Consumer and Commercial Regulatory System

Introduction

Regulating consumer and commercial law has proven extremely difficult, especially in the new digital age where online trading has advanced significantly over the years.[1] There is now more likelihood that consumers will be subjected to unfair and unlawful trading practices and so it is vital that all corporations are being regulated effectively. This will enhance consumer confidence and will have a beneficial effect upon the market in general. It has been said that markets work best when consumers have confidence in the corporations they are dealing with, yet the increase in rogue traders has significantly diluted such confidence. At present much confusion exists as to how regulators should control corporations in order to ensure that they are complying with the obligations that have been imposed upon them. Consequently, the powers that have been provided to regulators under the Consumer Protection from Unfair Trading Regulations 2008 appear somewhat ineffective on the basis that they still do not provide sufficient protection to consumers. This study will therefore consider whether the influential model of ‘responsive regulation’ that was proposed by Ayers and Braithwaite will be more effective in ensuring compliance of all corporations. This will be reviewed in light of the 2008 Regulations and consideration as to whether consumers will be better protected under the new model will be made. In doing so, an overview of consumer protection will first be provided, followed by a review as to how effective the 2008 Regulations. Once this has been done, the responsive regulation model will then be analysed and consideration of its effectiveness will be made.

Consumer Protection

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A consumer has been described in Lloyd Shuhfabrik Meyer & Co GmbH v Klijsen Handel BV[2] as an individual or group of individuals that consumes goods and services generated within a social system. Concerns have been raised in recent years as to whether consumers are being adequately protected from unfair and illegal trading practices.[3] Hence, it has been argued that the current regime dealing with consumer protection is ineffective in that regulators do not deal with wrongful or fraudulent traders in an appropriate manner. As shown in Macaulay v Scroeder Publishing Co Ltd[4] and Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd[5] parties to an agreement often have unequal bargaining power, which highlights the importance of being able to provide protection to vulnerable consumers. Companies will have greater knowledge of the industry than private consumers and so it is integral that regulators are capable of provided appropriate protection to consumers in the event of unfairness. As noted by Lord Denning in Lloyds Bank v Bundy;[6] “many of the traditional defences to contract enforcement were properly seen as merely exemplary of a general doctrine of ‘inequality of bargaining power’ and all provided testimony to the fact that the age of laissez faire was outwearing its judicial welcome.”[7] This demonstrates how a free market economy no longer exists as there is often an ‘inequality of bargaining power’ resulting in the need for vulnerable parties to be provided with more protection than they have required in the past.

Consumer Protection from Unfair Trading Regulations 2008

The Consumer Protection from Unfair Trading Regulations 2008 was established in order to act as a safeguard for consumers against unfair trading practices. These Regulations implemented the Unfair Commercial Practices Directive 2005/29/EC (UCPD) which intended to provide regulators with the power to impose obligations upon corporations to trade fairly. Various consumer protection laws were replaced by these Regulations as the consumer protection regime prior to 2008 was deemed unsatisfactory in protecting consumers.[8] As put by the Office of Fair Trading: “The Regulations introduced a general duty not to trade unfairly and seek to ensure that traders act honestly and fairly towards their customers.”[9] Although the Regulations address business to business practices, the primary focus was on the protection of private consumers as identified in Office of Fair Trading v Purely Creative Ltd and Others.[10] Corporations found to be in breach of the Regulations may have criminal sanctions imposed upon them by regulators and, as noted by Worthington and Britton, these “extend criminal liability beyond simply misleading practices to include, in part, aggressive practices such as coercion and harassment.”[11] The regulatory powers and responses of regulators are therefore considered more effective under these Regulations as corporations will now be more likely found liable for adopting unfair and unlawful practices than they would have in the past. This provides greater protection to consumers who will be a lot more confident when entering into commercial transactions.

These Regulations were thereby said to “herald a new era in consumer regulation,”[12] especially where online transactions are concerned as there was a great reluctance to purchase goods or services on the internet for fear of unfairness being created.[13] In Tiscali UK Ltd v British Telecommunications Plc[14] it was noted that the Regulations “make it easier for traders based in one Member State to market and sell their products to consumers in other Member States.”[15] This is economically beneficial in that it contributes to the growth of the internal market. Conversely, not all agree that the Regulations are effective and instead believe that online trading still poses many risks.[16] This is mainly due to the fact that not all e-traders are a signatory to the Regulations and as such regulators will be unable to control many cross-border transactions. As a result, it is imperative that consumers are aware of the risks when purchasing goods or services online and should only purchase from those traders who are a signatory to the Regulations. This should be easy to identify because traders will be prohibited from claiming that they are a signatory to the Regulations if they are not.[17] Regardless of this it seems as though the Regulations are not as effective when it comes to the protection of consumers as it was hoped. Furthermore, even if protection is acquired under the Regulations, there is no guarantee that consumers will be compensated. This is because there is no direct right to claim compensation and instead consumers have to rely on existing civil law. [18]

Responsive Regulation Model

The current law therefore appears out of date, complicated and too extremely restrictive[19] and therefore highlights the need for further changes to be made. A number of proposals have been put forward to rectify the current problems that exist, yet the extent to which these are viable is a debatable subject. Differing views as to how Regulators should deal with corporations to ensure compliance exist between “those who think that corporations will comply with the law only when confronted with tough sanctions and those who believe that gentle persuasion works in securing business compliance with the law.”[20] A model of ‘responsive regulation’ was thereby proposed by Ayers and Braithwaite which adopts a responsive approach by enforcing compliance strategies at first and then applying more punitive deterrent responses later on if the regulated corporation fails to comply with their obligations. They believed that corporations would be more likely to comply if an explicit enforcement pyramid was in place. An enforcement pyramid would thus include a range of enforcement sanctions ranging from persuasion, warnings and civil penalties to criminal sanctions, licence suspensions and licence revocations.[21] Consequently, it would be presumed under this model that regulators would always start at the bottom of the pyramid and then work their way up for more serious compliance failures. This model appears to replace blanket commitments with deterrence and compliance models and has been viewed as “hugely influential worldwide.”[22]

This model is currently being employed by many different governments and regulators and has since been expanded upon by Braithwaite into a comprehensive regulatory and democratic ideal, which incorporates notions of deliberative democracy and restorative justice.[23] This responsive regulation model does appear to be more effective than the approach that is currently being taken under the 2008 Regulations since there is no guarantee that consumers are being provided with appropriate protection. This is due to the fact that there is a lack of compensation being provided to consumers and regulators are likely to be a lot more lenient when it comes to sanctioning corporations.[24] Under the pyramid model, corporations will be most likely to adopt a self-regulatory approach to ensure compliance. This is because corporations will be aware of the consequences that will be imposed if they do not comply with their obligations and will have been given a number of chances to change any unfair practices that have been assumed. The Australian Law Reform Commission believes that this is the ideal approach since regulators have access to severe punishments if needed and are able to persuade corporations to undertake appropriate behaviours to ensure compliance.[25] This approach promotes self-regulation and provides corporations with the ability to change, through effective persuasion, before the use of penalties arises. Only those who ignore the persuasive practices of regulators will be penalised, which ensures that only corporations who deserve to be punished will be.[26]

On the other hand, it has been argued that voluntary compliance at the bottom of the pyramid may prove impossible as a result of the constant threats of more punitive sanctions at the top.[27] Furthermore, it cannot be said that corporations will actually respond to the pressures imposed by regulators since it has been said that corporate behaviour is not driven by regulatory pressure but rather cultural or competitive pressures.[28] In accordance with this, it could be suggested that the responsive regulation model will be appropriate for many corporations, though there will be some corporations where this approach will be ineffective. It would therefore be better for corporations to be analysed individually in order to consider what the best approach would be to ensure compliance since there will be certain circumstances whereby the pyramid approach will not be appropriate.[29] An example would be where there are potentially catastrophic risks that are being controlled. Here, it would not be appropriate to use a step by step approach to regulation since the regulator would need to go straight to the top of the pyramid when choosing an appropriate sanction. Conversely, there may be a situation whereby the risk is minimal and so mere persuasion would be needed. This situation is ideal for the responsive regulation model, though the former is not. Arguably, whilst the responsive regulation model may be better at ensuring compliance with consumer protection laws than the current 2008 Regulations are in some situations, this will not be the case for every situation. Nevertheless, given the criticisms for both approaches, it appears as though some reform to this area is needed if the regulatory approaches that are currently being adopted are improved.

Conclusion

The current consumer protection regime is extremely complex when it comes to ensuring that corporations are complying with their obligations. As a result, consumers are still being put at risk when entering into commercial transactions. Although the Consumer Protection from Unfair Trading Regulations 2008 attempted to act as a safeguard for consumers against unfair trading practices, it cannot be said that these are being fully realised. This is because of the limited powers that are provided to regulators when imposing sanctions upon corporations. Consequently, it seems as though further changes need to be made to the existing regime in order to guarantee the protection of consumers. Ayers and Braithwaite model of responsive regulation does provide regulators with appropriate powers to imposes relevant sanctions upon corporations, whilst at the same time providing them with the ability to make necessary changes. This step-by-step approach does appear fair in that corporations are initially given the chance to rectify their non-compliance activities. Nevertheless, because this model will not be applicable to all corporations, it has been considered largely ineffective in making sure that corporations actually respond to regulatory pressure. Corporations should therefore be analysed individually in order to consider what the best approach to take would be. This will prevent unfairness and will enable consumers to have greater confidence when entering into commercial transactions. This will be a lot more beneficial for the economy overall and online trading will be likely to increase even further.

Bibliography

Books

F Sudweeks and C T Romm., Doing Business on the Internet Opportunities and Pitfalls with 39 Figures (United States: Springer, Business & Economics).

I Ayres and J Braithwaite. Responsive Regulation (Oxford: Oxford University Press, 1992).

I Worthington and C Britton., Business Environment, (6th edn Pearson Education, 2009).

R Baldwin, M Cave and M Lodge., Understanding Regulation: Theory, Strategy and Practice (Oxford: Oxford University Press, 2011).

R Kagan and J Scholz., ‘The Criminology of the Corporation’ in K Hawkins and J Thomas., Enforcing Regulation (Boston: Kluwer, 1984).

Journal Articles

D Hertzell., ‘Time to Redress the Balance’ (2011) 161 New Law Journal 683, Issue 7466.

F Haines., Corporate Regulation: Beyond Punish or Persuade (Oxford: Oxford University Press, 1997).

H Thorpe., ‘Consumer Protection from Unfair Trading’ (2008) 32 Company’s Secretary Review 2.

J Braithwaite., ‘Responsive Regulation and Developing Economies’ (2006) 34 World Development 884.

L Timmermann., ‘Consumer Protection from Unfair Trading Regulations 2008, Part 2’ (2009) Trusted Shops, <http://www.trustedshops.co.uk/news/consumer-protection-from-unfair-trading-regulations-2008-part2/> [Accessed 13 April 2014].

M J Trebilcock., ‘The Doctrine of Inequality of Bargaining Power: Post-Benthamite Economics in the House of Lords’ (1976) 26 University of Toronto Law Journal 4.

Office of Fair Trading., ‘Consumer Protection from Unfair Trading Regulations 2008’ (2008) Information for Businesses on the Consumer Protection from Unfair Trading Regulations, <http://www.oft.gov.uk/business-advice/treating-customers-fairly/protection> [Accessed 13 April, 2014].

P Stokes., ‘New OFT Powers in the Credit Clamp-Down’ (2005) 155 New Law Journal 236, Issue 7164.

R Baldwin and J Black., ‘Really Responsive Regulation’ Law Society Economy, Working Papers, 5 <http://eprints.lse.ac.uk/23105/1/WPS2007-17BlackandBaldwin.pdf> [Accessed 12 April 2014].

S Brown., Protection of the Small Business as Credit Consumer: Paying Lip Service to Protection of the Vulnerable or Providing a Real Service to the Struggling Entrepreneur?’ (2012), 41 Common Law World Review 1.

Case Law

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269

Lloyd Shuhfabrik Meyer & Co GmbH v Klijsen Handel BV [1999] ETMR 690

Lloyds Bank v Bundy [1974] 3 WLR 501

Macaulay v Scroeder Publishing Co Ltd [1974] 1 WLR 1308 (HL)

Office of Fair Trading v Purely Creative Ltd and Others [2011] EWHC 106 (Ch)

Tiscali UK Ltd v British Telecommunications Plc [2008] EWHC 3129 (QB)

[1] F Sudweeks and C T Romm., Doing Business on the Internet Opportunities and Pitfalls with 39 Figures (United States: Springer, Business & Economics) 9.

[2] [1999] ETMR 690

[3] P Stokes., ‘New OFT Powers in the Credit Clamp-Down’ (2005) 155 New Law Journal 236, Issue 7164.

[4] [1974] 1 WLR 1308 (HL)

[5] [1968] AC 269

[6] [1974] 3 WLR 501

[7] M J Trebilcock., ‘The Doctrine of Inequality of Bargaining Power: Post-Benthamite Economics in the House of Lords’ (1976) 26 University of Toronto Law Journal 4, 359.

[8] S Brown., Protection of the Small Business as Credit Consumer: Paying Lip Service to Protection of the Vulnerable or Providing a Real Service to the Struggling Entrepreneur?’ (2012), 41 Common Law World Review 1, 59.

[9] Office of Fair Trading., ‘Consumer Protection from Unfair Trading Regulations 2008’ (2008) Information for Businesses on the Consumer Protection from Unfair Trading Regulations, <http://www.oft.gov.uk/business-advice/treating-customers-fairly/protection> [Accessed 13 April, 2014].

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