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This month OFT Chief Executive Clive Maxwell discusses protecting patients' interests - the OFT's role in reviewing NHS hospital mergers
The NHS is facing the twin challenges of spending cuts and rising demand. Maintaining the quality of services to patients is central to NHS hospital objectives. With these objectives in mind, many hospitals and commissioners are reconfiguring services, which may at times result in mergers between providers. Patient choice and competition gives incentives for providers in the NHS to ensure patients receive the best quality care. This must be seen in the context of financial and clinical sustainability.
The OFT plays an important role in reviewing mergers involving foundation trust (FT) hospitals, a role confirmed in legislation passed by Parliament in the Health and Social Care Act of 2012. The question for the OFT is whether overall the merger is in the interests of patients.
Since the Act came into force, the OFT has reviewed two such mergers. The first involved the merger of two FT hospitals in Dorset and the other the transfer of neurosurgery services between two FT hospitals. We are also currently reviewing a pathology joint venture involving providers in London.
Given this background and the developments in this space, it is a good time to take stock of our role, a role which the Competition and Markets Authority (CMA) will take on after the OFT and the Competition Commission (CC) merge in April 2014 to create a single UK competition authority.
The CC decision to block the merger of Royal Bournemouth and Christchurch FT with Poole Hospital FT received significant interest. The OFT referred the merger to the CC after finding it would reduce patient and commissioner choice, reducing the hospitals' incentives to maintain or improve the quality of services above national minimum standards. The CC probe found that there was not enough evidence that the proposed merger would result in overall benefits for local patients.
In a case from February 2013, which concerned neurosurgery services in London, the OFT found no competition concerns. The OFT, within its 40 working day timetable, cleared the acquisition by University College London Hospitals NHS Foundation Trust of Royal Free London NHS Foundation Trust's neurosurgery services.
The role of competition in the NHS has been debated for some time. A recurring theme has been whether the competition system has the right tools and approach to account for the specific aspects of the NHS. To address some of these concerns, the OFT together with the CC and Monitor, the healthcare regulator, recently published a joint statement (pdf 170kb) emphasising that patients' interests are at the heart of the assessment of NHS hospital mergers.
The statement also explains that Monitor, given its sector expertise and role as the healthcare regulator, will provide advice to hospitals considering mergers at an early stage. Monitor's proactive advisory role is expected to lead to fewer problematic mergers, while also helping hospitals build their case ahead of approaching the competition authority. In addition, we would expect early stage engagement by hospitals with Monitor and the OFT, to minimise the risk of lengthy merger review, by helping the merging NHS hospitals in identifying whether the merger will have a positive effect overall on patients.
Patient benefits arising from mergers are a key part of the overall assessment. Monitor advises the OFT on patient benefits brought about by the merger and the OFT places significant weight on Monitor's advice.
The OFT's review of NHS hospital mergers, which is driven by the aim of protecting patient interests, benefits from being open, transparent and independent. When assessing mergers involving NHS hospitals, the OFT gathers views from relevant stakeholders, including commissioners, patient representatives and other providers. The outcome is always based on evidence.
Looking ahead, the drive for reconfigurations and the need to ensure NHS services are sustainable is likely to lead towards more mergers between hospitals. The OFT is committed to ensuring these do not go against patients' interests, while helping providers in considering the implications of proposals. We see this as important, given the relative novelty of competition consideration in this space. We will therefore continue to engage with relevant stakeholders over the coming months to understand the wide ranging views in the industry and explain the OFT's role in this sector. Furthermore, we are working closely with Monitor and the Competition Commission in order to make sure that the assessment framework is responsive, predictable and continues to have the interests of patients at its heart.
When buying something online, we've all been caught out by hidden charges, which can be revealed late on in the buying process, or by charges that are otherwise unclear. The OFT has just published further research into this issue, considering whether harm is caused to consumers by different ways of 'partitioning' prices.
We previously looked into the potential impact of 'drip' pricing on consumer decisions in our Advertising of Prices market study. This occurs when the price is split so that a part of the price is presented later in the buying process. For example, when buying something online a shopper might only be shown a headline price on the first screen but is not shown an additional fee, such as postage and packaging, until they have clicked through to a subsequent screen. Out of the five pricing practices we looked at, the research showed drip pricing to be potentially the most harmful to consumers.
You may have seen our subsequent enforcement action last year against a number of airlines regarding their 'dripping' of payment surcharges (for example, a fee for paying by debit card) in online bookings. The Which? super-complaint regarding payment surcharges, received by the OFT in 2011, had highlighted the potentially significant detriment that could be caused to consumers by this practice. Following our response to the super-complaint and enforcement action, it is now the industry standard for airlines to include compulsory charges such as debit card fees upfront in the headline price rather than adding these at the final stage of payment.
We have continued to monitor the use of this practice in other industries, and noted that some businesses are moving away from 'drip' pricing and towards displaying additional fees separately, but on the same page as the overall headline price. To extend our knowledge further and to supplement our previous research we therefore undertook research to explore whether partitioned pricing of this kind, without a 'drip', could affect the consumer decision making process.
Our Partitioned Pricing research consisted of two strands: a literature review and a controlled laboratory experiment exploring consumer behaviour. The literature review explored the theory of partitioned pricing and its possible impact on consumer decisions, and it indicated that partitioned pricing has the potential to impact consumer behaviour. In particular, partitioned pricing can lead to consumers believing the price is lower than it actually is which, in turn, can increase their demand for the product or can lead to them searching less than they otherwise would have done for alternative products or services. To complement this review, we commissioned a behavioural experiment to inform us whether the potential impacts were likely to arise in practice and if so what, if any, harm they might cause. Information on the design of the experiment can be found in our behavioural experiment report.
The experiment found further evidence to support the view that partitioned pricing can affect consumer behaviour, even when all the parts of the price are presented together. In particular, we found that improving the transparency of the various parts of the total price-and the transparency of the total price itself-can significantly improve consumer decisions. These findings mean that partitioned pricing could lead to consumers either buying more or less than they should have done or searching more or less than they should have done-just like 'drip' pricing. In addition, because our experiment was set in a very simple laboratory environment, we would expect there to be a more significant impact on consumers' actual decision-making in complex real-world situations.
Our findings suggest that increasing the visibility and clarity of prices to make it easier for consumers to work out and compare the total price of what they are buying will help improve their decisions. In light of this the OFT hopes that businesses will want to make prices easier for consumers to understand, either by including all compulsory charges in the upfront price or by focusing on the total price albeit with a breakdown of the headline price and additional compulsory charges. And to the extent that they don't, we will take our new understanding of partitioned pricing's impact into account as we consider future enforcement action.
'Would you like to purchase extended protection?' is something you are likely to have heard when buying a new electrical good. Having spent time researching the electrical product that best suits your needs you head to your computer to purchase it online or go to a store to buy it there. At the point of purchase, you are then often asked whether you want to purchase an extended warranty.
Although extended warranties can provide benefits, saying yes without giving it some thought beforehand could mean signing up to a bad deal. Some extended warranties can work out to be expensive compared to others, sometimes costing up to 50 per cent of the price of the good being bought. It's not just the cost but also whether the warranty will actually be used. Modern appliances are generally reliable and it can often take years before they become faulty, so it may be cheaper to repair the product rather than purchase an extended warranty.
Also, consumers already have various options if something goes wrong. They may be covered by household insurance. There is also a considerable amount of consumer rights law which provides the consumer with protection in addition to the manufacturer's guarantee. In particular, the Sale of Goods Act 1979 provides that goods should be of satisfactory quality, be fit for purpose and be as described. The requirement to be of satisfactory quality might include the item working or lasting for a reasonable length of time. What this means depends on the item but having spent perhaps a few thousand on a TV it would be reasonable to expect it to last a considerable length of time. The same may not be said for a 50p plastic torch. If the goods do not meet these requirements, consumers may be able to get a repair, replacement or refund from the seller.
Yet for some consumers, the peace of mind that comes from having an extended warranty is valuable. Ensuring that these consumers can make the best choice for their needs is important. However, over the years OFT research into the market has found problems that can make it difficult for consumers to know what the right extended warranty is for them. Often, useful information to help assess value for money is not available. Also, the question of buying an extended warranty is often last-minute, with most not even thinking about purchasing one until they have already bought their electrical appliance. Consequently a comparatively low number of people shop around - 25 per cent compared to 69 per cent within the general insurance market. This means that many consumers may have bought an extended warranty without having enough information to assess whether it was the best deal that was right for them.
To deal with this and other concerns, two of the biggest high-street sellers of extended warranties, Argos and Dixons, agreed to create a new website to make shopping around easier as part of legal undertakings agreed with the OFT. Four more providers - D&G, Richer Sounds, Tesco and Warranty Direct - voluntarily decided to also join and the site, and www.compareextendedwarranties.co.uk was born last month. This website provides a one-stop point of information, covering 75 per cent of the market, for consumers to pick the best extended warranty. We hope that the proportion of the market covered will grow as more providers of extended warranties sign up.
Since the launch, reception has so far been good - there have been thousands of visits to the website and feedback from stakeholders has been positive. But this is just the beginning. As time progresses we're hopeful that many more consumers will see researching for a warranty, if they need one, as part of the normal shopping process. So when they're asked: Would you like to purchase extended protection?' they will truly know the answer that is best for them.
Unfair Terms in Consumer Contracts Regulations (UTCCRs) can seem complex. Generally, the regulations cover contract terms in business-to-consumer agreements and are designed to protect consumers against terms which could be used to give the business an unfair advantage. Action the OFT has taken under the UTCCRs includes work to change the contract terms offered by gyms, making them more transparent and giving their members better cancellation rights.
For many businesses, awareness of UTCCRs is low and some see the legislation as too complex to get involved in. However, our research shows that far from deliberately flouting the rules, most businesses want to comply with the UTCCRs but need some help getting started. Many report that they simply do not have the time or the resources to translate lengthy legal information into what they should do to comply.
With that in mind, this week we have launched a new Unfair Terms hub to provide businesses with a useful starting point. The online resource is not a replacement for sound legal advice, but it does introduce the topic in a more accessible format. The content on the site has three levels of information:
When considering the UTCCRs, businesses should use the materials as a starting point and follow six simple steps:
The new hub provides businesses with easier to understand information to help them meet their legal obligations under UTCCRs.
From April 2014, many of the functions of the OFT and Competition Commission will be combined into the new Competition and Markets Authority. The new organisation will play an important leadership role when it comes to UTCCRs and will continue to provide business guidance on the UTCCRs.
Barely a day passes without reading a story about problems created by payday loans for some of the more vulnerable people in our society.
Tackling them is a priority for OFT.
In our recent report we provided evidence of widespread bad practice across the payday sector. Of particular concern were failing to assess whether loans are affordable before making them or rolling them over, failing adequately to explain how payments will be collected, using aggressive debt collection practices, and failing to treat with forbearance borrowers in financial difficulty.
We have taken steps to tackle bad practice, including revoking the licences of three payday lenders and requiring three others to change their behaviour.
Following publication of our report, we wrote to all payday lenders - over 200 of them - making it very clear that they risk losing their licences if they do not put things right.
We followed this up by sending to each of 50 leading lenders detailed dossiers of the specific problems we found when we inspected them. Each lender was given 12 weeks to demonstrate, to our satisfaction, that they comply fully with their legal obligations and the standards that we expect of them.
Should lenders fail to do so, we have a range of powers that we will not hesitate to use, including suspending licences where there is an urgent need to do so, revoking licences or imposing formal requirements to change behaviour.
We are currently evaluating the first responses and expect to receive them all by the end of next month.
We can report that already five lenders have advised us that they have left the payday market, including two that have surrendered their consumer credit licences.
We can also confirm that we will shortly announce whether or not we will refer the payday lending market to the Competition Commission having consulted on our provisional decision that a full investigation by the Commission into this market, which does not appear to be working well for consumers, is appropriate.
You may have seen the report in which the Public Accounts Committee criticised our approach to regulating consumer credit markets. We will, of course, consider carefully the points they made. But it's fair to say we were disappointed that the committee overlooked the legislative constraints under which we operate. These constraints were recognised in the recent NAO report which found that the OFT delivered a good return, saving consumers over £8 for every £1 it spent enforcing the law.
Looking to the future, we are working closely with our colleagues at the Financial Conduct Authority, which will take responsibility for regulating consumer credit from April 2014. The FCA is better resourced and has more powers than the OFT, which will lead to more effective regulation of consumer credit markets.
By its very nature the quick house sales market is more likely to be used by the vulnerable who, often in financial difficulty, are looking to get a fast sale to ease their money worries.
Providers of this service offer to buy a house or find a third party buyer very quickly and usually at a discount from the full market value. While some offer a valuable service, we have concerns that some practices might lead to homeowners receiving much less for their property than it is worth. Any losses can potentially be very high.
Our intelligence suggests there may be problems with the quick house sales sector, but we need more evidence before drawing firm conclusions. Whilst we had enough information to trigger a market study, we really needed to hear first hand whether people had experienced problems. It's not easy to get people to come forward, but within just a few days of launching our study last week more than 75 individuals had contacted us.
Practices in this sector we would be concerned about include:
We also received a number of positive responses from firms operating in the sector who want to talk to us further. Some firms say they are committed to ethical trading and are equally concerned about firms who mislead consumers. They welcomed our interest in the sector and we are looking forward to a constructive dialogue with them.
The OFT has requested information on the business models and practices of over 50 quick house sale firms but we're also keen to hear from anyone with experience of this sector, be they valuation expert, estate agent, debt advisor or home owner.
More information on the study is available on the market study page, but anyone who wishes to contact the OFT can email firstname.lastname@example.org or call 020 7211 8608 by 16 May 2013. All information will be treated in confidence.
The UK merger regime is going through a particularly busy period.
Whilst merger activity in the economy overall has been depressed, there have been more of the kinds of merger that the competition authorities need to scrutinise carefully.
The OFT expects to have taken about 100 decisions on mergers by the end of this financial year, which is about the same as the previous year and much higher than in the years before that. We're also making more references to the Competition Commission - about 15 per cent of cases this year, compared with a typical rate of around 10 per cent for the period since 2004.
The upsurge in activity looks to be very much driven by difficult economic circumstances, with a high proportion of the mergers that we see involving firms in the same markets coming together, and leading to consolidation in those market sectors.
These types of merger case present their own particular difficulties. We need to be able to work with firms to resolve issues without a referral wherever it's appropriate to do so, but we equally need to respond to evidence gathered which suggests that there is a reasonable prospect that consumers will suffer higher prices or reduced choice.
There are also some other important changes underway in the merger regime. In particular, we're deliberately taking a more robust approach to parties integrating merging businesses before the conclusion of our consideration of the merger. This has included, for the first time, requesting parties in some cases where a transaction has been completed to appoint a trustee to monitor their compliance with their initial undertakings to hold firms separate during the merger investigation.
We're also now looking at more mergers in public services: we have considered our first two mergers between publicly-owned hospitals, and we fully expect that the OFT and then the CMA wil become more involved in looking at a wider range of mergers affecting public services.
I said more about these issues, and the other ways in which the OFT is maintaining delivery of competition work in its final year, in a speech earlier this month. Read the speech in full (pdf 221kb).
It was hard to miss the publication of our report on the petrol and diesel sector last week - few OFT projects have generated so much media coverage.
Alongside factual coverage, the report has generated a lot of critical comment disagreeing with our conclusions because, as one commentator put it, drivers 'instinctively know that something's not right'.
It is certainly true that there is widespread mistrust in how the petrol and diesel market operates, but we need to look at the evidence.
Our aim was to gather the facts and analyse the evidence to see whether there were competition problems that we could address to improve the way this sector functions, and we approached the task with an open mind. We're certainly not reluctant to intervene in markets where we do identify problems - only last year we referred the private motor insurance industry to the Competition Commission because we identified competition concerns that could be leading to higher prices for motorists.
In the five months we spent looking at the fuel sector, we gathered views and information from companies, industry representatives, motoring groups, MPs, motorists and many others, as well as reading a raft of market reports, government studies and academic literature. We also carried out some in-depth econometric analysis to assess the factors associated with local variations in pump prices and to determine whether there is evidence to support the existence of 'rocket and feather' pricing.
We set out our conclusions in detail in our report and have now published a full suite of Annexes with supporting information.
Not everyone will have time to read the full report, so we have also prepared questions and answers which cover key issues that seem to be of most interest. To provide a taster, here are some of the headlines.
Our overall finding based on the available evidence was that at a national level competition is working well in the UK road fuel sector. Rises in pump prices for petrol and diesel over the last 10 years have largely been caused by higher crude oil prices and increases in tax and duty and not a lack of competition. Pre-tax, the UK has some of the cheapest road fuel prices in Europe.
Not surprisingly, we found that prices are lower where there are more competitors. Supermarkets play a particularly important role - their business model of operating larger sites mean they consistently offer lower prices than their competitors, and prices of other fuel retailers are lower in areas where there are supermarket forecourts. Other factors that we found influence prices are the amount a forecourt sells and the transport costs of getting fuel to it. (See Chapter 4 and Annexe D for more on this issue.)
We carefully examined claims that supermarkets' and major oil companies' practices may be making it more difficult for independent dealers to compete with them. But we didn't receive evidence of any anti-competitive practices that might lead us to take enforcement action. (See Chapter 5 for more on this issue.)
And despite motorists being convinced that prices rise more quickly than they fall, our analysis of so-called 'rocket and feather' pricing found very limited evidence to suggest it exists in practice - changes in costs appear to be passed on to motorists, with little discernible difference in the speed depending on whether they are going up or down. (See Chapter 6 and Annexe E for more on this issue.)
It has also been suggested that the OFT hasn't addressed some issues - such as the rise in gross margins for diesel - or considered particular options for change - such as making wholesale prices transparent to consumers. Both of these issues are covered in Annexe A.
In brief, the evidence indicates that the rise in diesel margins predominantly relates to refining and is explained by an increase in demand to which UK refineries are not well placed to respond.
On transparency of wholesale prices, it's difficult to see how knowing the wholesale price would help drivers to make better choices about where they buy fuel. If anything, it might distract attention from retail prices which is what motorists should be focusing on if they want to get the best deal.
While overall we think competition is working well in this sector, it is clear that in some places competition is stronger and more effective than others. There will always be areas of the country which cannot support lots of competing forecourts. This is a tough issue to address - we can't order oil companies or supermarkets to open forecourts, nor can we investigate the prices that are charged by every forecourt, and every wholesaler supplying them, to check that they are reasonable.
What we can do is make sure that what competition there is in these areas does not get stifled by anti-competitive behaviour. This is why we have made it absolutely clear that where we receive credible evidence of anti-competitive behaviour, we will look to take action, as we have done in many other markets. (Annexe F provides guidance on the law and on how to complain to help those who want to submit such evidence.) We have recently opened a competition investigation in the Western Isles of Scotland where we do have such evidence.
And we have raised concerns about high prices at motorway service stations - we think that it would help drivers if they could see the price before they've pulled off the motorway and we're calling on the Department for Transport to consider putting signs on the side of road. We await their response, but greater price transparency on motorways could help exert downward pressure on prices.
In summary, we reached our views after careful consideration and on a solid base of evidence. We welcome informed debate. We encourage those who disagree with our conclusions to study our report and tell us if our analysis is wrong. And we would welcome hard evidence of businesses colluding to fix prices or engaging in other unlawful behaviour. This is a key sector and one where we will intervene if the evidence justifies it.
Recent failures in public markets, such as the collapse of the residential care
provider Southern Cross, reiterate the importance of government and other public authorities being able to respond to failure when it occurs.
As the government opens up public services to more competition, the failure and possible closure, merger or takeover of poorly performing public service providers is likely to become more common.
For many goods and services that we buy, we are used to companies failing - often when they have been overtaken by cheaper, more innovative and efficient rivals. There can be virtually no disruption to consumers as they are readily able to buy similar products from rivals. This is a key way that competition delivers improvements in efficiency, productivity and quality.
But we recognise that there can be stark differences between the provision of public and private services. Concerns about whether the security contract for the Olympic Games would be delivered showed the real risks public services face if things do go wrong. If managed badly, the exit of a provider can lead to significant disruption for people who use the service, and place potentially heavy burdens on taxpayers.
However, when managed carefully, the exit (or the credible threat of exit) of a public service provider can be an important driver of competition, creating opportunities for better suppliers to take over services, and incentivising those working in public service organisations to relentlessly focus on improving performance.
The purpose of our latest paper on public markets is to look at ways in which government and others can protect users of public services without removing the drivers for competition. The findings will help inform future OFT advice and guidance on how exit can be managed to protect people and ensure uninterrupted service whilst also preserving the credible threat of exit to drive competition.
The working paper finds that:
Ultimately, we believe there is no reason to prevent failing providers of public services from exiting a market. But the challenge faced by government, regulators and contracting authorities is how they facilitate the 'orderly exit' of failing public service providers in a way which minimises disruption and protects people who use these services.
Today we've published our Annual Plan consultation document and a new Strategic Assessment of risks to markets and consumers. This is the first time we have shared, in such a transparent and open way, thinking behind how we prioritise our work and our Annual Plan themes.
Those themes proposed for 2013-14 are:
The Strategic Assessment signals our wider commitment to intelligence-led enforcement. It flows from a programme of work, our 'Enforcement Debate', to review our approach to enforcement and identify the challenges we face to improve it: enhancing skills, encouraging the right attitude and culture for successful enforcement work, and the importance of intelligence. We have set up an 'Enforcement Academy' to help us achieve the first two aims along with a number of recent appointments to strengthen our senior enforcement team.
The Strategic Assessment marks a start in delivering a more intelligence-led enforcement function. It is evidence-based research that highlights 50 risks to markets and consumers. It identifies some key developments and trends in the macro-economic, regulatory, political and social environment and considers the risks in this context.
Of course, the Strategic Assessment does not present an exhaustive list or fixed set of issues that we will definitely work on. Rather, it is a clear articulation of how we see the risks to consumers and markets today. By consulting on our Annual Plan and publishing the Strategic Assessment at the same time, it gives others the chance to challenge and improve our assessment. It sets the context for the selection of the five themes we are consulting on in our Annual Plan, which are intended as the areas we will focus on in 2013-14. I would urge you to read it, and to respond to our Annual Plan consultation.