Consumer Policy Tools

Background Paper to Creating Confident Consumers

May 2003

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Sanctions and Redress Mechanisms

Where there is a consumer interest that should be protected by law, policy-makers need to consider whether that interest should be protected through public enforcement and sanctions or through private claims and redress.

In making this decision, a number of factors need to be taken into account, including:

• The information costs of compliance or enforcement: e.g. the choice between performance and specific standards needs to reflect that it may cost less to verify that a product contains a particular design or device than to determine whether products of widely varying design meet a given standard of safety or quality performance. [37]
• Whether there is a public goods aspect to the class of dispute in question which requires a public institutional presence. [38] In liability regimes (e.g. tort, contract), the consumer is responsible for enforcement and is best informed (at least cost) about the occurrence of a "bad deal" (i.e. the consumer has not made the deal he intended or expected). However, as noted previously, this information cost saving involves a failure to share the costs of enforcement amongst all those who might benefit from enforcement and resulting under-enforcement.
• The positive externalities from the provision of civil justice: providing an avenue for redressing grievances in a socially non-disruptive fashion (i.e. "writs rather than rifles"); providing some measure of consistency and predictability in decision making by generating and interpreting legal rules which other parties can rely on as precedents in shaping their own conduct; and the incentive or deterrent effect on third parties of requiring one party to pay compensation to another. [39]

Where the protected class is large and dispersed, and individual claims are relatively small, consideration needs to be given to economies of scale. In this context, public enforcement may be more efficient than requiring individuals to take claims on an individual basis. Alternatively, class actions could be used to achieve economies of scale in litigation where members of a class have similar claims. This would reduce the costs in individual prosecution of each claim, and enhance access where many of these individual claims might not otherwise have been brought. [40]

In some cases, it might be appropriate to use a combination of public and private enforcement. This would harness the efficiencies noted above, providing a measure of protection to consumers who would be unlikely (or unable) to take action on their own behalf. It would highlight under-enforcement in relation to particular classes of case by public enforcement authorities. [41] It would also harness the incentives that competitive firms have to monitor each others' conduct which would, in turn, result in better outcomes for consumers. [42]

There are other possible redress mechanisms, including:

• Facilitating or mandating informal dispute resolution processes within firms, bureaucracies or government agencies. This may be complemented by the provision of internal or industry-wide dispute resolution systems, where consumers with a grievance not resolved within the firm at first instance can seek resolution through an informal, but external, process. [43]
• Alternative dispute resolution (ADR), which may be publicly or privately supplied as a complement to the civil justice system. However, consideration needs to be given to whether encouraging parties to rely on ADR may compromise some of the public goods aspects of the civil justice system. In addition, because enforcement (if required) is likely to be through the courts, consideration needs to be given to what forms of public supervision are required of ADR systems (especially privately-provided systems). [44]
• Self-executing remedies such as cooling-off periods imposed on consumer contracts. These can provide an extremely low-cost remedy for consumers who may have been rushed into a decision. [45]

Finally, government can provide, or facilitate the provision of, forms of public legal education, to:

• enable consumers to avoid potential disputes in the first place
• educate them on how to take complaints effectively on a self-help basis. [46]

[37] Supra at note 3, at 13.

[38] Ibid., at 19.

[39] Ibid., at 18.

[40] Ibid., at 31.

[41] Ibid., at 22.

[42] For instance, a significant proportion of private actions taken under the Fair Trading Act 1986 are taken by businesses against their competitors. In this way, the market polices compliance with the Act and contributes to the Act's consumer protection objectives.

[43] Supra at note 3, at 24.

[44] Options might include ex ante certification of the mechanisms (e.g. required qualifications of personnel, or decision-making processes) or ex post judicial supervision (e.g. rights of appeal or judicial review). Supra at note 3, at 19-20.

[45] Ibid., at 25.

[46] Ibid., at 23.

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