Ever felt swizzed by the small print in your mobile contract, bamboozled by a plethora of insurance products or locked into a subscription you signed up for by mistake?
Then you are far from alone: a paper on the UK’s productivity predicament suggests the way the markets for some key services work is not only a monumental pain for consumers but bad for the economy, too.
Rachel Reeves has promised to tackle the cost of living in her 26 November budget – alongside bringing in tax rises.
Briefing in advance has suggested she and her colleagues are focused on cost-cutting levers they can easily pull from Whitehall: removing VAT on energy bills, for example.
However, in their paper “getting Britain out of the hole”, the economists Andrew Sissons and John Springford suggest a much more muscular approach to making markets for key services work better.
They argue that lack of proper competition for services is an important explanation for the UK’s frustratingly “sticky” inflation.
While it was goods – chiefly energy – that drove the post-Covid increase in prices, it has been services inflation that has hung around.
Part of the reason for this lies in rising wages, especially at the lower end of the scale, and Reeves’s £25bn increase in employer national insurance contributions, which companies have passed on to customers where they could.
However, the authors say there is another problem here: the failure of regulation to make some markets – from household energy to mobile phones to insurance – work to the benefit of consumers.
“Too many markets for services are beset by problems with limited competition, ineffective regulation or problematic market structures that hurt consumers and make services inflation more persistent than it should be,” they argue.
They point to well-known challenges in energy and transport, including the need for massive investment in the transition to net zero, and creaking infrastructure in need of costly upgrades.
They also point to “signs that the competition regime for services that require contracts – personal finance, consumer energy and telecoms, for example – is failing to keep bills down”.
“This spending is gobbled up by companies in the form of a producer surplus, where more competitive markets would allow consumers to spend on other goods and services, raising the efficiency of the economy,” they add.
The headaches are different for each market but customers can often end up trying to judge which of a plethora of complex tariffs or products is the best value, enduring eye-watering automatic increases in bills, or struggling to end a subscription they signed up for online.
They point out that, since 2022, there has been a noticeable rise in inflation in April, when automatic price increases in some phone and broadband contracts kick in.
These unwelcome spring price increases are often pegged just above the retail prices index (RPI) – the outdated inflation measure that conveniently tends to be higher than the consumer prices index measure targeted by the Bank of England. The authors call for the use of these “RPI-plus” contracts to be strictly limited by regulators.
Elsewhere, the nature of the rip-off may be harder to detect. There may be many players, apparently competing hard, but the baffling complexity of the products on offer, and the faff of comparing these and switching, mean only the keenest consumers are getting a fair deal.
This is at heart a problem of “information asymmetry”: companies are able to exploit the fact that they know much more than their customers.
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“Most consumers don’t have the time or the skills to read the terms and conditions, and producers have access to troves of data about how consumers behave in the real world, and can take advantage of them,” the authors say.
A similar argument was made in another recent paper, by the behavioural economist and former government adviser David Halpern, and the former cabinet secretary Gus O’Donnell. They highlighted the phenomenon of “shrouding”, whereby consumers are unable to see all the information they need to make decisions – because of hidden charges, for example.
Since Labour came to power, Reeves has repeatedly urged the nation’s army of regulators to take more account of economic growth. She has suggested that means they should “tear down regulatory barriers” and get rid of the dreaded “red tape”.
Sissons and Springford argue, however, that regulators may need to be better resourced and more interventionist, to make markets work better to the benefit of consumers and the economy.
As well as restricting the use of those RPI-plus contracts, they set out a series of radical proposals. These include a new government-enforced rule that any service you can subscribe to online, you can cancel online, too.
Auto-renewing contracts, where consumers end up stuck with their existing provider unless they act by a certain deadline, should not be the norm, they argue – aside from perhaps in essential areas such as car insurance.
In some markets, the pair suggest, regulators could even draw up definitions of a few standard products – plain vanilla insurance contracts, with a set excess and very few exemptions, for example.
That could allow companies to compete to provide these on the basis of price and service – instead of baffling consumers with byzantine small print.
Aside from workers’ rights, Labour’s language on regulation has tended to follow the laissez-faire playbook of the Tories – Reeves has even said overbearing rules are a “boot on the neck” of businesses.
But it will take better, not less, regulation to foster more dynamic markets for the services consumers rely on, and stop them being shortchanged.
