UK economists are calling on regulators to take decisive action against rising consumer bills, which they argue are detrimental to both households and the broader economy. In a recent paper titled “Getting Britain Out of the Hole,” economists Andrew Sissons and John Springford highlight the urgent need for reform in the markets for essential services, including energy, telecommunications, and insurance.
The paper indicates that a lack of effective competition in these sectors contributes significantly to the UK’s persistent inflation rates. While goods prices, especially energy, surged following the COVID-19 pandemic, it is the inflation in services that has remained stubbornly high. This inflation is partly driven by rising wages, particularly in lower-income brackets, and an increase in employer national insurance contributions amounting to £25 billion, costs that businesses often pass on to consumers.
The authors argue that inadequate regulation has allowed many markets to operate in ways that are not beneficial for consumers. “Too many markets for services are beset by problems with limited competition, ineffective regulation, or problematic market structures that hurt consumers,” they state. This situation leads to customers facing challenges such as complex tariffs, automatic price increases, and difficulties in cancelling subscriptions.
The paper identifies specific issues in the energy and transport sectors, noting the need for substantial investment to transition to net-zero emissions and to upgrade aging infrastructures. Furthermore, the authors point out that the current competition regime fails to keep bills under control, allowing companies to benefit at the expense of consumers.
Proposed Changes to Consumer Protection
One of the significant concerns highlighted is the practice of automatic price increases in contracts for services like mobile phones and broadband. Since April 2022, many customers have experienced unwelcome hikes in their bills, often linked to the retail prices index (RPI), an outdated measure that tends to be higher than the consumer prices index. Sissons and Springford advocate for stricter limits on the use of “RPI-plus” contracts by regulators.
The complexity of products offered in the market poses another challenge. Consumers often struggle to discern the best value among numerous options, leading to potential exploitation by companies that have access to extensive consumer data. The authors emphasize the issue of “information asymmetry,” where businesses possess significantly more information than their customers, hindering informed decision-making.
The need for regulators to enhance their resources and adopt more interventionist stances has been a recurring theme in discussions about market reform. Sissons and Springford propose several radical changes aimed at improving market dynamics. Among these is a suggestion that all online subscription services should allow customers to cancel their subscriptions online. They argue that auto-renewing contracts should only be standard in essential services, such as car insurance.
The authors also recommend that regulators define standard products, such as simplified insurance contracts with clear terms and minimal exclusions. This approach would encourage competition based on price and service rather than relying on complex terms that confuse consumers.
The Regulatory Landscape
Since the Labour Party assumed power, Rachel Reeves, the Shadow Chancellor, has consistently urged regulatory bodies to consider economic growth in their decision-making. She has suggested that reducing regulatory barriers could stimulate business activity. However, Sissons and Springford contend that effective regulation is crucial for fostering competitive markets that benefit consumers.
Reeves’s upcoming budget on November 26, 2023, is expected to address the rising cost of living, including discussions around potential tax increases and measures to alleviate consumer burdens. The focus on removing VAT from energy bills has been highlighted as one of the strategies.
As the debate on consumer protection continues, the call for enhanced regulatory measures underscores the pressing need for a market environment that supports both consumers and the economy. With inflation rates remaining a significant concern, the implications of these proposed changes could reverberate throughout the UK economy, impacting millions of households.
