The Chancellor George Osborne and the Business Secretary Sajid Javid made a joint announcement on Monday about government plans to boost competition in nine key consumer markets.
Having found that households spend up to 40% of their disposable income on a few essentials, including energy, insurance, telecoms, water and health services, they’re keen to resolve structural issues that prevent consumers from getting the best possible deal.
There’s no faulting their intentions: it is well-recognised that some of our largest consumer markets aren’t working properly. The average household could save nearly £500 a year by switching to get the best deals on their broadband, mobile phone and energy bills, and some of the markets the new measures target – the energy market and retail banking – are already under investigation by the Competition and Markets Authority. Some of the policies announced yesterday were also already underway; for example, revisions to renewable energy subsidies to protect consumers from higher bills were first announced in July. Once we strip these measures out, the government’s announcements look less impressive. There’s one big thing – the introduction of competition between water suppliers. But the rest is a clutch of minor policies on dentistry pricing, ending the right to claim for minor whiplash to reduce car insurance costs, and making sure there’s competition between school uniform suppliers. It’s not exactly radical.
Rather than the piecemeal approach the government appears to be taking, tackling minor issues which are particular to certain markets, the SMF would argue it’s time for some bold consumer reforms. That’s not to suggest that the issues the government has highlighted aren’t problems, or that they’re not worth solving, but ultimately the pay-off for consumers would be bigger if rather than fiddling around with minor issues specific to certain marketplaces, the government tackled the common problems across these markets: that consumers aren’t motivated to shop around, and struggle to compare deals even when they can.
The SMF’s recent report Should Switch, Don’t Switch explored the reasons why consumers don’t shop across markets, using research from social psychology and behavioural economics, and examined why consumers are more likely to switch in some markets than others. For example, although car insurance has increased in recent years with rising injury claims, the market as a whole is relatively competitive with a third of consumers switching each year. Rather than tinkering around the edges as the government proposed yesterday, a few bold reforms could help other consumer markets mimic this success.
Why does the car insurance market work relatively well? Firstly, it’s a relatively simple market place where consumers can get reasonable quotes with information they have easy access to – their car registration, their number of years of no-claims. Those are much easier bits of data to remember than the number of kilowatt hours you use each month. Additionally, consumers have to engage to renew their contract each year, unlike in some of the other services discussed in yesterday’s paper. This gives consumers a nudge to look around the market, and the opportunity to win new customers makes it easier for new providers to enter the market.
With a couple of radical reforms, the government could help all the consumer markets mentioned today adopt these features which help consumers get good deals. We would urge the government to consider creating an Active Consumer Week, to take place in January every year. A concerted focus on encouraging consumers to switch, at a time when we’re usually planning for the year ahead and making resolutions could motivate many to engage with a market in the way they haven’t done before, in the same way that the end of an annual contract encourages switching in motor insurance.
We also need to make it easier for consumers to shop around and compare deals. While giving customer’s accurate, comparable quotes is difficult in markets like energy and mobile telecoms, technology can make it a lot easier and avoid reliance on estimated use. We’re already halfway there, with the government’s midata initiative making it possible for consumers to use their own data to get personalised quotes from suppliers across a variety of core services, rather than trying to figure out the prices they’re likely to face from complex tariffs. The government could do more, however, to recognise the importance of this initiative. Putting all the information in one place, a Unified Data Programme, and allowing consumers to delegate its collation to a third party could unlock the possibility of automated comparisons and even automated switching, as we discuss in our submission to the CMA’s retail banking investigation. When it comes to services like electricity when the end product is much the same for the consumer regardless of who supplies it, technology could unlock innovations like reverse auctions, removing the burden of switching from the consumer and making sure they will always get the best deal for their usage patterns.
Each of these reforms would require a lot more effort than the actions announced by the government yesterday. But consumers would be significantly more likely to see significant savings as a result.
