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Models of self-regulation: an overview of models in business and the professions

An overview of models in business and the professions The purpose of the National Consumer Council is to make all consumers matter. We do this by putting forward the consumer interest, particularly that organisations, the National Consumer Council of disadvantaged groups in society, by researching, has had extensive experience over many years of campaigning and working with those who can observing, assessing, commenting on, and to make a difference to achieve beneficial change.
some extent participating in, self-regulatory We are a non-profit-making company limited by guarantee and funded partly by the Department This paper draws on that experience to review the principles and practice of self-regulation in the UK today (see chapters 2, 3 and 4), and to set out some guidelines on the planning and Create smart, streetwise, skilled consumers
implementation of effective self-regulatory by promoting access to high quality education, arrangements (see chapters 5 and 6).
Develop markets and public services that work
for everyone by finding the right balance between free markets, regulation and self-regulation; Provide solutions to the problems of exclusion
by tackling the barriers that put goods and Ensure decision-makers everywhere are
consumer aware by strengthening consumer Achieve the right balance between innovation
and consumer protection by improving the Please check our web site at www.ncc.org.uk for up-to-date news about our publications, policies and campaigns. We can often make our publications available in braille or large print, This report is reprinted with amendments from the original version published in October 1999.
It is based on a draft written for the National Consumer Council by Richard Thomas, director of public policy at Clifford Chance. In 1986 he Self-regulation of Business and the Professions, while legal officer for the National Consumer We are very grateful to Richard, and to Clifford Chance, for the work on this report.
Published by the National Consumer CouncilNovember 2000 National Consumer Council
PD 20/P/00ISBN 1 899581 22 7Price £14.00 An overview of models in business and the professions 1. Models of regulation: from self-regulation to regulation 2
2. The self-regulation spectrum 6
3. Legal and voluntary rules: the arguments for and against 18
4. Self-regulation in practice 25
5. Assessing self-regulatory arrangements: the key factors 39
6. The credible self-regulatory scheme: a checklist 50
Appendix 1: bibliography 52
Appendix 2: list of self-regulatory schemes affecting consumers 55
The National Consumer Council’s approach to the analysis of issues affecting consumers isrooted in the presumption that consumers are the best judges of their own interests – makingdecisions, exercising choices and having real influence as buyers and users of goods and services.
Lively competition plays a vital part in contributing to positive outcomes. Despite the evidenceof significant consumer dissatisfaction in particular areas, it is important to recognise that tens ofmillions of transactions take place every day, which leave most consumers satisfied with mostthings most of the time. Care must always be taken not to propose or support interventionwhich will be counter-productive, or otherwise produce undesirable results.
But, if a well-developed competitive market is necessary to achieve widespread consumersatisfaction, it is not – and cannot be – sufficient by itself. Markets also need to be strengthenedand supplemented with regulatory intervention to provide for matters important for consumerswhich the market cannot deliver.
Regulation of any kind is a means to an end, not an end in itself. It provides a means of achievingdefined goals, by adopting rules directed at shaping conduct or controlling behaviour in someway, and then putting machinery in place to enforce those rules.
The starting point, therefore, for any review of regulation must be with policy objectives. Whyis there a need for some form of intervention in the market place? What is the mischief we needto deal with? What standards do we need to raise? What policy objective are we pursuing? Whatis the public good we seek? What do we want the rules to achieve? Any intervention, whether legal or self-regulatory, must be justified by reference to issues suchas: Inadequate competition – where suppliers, individually or collectively, dominate the
market or make arrangements which reduce competition and consumer choice.
Fraud, deception and oppressive marketing practices – where suppliers take advantage
of consumers in ways that are illegal or unfair.
Imperfect information – where the information essential to informed consumer choice
is either completely unavailable, or false or misleading.
Safety – where there is risk of consumers using goods or services which may damage
their health.
Resolution of disputes and the pursuit of redress – where easily accessible procedures
are needed to make sure consumers can get a remedy for breaches of contract or
other laws or codes.
Externalities – where there is a need to ensure that the costs of producing goods and
services reflect all the consequences of their production (as with pollution).
Social objectives – where the market is unable to make socially desirable goods and
services available for defined groups of consumers. Also, where an unregulated
market is unlikely to achieve democratically desirable results relating to public order,
taste and decency, and similar goals.
Vulnerable consumers – for example, those with weak bargaining power and children
may need special or additional protection.
Raising standards – in a sector where businesses can gain a competitive advantage or
where there are known to be problems with compliance with the law.
While the National Consumer Council’s focus is on the consumer interest, some of the issueslisted above obviously relate to broader social policy objectives. For example, regulation isneeded to protect the health and safety of workers and while this may have a cost for consumersin higher prices, it is not otherwise specifically related to consumers’ interests. Regulation oftaste and decency is another example.
While there might be broad agreement on the fundamental reasons for intervening in markets,there is inevitably debate about the precise nature of that intervention in relation to particularcircumstances in a particular market. Is intervention really the best way to achieve a givenobjective? If so, what type of regulation is needed? One type is self-regulation.
Self-regulation means in essence that rules which govern behaviour in the market are developed,administered and enforced by the people (or their direct representatives) whose behaviour is tobe governed.
Self-regulation is usually, but not necessarily, a collective activity, involving participants from amarket sector who agree to abide by joint rules, much like a club membership. It is also (at leastnominally) voluntary, with benefits perceived for those who participate.
In practice, as we shall see, the two forms of self-regulation – legal and voluntary – are by nomeans mutually exclusive or even complete opposites. Moreover, there is often considerableoutside pressure to self-regulate. And there are many ways in which independent interests can,and should, have an influence on self-regulatory arrangements.
Most would agree that fraud and deception demand legally binding rules of universal application.
But in other areas, there are ebbs and flows in attitudes and policy towards regulation. At anygiven time, one approach is more likely be favoured over another. The graphic below shows thevarious approaches.
The ebbs and flows of market intervention Debates about the appropriate level and nature of intervention draw in a wide range of interests –from businesses and their organisations, through consumer organisations and regulatory bodies, tothe media, economists, lawyers and ultimately politicians and law-makers. Today all interests arelikely to be guided by some broad, basic principles, such as those articulated in the BetterRegulation Guide launched by the government in 1998. These principles are outlined in the boxbelow.
Good regulation: the government’s key principles Transparency: be open, keep it simple, be user-friendly.
Accountability: to government ministers and parliament, to users, to the public.
Targeting: regulation should focus on the problem, and minimise side-effects.
Consistency: be predictable, people should know where they stand.
Proportionality: fit the remedy to the risk, only regulate when you need to.
In this chapter we give shape to the countless number of self-regulatory arrangements currentlyin use, in order to highlight the differences between them and to demonstrate how self-regulation can shade into the regulatory framework. While it might be possible to classify self-regulatory systems according to legal effect or to motivation, we use the simpler approach –classifying them according to how they have been adopted. At the end of the chapter wesummarise the features they have in common.
Using this classification, we can identify eight main types of self-regulatory arrangement that fallbroadly along a spectrum: Trade association
Negotiated
codes approved by
Unilateral
‘Recognised’
sectoral codes
Customer
Official codes
charters
& guidance
Unilateral codes
of conduct
Legal codes
In this chapter and others, we use the word ‘code’ to mean any set of self-regulatory rules fallingshort of primary or statutory legislation.
Appendix 2 contains a list of self-regulatory schemes affecting consumers, ordered according tothis classification, although in some categories we have not given examples. This list is notcomprehensive. It merely gives an idea of the range of areas covered.
At one end of the self-regulation spectrum is the individual business which decides to adopt andimplement specific policies which amount to some form of self-restraint on its conduct towardsits customers. In a sense this is the ‘purest’ form of self-regulation.
A business may adopt a course of conduct of this kind for competitive advantage, to deflectcriticism, to persuade legislators that the business gives no cause for concern, to promote itsreputation in the eyes of its staff and other stakeholders, or to pursue goals of social responsibility.
The policy may be vigorously promoted to customers and others, or it may remain an entirelyinternal matter. There are numerous examples of this type of self-regulation, some of which arelisted in the box on the next page.
Unilateral business codes of conduct: some examples Direct marketing companies that allow customers to cancel an order and return goods,often refunding postal costs.
Shops that adopt a generous returns policy (for exchange or refund).
Price promises that offer a reduction, or sometimes a reward, if the same product canbe bought cheaper elsewhere.
Lenders that grant ‘an indulgence’ to those with repayment difficulties.
Insurance companies that meet claims beyond a literal interpretation of the policywording.
Banks that pay fixed penalties for mistakes.
Travel companies that offer compensation beyond the customer’s entitlement whendelays or other problems occur.
Codes of ethically or socially responsible business conduct in relation to employees orthe environment.
The growth of customer-friendly arrangements like these is a welcome reflection of consumersovereignty in a highly competitive market place. In some cases the promises a business makeswill be contractually binding. In others, policing (for example, through the Trade DescriptionsAct or the Advertising Standards Authority) may be necessary if businesses make exaggerated orunfulfilled claims. Beyond that, however, what each business does is a matter for its ownjudgement.
Customer charters take self-regulation by an individual business one step further, with a formalexercise covering all key aspects of its dealings with customers, though still stopping short ofcollective participation with other companies.
The customer charter, like the Citizens Charter (now called Service First) from which it derives,is a company’s formal public commitment to combine compliance with its legal obligations withcustomer service initiatives, promising: defined levels of performance across all the activities important to customers; defined penalties where standards are not fulfilled; independent auditing of the company’s performance; full and public reporting of actual performance.
Businesses claim that a charter can deliver quality and customer satisfaction on all aspects of thecompany’s service, not simply reduce risk at the time of purchase. It ‘translates every element ofcustomer dissatisfaction into pain for the company’, energises managers and staff, supplies afeedback link from customers, and forces the company to sit up and take notice of what itscustomers want and need.
The AAMI (Australian Associated Motor Insurers Limited) Customer Charter was introducedby one of Australia’s leading insurance companies in 1996 and now sets out 17 specificpromises of performance covering, for example: availability of decision-makers to deal with claims and queries; detailed responses to all written enquiries within five working days; detailed promises relating to motor and household insurance; free and accessible internal dispute resolution procedures; a $25 penalty payment for failure to meet any promise.
The company’s performance is audited by KPMG and an Annual Report is publisheddocumenting performance against standards, the nature and extent of penalties paid anddetails of the audit process.
It is ironic that the next point along the spectrum has all the characteristics of ‘genuine’ self-regulation – entirely voluntary, self-imposed, collective – but in practice is almost extinct. Thisis the code of practice or similar set of rules unilaterally adopted by a trade or profession, withoutany consultation or discussion with the outside world. While there have been such initiatives inthe past, particularly within the professions, it is more or less unthinkable that a trade orprofessional organisation would set off in isolation in this way in the current climate.
But unilateral sectoral codes do still happen. It is of some concern, for example, that the Code ofPractice on Electronic Commerce, produced by the International Chamber of Commerce inApril 1998, seems to have involved minimal consultation with national or internationalconsumer organisations (though it has been presented as the start of a longer process ofdeveloping self-regulation). Other examples can be found in complementary and alternativehealth therapies – please see the box below.
Unilateral self-regulation in complementary and alternative medicines ‘In the United Kingdom there has been little proscription by authority to limit the professional responses toincreasing public demand for complementary and alternative medicine. As long as certain limited activitiesand titles are not assumed it has been perfectly legitimate for a wide range of professional practices andtherapies to develop. The natural instinct for self-enhancement of professional status has also beenunhindered and most practitioners have seen it to be an advantage to subscribe to organisations overtlyraising standards. On the other hand there are few formal obligations to meet any particular level ofstandards, and it has still been possible for individuals to break away to pursue their own path, even set uptheir own training programme or professional body, without sanction. They do not have to submit toanyone, building their base entirely on their ability to please their customers, their patients … … Consumer interests demand that professional groups provide ample opportunities for members of thepublic to pursue complaints against practitioners both with the assurance of formal disciplinary codes,sanctions and procedures in place, and complaint procedures freely available to the public (Health Which?).
Provision of both these was patchy among even the most established groups and few examples of publiclyavailable complaints procedures were submitted to the survey team. It is likely that it is in this area thatprofessional groups will wish to most confirm their professional aspirations.’ Professional Organisation of Complementary and Alternative Medicine in the United Kingdom, a
report to the Department of Health, University of Exeter,1997

More common in the modern world of stakeholder involvement are codes of self-regulationwhich have been negotiated, or at least discussed (either formally or informally) between anindustry body on the one hand, and government and consumer organisations on the other.
This category also includes schemes where ‘public interest’ or ‘consumer’ representativesparticipate in the administration of the code. Well-known schemes of this kind include: the British Code of Advertising Practice and Sales Promotion and its enforcementarrangements; the ombudsman schemes set up across the financial services industry and for estateagents and funeral directors; the regulation by ICSTIS (the Independent Committee for the Supervision ofStandards of Telephone Information Systems) of premium rate telephone calls; and the code of practice adopted by the Association of Energy Suppliers to restrainunacceptable methods of marketing gas and electricity. This code sits side by sidewith the requirements of the energy regulators on marketing energy contracts(which are part of the licence conditions for energy suppliers) but it goes somewhatbeyond the licence requirements.
The fact that a code has been negotiated with consumer or other outside bodies does notnecessarily mean that consumer or other representatives are involved in its administration.
Also included in this category are the initiatives developed by or with local authorities (likeGood Trader Schemes), where local traders can apply for some form of accreditation. Anotherform involves government departments promoting codes as an alternative to regulation. Oneexample is the Code of Practice on Green Claims developed by the Department of theEnvironment, Transport and the Regions (DETR) – please see the box below.
An example of a negotiated code: Code of Practice on Green Claims The Department of the Environment, Transport and the Regions (DETR) launched the Code of Practice onGreen Claims in February 1998 to help manufacturers and retailers avoid meaningless or misleading claims(on packaging) that a product has a positive impact on the environment. The code includes guidance ongiving positive environmental information to consumers and the standard of information they can expect.
The code was negotiated with the Confederation of British Industry, British Retail Consortium, LocalAuthority Co-ordinating Body on Food and Trading Standards and consumer groups. Launching the code,the Environment Minister said his aim was legislation, but first he wanted to establish acceptable standards.
The National Consumer Council was given the job of monitoring whether manufacturers and retailers hadbeen observing the code in the first year. The code’s most serious shortcoming is the lack of real sanctionsagainst those who break it. The DETR suggests that companies shown to have broken the code could be‘named and shamed’. Also, there is no mechanism to adjudicate on whether claims breach the rules,although the Minister has suggested that this role could be carried out by the advisory panel he is setting upto advise the DETR on ways of raising the standards of information available in the market. Given that thisis an unpaid ad hoc advisory panel, it is hard to see how it can undertake adjudication without considerablerestructuring.
There appear to be no plans for monitoring the operation of the Code of Practice on Green Claims after thefirst year.
Trade association codes approved by the Office of Fair Trading This category is a variant of negotiated codes and covers the 49 codes that have been drawn upby trade associations in consultation with the Office Of Fair Trading (OFT) and formallyapproved by the Director General of Fair Trading. We describe this mechanism in detail inchapter 4.
These are codes which have some form of statutory foundation or recognition. It includes theprofessional ‘codes’ of lawyers and doctors. The Solicitors Act empowers the Law Society tomake ‘practice rules’ for solicitors and the General Medical Council has a corresponding powerfor doctors. More recently, the Financial Services Act 1986 gave authority and recognition tothe Securities and Investments Board (now re-constituted in the Financial Services Authority)and to self-regulatory organisations such as the Personal Investment Authority and theInvestment Management Regulatory Authority.
There are many examples of a government department or regulatory agency issuing a code orguidance (often elaborating on statutory provision), whichhas had self-regulatory input and is intended to be followed within the business sector inquestion. The ‘enforcement’ of such codes is left to traditionalmethods – in other words, civil or criminal action in the courts.
Example 1: ‘Following a dispute that arose after the Director General of Fair Trading proposed to issue a
prohibition order in respect of a breach of section 18 of the Estate Agents Act, discussions were held with
the three main bodies representing estate agents . . . . This led to the Director General issuing revised
guidance as to the meaning of section 18. It is of course subject to any interpretation the courts eventually
may give but in the meantime it should help to clarify the position. ‘
Office of Fair Trading press notice, 8 September 1988
Example 2: The Department of Trade and Industry issued guidance notes on the interpretation of the
Package Travel, Package Holidays and Package Tours Regulations 1992, after consulting on the
interpretation with travel groups and consumer bodies. The guidance notes reinforce, but do not replace,
the regulations. Again, it is the courts that are ultimately responsible for deciding on the interpretation.
The final type of code is perhaps not true self-regulation at all, but business interests are likely tohave a strong influence in negotiating the content. These are codes imposed by government orby a public authority under the authority of statute, but which lack the full force of conventionallaw. Official guidance from the Cabinet Office says that a Code of Practice should not ‘be usedto define specific legal obligation … It may be appropriate to explain or supplement theprovisions of … legislation … [but] … should not be regarded as a substitute …’ Legal codes usually have some form of status as supporting evidence. They tend to be looser instyle and content than formal legislation and are not necessarily intended to be binding on everyoccasion. For instance, the Road Traffic Act 1988 (section 38) authorises the Department ofTransport to publish a Highway Code. The Act says that ‘a failure to observe . [the HighwayCode] … may be relied upon to establish or negative any liability’. And under the Health andSafety Act 1974, an approved code of practice can effectively shift the burden of proof incriminal proceedings to the employer – the breach of a code is prima facie evidence of anoffence.
Under section 40 of the Food Safety Act 1990, the government may issue codes of recommended practiceto enforcement authorities for the carrying out of their functions under the Act. Before issuing a code,ministers are required to consult those who represent interests likely to be affected by the code. Codeshave been issued, among other matters, on the enforcement of meat hygiene regulations, dairy productshygiene regulations, food standards regulations and inspection procedures. Ministers can direct an authorityto take steps to abide by the provisions of a code. This direction can be enforced through the courts,otherwise the codes operate as guidance.
There are now more and more examples where this final category of self-regulation has beenused for consumer affairs. One of the most important examples concerns price marking. Part IIIof the Consumer Protection Act 1987 introduced a new general prohibition on false ormisleading pricing, but this is backed up by a statutory Code of Practice. The Code is admissible in evidence, but is not mandatory in itself. Although the so-called ‘DTI Code’ is drawn up bythe Secretary of State, this must follow advice from the Director General of Fair Trading andconsultation with all interested parties. Commercial interests clearly had a major influence on itsfinal content.
The common features of regulatory systems Despite the many differences between the eight types of self-regulation described above, we canidentify three elements common to most forms of regulation, both statutory and self-regulatory: Rules which set out how business conduct is to be judged.
Monitoring and enforcement of the rules.
A redress system for consumers who have suffered loss, through breach of the rules.
The three elements may not always be provided for in one system but, unless all three arecovered somehow, the regulation is unlikely to be effective.
In a unilateral business code of conduct scheme (see page 8), the business is free to ‘make up’ therules on its own because they represent an advance on statutory requirements. However, thenearer we get to statutory regulation, the greater input there is likely to be from outside bodies,including government, into what the rules should be.
In the systems nearer to ‘pure’ self-regulation, monitoring, enforcement and redress may beweak or non-existent. Monitoring and enforcement, if carried out at all, may be left to localtrading standards departments through the Trade Descriptions Act 1968 and its criminalsanctions, or to the Advertising Standards Authority. So under these circumstances, redress willnot be available unless the promise amounts to a contract term, when the consumer will have torely on action in the civil court.
Schemes further along the spectrum towards statutory regulation are more likely to incorporatemonitoring, enforcement and redress, though there may be differences in how much inputoutsiders make to the scheme’s operation. But with official and legal codes, once again theenforcement is usually the preserve of statutory bodies who have a duty to enforce the legislation. This gives rise to the need for interpretative codes. Here again, redress may beunavailable – unless the legislation provides for it, when consumers will have to seekcompensation in the civil court.
The arguments in support of self-regulation as a way of controlling business behaviour oftenfocus on the disadvantages (both actual and perceived) of the ‘alternative’ method – legislation.
While it can be artificial, and indeed dangerous, to draw too sharp a distinction between the two,this chapter summarises the arguments commonly used for and against both methods. Thisprovides a background to the examples (in this and the next chapter) of self-regulation in action.
We are not suggesting that all strengths and all weaknesses apply to each self-regulatory code andeach piece of legislation, merely that any one of these might apply to any individual scheme.
(a) Legally imposed rules draw authority and legitimacy from the democratic process. They are theprincipal means for achieving political objectives (in this context, setting out the nature andextent of market intervention).
(b) Whether criminal, civil or administrative, their effect is coercive: businesses cannot choosewhether to follow the rules or not.
(c) They have universal application, applying to every business or activity within the scope of theparticular rule: ignorance of the law is no defence.
(d) They are adaptable, in the sense that their content can be as broad, or as detailed, as necessary.
There are no restraints on what can be included, other than those imposed by the democraticprocess involved in making them.
(e) They have credibility by virtue of their status, and by their nature (at least in principle) achieveobjectives which will not result from voluntary action.
(a) There are difficulties in securing political attention and legislative time, both for introducingand amending legislation.
(b) Legally enforceable standards are usually written in negative terms, giving business an incentiveto avoid breaking standards but doing nothing to promote a positive approach to satisfying thecustomer.
(c) Legislation written in general terms leaves too much discretion to businesses and regulators.
But clarity and certainty tend to produce complexity and loss of flexibility.
(d) The comparatively minor nature of many trading offences and, often, the need for strict legalliability, make the criminal law an unwieldy and inappropriate vehicle for regulation. Legislation thatis concerned with subjective matters, often seeking to regulate a wide variety of differentcommercial and organisational practices, can be particularly unsatisfactory.
(e) Legislation is costly in interpretation, application, and enforcement.
(f) Law enforcement by a statutory body is no panacea: statutory regulators can sometimes tendtowards over-zealous aggression, complacency, or under-resourced impotency. Evidential,procedural and due process requirements (including those imposed by human rights legislation)can also handicap flexibility and effectiveness. And credibility can be undermined bybureaucratic delay and the threat of legal challenge from regulated businesses.
(g) Legislation can have unintended costs or side-effects which do not serve consumers’ interests.
(h) Traditional legislative routes cannot tackle modern forms of business practice – for instance,telephone transactions (there is often no record of what was said or done) or the anticipatedexplosion in electronic commerce.
Electronic commerce: is self-regulation the answer? The huge potential of commerce via the internet will not be fully realised unless consumers can beconfident they are protected from unacceptable business practices. It is argued that self-regulation has arole.
The OECD (Organisation for Economic Co-operation and Development) Committee on Consumer Policyaims to develop a set of consumer protection guidelines. They are likely to address such points as theidentification and location of the business, product disclosure, cooling-off periods, privacy, security andcomplaints procedures. But even if the guidelines can be internationally agreed and adopted, enforcementand redress through legal means – as with all forms of international trade – present almost insuperablebarriers.
Self-regulation across national borders suffers the same disadvantages as other forms of regulation. Whichglobal body has the standing, authority and resources to secure agreement to a regulatory code, let aloneenforce it? Certification that a business complies with the OECD or other self-regulatory guidelines might seem to offera solution, especially where the certification is provided by a reputable external body. In the UK, forinstance, the Advertising Standards Authority has recently consulted on detailed proposals for a Trustmarkscheme. The WebTrust scheme, launched by the international accountancy profession, has a similar goal.
Consumers’ Association have developed the Web Trader scheme. This relies on a code of practice, settingstandards for dealing with online consumers. Traders who join promise to observe this code. Consumers’Association investigates reports of non-compliance. The sanction available is to remove the trader from thescheme.
But all such schemes are developing in isolation from the OECD guidelines and even these have not yetbeen internationally adopted. There is certainly no single set of standards and no single certification body.
As more and more of these schemes emerge, the risks of consumer confusion increase.
A more promising model may be the business charter, under which individual companies could show whatthey promise, how they arrange for independent monitoring of compliance with those promises and whatredress they provide automatically if they fail to keep them.
(a) Voluntary initiatives can be a flexible, cost-effective way of tackling problem areas. Self-regulation implies a clear wish by participating traders to distinguish themselves from those withlower standards. The business benefits when customers actually seek out traders who observeself-regulatory requirements.
(b) Self-regulation can not only ban detrimental practice, it can also benchmark best practice overand above the basic minimum requirements.
(c) An arrangement that is drawn up by, or with, members of an industry will be ‘owned’ bythem. It will be tailor-made for the needs and problems of that particular sector, and will (at bothdesign and enforcement stages) reflect inside knowledge about the realities of that sector.
(d) It should be quicker and less costly to put in place (and adapt to changing needs) thanlegislation.
(e) It can more easily deal with matters of subjective judgement, such as questions of decency.
(f) It can address complex areas – especially where common values and assumptions are shared –without attracting the disadvantages of complex legal requirements.
(g) It can put the burden of proof of compliance on the trader.
(h) Redress can be achieved more quickly and cheaply than legal remedies through civil proceedings.
(i) The cost of self-regulation can be laid on the trade or industry involved (although this isincreasingly true of statutory regulation as well).
(a) The outstanding drawback with a self-regulatory arrangement is that it does not apply to thosetraders who are not members of the scheme. And where there is only partial coverage, it is often thosewho stay outside the scheme who tend to be the main cause of consumer problems.
(b) On the other hand, of course, where there is full coverage across a business or professionalsector there can be a strong tendency towards anti-competitive behaviour, especially whereself-imposed restrictions impose barriers to entry or make it difficult for consumers to exerciseinformed choice. Effective self-regulation organised on any sort of collective basis involves someform of cartel-type restrictions. The more these lack any features that might bring them underthe scrutiny of the competition authorities (through the Restrictive Trade Practices Act 1976 or,soon, the Competition Act 1998), the less likely they are to produce tangible and meaningfulbenefits for consumers. For instance, it is easy for self-regulation to lead to unnecessarily highprices. So there is a very narrow line between ‘self-regulation in the public interest’ and‘restrictive practices’ – as examples from various professions show.
Chapter 1 of the Competition Act 1998, which concerns anti-competitive agreements, does notapply to professional rules. There is some scrutiny by the Director-general of Fair Trading, butprofessional rules are, in effect, treated differently from other service sectors.
The problem is less acute outside the professions. Most trade association codes do not gainautomatic exemption from competition legislation – but the tendency remains. The converse isthat, unless codes are approved by a competition authority, some provisions of benefit toconsumers may be rejected by a self-regulatory body for fear of falling foul of competition law.
Professionals: the fine line between self-regulation and restrictive practices Example 1: It is reported that in New York in the 18th century, when lawyers had a monopoly on court
practice, they decided to admit no more apprentices in training for the next fourteen years – except their
own sons.
Example 2: Conveyancing in the UK was for many years the legal preserve of solicitors. To ‘protect the
interests of consumers’, their self-regulatory rules prohibited advertising. The lifting of both rules (opening
up conveyancing to non-solicitors in 1990 and progressive deregulation of advertising in the early 1980s)
resulted in dramatically reduced prices for house-buying as competition increased.
(c) There can be distortion of the market. Non-members of a self-regulatory scheme do not have tofollow the rules, so they can under-cut the market with lower standards.
(d) Even participating traders may not take self-regulatory requirements seriously.
(e) A plethora of codes and, often, their inaccessibility make it difficult to educate traders,consumers and their respective advisers about their obligations and rights.
(f) A limited range of sanctions is available for breach of self-regulatory rules. The usual sanctionswould be expulsion (a step a trade association, for example, may be reluctant to take) or a fine(which seems rare in practice). Sometimes there is no sanction, as with the government’s presentCode of Practice on Green Claims (please see chapter 2).
(g) Public confidence may be lacking: there can be scepticism about the commitment of businessinterests to content of regulations and their enforcement.
(h) There are real and perceived doubts about the ability of professional or trade bodies to bothrepresent the interests of their members and aspire to a public interest role. Doubts aboutimpartiality are especially acute where the self-regulator is responsible for enforcement, or isinvolved in adjudicating disputes between consumers and traders.
(i) Inadequate self-regulation may act as a barrier to adequate legislation.
(j) As with legislation, if there is no commitment and resources for monitoring and enforcement,effectiveness will be limited.
A voluntary code in action: Code of Banking Practice The self-regulatory Code of Banking Practice is followed by banks and building societies in their dealingswith customers. The code focuses on the following key commitments:- helping to choose a product suitable for the customer’s needs correcting mistakes and handling complaints speedily treating financial difficulty and mortgage arrears sympathetically and positively.
There have been several editions, and there are regular reviews. The financial services industry andconsumer and advice organisations are consulted on content. In an initiative outside the regular reviews,the code was recently updated to deal with concerns about keeping customers informed about interest ratechanges.
Observance of the code is monitored by the Independent Review Body for the Banking and MortgageCodes, which includes consumer and other ‘outside interest’ representatives. The Review Body has, untilrecently, employed only one member of staff for monitoring. In practice, monitoring relies heavily on askingbanks and building societies to certify that they have systems in place for observing the code’s provisions.
Some reliance is placed on complaints to the Independent Review Body (though this is not really acomplaints body and has a low profile) and press coverage of problems. But there is little measurement ofwhat actually happens to consumers. The system relies on complaints-handling by the BankingOmbudsman.
We recently reported on how the code operates in connection with consumers in trouble with theiraccounts (In the Bank’s Bad Books, National Consumer Council, 1997). In our recommendations we said: ‘The Independent Review Body should be more proactive in reviewing the operation of the code. Inaddition to completing the annual statement of compliance by each institution, we would recommendbuilding on the research carried out for this report, by carrying out a similar survey next year and in futureyears. We would also recommend other methods of establishing the effectiveness of the code, such asmystery shopping.’ We also recommended a system of sanctions for situations where the Review Body’s monitoring shows non-compliance. At present, sanctions appear to be limited to a warning to the bank or building societyconcerned. We are glad to note that, very recently, some of these concerns have been accepted andproposals for more effective monitoring adopted.
In this chapter we review seven examples of self-regulation in practice in the UK – starting withtrade association codes that have Office of Fair Trading approval, and going on to self-regulatoryarrangements in the fields of insurance selling, financial services, advertising, solicitors, buildersand health services professionals. We focus particularly on the limitations of trade and professionalbodies’ arrangements and the need for self-regulation to be rooted in a legal framework.
Example 1: trade association codes approved by the Office of FairTrading Under section 124 of the Fair Trading Act, the Director General of Fair Trading has a duty to‘encourage’ trade associations to draw up and adopt codes that will safeguard and promote theinterests of consumers. Appendix 2 lists the codes that have been formally approved by theDirector General under this provision. In recent years the effectiveness of codes of practicebacked by the Office of Fair Trading (OFT) has been questioned by consumer organisations andby the OFT itself.
In 1996, for instance, Consumer Congress wrote to 38 trade associations responsible foroverseeing 21 codes of practice approved by the OFT, asking for details about the operation ofcodes. With some honourable exceptions, the picture that emerged was one of inactivity andcomplacency by the very bodies – the trade associations – most likely to advocate self-regulation. Most reported few complaints and some said they had received no complaints at all.
Only two out of 27 trade associations had conducted any sort of research into consumerawareness of, or attitudes towards, their codes. Independent lay involvement was rare and – withnotable exceptions – there was little evidence that commitments were being fulfilled orsanctions enforced. Five associations did not even know when they had last discussed their codewith consumer representatives, enforcement bodies or advice services.
In 1998, following a consultation to which both Consumer Congress and the NationalConsumer Council responded, the OFT published its own report, Raising Standards of ConsumerCare: progressing beyond codes of practice. As the title implies, the OFT concluded that its policy offormal support for codes had not met expectations: With notable exceptions, the overall regime of OFT-supported codes does notcommand sufficient support from all interested parties.
Trade associations have difficulty in reconciling the roles of protecting members’ interestswith regulating standards of service.
Consumer bodies and trading standards authorities commented on the low visibility ofcodes and a format which is too lengthy, variable and complicated to make asignificant impact on most consumers.
Codes have little influence on buying decisions, so there is little incentive for firms tocomply.
There is a risk of a ‘lowest common denominator’ approach to setting standards.
Trade associations face difficult disciplinary conflicts, especially when expulsion is themain sanction.
The numbers of customers using redress schemes are ‘disappointingly low’.
Some highly reputable traders prefer non-involvement with codes, because of therisks to brand image.
Trade associations generally lack the resources to raise the profile of codes and there aresometimes disputes or overlaps with other trade associations.
The OFT concluded that after twenty years’ experience and development, the problemsinherent in the operation of codes of practice meant that a different tack was now needed,especially in the key areas of publicity, standard-setting, enforcement and redress.
The government’s Consumer Strategy accepted that some codes are little more than salesdevices. Published in July 1999, it proposes to: provide core principles for effective codes of practice, designed wherever possible toprevent problems happening in the first place; encourage trade associations to tailor the principles to the specific circumstances oftheir industries or selling methods, ensure that members stick to them, and takeeffective action if they do not; enable the OFT to approve codes which are effective in protecting consumerinterests.
We welcome the role that is to be given to the OFT to promote the principles and provide aseal of approval for schemes, to help consumers identify businesses which adhere to codes. Thiswill need serious commitment from the OFT if it is to deliver a system consumers can rely on.
The Association of British Insurers (ABI) Code of Selling of General Insurance sets out somerequirements for selling insurance policies. For example: making it clear to the customerwhether the seller is tied or is independent; explaining the main terms of the policy; and drawingattention to unusual or onerous policy restrictions. The National Consumer Council participatesin the ABI Independent Code Monitoring Committee, which monitors the operation of theCode.
In 1998, in collaboration with the National Association of Citizens AdviceBureaux and Consumers’ Association, we pressed for a range of improvements to: (a) the independence, resources and accountability of the Committee; The ABI subsequently implemented some of these. For example, more independentrepresentatives and consumer representatives have been appointed.
The ABI regime on insurance intermediaries has some effective features, for example: Member insurers pay for an ongoing audit of independent intermediaries, to checkand guide compliance with the Code. The audit involves a comprehensivequestionnaire, risk assessment, compliance audits, advice on compliance, with linksto a disciplinary process if advice has no effect.
It uses mystery shoppers to check compliance.
It supports a programme of training for consumer advice workers carried out by thestaff of the Insurance Ombudsman Bureau.
But the operation of the Code also has a number of flaws: Claims and complaints handling: the scheme does not enforce insurers’ observance ofthe ABI statements of practice on claims, which set standards for matters which ariseafter the sale.
Competence: in other words, the knowledge, understanding and skills required forselling insurance or handling clients’ money.
Lack of flexible and proportionate penalties for insurers, such as fines.
Monitoring: there is no third party audit for insurers which – given that independentintermediaries are subject to this – gives rise to a perception of unfair competition.
Status: the form of the Code’s requirement for intermediaries to disclose theirposition as either tied agents or independent intermediaries gives a meaningless or,worse, misleading impression to consumers.
Redress: the Code in effect makes the insurer liable for an independentintermediary’s failure to comply if the insurer has failed to use its best endeavours toachieve the intermediary’s compliance. Otherwise, the Insurance Ombudsman hasno authority to deal with a complaint against an intermediary who is not in thescheme.
In November 1998 the ABI and a number of other insurance industry bodies consulted on a newself-regulatory set-up for the insurance industry, to be known as the General Insurance StandardsCouncil (GISC). The body is to cover advice on, and sales of, general insurance and re-insurancein the UK.
In our response, General Insurance Self-regulation (National Consumer Council, January 1999) weoutlined our concerns over the ABI Code of Practice and concluded that the new schemeseemed to be looking for the lowest common denominator rather than striving to meet theneeds of consumers. There are many aspects of the new regime which we support. Theseinclude requirements related to financial probity, requirement for all intermediaries to belong tothe voluntary regime of the Financial Services Ombudsman and provisions relating tocompetence and training. The new proposals, however, do not address our concern that thescheme proposes only to regulate selling, not the observance of the statements of practice onhandling claims.
Our chief concern lies with the governance proposals. Despite a declared intention that ‘ … theindependence of the new regime will be a key factor in establishing its credibility’, there were tobe no public interest or consumer representatives on the board of the GISC. Since the originalproposal, the GISC has decided there should be two public interest representatives, out of a totalof 17 board members. While the proposals also involve an external scrutiny committee, this isnot an adequate substitute for a majority of non-industry board members.
One of the most comprehensive, and complex, examples of a statutory/self-regulatoryinter-relationship was established in 1986 for the financial services sector.
The white paper that preceded the Financial Services Act 1986 said that the law should providea clearly understood set of general rules, but that ‘self-regulation has a continuing and crucialcontribution to make. It means commitment by practitioners to the maintenance of highstandards as a matter of integrity and principle, not because they are imposed from outside.’ That Act did not prove to be a success. The arrangements that emerged – a private Securitiesand Investments Board recognised under statutory authority, in turn overseeing a collection ofself-regulatory organisations – did not seem to satisfy anyone. The self-regulatory organisations were criticised for ineffectiveness, while many financial service businesses felt that the approachwas not genuinely self-regulatory, with a tendency towards bureaucracy and heavy-handedenforcement.
The present government’s proposals to repeal the 1986 Act and to create a Financial ServicesAuthority are now taking shape through the draft Financial Services and Markets Bill, publishedin July 1998. The wide-ranging scope of this legislation, and the grant of strong legal powers to astatutory body, are seen as a rejection of self-regulation. It is certainly a rejection of thearrangements set up under the 1986 Act and a shift along the spectrum from self-regulation toregulation.
But it would be a mistake to overlook the self-regulatory elements that will stay in place. Forexample: The Financial Services Authority (FSA) includes some board members drawn fromthe industry.
The legislative and regulatory processes involve extensive consultation with theindustry.
The FSA has established a Practitioner Panel through which practitioners willcontinue to have a good deal of influence.
The Financial Services Ombudsman will have a ‘voluntary’ jurisdiction to includeactivities that do not fall within the compulsory jurisdiction.
Conduct of business in banking, general insurance and mortgages will – at least forthe time being – be left to self-regulation.
The self-regulatory arrangements for the greater part of the print advertising industry are widelyheld to be reasonably successful and were strongly supported by government in its consumer white paper, modern markets: confident consumers. They operate under conditions that favoursuccess, including a background threat of legislation and the availability of special sanctions.
There are also complex institutional arrangements designed to remove the operation of theAdvertising Standards Authority (ASA) Council from direct industry control.
Although the Committee of Advertising Practice (CAP) co-ordinates the efforts of the 21sponsoring trade and professional associations to promote compliance, it is the independent ASAthat has responsibility for interpreting and administering the British Codes of Advertising andSales Promotion. And it is the ASA’s independence that is seen as key to its acceptance as arobust regulator.
Eight of the ASA’s twelve members are lay and the remainder are independent individuals, notdelegates, who bring useful inside experience of advertising. The ASA monitors compliancewith the Codes and investigates over 12,000 complaints a year. Important features include theASA’s monitoring and research programme, the publication of monthly Case Reports and anAnnual Report, and the prominent publicity given to the scheme. The effect of adversepublicity and the sanctions of withdrawal of trading privileges, and ultimately, the denial ofmedia space to offenders are highly important. In addition, a copy advice service is offered toadvertisers, agencies and the media by the joint secretariat of the CAP and ASA, on behalf of theCAP.
The Codes themselves are sophisticated documents, elaborating the basic principles thatadvertising should be legal, decent, honest and truthful. In some areas their flexible and informalapproach certainly goes well beyond what could easily be required by law. There are specialistsections of the Codes that deal, for example, with health and beauty claims, vitamins, slimming,distance selling, financial services, children, alcoholic drinks, environmental claims, betting andgaming, and cigarette advertising. The use of specialist sections allows the Codes to adapt tomarket changes as they develop, and Codes are revised and updated regularly. Notably,however, the Codes are drawn up by the CAP without any outside representatives sitting on thecommittee, although extensive consultation is undertaken.
The main criticisms of advertising self-regulation relate to the length of time investigation andadjudication can take, and the consequent lack of effect this has as a deterrent. The prospect of anadverse finding, buried in a case report many months after the end of the advertising campaign, isunlikely to inhibit some borderline advertising claims or even blatant offenders, although the ASA can point to cases where advertisers have fought strongly to avoid a negative adjudication.
The ASA challenges the view that the process is over-lengthy, pointing out the quasi judicialfunction it undertakes and the complexity of some adjudications, for which experts may have tobe consulted. It would be helpful if monthly case reports gave some idea of when the complaintwas made in order to judge how long on average it takes to deal with a case. The system also hasa power to require poster advertisements to be pre-vetted by the CAP copy advice service whenan advertiser has broken the rules on matters of decency or social responsibility.
Health claims: a case for firmer regulation? In 1999 the Health Committee (a Select Committee of the House of Commons) took evidence on theregulation of private and independent health care, including its advertising.
We flagged up a concern that cases about misleading claims for clinics and health products appearregularly in the Advertising Standards Authority (ASA) bulletin and that firmer regulation may be needed inan area such as health, where consumers are highly vulnerable.
The ASA gave evidence to the Committee, as did an individual who had concerns about claims made byprivate clinics. He pointed out that clinics which had had adverse ASA reports against them, requiring themto change their copy, often continued to use the same advertisements apparently without any effectivesanction.
Even the use of ‘ad alerts’ (where the CAP tells a magazine not to accept advertisements in future) did notappear to have had any effect in a number of cases. The ASA regarded this as an aberration and quotedfigures to show very high compliance. In health claims, they said, they have difficulty with terms such as‘fully qualified’ and ‘very experienced’ and that they only regulate advertising, not what actually happensinside a clinic, and we accept that there is a vacuum in this area (National Consumer Council, Self-regulation of Professionals in Health Care, June 1999). Regulation of advertising cannot regulate theprovision of goods or services which is itself not subject to any legal or other control.
Since 1988, there has been a statutory backup to the self-regulation provided by the ASA andother bodies such as the Direct Marketing Authority. The EC Directive on MisleadingAdvertising was implemented in the UK by the Control of Misleading AdvertisementsRegulations 1988. The Directive itself was much changed during negotiations, to accommodatethe UK self-regulatory system. The Department of Trade and Industry made it explicit at the time that the Regulations were intended to act as a ‘long-stop’ to ‘strengthen’ the self-regulatorysystem.
Under the Regulations, the Director General of Fair Trading is under a duty to considercomplaints that an advertisement is misleading. If necessary, he is empowered to seek aninjunction or interdict. But he has a discretion before considering any complaint to require thecomplainant to show: that the ‘established means of dealing with such complaints’ … have had a ‘reasonableopportunity’ to deal with the complaint; and that ‘those means have not dealt with the complaint adequately’.
The 1988 Regulations do not specify or prescribe the ASA as an ‘established means’ but(consistent with the wording of the Directive) they do require the Director General to haveregard to ‘the desirability of encouraging the control, by self-regulatory bodies, of In January 1999 the Advertising Standards Authority ‘abandoned’ its attempts to enforce its self-regulatoryCodes against a company it claims sent more than five million unsolicited faxes advertising products fromViagra to World Cup football tickets. The company has been referred to the Office of Fair Trading – onlythe tenth time in eleven years the step has been taken. The Director General of Fair Trading secured a highcourt injunction to prevent the company from publishing the same, or similar, advertisements.
In practice, the Regulations have indeed worked as a long-stop, with the ASA continuing tohandle the bulk of complaints and the OFT intervening in a very small number of intractablecases. The health claims cases show, however, that some advertisements may slip through thenet and continue to appear, even after requests to change the advertisement’s copy. In such cases,it appears there has been insufficient monitoring of the continuing advertisements to alert eitherthe ASA or the OFT that further action needs to be taken.
We are strongly in favour of the kind of statutory underpinning that applies in the advertisingsector, but consider that the ASA and OFT need to be much more open about when they thinkit appropriate to invoke the statutory provisions. Advertisers who flout ASA adjudication wouldthen know that they risk further action. As Mr Justice Hoffman said, in the first case to bereferred from the ASA to the OFT and which resulted in an injunction against a companyadvertising misleading slimming products (DGFT v Tobyward Ltd [1989] 2 All ER 266) : ‘I think that advertisers would be more inclined to accept the rulings of their self-regulatorybodies if it were generally known that, in cases in which their procedures had been exhaustedand the advertiser was still publishing an advertisement which appeared to the court to beprima facie misleading, an injunction would ordinarily be granted.’ The solicitors’ trade association, the Law Society, also regulates the profession, using devolvedpowers from the Lord Chancellor under the Solicitors’ Act. Solicitors are subject to over 800pages of ‘practice rules’, approved by the Council of the Law Society which is elected by theprofession and has no lay members. The Law Society has an arm’s-length agency, the Office forthe Supervision of Solicitors (OSS), that deals with complaints by clients amounting toinadequate professional service and minor misconduct. More serious misconduct is dealt withseparately by the Solicitors’ Disciplinary Tribunal.
For poor service or minor misconduct, the OSS can: award compensation up to £1,000 for poorservice (soon to rise to £5,000); order a solicitor to waive or reduce a bill; or order a solicitor tocorrect a mistake and pay for the costs of doing so. It can also intervene in a solicitor’s practicewhere it suspects financial irregularities. The OSS maintains a fund to compensate clients whoare victims of dishonest solicitors. Loss arising from negligence is handled through the SolicitorsIndemnity Fund.
The OSS has learned from the criticisms of its predecessor (the Solicitors’ Complaints Bureau)and consults widely. Its complaints scheme is well publicised and it has clear principles, standardsand targets. It conducts customer satisfaction surveys and publishes the results, and reports ontargets. Its Compliance and Supervision Committee has a lawyer majority. The Client RelationsSub-committee has a lay chair and lay membership.
But it is arguable how much influence the lay members have on regulation and complaints-handling policy: it is certainly not a controlling one, which lies with the Law Society’s Council.
The blurred boundaries between low level negligence and poor service on the one hand, andmore serious negligence and dishonesty on the other, confuse clients. Given that there are some75,000 practising solicitors, compliance centres largely on reacting to those seen to be causingproblems to clients, other solicitors or other professionals, although the more proactive measuresinclude a phone line for reporting misconduct or dishonesty.
The OSS is undergoing a review of its complaints-handling function. It aims to turn itself into abody that reviews how firms deal with complaints, rather than dealing with the complaints itself.
This will require the OSS and the Law Society Council to agree and distribute a detailed code ofpractice and a package of sanctions for those who breach the code.
However, the solicitors complaints scheme has never commanded public confidence. In the past, itsmain problems were its closeness to the Law Society, its legalistic procedures that appeared tofavour the solicitor, and long delays. Today’s scheme, the OSS, has made its case-handlingprocedures more client-friendly, but continuing unacceptable delays caused by the sheer volume ofcomplaints, and questions about its independence from the Law Society, remain. Recently thedividing line between the two bodies was further blurred when the Secretary General of the LawSociety took over, for the short term, the management of the OSS because of internal crisis.
The scheme is accountable to the Lord Chancellor through the Legal Services Ombudsman,who keeps it under review and reports annually on its operation. As a result of continuingcriticisms, the Access to Justice Act 1999 gives the Lord Chancellor powers to establish a newoffice which will be able to intervene effectively to improve complaints-handling by the legalprofessional bodies. So looming in the background, if the OSS fails to deal with complaintsadequately and in good time, will be the creation of an independent body.
As we reported in our review of the building trade, Controlling the Cowboys, consumers searchingfor a builder are encouraged to look for membership of a trade association as a measure ofsecurity. But the sheer number and diversity of trade associations in the field is a major problem– a scan of the British Directory of Associations shows no fewer than seventy trade orprofessional associations in the building and allied industries. Undoubtedly many are reputable bodies (though even they operate with a variety of different objectives, rules and membershiprequirements). Equally, there are less reputable outfits whose objective is simply to make moneyfrom selling membership in exchange for a marketing logo. How can consumers be expected tofind their way through the maze and identify a reliable trade association? In an earlier study of small-scale builders in Bristol (Bristol University and the RowntreeFoundation, Improving the Efficiency of the Housing Repairs and Maintenance Industry, 1995), tradeassociations were criticised by builders themselves for their lack of rigorous membership criteria.
Organisations that did not carry out inspections of work or obtain customer references,concluded the report, could give no guarantee of quality against measured standards.
Membership was as open to the cowboy element as to more competent firms. The specialisttrade bodies that regulate heating and electrical work were felt to be more effective than othertrade bodies in vetting and keeping members up to date on technical developments andregulation changes. And some of these, such as CORGI (for domestic gas installation), operate acompulsory registration scheme, required by statute.
In 1998, the Department of the Environment, Transport and the Regions set up a ‘cowboybuilders working party’. Its report (August 1999) builds on some of the findings of our report,Controlling the Cowboys, and proposes an external accreditation scheme for individualconstruction businesses and trade associations. It also suggests a publicised national list ofaccredited builders, backed by an insurance-backed warranty and a complaints scheme. Like anyvoluntary scheme it will depend on proper vetting, monitoring and sanctions with independentsupervision to command confidence.
Consumers are particularly in need of adequate protection when they buy newly built houses,and especially so when they buy from the original contracting purchaser. The protection theyget from the law in this case is far less comprehensive than the legal protection given to buyers ofordinary goods. (For more details, see Controlling the Cowboys, National Consumer Council,1996.) The regulatory bodies for health professionals, including GPs, nurses, midwives, chiropractors,dentists and opticians, are set up under separate Acts of parliament.
Each statutory body has a council made up of representatives from the profession and educationalbodies, from other professional bodies, and members appointed by the body to which thecouncil is accountable (such as the Department of Health).
The councils vary in their organisational structure, but most have sections dealing withregistration, education and training, and professional ethics and discipline. The public registerslist the names of members, place and date of qualification, and address, but do not giveinformation about previous actions taken against a professional.
We recently published a paper examining self-regulatory systems in the health sector (Self-regulation of Professionals in Health Care, National Consumer Council, June 1999). Among theproblems we identified are: The primary aim of professional regulation is to protect the public, but it has other,contradictory, functions. It also limits access to professions and protects and promotesthe profession’s own interests, so that there is an in-built tension between the publicinterest and professional protectionism.
There is no over-arching body to monitor and evaluate the extent to which theindividual forms of professional self-regulation suitably serve the needs of patients.
This is particularly relevant in the context of multi-disciplinary care.
People are poorly protected when using private-sector services (which may be financedby public funds). For instance, doctors do not have to have specialist training topractise a speciality, the professions allied to medicine do not have to be state-registered, and any qualified medical practitioner can set up a cosmetic surgery clinicand advertise for patients.
Unregistered professionals can be used in NHS services, for instance in general practice,through nursing or locum agencies.
Consumers do not understand which health titles are protected and whicharen’t – for instance, the use of ‘nurse’, ‘physiotherapist’, or ‘psychologist’.
There is no clarity about what it means to be ‘on the register’ – with variations betweenbodies in the extent of the information they include about extra qualifications,whether the person is currently professionally active or not, re-validation or re-certification, and any previous actions taken against the practitioner.
There is lack of openness in the proceedings of the bodies at different stages – forinstance, in the criteria used for screening initial complaints, the reasons for rejectingcomplaints, and information about the nature of complaints and their outcomes.
The extent of lay and consumer participation varies on councils and committees, and inthe local audit and other processes that are an integral part of health self-regulation.
‘Black-letter’ law enforcement cannot by itself promote good business standards or eliminateunacceptable practices. And as we have seen, self-regulation by itself can seldom providecompletely effective consumer protection. Weighing up the respective merits of legislation andself-regulation is often a matter of ‘horses for courses’. The challenge is to decide which horsesfor which courses.
There are many stopping-off points along the broad spectrum between completely unilateralself-regulation and precise, specific statutory controls. Equally, there can be strong self-regulationand weak legislation (for instance, where the law depends on individual consumer initiative forits enforcement). It is the nature of the problem, the policy objectives and thepolitical/economic background that will largely determine the most appropriate approach.
The National Consumer Council has had extensive experience over many years of observing,assessing, commenting on and – to some extent – participating in self-regulatory arrangements ofvarious kinds. This experience, and the policy and practice reviewed in this paper, have led us todraw conclusions about the basic essentials for effective self-regulation.
In this chapter we identify four central issues of principle (1 to 4 below) plus four practicalconsiderations (5 to 8 below). Together they make up the core guidelines (summarised in thechapter 6 checklist) that will inform the National Consumer Council’s assessment of any self-regulatory arrangement.
The National Consumer Council’s approach to policy and practice 1. A self-regulatory scheme must always have clear policy objectives.
2. Self-regulation should not inhibit the scope for competition to deliver benefits for
consumers.
3. A strong independent element must be involved in the scheme’s design and have a
controlling influence on its governance.
4. A dedicated institutional structure must be set up, separate from the existing trade
and professional organisations.
5. A pragmatic approach may be inevitable.
6. There should be a presumption of scepticism towards self-regulation organised on a
collective basis.
7. Effective self-regulation is usually best stimulated by a credible threat of statutory
intervention
.
8. Self-regulation works best within some form of legal framework.
Guideline 1: policy objectives are the starting point The first step for any form of regulation must be to frame its policy objectives (as distinct fromthe method for achieving them). In other words, there has to be clarity about the need andrationale for intervention in the market, based on the ground covered by the list set out inchapter 1 (see page 2).
Eventually there may have to be trade-offs between what might be achieved by legislation andwhat might be achieved by self-regulation, but these should follow after the expression of theoptimum policy objectives.
It is increasingly common to use cost benefit analyses, compliance cost assessments andregulatory impact assessments to assess statutory interventions. The National Consumer Councildoes not itself carry out any sort of economic appraisal of self-regulatory schemes. Quite apart fromthe resources this would involve, we feel it is an inappropriate and limiting approach, notablybecause of the difficulty of measuring critical ‘non-efficiency’ values like accountability andfairness.
Guideline 2: self-regulation should not inhibit competition Self-regulation must work, as far as possible, with the grain of the market. This could meanencouraging worthwhile initiatives by individual businesses, particularly where these can beformalised into a measurable, accountable consumer charter.
A ‘core standard for the better business’ – along the lines of the discussion draft produced by theOffice of Fair Trading for its Raising Standards conference in September 1998 – may be anotherway for self-regulatory initiatives to be harnessed to a lively competitive process. The internet,and other improved means of delivering information to consumers, are likely to contribute topublicising worthwhile initiatives by individual businesses.
On the other hand, where self-regulation involves collective arrangements between businesses, itis essential to consider the potentially damaging effects on competition (see guidelines 6 and 8below).
Guideline 3: there must be strong independent input Advance consultation
Self-regulation is unlikely to be effective unless there has been a genuine process of consultation
and involvement beforehand. This will usually extend to all the stake-holders identified by those
promoting a scheme – for example, government, regulatory and representative bodies.
Consumer organisations will usually expect to be informed and consulted too, although theyneed to remain alert to the danger of being used to bring legitimacy to a weak arrangement. Thisproviso is even more critical where it is proposed that consumer organisations get directlyinvolved, or nominate representatives. It is of particular concern where one or tworepresentatives, without wide-ranging expertise, access to research resources or payment, arebrought in to make it look as though there is a real opportunity for consumers to influence theoperation of the scheme.
Independent input to the scheme’s operation
If a business or industry seriously intends to show that its self-regulatory scheme is a viable
alternative to statutory regulation, it has to address the question of independent development and
operation.
For credibility and legitimacy, there are three areas where independent input is critical: the overseeing of monitoring and enforcement, including the imposition of sanctions;and the overseeing of any redress mechanism.
Some existing schemes incorporate these three areas into a single system. Others divide them upbetween different bodies (as we saw in chapter 4).
With some exceptions, a trade or professional organisation cannot be expected to carryresponsibility for running a self-regulatory scheme. Its first job is to represent its members’interests. At best, trade bodies have persuasive influence, rather than real power, over theirmembership and are generally in a weak position to secure commitment to a code’s provisions orto enforce them effectively. However committed, they will be caught between alienating theirown membership yet still generating public scepticism about their impartiality. There appear tobe real difficulties for most trade associations, too, in securing the resources and commitmentneeded for adequate monitoring and publicity.
It is striking that the more successful self-regulatory schemes – the advertising, ombudsmen anddirect marketing schemes, for instance – are all enforced through dedicated organisational structuresoutside the industry itself (though the financial services experience with self-regulatoryorganisations suggests that a separate structure is not enough on its own).
It also seems to be important that the controlling influence – notably the membership of thegoverning body – should be genuinely independent, coming from outside the industry that is thesubject of regulation. This does not necessarily mean a majority of consumer representatives: itmight include professionals, academics, representatives of other interests or industries, orstatutory regulators.
However, we recognise that independent operation is not always achievable in practice. Wemay sometimes have to accept schemes that do not meet the ideal. In particular, we recognisethat self-regulatory systems themselves may evolve along the spectrum we outlined in chapter 2.
Where this is the case, we are likely to take a different view about what is acceptable, depending on which of the three functions – rule-making, monitoring and enforcement, and redress – is inquestion.
As with the court process, there is little doubt that any redress mechanism should be free from
pressures from the trade or professional body to deliver decisions which suit its purpose or appear
to favour members. So the running of the redress system should always be separated from the
rest of the scheme, and with lay members in a majority.
Similarly, the body for code monitoring and enforcement – a role akin to a policing or trading
standards function – should usually have a majority of independent lay members. Trade bodies
find it very difficult to impose sanctions on their own members and may also be tempted to stint
on the effort needed to monitor compliance with a code.
In practice, it is in drawing up the rules that a lay majority is most often missing. Where the rules
are part of a voluntary scheme that is attempting to raise standards above those required by the
law, there is probably no place for imposing the views of outsiders who will not be involved in
delivering the improvements. However, this only applies where statute has already fixed the
basic standards.
Making the rules is the area that professional bodies, and those with special expertise, guard mostjealously. There is a feeling that outsiders do not have the knowledge needed to judge what isappropriate. We are not persuaded that this is the case, or that insiders can always distinguishbetween what they think is in consumers’ interests and what is their preferred way of carryingon.
If there is not to be a majority of lay people on the body that makes the rules, there must besome regular outside scrutiny: from the competition authority, to ensure that the self-regulatory body does not setentry requirements that are too high; from government, to impose statutory rules where the profession or industry is notprepared to act in the public interest; and perhaps from the Office of Fair Trading, to make sure that the balance of interests isfairly resolved in deciding what the rules should be.
All this does not mean that involvement by the trade or profession should be excludedaltogether. A major benefit of successful schemes has been the input from those who reallyunderstand what can, and does, happen in the field and have a well-developed sense ofacceptable and unacceptable practices. This contribution is important at all stages – the designand refinement of the scheme, ensuring compliance, investigating complaints and ensuringadequate redress. The challenge in each case is to achieve the right balance between insiders andoutsiders.
‘The two basic functions of trade associations are representation and the provision of information to Most trade associations do not attempt to influence the conduct of their members … They can have onlylimited power over their members and if they attempt to exercise that power they may suffer a loss ofmembership or even risk action under the restrictive trade practices legislation … An industry is likely to seek to regulate behaviour of market participants where by so doing it will improvethe image of the industry, increase sales and perhaps fend off statutory regulation which invariably is seenas being worse than self-regulation, although this is an assumption which is open to challenge.
The industries where self-regulation is most appropriate are those which deal directly with the public andwhere the product is difficult to evaluate. Problems occur where the public have little knowledge of whatthey are buying. This applies particularly to some financial services, building work and car repairs … The problems for trade associations being regulators are basically those of ensuring that everyone in themarket is covered, how any regulations are to be enforced and also possibly ensuring that restrictive tradepractices legislation is not used against them. All such arrangements are potentially unstable and perhapsare held together predominantly by the fear of more onerous statutory regulation.’ Mark Boleat, Trade Association Strategy and Management
Guideline 4: a dedicated institutional structure If trade and professional associations are not the appropriate bodies to run self-regulation – as webelieve they are not – it will usually be necessary to set up separate organisational arrangementsspecifically for the purpose.
The body set up must have proper resources to carry out its task. The features it should have tobe considered credible are set out in a checklist which forms chapter 6 of this report.
Clearly some self-regulatory schemes, such as those covered under the categories of official codesand guidance, and legal codes, are unlikely to have an independent structure.
On some occasions – for example, where there is no realistic prospect of legislation – self-regulation on its own may be the only option.
International electronic commerce is an obvious example. Here, there is almost no prospect ofmeaningful regulation being agreed and enforced globally. If consumers are not to be entirelyabandoned to a ‘look after yourself’ free-for-all, self-regulatory options simply have to beconsidered .
There may be occasions, too, where self-regulation will probably be as good as, or even betterthan, anything that could be achieved by statute. This includes sectors where traders are happyto agree to abide by higher standards than those required by legislation or where there is likely tobe greater compliance as a result of direct trader participation. A self-regulatory scheme may alsobe suitable for dealing with detailed technical or single-sector issues, or for refining vague andimprecise legal concepts (like ‘fairness’, ‘reasonableness’ and the like), or to act as a test-bed forlegal rules.
Guideline 6: a sceptical approach to collective self-regulation Self-regulation that brings businesses together into a collective activity clearly has the potentialfor anti-competitive effects and other limitations. This means always treating such arrangementswith a degree of scepticism.
Those who propose self-regulation must show there is some genuine consumer advantage to begained. Why is this self-regulatory arrangement better than legislation for the particular purpose?If the industry says it will observe self-imposed rules, why not the same rules written intolegislation? Where consumer detriment is acknowledged, why has the industry not put its housein order already? Is it really sensible to ‘try self-regulation first’? Will self-imposed rules really gofurther, be more positively observed and be more effectively enforced than legal rules? If self-regulation is claimed to be cheaper and more flexible, is there a real commitment to monitoringand enforcement? In essence, this guideline is to make sure we ask questions about motivation which, among otherthings, may be: Cosmetic: to improve image or enhance status.
Beneficial: to raise standards, to refine or improve legislation, or to provide
cheaper/quicker redress.
Detrimental: to forestall necessary legislation or regulation; to restrict competition.
Guideline 7: backed by a credible threat of legislation The fear of unwelcome statutory regulation has been the driving force behind many – perhapsmost – self-regulatory schemes. The more explicit and focused the threat, the more effort islikely to be put into self-regulation, though even a general anxiety about possible intervention(as with professional services) will sometimes act as a spur.
The Jack Committee on Banking Services (February 1989) called for improvements in standards of bankingpractice, and expressed a predisposition for non-statutory self-regulation. The Committee report included anillustrative Code and expressed the ‘earnest hope and expectation’ that the banks would, by introducingsuch a Code, respond fully and convincingly to the need for a substantial improvement in standards. Thereport also proposed a ‘fallback measure’ – for government to introduce a statutory code – if the bank’sresponse was inadequate or non-existent.
The government of the day decided against statutory provision immediately, but the threat of legislativebacking succeeded in putting pressure on the industry. The banks and building societies, through theirassociations, responded in March 1992 by introducing the Banking Code, backed by an independentReview Committee. Conscious that legislation remains a possibility, the industry has substantially improvedthis self-regulatory arrangement over the years (see chapter 3, page 25).
A similar strategy is being pursued by the present government in relation to mortgages. Here, the threat isbacked by reserve powers in the Financial Services and Markets Bill which can be activated by ministersthrough secondary legislation. The mortgage industry is clearly trying to demonstrate that the MortgageCode is effective, although many believe that statutory intervention is inevitable (not least because self-regulation cannot control all intermediaries and some lenders on the fringes of the market).
Guideline 8: self-regulation works best within a legal framework Self-regulation and legal regulation are not black-and-white opposites. It is widely accepted thatthe right balance has to be found between the two. Self-regulation, at its best, can be seen as aco-operation between the regulator, regulated and those in whose interests regulation is made.
But for self-regulation to work effectively, there may be a need for a concept of co-regulationwhich is underpinned by legal regulation.
Codes and the law: Australian ‘co-regulation’ In 1998 the Australian government issued a Policy Framework on Codes of Conduct. This said that whereself-regulation fails, legislative options would be pursued to provide the means for industry to self-regulateeffectively. ‘Co-regulation’ was described as a process where industry develops and administers a code andthe government provides the ability to enforce it through legislative backing.
The main roles for the back-up legislation would be to: delegate to industry the power to regulate and enforce the code; enforce undertakings to comply with the code; prescribe the code, but only apply it to those who choose to be bound; set out required standards, but provide for an approved code to modify or elaborate them; provide a reserve power to make a voluntary code compulsory; require the industry to have a code and, in its absence, impose a code; or The best UK and overseas examples of self-regulation at work seem to be those where there is alegislative framework within which ‘private’ initiatives can take place. It is helpful to have apublic institutional structure in place (such as the Office of Fair Trading) charged withmonitoring self-regulatory initiatives, and we welcome the role to be given to the OFT in theconsumer strategy. Failures and/or breaches of self-regulation may have to be corrected byeffective public remedies.
So the recent UK trend towards self-regulation within a statutory framework has particularattractions. A code with a self-regulatory element, and which is recognised by statute, can bringpositive advantages for consumers.
It is important that the status of the code is made clear. A self-regulatory code can be especiallyuseful where it is admissible in evidence to illustrate a general legal rule or duty, and where thestatute makes it clear that the general rule is binding on all traders, irrespective of trade associationmembership .
The National Consumer Council has long seen Part III of the Fair Trading Act as a potential toolfor controlling business practices that are unfair but not illegal. We have already said that self-regulation can deal better than the law with questions of complex subjective judgement, such as‘fairness’. If Part III could be used to give a legal framework to self-regulatory code rules dealingwith ‘unfair’ behaviour, the problems of incomplete coverage and lack of sanctions could beaddressed.
The government’s Consumer Strategy proposes changes to Part III, which seem to fall short ofincluding ‘unfair but not illegal’ practices within its scope. We consider it essential if the Act is tobe used to underpin self-regulatory schemes that there is in effect a legal duty ‘not to trade a set of principles the court could use in deciding In addition, we have suggested that in problem areas – like the building trade and ‘green’ claimsfor products – the Office of Fair Trading should take the lead in developing codes that wouldapply to the whole of a sector. Breach of the provisions in a code relating to fairness could be usedas evidence of unfair practices for the purposes of Part III, without actually being illegal (in muchthe same way as the codes of practice relating to health and safety are already used underemployment law).
The importance of Office of Fair Trading involvement in codes of practice cannot be overstated.
Its scrutiny is essential to make sure that all interested parties have an opportunity to representtheir case and that the major players in an industry do not use the code anti-competitively toprevent entry at a lower level.
1. The scheme must be able to command public confidence.
2. There must be strong external consultation and involvement with all relevant
stakeholders in the design and operation of the scheme.
3. As far as practicable, the operation and control of the scheme should be separate from the
institutions of the industry.
4. Consumer, public interest and other independent representatives must be fully
represented
(if possible, up to 75 per cent or more) on the governing bodies of self-regulatory
schemes.
5. The scheme must be based on clear and intelligible statements of principle and
measurable standards – usually in a Code – which address real consumer concerns. The
objectives must be rooted in the reasons for intervention (outlined in chapter 1.)
6. The rules should identify the intended outcomes.
7. There must be clear, accessible and well-publicised complaints procedures where breach
of the code is alleged.
8. There must be adequate, meaningful and commercially significant sanctions for
non-observance.
9. Compliance must be monitored (for example through complaints, research and
compliance letters from chief executives).
10. Performance indicators must be developed, implemented and published to measure the
scheme’s effectiveness.
11. There must be a degree of public accountability, such as an Annual Report.
12. The scheme must be well publicised, with maximum education and information directed
at consumers and traders.
13. The scheme must have adequate resources and be funded in such a way that the
objectives are not compromised.
14. Independence is vital in any redress scheme which includes the resolution of disputes
between traders and consumers.
15. The scheme must be regularly reviewed and updated in the light of changing
circumstances and expectations.
Published and unpublished materials in date order: 1. National Consumer Council/Office of Fair Trading material
1. Office of Fair Trading, Redress procedures under codes of practice: conclusions following a review by the OFT, 1981, 28pp.
2. National Consumer Council, The Solicitor’s Complaints Bureau: a consumer view, December 1994.
3. National Consumer Council, Green Claims: a consumer investigation into marketing claims about the environment, March1996.
4. National Consumer Council, A Code of Practice for Home Loans: response to the Council of Mortgage Lenders on the draftCode of Mortgage Lending Practice, September 1996.
5. National Consumer Council, Controlling the Cowboys: a consumer review of the home improvements and repairs market,November 1996.
6. Office of Fair Trading, Voluntary Codes of Practice - a consultation paper, December 1996.
7. National Consumer Council, Voluntary Codes of Practice, response to the OFT consultation on voluntary codes of practice,March 1997.
8. National Consumer Council, Green Claims Code of Practice, July 1997.
9. National Consumer Council, Review of Insurance Ombudsman Bureau Scheme, September 1997.
10. Office of Fair Trading, Core standard paper and Consumer awareness trade association voluntary codes, conferencepapers, 22 September 1998.
11. Office of Fair Trading, Raising Standards of Consumer Care - progressing beyond Codes of Practice, February 1998.
12. National Consumer Council, Raising Standards of Consumer Care: progressing beyond Codes of Practice, response, April1998.
13. National Consumer Council, Insurance Intermediaries: why regulation, response to the Treasury’s consultation on insurancebrokers and other intermediaries, June 1998.
14. National Consumer Council, Financial Services and Markets Bill, response to the Treasury’s consultation on the draft Bill,January 1999.
2. Conference/speech materials
1. Gordon Borrie, ‘Laws and Codes for Consumers’, lecture at annual conference of the Association of Law Teachers, 1980,published in Journal of Business Law, 1980.
2. Papers delivered at a ‘Soft Law’ workshop of the University of Bremen, 15 November 1983, published in Journal ofConsumer Policy, Vol 7, No 2, June 1984.
3. Gordon Borrie (Director General of Fair Trading) ‘Estate Agents and Bankers - Regulation or Self-regulation?’, speech givenat the University College London on 2 November 1989.
4. David Hatch CBE (Chairman of the NCC) ‘Codes of Practice: Who are they working for? Making them work for Consumers’speech given on 25 November 1997.
5. Papers from Advertising Association seminar, 17-18 July 1997.
6. Australian Competition and Consumer Commission, paper on ‘Compliance Strategy’, delivered at the Sydney GlobalCommerce Conference, 1998.
3. Reports
1. Pickering, J.F. and Cousins, D.C., The Economic implications of Codes of Practice, report of a study commissioned by the OFT,1980, 272pp.
2. Department of Trade, The self-regulatory system of advertising control, report of the working party, 1980, 28pp.
3. OECD, committee of experts on restrictive business practices, report on ‘Competition Policy and the Professions’, 1984.
4. Department of Trade and Industry, Review of Legislation on False and Misleading Price Information, report of inter-departmental working part, February 1984, 10pp.
5. Arora, A., The Jack Committee Report on Banking Services: Law and Practice, July 1991.
6. University of Exeter, Professional Organisation of Complementary and Alternative Medicine in the United Kingdom, a reportto the Department of Health, 1997.
7. Consumers’ Association, Advertising Self-regulation, Policy Paper, June 1997.
8. Consumers’ Association, Financial Products Regulation - policy paper, June 1998.
4. Articles
1. Pickering, J.F. and Cousins, D.C., ‘The benefits and Costs of Voluntary Codes of Practice’, European Journal of Marketing No6, 1982; ‘The Impact on Consumers’, extract p393 of Consumer and Trading Law Cases and Materials.
2. Journal of Consumer Policy, vol. 7, No 2, June 1984 includes:Woodroffe, G., ‘Government Monitored Codes of Practice in the United Kingdom’, 13pp.
Schuster, A., ‘Government Monitored Codes of Practice in Ireland’ comments and brief reports, 12pp.
Borrie, G., ‘A Duty to Trade Fairly?’ 1p.
Thomas, R., ‘Codes of Practice in the United Kingdom and the Consumer Interest’, 4pp.
Braun, J., ‘Administration of the Direct Selling Code in the United Kingdom - a personal experience’, 4pp.
Murray, J., ‘Codes of Practice in Ireland: a practitioner’s view’, 5pp.
Ewoud, H.Hondius, ’Non-legislative Means of Consumer Protection: the Dutch perspective’.
Jean Calais-Auloy, ‘Collectively Negotiated Agreements: proposed reforms in France’.
Ulf Bernitz, ‘Guidelines Issued by the Consumer Board: the Swedish experience’.
Christian Joerges, ‘The Administration of Art. 85(3) EEC Treaty: the need for consultation and information in the legal Tony Venables, ‘European Codes: a red herring’.
Jules Stuyck, ‘Consumer Soft Law in Belgium’.
Prof. Dr. Bernd Stauder, Joachim Feldges, Peter Mulbert, ‘Consumer Protection by Soft Law in Switzerland - practice and Thierry Bourgoinie, ‘The need to reformulate protection policy’.

Source: http://www.talkingcure.co.uk/articles/ncc_models_self_regulation.pdf

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