Essential Services, Essential Oversight: Putting consumers at the heart of markets

At Citizens Advice we like seeing problems solved. Our advisers help thousands of people each day to understand their rights and navigate difficult problems. What we like most is fixing problems so that people never need our help in the first place.

In many cases the problems we see are linked to the way that businesses, especially those operating in essential markets like energy or financial services, treat their customers. These usually boil down to 2 facts:

1. It’s possible for businesses to profit from actions which lead to consumer harm
2. Some people, especially those in vulnerable circumstances, have different needs which can make them less profitable to serve

It’s easy to paint firms as villains and that these problems are malicious. In some cases that would be a fair allegation. But it’s better to look at the points above as facts which we need to recognise and address, along with an important conclusion: chasing profit alone doesn’t ensure that your customers have great outcomes.

That’s why, as my colleague Elizabeth Blakelock argued in the previous blog in this series, regulation has such an important role. It changes the incentives — the risks and the rewards on firms — to try and reduce harm.

What I want to focus on in this blog is how regulators have tended to do this though setting more and more rules, how this process is often slow, inefficient and wholly unsuited to markets with rapidly changing technology, and what a better approach, one focused on outcomes, could look like.

How the sausage gets made (too slowly)

Inside all regulators there’s a factory for making policy, rules and guidance, which consumer groups like us look to influence. It works a little like this:

1. Someone spots a problem. Maybe it’s a widely mis-sold product, an anti-competitive practice like the loyalty penalty or a failure of firms to not look at the specific needs that certain groups have. They spend time building an evidence base, then convincing regulators that they should be looking at this issue — which usually involves having first to build some media or parliamentary interest in the issue. This can take months or even years.
2. Once the regulator is convinced to take action, they often will need to look at drafting new rules or guidance to address the practice in question. This also requires collecting lots of evidence, working out a bunch of different approaches, stakeholder engagement to figure out what will work and the politics, and then consultation. That can easily take a year.
3. Then the new rules have to be implemented. Sometimes this happens quickly, but more often than not industry is given around a year to ready itself for the new rules.

There’s something inherently inefficient about this process.

First it’s reactive — often needing poor practices to have emerged to enough of a degree to justify both the regulatory resource to think about the problem and to have the evidence needed to pass regulators’ tests for proportionate intervention.

Second, it’s very resource intensive. It needs a range of researchers, economists and policy folk to collect and analyse data, explore options with lawyers, draft rules and consult. All of that means there is a constant and significant opportunity cost — the issue being prioritised means another issue is deprioritised.

And third, it takes a long time, to the point that by the time an issue has been dealt with, practices may have changed or, moreover, a bunch of other issues have been identified which means going through the process again and again. Rule books get bigger, compliance costs go up, consumers are protected from old harms but remain exposed to new ones.

All of these problems are made worse by the impact of technology on consumer markets. Products and practices are evolving at a rate where risks and harms are changing faster than the policy process sketched out above can ever keep up with. If we’re ever to have a regulatory regime which can keep up with technology like AI then we need to think about a different approach.

So what would be better?

The ideal answer is that regulators should be clear that firms shouldn’t do things which harm people in the first place. And, while we’re at it, businesses should also make sure that whatever it is that they’re doing, that this is in the best interest of their customers. They should understand who their products are targeted at, what the needs of those customers are and act in a way which means that those needs are met. Prices should represent fair value. Reasonable steps should be taken to avoid foreseeable harm. Firms should put the same level of resources into making sure that their products and services achieve what their customers expect as they do into getting customers to buy them in the first place.

Is this idealism? Well no. I’ve been a bit naughty since this is precisely the approach the Financial Conduct Authority (FCA) has taken in setting out their new Consumer Duty. Rather than continually grind through the policy cycle, addressing issues reactively and playing catch up with an evolving industry, the FCA has instead set out high level principles which are focused on firms taking reasonable steps to ensure that their customers achieve good outcomes.

This is a big shift. Rather than focusing regulation on specifying measures or steps which firms must undertake, instead the regulator is specifying what outcomes it expects the industry to achieve for its customers. This matches how consumers look at markets. They don’t care that an insurer has followed this step or that when they’re offered a price for their premiums, what they care about is whether they’re paying over the odds. If there are limitations on that insurance which means they may not be able to claim in certain circumstances, what matters is that they understand these before signing up — clearly and not just on a piece of paper full of small print. Understanding and fair value are outcomes. And outcomes are what count, not processes.

It’s time for all regulators to look the role that Consumer Duties can play

The FCA’s approach is one which all regulators should be considering. For regulators it’s a route to more efficient processes, reducing the need to go through lengthy policy processes to ensure consumer protection keeps up with changes in the market. Regulators instead can focus their attention on supervision and enforcement, holding firms under their watch to the highest standards and able to ask the clear but searching question of “how did you ensure that what you were doing would deliver good outcomes for your customers?”.

For firms, an outcomes based approach offers the chance for innovation and flexibility in regulation rather than tight, prescriptive rules which carry compliance costs each time they are updated. It recognises that individual businesses, rather than regulators, are best placed to know who their customers are and how to best serve them. But regulators need to be there to ensure that business acts responsibly and to not fall foul of the 2 facts we stated earlier.

And for consumers and their advocates like us, it means faster action when we see things go wrong. But more than that, and this is the holy grail, consumer duties should aim to drive a shift in culture in markets which places the customer and their outcomes on par with profits. Such a change would mean that many problems which consumers face are picked up and addressed by firms before they emerge.

It’s essential to recognise that this can only be achieved if there is a corresponding change in the culture of regulators themselves. When Parliament pushed the FCA to consult on implementing a consumer duty, it was — in my mind — pushing for a cultural change across both regulators and their firms. The initial signs suggest that the FCA has taken up this challenge, both internally and in how it sets expectations on firms. That change is sorely needed across other essential markets and their regulators. That’s why we’re calling on all regulators of essential services to consult on implementing a consumer duty.

If firms continually ask themselves “is what I’m doing actually helping my customers get what they need?” and act accordingly, and if regulators stand ready to challenge firms on their thinking, it would stop many problems before they start. And that’s something worth exploring.

This blog is part of a series by Citizens Advice, “Essential Services, Essential Oversight” looking at the role of regulators and exploring ideas which aim to put the consumer at the heart of markets.