Good afternoon and thank you Michael for your introduction.
What is customer centric retailing? Surely it is ensuring customers have the best possible experience when they do business with you. Today I would like to focus on how compliance with consumer protection legislation ensures a good experience for your customers and how this is good for your business.
I will start by demonstrating how wrong it can go and the brand damage that ensues when consumers are misled; I will give you some pointers on how to get it right, and update you on some of the work areas the Commission is currently focussed on.
But let me start by reminding you what the Commerce Commission exists to achieve.
Competitive markets and informed consumers
The Commission aims to achieve markets that are competitive and consumers that are informed. Understanding how these two objectives are interdependent is key to understanding the two sides of the coin the Commerce Commission deals with.
Let me quote John Fingleton, CEO of the Office of Fair Trading in the UK. He has said:
"Good consumer outcomes rely on competitive markets to provide choice and value, while vibrant competition relies on consumers confidently shopping around. Competition and consumer policy together provide a framework for markets to deliver maximum benefits for consumer welfare and productivity growth."[1]
In recognition of this 'two sides of the same coin' philosophy the Commission has recently combined its Fair Trading, Credit Contracts and Consumer Finance and Commerce Act teams in one new Enforcement branch. This is both an internal rationalisation, to allow optimal use of resources, and an holistic approach to consumer law and competition issues.
In talking about Commerce, Fair Trading and Consumer Credit laws, it is important to remember that these laws impact the lives of every New Zealander. We all, as consumers, have a right to purchase goods and services without deception, businesses have the right to compete on a level playing field, and when we borrow money for a car, house or appliance, we have the right to know and understand exactly what we are signing up for.
When it goes bad
Let's stop and ponder for a moment what happens when a company breaches consumer protection legislation, in particular, the Fair Trading Act.
Who can forget Ribena.
Such was the extent of the brand damage from the Ribena investigation that it has been written about in international marketing journals and has become something of a case study in how badly a misleading claim can damage a company's reputation and drive customers away.
Senate Communications conducted research into the Ribena crisis and found consumers and retailers were less than forgiving of the global giant's mistake, with the issue resonating in the public mind months after the court case.
Of 50 shoppers surveyed, 48 had positive feelings toward Ribena prior to the case going public but less than a third said they would buy the ready-to-drink products following the bad publicity surrounding the case, stating "[GlaxoSmithKline] lied to us" and "[our] view of Ribena and GlaxoSmithKline has been tarnished". [2]
But wait - there's more.
Recently both Telecom and The Warehouse have suffered bad headlines in the media as a result of the Commission taking enforcement action under the Fair Trading Act.
And these are just the headlines. Read the comments sections of the websites these stories come from, or listen to talkback radio and you can see and hear the backlash consumers express when they find out they were misled. And let me be quite clear about one thing - when the Commission takes enforcement action we are very aware of the potential impact on a company's reputation - it is an acknowledged part of the enforcement action.
In short - misleading your customers will harm your business. The effect can be seen directly when, for example, the share price of a listed company falls when Commerce Commission action is announced. But how can you quantify the indirect losses as a result of consumers losing confidence in your business and deciding to go elsewhere?
In the Ribena case there was a direct correlation to a drop in sales. Foodstuffs reported that in the North Island central zone sales were 12 per cent lower in the fortnight immediately following the sentencing than they were in the same fortnight a year earlier.
Consumers have the final word. When we warned Inghams chicken last year that it was misleading to claim their chickens contained no GM ingredients when they had been fed genetically modified soy feed, there was a public outcry.
Would you want this kind of coverage for your company on the 6pm TV news?
[Video clip]
Avoiding the bad headlines
So how do you avoid the reputational harm of being in the Commerce Commission's sights for a breach of the Fair Trading Act? Its simple - adopt a compliance programme and make sure everyone from the shop floor salesperson through to shelf-stackers and right up to the CEO are all aware of the obligations.
[Video clip]
That clip is from a new resource - I'll tell you more about that shortly.
How many businesses represented here today have a compliance training programme in place to ensure their staff know their obligations under the Fair Trading Act?
I am disappointed to report that the figure is actually pretty low. We recently commissioned a survey of 350 businesses on a number of aspects of the legislation we enforce. Of those who recognised that the Fair Trading Act applied to their business, 69 percent said they did not have a compliance programme or staff training on the Fair Trading Act.
Needless to say, this has sharpened our focus on spreading the word about the benefits of introducing a compliance programme.
The Commission recognises that it is better all round if the Act isn't breached. Consumers aren't left out of pocket, your business reputation isn't harmed, and the Commission hasn't needed to take what can often be lengthy court proceedings. We actually want to take less enforcement action.
In order to help your business be compliant we are developing tools that assist with putting in place an in-house compliance programme. There are resources on our website, including a training DVD and a checklist. We also make our Fair Trading managers available to come and talk to industry groups about compliance.
The most important thing you can do to protect your brand is to ensure consumer confidence in it is not undermined by breaches of the Fair Trading Act.
A new way
Straightened financial times call for prompt, effective action. The Commerce Commission is not immune from the need to maximise its resources in the public interest, and to obtain the most effective remedies possible from its enforcement activities.
For that reason, the Commission is joining many enforcement agencies worldwide in further developing its tools and techniques for resolving disputes. Our aim is to get outside the binary litigate/ don't litigate choice, and to make sure that we consider alternatives to litigation where they exist.
But let me be clear - we will bring the full weight of prosecution to bear in cases where alternatives to litigation are not appropriate. In the coming financial year we anticipate resolving up to 270 Fair Trading cases. And in the year to date we have completed 271 Fair Trading investigations, with nine of these so far having been resolved through the Courts.
In terms of alternatives, we are developing, and will publish, a policy and processes for dispute resolution. We would like the approach to dispute resolution to be well-understood and applicable across as many of the Commission's activities as is appropriate and responsible.
An example of how this new approach can work, both for the market and for consumers, is the recent settlement with credit card companies over the setting of Interchange fees.
Interchange
The Commission's view was that the fixing of interchange fees was anticompetitive, and was increasing the cost of credit card services. A year ago, litigation seemed intractable to all concerned. Yet a year on, the scheme rules have been changed and we believe that we have achieved a competitive market outcome. With some very active engagement by all parties, we were able to resolve that proceeding and avoid the cost, delay and uncertainty of a Court hearing.
What we settled on was a forward-looking set of scheme and bank rule changes that we think will benefit the New Zealand consumer. We applied our efforts, in the months before trial, to designing a competition remedy of the kind that the Court could not have delivered even if it had upheld the Commission's claim.
The Commission claimed in High Court proceedings that the multilateral interchange fees substantially lessened competition by artificially inflating the cost to retailers of accepting credit cards, and ultimately raising prices paid by all consumers, irrespective of their choice of preferred payment method.
As a result of our settlements with Visa and Mastercard and the banks involved, retailers will benefit from significant new product offerings, and it is likely that interchange fees charged in respect of transactions in New Zealand using Visa and MasterCard credit cards will be lower on average. We expect to see downward pressure on interchange fees while ensuring that those fees remain transparent and open to competitive forces in the future.
We expect the savings to retailers over the next three years as a result of these settlements to be in the order of $70 to $80 million. Additionally, we expect as a result of some businesses adding a surcharge for credit card use, that we will see a reduction in credit card use, which will create the competitive pressure on credit card companies to renegotiate terms and conditions with banks, and the same pressure on banks to negotiate better deals with retailers.
Also, consumers can make an informed choice. Use a credit card and possibly pay a surcharge, or choose to pay by another means. This removes the cross-subsidisation that existed where all consumers paid higher prices to cover the cost of those who paid by credit card.
The solutions reached have been of great interest to other agencies in North America and elsewhere, who are investigating the same problems, and we count it as an example of effective out-of-court resolution. We continue to monitor this market to ensure the outcomes we expect do happen.
Current focus
Finally let me update you on some of our current priorities. The Commission's enforcement of the Fair Trading Act has a history of significant success in influencing trader behaviour and improving consumer confidence. Through past successes we are able now to become more focussed about our interventions, and leverage off the past to impress upon businesses the importance of compliance.
Last year, after reviewing New Zealand and overseas experiences of heightened consumer concern, we created three focus areas in Fair Trading: financial services, sustainability and telecommunications. These focus areas have allowed the Commission to develop its knowledge of these industries and to take a proactive stance to resolving issues. They are constantly reviewed, and over time new focus areas will be developed in response to new emerging issues.
In the area of financial services we have been particularly busy. The most significant current matter relates to the representations made by ING and ANZ National Bank Limited with regard to the Diversified Yield and Regular Income Funds. As reported in media last month, we have concluded the investigation and I expect we will be making an announcement on the outcome shortly.
In the financial services area there is frequently a crossover between Fair Trading work, and that undertaken under the Credit Contracts and Consumer Finance Act. We recognise the need for further guidance to the credit industry on the application of this Act, and further education of consumers as to their rights. Last year we released draft credit fees guidelines for public comment. Submissions showed strong support for the guidelines and raised several issues requiring further development. Last week we released revised draft guidelines. Ultimately, these guidelines will allow creditors to act with confidence in setting fees and establish business models that comply with the Credit Contracts and Consumer Finance Act.
In the area of sustainability, we were concerned that marketers were increasingly using so-called "green-washing" as a positioning tool, often with little or no science to back up their claims. The harm here is two-fold. Consumers are misled into buying a product or service they believe is better for the environment than another, and competitors are deprived of legitimate sales.
In this area we have provided guidance in the form of guidelines for green marketing, and for carbon claims. We have had very good feedback about these from the business community. We have also engaged in discussion with a range of industries that make sustainability claims in their advertising. False or misleading green marketing claims will, from now on, be given enforcement priority by the Commission.
Let me now turn to telecommunications, which features prominently in the thousands of complaints we receive each year under the Fair Trading Act. One of headlines you saw earlier related to the large case we resolved with Telecom in January this year resulting in refunds to customers totalling $9.5 million. In addition, late last year, Telecom incurred a $500,000 court penalty following our prosecution for misrepresentations of the Xtra Go Large broadband plan. Importantly for consumers this was accompanied by $8.4 million in refunds. In addition we commenced litigation last year against Vodafone on various misleading representations made in relation to five different retail products (including broadband and mobile products).
Practically every New Zealander is a consumer of telecommunications products, so this is an area with very large impact when things go wrong. Hence, in addition to litigation where necessary, the Commission is focussed on providing guidance to the industry. We have begun, and will continue to have, regular compliance meetings with telecommunications companies. We also issued, in November last year, draft guidelines on disclosure of telecommunication product bundling and will soon issue the finalised guidelines. This is an important initiative to ensure advertising of such products meets clear minimum standards. This makes it easier for consumers to make informed choices, and will better drive competition in this market.
Finally, on the subject of Fair Trading, let me tell you about a successful new initiative - the Low Level Inquiry Unit. Each year the Commission receives about 10,000 complaints under the Fair Trading Act. We do not have the resources to investigate each and every one, instead selecting cases according to our enforcement criteria, on factors such as the scale of detriment.
But often consumers are raising issues that can be resolved quite quickly, allowing the Commission to prevent a small problem from becoming a bigger one. The Low Level Inquiry unit looks for quick, simple resolution of straightforward Fair Trading Act complaints, either through compliance advice to the trader, or in more serious cases a warning. The unit has closed around 50 cases each quarter since its inception, exceeding all expectations.
This approach presents a win-win situation - the aggrieved consumer has their problem resolved and has confidence that the Commission has acted on their complaint, whilst the business has avoided more serious enforcement action but has learned what they must do to be compliant.
And finally, how do we as a Commission demonstrate that we are having an impact on competitive markets and informed consumers? Two things stand out.
The first is a measure of what we achieve for consumers. In the year to date the Commission has achieved penalties, settlements and refunds for consumers in Fair Trading cases totaling $19 million.
The second is the number of businesses who adopt compliance programmes and so limit their exposure to the risk of breaching the Fair Trading or Credit Contracts and Consumer Finance Acts. The Commission aims to see a vast improvement over time in the figure I quoted earlier.
Closing
And so we come back to compliance. The Commission's role is to promote competition in New Zealand markets and prohibit misleading and deceptive conduct by traders. In doing this, we support the government's goal of growing the New Zealand economy in order to deliver greater prosperity, security and opportunities to all New Zealanders
Let me reinforce this point - the Commission does want you to prosper. In the past we have been seen as purely an enforcer. The Commission will continue to vigorously pursue through the Courts those businesses that blatantly breach competition and consumer legislation. However we do believe that we can be more effective in the future by becoming more of an influencer. By this I mean that we will aim to educate to change behaviour so that breaches of the Fair Trading, Credit Contracts and Consumer Finance and Commerce Acts are avoided. We are working very hard to provide you with the tools you need to put in place robust compliance programmes and training for your staff.
This is good business. I urge everyone here today to make it your personal responsibility to go back to your firm after this conference and ask these questions - do we have a legislative compliance programme? Can I be confident that all my staff know how to avoid breaching the Fair Trading Act?
And if you answer No to either or both of these questions I suggest your first port of call is our website and the compliance resources provided there. In particular there are checklists you can download, and a DVD you can order (and with the marvel of modern technology will soon be able to watch online) - you saw a clip from this DVD earlier.
Finally I will end with this quote from the BC Roman writer Publilius Syrus - he said "A good reputation is more valuable than money."
[1] John Fingleton speech 9 December 2009; Joining up Competition and Consumer Policy - the OFT's approach to building an integrated agency
[2] Source : The reputation revolution - the time to act is now, by Neil Green, Senate Communications
