Consumer Rights Bill

Baroness Drake Excerpts

Wednesday 29th October 2014 Grand Committee

[Baroness Hayter of Kentish Town (Lab)]

My Lords, in moving Amendment 55A, which is in the name of my noble friend Lord Stevenson and myself, I shall also speak to Amendments 56FA and 56FB in this group.

Clause 62(2) states:

“An unfair consumer notice is not binding on the consumer”.

We concur with that, but we are concerned that the consumer notice should clearly include any promotions that are designed specifically to catch the shopper’s eye. We are also clear that in assessing whether something is unfair, the CMA should be able to include some elements of price where those have been hidden from plain sight—that is, if the consumers do not appreciate their significance at the point of purchase.

To some extent this amendment and those in the next group are part of our attempt to ensure that consumers should not fall victim to hidden traps in the traded standard terms and conditions, and that while some core terms and some charges are immune from any fairness assessment, that should not be the case where such terms or charges may influence behaviour or where they are not fully understood at the point of sale. The Unfair Terms in Consumer Contracts Regulations put the terms into two categories: those that a consumer will or can be expected to properly take into account when deciding to enter the contract; and those that he or she will not or cannot. It is the latter that can be assessed for fairness.

The Consumer Rights Bill narrows the scope of the price exemption following the somewhat unwelcome 2010 Supreme Court decision on bank charges, but still assumes that the consumer will behave like a rational economic person and take account of all prominent information. However, behavioural studies tell us that people are often far more influenced by presentation than by the information itself, or put more emphasis on salient rather than actually useful information. As such, even when a price or term is disclosed, consumers do not always factor that into their purchasing decision. They also tend to overvalue a benefit received now and underestimate the impact of deferred costs, which leads to an excessive willingness to pay at the point of purchase while underestimating the future use of the product, which may lead to future costs. Earlier in Committee we talked about a future fee, which a shopper may not consider relevant to them as they do not appreciate the likelihood of it affecting them.

Similarly, we know that consumers are influenced in their buying choices by a wide range of factors, which is what Amendment 55A seeks to cover. Indeed, it is interesting to note that one of the leading university departments specialising in behavioural economics—how consumers actually make decisions—the University of Warwick Business School, wrote to the Minister in the Commons on 7 October, saying that,

“simply providing consumers with information about a charge does not absolve the seller from the responsibility for ensuring the charge is fair and reasonable”.

The business school therefore asked that terms that are effectively “hidden in plain sight” should be assessable for fairness, but its wise words pertain also to other issues that might have been included in information put to shoppers with exactly the aim of tempting them into the purchase.

One example of this, which we know influences behaviour, is the choice of price times; in other words, when you find out about them. Research done in 2010 by the OFT shows that consumers make more mistakes and poorer purchasing decisions under what is known as “drip-pricing”, a form of partitioned pricing, where consumers see only part of the full price upfront and price increments then drip through the buying process. This can cause the most consumer detriment.

We all tell stories in this Committee. I was on the point of buying a walking jacket the other day because it was reduced to only £15. But as you get into it, you choose the colour, the size and whether or not you want a hood, and then you get insurance added on. The jacket was only £15 but the postage and packing was 1p short of £4. That is a very large amount to add on to the price but by that stage you have chosen the size, you have chosen the colour—it is a very clever way of selling. However, drip-pricing has a very negative effect on behaviour because we start our purchasing process before we see the whole price. Other offers, such as “take home today”, “easy to assemble”—I have fallen for that one—and “money-back guarantee”, are the ones that influence the buying process. We are not saying that they should be outlawed but they should be looked at for fairness.

Amendments 56FA and 56FB would amend the terms that cannot be assessed for fairness and replace them with,

“only where the price payable does not relate to future variable fees”.

Normally, price is absolutely not assessable for fairness, because it is assumed to be clear to the purchaser. It is up to them to decide whether to accept it and then it is part of the contract. However, future and unknown prices within a contract need to be assessable for fairness, as the consumer is not in a position to judge them and evaluate their worth at the point of purchase. I beg to move.

[Baroness Drake (Lab)]

My Lords, I support Amendments 56FA and 56FB. These amendments are not about extending consumer rights, so that more contract terms can be deemed unfair; they are about enabling more matters to be assessed for fairness. The problem arises because of the interplay of two provisions. The court may assess a contract term for unfairness unless it falls into a certain exempt category; and core terms in a contract are exempt from assessment for fairness by the courts if they are prominent and transparent.

Through this Bill the Government are clearly seeking to address the problem thrown up by the 2009 Supreme Court decision in the case of the OFT v Abbey National that held, as my noble friend has said, that charges for unauthorised overdrafts were exempt for assessment for fairness. This gave rise to uncertainty about whether ancillary charges could be assessed for unfairness. To use the Government’s own words, this created a situation whereby:

“Some protection in law is necessary because consumers often cannot, or do not wish to, investigate the detail of every contract term before they sign up to an agreement”.

This Bill provides for the “prominence” test for core terms in a contract to be exempt from assessment for fairness by the courts, but this raises other concerns. Prominence is very important and welcome, but its efficiency in providing a remedy both for unfairness and for a weak and ineffective market depends on how the consumer’s attention is drawn to a term and their understanding of its significance. As the OFT commented:

“Transparency alone cannot turn a substantially unfair term into a fair one”.

As the BIS Select Committee commented, bringing something to the consumer’s attention is not the same as a consumer appreciating its significance.

Prominence should not be operationalised in a way that gives too great a protection to traders in exempting contract terms for assessment for unfairness and too weak a defence to the behavioural bias that consumers demonstrate, so unfairly restricting their access to the courts for assessing the fairness of the term of a contract.

These amendments are clearly seeking to mitigate that risk by limiting the wide range of price terms that are immune from a fairness assessment. Consumer markets and products are becoming more complex, increasing the risk that consumers do not understand the significance of certain information. We have behavioural bias. We have asymmetries of knowledge and understanding between the trader and consumer that can actually create incentives for the trader to frame information in certain ways—a problem which the noble Lord, Lord Taverne, illustrated has not been remedied in 400 years.

The Bill may narrow the scope of the price exemption following the Supreme Court’s decision, but it does so on the assumption that consumers will take into account all information that is provided prominently. However, we know that that is so very often not the case. Consumer behavioural bias is very powerful. If the most important goal is buying a house or a holiday, people will focus less on the detail of the associated insurance policies. The closer that the consumer gets to signing something, the less likely they are to walk away or assimilate the detail. As my noble friend Lady Hayter has spelled out, the behavioural biases that consumers exhibit are very significant. At risk of repetition, I shall restate some of them. People are more influenced by presentation than the information. They overvalue a benefit that is received now. They underestimate the impact of any deferred cost. They underestimate future use. They are prone to optimism bias. Volume information means that they reach saturation point. Excessive or complex product information can freeze their decision-making. That is probably one-fifth of the list that one could enunciate if one was going through a study of the literature.

The one thing that behavioural science shows us is that if consumers are not factoring certain prices into their decision, those prices will not be subject to competitive forces, so the markets cannot work effectively. In effect, the Government will not secure the functioning markets they are quite rightly so keen to secure unless there is some limit on the wide range of price terms which are now immune or could be immune to fairness assessment.

By way of illustration, perhaps I may refer to the letter dated 27 October from the noble Baroness, Lady Neville-Rolfe, to my noble friend Lady Hayter on mortgage contracts. To me, the contents raise more concerns than they settle. On the issue of “mortgage prisoners”, the letter makes a reference to the FCA’s concerns that some firms do not seem to be applying its transitional arrangements in the spirit in which they were intended. That is very politely and gently stated, but it is quite clearly yet another example of the failure of rule compliance and is hardly an expression of confidence that Clause 64 of the Bill will work effectively. In her letter the noble Baroness also refers to a number of things that the FCA is doing to address the concerns raised by my noble friend, but of course these apply to regulated products. They cannot deal with unregulated products, which include the Bank of Ireland example cited by my noble friend. For these unregulated products we must rely on the unfair contract terms, the problems with which my noble friend and I have, I hope, gone through in some detail.

Other non-financial sectors will exhibit similar problems with unregulated products, especially where switching is difficult because of the length of the contract wrapped around the product. Examples of these would be products bought in the ICT and telecoms sectors or longer term courses in higher education. When one takes into account the extent of the behavioural bias which consumers bring to the market and how that creates incentives for traders to frame information, the fact is that if consumers are not factoring these prices into their decisions, it means that competition and functioning markets cannot be operating. There really is a compelling case for amendments that would constrain terms that are not assessable for unfairness.