Reform the regulators to ensure markets work in the consumer’s interest
WHEN should governments intervene in markets? George Osborne recently described the Help to Buy scheme as a “necessary intervention” to fix a specific market failure – the shortage of high loan-to-value mortgages.
Aside from concerns that this may pump up a housing bubble, Osborne’s comments – and Ed Miliband’s earlier proposal to inject more competition into the energy market (obscured by the row over a 20 month freeze in retail energy prices) – are the latest manifestation of a belief that there is a role for the state when markets fail.
But consistency and clarity about when – and how – regulation is prescribed should form the backdrop to such eye-catching political promises. Ultimately, consumers drive markets. If governments intervene, it should be to set a framework for well-functioning markets in which good businesses can thrive, bad businesses are driven out, and consumer needs are met.
In many circumstances, self-regulation is sufficient. But in other markets, more intrusive regimes are needed, with the caveat that regulations should be removed when the market begins to perform competitively.
One problem we have is the complex patchwork of institutions responsible for getting this right. When the new Competition and Markets Authority is formed next spring from the merger of the Office of Fair Trading and the Competition Commission, it will have primary responsibility for overseeing competition law. Alongside this sit sector regulators – Ofcom, Ofgem, Ofwat, CAA, the ORR and the Financial Conduct Authority. All of these organisations have a degree of responsibility for competition in their sectors.
Some defend this as enabling regulators to get close to those they regulate, and to understand the way they work. But regulators can get too close, leading to a failure to see when things go wrong or to stand up to vested interests. The failure of the Financial Services Authority to spot systemic problems in finance, or even to respond to very specific warnings from Which? about Payment Protection Insurance (PPI), is an obvious example.
We want regulators with sufficient clout to stand up to vested interests. Politicians should look at the potential benefits of combining more efficiently the expertise of institutions – particularly those that are looking separately at bringing about huge investments in network infrastructure, at a cost to consumers and businesses of billions.
The government must also require regulators to improve their governance and culture, making them accountable for a clear set of consumer-focused outcomes from their market interventions.
The basics that consumers need from essential markets include straightforward pricing, useable information, easy and quick switching, and effective complaints handling that’s used to drive improvements. Against those criteria, it’s justifiable to intervene in financial services, energy, telecoms, transport and water. But we need institutions and politicians that are clear about how far they should go in making markets work effectively. It doesn’t fit easily into an election pledge card; but getting this wrong costs us all – and the economy – dearly.
Richard Lloyd is executive director of Which?