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The Penrose Report: Power to the People

Posted on 11 March 2021

In September 2020, John Penrose MP, was tasked by the UK Government to look at the UK’s competition regime. Specifically, he was asked to consider:

"how the competition regime could evolve to meet the government’s policy aims of promoting a dynamic, innovation-driven economy which delivers for consumers and businesses across all regions and nations of the UK, within the context of recovery from COVID-19 and the end of the transition period."

He published his report on 16 February 2020 (the "Penrose Report"). 

The Scope of the Report

The Penrose Report seeks to answer the following key questions:

"Building on the government’s existing competition policy direction, as the UK looks to forge new relationships with the EU and other international partners, how can the UK’s competition regime best:

  1. Play a central role in meeting the challenges of the post COVID-19 economy and in driving the recovery?
  2. Contribute to the government’s aim of levelling up across all nations and regions of the UK?
  3. Increase consumer trust, including by meeting the 2019 Manifesto commitment to tackle consumer rip offs and bad business practices, and by ensuring the competition regime operates in a way which is strong, swift, flexible and proportionate?
  4. Support UK disruptors taking risks on new ideas and challenging incumbents?
  5. Make best use of data, technology and digital skills which are vital to the modern economy?"

Assessment of the current regime

The CMA is identified in the report as having a good but not great reputation when compared to other competition authorities across the globe:

"The UK’s competition and consumer regulators have always been pretty good, but currently they’re lagging behind their equivalents in other countries. For example the Competition and Markets Authority (CMA) opens fewer enforcement cases than its opposite numbers in France and Germany, issues lower aggregate fines for breaches of competition laws, and ranks below them, the European Commission, Australia and the US Federal Trade Commission in international league tables too".

However, the report does also acknowledge that the CMA and sectoral regulators have been making steps to address issues.

The report highlights that, in order for the UK to have a world leading competition and consumer protection regime, the UK will need will need a new Competition Act to update and modernise our institutions for the new digital economy.

The report suggests that many of its proposals do not need legislation and can be done faster, by utilising: (i) the existing system of once-a-Parliament Government policy directions to CMA and some of the sector regulators; (ii) changes to those regulators’ internal processes and governance; and/or (iii) by altering the Memorandums Of Understanding between them.

A Consumer First Regime?

Perhaps the central theme of the report is how to give citizen-consumers more power and choice, so that firms have to work harder to attract and keep their business. In this regard, the emphasis of the Penrose Report differs from some previous critics of the present system.

The CMA has, for some time, been pushing for reform. However, this effort has tended to focus on gaps in enforcement arising from the growth of the digital economy. Shifting the debate to one of consumer empowerment, rather than consumer protection, is perhaps a better way to start to meet, head-on, the real issues that consumers face on a day-to-day basis, whether online or offline.

The report states that "trust and confidence oil the wheels of commerce", with far reaching societal and economic benefits. It goes on to identify three key factors which are required for such a system to work effectively:

  • First, customers need to have trust and confidence in the legal and complaints system, so they know it is on their side and things can be put right if there is a problem. Penrose states that this is "why contract and consumer laws have to work in favour of customers, so they can enforce their rights if it comes down to it, but also to make rip-offs rarer in the first place."
  • Next, customers need enough honest and reliable information to make informed choices about what they are getting for their money.
  • Finally, customers need to be able to switch easily and freely from one product to another. Penrose recognises that "this isn’t as simple as it sounds because lots of us are creatures of habit, or short of time, so we often stick to the same brands of coffee or shop in the same shops unless something jolts us out of it".
Trust in legal and complaints systems

The first factor is expanded on in Chapter 7: "Sticking up for Consumers".

The Report concludes that most of the existing consumer protection rules already work well enough, and do not need to be changed. However, it identifies three important gaps in the legal framework which need to be plugged in order to prevent consumers from being ripped off:

Loyalty penalties and price discrimination (where people are charged different prices for the same things)

Rip-offs hidden in the small print of long and complicated contracts that no-one has time to read

Using the concepts of "nudge theory" to "nudge" people the wrong way (called "sludge")

On loyalty penalties, Penrose suggests the introduction of "coat-tail" protections more broadly. Essentially these allow customers who do not switch to benefit from the prices offered to customers who do regularly switch. In theory, this means that loyal customers will not miss out on the lower (more competitive) prices and therefore be penalised for loyalty.

This fits with the work of other organisations in this area. Citizens Advice identified that loyalty penalties tend to affect vulnerable consumer groups more than others. There is also little recourse for consumers under the current competition and consumer protection regime for these types of issues. Citizens Advice estimated that loyalty penalties costs consumers £3.4 billion a year. Whilst some sectors are looking to introduce "coat-tail" measures already, a wide-reaching general prohibition on loyalty penalties would require new law, and would no doubt attract a high degree of pushback. However, on the face of it, this looks like a simple solution to a significant economic issue faced by consumers.  It will therefore be interesting to see just how much traction it gets.

When considering "rip-offs of hidden in the small print" and "sludge", trust (in the system or in business) alone is unlikely to engender the consumer empowerment that the Penrose Report calls for. In reality, (particularly a digital reality), even if consumers are provided with greater transparency they may still have very limited freedom of choice or autonomy of decision-making.

It is interesting therefore, that one of the key battlegrounds for consumers (albeit in the data protection space), cookie consent notices, are heralded by Penrose as "a small but welcome step in the right direction…most websites now offer choices of whether to accept cookies or not". Critiques of the current system would say that genuine choice is in fact rarely on offer. Cookie notices could also be seen to make frequent use of "sludge" and "rip off" terms; potentially unknowingly nudging and manipulating users to consent to terms less favourable to their privacy and generally leading to a significant lack of trust in the system. How Penrose and the CMA will tackle other forms of sludge and rip offs will require careful consideration.

The report recommends that the CMA undertake a market investigation to assess how we should recognise and measure sludge and what consumer protection rules might be required.

Honest and Reliable Information & Ease of Switching

The report recommends that, in the context of Competition in Digital Industries, the CMA should consider how to improve transparency of the price consumers are paying through their digital goods and services. This will enable consumers to make informed choices about whether each one represents good value or not, and whether they wish to switch to others that might be better. Again, a market investigation is recommended to look into this issue.

The Penrose Report also recommends that the CMA update its guidelines on what "treating customers fairly" means in practice, including ‘transactional fairness’ in its work. This is in order to make it as easy as possible for businesses, charities and public bodies to identify and avoid problems in advance, and so that the guidelines keep up with changing attitudes of what society views as ‘fair’. However, CMA guidelines are just that, guidelines. They are not legally binding, and therefore it is questionable whether a change of this nature would result in direct and clear benefits for consumers.

Conclusion

The initial perspective of the report – consumer empowerment – is an interesting one.

However, it's debatable whether the solutions suggested will be capable of addressing what are complex issues that surround consumer choice and switching. 

Taking into account that consumer protection reforms were requested in the Tyrie reforms in February 2019 and no movement has yet been made, the road to reform of consumer protection and consumer empowerment may still be some way off.

It will be interesting to see in due course the official Government and CMA response to the Report.  Will Mr Penrose's ideas be taken forward or will they be shelved – only time will tell.

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