The Penrose Review: power to the consumer? - Oxera
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Advancing economics in business
May 2021
The Penrose Review:
risks of using algorithms
power to the demystifying
in business: consumer? AI
The Penrose Review: power to the consumer?
Penrose proposes the following changes. Many of these proposals are likely to
Contact have a positive impact—especially those
Leon Fields • The CMA should raise its public aimed at strengthening consumer rights.
Senior Consultant profile. The CMA should fulfil a role Greater public awareness of this enhanced
as a ‘consumer champion’ and a competition and consumer protection
‘micro-economic sibling for the Bank regime will enable consumers to identify
of England’. Specifically, it should unfair business practices and more readily
publish an annual ‘State of Competition seek redress.
and Consumer Detriment’ report and
monthly reports from its meetings with Moreover, upgrading local consumer
consumer complaints organisations.5 authorities such as Small Claims Courts,
The Penrose Review investigated the ADR services and LATS will make it easier
state of competition and consumer • The CMA should be given more for consumers to submit complaints and
protection policy in the UK, as well as powers to issue decisions and fines ensure that these are handled quickly and
economic regulation in network sectors. for consumer law breaches without efficiently. These consumer protection
Some of the consumer protection having to go to court. The CMA already bodies should be made more transparent
proposals would be beneficial to has the power to issue decisions and actively encourage consumers to
consumers; however, others are for competition law breaches, but report faulty products or businesses that
untested and may have unintended currently it is required to take consumer do not meet certain standards. Specifically,
consequences. In regulated sectors, law cases to a non-specialist court. Penrose suggests that these bodies
there are unanswered questions Penrose concluded that this process should adopt a fully digital approach to
around reforms to the appeals process, is slower, more bureaucratic and dispute resolution, comparable to using
and the measures proposed to reduce ultimately weaker.6 an app on your phone. This proposal
the scope of economic regulation while represents a potentially effective solution
increasing competition need to be • Localised consumer protection to improving consumer redress (and
explored in more detail. bodies should have a greater role. ultimately competition).
Penrose argues that consumers
should be able to submit complaints Greater legal powers for the CMA are
In September 2020, the UK government to Small Claims Courts or Alternative another important and pragmatic way
asked John Penrose MP to write a short Dispute Resolution (ADR) services to improve enforcement of consumer
independent report on the UK’s approach using a simple online process or even protection laws. Penrose also argues that
to competition and consumer protection a smartphone app. Local Authority the CMA should update its guidelines on
policy. Published in February 2021, ‘Power Trading Standards (LATS) teams what ‘treating customers fairly’ means
To The People’ proposes several changes.1 should also be given more resources in practice, so that businesses, charities
As noted in the report, a number of the to investigate local scams and other and public bodies can identify and avoid
issues have been explored before—for consumer protection problems that problems in advance. The Financial
example, by Lord Tyrie (former chairman of are too small to warrant a full-scale Conduct Authority (FCA) has arguably
the UK Competition and Markets Authority, investigation by the CMA.7 led the way in this area in terms of what
CMA), in the Furman Review of competition this concept means, within the context of
in digital markets,2 and in the 2020 CMA • The UK should introduce further ‘outcomes-based’ regulation. Oxera has
state of competition report.3 consumer protection laws to also put together a toolkit for financial
address harmful business services firms to ensure that they treat
Now that the dust has settled, this article practices—in particular:8 customers fairly in practice.9
focuses on two important themes of the
Penrose Review: • price discrimination and loyalty
penalties, i.e. when customers
Unintended
• that more consumer protection should who renew an existing contract consequences?
be introduced across all sectors; in industries like insurance
or energy are systematically While the Penrose Review’s proposals
• that more competition should be charged more than people who have many advantages, there are some
introduced in sectors that are subject frequently switch; practical considerations and potential
to economic regulation. unintended consequences. A firm
• ‘rip-offs’ hidden in small understanding of the economics on both
These are not the only issues covered in print or through information the supply side (competition among
the report, but they are the most closely asymmetries—for example, firms) and demand side (behaviour
related to applied economics. privacy and data usage policies of consumers) is required before
included in the terms and implementing interventions, particularly in
conditions of everyday products relation to complex pricing.
Expanding consumer like public Wi-Fi (which many
protection users do not read); First, an increased focus on obvious signs
of consumer detriment could create a
Penrose recommends expanding • ‘sludge’, or behavioural nudges risk of prioritising short-term fixes while
consumer protection powers for the CMA that encourage consumers to harming dynamic competition (and
and other regulatory bodies, such that they accept a bad deal—for example, thus consumers) in the long term. For
are in line with the UK’s strong competition where companies offer a ‘free example, the CMA (or another regulatory
enforcement powers. He argues that trial’ that converts into an body) might identify a particular business
the UK lacks a high-profile consumer expensive subscription (and is engaging in practices that are considered
protection agency, and that consumer often difficult to cancel), or where to be harmful. It might then impose tough
rights are relatively weak compared to our retailers falsely claim that items remedies immediately, including a ban on
European neighbours.4 are almost sold out in order to certain pricing behaviours. However, if the
create a false sense of urgency. remedies are inappropriately designed,
May 2021 1The Penrose Review: power to the consumer?
this action might discourage new and practice. network enhancements. In the case of the
innovative firms from entering the market. water sector in England and Wales, non-
Furthermore, it is important to understand The report suggests that the system should domestic retail competition was introduced
the behavioural economics: the consumer be simplified, with any appeals dealt with in 2017, and there are ongoing initiatives
biases being exploited (e.g. through by the Competition Appeal Tribunal (CAT). to encourage direct procurement of assets,
sludging methods), whether the market According to Penrose, the CMA proposed bio-resources markets, bulk supply trading
will correct itself or not, and which kinds this solution and it should be implemented and bidding-in markets for water.
of remedies are likely to work.10 A balance promptly.15
needs to be struck, the longer term must be Crucially, in many cases, these energy and
taken into account, and the market specifics While this may reduce the CMA’s workload, water markets retain the need for some
have to be understood. a question arises concerning how the form of backstop regulation—and it is not
CAT would handle future regulatory clear whether the CMA would be better
Second, interventions prohibiting loyalty appeals. In practice, these appeals can placed than sector regulators to do this.
penalties should only be made following involve technical points around regulation,
a case-specific analysis, as there are econometric modelling, and finance. It is In addition, the statement that there is ‘no
trade-offs. Penrose raises concerns that in not clear if the CAT would develop these inherent reason’ why non-network parts of
some industries (for example, mobile phone skills, or if the whole process should be the value chain should become a ‘normally-
contracts, broadband, home insurance and streamlined to the standard of a Judicial competitive’ industry does not take full
mortgages), consumers who automatically Review or similar. There will be pros and account of the economics (on either the
renew their subscription are systematically cons to any model. Indeed, in discussing demand or supply side): will there be
charged more than consumers who switch further changes to both the CMA and sufficient savings for consumers to switch
more often. This is loosely modelled on the CAT processes, the report notes that ‘the and, given the nature of the product and the
FCA’s new ban on insurers charging higher end-to-end process needs fixing, but there behavioural biases that may be present,
prices to loyal customers.11 Penrose is is no consensus on how to put it right’.16 will consumers engage and discipline
proposing that some restrictions are placed It recommends a taskforce to explore the firms?
on loyalty penalties across all industries.12 issues further.
However, the FCA’s proposed intervention Buying a coffee on a day-to-day basis
is as-yet untested. It is not clear whether it In addition, Penrose focuses on where, (considered by many to be a normally
will help consumers, and may even harm fundamentally, the line should be drawn competitive market) is not the same
them—as there is some evidence that between competition and regulation:17 as buying a one-off subscription utility
customers require a large benefit from service (such as energy supply). Utility
switching to compensate them for the Outside the network monopolies with markets may not work as well as intended.
associated hassle and uncertainty.13 their Regulated Asset Bases (RAB), there Indeed, as stated in the report, Penrose
If pricing practices are constrained is no inherent reason why most of the campaigned for the energy price cap18—for
to prevent introductory offers, fewer rest of each of these sectors shouldn’t increased regulation when it was perceived
people may switch, and this may reduce become a normally-competitive industry, that the retail market was not working for all
competition over time.14 It may be better to with the same high standards, strong consumers. In the water sector in England
wait until the impact of the FCA’s proposed competition and consumer powers as and Wales, consideration has been given
intervention is fully understood before other parts of our economy. The benefits to extending retail choice to domestic
applying similar regulations more widely. will be same as the ones described for customers. However, Ofwat’s analysis
digital industries […]. showed that the benefits to customers from
Third, some of Penrose’s proposals switching would be £8 per year.19 Will this
rightly focus on protecting vulnerable The report states that while progress be sufficient for consumers to engage with
consumers, such as the proposals that has been made in airport regulation and the market? In addition, since 2017 the
prevent companies from presenting unfair telecommunications, other regulators ‘have non-domestic retail market, which has been
behavioural nudges or hiding unfair terms only recently begun’; that regulation should opened to competition, has seen various
in the small print. In practice, a balance be stripped back to the monopoly assets; problems emerge.20
needs to be struck to ensure that remedies and that even with respect to monopoly
are proportionate and targeted. This is assets, there should be auctioning of These factors indicate that even if a utility
particularly the case where interventions contracts for new investment in network market can be liberalised, it is necessary to
intended to protect vulnerable people sectors. Penrose wants sector regulators to be realistic about the impacts. In an ideal
lead to decreased choice for others (for hand over more and more responsibility for world, regulation (and regulators) would
example, hypothetically, an absolute ban market supervision to the CMA. be peeled back to the bare minimum.
on all online gambling might protect some However, interventions should be based on
while preventing others from enjoying This does, however, offer a somewhat the economics, and who undertakes them
a responsible level of gambling). It is sceptical view of the status quo. Most based on practicality.
nonetheless usually possible to protect regulators have a duty to promote
vulnerable consumers in a way that does competition. Since privatisation, they have
not unduly disadvantage other groups. explored where along the value chain
Getting the balance right
competition is likely to be both feasible and
The Penrose Review is ambitious in its
Pushing back regulation desirable—and what form this might take.
coverage. The report’s consumer protection
Many of the sectors’ regulators have both
proposals would lead to greater public
Penrose also proposes changes in sectors ex ante powers to promote competition and
awareness, enabling consumers to identify
in which consumers are already protected ex post powers to enforce competition law.
unfair business practices and more readily
through economic regulation (such as
seek redress. It seeks to push the CMA to
water, energy and telecommunications). In In energy, there is now competition in
do more as a ‘consumer champion’.
these sectors, in the monopoly parts of the generation/production, retail, storage,
value chain, the respective regulators set metering and ancillary services. Regulation
price limits. These can in turn be appealed is confined to the network assets, and
However, there may also be various
by the companies to the CMA—which can Ofgem’s offshore transmission framework
potential unintended consequences that
be a complicated and lengthy process in involves ‘competition for the market’ for
would need to be considered further.
May 2021 2The Penrose Review: power to the consumer?
Penrose, J. (2021), ‘Power To The People: Stronger Consumer Choice And Competition So Markets Work For People, Not The Other
An increased focus on consumer detriment
1
Way Around’, February—hereafter the ‘Penrose Review’.
could create a risk of prioritising short-
2
Furman, J. (2019), ‘Unlocking digital competition: Report of the Digital Competition Expert Panel’, HM Treasury, March.
term interests while harming dynamic
competition. The proposals to reduce the 3
The Penrose report expands on many of the proposals set out in the February 2019 letter from Lord Tyrie, then head of the CMA. Similar
to the Tyrie letter, Penrose advocates that the CMA has greater focus on consumer protection while relinquishing some of its other
scope of economic regulation and increase responsibilities (for example, the responsibility of reviewing appeals from some sector regulators). Penrose also builds on the ideas of the
competition, while appealing, require further March 2019 Furman Review, a major independent government review of competition in the digital economy. Both Penrose and Furman
recommend establishing a digital markets unit to oversee competition in the digital economy, while Penrose cautions against regulatory
analysis in terms of what is desirable and scope creep. Finally, Penrose echoes some of the concerns raised by the CMA’s November 2020 state of competition report, which
feasible. highlights the relatively high rates of consumer redress issues and poor complaint handling of companies in the UK.
4
For example, Penrose highlights that one in eight UK consumers had an experience worthy of a complaint, compared to an EU average
Any interventions would need to be based of one in 12 (see the Penrose Review, section 1.3).
on the latest economic thinking and 5
See the Penrose Review, section 2.1.
evidence, and on a sound understanding 6
See the Penrose Review, section 2.2.
of the interactions between firms and
consumers. 7
See Penrose Review, sections 6.2 and 6.4.
8
See Penrose Review, sections 7.2, 7.3 and 7.4.
9
Oxera (2019), ‘Fair ground: a practical framework for assessing fairness’, Agenda, March.
Contact For a discussion of deception in markets, see Oxera (2017), ‘The policy of truth? Deception in markets and in public policy’, Agenda,
10
April.
11
FCA (2020), ‘General insurance pricing practices: Final Report’, September.
leon.fields@oxera.com 12
Penrose suggests that ‘loyalty penalties’ should be permitted if they are presented transparently before users sign up and given that
Leon Fields firms are able to justify why their pricing structure is pro-competitive.
13
See Deller, D. et al. (2021), ‘Switching energy suppliers : it’s not all about the money’, The Energy Journal, 42:3, pp. 95–120. N.B. Oxera
tristan.byrne@oxera.com has advised parties that were subject to the FCA’s investigation..
Tristan Byrne See CMA (2018), ‘Tackling the loyalty penalty’, 19 December, paras 2.39–2.41. N.B. Oxera has advised parties that were subject to the
14
FCA’s investigation.
15
The Penrose Review, p. 18. In Lord Tyrie’s 2019 letter to the Secretary of State (BEIS), the (then) CMA Chairman proposed that there
was a strong case for removing responsibility for hearing regulatory appeals from the CMA, with these matters consolidated in the Courts
(rather than the CAT).
16
The Penrose Review, p. 19.
17
The Penrose Review, p. 36.
18
The Penrose Review, p. 2.
19
Ofwat (2016), ‘Costs and benefits of introducing competition to residential customers in England’, September.
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