TECHNIQUES OF REGULATION
READING
Ramsay chap 3* (there’s more here than you need and pp 119-128 are the most
relevant, but you might as well read it all).
Cartwright chap 2*
G Howells “The Potential and Limits of Consumer Empowerment by Information”
(2005) 32(3) Journal of Law and Society 349*
Howells and Weatherill pp 51-76.
Cranston chaps 8, 9 and 12.
FURTHER/ADVANCED READING
There is quite a lot of literature that you could peruse if you were so inclined.
See, for example:
Ogus Regulation chapters 7 (information regulation); 8 (standards) and 10 (prior
approval). (These are not focused on consumer law, but are very good
examinations of forms of regulation).
Hadfield, Howse and Trebilcock “Information Based Principles for Rethinking
Consumer Protection Policy” (1998) 21 JCP 131. (a very good article which might
have gone in the list above).
Whitford “Structuring consumer protection legislation to maximise effectiveness”
(1981) Wisconsin Law Review 1018-1043 (a bit dated and US focused, but
interesting).
Better Regulation Executive and National Consumer Council Warning: Too Much
Information Can Harm (Final Report, November 2007).
HM Government A Better Deal for Consumers: Delivering Real Help Now and
Change for the Future (Cm 7669) July 2009.
INTRODUCTION
If we are thinking about how we should deal with a consumer problem, we need
to consider what the tools, or techniques, of regulation are. Law-makers will
generally have a choice of techniques, though remember that a lot of the UK’s
consumer law now comes from Brussels, and the UK authorities may be limited in
what they can do. Regulators, such as enforcement authorities, will generally
19
have their powers set out by Legislation, but they will have a choice of regulatory
approaches
(when
to
warn,
when
to
prosecute
etc).
Furthermore,
the
Government appears minded to broaden the powers regulators have, particularly
when it comes to what we might describe as sanctioning. The Government has
done this for some areas (by passing the Regulatory Enforcement and Sanctions
Act 2008, although this does not cover consumer law) and has set out some of its
ideas for consumer law enforcement in its White Paper HM Government A Better
Deal for Consumers: Delivering Real Help Now and Change for the Future (Cm
7669) July 2009.
Any attempt to divide up the techniques of regulation is likely to be imperfect.
The approach I have taken gives you, I hope, a flavour of some of the main
choices available.
PRIOR APPROVAL
The essence of prior approval is that a regulatory agency or similar body is given
the power to screen out and exclude suppliers who fail to meet minimum
standards. Ogus notes the following characteristics of prior approval by licensing:

Licences are issued before the regulated activity takes place

The quality of all those engaged in the activity has to be assessed to see if
they meet minimum standards

The conditions of the licence typically involve minimum and uniform standards

The ultimate sanction of prohibiting the occupation or activity is particularly
severe

The administrative costs are high

Significant welfare losses arise if the system is used for the anti-competitive
purpose of creating barriers to entry.
Licensing is the most interventionist form of regulation, and it is generally
assumed that prior approval should be used only in limited circumstances
because of the risks involved with its use. Here are some strengths and
weaknesses that you might like to consider:
STRENGTHS OF PRIOR APPROVAL
20

It gives considerable power to the regulator

It allows potential harm to be tackled at an early stage

It gives consumers confidence

It may be effective as part of an enforcement strategy
RISKS OF PRIOR APPROVAL

It can be used for protectionism

It can increase costs for traders which is passed on to consumers

It can reduce innovation

It can lead to inappropriate decisions by regulators

It can be expensive to run with the cost being paid by the taxpayer

It can lead to moral hazard
Chapter 12 of Cranston is helpful in giving a picture of some of the areas where
prior approval is used, and chapter 10 of Ogus contains some excellent
discussion. In what types of situation do you think prior approval might be an
appropriate regulatory technique?
Think about the strengths and weaknesses of prior approval as a
way of protecting consumers. In what situations, if any, do you
think it offers the best form of regulation?
STANDARDS
Standards are minimum duties imposed upon traders, either by the criminal or
the civil law. The term is often used to refer to minimum quality for products
agreed by standardisation bodies. The main types of standards are specification
standards and performance standards, although Ogus argues that there is also
a separate category known as target standards. He defines them as follows:
“A specification (or input) standard…compels the supplier to employ
certain production methods or materials, or prohibits the use of certain
production methods or materials.”
21
A performance (or output) standard requires certain conditions of quality
to be met at the point of supply, but leaves the supplier free to choose
how to meet these conditions”.
A target standard prescribes no specific standard for the supplier’s
processes or output, but imposes criminal liability for certain harmful
consequences arising from the output”.
(Ogus Regulation p 151).
Think about the advantages and disadvantages of these different types of
standards. Do standards offer advantages over other forms of regulation? It is
helpful to think about specification standards as an illustration of some of these
issues:
STRENGTHS OF SPECIFICATION STANDARDS

Certainty

Consistency

Ease of Assessment
WEAKNESSES OF SPECIFICATION STANDARDS

Discourage Innovation

Inflexible

Can be used anti-competitively
Compare these with other types of standard, and also with other
forms of regulation such as prior approval and information
regulation. When should each be used to protect consumers?
The creation of criminal offences might also be classified as a type of broad
standard (Cranston describes these as standards), but they are a different form
of standard from those discussed above. Likewise, the requirement under the
Sale of Goods Act that goods be of satisfactory quality is also a form of standard,
albeit, again a different type. It is important to think about the number of
different ways in which a term like “standards” can be used.
22
One area where standards have become very important is in that of unfair
commercial practices. We will be looking at the Unfair Commercial Practices
Directive when we examine the protection of economic interests later.
INFORMATION REMEDIES
Note that much of the literature on consumer protection theory has focused on
the topic of information regulation. As well as the literature mentioned above,
there is a mass of articles to which I can refer anyone who is interested.
There are two main types of information regulation: we can require specific
information to be provided (disclosure), or prevent misleading information from
being provided.
DISCLOSURE
Disclosure regulation can be seen as helping the market to function by ensuring
that valuable information is supplied. We see disclosure regimes in relation to a
number of areas. Examples include consumer credit, product safety, food labelling
and recycling. There are sometimes mandatory disclosure requirements warning
about the risks attached to products. Sometimes, these tell us how to avoid
hazards in using the products. In other occasions, they tell us about the largely
unavoidable hazards in products, for example tobacco. How valuable are these
requirements? They are critiqued in the Report of the Better Regulation Executive
and National Consumer Council Warning: Too Much Information Can Harm (Final
Report, November 2007).
Is information regulation enough? What would you think of a law which allowed
dangerous products to be sold provided they were clearly labelled as being so?
Would it depend on what the product was? Remember the problems of
externalities here. Can we rely on the market to disclose information or does the
Government have to step in? If the market was unregulated, what kind of
information might we not get? Are there particular groups of consumers who may
be put at risk by an emphasis on disclosure?
Even if we believe that insisting on disclosure is not enough by itself, this does
not mean that disclosure has no role to play. There may be areas where
information is the best way of protecting consumers. The Government said in its
White Paper, Modern Markets: Confident Consumers:
23
“Good, reliable information information is essential if consumers are to
make the right choice. They need to know the price and the quality of
competing products. In many cases they need to know whether they are
safe, the quantity is accurate and the meaning of contract terms (including
the costs of add-ons and the nature of guarantees).” [para 3.1].
Is there anything else that consumers need to know?
Strengths of Disclosure

Helps the market to function

Respects choice

Encourages care

Relatively cheap
Weaknesses of Disclosure

Does not deal with externalities – it primarily protects the recipient

Relies too much on the consumer – will the consumer use it?

The most vulnerable may not be protected

Impossible to set at an ideal level – who understands and acts on it? (note
Wilhelmsson here and the idea of the “information paradigm”)

It doesn’t address problems of access – it’s no use giving information if there
is no choice in practice.

Some information is difficult to communicate. Note the idea of “the market for
lemons” (Akerlof)

Danger of Information Overload.
Think about the reasons why the market might not provide information that the
consumer would want. We looked at that when considering the context and aims
of consumer law.
Most of the literature about disclosure concentrates on disclosure of product
characteristics e.g. ingredients, cost etc. Are there other issues that might be
important e.g. standing of the provider (relevant for banks, perhaps). Also, where
is the line to be drawn between information and education? The White Paper A
Better Deal for Consumers: Delivering Real Help Now and Change for the Future
(Cm 7669) argues for:

A New Consumer Rights Publicity Campaign;

Improving Access to Information and Advice; and

Better Information for Consumers in Specific Situations
24
(White Paper pp. 66-74).
A further issue to consider is whether there may be indirect duties of disclosure.
For example, Article 7(1) of the Unfair Commercial Practices Directive states that
a commercial practice shall be regarded as misleading if:
“in its factual content, taking account of all its features and circumstances
and the limitations of the communication medium, it omits material
information that the average consumer needs, according to the context, to
take an informed transactional decision and thereby causes or is likely to
cause the average consumer to take a transactional decision that he would
not have taken otherwise.”
If it’s a contravention to omit material information that the consumer needs, does
this mean that there is a general duty to disclose? We’ll talk about this in more
detail later.
INFORMATION REMEDIES AND COOLING OFF PERIODS
Another possible regulatory technique is to require the trader to allow the
consumer to cancel an agreement within a certain time. For example, the
Consumer Protection (Cancellation of Contracts Concluded Away from Business
Premises) Regulations 1988 provide consumers with a 7 day cooling off period
during which they can cancel contracts that are covered by the Regulations.
Similar provisions are found in the Consumer Credit Act 1974, and the Distance
Selling Regulations 2000. Howells and Weatherill argue that “the right of
cancellation can be seen as an extension of the policy of ensuring that the
consumer makes a fully informed choice.” (Howells and Weatherill p 376). Cooling
off periods are frequently contained in legislation that also makes provision for
disclosure.
The Consumer Rights Directive is likely to lead to increasing use of cooling off
periods.
INFORMATION REMEDIES AND BEHAVIOURALISM
One of the main debates in consumer law (and in law and economics/behavioural
sciences literature) is about behavioural economics. We mentioned this when
looking at the reasons for regulation. Some research in this area suggests that
people tend to make bad decisions, rather than the rational decisions that neo-
25
classical economists think they should, and that there may be specific reasons for
this.
Possible categories are:

Hyperbolic Discounting;

Over-optimism;

Framing Effects;

Availability and Anchoring;

Information Overload;

Fairness;

Emotions
One possible conclusion to draw is that people are not very good at making what
might be seen as “objectively” good decisions and that recognition of this might
lead us to move away from disclosure-based remedies which rely upon
consumers making their own choices. This is discussed in the article by Howells
above. Do we pay too much attention to information regulation such as
disclosure? If so, what are the alternatives?
REGULATING FALSE AND MISLEADING INFORMATION
There is a general consensus that supplying false information should be
prohibited, particularly where there is fraud. In the words of Cayne and
Trebilcock: “the community will not and should not tolerate dishonesty, whatever
the economic consequences of preventing it” (D Cayne and MJ Trebilcock “Market
Considerations in the Formulation of Consumer Protection Policy”). Controlling
misleading (as opposed to false) information is more difficult, as we will see later.
What happens if a statement is only misleading to unusually credulous
consumers? Might there be distributive justifications for tackling such statements
anyway? Think about the different types of consumer mentioned by Wilhelmsson.
These range from the fully informed consumer to the consumer without choices.
Does the image we have of consumers dictate the appropriate standard for the
law? Some of these points will be developed in our discussion of the Unfair
Commercial Practices Directive.
CERTIFICATION
The main way of addressing information deficits is through disclosure. An
alternative is to use certification. This is where a product is given some kind of
26
kitemark (for example, the CAT standard for financial products, or the Trustmark
Scheme for traders, or “Scores on the Doors” for food hygiene). This gives the
consumer an indication of its quality or terms without resorting to detailed
disclosure. Is this better than disclosing lots of detailed information?
The regulation of information has been absolutely central to
consumer protection policy in many countries. To what extent
should the control of information be used to protect consumers?
Are there risks in relying too heavily upon it?
SANCTIONS, ENFORCEMENT AND REDRESS
Where there is a breach of a duty (for example, failure to comply with a licence,
or breach of a standard) then we need to decide what can be done about it. This
will be examined in more detail when we look at enforcement, and is also
relevant to other topics, such as the role of criminal law.
SELF REGULATION
As well as licensing products and suppliers, imposing minimum standards, or
requiring information to be supplied etc, governments can allow sectors to
regulate themselves, within the broad structure of the general law, by producing
codes of practice. Under s.8(2) of the Enterprise Act, the OFT has the power to
approve (and, withdraw its approval from) codes of practice. Section 8(3) states
that any such arrangements “must specify the criteria to be applied by the OFT in
determining whether to give its approval to or withdraw its approval from any
consumer code.” A consumer code is, according to s.8(6):
“a code of practice or other document (however described) intended, with
a view to safeguarding or promoting the interests of consumers, to
regulate by any means the conduct of persons engaged in the supply of
goods or services to consumers (or the conduct of their employees or
representatives.”
The OFT sets out the core criteria, and then code sponsors draft their codes,
tailoring and adding to the core criteria to fit their particular sector.
The Core Criteria fall into the following headings:
1. Organisational
27
2. Preparation of the Code
3. Content of the Code
4. Complaints Handling
5. Monitoring
6. Enforcement
7. Publicity
The procedure is made up of two stages:

First, code sponsors will develop codes that they believe comply with core
criteria. If successful, the OFT declares that they have achieved “stage one
status”.

Secondly, the sponsor must prove that the promises in stage one have
been satisfied. The OFT then endorses and promotes the code: the logo
“OFT Approved Code” can be used.
Stage 2 approval will take some time to achieve – it might require evidence from
customer surveys, and even details of “mystery shopper” exercises. Traders may
decide to develop two versions of the code: one for consumers, and one for
traders. Since the textbooks were published, the OFT has given approval to the
codes of the following trade bodies:

Bosch Car Service

The Carpet Foundation

The Property Ombudsman Ltd (Sales)

Direct Selling Association

Motor Codes Ltd (New Car Code)

Vehicle Builders and Repairers Association Ltd

British Association of Removers

Debt Managers Standards Association (DEMSA)
28
You might like to consider how effective you think codes which comply with the
core criteria are likely to be, and to consider some of the advantages and
disadvantages of self-regulation. Codes have been argued to have some
advantages over other forms of regulation or no regulation at all:
1. They reduce rule-making and enforcement costs.
2. They do not need parliamentary time.
3. Their rules may be aimed at particular industries.
4. Voluntary compliance may be more effective than forced compliance.
5. Codes can be an effective pilot for legislation.
6. They are flexible.
7. They reduce the costs to consumers of obtaining redress (their provisions
may sometimes be incorporated as terms of a contract - see Bowerman v
ABTA (Times 24 November 1995))).
8. They raise consumer awareness of rights.
9. They encourage the better supply of information.
10. They reduce undesirable practices and encourage better performance.
These arguments were questioned by the European Consumer Law Group in
(1983) 6 Journal of Consumer Policy 209. Pickering and Cousins argued that on
balance the social benefits of codes outweigh the costs (The Economic
Implications of Codes of Practice, UMIST). There are problems with codes
however. Here are a few to think about:
1. Some traders will not honour the code; the main sanction for this is
expulsion. Will this work? The provisions of codes may not always, for
example, be incorporated as terms of a contract.
2. Codes may not set the right level of performance. What about consumer
choice?
3. They might lead to cartels.
4. They have little impact on the trading practices of non-participants,
(according to Pickering and Cousins). Non-participants can, of course continue
to trade. Only in industries such as travel is it almost vital to be a member of
a trade organisation. (ABTA membership is seen as highly important by
consumers). Also, some relatively high profile codes have not been approved
in the past (e.g the Banking Code).
5. Although described as "self regulation", they involve an investment of
public resources in terms of negotiation and monitoring. However, under the
29
current regime, the OFT has made is clear that it will not generally assist code
sponsors in drafting their codes.
IMPROVING ACCESS TO JUSTICE
Another way in which the law can protect consumers is by making it easier for
consumers to seek redress. Private law can be seen as a technique of regulation,
and by making it easier for consumers to assert their rights, we can both protect
consumers and control traders. But how do we get around the problems of
transaction costs? If we place too much emphasis on the “individual claims
paradigm” (Wilhelmsson), do we avoid protecting those most in need? Is the
solution to develop new methods of redress? One possibility is the class action,
which would allow action to be brought on behalf of a group of consumers. In
some cases there is what Howells and Weatherill refer to as the “private initiative
model” where a case is brought by the individual consumers affected. This can be
compared
with
the
“consumer
organisation
model”,
where
consumer
organisations are given standing to represent consumers, and the “public agency
model” where public bodies act to protect the consumer interest. (The second and
third examples need to be considered alongside discussion of enforcement).
In the Canadian case Western Canadian Shopping Centres Inc v Dutton [2001]
SCR 534, McLachlin CJ identified three main advantages of class actions over
individual law suits:
“First, by aggregating similar individual actions, class actions serve judicial
economy by avoiding unnecessary duplication in fact-finding and legal
analysis…Second, by allowing fixed litigation costs to be divided over a
large number of plaintiffs, class actions improve access to justice by
making economical the prosecution of claims that would otherwise be too
costly to prosecute individually…Third, class actions serve efficiency and
justice by ensuring that actual and potential wrongdoers do not ignore
their obligations to the public.”
Do you agree? How do class actions compare with public enforcement?
In HM Government A Better Deal for Consumers: Delivering Real Help Now and
Change for the Future, the Government has proposed the creation of the role of
30
“Consumer Advocate” who will, among other things, “monitor and champion the
new approach to consumer focused enforcement” envisaged by the White Paper.
This will be examined further when we look at enforcement.
Think about the different techniques of regulation we have
identified, their strengths and their weaknesses. Would a successful
consumer protection regime use some, or all of these, and when?
31