Customer Service Toolkit - 2004
2 Consumer Protection & Business
2.1
Why do Consumers Need Protecting?
A hundred years ago, one simple rule tended to govern transactions between customers and
businesses. That was “caveat emptor” – or “buyer beware”. Things have changed.
These days, government and the law provide a range of protections to consumers who fear
they might be take advantage of by businesses. This limits what business can and can’t do.
It adds to business costs. Businesses may need to produce more carefully to avoid making
dangerous products, they will need to spend time and money understanding all the rules and
regulations, and they may end up in court with expensive lawyers and facing huge fines.
What has caused this big change over the last 100 years or so?
•
Increasing Complexity. Products today are simply much more complex than they used
to be, and it is unreasonable to expect consumers to really understand everything they
buy. This is not just the case for tangible products such as consumer items. Think of the
wide range of complex financial products that are now offered which even experienced
financial advisors struggle to understand and explain!
•
Increased Competition. There are so many different sellers it is unreasonable to expect
consumers to know enough about them all to judge if it safe to buy from them; it is not as
though we do all our shopping at the village shop anymore.
•
Higher Incomes. Consumers simply buy so much more stuff than they used to.
•
Science & Technology. This means all sorts of new materials are available which may
not be entirely understood, and may have, for example, unforeseen effects on customers’
health.
•
Changing Social Attitudes. As a society, we are less tolerant of individual misfortune
which is someone else’s fault. There is an issue of attitude to risk involved here.
Increasingly, people are unwilling to accept the risks involved in their own actions. A
mistake is seen as someone else’s fault. Consumers are increasingly willing to take
businesses to court for damages which can be quite large (although nothing like as big as
in the US). Businesses now have to be very careful indeed, and take out insurance
(some of which they have to by law) against this danger. The price of this insurance is
rising sharply, which all adds to business costs. There is also the issue of consumerprotection media stories (e.g. ‘Watchdog’ on BBC) and even if a business has done
nothing wrong (at least legally) they can be badly damaged by adverse publicity and lost
sales. Our society is becoming increasingly “litigious”. Businesses make attractive
targets since they are perceived by customers to have “deep pockets”.
2.2
Main Pieces of Consumer Protection Legislation
There are several laws relating to how businesses must behave in order to protect
consumers. The European Union (“EU”) is active in this area, as well as the UK government.
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•
Weights & Measures Act1 1951. This says sellers must measure/weigh goods correctly
or face fines from the local Trading Standards Officer. More recent changes have made
it compulsory to use metric measures. Sellers now also have to give per unit (per kg or
per litre) prices so sellers can’t confuse buyers with odd-shaped packaging.
•
Trades Descriptions Act 1968. This is about how goods are described. If it says
‘washes white than white’ then it must, in fact, wash whiter than white or the business can
be prosecuted.
•
Unsolicited Goods Act 1971. This stops you having to pay for goods that are sent to
you even though you didn’t ask for them.
•
Consumer Credit Act 1974. Selling goods on credit (HP, loans, deferred payment) can
be complicated, and this law makes sellers tell buyers clearly what is involved, especially
the true cost of repayment (APR) which it is easy to disguise with clever calculations.
•
Consumer Safety Act 1978. Businesses can’t sell goods which might harm consumers
e.g. soft toys with staples sticking out.
•
Sale of Goods Act 1979. A very important act. Goods for sale must meet three
conditions:
¾ They must be of ‘merchantable quality’ i.e. without obvious flaws or problems.
¾ They must be fit for the purpose they are sold for.
¾ The goods must be as described.
•
Supply of Goods & Services Act 1982. This widens previous laws to include services
as well as goods.
•
Consumer Protection Act 1987. This brought UK law into line with EU law. This whole
area of consumer protection is increasingly run by the EU, rather than by the UK. The
reason for this is so all EU businesses meet the same standards, and goods produced in
any one country can be sold freely in any other EU country. This is an example of the
Single Market.
•
Food Safety Act 1990. Forces food businesses to make sure food is safe to eat.
•
Sale & Supply of Goods Act 1994. This brings the Sales of Goods Act (goods) and the
Sale of Goods and Services Act (services) together into one law. It also adds the right of
rejection and refund to the buyer if products are not satisfactory.
•
Food Safety (General Food Hygiene) Regulations 1995. Further and more detailed
regulations adding to the 1990 Act.
•
Food Labelling Regulations 1996. Businesses must tell consumers exactly what is in
food.
1
An Act is what a law is called when it has been passed by parliament.
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2.3
European Union Involvement in Consumer Protection
In addition to the above, two pieces of EU legislation that contribute to consumer protection
are:
1. EU Directive Unfair Terms in Consumer Contacts 1993 (Unfair Terms in
Consumer Contracts Regulations 1994 in UK). Allows consumers to cancel any
contract deemed unfair.
2. EU Directives 88/314 & 88/315 (Price marketing Order 1991 in UK). Businesses
must put all selling prices in writing
2.4
Implications of Consumer Protection Legislation for Business
Basically, the existence of consumer protection legislation and regulations add to business
costs. These costs include the costs of:
•
Reading, understanding and complying with the laws (time and money).
•
Employing specialists to deal with the laws and their consequences.
•
Changing business practices e.g. re-training sales staff or re-designing labelling and
packaging.
•
Dealing with complaints, especially if they end up in the courts.
•
Fines and penalties
•
Damaged reputation and image with customers.
These costs are especially difficult for small businesses that lack the time, money and
expertise to deal with it all. Why might this be a problem? New small businesses sometimes
become the big businesses of the future; growth and employment depend on new business
start-ups. If entrepreneurs are discouraged by too many regulations and don’t start new
businesses, then future growth and employment may suffer.
It could be argued that at least all UK businesses face the same costs, even if they are high.
But many UK businesses are in competition with foreign businesses, either in the UK market
for imports or in the world market for exports. So higher costs can damage UK
competitiveness, and this can damage growth and employment. This is one reason why the
EU sets common standards for all EU businesses, so competition is fair and equal. But this
doesn’t cover other countries such as the US and Japan. So the government has to strike a
very careful balance between protecting consumers and not burdening business with too
many costs. At present the Confederation of British Industry (CBI, which acts on behalf of all
UK business) is complaining vigorously that the Labour government has added a huge
number of new regulations (not just to do with consumer protection) and this is damaging UK
business; they want the government to cut down on this.
2.5
Monopolies and Anti-Competitive Practices
A monopoly is defined in the UK as any business with a market share of 25%+. These
businesses have a lot of market power that is sometimes abused. One form of abuse not
discussed so far is ‘anti-competitive’ practices where a large business tries to make life
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difficult for smaller businesses (potentially putting them out of business) and this gives
consumers less choice, higher prices and worse service.
The main anti-competitive practices are as follows:
•
Cartels/Collusion. These are illegal agreements between businesses in the same
market to ‘gang up’ on consumers, suppliers or competitors e.g. by putting prices up to
harm consumers, or down to harm competitors.
•
Keeping Competitors Out. This can be done by erecting artificial barriers to entry.
Another trick is to use ‘destroyer pricing’ and cut the price to make entering the market
unattractive, or too costly for a new entrant, and raising the price again when they have
‘won’. The existing firm needs to have lower costs (e.g. through economies of scale)
and/or larger financial reserves to keep this up.
•
Restrictive Practices. For example, pressuring suppliers not to supply to competitors.
Another one is to pressure retailers not to stock the products of competitors, or to stock
them disadvantageously. For example, the eye-level shelves in a supermarket generate
the best sales, so putting the brands of a competitor on the bottom shelves (also
associated with discount brands) damages the sales of the competitor.
2.6
Competition Legislation in the UK
The main anti-competitive legislation in the UK is as follows:
•
Monopolies & Restrictive Practices (inquiry & Control) Act 1948 & Monopolies &
Mergers Act 1965. These Acts set up the Competition Commission (as it is now called)
with the power to block business deals e.g. mergers that are ‘against the public interest’.
One issue is what this actually means, and long and expensive arguments are usually
involved with each side arguing that a proposed deal is or isn’t ‘against the public
interest’.
•
Restrictive Trade Practices Act 1956 (goods) & Restrictive Practices Act 1976
(services). A ‘court’ was set up to decide which restrictive practices were acceptable and
which not. Businesses were expected to go voluntarily to this ‘court’ for a decision.
•
Fair Trading Act 1973. This Act defined a monopoly at 25% of market share, and set up
various official bodies to oversee the arrangements for controlling this.
•
Competition Act 1980. This Act allowed the Minister in charge to instigate an
investigation into monopoly practices if he thought it necessary.
•
Telecommunications Act 1984. This Act made the Competition Commission
independent of the government. It also privatised BT and forced BT to accept
competition into the market (BT was a nationalised monopoly before).
•
Competition Act 1998. This Act was designed to match EU law, and to control anticompetitive practices.
2.7
Role of the Competition Commission
The job of the Competition Commission (formerly the Monopolies’ and Mergers’
Commission) is to examine alleged cases of anti-competitive practices, or abuse of
monopoly power, and report to the Minister as to whether further action (such as forbidding a
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merger) is ‘in the public interest’. It has been very active over the years, although it is
frequently accused of favouring business at the expense of consumers.
2.8
European Union and Competition Regulation
The EU was founded on the principles of free trade, competition, efficiency and economic
growth, made clear by Articles 85 and 86 of its founding treaty, the Treaty of Rome. Article
85 forbids agreements between member states that work to protect business from
competition. Article 86 forbids abuse of monopoly power. The regulation of competition is
gradually passing from member states to the EU, especially for larger businesses with
interests in more than one EU country.
2.9
Reasons Why Businesses Are Regulated
There are quite a few businesses that used to be nationalised. For one reason or another,
usually because of ‘natural monopoly’, these businesses have remained in a very dominant
position. To limit their ability to act against consumers, they are all subject to a controlling
body of independent supervisors.
The UK now has a series of “industry regulators”; for example:
•
OFCOM - the regulator for the UK communications industries, with responsibilities across
television, radio, telecommunications and wireless communications services.
•
OFGEM – regulator of the electricity and gas industry.
•
OFWAT - regulator for the water and sewerage industry
The main objectives of these bodies are to:
•
To agree a limit to price increases. This is usually tied to promises about increased
efficiency. For example, an agreement set at RPI – 1% means prices can only rise at 1%
less than inflation, so to make any profit at all the business has to generate efficiencies
(cost savings) of more than 1%.
•
To agree methods of allowing more competition into the market. For example, BT
controls most of the final link between the telephone network and the consumer’s house.
This limits the ability of competitors to offer telephone and internet services. BT has been
forced to open up access to its own network (at reasonable, not extortionate, prices) to
allow more competition into the market.
There are many other arrangements by which different kinds of business, and different
markets, are regulated. For example, the Financial Services Authority (FSA) oversees all
financial businesses, especially those dealing with consumers.
2.10 Ombudsman
What happens when a customer receives poor service from public or former privatised
organisations? An important service provided to protect customer rights is the Ombudsman
service.
Ombudsmen are independent, impartial and provide a free service for consumers. They
investigate complaints that haven't been solved by the organisation complained against.
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Ombudsmen investigate complaints when something has been handled badly or unfairly,
making a customer suffer as a result. This is sometimes called maladministration.
Examples might include:
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Unreasonable delay
•
Rudeness
•
Failure to follow proper procedures
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Bias
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Knowingly giving advice which is misleading or inadequate
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Refusing to answer reasonable questions
When an ombudsman investigates a complaint he or she can either uphold (find it in the
favour of the person who has complained) or not uphold it (find that the organisation
complained about has not behaved wrongly). The ombudsman can usually recommend
redress: a sort of compensation for what has gone wrong.
By the way – “Ombudsman” is a Swedish word and means representative or agent of the
people. It is used for both men and women. Sweden had the first ombudsman in 1809 and
other countries used the word when they appointed ombudsmen of their own.
2.11 Other Relevant Legislation
2.11.1 Data Protection Act
The Data Protection Act (1998) is concerned with regulating the process of obtaining,
storing, using and disclosing of data relating to individuals, including facts such as
addresses, telephone numbers and dates of birth and opinions. The 1998 updates the Data
Protection Act of 1984 and now applies to all personal data held in any format, either
computerised or on paper.
The Data Protection Act established eight enforceable principles of good practice. The Act
should be of interest, therefore, to any business holding personal customer service data.
The Act states that data must be:
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Obtained and processed in a fair and lawful manner
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Processed for limited purposes
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Adequate, relevant and not excessive
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Accurate
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Not kept for longer than necessary
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Processed in accordance with the rights of the person concerned
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Kept secure
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Not transferred to countries that do not have adequate data protection
The Act gives the individual concerned certain rights, including the right to be informed where
the data is being processed, what data is being held and the reasons for holding it, and to
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whom the data may be disclosed. If any aspect of the Act is breached, then the organisation
will be liable for prosecution.
2.11.2 Disability Discrimination Act
The Disability Discrimination Act 1995 is concerned with ending discrimination against
people with disabilities by setting out their rights in respect of employment, obtaining goods
and services and buying land and property. The Act makes it unlawful to refuse to offer a
service that would otherwise be available to people with disabilities, or to offer disabled
people a lower standard of service than that available to others. It also obliges service
providers to make ‘reasonable adjustments’ so that disabled people can access the service
on offer.
In addition to the legislation outlined above, organisations must also take into account laws
concerning health and safety (such as the Health at Safety at Work Act 1974) and
discrimination (such as the Sex Discrimination Act 1975/1980, the Race Relations Act
1976/1994 and the Human Rights Act 1998) when dealing with internal as well as external
customers.
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