9 July 2004

NCP Inquiry
Productivity Commission
PO Box 80
Belconnen ACT 2616 

Dear Commissioners

Consumer Law Centre Victoria submission to the Review of National Competition Policy Arrangements

The Consumer Law Centre Victoria (CLCV) welcomes the opportunity to make this submission to the Review of National Competition Policy (NCP) Arrangements being undertaken by the Productivity Commission (the Review). 
The CLCV
The CLCV is one of Australia’s leading consumer organisations, undertaking research, policy development, advocacy and education. The CLCV also operates a large consumer legal practice assisting thousands of low-income consumers each year with free legal advice and representation. The CLCV is currently working on a range of issues that affect the consumer interest, including utilities, banking and credit, telecommunications, insurance, competition policy, fair trading and access to justice.
Opportunities created - the benefits of NCP
In our view, fair, effective competitive markets deliver the best price, quality and access to goods and services for the majority of Australian consumers. They also enable Australian companies to compete more successfully on an international scale.  The CLCV welcomes the contribution of NCP to Australia’s overall productivity and acknowledges its success in major consumer markets. The CLCV agrees with the view set out in the Productivity Commission’s Annual Report 2002 that ‘microeconomic policy reforms have played a central role in Australia’s recent productivity surge. These reforms, with their focus on openness to foreign trade and investment and enhanced domestic competition have been the drivers and enablers of Australia’s recent productivity growth.’ 
Challenges ahead – maximising benefits and addressing unequal distribution
In our view, the potential benefits of competition have not, however, been fully realised in Australia. Additionally, the experience of the CLCV is that low-income, vulnerable and rural/regional consumers have not enjoyed the benefits of NCP to the same extent as the remainder of the Australian population. Inequitable distribution of the benefits of competition, between different groups of consumers, has in our view, largely arisen as a result of market failures, particularly information asymmetries, discrimination and lack of effective demand-side participation. 
Information asymmetry 
Information asymmetry is, in our view, the principal market failure hampering the effective implementation of NCP. This problem is compounded by bundled and complex contracts, such as those offered in the telecommunications industry and the utilities sector.  In Victoria, for example, information asymmetry in relation to tariff structures, contract terms and conditions, demand management and energy efficiency has hampered the beneficial outcomes expected to flow from the introduction of FRC in the electricity and gas markets.  
Discrimination against "unattractive" consumers
In the deregulated Australian financial services market, for example, discrimination against low-income Australians takes place on the basis of factors such as income level, bank balances and home ownership and has arguably lead to the creation of exploitative residual markets for low-income and vulnerable consumers. In these circumstances policy intervention may be required to provide suitable alternatives for low-income and vulnerable consumers that are not exploitative in nature.

In its May 2004 report on ‘Banking Fees in Australia’, the Reserve Bank of Australia (RBA) noted that: ‘individuals that maintain high balances and make few transactions can avoid many of the fees introduced since the mid-1990s. In contrast, customers with low balances who make frequent transactions using non-electronic channels are paying considerably more in fees than was the case in the mid-1990s.’ Low-income and vulnerable consumers, who are forced to deal with banks for basic transaction account services because their salary or social security benefits must be deposited into a bank account, are increasingly excluded from low-fee banking facilities. Such facilities are routinely made available to wealthier consumers who are granted generous fee waivers because, for example, they are members of professional associations or have a mortgage, term deposit or other investment with the bank. 

Indeed, the RBA’s report concluded that those who have benefited most from the deregulation of the banking industry ‘are those with a loan secured by a residential mortgage, who use electronic payment channels and who avoid late payment and other similar charges. In contrast, those customers without a loan, who have low balances and have a high volume of transactions would not have benefited from the fall in interest margins and would be paying higher fees.’ Unfortunately, a typical profile of a low and fixed income consumer is one that maintains low balances, has a high volume of transactions and does not have a loan. Moreover, such a consumer is more likely to incur penalty fees, such as direct debit default fees, as the capacity to avoid these charges is mostly determined by having adequate financial means. 

The introduction of alternatives such as a regulated Basic Bank Account would provide a solution to the current situation faced by many low and fixed income consumers. In the credit market, No Interest Loan Schemes, and other similar micro-credit initiatives, seek to provide alternatives to exploitative credit such as payday lending.
Lack of effective demand-side participation
Consumer sovereignty is essential to an efficient, fair marketplace. As Timothy Muris, Chairman of the US Federal Trade Commission has stated, ‘…well-conceived competition policy and consumer protection policy take complementary paths to the destination of promoting consumer welfare.’ In an Australian context, Louise Sylvan, Deputy Chair of the Australian Competition and Consumer Commission, recently made a similar point: ‘In the same way that misuse by a company of its market power inhibits appropriate vigorous competition, the failure of consumers to be able to exercise their market power also inhibits competition’. Disclosure, education and literacy programs, appropriate consumer protection regulation and law enforcement are all required to maximise the benefits of NCP and mitigate the unequal distribution of the benefits of NCP.
The recent introduction of unfair contract terms legislation into the Fair Trading Act 1999 (Vic) is one example of consumer protection regulation supporting a fair and competitive market. One consequence of the lack of effective demand-side participation is the creation of one-sided, “take it or leave it” contracts, regularly in a form that is standard across a market. For instance, the telecommunications mobile phone market, while highly competitive on price with many entrants seeking to obtain market share aggressively and quickly, is notorious for the use of standard form contracts which impose unfair terms on consumers. For sellers who regularly provide consumers with standard form contracts, the cost of analysing the impact of the terms is spread out over a large number of transactions. For consumers, on the other hand, the cost of acquiring and processing information on contract terms is likely to be far greater than the price of entering into the contract. This leads to market failure, in which consumers are unable to influence the terms of standard form contracts.
 
In our view, significant investment is required to build demand-side advocacy in the Australian community. Initiatives, such as the CLCV National Electricity Market (NEM) Capacity Building Project, which provides stakeholders, including consumers, with a more detailed understanding of the electricity industry nationally and builds the capacity of the consumer movement to advocate on behalf of consumers in the NEM, are critical to increase consumer awareness and participation in the market. The creation of the Victorian Consumer Utilities Advocacy Centre, which plays a key role in undertaking research on utilities issues and disseminating information gathered in this research as well as undertaking proactive advocacy on behalf of Victorian consumers, is a prime example of how government can foster robust markets by introducing effective consumer advocacy.      
Maximising Benefits - Ensuring competitive markets
In order to maximise the benefits of NCP, it is essential that Australian governments act swiftly to prevent anti-competitive conduct by ensuring that there are no safe harbours from the reach of the provisions of Part IV of the Trade Practices Act 1974 (Cth) (TPA). 
The shielding of particular industries, such as pharmacists, from the operation of NCP continues to prevent the realisation of the full benefits of NCP. In addition, the recent High Court decision of Boral Besser Masonry Limited v The Australian Competition and Consumer Competition indicates the need to strengthen the legislative prohibitions which constrain anti-competitive conduct, to withstand restrictive judicial interpretation. 
Similarly, NCP fails to benefit consumers in industries, such as the mortgage broking industry, where commissions and ‘soft dollar payments’ distort the market so that consumers are not provided with accurate and complete information about the products offered by lenders. Further, competitive markets are threatened by the lack of criminal sanctions for company directors involved in serious or hard-core cartel behaviour. The financial gains realised by Australian corporations that participate in cartels are substantial and the existing financial penalties do little to deter illegal behaviour.   
If you have any questions about this submission please contact Margery Clark on 03 9629 6300.
 
Yours sincerely

Chris Field								Margery Clark
Executive Director							Solicitor