consumer expectations may definitely tip towards the belief that the likelihood of being separated is too high, so that it is necessary to buy the add-on. This can be the combined result of: (i) too many naïve consumers paying extra irrespective of the fact that they have not been separated yet; and (ii) policies adopted by airlines to allocate remaining seats that, as a result, tend to increase the likelihood of being separated, such as random allocation. Under this scenario, besides the fact that sophisticated consumers are forced to pay extra to prevent being separated, there is an additional source of consumer detriment. Although every consumer ends up having to pay for the same bundle of services – the basic flight ticket plus the add-on – the fact that consumers have to factor in the price for the second ancillary component means that they have to spend more time shopping around in order to find out all-inclusive final prices and compare them. This is because airlines typically present the option to choose seats in the booking process only after consumers have selected basic flight tickets. In addition, add-on prices can vary materially not only between flights, but also within each flight and in a dynamic fashion over time (depending on how many unsold seats are left).

Case Study on Allocated Airline Seating  171 Therefore, this partitioned pricing practice amounts to ‘drip pricing’, a practice aimed at artificially raising consumer search costs in order to soften pricing rivalry. In this respect, it is worth noting that the OFT had found drip pricing to have the most potential to mislead consumers.110 Of course, consumers differ in the extent to which they are affected by drip pricing. Those (sophisticated) consumers who are generally more active and engaged, and thus have lower search costs, are less affected and therefore still able to drive pricing rivalry between airlines with respect to the all-inclusive price. This, in turn, tends to protect those (naïve)111 consumers who are less active and engaged, and thus exhibit higher search costs in that a lower number of alternative options gets compared. In this sense, CToH 3 ‘the shock’ may become applicable. On the one hand, the higher the proportion of naïve consumers, the stronger the incentive for firms to use drip pricing. On the other hand, to the extent that consumers in general are affected, albeit some to a lower extent, there should be the opportunity for firms to develop a reputation for fairness by presenting the all-inclusive price upfront.

C.  Routes for Enforcement There is no doubt that partitioned/add-on pricing was once a welcome innovation. It enabled more consumers with a comparatively lower willingness to pay to purchase basic flight tickets to short-haul destinations. However, as explained above, there is a risk that this practice led to excessive hollowing out by airlines pretending that what have always been considered basic service quality attributes, such as sitting next to one’s companion(s), are instead non-compulsory add-ons that consumers can purchase by paying extra. The impression is that this practice is merely an attempt by airlines to raise more revenue whilst making the booking process more complex and manipulating consumers’ concerns at being separated from travel companions. Because of this, the CAA briefly considered future (dystopian) scenarios whereby firms are better able not only to detect those consumers that have a high willingness to pay, especially because they care about being seated close to their companions comparatively more than the average, but also potentially to tweak the algorithms in charge of allocation of unallocated seats in order to induce those

110 Specifically, the OFT relied on evidence from laboratory experiments in which a set of the most common price framing practices were compared in terms of their ability to induce participants to make shopping mistakes, thus failing to select the cheapest option: see OFT, ‘Advertising of Prices’, OFT1291 (London, 2010), available at http://webarchive.nationalarchives.gov.uk/20140402173016/http://oft.gov. uk/shared_oft/market-studies/AoP/OFT1291.pdf. 111 It is important to point out that the category of consumers described here as naïve does not necessarily coincide with the category of naïve consumers under the previous configuration. In other words, it is not necessarily the case that apprehensive consumers also have relatively high search costs, although it may well be the case that consumers with a relatively higher willingness to pay for the basic flight ticket may also be time-poor and thus exhibit high search costs.

172  Applying CToHs – Case Studies consumers who are potentially more apprehensive to pay extra to avoid being separated.112 Regarding public enforcement under general consumer law, the most straightforward approach would be to rely on Article 7(1)(2) UCPD (Regulation 6 CPRs), which prohibits misleading omissions113 and thus entails a duty to disclose information deemed to be material for an average consumer in order to make an informed transactional decision.114 Firms would have to disclose the likelihood of consumers being separated without buying the add-on. But it would lead to providing consumers with even more information than they already receive, without the certainty that they would draw the correct inferences and avoid costly add-ons. Worse, this remedy may backfire to the extent that increasing the salience of this quality attribute would unsettle those consumers with the lowest risk tolerance, who may end up buying the add-on. This, in turn, may increase the likelihood of add-ons being purchased and lead to an escalation, ultimately tipping consumer expectations towards the opposite (ie unintended) outcome, where buying the add-on becomes unavoidable. Another way to consider misleading omissions is to pursue enforcement under Regulation 6(4)(d) CPRs. Indeed, with respect to drip pricing, the law already requires firms to display the ‘all-inclusive price which includes all unavoidable and foreseeable taxes, fees and charges at all times’.115 From the demand side, the condition of unavoidability is met to the extent that we presume consumers would normally want to sit together with their companions but believe that the risk of being separated is too high. From the supply side, the condition of foreseeability is met as the firm must be aware that an increasing proportion of passengers buy the add-on.116 The obvious remedy would be to require firms to disclose the all-inclusive price upfront. Specifically, firms could be required to indicate the price inclusive of the cheapest available fee charged for selecting seats at the time 112 See CAA (n 105) para 5.61. These issues are discussed in more detail in the following case study, specifically looking at how firms could exploit new technological advancements empowered by big data, artificial intelligence and machine learning in order to develop algorithms capable of setting personalised prices. 113 See n 44 above. 114 It is worth noting that the failure to provide information required could also be found to be in breach of Art 23(1) of the Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community, which sets out a number of legal obligations relating to the way prices for flights are displayed [2008] OJ L293, 3–20. 115 See OFT and CAA, ‘Guidance on the Requirements of Consumer Law Applicable to the Sale and Advertising of Flights and Holidays’ (London, 2013) para 2.3 https://publicapps.caa.co.uk/docs/33/ CAP1015CAAOFTApplicableConsumerLawGuidance.pdf. 116 On 31 October 2018, the Italian consumer protection authority intervened to prevent the implementation of the new cabin bag policy of the low-cost carriers Ryanair and Wizz Air requiring passengers to start paying extra to take on board a standard cabin bag (a ‘trolley’ weighting less than 10 kg). The Italian authority argued that this service attribute could not be considered non-compulsory, but was instead unavoidable and foreseeable in light of the fact that consumers normally bring this standard type of hand luggage and have been able to do so at no extra charge so far. See Autorità Garante della Concorrenza e del Mercato, ‘PS11237-PS11272 – Cabin Bag Surcharge, ICA Suspends Ryanair’s and Wizz Air’s New Policies’, press release, 31 October 2018, http://en.agcm.it/en/media/ detail?id=e886f1d1-aa4e-47e0-833c-d681ffd9f2bb&parent=Press%20Releases&parentUrl=/en/media/ press-releases.

Case Study on Fertility Add-Ons  173 of booking. In order to avoid increasing search costs for those consumers who do not value the option of sitting next to their companion, the disclosure could come in the form of partitioned pricing (eg £100 for the basic flight ticket plus £10 for the basic allocated seating charge). In addition, airlines could be required to provide digital comparison tools and online intermediaries with the updated information needed to factor in add-on prices in their comparison results.117 In addition (and similarly to the next case study), an alternative approach may be to consider the practice of partitioned pricing as an ‘aggressive’ practice within the meaning of Article 8 UCPD (Regulation 7 CPRs), in particular with reference to the concept of ‘undue influence’. Here, the use of the algorithm and the opacity surrounding the way it operates significantly impairs, or is likely to significantly impair, the average consumer’s freedom of choice or conduct in relation to the product concerned and could cause the consumer to take a decision that he would not have otherwise taken. This is particularly so when the market configuration aligns to a ‘subsidy’ situation, whereby airlines are aligned on the exploitation of those consumers who are particularly apprehensive and play on that fear. All of the solutions explored link once again to the idea that traders ought to behave diligently and ought to have an obligation to trade fairly (see chapter seven), which would help bolster the role consumer law can play in protecting consumers in a variety of market configurations.

V.  Case Study on Fertility Add-Ons A. Background In November 2016, BBC Panorama reported on a study by a research centre at Oxford University showing that ‘[n]early all costly add-on treatments offered by UK fertility clinics to increase the chance of a birth through IVF are not supported by high-quality evidence proving that they work’.118 Specifically, the researchers reviewed 38 interventions offered by private fertility clinics on top of the standard fertility treatments such as IVF. The National Health Service (NHS) watchdog, the National Institute for Health and Care Excellence, only recommends the use of 11 of these treatments, and all of those should only be used in specific circumstances.119 The researchers found that one in seven couples are affected by fertility issues. A large proportion of couples seeking fertility treatments do so privately, with only 59 per cent of overall treatments paid for by the NHS, which only offers the

117 See CAA (n 105). 118 See D Cohen, ‘“No Solid Evidence” for IVF Add-On Success’, BBC News, 28 November 2016 www. bbc.co.uk/news/health-38094618. 119 See, NHS, ‘Expensive IVF Add-Ons “Not Evidence Based”’, 28 November 2016 www.nhs.uk/news/ pregnancy-and-child/expensive-ivf-add-ons-not-evidence-based/.

174  Applying CToHs – Case Studies standard fertility treatments that have been scientifically proven to be effective.120 The prices charged by private clinics for add-on treatments can vary from £100 up to £3,500 each, on top of the costs of standard IVF treatment.121 In a survey of the sector, the government’s fertility regulator, the Human Fertilisation and Embryology Authority (HFEA), found that 70 per cent of clinics offer some form of add-on treatment and this is most common in the private sector in London.122 In October 2018, the HFEA published traffic-light colour-coded information on nine such treatments, described as ‘typically emerging techniques that may have shown some promising results in initial studies but haven’t necessarily been proven to improve pregnancy or birth rates’.123 Of the treatments, none of them are classified as green. Some are classified as red, meaning that there is no evidence to show that the treatment in question is effective and safe. This includes assisted hatching, intrauterine culture, reproductive immunology test and treatment, and some techniques to select sperm for injection. Other treatments are colour-coded amber, meaning that there is a growing body of evidence that is showing promising results but where further research is still required.124 The HFEA also announced the intention to review its code of practice by the end of 2018, to require that private clinics provide patients with information on the available evidence regarding the effectiveness of add-on treatments.125 In November 2018, the regulator published the revised code, which includes a disclosure requirement that ‘[b]efore treatment is offered, the centre should give the woman seeking treatment and her partner, if applicable, information about … the nature of the proposed treatment and any treatment add-ons, inclu­ ding evidence of effectiveness’.126 In addition, in January 2019, the HFEA published, jointly with 10 professional and patient fertility groups, a ‘consensus statement’ providing the following key principles:127 (i) clinics should only offer treatment add-ons where more than one high-quality study demonstrates a treatment add-on to be safe and effective; (ii) clinics should stop offering a treatment add-on to patients if concerns are raised regarding its safety or effectiveness; (iii) patients must be clearly informed of 120 ibid. 121 See above (n 119). 122 See HFEA, ‘Fertility Treatment “Add-Ons”’ (London, 2017) para 2.3 https://ifqlive.blob.core. windows.net/umbraco-website/1356/fertility-treatment-add-ons.pdf. 123 See HFEA, ‘Treatment Add-Ons’ www.hfea.gov.uk/treatments/explore-all-treatments/treatmentadd-ons/. 124 ibid. 125 H Devlin and I Sample, ‘UK Fertility Regulator to Issue New Rules on Expensive IVF Add-Ons – Patients Will Have To Be Told When Fertility Treatment Extras Are Not Likely To Be Effective’, The Guardian, 9 July 2018 www.theguardian.com/society/2018/jul/09/uk-fertility-regulator-to-issuenew-rules-ivf-add-ons. 126 HFEA, Code of Practice (Edition 9.0, London, 2018) para 4.6 https://portal.hfea.gov.uk/ media/1376/code-of-practice-9th-edition.pdf. 127 HFEA, ‘The HFEA, the UK Fertility Regulator, Today Calls For a Change in How Patients Are Offered Optional Fertility Treatment Add-Ons’, press release, 15 January 2019 www.hfea.gov.uk/ about-us/news-and-press-releases/2019-news-and-press-releases/fertility-regulator-calls-for-clinicsto-be-more-open-about-treatment-add-ons/.

Case Study on Fertility Add-Ons  175 the experimental nature of any treatment add-on that is offered, where there is no robust evidence of its safety and/or effectiveness; and (iv) patients should not be charged extra to take part in a clinical trial. The first principle, notably, amounts to a departure from the mainstream transparency paradigm in that it betrays a desire to set a substantive requirement banning clinics from offering ‘experimental’ add-ons in the first place. In other words, the regulator appears to lack confidence in the effectiveness of the disclosure requirements set out in its own code of conduct.

B.  Mapping against the CToHs This is a situation where consumers clearly lack the expertise to be able to tell whether they should buy an add-on, in particular given the lack of scientific evidence corroborating the implicit quality claim that it can help to improve the chances of successful pregnancy. In other words, consumers face an information asymmetry given the ‘bundled’ credence nature of an add-on, whereby they are unable to tell not only whether it actually works (at the treatment stage), but also whether it is actually needed in the case that its use is recommended only in specific circumstances (at the diagnostic stage). In addition, consumers cannot even tell with hindsight whether the treatment in question actually worked, because the add-on does not affect pregnancy rates that result from the standard IVF treatment. Combined with the fact that consumers would normally not be frequent repeat purchasers, this would suggest that consumers cannot learn from past experiences. In addition, as this is a situation where the emotional pressure is likely to be particularly great, consumers may find it difficult to question selling advice received by staff at private clinics, as long as they are not told that the treatment might have dangerous side effects or even reduce pregnancy rates (as with preimplantation genetic screening, which requires removing a cell from the embryo and thus might damage it). By the same token, it is unlikely that consumers would be put off by a warning that the body of available evidence that the treatment works is not large enough to warrant acceptance by the HFEA, because they hope that future evidence will confirm their optimism that it does indeed work. This produces a vulnerable purchasing situation where consumers are very likely to be affected by self-confirmation bias, in that they may be willing to believe that the treatment could help as long as they are confident that in the worst possible scenario the treatment turns out to be merely inconsequential (ie with no reduction to the chances of a successful pregnancy).128 This is particularly so considering that it may suffice that just one of the two partners is affected, with the other willing to suspend its rational beliefs and get aligned in order not to upset

128 This pay-off structure is reminiscent of an option whereby consumers pay a premium to be able to gain from upside risk, but do not have to exercise the option in case of (ie if there is no exposure to) the eventuality of downside risk.

176  Applying CToHs – Case Studies the partner in question.129 Under these circumstances, consumers affected by self-confirmation bias may be willing to pay for untested add-ons. On the supply side, all firms would in general want to offer untested add-ons so as not to be outdone by rivals. The risk is that not offering the treaments or being openly sceptical about the usefulness of certain add-ons may not pay off, and may even be counterproductive if some couples go to a rival private clinic offering them. Furthermore, couples who are not affected by self-confirmation bias merely shop on the basis of the disclosed pregnancy rate. This pregnancy rate is unaffected by the use of add-ons. As a result, the decision to offer add-ons does not entail a risk that sophisticated consumers might decide to exclude the private clinic in question from their choice set based on an inference of low quality. The last consideration suggests that CToH 4 ‘the subsidy’ would provide the best fit for this case. However, in contrast to that configuration, firms may have weak incentives to lower the price for standard treatments by competing away at least part of the rents extracted by selling expensive add-ons to (naïve) consumers affected by self-confirmation bias. This is because this is not a case where naïve consumers shop around by only taking into consideration the salient price for standard treatments, whilst ignoring the cost of (shrouded) add-ons; rather, here the availability of add-ons can be a prominent consideration in the choice of fertility service provider. Therefore, it is unlikely that sophisticated consumers who are unaffected (notwithstanding their vulnerable purchasing situation) may benefit from the exploitation of those who are affected by the availability of add-ons. Accordingly, the practice could quickly descend into the realm of CToH 1 ‘the scam’ to the extent that all firms are intent on exploiting consumers’ vulnerability by selling treatments whose effectiveness has yet to be proven. The striking feature of this configuration is that persistent consumer exploitation under the first CToH can easily coexist with normal competition with respect to the mainstream standard treatments. In addition, this is a case where the pool of naïve consumers is likely to be broad-based and include consumers not traditionally described as ‘vulnerable’ (ie where vulnerability is viewed in the narrow sense of a combination of low income, lack of tertiary education and old age).

C.  Routes for Enforcement A key benefit of this case study is to highlight the importance of keeping in mind that consumer vulnerability can be more generally rooted in the specific contextual circumstances giving rise to a vulnerable purchasing situation than in the presence of those demographic traits, such as low income and old age, which are conventionally 129 In addition, at least one of the two partners (typically the woman seeking to become pregnant) is often subject to a treatment that entails a lot of physical and mental stress for a prolonged period. This would, of course, tend to make the situation of vulnerability worse, as the patient would want to do everything in her power to increase the chances of a successful pregnancy, thus not having to undergo the same painful treatment again.

Case Study on Fertility Add-Ons  177 used to identify consumer vulnerability. Specifically, the combination of severe information asymmetry and emotional load may trigger widespread self-confirmation bias that makes it possible for the generality of private clinics to exploit patients by upselling untested fertility treatments at potentially substantial prices. Nevertheless, and perhaps surprisingly, competition with respect to mainstream standard treatments should work as usual, alongside the parallel exploitation of consumer vulnerability with respect to untested treatments. As a corollary, this entails that the market will not tend to self-correct itself (due to the lack of consumer learning). As a result, the exploitation of consumer vulnerability is likely to persist. Several enforcement strategies are available. Currently, the outlined regulatory intervention requires firms to disclose the lack of scientific evidence corroborating the usefulness of add-on treatments. When this is not the case, the current practice could amount to a misleading omission within the meaning of Article 7(1)(2) UCPD (Regulation 6(1) CPRs). However, this traditional transparency remedy is likely to fail to protect consumers affected by self-confirmation bias. Many consumers with adequate information would still conclude that trying the untested add-on is worth it. Alternatively, a more viable enforcement strategy may be to consider whether a high level of consumer protection can be achieved under the general prohibition of unfair commercial practices. Under Article 5(3) UCPD (Regulation 3(3) CPRs), a practice is unfair if it contravenes professional diligence and materially distorts or is likely to materially distort the economic behaviour with regard to the product of the average consumer … or the average consumer of the group when a commercial practice is directed to a particular group of consumers.

Article 5(3) UCPD and Regulation 2(3) (4) and (5) CPRs tackle practices which are likely to materially distort the economic behaviour only of a clearly identifiable group of consumers who are particularly vulnerable to the practice or the underlying product because of their mental or physical infirmity, age or credulity in a way which the trader could reasonably be expected to foresee

and explain that, in those cases, it is the average consumer of that group that needs to be considered as the benchmark. Specifically, with respect to the vulnerability criteria of ‘mental or physical infirmity’, it is worth noting that the European Commission’s updated guidance refers to an enforcement action by the Italian consumer authority, which considered advertising that misleadingly presented products as able to a cure serious illness as particularly serious because it could cause vulnerable consumers, such as people affected by the serious illness in question, to take a transactional decision that they would not have taken otherwise.130 130 Commission Staff Working Document Guidance on the Implementation/Application of Directive 2005/29/EC on Unfair Commercial Practices Accompanying the document Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions A comprehensive approach to stimulating cross-border e-Commerce for Europe’s citizens and businesses, SWD (2016) 0163 final, 43.

178  Applying CToHs – Case Studies It would arguably be a stretch to describe couples going to a private fertility clinic as either mentally or physically infirm. However, the gist of that interpretation is to protect consumers whose personal circumstances render them potentially vulnerable to claims that ‘emerging’ treatments could help and could certainly play into their credulity.131 In any event, in the UK, there may not be a need to proceed down the ‘vulnerable’ route. Indeed, the general prohibition under Regulation 3 CPRs simply states that a ‘commercial practice is unfair if it contravenes the requirements of professional diligence; and it materially distorts the economic behaviour of the average consumer with regard to the product’. In this context, there is no doubt, as demonstrated above, that even the average consumer armed with all the information would most likely end up buying the add-on and suffer financial detriment as a result. The case would then turn on professional diligence and whether or not it is diligent for fertility clinics to engage in the practice. An alternative approach would be to consider the sale of untested add-ons as an ‘aggressive’ practice within the meaning of Article 8 UCPD (Regulation 7 CPRs), in particular with reference to the concept of ‘undue influence’. In this respect, Article 9(c) UCPD (Regulation 7(2) CPRs) takes into account the fact that a firm ‘exploits a specific misfortune or circumstance of which it is aware to influence a consumer’s decision on a product’. Ultimately, a high standard of consumer protection would necessitate a positive duty to trade fairly (chapter seven) that prevents the sale of untested and expensive treatments to unsuspecting patients.

131 Weatherill believes that Art 5(3) should take a broad view of what may be regarded as credulity and (citing R Incardona and C Poncibo, ‘The Average Consumer Test in the Unfair Commercial Practices Directive: Liberal and Anti-Paternalistic or Simply Approximate?’, papers delivered at the IACL Conference, Malta, March 2006) could cover consumers’ emotional foibles. See S Weatherill, ‘Who Is the Average Consumer?’ in S Weatherill and U Bernitz (eds), The Regulation of Unfair Commercial Practices under EC Directive 2005/29 (Oxford, Hart Publishing, 2007) 136.

7 Fairness by Design: The Introduction of a Positive Duty to Trade Fairly I. Introduction We began by explaining how consumer and competition law are currently limited in their ability to protect consumers. In chapter four, we explored the economic case for intervention, and showed the many ways in which markets will fail to self-correct and the economic justifications for intervention in markets. Chapter five laid out the four consumer theories of harm (CToHs), and our framework for identifying consumer detriment and prioritising intervention. Chapter six used examples applying our theories of harm and reflected on the type of intervention that would be most suited to repair or, even better, avoid consumer harm. We concluded that a more prescriptive standard of conduct was warranted, suggesting that it takes the form of a more forceful application of consumer law. It is not necessarily because we see ourselves as paternalists in the wider spectrum of consumer theories, but because we believe that the application of the CToHs’ analytical framework convincingly shows how often consumer detriment is not only persistent, but may also get worse over time as distrust takes hold. In some market configurations, even the shrewdest of consumers are not able to avoid a bad deal, even if they are engaged to start with, and even if they ultimately take the unfair business to court. This still may not change the behaviour of that business and others operating in the relevant market. As a result, in order to maintain a high level of consumer protection, greater intervention is required. Greater intervention may be seen as controversial, but it is nonetheless essential. The question is thus to define what type of intervention would be appropriate. We make a call for a bolder way to tackle unfairness and have already hinted that the adoption of a duty to trade fairly would best assist consumers. We believe that fairness by design is the way forward, and that it should be for businesses to behave more than consumers to beware. Because the move to a duty to trade fairly entails seeing consumer law encroaching further on the autonomy of traders, we start this last chapter by explaining the merits of a more robust approach to public enforcement and intervention, before exploring the way a positive duty to trade fairly could become part

180  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly of the legal landscape. In that sense, we advocate not an overhaul of the system, but simply a much better use of the tools already there, albeit with some alterations.

II.  Justifications for Adopting a More Prescriptive Standard of Conduct for the Protection of Consumers A.  Consumer Protection is Anchored into Paternalism Paternalism is nothing to be feared. It used to be mainstream. The legal historian Atiyah dated criticisms towards ‘paternalism’ in the law back to the early nineteenth century: ‘Throughout the 18th century, the law was perceived of as protective, regulative, paternalistic and above all a paramount expression of the moral sense of the community … Economic liberalism ultimately proved fatal to the principle of good faith.’1 This paradigmatic change was not limited to the law. Betty Mensch explains: Atiyah argues that the emergence of promissory liability for future expectations was closely related to the emergence of laissez-faire market ideology in the nineteenth century. This ideology, premised on the newly conceived subjectivity of values, promoted a faith in the self-interested, freely bargained, value-exchange mechanism as the key to all rational economic thought. While economists explained the logic of supply and demand in free markets, Victorian moralists preached the utilitarian virtues of frugality, individualism, self-reliance, and promise keeping … these free market principles quickly filtered into the thinking of judges, and therefore into the specific content of contract doctrine. Atiyah does not directly tackle the troublesome question of causation, but he does connect nineteenth-century England’s changes in value structure and legal doctrine to the rise of commercialism. Generally following Weber, Atiyah assumes that the new commercial classes required the certainty and predictability of fixed rules. Moreover, judicial rhetoric about the importance of promise keeping helped discipline the masses for the orderliness and dependability required in an advanced commercial economy.2

Besides, consumer law in many countries of the EU was built on paternalistic rationales, although it is important to acknowledge that there has always been 1 PS Atiyah, The Rise & Fall of Freedom of Contract (Oxford, Oxford University Press, 1979) 235. 2 B Mensch, ‘Freedom of Contract as Ideology’ (1981) 33 Stanford Law Review 753, 756; A Maurer, ‘Consumer Protection and Social Models of Continental and Anglo-American Contract Law and the Transnational Outlook’ (2007) 14 Indiana Journal of Global Legal Studies 353, 366 further observed that ‘[l]egal philosophy on both sides of the Atlantic was strongly influenced by the principles of individual freedom prominently promoted by Immanuel Kant … In sales law, this was reflected by the application of the doctrine of caveat emptor, which was the expression of the ideal of a society where equal citizens could freely bargain over the contractual terms of a consumer product sale … The concept of caveat emptor that corresponded with this political philosophy of individual freedom and equality and the economic concept of laissez faire was seen in 1870 to have been adopted by the common law in almost every state.’

Justifications for Adopting a More Prescriptive Standard  181 a tension because of the way consumer protection encroaches on freedom of contract,3 not to mention the way in which different legal traditions envisage the protection of consumers.4

B.  Pursuing a Standard of Substantive Fairness From a legal perspective, the call for a more equitable approach to consumer protection is typically taken to mean the adoption of corrective measures to prevent the manipulation of preferences (and thus the exploitation) of those consumers that are most vulnerable to persuasion tactics.5 Regulatory interventions aimed at protecting vulnerable consumers tend, therefore, to go beyond disclosure requirements meant to improve transparency (procedural fairness), by embracing the imposition of conduct requirements setting minimum standards of quality (substantive fairness). In this respect, the UK Government intervened to cap energy prices in response to public pressures.6 The Financial Conduct Authority (FCA) also launched a consultation on fair pricing for essential retail financial services7 and a discussion paper on a duty of care and potential alternative approaches8 that considers the merits of the introduction of a duty short of a fiduciary duty. This work is in addition to the launch of a market study into the insurance industry concerning pricing practices. These interventions are not isolated. They build on a number of recent initiatives, notably by consumer bodies9 and also follow in the footsteps of the 3 G Gilmore, The Death of Contract (Columbus, Ohio State University Press, 1975) 95: ‘The most dramatic changes touching the significance of common law in modern life also come about, not through internal development in common law, but through development in public policy which systematically robbed contract law of its subject matter … removing from “contract” transactions and situations formerly governed by it.’ 4 Geraint Howells and Thomas Wilhelmsson recognise those differences as still very much alive: ‘The consumer field appears as one where such a difference between American and European attitudes can be noted. Whilst collective consumer activism has been a prominent feature of American consumer markets, Naderism being the catchword in this context, European consumer protection has in many countries been developed from above, by the State’, as quoted by Maurer (n 2) 377. 5 With reference to the European context, see G Howells and T Wilhelmsson, ‘EC Consumer Law: Has It Come of Age?’ (2003) 9 European Law Journal 370; G Howells, HW Micklitz and T Wilhelmsson, European Fair Trading Law – The Unfair Commercial Practices Directive (Aldershot, Ashgate, 2006) 111; I Ramsay, Consumer Law and Policy: Text and Materials on Regulating Consumer Markets (Oxford, Hart Publishing, 2007) 286. VH van Boom, ‘Price Intransparency, Consumer Decision Making and European Consumer Law’ (2011) 34 Journal of Consumer Policy 359 distinguished between consumers with a high need for cognition and those with a low need for cognition, with the former enjoying the task of calculating, comparing, analysing, etc in the consumption process and the latter shirking such tasks and employing basic strategies in consumption thinking and deciding. 6 See chapter six, s I.A. 7 See chapter six, s II.A. 8 FCA, ‘Discussion Paper on a Duty of Care and Potential Alternative Approaches’ (London, 2018) https://www.fca.org.uk/publication/discussion/dp-18-05.pdf. 9 See, eg the work of Citizens Advice on the loyalty penalty discussed in chapter six, s II.C.

182  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly BEIS Consumer Green Paper on Modernising Consumer Markets. There, it is noted that: [there] should be a new approach by government and regulators to safeguard consumers, who, for whatever reason, remain loyal to their existing supplier so that they are not materially disadvantaged. Exploitation of these customers by charging them significantly higher prices and providing poorer service is a sign of a market that is not working well and should be tackled vigorously.10

The fact that regulators are busy exploring how to protect vulnerable consumers more effectively11 is a further sign that the application of consumer law as it was is no longer sufficient. Intervention for the ‘vulnerable’ is a step in the right direction. Nevertheless, the current focus on consumer vulnerability is, in our view, too narrow, in that there is a growing need to protect consumers in general, including the mainstream average (sophisticated) consumer. Of course, there is always a danger that intervention could perpetuate consumers’ ‘moral hazard’, that is, prevent learning from past mistakes and triggering a feedback reputational loop that should ultimately discipline firms. Therefore, any intervention, wherever it sits on the paternalistic spectrum, should take care to avoid any unintended consequences for those consumers who might have benefited from the unrestricted flow of commercial information and freedom of product choice. Choosing the correct route for intervention becomes even more difficult when a measure adopted to protect one group of consumers may have negative repercussion for another. For example, there are market configurations where ‘sophisticated’ consumers benefit from the presence (and exploitation) of credulous and ‘naïve’ ones by enjoying a level of cross-subsidisation (eg CToH 4 ‘the subsidy’). Under such circumstances, regulatory intervention aimed at protecting naïve consumers might arguably lead to a general price increase for the sophisticated consumer. Therefore, continuing with such intervention takes on a distinctive connotation of redistributive justice.12 This redistributive ideal might become even more contentious when regulatory intervention is not merely to the benefit of those categories of consumer typically defined as ‘vulnerable’13 – due to their age, physical or mental infirmity

10 Department for Business, Energy & Industrial Strategy, Modernising Consumer Markets – Consumer Green Paper (London, 2018) para 1.6 www.gov.uk/government/consultations/consumer-green-papermodernising-consumer-markets. 11 See, eg National Audit Office, ‘Vulnerable Consumers in Regulated Industries’, HC 1061 (London,  2017) https://www.nao.org.uk/wp-content/uploads/2017/03/Vulnerable-consumers-inregulated-industries.pdf. 12 See, eg M Armstrong and J Vickers, ‘Consumer Protection and Contingent Charges’ (2012) 50 Journal of Economic Literature 477. 13 In this respect, see T Wilhelmsson, ‘Varieties of Welfarism in European Contract Law’ (2004) 10 European Law Journal 712, 721.

Justifications for Adopting a More Prescriptive Standard  183 and credulity – but is meant also to reach those consumers who are variously inattentive, weak-willed, overconfident and myopic.14 Nevertheless, we have seen (notably in chapter four) that behavioural biases are common response mechanisms for consumers to cope with the uncertainty linked to a lack of predictability of the transactional outcome, especially when there is a broadly held suspicion that traders are keen to exploit consumers’ vulnerability. This, in turn, can lead to distrust in the market in general. In any event, any consumer faces cognitive limitations in dealing with the amount and complexity of information that often accompanies making a fully informed purchasing decision.15 Even the shrewdest can face cognitive overload that impinges on their ability to act as the ‘informed consumer’ posited in the market-based paradigm. As a result, it becomes harder to justify the friction on the demand side between efficiency and equity. Embracing the idea of ‘perfectly rational’ consumers (ie the neoclassical standard of ‘homo economicus’) means that those consumers who fail to match that aspirational standard may blame themselves for their mistakes, rather than call for a higher standard of consumer protection where sellers are expected not to take advantage of consumers’ ‘bounded rationality’. It is intuitive to see how this, in turn, could lead to disengagement. By contrast, to adopt a positive duty to treat consumers fairly can provide the confidence consumers need to challenge poor standards and discipline firms by actively shopping around. As Ian Ramsay puts it: Determining whether the standard of deception should be that of protection of the reasonable or credulous consumer is a political battle over whose vision of market relations will be made to stick to society. It is about whether to view the law as fostering relationships of trust and independence or as promoting a Hobbesian world of self-interested distrust. Law, through its images of social behaviour, affects the moral order of markets. It invites us, like the advertisement, to buy into and reproduce the legal images of behaviour. If the law repeatedly produces images of the consumer as a rational person, carefully weighting alternatives, then those who are taken advantage of may simply blame themselves for their failures in the marketplace. A more appropriate 14 For a discussion on the policy insights and implications of behavioural (psychology) economics, see C Jolls, ‘Behavioral Law and Economics’ in Diamond P and H Vartiainen (eds), Behavioral Economics and Its Applications (Princeton, Princeton University Press, 2007). 15 See van Boom (n 5) 360–61; P Henry, ‘Is the Internet Empowering Consumers to Make Better Decisions, or Strengthening Marketers’ Potential to Persuade?’ in CP Haugtvedt, KA Machleit and RF Yalch (eds), Online Consumer Psychology: Understanding and Influencing Consumer Behavior in the Virtual World (London, Routledge, 2005). See also S Hurley, ‘The Public Ecology of Responsibility’ in C Knight and S Stemplowska (eds), Responsibility and Distributive Justice (Oxford, Oxford University Press, 2011), who notes that under cognitive load or time pressure, people tend to default to believing statements they have understood, even when they have been told these are false, and to acting on these beliefs. See also A Etzioni, ‘Behavioral Economics: Toward a New Paradigm’ (2011) 55 American Behavioral Scientist 1099, distinguishing ‘universalistic’ limitations, which are found in all people at all times, from ‘particularistic’ or ‘oscillating’ limitations, which are found, respectively, only in some people or only sometimes.

184  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly understanding of the credulous person test is the assumption that consumers are entitled to trust sellers and manufacturers. Fostering trust focuses on the sales practices used in the market and the rationale for protection is the reinforcement of trust rather than protection for the weak.16

C.  A More Prescriptive Standard of Consumer Protection is in Line with Relational Contract Theory Intervention in consumer markets finds some parallels with ‘relational contract theory’. According to Ian Macneil, all contracts are dependent upon the social institutions and practices that frame them.17 There is also a partition between discrete and relational contracts, with the former being one-shot transactions where the parties’ interaction is limited (because contracted performances can be clearly specified from the outset) and the latter being long-term or open-ended interactions. It is true that consumer law is indeed dependent on public as well as private enforcement, but consumer contracts are not normally thought of as relational. This label tends to be reserved for employment contracts or complex businessto-business supply contracts, on the basis that performances cannot be wholly specified from the outset but need to be adjusted as the circumstances unfold.18 It is fair to say that the vast majority of business-to-consumer transactions are more akin to discrete contracts in nature, where the degree of interdependence between service provider and customer is low (ie even if the contract can be openended, as with essential utility services). However, a large proportion of consumer contracts also involve ongoing relationships, traditionally for service contracts, but also increasingly for consumer goods, where brands attempt to build a relationship of trust. John Wightman applied this relational framework to the analysis of the role of transactional contexts with respect to the use of unconscionability in controlling what constitutes ‘permissible advantage taking’. This relational approach is presented in opposition to the predominant contract law, based on the neoclassical tradition and focused primarily on ‘agreement’ and ‘consent’. Wightman argued that by focusing on how consent has been given and obtained in practice, the concept of unconscionability is framed and treated as a procedural issue, and is thus devoid of an element of substantive analysis with respect to the class of

16 I Ramsay, ‘Consumer Law and Structures of Thought: A Comment’ (1993) 16 Journal of Consumer Policy 79. 17 I Macneil, ‘Values in Contract: External and Internal’ (1983) 78 Northwestern University Law Review 340. See also RW Gordon, ‘Macneil, Macaulay, and the Discovery of Power and Solidarity in Contract Law’ (1985) Wisconsin Law Review 565, 577–79. 18 See J Wightman, ‘From Individual Conduct to Transactional Risk: Some Relational Thoughts about Unconscionability and Regulation’ in M Kenny, J Devenney and LF O’Mahony (eds), Unconscionability in European Private Financial Transactions (Cambridge, Cambridge University Press, 2010) 101.

Justifications for Adopting a More Prescriptive Standard  185 transactions concerned.19 In this mainstream approach to unconscionability – the ‘individual conduct model’ – the burden of proof lies on the claimant to argue the presence of procedural vitiating factors such as duress, undue influence and misrepresentation undermining consent.20 This allocation of the burden of proof is reversed with the adoption of the ‘contractual risk model’, whereby the claimant is exempted from establishing the presence of a vitiating factor given the degree of risk faced in particular circumstances. This substantive conception of unconscionability is therefore inherently contextual: ‘Context is thus relevant in identifying these characteristics, although the context which is relevant is not the specific context of a particular transaction in dispute, but rather the category of transactions of which it is part.’21 In this respect, Wightman identifies two categories of risk that may be of relevance to the analysis of consumer commercial practices, namely, relational and transactional risks. The first refers to a situation where a relationship of trust and confidence exists between the parties, in particular, by virtue of an established professional relationship, such as the one between solicitor and client.22 In the second case, the risk for the buyer results from the nature of the transaction, whereby the seller is in an advantageous bargaining position as a result of superior experience in dealing with complex transactions.23 In both circumstances, the consumer is in a weak bargaining position due to, respectively, a lack of knowledge or a lack of know-how. In the former case, the consumer is not expected to possess or gain sufficient expertise, and thus requires professional (expert) advice to assess

19 ibid 105–06. ‘Procedural unconscionability takes account of defects in the bargaining process; these are expressed as vitiating factors, and typically involve wrongdoing by a defendant which can be treated as undermining the consent of the claimant, thus bringing unconscionability under the umbrella of the conceptual structure of the “neoclassical” law … If a purely procedural notion of unconscionability is adopted, it seems inevitable that the rules will focus on the acts of wrongdoing by the defendant which result in an undermining of the consent of the claimant, and in principle the presence or absence of these elements does not depend on the particularities of the kind of transaction in question.’ See also R Bradgate, R Brownsword and C Twigg-Flessner, The Impact of Adopting a Duty to Trade Fairly (London, Department of Trade and Industry, 2003) 22: ‘By far and away the most important feature of any regime of contract law is the set of values that informs its substantive doctrine. Broadly speaking, the substantive content of doctrine (in whatever form, general or specific, and however expressed) will reflect the local valuation of self-reliance and individualism as against mutuality and co-operativism. The more that mutuality and co-operativism are valued, the thicker the concept of fair dealing and the greater the demand that the interests of fellow contractors should be respected. Characteristically, regimes of contract law that are predicated on the values of self-reliance and individualism will interpret a requirement of fair trading (or fair dealing, or fairness in contract) as a matter of fair procedure. The baseline is that no one should be coerced into a contract and nor should fraud be tolerated. When the classical model of English contract law organised itself around the slogan that “a free contract is a fair contract”, it signalled that its regulatory interventions in the name of fair contracting would not go beyond these minimal procedural rules.’ 20 Wightman (n 18) 108. 21 ibid 110. 22 ibid 112. 23 ibid 123.

186  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly what is necessary to fulfil his needs. In the latter case, what is lacking is hands-on experience of how best to shop around to find a deal that constitutes good value for money. In the neoclassical approach, there is an expectation that the consumer shall make himself familiar with what is on offer, and at what price, when making a purchase. Arguably, the degree of similarity between relational and transactional risks depends on how remediable the underlying information asymmetry is. This distinction is reflected in the kind of trust mechanism most appropriate to each purchasing situation: while the lack of expert knowledge calls for trust and confidence in the other party, deterrence-based (dis)trust should be sufficient to control service providers’ potential opportunism – hence, the orthodox case for demandside interventions to improve transparency and facilitate switching. It could, however, be argued that the skills needed to avoid making mistakes in a transactional decision often amount to proper expertise. In the case of business-to-business transactions, it is common practice for corporate buyers to hire procurement specialists because procurement transactions are highly complex.24 But complexity is prominent in retail markets as well. Choosing a mortgage or insurance requires an understanding of the technical specifications of the product. Besides, even when purchasing commoditised products, complexity may arise from other contract features, such as payment terms or ancillary add-ons, which may vary between rival firms. Under these circumstances, retail consumers find themselves in a position similar to that of professional procurement, but without the skills, time and resources needed to take fully informed decisions. This consideration also calls into question the argument that consumers can rely on the (self-correction) reputational mechanism as a proxy for the lack of exploitative practices. However, when consumers are struggling to cope with complexity in the first place, it is difficult to discriminate between good and bad firms, so that a negative experience may be taken as a signal that firms in general are not to be trusted. This may be particularly the case if consumers come to suspect firms of practising obfuscation on purpose. This then become a self-reinforcing mechanism, because firms come to the commonly held view that treating consumers fairly might not pay off. Accordingly, using a relational approach to frame unconscionability and unfair practices backs the adoption of a higher standard of consumer protection by focusing on the observable features of the transactional context, thus diminishing the role traditionally attributed to consent and agreement.25 It opens the way for a duty to trade fairly to be introduced.

24 Indeed, it is often argued that small and medium enterprises lack the expertise needed to procure utility services such as electricity and gas – hence the question of whether they, too, are in need of some form of protection. 25 E Voyiakis, ‘Unconscionability and the Value of Choice’ in Kenny et al (n 18) 95.

Introducing a Positive Duty to Trade Fairly  187

III.  Introducing a Positive Duty to Trade Fairly Directive 2005/29/EC on unfair commercial practices (UCPD) and the Consumer Protection from Unfair Trading Regulations 2008 (CPRs) in the UK are based on the principle not to trade unfairly.26 We see it as an important milestone to move away from the double negative (not to trade unfairly) and recognise a positive obligation to trade fairly imposed on traders. The idea is not totally new in the field of consumer protection. The Office of Fair Trading (OFT) had already advocated for a general duty to trade fairly, and the government noted at the time that the omission of such a general clause was one obstacle to its claiming to lead the world in consumer protection.27 The adoption of the UCPD also prompted a re-examination of the question and the production of a report on the impact of adopting a duty to trade fairly in 2003.28 This report concluded that a general duty of fair trading might add to existing obligations in English law because the fair trading obligation signifies a further move from classical doctrine (values of self-reliance and individualism) to modern substantive doctrine (values of mutuality and co-operativism).29 At the time, there was clear resistance to the idea of pushing the UCPD notion to a positive obligation. Indeed, Collins explained that the UK Government raised a strong opposition to the introduction of a positive duty to trade fairly as originally mooted in the European Commission’s proposal: This shift to negative terminology fits more comfortably into the traditional British liberal perspective on the state that what is not prohibited is therefore permitted, thereby avoiding the appearance of the imposition on businesses of a vague positive duty to behave in ways dictated by the government.30

However, as observed in the previous section, there are growing sign that opinions on how to intervene in consumer markets are shifting. The current duty not to trade unfairly suggests that all that is not forbidden is allowed. The entire architecture of the UCPD is built on the premise that what is not unfair is therefore fair by default. It also means that the only obligation that 26 See GB Abbamonte, ‘The Unfair Commercial Practices Directive and its General Prohibition’ in S Weatherhill and U Bernitz (eds), The Regulation of Unfair Commercial Practices under EC Directive 2005/09, New Rules and New Techniques (Oxford, Hart Publishing, 2007) 15. 27 See G Howells, ‘The End of an Era – Implementing the Unfair Commercial Practices Directive in the United Kingdom: Punctual Criminal Law Gives Way to a General Criminal/Civil Law Standard’ (2009) 11 Journal of Business Law 184. The predecessor to the OFT consulted in 1986 on the introduction of a general duty to trade fairly. The OFT also called for a right of private redress to be introduced for all unfair practices under the UTCCRs: see OFT, ‘Response to the Law Commission and the Scottish Law Commission Consultation on Consumer Redress for Misleading and Aggressive Practices’ (London, 2011); Department for Trade and Industry, ‘Comparative Report on Consumer Policy Regimes’ (London, 2003) 33. 28 See Bradgate et al (n 19). 29 ibid para 2.4. 30 H Collins, ‘Harmonisation by Example: European Laws against Unfair Commercial Practices’ (2010) 73 Modern Law Review 97.

188  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly falls on the trader is to not actively seek to mislead consumers or take advantage of them. By contrast, using a positive obligation to trade fairly clearly raises the expectations placed on traders. They not only need to abstain from being unfair and using unfair practices, but also need to find ways to be virtuous. When considering the potential for the introduction of a duty to trade fairly, Bradgate, Brownsword and Twigg-Flesner thought it could take different forms. They explained: Whether the general duty was fully or only partially overarching, there are any number of ways in which it might be formulated. For example, the legal requirement might copy out the ethical objective by placing businesses under a duty to respect the legitimate interests of their consumer customers; or it might require businesses to act in accordance with the principle of good faith and fair dealing (which may or may not be elaborated in terms of respecting the legitimate interests of consumers); or it might require businesses to trade fairly or in accordance with reasonable (consumer) expectations, or to eschew unfair commercial practices, or the like. During the drafting of the duty, considerable significance may be attached to the particular choice of doctrinal expression. For example, it may be argued that a general duty drafted (positively) as a requirement to trade fairly or reasonably is more onerous or less certain than one drafted (negatively) as a prohibition on unfair or unreasonable trading. However, if the general duty is to have the required flexibility, the particular doctrinal expression employed is unlikely to freeze the regulatory regime.31

In this section, we explore the routes that could be followed to achieve this result, all based on areas of law where something akin to a positive duty to trade fairly already exists or is developing. The solution could be found in the creation of new legislation, existing legislation or the way courts interpret existing notions. More precisely, we review the notion of ‘good faith’ in contract and commercial law, and a better use of the notion of professional diligence enshrined in the UCPD as potential routes. We note that a duty to trade fairly could also take the form of a statutory duty of care (possibly akin to a fiduciary duty), although we do not explore it. This idea is currently open for discussion in the field of financial services, but it seems that, for more mainstream consumer contracts, it would impose too strong a requirement on traders. Ultimately, we conclude that a positive duty to trade fairly would establish a more level playing field for consumers to engage in the market and for regulators to enforce where behaviour does not meet desired standards.

A.  Creating an Implied Term to Trade Fairly in Consumer Contracts The UCPD is ‘without prejudice to the rules on the validity, formation or effects of contracts’.32 Therefore, at least in theory, an exploration of the way good faith and

31 Bradgate

32 Directive

et al (n 19) para 1.7. 2005/29/EC, Recital 9.

Introducing a Positive Duty to Trade Fairly  189 fairness standards have been applied in contract law ought not to have any forbearance on the way consumer law will apply. However, we seek to explore this area of law for two main reasons. First, it may be that an alternative to the application of the UCPD is necessary to develop a general obligation to trade fairly. Secondly, the developments in contract and commercial law offer a unique insight into how other disciplines have tackled similar issues. What we find is that, despite the absence of a general obligation of good faith, many other solutions to the same effect have developed. These can form a useful reference point to developing a stand-alone standard in consumer law. A third reason is that, despite what the UCPD does say, the separation between instruments is not as clear cut. As Hugh Collins puts it, ‘[i]mplied terms lie on the point of friction between the basic disposition of the common law to respect freedom of contract and the regulatory impulse to prevent the worst instances of market exploitation and opportunism’.33 Unsurprisingly, the existence of and the need for a duty of good faith in contract law and commercial law has been a long-fought battle.34 Many find the idea of a duty of good faith irreconcilable with the common law of contracts.35 Besides, English law tends to operate along a rather sharp divide between the expectation that parties will act solely in their own interests and that they should take into account a fiduciary duty, where the utmost care needs to be applied. The standard of good faith is inextricably linked to contract law through the use of implied terms. Implied terms are an interesting tool, in that a duty to trade fairly could be framed as an implied term. It could be implied into any consumer contract that the trader will act honestly and not mislead the consumer. It would build on already existing case law36 where the courts have found ways to imply terms in contract and protect weaker parties, as well as lean on already existing statutory implied terms. Indeed, the Sale of Goods Act and now the Consumer Rights Act 2015 contain a number of implied terms that are underpinned by fairness. This includes, for example, that a service should be performed with reasonable care and skills under section 49. It is not possible for the trader to limit or exclude its liability. Implied terms ensure that the reasonable expectations of

33 H Collins, ‘Implied Terms: The Foundation in Good Faith and Fair Dealing’ (2014) 67 Current Legal Problems 297. 34 S Saintier, ‘The Elusive Notion of Good Faith in the Performance of a Contract: Why Still a Bête Noire for the Civil and the Common Law?’ (2017) 6 Journal of Business Law 442. 35 In Walford v Miles [1992] 2 AC 128, 132, the duty to carry on negotiations in good faith was deemed inherently repugnant to the adversarial position of the parties when involved in negotiations. For M Bridge, ‘Doubting Good Faith’ (2005) 11 New Zealand Business Law Quarterly 430, 450, ‘­introducing a general principle of good faith and fair dealing would be like setting a bull loose in a China shop’. 36 See, eg Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433; Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL). Hugh Collins commented that ‘although Neil Andrews describes the implied term as disastrous in view of the subsequent collapse of Equitable Life, this is precisely the sort of case where an implied term should be considered’: Collins (n 33) 317.

190  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly the consumer purchasing a product are met and, if they are not, that they have a cause of action. There is therefore nothing novel or foreign to English law in recognising an implied duty of good faith in the performance of contracts.37 The groundwork has already been done in contract law to enable judges to imply a duty to trade fairly in all consumer contracts. The adoption of a duty to trade fairly in consumer law is made even easier by the fact that the adoption of the notion of good faith as a blanket standard is also gaining traction in commercial law. In Yam Seng, the High Court held that it is an implied term of the agreement that the parties would deal with each other in good faith and that English law should indeed recognise this duty of good faith in performance, which, at its core, contains an expectation of honesty, the content of which should be defined from the context of the case.38 According to Leggatt J, the term can be described as a duty of good faith and fair dealing in the performance of contracts.39 Leggatt J also suggests that some enhanced duties of disclosure and co-operation might apply in relational contracts.40 Saintier argues that in Yam Seng, Leggat J goes to some length to show that recognising good faith as a duty of honesty is nothing more than a logical step in the development of English common law since it can easily be drawn from existing norms. He stated that to base the notion on the use of implied terms would in fact allow for it to ‘fit in the common law tradition’.41 Several cases that followed Yam Seng did not develop the notion of good faith as a positive obligation,42 but have been prepared to recognise good faith and use the concept as a component of an implied term, although not an overarching principle according to Ewan McKendrick.43 In particular, in Hamsard,44 Norris J stated that there could be an implied term not to do anything to frustrate the purpose of the contract, but it would not imply a positive obligation upon a contracting party to subordinate its own commercial interests to those of the other contracting party. The judge explained that good faith could not

37 Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB), para 145. 38 ibid para 131. 39 ibid para 150. 40 ibid para 142. 41 Saintier (n 34) 444, citing Yam Seng (n 37) para 131. 42 The only case to embrace Yam Seng is Emirates Trading Agency v Prime Mineral Export Private Ltd [2014] EWHC 2014. But see also the Canadian Supreme Court case of Bashin v Hrynew [2014] SCC 71, which recognises such duty of good faith. However, in MSC Mediterranean Shipping v Cottonex Anstalt [2016] EWCA Civ 789, the Court of Appeal rejected the idea developed by Leggat J that good faith is a general organising principle of the common law which underpins and informs more specific rules, including the idea that contractual discretion cannot be exercised ‘arbitrarily, capriciously or unreasonably’. 43 Cited by Saintier (n 34) 450. See also the case law she cites. E McKendrick, ‘Good Faith in the Performance of a Contract in English Law’ in L Di Matteo and M Hogg (eds), Comparative Contract Law (Cambridge, Cambridge University Press, 2015) 224. 44 Hamsard 3147 Ltd v Boots UK Ltd [2013] EWHC 3251 (Pat).

Introducing a Positive Duty to Trade Fairly  191 override a party’s legitimate commercial interests. Other cases default to using alternative standards, such as honesty and integrity.45 In any event, and whatever way good faith is framed, it is clear that a social contractual norm does exist in English contract law.46 According to Collins, ‘the true grounds for implying terms into contracts is always good faith and fair dealing, though the difference between terms implied in fact and terms implied in law signifies different meanings of the kaleidoscopic idea of good faith’.47 It varies from merely requiring honesty in fact to edging close to fiduciary duties and requiring that the performance of the contract takes the interests of the other party into account.48 Without needing to prove dishonesty, the least demanding standard of good faith imposes a minimum honesty requirement that imposes a standard of unconscionability according to Collins. It at least encompasses taking unfair advantage of the other party’s weaknesses (undue influence, for example) or of omissions in the express allocation of risks in the contract (as in terms implied in fact).49 At the other end of the spectrum, the ‘reasonable expectations of honest men’, a standard formulated by Steyn LJ in First Energy (UK) Ltd v Hungarian International Bank Ltd,50 provides the backdrop to interpretation. According to Steyn LJ, a theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or principle of law. It is the objective which has been and still is the principal moulding force of our law of contract.51

The standard does not, of course, extend to asking parties to not act in their own interest and be purely motivated by the welfare of others, but it expects each party to do what is reasonable to enable the other to enjoy the benefit of the contract.52 The core value of good faith is honesty.53 It is assessed objectively by reference to a conduct that would be regarded as commercially unacceptable by reasonable and honest people.54 The content of the obligation is therefore heavily dependent on context.55 Besides, honesty is not the only applicable standard. Leggat points to others, such as fidelity to the parties’ bargain and cooperation in the performance of 45 See, eg D&G Card Ltd v Essex Police Authority [2015] EWHC 2145 (Ch) para 196. Cited in Saintier (n 34) 452. 46 ibid 453. 47 See Collins (n 33) 301. 48 ibid 314. 49 ibid. 50 [1993] 2 Lloyd’s Rep 194 (CA) 196. 51 ibid. 52 Cited by Collins (n 33) 315. In particular, in Hamsard 3147 (n 44), Norris J stated that there could be an implied term not to do anything to frustrate the purpose of the contract, but it would not imply a positive obligation upon a contracting party to subordinate its own commercial interests to those of the other contracting party. 53 Yam Seng (n 37) para 141. 54 ibid para 144. 55 ibid para 147.

192  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly the contract. According to Leggat, there is an expectation that the parties will ‘share information relevant to the performance of the contract and that a deliberate omission to disclose such information may amount to bad faith’.56 As it stands, and while much uncertainty remains, we find ourselves in the ironic situation that we expect businesses to behave honestly towards each other and judge what is honest from the standing point of a reasonable man. The standard may not be called good faith or be framed as a positive obligation, but nevertheless some expectations are placed on businesses and their way of dealing with other businesses. However, we do not seem to have totally the same expectations in their relationships to consumers. When applying the UCPD/CPRs and assessing behaviours in this sphere, we tend to do it from the impossibly high standard of the ‘average consumer’, who ought to have been more agile and aware to avoid the dodgy practice. One explanation may be that in relationships between businesses and consumers, many will see the entities as not having a common project. Here, we are not looking at networks of franchisees who, whilst competing for a share of profit, all expect to adhere to common rules for the brand to succeed, for example. Consumers and firms are on separate sides of the divide. Consumers are part of the market rather than part of the firm, where all are supposed to rationally look after their own interests. However, both firms and consumers need each other for any market to exist, and fair businesses also have an interest in all competitors behaving fairly towards consumers. This is particularly the case considering the possibility that consumers may draw an inference from a negative experience with a firm that the generality of firms are keen to induce and exploit consumers’ mistakes, thus damaging the standing of rival firms as well. There would therefore be a strong impetus for adopting an implied term to trade fairly in consumer contracts.

B.  Shaping an Obligation to Trade Fairly under the UCPD and the CPRs Ramsay explains that, traditionally, enforcement agencies, in the UK at least, see enforcement as a last resort and often look for clear violations of specific rules. For example, experience under the Unfair Terms in Consumer Contracts Regulations enforcement has been generally based around the ‘grey list’ and procedural ­fairness.57 In the application of the UCPD, case law also seems to revolve much more around the application of the blacklist, misleading actions and omissions, and aggressive practices. In addition, enforcement under the CPRs explicitly

56 ibid para 138. 57 I Ramsay, Consumer Law and Policy, Texts and Materials on Regulating Consumer Markets, 3rd edn (Oxford, Hart Publishing, 2012) 165.

Introducing a Positive Duty to Trade Fairly  193 favours soft enforcement options, such as education and guidance, and the promotion of self-regulation initiatives and codes of conduct.58 We advocate a broader use of the general clause contained in the UCPD (Article 5) and the CPRs (Regulation 3) in the enforcement of consumer law. A more systematic use of the general clause will go some way to turning the principle around and moving the expectations from abstinence to positive action. The interpretation given to professional diligence is a perfect place to start making this shift. What is required is for enforcers to build cases that frame positive judiciary intervention. From an economic point of view, we have already seen that any practice that can be caught by one of the consumer theories of harm clearly requires intervention of some sort, because the market (and its players) will not be able to rectify the harm suffered by consumers on its own. Economics therefore underwrites the need for a legal change. This should be powerful enough on its own, given the fact that the UCPD is mostly guided by economics. Indeed, it is economic harm that it seeks to avoid, and it is the economic behaviour of the consumer that it observes to decide if a practice is misleading or aggressive. The general unfairness clause was introduced to provide a safety net in order to make this framework directive future-proof  59 and able to adapt to the evolution of the market.60 Therefore, according to Micklitz, it should only be applied to close regulatory gaps.61 The many gaps and limitations highlighted in chapter two show that increased reliance on the general clause is therefore exactly in line with what the legislators wanted to achieve by providing a stand-alone test.62 The general clause (Article 5 UCPD; Regulation 3 CPRs) is a cumulative test where the practice must be contrary to the requirements of professional diligence, and must materially distort, or be likely to materially distort, the economic behaviour of the average consumer. In the way the test is formulated in the directive, it must materially distort the economic behaviour of the average consumer whom it reaches or to whom it is addressed, or of the average member of the group in cases where a commercial practice is directed at a particular group of consumers.63 Note at this stage that when the general clause is put in motion, it does not offer consumers a right of private action. In the UK, a right of private action is offered under the CPRs, but only for misleading action or aggressive practices. In this 58 See OFT, ‘Guidance on the UK Regulations (May 2018) Implementing the Unfair Commercial Practices Directive’ (London, 2008), ch 11, https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/284442/oft1008.pdf. 59 Abbamonte (n 26) 20. 60 G Anagnostaras, ‘The Unfair Commercial Practices Directive in Context: From Legal Disparity to Legal Complexity?’ (2010) 47 Common Market Law Review 147, 152. 61 H-W Micklitz, ‘Unfair Commercial Practices and Misleading Advertising’ in H-W Micklitz, N Reich and P Rott (eds), Understanding EU Consumer Law (Cambridge, Intersentia, 2009). 62 See Case C-435/11 CHS Tour Services GmbH v Team 4 GmbH [2013] ECR I-0000; confirmed in C-388/13 Nemzeti Fogyasztóvédelmi Hatóság v UPC Magyarország Kft ECLI:EU:C:2015:225, paras 61–63. 63 European Commission, ‘Commission Staff Working Document – Guidance on the Implementation/Application of Directive 2005/29/EC on Unfair Commercial Practices’ (Brussels, 2016) 55.

194  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly sense, the general clause is incomplete and does not offer the highest standards of protection. This would inevitably need to be addressed, for private redress (which should include individual as well as collective actions) ought to come and complement public enforcement efforts. A right of private action must include misleading omissions and cover the general clause. In what follows we analyse the constituting elements of the general test for unfairness in detail.

(i)  Professional Diligence The notion of professional diligence is defined in Article 2(h) UCPD, which explains that it is the ‘standard of special skill and care which a trader may reasonably be expected to exercise towards consumers, commensurate with honest market practice and/or the general principle of good faith in the trader’s field of activity’. This definition is reproduced in the UK implementation in Regulation 2 CPRs. Professional diligence connotes good business conduct.64 It applies to companies as well as their directors, who may be held accountable for practices that fall short of the professional diligence standard (Regulation 15 CPRs). According to Giuseppe Abbamonte, professional diligence is broader than subjective good faith since it encompasses not only honesty, but also competence on the part of the trader. Accordingly, the honest but incompetent antique dealer who sells fakes believing them to be originals will not conform to the standard of professional diligence.65 A breach of the prohibition on misleading and aggressive practices is in itself contrary to the requirements of professional diligence. The presumption is that such a behaviour will always automatically represent a breach of professional diligence.66 The UCPD incorporates concepts that ought to be interpreted independently from national concepts. It is essentially an exercise that rests on judicial interpretation and, more specifically, interpretation by the CJEU.67 In this respect, Collins further noted that whilst the UCPD employs unusually detailed definitions of many of its key concepts[, t]hese … are striking for their avoidance of traditional legal concepts drawn from national traditions … thereby reducing the risk that they might be interpreted as synonymous with concepts in national legal systems.68 64 Professional diligence needs to be distinguished from the defence of due diligence available under the UCPD for strict liability offences. Due diligence is said to be more demanding because it exonerates the perpetrator for the actions of third parties. 65 Abbamonte (n 26) 22. 66 CHS Tour Services (n 62) para 36. 67 See Ramsay (n 57) 284. 68 Collins (n 34) 92. In this respect, the European Commission, ‘First Report on the Application of Unfair Commercial Practices Directive’ (Brussels, 2013) 12 reported that ‘The concept of professional diligence has been correctly transposed in most of the Member States. It appears that a few Member States have instead maintained the notions of “good practice” or “good market practice”. In this connection, the Commission is currently in contact with the Member States concerned to make sure that these concepts do not lead to a more restrictive interpretation than required by the UCPD.’

Introducing a Positive Duty to Trade Fairly  195 However, there is very little case law devoted to the notion,69 possibly illustrating that across Europe the use of the general clause is under-developed.70 The only certainty is that the notion of professional diligence needs to be developed on a case-by-case basis. However, professional diligence is defined by reference to other standards, some of which were already well established in the law of the Member States prior to the UCPD.71 Honest market practices and good faith are such concepts. We can therefore turn to these to get a sense of what professional diligence may encompass.

(ii)  Honest Market Practices Honest market practices were not defined in the UCPD, although it is clear from the definition of professional diligence that they are defined by reference to the trader’s field of activity. In some regulated industries, this may be instrumental to the way the notion gets interpreted. While there could be a potential danger that in markets dominated by unfair traders, the standard of market practices could be particularly poor, the market has to satisfy a certain standard of honesty. Although the CJEU has not yet commented on the concept enshrined in the UCPD, we can draw from a number of other sources to understand this notion. First, Durovic believes that the case law developed on the similar concept of ‘honest practices in industrial and commercial matters’ in trademark cases is applicable and relevant to the application of the UCPD.72 That case law has recognised that any use of a trademark that misleads consumers as to the existence of a special relationship between two undertakings,73 or that discredits or denigrates a trademark,74 would not be consistent with a standard of honest practice. It also considers that a commercial practice is not honest if it does not enable normally informed and reasonably attentive internet users, or enables them only with difficulty, to ascertain whether the goods or services referred to by an advertisement

69 Some clues can be found in the Advocate General’s decision (paras 89–94) in Case C-304/08 Zentrale zur Bekämfung unlautern Wettbewerbs eV v Plus Warenhandelsgesellschaft mbH [2010] ECR I-00217. Note that the court did not address the issue. In Case C-540/08 Mediaprint Zeitungsund Zeitschriftenverlag v Österreich-Zeitungsverlag GmbH [2010] ECR I-10909, para 46, the issue is addressed very succinctly, noting that a practice was allowed because it was not contrary to professional diligence. The opinion of the Advocate General in Case C-453/10 Jana Pereničová and Vladislav Perenič v SOS finance spol sro [2012] ECR I-0000 discussed professional diligence applying the test to the facts of the case although the case concerned a misleading action. 70 Another explanation could be that the legislation performs very well without the need to use the general clause, but the economic and legal analysis conducted in previous chapters shows that this is not the case. 71 European Commission (n 63) 50. 72 M Durovic, European Law on Unfair Commercial Practices and Contract Law (Oxford, Hart Publishing 2016) 82. 73 Case C-63/97 BMW v Ronals Karel Deenik [1999] ECR I-905. 74 Case C-228/03 Gillette Company and Gillette Group Finland Oy v LA-Laboratories Ltd Oy [2005] ECR I-02337.

196  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly originate from the proprietor of the trademark, from an undertaking economically linked to it or from a third party.75 In Portakabin, the CJEU developed a duty to trade fairly confirmed by subsequent case law.76 The CJEU explained that the condition that trademark use be in accordance with honest practices in industrial or commercial matters: is the expression of the duty to act fairly in relation to the legitimate interests of the trade mark proprietor. The issue of whether that condition has been satisfied must be assessed by, inter alia, taking account of the extent to which the use by the third party is understood by the relevant public, or at least by a significant section of that public, as establishing a link between the third party’s goods and those of the trade mark proprietor or a person authorised to use the trade mark, and of the extent to which the third party ought to have been aware of that.77

Secondly, codes of practices may play some role in the interpretation of professional diligence under the UCPD. Recital 20 states: It is appropriate to provide a role for codes of conduct, which enable traders to apply the principles of this Directive effectively in specific economic fields. In sectors where there are specific mandatory requirements regulating the behaviour of traders, it is appropriate that these will also provide evidence as to the requirements of professional diligence in that sector. The control exercised by code owners at national or Community level to eliminate unfair commercial practices may avoid the need for recourse to administrative or judicial action and should therefore be encouraged. With the aim of pursuing a high level of consumer protection, consumers’ organisations could be informed and involved in the drafting of codes of conduct.

Codes of conduct are defined by Article 2(f) UCPD as an agreement or set of rules not imposed by law, regulation or administrative provisions which defines the behaviour of traders who undertake to be bound by the code in relation to one of more particular commercial practice or business sector. The UCPD therefore enables professionals to self-regulate in order to avoid the need for recourse to administrative or judicial action.78 However, the significance of codes of conduct may not be as important as first anticipated. In Bankia,79 the CJEU had to assess professional diligence in relation to the use of codes of conduct and the alleged practice of taking advantage of ­novation to force the price of restructuring a debt. The debtor argued that ‘Bankia acted in a way that was contrary to the requirements of professional diligence inasmuch as it took advantage of restructuring the debt in order to alter the valuation of the property in question’.80 In addition, the defendants claimed that, according 75 Cases C‑236/08 to C‑238/08 Google France and Google [2010] ECR I‑0000, para 83; Case C-558/08 Portakabin BV v Primakabin BV [2010] ECR I-06963, para 54. 76 Case C-252/07 Gerolsteiner Brunnen GmbH v Putsch GmbH [2004] ECR I-691, para 24. 77 Case C-558/08 Portakabin BV v Primakabin BV [2010] ECR I-06963, para 67. 78 Case C-109/17 Bankia SA v Juan Carlos Marí Merino, Juan Pérez Gavilán, María de la Concepción Marí Merino [2018] ECR I-0000, para 57. 79 ibid. 80 ibid para 20.

Introducing a Positive Duty to Trade Fairly  197 to the Code of Good Banking Practice, they were in a position to avoid enforcement and to discharge the debt by giving the property in payment while remaining there as tenants. Because Bankia was bound by that code, it should have accepted the giving of the property in payment, as suggested by the defendants. Not doing so thus constituted an unfair commercial practice contrary to Article 6(2)(b) UCPD, under which non-compliance with a code of conduct may constitute an unfair practice. Unfortunately, national law did not ensure actual compliance with codes of conduct and the CJEU decided that the directive does not require the Member States to provide for there to be direct consequences for traders solely on the ground that they have not complied with a code of conduct after subscribing thereto.81 Other guidance can be found at the national level. Some case law provides further clues as to the standard of honest market practices. For example, in the UK, the judge in OFT v Ashbourne82 noted that one can expect from a professional that: he does not include unfair terms in the terms and conditions recommended to clients; that one does not add any terms that are likely to mislead consumers regarding the rights and obligations of the gym club or those of the consumer; that one does not omit material information and provide information that is clear; that one does not demand payment that the consumer is under no obligation to pay. By recommending to gym clubs that they use terms contrary to this advice and insist on their inclusion into contracts, the defendant did not behave in a way that conformed with honest market practices.83

In R v X Ltd, the judge explained: I am quite satisfied that the evidence of the installation of the CCTV and the evidence of the lamentable, indeed deplorable and dismissive tone of the customer operator in the recorded calls is evidence of a contravention of honest market practice or breach of good faith.84

However, in order for the general clause (Regulation 3 CPRs) to be satisfied, the judge at first instance considered that there needed to be evidence that at least one director knew of the circumstances that would lead to the transaction or was indifferent to the risk and thus reckless.85 The prosecution viewed the fact that the directors were not aware as a failing in the standard of professional diligence because the: controlling minds of the company took no or no sufficient steps to ensure that employees and independent contractors engaged by the company complied with the code of practice either because it was never their intention that they should or because they did not care less, one way or the other.86



81 ibid

para 58. EWHC 1237 (Ch). para 227. 84 [2014] 1 WLR 591, para 30. 85 ibid para 30. 86 ibid para 31D. 82 [2011] 83 ibid

198  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly A particularly compelling piece of evidence was the fact that supervisors and three of the four directors had been given the opportunity to review the recordings of a number of telephone calls made with the ‘dismissive’ customer operator. The fact that ‘nobody had seen anything wrong with them’ was ‘evidence, at the very least, that the controlling minds were reckless of their obligations to consumers’.87 According to the Court of Appeal, the correct test ought to be whether the depth of the evidence relating to this one customer led to the inference that the way in which the company operated (through at least one of its controlling minds) demonstrated reckless disregard for the requirement of professional diligence generally: in that regard, it matters not that the particular controlling mind cannot be identified.88

The Court concluded that there was clearly evidence from which a jury could reasonably reject innocent explanations and reach a conclusion that the only proper inference to draw from the facts was that the company was knowingly or recklessly operating a commercial practice in contravention of the requirements of professional diligence, likely to distort the economic behaviour of the average consumer.89

(iii)  General Principle of Good Faith Good faith is an interesting limb in the professional diligence test. It can be added to the assessment of honest market practices or substituted for it. It can act as a guarantor of good market practices, for example, in sectors where a code of practice might have been devised to cater to their own self-interest and with little regard to consumers’ interests.90 Good faith is a principle that pre-exists and derives from the Unfair Terms in Consumer Contracts Directive.91 The test for unfairness in Article 3(1) of the directive is as follows: A contractual term which has not been individually negotiated shall be regarded as unfair, if contrary to the principle of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.

In this context, good faith is not a stand-alone requirement, but rather is integrated into the wider fairness test, in part the result of UK resistance at the negotiation stage.92 87 ibid para 32. 88 ibid para 34. 89 ibid para 35. 90 On this point, see, eg, Durovic (n 72) 85. 91 It is also a concept that is known to common law lawyers. The implied terms in the Sale of Goods Act also rest on the notion of good faith: see, eg J Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 Law Quarterly Review 433, 442. 92 Resistance from the judiciary was also felt in both Director General of Fair Trading v First National Bank [2001] UKHL 52 and Office of Fair Trading v Abbey National plc and others [2009] UKSC 6, as the court did not refer the matter to the CJEU for interpretation.

Introducing a Positive Duty to Trade Fairly  199 In Aziz, the CJEU explained that: With regard to the question of the circumstances in which such an imbalance arises ‘contrary to the requirement of good faith’, having regard to the sixteenth recital in the preamble to the directive and as stated in essence by the Advocate General in point 74 of her Opinion, the national court must assess for those purposes whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations.93

For Advocate General Kokott, it is important that: inter alia whether such contractual terms are common, that is to say they are used regularly in legal relations in similar contracts, or are surprising, whether there is an objective reason for the term and whether, despite the shift in the contractual balance in favour of the user of the term in relation to the substance of the term in question, the consumer is not left without protection.94

As a result, had a consumer not willingly submitted to such a term, it can be considered contrary to good faith. A similar test is likely to apply under the UCPD. Good faith has a subjective and an objective content, and thus would cover situations where the trader knew he was taking advantage of a consumer unfairly and situations where the practice is objectively unfair.95 For example, including a clause in consumer contracts barring the use of claims management companies to claim compensation when knowing this would result in a reduction of claims put forward could qualify, in our view, as being contrary to good faith.

(iv)  Material Distortion of the Economic Behaviour of the Consumer This part of the test under the general clause is focused on the effect the lack of professional diligence will have on consumers. According to Article 2(e) UCPD, the material distortion of the economic behaviour of the consumer means using a commercial practice to appreciably impair the consumer’s ability to make an informed decision, thereby causing the consumer to take a transactional decision that he would not have otherwise taken. According to Article 2(k), transactional decision refers to, among other things, any decision taken by a consumer, whether to act or to refrain from acting, concerning whether, how and on what terms to purchase or retain a product. This definition

93 Case C-415/11 Mohamed Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) [2013] ECR I-0000, para 69. The position was confirmed in later case law: see, eg Case C-342/13 Katalin Sebestyén v Zsolt Csaba Kövari [2014] ECR I-0000, para 28. 94 Advocate General opinion in Aziz (ibid) para 75. 95 C Twigg-Flesner, D Parry, G Howells and A Nordhausen, An Analysis of the Application and Scope of the Unfair Commercial Practices Directive (London, Department for Trade and Industry, 2005) para 2.21 https://webarchive.nationalarchives.gov.uk/+/http:/www.bis.gov.uk/files/file32095.pdf.

200  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly sets a very broad scope that can cover all the different phases before and after a business-to-consumer (B2C) transaction.96 This component of the general test effectively sets out the counterfactual that all theories of harm have worked to. It is worth noting, though, that the requirement of material distortion does not introduce a fully fledged effects-based test of the type adopted in the enforcement of competition law. Whilst the distortion of consumer decision making must ultimately cause an inefficiency, leading to a reduction of consumer surplus, no direct inquiry into whether, how and to what extent the unfair commercial practice resulted in consumer harm is formally required in the unfairness test. What is important to consider is if the ability the consumer has to make free choices is impaired or not. This is because it is presupposed that removing a consumer’s freedom of choice artificially impacts on market structures. There is, however, a de minimis threshold in that the behaviour of the consumer must have been appreciably impaired. Twigg-Flesner et al comment that the directive does not catch practices intended to legitimately influence consumer behaviour without impairing the consumer’s ability to make an informed choice. Product placement, brand differentiation and the offering of incentives are seen as legitimate influence.97 Similarly, Durovic believes that the directive does not prohibit the trader from using commercial tactics with the purpose of affecting the decision-making process.98 It is true that the directive itself does not affect advertising practices where mere puffery is used. A little exaggeration is tolerated, but it is not clear how much of a change or nudge in behaviour is required here to satisfy this requirement. The definition of material distortion appears to fully endorse the neoclassical transparency paradigm. Accordingly, the materiality threshold would be inherently based on the mainstream ‘average consumer’ benchmark of the informed consumer.99 However, this approach may be at odds with the consideration that consumer decision making might be distorted even in the absence of conduct that impairs the consumers’ access to accurate information, that is, because of other choiceconstraining factors.100 In this respect, Chris Willett further warned that unless the concept of professional diligence is seen as setting a normative standard on the

96 See, in this sense, Case C‑281/12 Trento Sviluppo srl and Centrale Adriatica Soc. coop. arl v Autorità Garante della Concorrenza e del Mercato ECLI:EU:C:2013:859. 97 Twigg-Flesner et al (n 95) para 2.29. 98 Durovic (n 72) 90. 99 In this sense, see Micklitz (n 61) 87. Twigg-Flesner et al (n 95) para 2.32 observed that the meaning of ‘material’ in the UCPD differs from the meaning in the UK Trade Description Act 1968, with the former referring to the materiality of falseness of the impugned statement, whereas the latter is about the economic impact of the use of the unfair practice. 100 See Collins (n 34) 101; C Willett, ‘Fairness and Consumer Decision Making under the Unfair Commercial Practices Directive’ (2010) 33 Journal of Consumer Policy 247, 263.

Introducing a Positive Duty to Trade Fairly  201 supply side, there is a risk that the general clause would be limited to a transparency paradigm.101 This would, in turn, allow the use of transparency as a defence to an allegation of violation of professional diligence. This ought to be resisted in recognition of the cognitive limitations normally faced by consumers, which are particularly significant at the pre-contractual stage, when an especially large quantity of information needs to be dealt with. In addition, Hugh Collins raised the concern that the ‘materiality’ requirement might allow defendants to argue that their challenged conduct did not distort the economic behaviour of consumers, therefore shifting the burden of proof onto the plaintiff to produce evidence to the contrary.102 As explained above, this assessment entails the identification of a counterfactual scenario: the distortion is based on a comparison with a baseline scenario where the consumer is not subjected to the challenged practice. Fernando Gómez noted that the UCPD is silent on how to determine this benchmark:103 in the counterfactual, is the consumer faced with a normal practice prevalent in the market or is he entirely unaffected by any (purposefully persuasive) commercial practice whatsoever? This issue is particularly relevant to those market configurations where the use of unfair commercial practices is widespread. Under those circumstances, it may be difficult to establish that the consumer would have taken a different transactional decision, unless the majority of the other competing traders had refrained from adopting similar practices as well. This issue is, therefore, clearly intertwined with the discussion on what constitutes a violation of professional diligence.104 Specifically, to achieve a higher standard of consumer protection, the normative standard of professional diligence should discourage opportunism but promote trustworthiness and, more prescriptively, assistance. Accordingly, it could be argued that the material distortion is due to the trader’s implicit refusal to assist both potential and current customers to avoid making mistakes. Therefore, there would be no need for a complex inquiry into the conduct of competing traders in order to establish the appropriate benchmark of professional diligence. In conclusion, the adoption of a normative and objective (as opposed to positive and subjective) standard is key to the achievement of a high standard of consumer protection. To this end, applying the CToHs’ analytical framework here should give the necessary grounding to demonstrate a material distortion of the economic behaviour of the average consumer. The only remaining obstacle could be that the notion of the average consumer as the default benchmark is still 101 ibid 265. 102 This concern is also of relevance to the sub-general clauses, given the common requirement that the impugned practice ‘causes or is likely to cause the average consumer to take a transactional decision he would not have taken otherwise’. 103 F Gómez, ‘The Directive on Unfair Commercial Practices: A Law and Economics Perspective’ (2006) 2 European Review of Contract Law 4. 104 ibid.

202  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly attached to this limb of the test. However, we showed in chapter two that the way the ‘average consumer’ standard has been applied by the CJEU to date can easily be changed and that sufficient freedom is in fact given to Member States to deviate from the mainstream neoclassical paradigm.

C.  General Clause in Action: Tackling Failures to Disclose a Price Disadvantage As argued in section I.D of chapter six, one prominent example of where the general clause could be used successfully in our view is with regard to failures to disclose a price (dis-)advantage. As it stands, it is difficult to use misleading omissions under the UCPD and the CPRs to tackle the problem of ‘confusopoly’ (ie framed under CToH 3 ‘the shock’), whereby rival firms engage in tariff proliferation and price obfuscation in order to artificially increase consumer search costs. The CJEU rejected the idea of a general duty to provide information.105 Nevertheless, the consumer has a right to information. The nuance is important. A duty to disclose would place the obligation on the trader, whereas the solution chosen places the burden on the consumer. From the case law of the CJEU, it is clear that consumers need to obtain missing information (to be reasonably well informed)106 and obtain true information from the trader,107 and that the reasonable consumer is required to identify objectively false information.108 Under Article 7(1)(2) UCPD, a commercial practice is a misleading omission if it omits, hides or provides in a manner which is unclear, unintelligible, ambiguous or untimely information that the average consumer needs to take an informed transactional decision and, as a result, causes, or is likely to cause, the average consumer to take a transactional decision he would not have taken otherwise. Whilst the prohibition of misleading action represented a long-established provision at the time the UCPD was adopted,109 the same cannot be said for the prohibition of misleading omission, especially with respect to the imposition of a ‘duty to disclose’ within the UK legal system.110 Indeed, the duty to disclose is 105 Case C-204/88 Ministère public v Jean-Jacques Paris [1989] ECR-04361; see also Case C-372/89 Gold-Ei Erzeugerverbund GmbH v Überwachungsstelle für Milcherzeugnisse und Handelsklassen [1991] ECR I-00043. 106 See Cases C-220/98 Estée Lauder Cosmetics GmbH & Co OHG v Lancaster Group GmbH. [2000] ECR I-00117; C-373-90 Nissan [1992] ECR I-00131. 107 See Case C-362/88 GB-INNO-BM v Confédération du commerce luxembourgeois [1990] ECR I-00667. 108 See Case C-470/93 Verein gegen Unwesen in Handel und Gewerbe Köln eV v Mars GmbH [1995] ECR I-01923. 109 At the European level, Willett (n 100) 253 argued that this prohibition broadly reflects the test in the Control of Misleading Advertisement Directive (84/450/EC), whereas Collins (n 34) 103 referred it back as far as the UK laws under ss 20–26 of the Trade Descriptions Act 1968. 110 In this respect, see Collins (n 104) 104–08; Twigg-Flesner et al (n 95) para 4.13; Bradgate et al (n 19) paras 6.50–6.60; Ramsay (n 5) 308.

Introducing a Positive Duty to Trade Fairly  203 only implied via the prohibition to hide material information under Article 7(1) UCPD. Wilhelmsson and Twigg-Flesner reported that the Commission wished to avoid introducing directly a positive duty to disclose to avoid having it being criticised as disproportionate for traders (that is, in terms of legal uncertainty and compliance costs).111 Nevertheless, the UCPD explicitly includes a duty to disclose material information in the case that the commercial practice qualifies as an ‘invitation to purchase’, which under Article 2(i) UCPD is defined as ‘a commercial communication which indicates characteristics of the product and the price in a way appropriate to the means of that commercial communication and thereby enables the consumer to make a purchase’. Arguably, this broad definition includes the kind of price advertising consumers search for in order to compare prices and therefore it is relevant to confusopoly.112 In particular, it is considered that the consumer always needs to know the main characteristics of the product (Article 7(4)(a) UCPD) and either the price or, where the nature of the product is such that the price cannot reasonably be calculated in advance, the manner in which the price is calculated (Article 7(4)(c) UCPD). Arguably, this duty to disclosed is too narrow in scope to be effective under confusopoly, given that the provision of detailed information about how complex tariffs are set up is very much instrumental in the persistence of consumer cognitive overload, that is, to the extent that it is then left to the consumer to determine which tariff plan is the most convenient based on his needs.113 In this respect, it is unhelpful that ‘the existence of a specific price advantage’ (or, better still, a lack thereof – ie the existence of a price disadvantage) is not

111 T Wilhelmsson and C Twigg-Flesner, ‘Pre-contractual Information Duties in the Acquis Communautaire’ (2006) 2 European Review of Contract Law 441. 112 In this sense, see European Commission (n 63) 13: ‘Traders may choose whether to include the price in their advertising. However, all commercial communications that include the price qualify as ‘invitation to purchase’ under the UCPD: for those, the Directive obliges traders, by virtue of its Article 7(4), to comply with a number of specific information requirements.’ 113 In contrast, however, it is worth noting that Law Commission & Scottish Law Commission, ‘Consumer Redress for Misleading and Aggressive Practices’ (London, 2012) para 7.36 recommended that ‘[t]raders should not be liable for omissions as a specific category, but should be liable where the overall presentation of a product or service would be likely to mislead the average consumer’. This recommendation went against the opinions of both Consumer Focus (at the time one of the main UK consumer representative body) and the OFT, arguing that a departure from the UCPD would be both confusing and unnecessary. Weight was instead given to arguments that the introduction of a duty to disclose would be disproportionate for traders, in that it would raise uncertainty regarding permissible future commercial practices and constitute a departure from current UK private law. Regarding the scope of ‘overall presentation’ – taken from the definition of misleading action – the joint report specifically ruled out a duty to disclose that a lower price may be available elsewhere, with a reference to consumer electronic markets, where new versions are frequently launched. See para 7.30: ‘We think that these sort of omissions fall into the category of general knowledge, and should not give rise to a right of redress. The average consumer does not need to be told that a product may be available cheaper elsewhere if the consumer shops around, as it is a matter of common sense, which consumers can reasonably be presumed to know. It would only be misleading if the trader promises that its price is the cheapest, when it is not. It is also a matter of general knowledge that electronic equipment is constantly being updated.’

204  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly listed among the information deemed to be material in the context of an ‘invitation to purchase’. This is because had it been the case – for example, with a duty to disclose the fact that a particular tariff offered by the same firm is the cheapest for a particular consumption profile –114 the market might tend to self-correct, in a fashion similar to the unfolding of the ‘unravelling principle’.115 In a way, it could be argued that this type of intervention would actually reinstitute the ‘unravelling principle’. Accordingly, it is important to understand whether this piece of information could be deemed to be material in the context of an ‘invitation to purchase’. This requires (the plaintiff) to show that the information is needed by the ‘average consumer’ to take an informed transactional decision. In this respect, Willett observed that the positive duty to disclose required under an ‘invitation to purchase’ can provide some guidance as to the principles underlying the implementation of the negative duty to disclose entailed by this ‘needs test’: One theme here seems to be information regarding to two connected issues: the extent of the financial commitment and whether the consumer will obtain ‘value for money’ in relation to the trader and product performance … All of these matters are potentially related to what consumer pays and what is received in returns.116

As explained above, the assessment of what is needed is based on the adopted notion of the average consumer, which, in turn, shapes the appropriate standard of professional diligence. Accordingly, it can be argued that the prohibition to omit, hide or provide in a manner which is unclear, unintelligible, ambiguous or untimely material information (in the sense that it is needed by the average consumer to take an informed transactional decision) should justify the imposition of a duty to proactively disclose ‘the existence of a specific price advantage’. Specifically, the ‘need’ for the ‘average consumer’ arises from the fact that consumers are overwhelmed because of tariff proliferation. Therefore, this configuration provides a collective underpinning to the individual duty to disclose. As put by Gómez, not only would this be good for consumers, it would also make sense for the overall market efficiency: As it stands, the commercial practice has to impair – maybe unless it qualifies as a misleading omission – the consumer’s ability to make informed choices, so the shift from the baseline … requires some kind of behaviour attributable to the firm engaging in the commercial activity … From a purely economic perspective, this linkage should not be a pre-requisite for imposing duties upon firms engaging in commercial communications or commercial practices generally. If these firms, although not responsible

114 Arguably this requirement would not impose ‘any concession to the principle [in English thinking] that parties may legitimately bargain with price sensitive cards close to their chest’: Bradgate et al (n 19) 35. 115 See discussion in ch 4. 116 Willett (n 100) 256.

Introducing a Positive Duty to Trade Fairly  205 for the level of information prevalent among consumers, are well-placed … to increase the information useful for consumers so that they can make more informed choices, there is no economic reason not to require them to do so. That is, if firms can, in [a] cost-effective way, correct inadequate levels of information on the part of consumers, their practices should be deemed unfair if they do not engage in these educational or corrective actions. In cost–benefit terms, they are [the] cheapest providers of a social benefit.117

The case for introducing this duty to proactively disclose the existence of a specific price (dis-)advantage through the general prohibition against unfair practices is strengthened by the consideration that consumers would benefit from it not only at the time of purchase (when the positive duty to disclose entailed by the ‘invitation to purchase’ would apply), but also throughout the ongoing B2C relationship with their current service provider. Needless to say, this would add to the tendency for the market to concretely self-correct and revert from the common use of tariff proliferation. Furthermore, the case for extending the duty to disclose on an ongoing basis is warranted by the broad definition of transactional decision under Article 2(k) UCPD, which specifically covers the decision taken by the consumer, whether it be to act or to refrain from acting, concerning whether, how and on what terms to retain a product. In conclusion, under the general clause, it seems that the practice of price obfuscation under which all tariffs are adopted in order to cause confusion could be seen to be contrary to professional diligence because it is adopted with a view to confusing consumers and pushing them into apathy and paralysis. This is therefore contrary to honest market practices, which should promote fair competition in the market place and not the apportionment of custom between competitors because of disengagement. The practice would even be contrary to good faith, because had the consumer known, he or she is unlikely to have agreed to be subjected to the practice. Besides, it is the lack of information about the existence of the price (dis-)advantage that leads the consumer to do nothing. Specifically, the ‘need’, even for the ‘average consumer’, arises from the fact that consumers are overwhelmed by the proliferation of tariffs. In this sense, the ability to identify the right tariff – and to verify that this remains the case over time with respect to ongoing relational services, such as with respect to essential utilities – requires the kind of expertise sought from professional procurement specialists. The material distortion of the economic behaviour of the consumer occurs because tariff proliferation appreciably impairs the consumer’s ability to make an informed decision. As a result, consumers fail to switch to a provider offering more advantageous tariffs. Hence, the consumer is in a weak bargaining position and the trader has a duty to assist existing and prospective customers to avoid selecting or staying on the wrong tariff. Properly assisted, consumers would, in most cases, take a different transactional decision and switch.



117 Gómez

(n 103).

206  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly

IV.  The Impact of a General and Positive Duty to Trade Fairly Whatever form this general and positive duty to trade fairly may eventually take, it should in all configurations offer great flexibility, be cost effective and be future proof.

A.  Flexibility of the Duty to Trade Fairly This general duty to trade fairly could be developed along the broad spectrum ranging from implied terms to the general unfairness clause, and designed to fit the needs of consumers by adapting to changing commercial practices. Under English contract law, claims must be framed in particular ways. A duty to trade fairly would cut through such inflexibility and make it ‘much easier for litigants to bring forward novel claims (or defences), and for judges to handle such points’.118 Similarly, it would be easier for enforcers and regulators to respond to consumer needs, for the predictability that normally characterises the common law can be quite detrimental. In L’Estrange v F Graucob Ltd,119 for example, the Court of Appeal failed to protect a small café owner who had signed a poorly presented contract to install a cigarette vending machine without appreciating the risk that no replacement or repair would be offered should the machine be defective. According to the Court, Mrs L’Estrange was bound by signing the contract in the absence of fraud, misrepresentation or coercion. According to Raphael Powell, ‘in a legal regime operating with an overriding objective of good faith in negotiation, it would be possible to act on such concerns about lack of transparency and exploitation of vulnerability’.120 One important aspect of the flexibility that a principle-based duty to trade fairly in consumer law would bring is that it could help in tackling v­ ulnerability.121 It is our contention that introducing a flexible standard will help assist the courts in dealing with vulnerable consumers and the protection that is not only appropriate for them, but also reasonable to expect from businesses beyond the limited protection currently offered to the average member of a vulnerable group. As shown in two of our case studies, on allocated seating and fertility treatments, vulnerability can affect a broad section of consumers, certainly well beyond the narrow scope based on typical demographic traits, such as age and level of income. 118 See Bradgate et al (n 19) para 2.6. 119 [1934] 2 KB 394. 120 R Powell ‘Good Faith in Contracts’ (1956) 9 Current Legal Problems 16, cited in Bradgate et al (n 19) para 2.20. Other jurisdictions have used a general clause to help in similar situations. 121 Another way of approaching this issue was floated by Lauren Willis, who proposed a performancebased framework whereby firms’ compliance with prescribed substantive standards is audited by regulators or appointed third parties: see L Willis, ‘Performance-Based Consumer Law’ (2015) 82 University of Chicago Law Review 1309.

The Impact of a General and Positive Duty to Trade Fairly  207

B.  A Future-Proof Duty to Trade Fairly In the future, the risk that consumers find themselves in a vulnerable purchasing situation may increase as firms exploit additional insights from the adoption of advanced analytical methodologies, such as artificial intelligence and machine learning empowered by big data availability. For example, firms may no longer post their prices in public (ie on a website) but instead set personalised prices privately, relying on algorithms able to identify consumers who are more likely to be willing to pay high prices, perhaps because they are particularly apprehensive or have relatively high search costs. The risk is that these practices might undermine the ability of consumers to collectively discipline firms. It could be argued that the neoclassical transparency paradigm would still hold, though, as consumers could help themselves by adopting digital shopping assistants able to collect and process vast amounts of complex information (ie without facing cognitive limitations) in order to provide bespoke advice to consumers. This is the rationale underpinning the implementation of open banking and the adoption of ‘aggregators’ (see chapter six, section II). It does, however, raise two concerns. First, unless the adoption of this type of advanced technology is close to universal, there will still be many vulnerable consumers particularly exposed to exploitation. Secondly, we should not underestimate the risk that firms may react by finding ways to frustrate consumers. Indeed, confusopoly emerged as consumers increasingly started to use the Internet to search for cheaper deals – ie tariff proliferation as a response to the reduction of search costs from e-shopping. For example, it is not obvious whether aggregators will be effective under personalised pricing, whereby tariffs are not posted and consumers have to negotiate bilaterally with each firm. Could consumers rely on digital shopping assistants to bargain on their behalf? What if firms adopted a policy of only dealing directly with consumers (as in the airline compensation case study)? Could consumers screen their identity to, say, hide the fact that they live in a high-income postcode? What if firms adopted a policy of setting a high price by default in this case? Could this practice be deemed to be unfair?122 And more fundamentally, perhaps, would a wasteful escalation or race to the bottom take place, whereby both firms and consumers devote time and resources on ‘exploitative innovation’?123 We therefore believe that the argument that the adoption of digital shopping assistants will substitute for the need of consumer protection enforcement in the future is naïve. Similarly, the promises of smart contracts (perhaps based on blockchain technology), which offer the ability to achieve full transparency 122 For a prescient analysis of this scenario, see HC Gamper, ‘How Can Internet Comparison Sites Work Optimally for Consumers?’ (2012) 35 Journal of Consumer Policy 333. 123 P Heidhues, B Kőszegi and T Murooka, ‘Exploitative Innovation’ (2016) 8 American Economic Journal: Microeconomics 1.

208  Fairness by Design: The Introduction of a Positive Duty to Trade Fairly and clear consent followed by automated contractual execution, may be overstated. Far from proving an adequate tool for the protection of consumers, smart contracts are strongly reminiscent of the contrast that has always existed between freedom of contract (based on the concept of procedural fairness) and unconscionability (based on the idea of substantive fairness). Indeed, it is easy to see how the complexity of some consumer contracts, and therefore the inherent risks for consumers, may be ratcheted up instead of down.124 Hence, we strongly believe that the case for a positive duty to trade fairly will be undiminished in the future. If anything, it will become stronger.

C.  Cost-Effectiveness of the Duty to Trade Fairly There is, of course, the possible objection that a duty to trade fairly would ultimately be detrimental to consumers as it would add costs that would ultimately be passed on to the consumers through higher prices. This argument is flawed, however. First of all, it seems to entail that firms do not incur costs when adopting unfair practices. This is clearly not the case. For example, under confusopoly, the costs of handling many different and complex tariffs certainly add to marketing and billing costs. Secondly, it is not clear why treating consumers fairly would have to be onerous per se. Only the unfair firms would truly suffer because they would not be able to raise extra revenue through the use of exploitative practices, rather than facing higher costs per se. Besides, when the generality of firms comply with a high standard of professional diligence, so that consumers have less need to be assisted, costs ought to in fact diminish. The benefit of correcting markets through the imposition of a duty to trade fairly should also have a positive impact on competition. Indeed, removing unfair practices will mean that all firms can compete on a level playing field. If all firms behave openly and honestly, they need to have the best product at the best price to attract the most customers. A fair market can be driven by engaged consumers demanding more from the traders they interact with, but markets will not self-correct when consumers are disengaged or not numerous enough to prompt a change in behaviour. Yet, we have shown that such disengagement is often perfectly understandable and rational. Neoclassical economics cannot demand rationality and by the same token sanction consumers when they behave as expected.

124 For an early analysis of this issue, see J Glass, ‘Smart Contracts and Consumer Protection’, Columbia Business Law Review (2015) https://cblr.columbia.edu/smart-contracts-and-consumer-protection/.

Conclusion  209

V. Conclusion A duty to trade fairly, based on a normative standard of professional diligence underpinned by an economic assessment of the prevailing competitive conditions, would have many advantages that far outweigh the disadvantages that detractors of a general duty would raise. While its contours are still a little hazy, it is not a concept that needs to be defined in the most minute detail. In fact, doing so would be counterproductive and detract from such a duty’s real advantage, that of offering flexibility for enforcers and the judiciary to respond to consumer needs. It could therefore be an implied term in contract law for low-value consumer contracts and it could manifest in the bolder use of the general clause under the UCPD. A general duty to trade fairly would prepare the ground for markets where fairness is included by design, and not as a form of redress, very much in the same way a positive duty to place only safe product on the market did. That is not to say that consumer detriment will no longer occur. Unfortunately, a duty to trade fairly does not totally solve the fact that detriment will be felt before the duty is applied. However, it is hoped that as the application of the duty develops, detriment declines and concurrently fairness spreads in a virtuous cycle. The general duty to trade fairly will also not necessarily be completely homogeneous, as the courts may conceptualise fairness in one way and alternative dispute resolution bodies may conceptualise it in another. There may also be disagreements between the way courts apply such a duty. Nevertheless, we believe that fairness and a positive duty to trade fairly can serve consumers and businesses alike. Indeed, fair competitors have a vested interest in markets being optimal and striking out unfair behaviours. Even if fairness cannot be defined easily, it can still be distilled into intrinsic ideas of fairness engrained into our legal systems. There are plenty of standards including equity that can inform the general behaviour we ought to expect from businesses d ­ ealing with consumers. We have seen that commercial law does not tolerate many of the behaviours in the consumer sphere that we have come to accept and resign ourselves to. Adopting a duty to trade fairly is a necessary paradigm shift. It is, at the very least, an idea that ought to be tried, because many others have but failed to protect consumers effectively – as the application of the consumer theories of harm has shown.

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220

INDEX Abbamonte, G  194 abuse of dominant position  59–60 excessive prices  60–63 exploitative abuse of collective dominance  63–7 Adams, S  140 airline industry allocated seating background  166–8 mapping against the CToHs  168–71 routes for enforcement  171–3 compensation claims background  160–62 mapping against the CToHs  163–5 routes for enforcement  165–6 anticompetitive agreements and concerted practices  67–8 applying theories of harm in consumer law complementarity of competition law and consumer law  7–9 impact on consumer welfare  6–7 latent theories of harm  10–11 spill-over effects  9–10 Atiyah, P  180 ‘average consumer’ as a reference point for protection  24–5, 36–7 free movement of goods doctrine  25–9 trademark laws  35, 36 unfair commercial practices legislation  29–34, 36 bank current accounts and savings accounts background  150 cash savings accounts  152–4 CMA market investigation into retail banking  154–5 FCA high-cost credit review  155–6 unauthorised overdraft charges  151–2 distributive effects and mapping against the CToHs  156–8 routes for enforcement  158–60 behavioural biases  79, 81–5, 106

BEIS  182 Bingham, Lord  48 blind trust  113–14 bounded rationality  13–14 boundedly rational consumers not verifying information  87–8 Bradgate, R  188 Briggs, LJ  34 Brownsword, R  188 ‘bundled credence goods’  89–91 CAA  161, 167 Caplovitz, D  39 Cartwright, P  40 case studies  137 airline industry allocated seating  166–73 compensation claims  160–66 bank current accounts and savings accounts  150–60 fertility add-on treatments  173–8 retail energy, CMA market investigation into  137–50 CAT  76 Chisholm, A  41 Citizens Advice  16, 17, 159 Civil Aviation Authority (CAA)  161, 167 claims management companies (CMCs)  162, 163 CMA see Competition and Markets Authority Collins, H  31, 47, 187, 189, 191, 194, 201 Competition and Markets Authority (CMA)  8–9, 40, 41, 58, 71–2, 73–4, 75, 160 market investigation into retail banking  154–5 see also retail energy, CMA market investigation into Competition Appeal Tribunal (CAT)  76 competition law economic approach to enforcement  3–6 see also limitations of competition law

222  Index ‘confusopoly’  140, 141, 142–5, 148, 149, 202, 203, 207, 208 consumer detriment levels of  16 secondary harm  16–17 consumer law economic approach to  11–15 see also enforcement of consumer law; limitations of consumer law consumer learning  96–7 imperfect consumer learning  97–9 policy options to correct imperfect consumer learning  99–102 consumer protection  78 competition policy, and  78 see also prescriptive standard of conduct for consumer protection consumer protection interventions  92 consumer learning  96–7 imperfect consumer learning  97–9 policy options to correct imperfect consumer learning  99–102 justification for distributive effects and substantive fairness  104–5 markets failing to self-correct, factors leading to  92, 106, 107 consumer learning, ineffective  96–102 fallacy of trust in markets  92–6 ‘unravelling principle’, limited  102–4 consumer surplus  80 behavioural biases  81–5, 106 consumer uncertainty regarding product quality and price  85–7, 105–6 boundedly rational consumers not verifying information  87–8 ‘bundled credence goods’  89–91 consumers updating their beliefs  88–9 product characteristics based on quality uncertainty  91 consumer theories of harm (CToHs) archetypal CToHs  111, 135–6 economic approach  1–2 Cseres, K  7 CToHs see consumer theories of harm Department for Business, Energy & Industrial Strategy (BEIS)  182 disengaged consumers  40–42 ‘drip pricing’  124, 129, 171, 172 Durovic, M  195, 200

ECMs see enhanced consumer measures enforcement of consumer law  50 private enforcement  50, 51, 52–3, 55 Civil Practice Rules and alternative dispute resolution  53–4 group litigation orders  54–5 representative actions  55 public enforcement  50, 51 enhanced consumer measures  51–2 enhanced consumer measures (ECMs) enforcement of consumer law  51–2 fair and unfair firms  110, 111 costs of unfair practices  110–11 fairness concept of  1 see also positive duty to trade fairly FCA see Financial Conduct Authority Fennelly, Advocate General  33 fertility add-on treatments background  173–5 mapping against the CToHs  175–6 routes for enforcement  176–8 Financial Conduct Authority (FCA)  72–3, 152, 153, 181 high-cost credit review  155–6 Ginsburg, D  11–12 GLOs see group litigation orders Gómez, F  201, 204–5 good faith  47, 48, 49, 188–9, 190, 191, 192, 198–9 group litigation orders (GLOs) enforcement of consumer law  54–5 HFEA  174 honest market practices  195, 196, 197, 198 Howells, G  8, 21 Human Fertilisation and Embryology Authority (HFEA)  174 Hviid, M  141 information as a transparency approach overuse of  18–24 King, S  14 Kokott, Advocate General  57, 199 Kroes, N  61 Law Commission  43, 44 Leggatt, J  190, 191–2

Index  223 lemon  111, 117–18, 123 adverse selection  119–20 risk of drift towards scam and subsidy  120–22 self-regulation and its opportunistic exploitation  122 Lewicki, R  95 limitations of competition law  56–9, 77 ex post enforcement  59 abuse of dominant position  59–67 anticompetitive agreements and concerted practices  67–8 market investigations  69–70, 71–2, 73, 74, 75 market studies  72, 73, 74 private enforcement  75–7 limitations of consumer law  1, 16–17 definition of the ‘average consumer’ used as a reference point for protection  24–5, 36–7 free movement of goods doctrine  25–9 trademark laws  35, 36 unfair commercial practices legislation  29–34, 36 disengaged consumers  40–42 overuse of information as a transparency approach  18–24 unfair contract terms legislation  42–9 good faith  47, 48, 49 significant imbalance  47, 48 transparency and prominence  44, 45, 46, 48, 49 vulnerable consumers  37–40 Littlechild, S  140 Macneil, I  184 market investigations  69–70, 71–2, 73, 74, 75 retail banking  154–5 see also retail energy, CMA market investigation into market studies  72, 73, 74 material distortion of the economic behaviour of the consumer  199–202 McKendrick, E  190 Mensch, B  180 Micklitz, H  13, 193 Monti, M  3 Mulheron, R  55 naïve consumers  109 National Institute for Health and Care Excellence  173

Office of Fair Trading (OFT)  140, 151, 152, 171, 187 Ofgem  137, 138, 139, 140 ordoliberalism  5 Oxford University  173 Panorama  173 paternalism  100–101, 180–81 positive duty to trade fairly  187–8, 209 cost-effectiveness of the duty  208 flexibility  206 future-proof duty  207–8 general unfairness clauses in UCPD and CPRs  193–4 failures to disclose a price (dis-) advantage  202–5 good faith  198–9 honest market practices  195, 196, 197, 198 material distortion of the economic behaviour of the consumer  199–202 professional diligence  193, 194–5, 196, 197, 198, 199, 200, 201 good faith  188–9, 190, 191, 192 implied terms to trade fairly  189–92 Powell, R  206 prescriptive standard of conduct for consumer protection paternalism, and  180–81 relational contract theory, and  184–6 substantive fairness  181, 182, 183, 184 products attributes  85, 86 credence attributes  86 experience attributes  85–6 search attributes  85 professional diligence  193, 194–5, 196, 197, 198, 199, 200, 201 psychological detriment  106, 113 Ramsay, I  7–8, 183, 192 relational contract theory  184–6 representative actions enforcement of consumer law  55 retail energy, CMA market investigation into background  137–41 ‘confusopoly’  140, 141, 142–5, 148, 149 distributive effects and mapping against the CToHs  145–8 routes for enforcement  148–50

224  Index Riefa, C  52–3 Ryanair  161, 162 Saintier, S  190 scam  111, 112–13, 116–17 absence of entry and exit barriers  114–15 blind trust  113–14 maximum financial detriment  115 unfair firms active  114–15 shock  111, 124–5, 128–30 risk of drift towards the lemon and the scam  125–6 types of consumer detriment  126–8 significant imbalance  47, 48 Simon, H  13–14 smart contracts  207–8 Smith, R  14 sophisticated consumers  109–10 Steyn, Lord  48, 191 subsidy  111, 130–32, 133–5 cross-subsidisation of sophisticated consumers  133 types of consumer detriment  132–3 substantive fairness  104–5, 181, 182, 183, 184 ‘super consumers’  110 theories of harm origins of  2–3 competition law  3, 4, 5

transparency and prominence  44, 45, 46, 48, 49 Trstenjak, Advocate General  32 trust in markets, fallacy of  92–6 Twigg-Flesner, C  188, 200, 203 unfair contract terms legislation  42–9 good faith  47, 48, 49 significant imbalance  47, 48 transparency and prominence  44, 45, 46, 48, 49 ‘unravelling principle’  102–4 Vestager, Commissioner  62 vulnerable consumers  37–40, 106–7 Waddams Price, C  141 Wahl, Advocate General  61, 62 Whish, R  63 Wightman, J  184, 185 Wilhelmsson, T  203 Willett, C  17, 30–31, 36, 200–201, 204 Woodroffe, G  43 Wright, J  11–12 Zucker, L  93