Making the ‘Markets Work For People’: Penrose Report

Following HM Treasury's commission of the report in September 2020, on 16 February 2021, John Penrose MP published, "Power To The People: Stronger Consumer Choice and Competition So Markets Work For People, Not The Other Way Around" (the "Report"). The Report contains proposals to improve the UK's competition and consumer protection regime following the end of the UK-EU transition period and the COVID-19 pandemic. In this update, we focus on the digital markets and consumer issues discussed in the Report.

Competition in digital markets

The UK Government's has announced its intention to create a new digital markets unit ("DMU") within the Competition and Markets Authority ("CMA") from 2021, and received advice on the powers and remit the DMU should have from the CMA's Digital Markets Taskforce ("DMT") in December 2020. At a high level, the DMT's intention is for the DMU to have powers to create, maintain and enforce a code of conduct and carry out pre-emptive pro-competitive interventions to govern the behaviour of certain online platforms and other digital players with "significant market status" ("SMS").

The starting point for the Report's digital market proposals are familiar. It identifies similar anti-competitive features as set out in detail in the DMT's advice to the UK Government in December 2020 ("DMT Advice"), such as:

• Network effects: companies that have accumulated vast troves of customer data can benefit from an exponential growth loop. Large data sets mean platforms can attract more developers offering more and newer products and services which attracts more customers which means the platforms accumulate more data and so on.

• Tipping: Platforms can leverage their data insights in order to expand into adjacent markets, using their incumbent market power to foreclose competitors in those markets.

• Severe barriers to entry due high fixed costs and low marginal costs: economies of scale lead to much smaller margins for smaller rivals, which inhibits further investment in innovation.

These market dynamics are reinforced by certain practices such as defaults, nudging and limited interoperability between products and services of market-leading firms. Such anti-competitive features can lead to various types of consumer harm. The Report places a lot of emphasis on the harm to consumers that can arise as result of 'information asymmetry' in respect of the value of consumer data. Consumers do not know the value attached to their data and therefore have no way of telling whether the product or service they are receiving in exchange for their data is a good bargain. This type of harm is exacerbated by a lack of interoperability between platforms, meaning consumers are 'locked in' and unable to switch to a better product. Fewer incentives or opportunities for competitors to bring an innovative product to market also significantly reduces consumer choice.  

While the report acknowledges that there is a need to address these issues through competition enforcement, the core focus of the chapter on digital markets is actually on avoiding 'regulatory creep' and overreach by the DMU. Its remit should only cover individual firms that own and run new network and data monopolies, rather than apply more broadly to any sector as a whole. In order to reinforce this point, the Report suggests naming the new unit the 'Network and Data Monopolies Unit' ("NDMU") instead. Firms should only fall within the remit of the NDMU with the consent of Parliament by secondary legislation, following a CMA market study. This differs significantly from the proposals in the DMT Advice which contains a broad and relatively flexible legal test for SMS, and pegs SMS designation in the short term to certain 'prioritisation factors' (which would not have any statutory footing but would only be found in guidance), such as turnover and activities.

While the initial focus of the NDMU would be on the digital sector, the Report's plans for other sector regulators suggest that, in the long term, it would like to see oversight of network monopolies currently under the remit of other sector regulators (eg Ofcom) transferred to the NDMU. The NDMU's powers should also be clearly ring-fenced and should only be used where the CMA's existing powers cannot provide solutions in a particular case.

Similar to the DMT Advice, the Report recognises that for (digital) monopolies existing competition enforcement tools are insufficient, and both propose the use of pro-competitive interventions to reinstate normal competitive market conditions. The Report proposes that the NDMU should be able to impose and oversee interoperability, switching and data access requirements as well as data portability schemes. These suggestions largely overlap with the DMT Advice's proposed examples of pro-competitive interventions. In this context, the Report would like the CMA to explore to what extent Open Banking and Current Account Switching could be used as blue prints for analogous schemes in the digital space. Unlike the DMT Advice which proposes that a 'bespoke' code of conduct is prepared in respect of each SMS-designated firm, the Report proposes that the NDMU should have the power to design and enforce a more generally applicable code of conduct that can provide overall certainty on 'the rules of the game' to incumbents as well as smaller players.

All in all, if the UK Government decides to lean towards a Penrose-style toolkit for digital markets competition enforcement, the CMA can expect the digital unit's powers to be heavily ring-fenced and clipped back.

Consumer law enforcement

The Report makes the point that the UK trails behind the EU and US, amongst others, when it comes to Consumer law enforcement. As a consequence, it lists some suggestions as to how to improve the current enforcement regime including:

• Modernising Small Claims Courts and Alternative Dispute Resolution ("ADR"): One way of assisting small firms and consumers to enforce their rights quickly, and digitally, would be to make Small Claims Courts and ADR services available on a 24/7 basis and the process should be cheaper, perhaps through a mobile phone app.

• Consumer enforcement cases decision making and have fining powers for the CMA: The Report suggests the Report suggests that the CMA's civil consumer enforcement powers be updated. In particular, the CMA should be able to decide consumer infringement cases and impose fines in the same way that it currently does for competition law cases without having to go to court. This is designed to address the gap the Report discusses between competition and consumer law enforcement due to the CMA having stronger competition law powers. If the CMA wins a consumer case in court, the court has no power to impose a fine, only to order the offending firm to change its practice. Consequently the CMA's only redress if the firm does not change its behaviour is through contempt of court proceedings. This means that there is no incentive for the firm to co-operate or settle out of court.

The Report also focuses on three issues that it considers weaknesses in the UK's existing consumer protection regime:

• Loyalty penalties and price discrimination: Price discrimination occurs when customers are charged different prices for the same goods or services. A loyalty penalty occurs when companies charge longstanding customers more than they charge either new customers or customers who renegotiate their deal for the same goods or services. The Report notes that deeper pools of online data mean more firms are now able to tell when some of us are less likely to notice or care about a higher price than others and highlights the CMA's estimate that 28 million customers were paying a loyalty penalty of £3.4bn.

  The Report recommends:

  • that both new and existing customers be offered the same prices - it highlights that the FCA is consulting on an insurance specific rule requiring firms to offer the same prices to new and existing customers for home and motor insurance; and

  • the CMA should update its guidelines generally on what treating customers fairly means in practice including incorporating a concept of 'transactional fairness' satisfying the following criteria:

    • "No deception". Deception would include burying rip-offs in the contract's small print so that new customers are unaware of key details when they sign up.
    • "No hindrance". Consumers should be able to compare alternatives without difficulty and to be able to switch easily.
    • "Public explanation". The firm must expect to face challenges as to its pricing practices and be able to justify why these are beneficial to customers.

• "Rip-offs" hidden in the small print of long and complicated contracts: The Report addresses the issue that firms bury 'rip-offs' deep in contracts where consumers will not find or understand them and flags the increasing prevalence of this due to digitalisation. The consequence is 'information asymmetry' ie where consumers know and understand less than the sellers do. Three suggestions to tackle this, offered by the Report are:

  • expert advisors;
  • standardised key terms and conditions, allowing consumers to compare terms easily; and
  • minimum contract terms and standards (as already enshrined in consumer law).

  The Report recommends that the CMA continue to use these techniques but must also:

  • track whether digital comparison tools are growing and can level the playing field for buyers/consumers (ie help them make more informed decisions);
  • consider how to improve price transparency of prices consumers are 'paying' with their data for digital goods and services; and
  • consider how to introduce more competition in respect of digital monopolies (for example local public Wi-Fi networks).

• "Nudging" practices: Example of a nudging practice identified by the Report include:

  • "Subscription traps", where companies offer consumers free trials and tie them into longer, more expensive deals (often by making it difficult for consumers to cancel the trial);
  • hiding opt out routes for added cost services (eg making the opt out icon smaller, less visible and/or located away from the 'opt in');
  • creating a sense of urgency around price or availability (eg number of customers looking at the same product, time clock for offers);
  • using defaults to influence consumer behaviour (eg pre-ticked checkboxes for add-ons; displaying paid options more prominently).

  The report calls for the CMA to undertake a market investigation to assess how to recognise and measure nudging practices in future, and identify consumer protection rules and analytical techniques necessary to protect consumers as digital technologies evolve.

Points to consider

Whilst many of the Report's recommendations relate to areas of reform that have been previously suggested, the key point to note here is the reference to increasing digitalisation  and how consumer law enforcement needs to effectively keep up. Stakeholders should also take note of suggestions throughout the Report to reopen or extend previous market studies on digital comparison tools and online platforms and digital advertising.  

The overarching theme here is that businesses and firms should continuously review their business practices and ensure the role of the consumer is considered throughout and also the impact on competition within the market, particularly in light of technological advancements. The Report's emphasis on 'making markets work for people, not the other way around' suggests that an update to regulations and regulators powers is likely. Companies should monitor this space and review the UK Government's response when released.

The UK Government is reviewing the Report's proposals. We expect further clarity on where the Report will lead once the Government puts forward any legislative proposal(s) on statutory footing for the DMU and/or on changes to competition enforcement powers.