Creating Confident Consumers

The Role of the Ministry of Consumer Affairs in a Dynamic Modern Economy

May 2003

Previous Page / Table of Contents / Next Page

8. Deciding When to Get Involved - Guidelines for Involvement

• Guidelines for Involvement
  • Is There a Problem - That Is, Does the Market Operate in a Way That Prevents Consumers from Transacting with Confidence?
  • If There Is a Problem, What Are the Possible Underlying Causes?
  • Is There a Role for Government in Addressing the Problem? If So, What Is the Nature of This Role?
  • Does the Benefit of Government Involvement Outweigh the Costs to Society as a Whole?
  • Who Is Best Placed to Take a Lead Role on This Issue?
  • If the Ministry Is Best Placed to Carry out This Role, What Priority Should Be Given to the Issue?

This section of the Report suggests some "guidelines for involvement" - criteria that can be applied by Ministry staff when confronted by an issue in which the Ministry might potentially have an interest. The guidelines should help staff to determine whether the issue is an appropriate one for the Ministry to address and assess the relative priority of the work that might result. The guidelines also draw upon basic elements of the standard policy development process, and link back to the Ministry's outcomes as a focal point for its activities.

The Review Team has been keenly aware of the way consumer issues intersect with a number of policy portfolios vested in other government agencies - which means it is not always easy to draw neat boundaries around consumer policy. Various agencies will have differing perspectives, which means the Ministry often has to manage other agencies' expectations that it will pick up what they see as consumer issues. For example, in the area of consumer safety the Ministry could involve itself in injury-prevention initiatives led by other agencies such as ACC or the Ministry of Health or, alternatively, could work with other agencies to ensure that its consumer safety interests are being picked up within their portfolio responsibilities.

The Ministry should not get involved with issues simply because they involve consumers: every transaction involves consumers either directly or indirectly. Many consumer issues will, and should, be handled by other government agencies. Having a clear understanding (which is shared by others) of the parameters of consumer policy, coupled with a clear sense of what it is trying to achieve, will help the Ministry to concentrate on core issues that will maximise consumer well-being in the economy.

The Review Team considers that this approach is appropriate. It is consistent with the Ministry's location within an agency focused on economic development, and it reflects the nature of the legislation administered and enforced by the Ministry. The Review Team did not receive any indication from stakeholders that the Ministry's focus should be broadened beyond consumer issues in the marketplace.

Guidelines for Involvement

The Ministry has always made judgements about whether and how to intervene in emerging consumer issues. In future, these judgements will be enhanced by a clear set of guiding principles or "guidelines for involvement".

The guidelines for involvement are really a set of questions that will help the Ministry when it makes judgements about whether any given consumer issue is properly an issue for it. The guidelines for involvement will not give a definitive answer, nor can they be applied mechanistically. Instead, they are intended to ensure that decisions about picking up issues are principled and outcomes-focused, and that they take into account the impact on the Ministry's other priorities. The guidelines for involvement will also help the Ministry communicate in a clear and principled way to external agencies and stakeholders how it determines what issues it becomes involved in.

The Review Team recommends that the guidelines for involvement be reviewed from time to time, to ensure they remain relevant and useful.

Is There a Problem - That Is, Does the Market Operate in a Way That Prevents Consumers from Transacting with Confidence?

The Ministry should be aware of issues that lead to bad deals, which in turn could reduce consumer confidence in future transactions or in rules and institutions.

For example, the recent problems with weathertightness of houses could be seen as a consumer issue that, if not addressed, could reduce consumer confidence in the rules and institutions that govern building construction. The weathertightness issue can be seen as an information problem - there has been a gap between what consumers expected (a home of acceptable quality) and what they got - even though there is a regulatory framework governing building construction. Consumers' financial risk in housebuilding is significant, which means that their confidence in building construction may spiral downwards rapidly. This has serious implications for both the construction industry and the housing market, and may have wider economic consequences.

If There Is a Problem, What Are the Possible Underlying Causes?

Understanding the cause of the problem should help in assessing the appropriate response, which may include market-based responses such as providing information or self-regulation, or government intervention using competition or consumer policy tools.

The problem may be caused by the market's structure (making it non-competitive or imperfectly competitive), in which case competition policy may be an appropriate response.

Or the problem may be information-based, and so a consumer policy response may be appropriate. There may be a number of possible causes of an information-based problem - and these will need to be assessed. For instance:

• Are consumers able to form preferences and weigh alternatives in the marketplace?
• Do consumers have effective access to the information they need in transactions?
• Do consumers know the information exists? Have they understood its importance?
• Do consumers have too much information, so they are unable to find the right information?
• Are they exposed to hidden risks?

Is There a Role for Government in Addressing the Problem? If So, What Is the Nature of This Role?

A crucial first question is: "Will the problem resolve itself in an acceptable time period and in a socially optimal way?"

Where any of the following characteristics exist in a competitive market, a solution may not develop by itself:

• repeat transactions are rare and consequently the performance incentives created by the possibility of repeat business from satisfied customers are blunted
• entry and exit costs in the industry are low, leading to the possibility of a large number of fly-by-night operators with few sunk costs and only modest investments in their business reputation
• many sellers or producers are extra-jurisdictional, making redress through private law more difficult for consumers
• sellers characteristically have few assets against which a judgement may be enforced
• the costs of a bad deal or transaction are delayed or potentially catastrophic, making post-failure redress an inadequate or unsatisfactory solution
• the small size of a typical transaction creates a significant disincentive for individual consumers to seek redress through the courts, although the "economic cost" collectively may be significant.

If these characteristics (or others that suggest a solution will not develop by itself) exist, the next question is: "Can those characteristics be altered so that a market solution develops?"

Government could provide information, or require information to be provided, so that consumers are better informed about market or product characteristics. For instance:

• Odometer tampering - this issue arose because consumers were at risk of making bad deals if they relied on odometer readings as an indicator of a car's value. While there was a real problem in some odometers being wound back, consumers were ignoring better indicators of a car's value, such as a mechanic's report. Sustained publicity about odometer tampering over a number of years is having a positive effect in changing the value that consumers' place on odometer readings when purchasing motor vehicles. A new regulation under the Fair Trading Act 1986 will help reinforce the message that consumers should be wary when relying on odometer readings.

Government could regulate to restrict a particular product or activity, or it could regulate to change enforcement and compensation mechanisms. For instance:

• Pyramid selling schemes - the legal prohibitions against pyramid selling schemes did not appear to be deterring people from operating them in New Zealand. On closer examination, it became apparent that the potential financial gains significantly outweighed the fines likely to be imposed if a scheme was detected and enforcement action taken. A new penalty provision linked to the commercial gain from schemes is currently before Parliament. It is intended to alter the incentives for engaging in pyramid selling by rendering schemes profitless if enforcement action is taken.

Government could choose to deal with a problem itself, or use intermediaries. For instance:

• Government has a role in ensuring the delivery of information about consumers' and suppliers' rights and responsibilities under consumer law. The market is unlikely to provide this information on its own, and the delivery of this kind of information is one way of ensuring that regulation helps to make markets fair and transparent. Whether this role involves providing information directly, or funding its delivery by community agencies, will depend on what is the most effective and efficient means of delivering that particular information.

If government intervention is justified, a basic principle underlying the selection of consumer policy tools is that they should embody an information-based framework. Within this framework, the choice of policy tools may improve consumers' access to information, or improve consumers' estimates of the value of information, or carry out both roles in some circumstances.

For more detail on consumer policy tools see the Review background paper Consumer Policy Tools.

Does the Benefit of Government Involvement Outweigh the Costs to Society as a Whole?

Government intervention should be based on clear evidence that a problem exists and that government action is justified, given current government policies, the likely benefits and costs of action (based on a realistic assessment of effectiveness), and alternative mechanisms for dealing with the problem.

An intervention can impose considerable costs on business, and in turn these will, in all probability, be passed onto consumers. Therefore there needs to be an identified benefit that clearly outweighs the costs of any intervention.

Who Is Best Placed to Take a Lead Role on This Issue?

This requires a judgement about whether the Ministry should take up the role on behalf of the government.

In the following situations, the Ministry may not be well-placed to take a lead role on an issue:

• Another government agency administers the market rules and/or institutions - for instance, specific food labelling requirements are contained in the Food Standards Code administered by the New Zealand Food Safety Authority (NZFSA). This suggests that the Ministry's role regarding food labelling is a supporting role, with the NZFSA playing the lead role.
• Another government agency has more influence over relevant stakeholders and key players than the Ministry -for example, on many issues to do with health or accident prevention.

In both these situations, the other government agency would be better placed than the Ministry to take the lead role.

If the Ministry Is Best Placed to Carry out This Role, What Priority Should Be Given to the Issue?

The Ministry is a small agency that has to deal with a potentially very broad policy portfolio. It has a number of statutory obligations and other functions that need to be performed regardless of the emerging issues it may need to pick up. This means it needs to assess emerging issues in relation to its other priorities. In particular, the Ministry must balance the size of the problem against its impact on the Ministry's outcomes.

The problem may be severe, in which case it may have a significant impact on consumer confidence, even if the group of affected consumers is relatively small. For instance, the recent problems of weathertightness of homes have potentially severe financial consequences for individual consumers, and could also have a destabilising effect on the housing market. Alternatively, the problem may be widespread, even if individual losses are small. If the problem does not have a significant impact on the Ministry's outcomes, a judgement will need to be made as to whether the Ministry becomes involved.

Previous Page / Table of Contents / Next Page