John wrote this article for The Times newspaper.
Adam Smith never bought car insurance. Or used an internet search engine. Or took out a triple-play broadband-TV-phone contract. If he had, the father of modern economics might have been less confident that free competition between suppliers ensures all customers get a good deal. In some markets these days it doesn’t.
In car insurance, for example, there is fierce competition for new customers between scores of suppliers, forcing premiums down to scarcely profitable levels. Yet many existing customers are charged much more.
Last month, the financial regulator announced plans to outlaw this “loyalty penalty” by banning car and household insurers from charging existing customers more than new ones. The move by the Financial Conduct Authority was a victory for the campaign to stamp out the loyalty penalty led by Citizens Advice, the consumer rights body. Yet the FCA clampdown was a reminder of how long it has taken to tackle this abuse and how much more remains to be done. It also highlighted the broader need to retool Britain’s system of competition and consumer protection for a digital world.
It is two years since Citizens Advice issued a “super-complaint” requiring the Competition and Markets Authority to investigate the loyalty penalty. In five markets the CMA found that existing customers were being “ripped off” to the tune of £4 billion a year.
Welcoming the FCA’s “bold” move, Dame Gillian Guy, chief executive of Citizens Advice, said there was much still to do, “given that most of those who were paying the loyalty penalty back then are still paying it now”.
Some regulatory insiders say that part of the problem has been reluctance among regulators to take actions that limit price competition. Historically, they have been focused on fostering competition, which in theory should benefit all consumers, and some officials have been wary of steps that favour passive consumers at the expense of switchers, with little or no overall gain.
Regulators may also have been deterred by the criticism that greeted the most dramatic intervention in this area — the cap on default energy tariffs announced by Theresa May in 2017. All such curbs harm consumers in the end by distorting competition and stifling innovation, critics warned.
Nearly two years after the temporary cap was introduced, there is little sign of that. Consumers have enjoyed modest savings and the number shopping around for better deals has risen, partly because the loyalty penalty has fallen less than expected. “The price cap was a bodge. It shouldn’t have worked, but it looks like it might,” said Giles Wilkes, a price-control sceptic who inherited the plan when he was hired by Mrs May to oversee energy policy in Downing Street.
One Tory MP who campaigned on this issue was John Penrose. Rather than capping the default energy tariffs, the former Cabinet Office minister argued that regulators should cap the mark-up that suppliers can charge existing customers (as the FCA is now proposing with insurance). I mention this because Mr Penrose’s views carry rather more weight than the average backbencher. Last month, he was commissioned by Rishi Sunak, the chancellor, and Alok Sharma, the business secretary, to carry out a review of the broad sweep of British competition policy. His brief includes the need to bolster consumer trust by tackling “rip-offs” and ensuring a strong and swift response to problems by the competition regime.
This is right up his street. In a paper two years ago, Mr Penrose wrote that the UK’s rules to prevent customers from being ripped off were “too old-fashioned to cope with these and other new-economy challenges”. The pre-digital rules were designed to prevent monopolies gouging customers with high prices, whereas in many digital markets “products are given away free”.
The regulation of digital economy giants, such as Google and Facebook, is a hot issue for many governments. Last week, a key US congressional committee (or at least its Democratic members) issued a hard-hitting report accusing the technology titans of abusing their market power and calling for them to be broken up.
In a report for the UK Treasury last year, Jason Furman, a former chief economic adviser to President Obama, stopped short of urging their break-up, but called for radical reforms to the way in which technology companies and mergers are regulated in Britain. In his review, Mr Penrose has been asked to build on the Furman report and on a set of proposals two years ago from Lord Tyrie, then chairman of the CMA. Lord Tyrie concluded that the competition authority should be given the overriding duty to “protect consumers”, rather than its present duty to “promote competition . . . for the benefit of consumers”, because competition-based interventions were not always enough. “This was already the case prior to digitalisation. It is more so now,” he wrote.
These calls for reform come amid mounting evidence that the growing market power of big companies, not only in technology, is leading to many of the ills that developed economies are suffering: higher mark-ups, lower wages, reduced investment and stagnant productivity.
Even if these claims are overstated, there is clearly a need to update the UK’s competition regime. Politically, the government sees it as a key part of the “levelling up” strategy, as the disadvantaged are often the biggest losers. Originally asked to deliver his review in time for the autumn budget that never was, Mr Penrose now has a deadline of the end of the year, which suggests a welcome sense of urgency. Yet if the government wants to reboot the economy after Covid-19 and Brexit, it will take more than reports. As Adam Smith warned: “Man was made for action . . . He must not be satisfied with indolent benevolence.”
David Wighton, a former business editor of The Times, is a columnist for Financial News