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Creating Confident Consumers
The Role of the Ministry of Consumer Affairs in a
Dynamic Modern Economy
May 2003
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6. An
Outcomes Framework for Consumer Policy
The previous section on The Role of
Consumer Policy in a Dynamic Modern Economy established an
approach to consumer policy based on three fundamental
principles:
- consumers should get what they expect
- consumers sometimes do not get what they expect because of
a variety information barriers
- these information barriers need to be resolved so that
consumers get what they expect.
The next stage is to put these principles into practice in a
way that means they underpin the Ministry's essential role as an
organisation. This can be done by deriving from the principles a
framework of outcomes that the Ministry is seeking to achieve.
Elements of the Outcomes Framework
The Ministry's outcomes framework has a strong information
dimension, because information is central to consumers'
expectations of transactions being met. This, in turn, is likely
to enhance consumers' confidence in making transactions.
There is a single high-level outcome:
- consumers transact with confidence.
As well, there are three contributing outcomes that support
the high-level outcome:
- consumers' expectations of transactions are met by
suppliers
- consumers and suppliers have confidence in market rules and
institutions
- consumers have effective access to redress.
The framework reflects the fact that the Ministry is primarily
problem-focused. An outcome can be thought of as the "flip" side
of a problem - if there were no problems in a particular area in
the absence of government intervention, it would be unnecessary
to state an outcome. The overall flow of consumer and supplier
interactions in an information framework can be seen in the
diagram below, which also shows how the normal functioning of
these interactions contributes to the Ministry's high-level
outcome of "consumers transact with confidence".
→ Larger version of this graphic
Note: The flowchart represents the primary
drivers of the Ministry's work. However, the public as opposed to
the "pure" consumer safety aspects of Consumer Safety's work
[10] do not fit
within this framework. No implication should be drawn from this.
In particular it does not mean that these functions should not be
carried out within the Ministry. Indeed, there are pragmatic
reasons why this work should continue.
The Ministry's High-Level Outcome
Consumers Transact
with Confidence
Our high-level outcome that "consumers transact with
confidence" recognises three factors:
- consumer expectations are influenced by the quality of
information available to them about a transaction - when
consumer expectations are met, transactions are successful
and, collectively, successful transactions generate
confidence
- market rules and institutions influence the confidence of
consumers
- consumers have a reasonable expectation that effective
redress is available.
The Review Team's approach to developing a high-level outcome
as a goal for consumer policy was that for it to be meaningful it
should be consistent with
MED's
strategic framework, because this framework is focused on
improving New Zealand's rate of economic growth through, in part,
the existence of competitive and dynamic markets.
Consumers have a vital role to play in the development of such
markets through making decisions between products, services and
suppliers, and demanding new and better products and services.
Optimal participation in these markets over the long term depends
on confident consumers. Creating the conditions for this
confidence is the primary focus of the Ministry's outcomes
framework.
Confidence in transacting is important. When consumers are not
confident:
- they may avoid transacting in future so they don't have to
face the possibility of a bad deal and its consequences
- it may result in consumer inertia - they may opt for an
existing supply arrangement because of the perception that they
will face risk/costs by switching to another supplier or means
of supply, even though another supplier or means of supply may
offer a better deal or
- they may spend considerable time and effort investigating
or will accept higher costs attempting to avoid a bad deal.
In other words, consumers may incur additional costs, or
competition may be adversely affected through consumers
transacting less and suffering from inertia.
Consumer confidence comes from:
- having the skills and knowledge to be able to transact
effectively
- having ready access to information about the
characteristics of the products and services consumers intend
to purchase
- not being subjected to concealed risks, either from
hazardous goods or from "rogue" suppliers
- having effective access to redress when the market fails
- having robust market rules and institutions that govern
consumer transactions.
The Ministry's Intermediate Outcomes
Consumer confidence in transacting is influenced by three main
factors (the Ministry's intermediate outcomes), and the Review
Team has assumed that the combination of these three factors will
create an environment that allows consumers to transact with
confidence. The Ministry therefore needs to focus on these
intermediate outcomes as the major contributors to its high-level
outcome "consumer transact with confidence".
1. Consumers' Expectations of
Transactions Are Met by Suppliers
Consumers enter into transactions with
certain expectations. In particular, they may expect to
receive: a particular product or service; of a particular
description, quality, and quantity; at a particular price; or
on particular terms. Consumers also have fundamental
expectations around product safety. If those expectations are
met, consumers' confidence in the particular supplier, and in
the market overall, is likely to be reinforced.
When consumer confidence in the market is reinforced, it is
likely to spread to other consumers. Indications that the market
is working may be the absence of bad deals, or other market
signals such as the number of transactions being made. If
consumers' expectations are not met, that could result in a
spreading unease in the market through negative comment, warnings
to other consumers, and publicity. In extreme cases, this unease
can lead to widespread loss of confidence and even to market
collapse.
There are two key issues that will be crucial in determining
whether consumer expectations of transactions will be met.
[11]
1a. The Role of Information in
Creating Consumer Preferences and Expectations
Information helps shape the formation of
consumer preferences and expectations about the process and
outcome of a transaction.
Consumers assess the relevance/importance of information
- they value information by assessing its relevance and
importance, and they then make better choices about whether to
enter into a transaction. Consumers are more likely to make a bad
deal when they overestimate or underestimate the value of
information. For example, they may underestimate the importance
of the interest rate when entering into a finance deal, or
overestimate the importance of the nominal odometer reading when
purchasing a used car.
The "cost" of information is important to consumers. Consumers
are likely to be better informed about a transaction when the
cost of information is low relative to the value of the
information. They therefore require effective and affordable
access to relevant information.
Consumers who have affordable and ready access to information,
and who assess its importance accurately, are more likely to have
their expectations of transactions met. The more consumers'
expectations are met, the more their confidence in transacting
will be reinforced.
1b. Reductions in the Level of
Product or Service Failures
Consumers generally make assumptions about
the safety and quality of products and services. Assumptions
about quality and fitness for purpose are likely to be informed
by price and will vary accordingly. Consumers are likely to
assume that products on the market are safe.
[12] If there is a
gap between assumptions and reality (the outcome of a
transaction), consumers risk getting a bad deal.
There are some circumstances when an information-based or
"market" solution may not be effective or appropriate:
- The cost to the consumer of a bad deal is too high, and
society is likely to judge that access to redress would be
ineffective or inappropriate - for example, where there is a
risk of injury to the consumer.
- Suppliers are not aware of the problem (the causes of
failure are complex, and the absence of failure may be hard to
identify). This is particularly likely with "credence" goods
(goods that have to be taken on faith even after using them,
such as medicines) as their characteristics are not readily
apparent.
- The existence of redress mechanisms does not provide an
incentive for suppliers to reduce the levels of product/service
failure - for example, the cost to consumers of seeking redress
may outweigh the cost of the bad deal.
- The provision of consumer information would be ineffective
or inefficient in the circumstances.
Rules covering product safety, or the ability to ban or recall
"unsafe" goods, provide an incentive for suppliers to reduce
their rate of product/service failure. A low rate of
product/service failure will mean that most consumers'
expectations of transactions are met. In turn, this will
reinforce consumer confidence in transactions.
2. Consumers and Suppliers Have
Confidence in Market Rules and Institutions
Ideally, consumers and suppliers have
confidence in the market as a whole. Confidence is
self-reinforcing: if market participants believe the market
works well, they act with confidence and that tends to
reinforce confidence and further strengthen the market. Rules
and institutions that contribute to well-functioning markets
can reinforce consumer confidence by influencing the weighting
consumers give to different assumptions when making decisions
in the face of imperfect information.
Market rules and institutions (such as Disputes Tribunals and
the Commerce Commission) may also operate to align suppliers'
performance with consumers' expectations and vice versa. For
instance, rules may codify consumer expectations by imposing
guarantees of quality, or prescribing safety requirements, or
prohibiting deceptive conduct. Institutions and enforcement
measures, such as sanctions or naming and shaming, may provide
incentives for suppliers to comply with market rules.
Confidence in rules and institutions may not play a major
direct role in a consumer's decision to transact. For example, a
consumer in the market for a new kettle will probably look for
particular features but not consciously appreciate that all
kettles on sale in New Zealand have passed stringent testing
under Electricity Regulations. Consumers are more likely to
assume the product is safe.
If rules and institutions do not give effect to this
assumption, then consumer confidence will be undermined and may
result in increased transactions costs as consumers seek to
minimise their risk. Consumer confidence will most definitely be
undermined at a point when market rules fail.
While the Ministry currently has responsibility for some of
the rules governing consumer markets, the totality of the rules
and institutions governing consumer markets go well beyond the
proper scope of the Ministry's influence. Therefore, it is likely
that the Ministry will seek to influence some of these things
directly but that other outcomes are more likely to be sought by
government as a whole (for example, through recommendations and
best-practice approaches developed in international forums such
as the
OECD).
3. Consumers Have Effective Access
to Redress
The availability of effective redress can
build consumer confidence in transactions by influencing the
weighting consumers give to different assumptions when faced
with imperfect information. Accessibility of redress mechanisms
may reduce consumers' assessment of the risks of transacting
with a supplier they do not know or trust (or have imperfect
information about) because they are aware they can seek a
remedy if things go wrong.
In this context, redress mechanisms might include:
- supplier-based mechanisms such as returns and refunds under
the Consumer Guarantees Act 1993, and internal
complaints-handling mechanisms
- privately run alternative dispute resolution services such
as facilitated negotiation or mediation, either offered
face-to-face or online
- complaints mechanisms run by industry self-regulation
schemes such as the Banking Ombudsman, Electricity Complaints
Commissioner, the Insurance and Savings Ombudsman, and the
Advertising Standards Complaints Board
- traditional mechanisms such as civil justice through the
courts or disputes tribunals.
The availability of redress can lead directly to consumers'
expectations being met for specific transactions through
requiring suppliers to meet the consumer's reasonable
expectations.
Redress mechanisms can also result in reduced levels of
product and service failure, by providing an incentive for
suppliers to meet consumer expectations about product and service
performance. If suppliers know there is a real likelihood of them
having to provide redress in the event of product or service
failure, that can act as an incentive for them to take steps to
avoid that failure. Where redress involves court action, legal
precedents provide a measure of consistency and predictability in
decision making - suppliers can rely on court decisions and shape
their own conduct accordingly.
A Note about the Energy Safety
Service
The Terms of Reference for the Review excluded a strategic
review of energy safety policy, but it is clear that the energy
safety functions of the Ministry may have two outcomes. The first
outcome is about consumers' purchase and use of energy appliances
(this area of responsibility fits within the outcomes framework).
The second is concerned with the safety of members of the public
in their interactions with energy (this public safety aspect sits
outside the outcomes framework).
How the Ministry's Consumer Outcomes
Fit within MED's
Strategic Framework
The Ministry's proposed outcomes framework clearly fits within
the wider MED
framework relating to economic growth and the contribution
consumers make to the operation of competitive and dynamic
markets. (The diagram at the end of this section gives an
overview of the flows and interactions between the two
frameworks.)
MED also
seeks to promote increased levels of international commerce and
knowledge transfer that will contribute positively to
productivity growth. There are a number of dimensions to this,
but only two are directly relevant to the Ministry's outcomes
framework.
First, MED
is concerned with using multilateral and bilateral regulatory
co-operation, and unilateral regulatory reform, to reduce the
frictions and costs associated with trading and operating in two
jurisdictions. A related concern for
MED is
understanding and addressing the reasons why foreign consumers
may not have confidence in the quality of New Zealand markets,
firms, products, and services - particularly in the context of
electronic commerce.
Second, from an economic growth perspective, it is important
for New Zealand importers and exporters that:
- domestic consumers can purchase imports with confidence
knowing that they are safe, fit for purpose, and so forth
- foreign consumers can have confidence in transacting with
New Zealand firms, and purchasing products and services from
New Zealand.
The Ministry's contribution to this policy objective is
through its involvement in international standards setting and
the development of international guidelines and methods of best
practice. These activities improve consistency between New
Zealand's rules and those of key trading partners, which
facilitates the flow of products and services across New
Zealand's borders. When New Zealand's consumer policy represents
or improves on international best practice, exporters can use it
to build consumer confidence in export markets or as a basis for
establishing compliance with consumer policy in those markets.
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