Consumers First_Smart Regulation for Digital Australia

Background

This article examines principles-based regulation for communications in Australia, proposing a framework designed to enhance market efficiency, boost consumer welfare, and benefit businesses that prioritize consumer interests.

The existing regulatory framework is failing both consumers and businesses striving for improved services and competitive pricing This paper proposes a forward-thinking alternative regulatory vision for communications that prioritizes consumer welfare as the core principle of policy and regulation.

The telecommunications, broadcasting, and Internet sectors are evolving into a unified digital economy, necessitating the application of consistent regulatory policies across all markets To initiate reform, it is essential to develop principles-based regulation This paper aims to address several key questions regarding this transition.

 What is principles based regulation?

 What are its strengths, weaknesses, opportunities, threats?

 How could it deliver better outcomes for consumers?

 What would this mean for existing institutions and obligations?

 What are the options for its adoption?

Methodology

To evaluate the effectiveness of principles-based regulation for consumer protection in Australia's digital communications sector, we conducted a thorough literature review on principles-based regulation, complaint resolution, and regulatory enforcement This was complemented by interviews with expert stakeholders from government, regulatory bodies, industry, academia, and consumer groups, which provided insights into the current regulatory framework's strengths and weaknesses, as well as those of principles-based regulation Key quotes from these discussions are included throughout the report, with the interviewees' consent.

Finally, drawing on these sources, we propose a schema of how principles-based-regulation might work for digital communications in Australia

What is principles-based regulation?

Principles-based regulation emphasizes achieving specific outcomes instead of adhering to strict rules Regulators establish "desirable regulatory outcomes," which are then codified into principles and outcome-oriented rules.

Principles-based regulation encompasses a range of interconnected concepts, which may not all be applicable in every situation This approach shifts the focus from strict, detailed rules to more general, high-level principles that establish the standards for how regulated firms should operate.

To clarify the difference between rules and principles, consider that a specific rule might require a firm to execute all orders of under 10,000 securities within one business day, while a principle would emphasize the need for the firm to consider its customers' interests and treat them fairly Principles are typically characterized by their high level of generality, qualitative rather than quantitative terms, a focus on the underlying purpose of the rule, and standards of behavior that guide conduct.

Authorized firms and approved persons are expected to operate with integrity, demonstrating skill, care, and diligence in their business practices They must ensure reasonable care in their operations, treat customers fairly, and effectively manage conflicts of interest.

Principles-based regulation emphasizes the importance of senior management's involvement, urging them to deeply consider the implications of their decisions rather than simply adhering to a strict set of rules This approach fosters a culture of accountability and critical thinking within organizations, promoting better governance and ethical practices.

[regulatory] principles … in terms not of mechanisms which have to be adopted but rather in

Principles-based regulation emphasizes achieving meaningful outcomes rather than adhering strictly to rules, as highlighted by the Financial Services Authority in 2007 This approach aims to foster flexibility and innovation within financial services while maintaining accountability However, experts like Peter Wallison question its effectiveness, debating whether such regulation can truly deliver desired reforms in practice.

3 Julia Black, Martyn Hopper & Christa Band, Making a success of Principles-based regulation, LAW AND FINANCIAL MARKETS REVIEW 191, 191 (2007).

4 Julia Black, Forms and Paradoxes of Principles Based Regulation, LSE LAW, SOCIETY AND ECONOMY 15 (2008), available at http://ssrn.com/abstract67722 (last visited Jul

22, 2010) See also, Julia Black, Martyn Hopper & Christa Band, Making a success of

Principles-based regulation, LAW AND FINANCIAL MARKETS REVIEW 191, 192 (2007); John

H Walsh, Institution-Based Financial Regulation: A Third Paradigm, 49 HARVARD

6 Callum McCarthy, PRINCIPLES-BASED REGULATION - WHAT DOES IT MEAN FOR THE

INDUSTRY?, para 4, available at http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2006/1031_cm.shtml (last visited Jul 28, 2010).

Principles-based regulation encourages directors to consider the ethical implications of their actions, prompting them to ask, "What ought I do in this circumstance?" This approach emphasizes doing the right thing for customers rather than seeking loopholes Regulators provide a set of principles rather than prescriptive guidelines, recognizing that businesses understand their operations best This framework allows companies the flexibility to meet regulatory requirements in the most efficient way while also motivating them to actively develop strategies to fulfill their regulatory obligations.

The arguments for principles-based regulation

The arguments for principles-based regulation are in large part the same as the arguments against rule- based regulation.

Following the collapses of Enron and WorldCom, which were once hailed as leading global companies but later revealed to be corrupt entities led by fraudsters, there has been significant criticism of the rule-based Generally Accepted Accounting Principles (GAAP).

The Generally Accepted Accounting Principles (GAAP) have been criticized as merely a "road map for sham transactions" that can be easily manipulated by companies like Enron, which successfully concealed billions in debt without technically violating GAAP rules In response to such exploitation, regulators may introduce new rules to combat market misconduct; however, this approach risks creating an increasingly complex and extensive regulatory framework filled with detailed guidelines aimed at preventing future violations.

8 Ronald Gould, ‘Financial Regulation—Flattering Misconceptions’, conference presentation at the American Enterprise Institute, March 29, 2007, available at http://www.aei.org/event/1483/.

9 9 BBC NEWS | Business | The banks that robbed the world Available at: http://news.bbc.co.uk/2/hi/business/3086749.stm [Accessed September 13, 2010].

10 Peter Wallison, ‘Fad or Reform: Can Principles-Based Regulation Work in the United States?’, AEI Outlook series at 3 (2007), available at http://www.aei.org/outlook/26325 (last visited Jul 26, 2010)

12 John Tiner, PRINCIPLES-BASED REGULATION AND WHAT IT MEANS FOR INSURERS para 9

(2006), available at http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2006/0320_jt.shtml (last visited Jul 28, 2010).

The central issue with rule-based regulation is that rules are inherently both over-inclusive and under-inclusive For example, H L A Hart illustrates this with a legal rule that prohibits taking vehicles into a public park, which clearly bans cars but raises questions about whether it applies to bicycles, toy cars, or airplanes Depending on the interpretation, such a rule may fail to capture certain intended items (under-inclusiveness) or may inadvertently include items that should be excluded (over-inclusiveness) This duality persists despite careful wording or revisions, as human fallibility, imperfect knowledge, and the variability of the world contribute to the challenge Consequently, even rules that currently appear well-justified may eventually become problematic, highlighting a fundamental limitation of rule-based regulation and underscoring the rationale for principles-based regulation.

The United Kingdom's Financial Services Authority (FSA) contends that strict regulations hinder firms from operating in the most efficient manner, as these rules dictate specific operational procedures While they aim to achieve regulatory objectives, the prescribed steps may not be the most effective for every business Consequently, a one-size-fits-all approach can lead to unnecessary inefficiencies, as individual firms could potentially reach the same goals through alternative and more efficient methods.

Critics argue that regulations merely address the symptoms of market failure while overlooking the underlying causes Additionally, the complexity and abundance of these rules make them difficult for many senior management teams to navigate This focus on compliance often shifts attention away from the broader issues at hand.

13 David Kershaw, Evading Enron: Taking Principles Too Seriously in Accounting

Regulation, 68 THE MODERN LAW REVIEW 594, 605 (2005).

14 H L A Hart, Positivism and the separation of law and morals, 71 HARVARD LAW REVIEW

16 David Kershaw, Evading Enron: Taking Principles Too Seriously in Accounting

Regulation, 68 THE MODERN LAW REVIEW 594, 606 (2005) (quoting F Schauer, Playing By The Rules: A Philosophical Examination of Rule Based Decision Making in Law and Life (Oxford: Claredon Press, 1991) at 35).

The Financial Services Authority's 2007 document on principles-based regulation emphasizes the importance of focusing on meaningful outcomes in regulatory practices It highlights the need for a regulatory framework that prioritizes effective results over strict compliance In their analysis, Black, Hopper, and Band discuss strategies for successfully implementing principles-based regulation in financial markets, underscoring its potential to enhance regulatory effectiveness while fostering innovation.

18 John Tiner, PRINCIPLES-BASED REGULATION AND WHAT IT MEANS FOR INSURERS (2006), para

9 http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2006/0320_jt.shtml (last visited Jul 28, 2010).

Principles-based regulation emphasizes achieving meaningful outcomes rather than merely adhering to complex rules that often only address the symptoms of market failures This approach critiques traditional rule-based systems for their tendency to respond to existing problems without addressing their root causes, as rules can be finite while problems may be infinite Additionally, the intricacy of regulatory rules can create a disconnect between compliance experts and senior management, who are responsible for decision-making Consequently, firms may view regulation as a mere checklist rather than a framework aimed at achieving specific objectives, highlighting the need for a shift towards principles-based regulation that focuses on outcomes that truly matter.

Principles-based regulation offers regulators the flexibility to uphold both the letter and spirit of the law, effectively closing loopholes and future-proofing regulations This approach enables businesses to meet regulatory goals in the most efficient manner tailored to their specific needs Furthermore, principles-based regulation addresses the shortcomings often found in rule-based systems, enhancing overall compliance and effectiveness.

The complex web of regulations serves as a guide for legal entrepreneurs, helping them navigate the law effectively Comprehensive prohibitions on practices such as insider trading provide clearer guidance than a fragmented system of specific rules categorizing various forms of the practice.

According to Braithwaite, high-level rules or principles, such as those prohibiting insider trading, minimize the potential for creative compliance by broadly banning the act instead of detailing every specific instance This approach helps prevent the over and under inclusiveness often associated with rules, as principles can be applied to encompass only relevant conduct In essence, principles offer the flexibility to address behaviors that may technically adhere to the law but violate its underlying intent.

Proponents of principles-based regulation cite the absence of major corporate scandals like Enron or WorldCom in the United Kingdom as proof of its effectiveness For instance, the Association of British Insurers (ABI), representing the insurance sector, presented this argument to the UK Parliament’s Select Committee on Treasury.

REGULATION PROPOSING PRINCIPLES FOR BOTH REGULATED AND REGULATORS, para 6 http://www.ins.state.ny.us/press/2007/p0711051.htm (last visited Jul 27, 2010).

21 John Bradford Braithwaite, Rules and Principles: A Theory of Legal Certainty, 27

AUSTRALIAN JOURNAL OF LEGAL PHILOSOPHY 47, 56 (2002).

22 See, e.g Andromachi Georgosouli, The nature of the FSA policy of rule use: a critical overview, 28 LEGAL STUDIES 119-123 (2008).

Shifting to a more rule-based approach in the aftermath of Enron could lead companies and auditors to exploit loopholes Experts suggest that if Enron had been incorporated in the UK, it would not have been able to manipulate its balance sheet, prematurely recognize future profits, or classify energy trading turnover as revenue.

The ABI believes that principles effectively address loopholes by shifting the focus from strict legal compliance to the underlying principles of the law The International Accounting Standards Board (IASB), an independent and not-for-profit organization dedicated to serving the public interest, supports this view by emphasizing the importance of principles over detailed guidance.

The IASB advocates for a principle-based approach to accounting, moving away from a strict rule-book mentality that asks, "Where does it say I can’t do this?" This perspective encourages companies and their auditors to evaluate whether their accounting practices align with fundamental principles The IASB emphasizes that this method is not merely a lenient option; it necessitates the exercise of professional judgment in the public interest by both companies and auditors.

A clear set of underlying principles is essential for companies and auditors to navigate situations where there may be attempts to circumvent the intent of the law, eliminating the need for extensive regulations.

The Treasury Committee ultimately agreed with the ABI and the IASB by concluding:

The arguments against principles-based regulation

A key criticism from the United States regarding principles-based regulation is that it grants excessive discretion to regulators Peter Wallison illustrates this concern using the example of a nation's tax system, contrasting it with a rule-based approach In a rule-based system, individuals earning above a certain threshold are required to pay a specific tax amount, while a principles-based system merely states that everyone should contribute a fair percentage of their income Wallison contends that this ambiguity allows regulators to define what constitutes 'fair,' thereby bestowing unprecedented power upon them to interpret and enforce the rules.

Wallison also argues that principles-based regulation can limit market entry 42 Because regulatory decisions “may not always be transparent or consistent with one another,” a firm

A company that secures a favorable ruling from a regulatory agency on its business practices can gain a significant competitive advantage over those unaware of the decision or treated differently Even when industry principles are publicly known, regulators may informally endorse a specific company's approach, leaving competitors uninformed about the accepted methods This situation highlights the contrast between informal acceptance and established rules within the regulatory framework.

The argument emphasizes that principles-based regulation can lead to anti-competitive behavior due to the excessive discretion it grants regulators Wallison illustrates this by suggesting that regulators, influenced by intense lobbying, may restrict market entry or activities under the pretense of good policy, ultimately serving the interests of favored parties rather than promoting fair competition In contrast, rules-based regulation provides clarity and transparency, preventing such protective actions.

Wallison contends that principles-based regulation lacks the transparency of rule-based regulation, emphasizing that detailed written rules provide clarity for both regulators and the regulated, regardless of personnel changes He points out that rule-based systems establish clear procedures for modifications, ensuring all parties are informed of potential changes In contrast, Wallison criticizes principles-based regulation as overly informal, often relying on the subjective understanding of individuals rather than documented policies However, this critique may vary depending on the specific approach to principles-based regulation.

40 Peter Wallison, ‘Fad or Reform: Can Principles-Based Regulation Work in the United States?’, AEI Outlook series at 2 (2007), available at http://www.aei.org/outlook/26325 (last visited Jul 26, 2010).

47 Id at 3. based regulation (e.g one that does not clearly articulate policy changes or interpretations) rather than being a criticism of principles-based regulation in general.

In a similar vein, through its Regulatory Law Committee, the City of London Law Society,

One of the largest local Law Societies in the United Kingdom has raised concerns about the ambiguity firms face in meeting a regulator's principles-based approach While adhering to specific rules can be straightforward, complying with broader principles poses challenges For instance, a clear rule like "Drive 60 km/h" is easier to follow, yet it may lead to inflexible compliance, such as maintaining that speed regardless of conditions In response to this critique, the International Accounting Standards Board emphasizes that a principles-based approach necessitates companies to apply professional judgment in the public interest.

The Regulatory Law Committee of the City of London Law Society expressed concerns over firms' interpretations of regulatory principles, while others fear that the absence of detailed rules may hinder regulators' ability to assess firms, potentially leading to inconsistencies and the emergence of unpublished standards Critics argue that rules are easier to interpret consistently than principles, suggesting that rules are superior However, this critique is based on a specific view of principles-based regulation and does not account for a principles-based regulator that consistently interprets and clearly communicates its decisions, providing precedential value for all parties involved.

The enforcement aspect of a principles-based regulatory system presents conflicting issues Critics argue that such a system depends heavily on enforcement actions, as it focuses on monitoring the outcomes rather than the processes involved in achieving those outcomes.

The firm is adhering to specific regulations, indicating that enforcement actions may increasingly play a crucial role in shaping industry behavior However, there are concerns regarding the uncertainty that may arise from this situation.

48 Transputec plc., London “The City of London Law Society ~Who We Are.” Available at: http://www.citysolicitors.org.uk/Default.aspx?sIDu2&lID=0 [Accessed September 13, 2010].

49 John H Walsh, Institution-Based Financial Regulation: A Third Paradigm, 49 HARVARD

INTERNATIONAL LAW JOURNAL 381, 385 (2008) (quoting a letter from Margaret

Chamberlain, Chairman of the City of London Law Society Regulatory Committee, to John Tiner, Chief Executive of the Financial Services Administration) (internal quotations omitted).

51 John H Walsh, Institution-Based Financial Regulation: A Third Paradigm, 49 HARVARD

INTERNATIONAL LAW JOURNAL 381, 385 (2008) (See Emily Perryman, FSA ‘Should Not Monitor Compliance Process,’ IFAONLINE, Aug 10, 2006, http://www.ifaonline.co.uk/public/.)

52 John H Walsh, Institution-Based Financial Regulation: A Third Paradigm, 49 HARVARD

Principles-based regulation presents challenges for regulators, as it complicates the enforcement of rules due to the subjective interpretation of principles This difficulty can hinder the ability to impose penalties effectively, as highlighted by Philip Ryley in his 2006 analysis.

The anticipated fear that principles-based regulation would result in excessive enforcement actions has not materialized in practice Peter Wallison argues that the principles-based approach may struggle in the United States due to the Financial Services Authority's historical lack of frequent enforcement actions While principles can be subject to various interpretations, there are a finite number of reasonable interpretations grounded in good faith, allowing regulators to effectively account for these variations and implement appropriate regulations.

The arguments against principles-based regulation are generally the same as the arguments for prescriptive rules-based regulation

Rule-based regulation restricts the discretion of regulatory agencies by shifting the interpretive authority regarding a rule's meaning and scope to the regulated entities This effect intensifies as rules become increasingly detailed; the more specific a rule is about acceptable behaviors, the more the regulator limits its own ability to penalize activities that fall outside these precise boundaries Advocates of rules-based regulation argue that this limitation is beneficial as it prevents "unfettered government power."

Rules are often considered more transparent than principles in the context of personnel changes at regulatory bodies, as they are perceived to be clear and independent of interpretation This perspective assumes that rules inherently possess greater clarity than principles Additionally, many argue that rules are simpler to apply due to their straightforward nature.

Some argue that rules are more effective than principles in facilitating market entry, as they clearly define permissible and impermissible conduct for all firms.

53 John H Walsh, Institution-Based Financial Regulation: A Third Paradigm, 49 HARVARD

INTERNATIONAL LAW JOURNAL 381, 385 (2008) (quoting Adam Samuel, A Matter of

Principle, LEGAL UPDATE (TLT Solicitors, Bristol, U.K.), Aug 2006

54 Peter Wallison, ‘Fad or Reform: Can Principles-Based Regulation Work in the United States?’, AEI Outlook series at 4-5 (2007), available at http://www.aei.org/outlook/26325 (last visited Jul 26, 2010).

Case study: the United Kingdom’s Financial Services Authority

The Financial Services Authority (FSA) serves as the UK's integrated regulator for financial services, established as an independent, nongovernmental body under the Financial Services and Markets Act 2000 The FSA's primary objectives include maintaining confidence in the UK financial system, promoting public understanding of financial services, ensuring consumer protection while acknowledging individual responsibilities, and reducing the potential for financial crime.

3.4.1 The inception of principles-based regulation at the FSA

To fulfill its statutory objectives, the FSA must establish a range of rules and regulations, leading to its initial exploration of principles-based regulation Instead of directly implementing principles, the FSA opted to adhere to specific guidelines.

“principles of good regulation.” 65 These principles require the FSA to do things such as use

“its resources in the most economic and efficient way”, “facilitat[e] innovation” and be

“proportionate in imposing burdens or restrictions on the industry.” 66

The FSA established eleven guiding principles for firms to clarify its regulatory objectives These principles serve as a comprehensive framework for understanding the FSA's aims in regulation.

1 A firm must conduct its business with integrity.

2 A firm must conduct its business with due skill, care and diligence.

3 A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

4 A firm must maintain adequate financial resources.

5 A firm must observe proper standards of market conduct.

6 A firm must pay due regard to the interests of its customers and treat them fairly.

7 A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

8 A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

9 A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

62 William Michael Treanor et al., The Seventh Annual A.A Sommer, Jr Lecture on Corporate, Securities and Financial Law: "The U.K FSA: Nobody Does It Better?", 12

FORDHAM JOURNAL OF CORPORATE & FINANCIAL LAW 259, 265 (2006)

63 Financial Services Authority, PRINCIPLES-BASED REGULATION: FOCUSING ON OUTCOMES THAT MATTER 1, 3 (2007), available at http://www.fsa.gov.uk/pubs/other/principles.pdf.

64 Financial Services Authority, INTRODUCTION TO THE FINANCIAL SERVICES AUTHORITY 1, 4

(2001), http://www.fsa.gov.uk/pubs/other/fsa_intro.pdf (last visited Aug 17, 2010).

67 Financial Services Authority, PRINCIPLES-BASED REGULATION: FOCUSING ON OUTCOMES THAT MATTER 1, 9 (2007), available at http://www.fsa.gov.uk/pubs/other/principles.pdf.

10 A firm must arrange adequate protection for clients’ assets when it is responsible for them.

A company must engage with its regulators in a transparent and cooperative manner, ensuring that it appropriately discloses any relevant information to the FSA that the FSA would reasonably expect to be informed about.

Over the years, the principles established by the FSA have evolved to become fundamental to its regulatory strategy, and by 2007, the FSA emphasized that these eleven principles form the essential foundation of its regulatory framework.

From a consumer protection perspective, several key principles emerge Principle 2 emphasizes the necessity for businesses to operate with due care, skill, and diligence Principle 6 mandates that companies prioritize their customers' interests and ensure fair treatment Additionally, Principle 7 highlights the importance of addressing clients' information needs while avoiding any misleading practices Lastly, Principle 9 underscores the obligation for businesses to provide consumers with appropriate advice.

To buttress these consumer protection principles, the FSA developed the Treating

Customers Fairly initiative in an attempt to “see a step-change in the behaviour of the financial services sector and therefore to deliver improved outcomes for retail consumers.” 70

The FSA has been actively addressing concerns regarding firms' compliance with Principle 6, emphasizing the importance of prioritizing customer interests and ensuring fair treatment for all clients.

The FSA acknowledged the complexity of defining Treating Customers Fairly (TCF) due to the diverse activities of businesses, stating that a one-size-fits-all approach is not feasible They emphasized that overly detailed regulations could limit businesses' ability to achieve desired outcomes without enhancing consumer protection Consequently, the FSA concluded that businesses must evaluate what is suitable for their specific circumstances, considering the unique nature of their operations.

To make this assessment, the FSA expected all firms to embed TCF “into all aspects of their operations, including in all the different interactions they have with consumers.” 74

To help firms implement their own TCF strategy, the FSA suggested that business adopt a

The product life-cycle serves as a straightforward framework for companies to organize their considerations regarding various elements of Treating Customers Fairly (TCF) Consequently, the Financial Services Authority (FSA) recommended that businesses focus on ensuring fair treatment in their operations.

70 Financial Services Authority, Treating customers fairly - towards fair outcomes for consumers 1, 3 (2006).

71 Financial Services Authority, Treating customers fairly - building on progress 1, 3 (2005).

 marketing and promoting the product;

For the FSA, such a process would help businesses determine what constitutes

The FSA encourages businesses to discuss what constitutes fair treatment of customers and how to implement effective strategies across organizations of all sizes to positively impact customer experiences.

Out of this conversation the FSA crafted six outcomes that businesses must meet; they are as follows: 79

Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Consumers receive products that meet their expectations based on the promises made by companies, ensuring that the performance aligns with what was advertised Additionally, the level of associated service is satisfactory and consistent with consumer expectations.

Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

The FSA emphasized that the principle-based outcomes outlined in the TCF initiative are not new, as they align with the existing eleven principles for business Thus, the TCF initiative serves to further clarify and expand upon these pre-existing principles.

76 FINANCIAL SERVICES AUTHORITY, TREATING CUSTOMERS FAIRLY - PROGRESS AND NEXT STEPS

79 Financial Services Authority, Treating customers fairly - towards fair outcomes for consumers 1, 3 (2006).

The FSA emphasizes the importance of adhering to Principles 1, 2, 3, 6, 7, 8, and 9, with a particular focus on Principle 6, which mandates that firms must prioritize their customers' interests and ensure fair treatment.

The FSA announced that it does not plan to introduce new rules under the TCF initiative, aiming instead to shift its regulatory focus from prescriptive measures to a principles-based approach This transition is intended to better align good business practices within firms and markets with the FSA’s statutory objectives By emphasizing principles and desired outcomes, the FSA believes that firms and their senior management will prioritize achieving these goals over simply adhering to regulatory requirements.

To address concerns regarding the clarity of principles compared to a rules-based approach, the FSA employed various strategies to convey its expectations to businesses These strategies included publishing case studies and statements highlighting both good and poor practices, enabling businesses to grasp how the FSA interprets its principles and the behaviors it endorses or discourages.

Recommendation: Principles-based regulation should be adopted

Principles-based regulation has the potential to improve consumer outcomes in the telecommunications industry, which currently faces high customer complaint rates A recent Bank of Queensland survey revealed that many consumers consider telecommunications to have the poorest customer service compared to sectors like retail, hospitality, banking, and insurance Common issues include billing disputes, service quality, and delays in providing requested bills When effectively implemented, principles-based regulation can enhance the overall customer experience and address these prevalent concerns.

125 Delivering intensive supervision and credible deterrence Available at: http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0312_hs.shtml [Accessed August 30, 2010].

Analyzing 128 complaints data in isolation does not definitively reflect a company's customer service performance A high number of complaints may indicate that a company encourages feedback to gather insights and enhance its products, while a low number could suggest that it makes the complaint process difficult for consumers Additionally, the effectiveness of complaints to the TIO relies on consumers' awareness of the TIO and their willingness to pursue their complaints Thus, while complaints data is important, the true value lies in the specific content of the complaints rather than just the quantity.

129 Asher, Allan, and Elissa Freeman 2010 “Telecommunications: A Market Failing

Consumers.” The Australian Economic Review 43(2): 194.

“We operate by principles with our children We don’t give them a list of rules—we try to explain why our principles apply in the circumstance.” – Michael Malone, Managing

Under principles-based regulation, businesses gain the flexibility to implement regulatory requirements in the most efficient manner, while regulators can address behaviors that undermine the essence of these regulations This approach empowers consumers to understand their rights more easily, fostering a clearer dialogue within the industry about expectations and how to meet them effectively.

Principles-based regulation prioritizes consumer outcomes by encouraging companies to assess their products and services from a life-cycle perspective This approach places customer interests at the forefront while allowing businesses the flexibility to achieve desired outcomes in their own ways By addressing loopholes that comply with the letter but not the spirit of the law, principles-based regulation enhances accountability among service providers, focusing on outcomes rather than rigid rules.

Australia is familiar with principles-based regulation, which allows nursing home carers to prioritize the interests of their residents In contrast, John Braithwaite highlights that the rigid adherence to rules in the United States negatively impacts the quality of care, leading to a detrimental "rule-following mentality."

In the United States, staff members who go beyond basic rote learning demonstrate the integrity to challenge a strict adherence to rules, enabling them to address the unique needs of residents in their care In contrast, those who rely solely on checklists may neglect important aspects not listed, and prioritize compliance over the well-being of those they serve, potentially leading to outcomes that do not align with the best interests of the residents.

Braithwaite argues that this slavish adherence to lists is absent in Australia because carers focus on “the best outcome for the residents” because they know that inspectors are

In many cases, caregivers are encouraged to focus on achieving positive outcomes rather than strictly adhering to formal procedures and requirements This approach allows them to effectively communicate their circumstances, leading to reasonable interpretations and favorable results with inspectors In contrast, the United States presents a different scenario where achieving a reasonable outcome, which may contradict established rules, necessitates both caregivers and inspectors to overlook these regulations, ultimately undermining the very principles those rules were designed to uphold.

Taken as a whole, the previously mentioned arguments for principles-based regulation—the efficiency gains for companies that are free to

132 Braithwaite, John Bradford 2002 “Rules and Principles: A Theory of Legal Certainty.”

Australian Journal of Legal Philosophy 27: 47, 67 Available at: [Accessed July 27, 2010].

According to Professor Cosmo Graham from the University of Leicester, principles serve as the foundation for developing specific rules and guidelines for implementation This approach allows organizations to meet regulatory requirements in a manner that suits their needs while ensuring future-proofing, closing loopholes, and reducing creative compliance Ultimately, principles-based regulation offers greater certainty than rule-based regulation by prioritizing outcomes.

Principles-based regulation is often seen as more reliable than rule-based regulation because it prioritizes outcomes over strict adherence to rules For instance, Braithwaite illustrates this with an example from nursing homes, where identical food may be rated differently by two facilities—one as ‘satisfactory’ and the other as ‘needs improvement.’ This highlights the challenge of creating a universal rule for food satisfaction, given the diverse tastes and preferences of individuals As Braithwaite notes, while teams may disagree on what constitutes 'nice food,' they can consistently agree on whether residents generally enjoy their meals This suggests that reliability in assessments is achieved by embracing subjective experiences rather than insisting on objective standards.

Focusing on fairness as the central principle of consumer protection regulation can lead to positive outcomes for consumers, regardless of time, gender, ethnicity, or location Fairness should maintain its everyday meaning to preserve its flexibility and subjectivity Instead of rigidly defining fairness, businesses and regulators should utilize complaints data to gauge consumer perceptions of fair treatment This approach acknowledges that while a universal definition of fairness may not exist, both perceived and genuine fairness can thrive in the telecommunications market To facilitate this, it is essential to have a consumer-friendly complaints process, responsive businesses, a regulator with robust enforcement powers, and a willingness to employ a comprehensive regulatory toolkit Together, these elements enable consumers to express their views and provide actionable evidence through complaints data, driving meaningful changes in the marketplace.

While principles should be at the heart of regulatory frameworks, it is essential to establish rules that support these principles Regulatory systems are not strictly binary; they require a balanced approach that integrates both principles and rules for effective governance.

To ensure effective consumer protection, businesses should adhere to a fundamental principle: treating customers fairly While this principle stands alone, providing additional specific and general guidance can enhance its application in practice This guidance does not diminish the core principle; instead, it can be viewed as supplementary insights that reinforce the idea that fair treatment of customers is paramount in business operations.

The strength of this principle is that everyone will always agree with the desired outcome, as nobody will reasonably argue that a business ought not to treat its customers fairly

In the context of supplying food for a nursing home, while opinions on food quality may vary, the satisfaction of diners is universally acknowledged Similarly, although there may be differing views on the specific rules that create a fair consumer environment, there is a consensus that consumers deserve fair treatment Complaints data plays a crucial role in assessing this fairness, providing essential feedback on consumer experiences Regulators depend on this data to determine necessary actions for enhancing consumer protection Therefore, it is vital to ensure that the complaints process is highly accessible to encourage consumer feedback.

Principle 1: Businesses must treat their customers fairly.

Principle 2: Businesses must respect the privacy of their customers.

Principle 3: Businesses must provide their customers with clear, accurate and relevant information on products and services before, during and, where appropriate, after the point of sale.

Principle 4: Businesses must resolve customer disputes quickly and fairly.

Principle 5: Businesses must ensure that advertising and promotion of products and services is clear, accurate and not misleading.

Principle 6: Businesses must have appropriate policies and practices in place to assist customers who are disadvantaged or vulnerable.

Principle 7: A business that breaches the principles-based regulation will provide an effective remedy for the customer and may be liable to an effective sanction.

Principle 8: Businesses will develop ongoing monitoring and reporting measures designed to ensure successful implementation of the principles-based regulation.

Principle 9: Customers will behave honestly in their dealings with businesses and cooperate with businesses when seeking to resolve any problems or disputes.

Principle 10: For transparency and accountability, businesses will have their compliance with the principles-based regulation reviewed and reported by an external auditor

Note: whether a principle has been breached or not depends upon all the circumstances, including the principle in question, the conduct at issue and the parties concerned.

The principles are designed to safeguard consumer interests while offering companies the flexibility to achieve desired outcomes in their own ways However, simply stating these principles is insufficient; they require meaningful interpretation, which will be explored in detail in the following section of the regulatory discussion.

Principle 1 serves as the foundational guideline for the subsequent principles, emphasizing the importance of concepts like 'openness' and 'fairness.' While these terms may seem abstract without clear definitions, further clarification could restrict their applicability Instead, utilizing complaints data can objectively demonstrate whether consumers perceive fair treatment, thereby indicating if a supplier is violating the principles Additionally, both transactional and procedural fairness are integral to the standard understanding of fairness, which businesses must uphold.

Complaint resolution mechanisms as a part of consumer protections

Xu and Yuan emphasize the importance of effective complaint resolution mechanisms, stating that individuals facing issues, much like those in pain, seek swift and affordable solutions to alleviate their concerns.

Xu and Yuan emphasize that compliant resolution should be a central focus of consumer protection regulation due to the significant power imbalance consumers face when seeking redress from companies This inequality stems from three main factors: the disparity in resources between individuals and corporations, the tendency of companies to create contracts that favor their interests, and the unequal negotiating power that exists in these interactions.

Complaints data, including reports and statistics, is essential for defining fairness in various consumer situations Resolving complaints addresses consumer issues while also providing valuable insights for businesses to enhance customer service Additionally, this data aids regulators in identifying emerging trends in consumer protection and pinpointing companies that require greater attention to consumer matters.

The benefits to business of adequate complaint handling

Donoghue and de Klerk emphasize the importance of fostering a "culture of complaining" among consumers, where they feel encouraged to voice their grievances directly to manufacturers and retailers This direct communication is crucial, as it allows companies to identify product shortcomings and make necessary improvements When consumers are more inclined to express their dissatisfaction, the data collected from these complaints becomes more reflective of overall consumer sentiment, enabling both the market and regulators to respond effectively to consumer needs.

151 Zhengchuan Xu & Yufei Yuan, Principle-based dispute resolution for consumer protection, 22 Knowledge-Based Systems, 18, 19 (2009).

155 Suné Donoghue & Helena M de Klerk, The right to be heard and to be understood: a conceptual framework for consumer protection in emerging economies, 33 International Journal of Consumer Studies 456, 463 (2009).

Research has explored consumer complaining behavior, highlighting an effort model that categorizes first-stage complaints (Huppertz, 2003) and examines the segmentation of service 'complainers' and 'non-complainers' based on specific consumer characteristics (Bodey & Grace, 2006).

“For some telecommunications companies, the biggest cost may not be handling complaints one by one, but the potential loss of market share and [a company’s] performance in the

… markets based on the perception that it’s not providing good service.” – Simon Cohen, Telecommunications Industry Ombudsman

Dell's experience with customer call centers illustrates the critical importance of effective complaint resolution in business In 2003, the company relocated support calls for two corporate computer lines from Bangalore back to the United States due to customer dissatisfaction with the technical support provided This decision stemmed from the realization that unhappy customers were negatively impacting profits, as many chose to take their business elsewhere By addressing these concerns and improving their support services, Dell not only responded to consumer complaints but also enhanced their business performance.

There is little ambiguity that quality customer service is tied to customer loyalty As

Research indicates a strong positive link between customer satisfaction and both brand loyalty and repurchase intention, as highlighted by Sangareddy et al Additionally, effective handling of consumer complaints has been shown to enhance customer satisfaction and foster long-term relationships, according to Strauss & Hill.

Acquiring a new customer is often significantly more expensive than retaining an existing one, with estimates suggesting it can cost five to ten times more (Blodgett et al., 1995; Gummesson, 1994).

“The importance of customer retention is clear.

According to Jamieson (1994), enhancing customer retention by just 2 percent can yield profit benefits equivalent to a 10 percent cut in overhead costs Additionally, research by Bain & Co reveals that a 5 percent boost in customer retention can increase the value of each customer by an impressive 25 to 95 percent.

(Reichheld, 1996) 161 Therefore, there is a strong business argument for keeping customers and keeping them happy through quality customer service.

This data is not only for the industry’s use, however Complaint data informs United

The Kingdom's Office of Communications (Ofcom) relies on its policy and enforcement teams to identify trends in consumer detriment and emerging concerns, which are essential for monitoring and enforcement efforts The data collected serves as an early warning system for potential consumer issues, enabling Ofcom to gain a reliable understanding of the scale and types of harm faced by consumers.

157 Sridhar R Papagari Sangareddy et al., Attaining Superior Complaint Resolution, 52 Communications of the ACM 122 (2009).

159 Judy Strauss & Donna J Hill, Consumer Complaints by E-mail: An Exploratory

Investigation of Corporate Responses and Customer Reaction, 15 Journal of Interactive Marketing 63, 63 (2001).

160 Francis Buttle & Jamie Burton, Does service failure influence customer loyalty?, 1 Journal of Consumer Behaviour 217, 218 (2001).

162 Enforcement Report: A report on Ofcom's approach to enforcement and recent activity, Ofcom’s 3.5 (2009).

“Informed agreement has to be a critical element of regulation in the industry.”

- Simon Cohen, Telecommunications Industry Ombudsman

Ofcom employs a complaints-as-intelligence strategy, utilizing complaint data to enhance its regulatory efforts and improve industry standards This data holds significant value for both regulators and the regulated, and it is essential for both parties to maximize its potential The primary emphasis of this section is on how to effectively leverage complaints data to benefit businesses and consumers alike.

Why are there complaints in the first place?

Ouden et al highlight that the increase in complaints across various service industries is not due to inferior products, but rather the introduction of innovative products that deviate from customer expectations For instance, while purchasing a pair of scissors, customers primarily focus on their cutting ability In contrast, when buying a mobile phone or service plan, the product may function correctly yet lack anticipated features or have poor reception in familiar areas These 'soft failures' arise not from actual defects but from customers having incomplete information about the product, leading to unmet expectations.

To address this problem, Ouden et al suggest distinguishing between different types of consumers Novice users, the authors argue,

“have high expectations based on advertisements, and have little interest or appreciation for the underlying technology, while experienced users understand the capabilities and limitations of the product much better.” 167

They further argue that because consumers have different expectations, the types of complaints

165 Elke den Ouden et al., Quality and Reliability Problems from a Consumer's Perspective: an Increasing Problem Overlooked by Business?, 22 Quality and Reliability Engineering International 821, 822 (2006).

166 Elke den Ouden et al., Quality and Reliability Problems from a Consumer's Perspective: an Increasing Problem Overlooked by Business?, 22 Quality and Reliability Engineering International 821, 827 (2006).

Recommendation: The regulator should collect and analyse complaints data from businesses to discover problems and trends.

Businesses are advised to publish annual reports on complaints and their management strategies The nature of issues encountered often varies based on the user type rather than the product itself Therefore, comprehending a complaint at this stage necessitates an understanding of the consumers who utilize the product and how their familiarity or knowledge aligns or misaligns with it.

Businesses must adapt their strategies to cater to diverse consumer needs, minimizing soft failures Regulators can support this adaptation by collaborating with the industry to establish non-binding best practices and incentivizing companies to acknowledge and address soft failures, while penalizing those that neglect these issues To identify these challenges, businesses should actively listen to customer feedback, as complaints data can illuminate consumer views on fairness, enhancing the regulatory dialogue While this approach won't eradicate complaints, companies must still prioritize resolving consumer grievances.

Recommendation: a lifecycle framework

Ouden et al emphasize that enhancing consumer knowledge about products prior to purchase can significantly decrease complaints To proactively tackle consumer grievances, it is essential to provide clear, accurate, timely, relevant, and comprehensive information, thereby empowering consumers This approach, rooted in the philosophy of using information to reduce complaints, underpins the information-sharing strategy outlined in Principle 2.

Complaints will still arise, however, and they will need to be addressed According to

According to Papagari Sangareddy et al., the complaint management process involves three key factors: interactional justice, procedural justice, and distributive justice Interactional justice refers to the perceived quality of the interaction between customers and businesses, procedural justice pertains to the fairness of service recovery procedures, and distributive justice relates to the fairness of the outcomes in service recovery Higher consumer satisfaction with these factors correlates with greater overall satisfaction in the complaint resolution process Despite their significance, no jurisdiction has yet tailored its consumer protection regulations around these elements By enhancing customer experiences based on these metrics, businesses can improve compliance with consumer protection principles, fostering a sense of fairness among consumers This highlights the potential of principles-based regulation to shape industry complaint resolution mechanisms effectively.

172 Sridhar R Papagari Sangareddy et al., Attaining Superior Complaint Resolution, 52 Communications of the ACM 123 (2009).

The FSA’s Treating Customers Fairly (TCF) initiative provides a good framework for complaint handling Recall that under TCF the FSA suggested that business adopt a

The product life-cycle serves as a straightforward framework for companies to organize their approach to various elements of Treating Customers Fairly (TCF) The Financial Services Authority (FSA) outlined specific expectations for businesses, including fostering a corporate culture that prioritizes the fair treatment of customers (Outcome 1) and ensuring that consumers do not encounter unreasonable obstacles when changing products, switching providers, submitting claims, or making complaints.

The Financial Services Authority (FSA) aimed to enhance retail consumer outcomes by building on the concept of fairness outlined in its 11 Principles for Business To assist businesses in understanding these Principles and Outcomes, the FSA provided guidance and examples of both acceptable and unacceptable corporate behavior While the FSA's enforcement of the Treating Customers Fairly (TCF) initiative may have lacked vigor, the product life-cycle approach it advocated is recognized as valuable and is supported by existing literature.

A regulator may instruct businesses to assess various aspects, including product design and governance, target markets, marketing and promotion, sales and advice, post-sales information and services, and complaint handling, to improve consumer outcomes However, it is the company's responsibility to determine the significance of each matter and develop a response tailored to its specific business needs.

A well-structured framework is essential for guiding businesses towards achieving regulatory outcomes without imposing additional rules By allowing companies the flexibility to develop their own strategies, they can tailor their approaches to meet specific goals However, insights from the FSA suggest that establishing key milestones can be advantageous, as these benchmarks provide direction without dictating the exact methods for compliance.

173 See Financial Services Authority, supra n 71.

174 See Financial Services Authority, supra n 79

175 Financial Services Authority 2006 1, Treating customers fairly - towards fair outcomes for consumers FSA.

176 See generally, Moschis, G.P (1987) Consumer Socialization: A Life-Cycle Perspective Lexington, Boston, MA.; see also e.g Donoghue, Suné, and Helena M de Klerk 2009

“The right to be heard and to be understood: a conceptual framework for consumer protection in emerging economies.” International Journal of Consumer Studies 33: 456,

Understanding consumer perceptions in financial services goes beyond mere complaint handling; it involves a comprehensive analysis of the entire purchasing process from the consumer's perspective This includes examining consumer expectations regarding product performance, their dissatisfaction when those expectations are not met, and the emotions and reasoning behind their decisions to complain By exploring fairness throughout the consumer journey—from marketing exposure to sales and post-sales resolution—businesses can better assess and improve their service delivery.

In 2006, the Financial Services Authority (FSA) emphasized the importance of treating customers fairly to achieve positive outcomes for consumers Businesses are encouraged to establish a clear plan of action to meet these objectives, with specific milestones indicating deadlines for both the development and implementation of these plans.

To aid businesses in meeting these objectives, there should be an ongoing conversation between the regulator and the businesses during this process, with the regulator

“publish[ing] implementation reviews including case studies and examples of good and poor practices.” 178 The notion of a conversation is an important one This must go beyond mere

Effective supervision and inspection require a strong collaboration between regulators and the regulated entities to clarify the interpretation and implementation of key principles The regulator plays a crucial leadership role in initiating and sustaining dialogue among stakeholders, ensuring ongoing communication among businesses, individuals, interest groups, and regulatory bodies.

Emphasizing the product lifecycle is crucial for consumer protection as it enables companies to gain insights into the consumer experience from the initial use of a product to the complaint resolution process Additionally, this focus fosters a corporate culture centered on prioritizing consumer welfare.

4.4.1 First benefit of a lifecycle framework

Understanding consumer complaints requires viewing products or services from the consumer's perspective Before making a purchase, consumers develop expectations about how a product will perform in specific situations Once they begin using the product or service, they assess its actual performance against those initial expectations.

178 Black, Julia 2008 “Forms and Paradoxes of Principles Based Regulation.” LSE Law,

Society and Economy 1, 21, Available at: http://ssrn.com/abstract67722 [Accessed

180 Donoghue, Suné, and Helena M de Klerk 2009 “The right to be heard and to be understood: a conceptual framework for consumer protection in emerging economies.”

International Journal of Consumer Studies 33: 456, 457.

The regulator should collaborate with businesses to provide guidance and establish best practice guidelines aimed at creating a comprehensive consumer protection framework that addresses the entire lifecycle of their products and services.

Recommendation: Customer protection frameworks should include strategies for maintaining fairness and achieving the Outcomes in all interactions with customers.

To enhance customer protection frameworks, the ACMA should establish advisory groups with diverse stakeholders and publish case studies highlighting both effective and ineffective practices This initiative aims to foster a community that interprets the principles-based code A product's perceived performance significantly influences customer satisfaction; if initial expectations are unmet, it can jeopardize the entire customer-business relationship from the outset.

Focusing on the advertising and sales stages of a product or service allows businesses to identify how consumers may develop misconceptions With this insight, companies can effectively minimize misunderstandings, ultimately benefiting both the business and the consumer.

A 2010 survey conducted by Ofcom revealed that consumers view fairness as equally important as the fundamental aspects of a product, such as its functionality and value for money.

182 See Francis Buttle & Jamie Burton, supra n 161.

183 Opinion Leader 2010 1, 13 Consumer perceptions of fairness within financial services.

4.4.2 Second benefit of a lifecycle framework

The importance of enforcement

Effective regulatory enforcement is crucial for the success of principles-based regulation and complaint handling A well-designed regulatory scheme, no matter how theoretically sound, will fail to benefit consumers without robust regulatory action that upholds the law's intended objectives.

Understanding regulatory enforcement requires a foundational grasp of consumer protection, which Averitt and Lande define as enabling effective consumer choice through marketplace options and the freedom to choose However, this perspective overlooks critical insights from complaint resolution, as highlighted by Ouden et al They argue that consumer expectations often diverge from the actual capabilities of products or services, indicating that consumer protection must extend beyond simply providing options To truly empower consumers, businesses must ensure that customers receive adequate information to make informed decisions Thus, consumer protection law and enforcement should not be limited to competition law, which often overlooks the importance of information in the marketplace A more comprehensive approach to consumer protection enforcement is essential for fostering an informed and equitable market.

Strünck supports the argument that the market alone, even if well-functioning with multiple options and freedom of choice, is insufficient to provide adequate enforcement mechanisms. For Strünck:

Following economic theories of law, breaches of consumer law or corporate misconduct are not very likely to be sanctioned…

Many individual consumers, particularly in small claims cases, are reluctant to pursue legal action or take on additional burdens As a result, without intervention from other parties to uphold the law, it risks becoming ineffective Even if consumers are inclined to sue, the lengthy and costly legal process often discourages potential plaintiffs from proceeding.

186 Neil W Averitt & Robert H Lande, Consumer Sovereignty: A Unified Theory of Antitrust and Consumer Protection Law, 65 Antitrust Law Journal 713, 716-717 (1996).

188 Elke den Ouden et al.

Recommendation: The regulator should audit businesses regularly for compliance with the Principles.

As a result, markets do not work properly because they reward inefficiency and even fraud 189

Consequently, additional enforcement mechanisms are necessary besides those that protect a competitive market, for freedom of choice simply is not enough to guarantee that consumers have positive outcomes.

The literature on regulatory enforcement and complaint resolution intersects significantly, as some complaint resolution methods, such as arbitration, also serve as regulatory enforcement mechanisms In Europe, the most prevalent consumer redress methods include direct negotiation, mediation and arbitration, small claims procedures, collective action for damages, and actions for injunctive relief, all of which simultaneously function as enforcement tools.

Since 2006, European Union member states are required to empower public bodies with legal rights to take action against complaints, rather than relying solely on private entities This shift addresses concerns that without oversight from third-party complaint handlers, sellers could monopolize complaint resolution and impose their own standards By granting public bodies this authority, the EU aims to reduce transaction costs for harmed consumers, even if it does not fully incentivize individual actions Additionally, compliance data and other sources should enable interest groups to file 'super-complaints' regarding systemic issues.

Proactive and reactive enforcement

Faure et al differentiate between proactive (ex ante) and reactive (ex post) regulation in the context of consumer protection law enforcement In the UK, compliance monitoring primarily employs risk assessment to focus oversight on vulnerable market areas Conversely, Australia and Belgium demonstrate that targeted enforcement can be effectively implemented without formal risk models, instead utilizing complaint data from specific sectors This strategy aligns with the broader goal of enhancing consumer protection through tailored regulatory approaches.

189 Christoph Strünck, Claiming Consumers' Rights: Patterns and Limits of adversarial Legalism in European Consumer Protection, 4 German Policy Studies 167, 170-171 (2008).

190 Christoph Strünck, Claiming Consumers' Rights: Patterns and Limits of adversarial Legalism in European Consumer Protection, 4 German Policy Studies 167, 171 (2008).

191 Fabrizio Cafaggi & Hans-W Micklitz, Collective Enfocrement of Consumer Law: A

Framework for Comparative Assessment, 3 European Review of Private Law 391, 402

192 Jeanne M Hogarth & Maureen P English, Consumer complaints and redress: an important mechanism for protecting and empowering consumers, 26 International Journal of Consumer Studies 217, 217 (2002).

193 Michael Faure, Anthony Ogus & Niels Philipsen, Enforcement Practices for

Breaches of Consumer Protection Legislation, 20 Loyola Consumer Law Review 361

The enforcement model based on consumer complaints effectively assesses how fairly consumers perceive their treatment in specific situations and for different consumer groups.

Reactive enforcement is effective primarily in nations with a robust culture of consumer activism, like the Netherlands In such environments, consumers are informed about their rights and available options, including alternative dispute resolution (ADR) committees, while industry organizations are open to collaboration.

“take the initiative in publicising potential problems and seeking out defaulting traders.” 197 Curiously, although the Netherlands relies on reactive enforcement, 80 per cent of

In a recent EU-wide survey, Netherlanders demonstrated a strong belief in the ability of public authorities to safeguard consumer rights, with the highest agreement rate among participating countries This underscores the effectiveness of reactive enforcement in consumer protection, emphasizing that robust enforcement measures, aligned with consumer interests, are essential for ensuring consumer safety and trust.

Enforcement schemes

When evaluating a breach, regulators may opt for leniency towards companies with robust compliance systems, as courts in Australia have often reduced damages in such cases, encouraging firms to enhance their compliance mechanisms This approach aims to incentivize businesses to maintain effective compliance, ultimately benefiting consumers by reducing the likelihood of regulatory penalties Similar to principles-based regulation, this strategy allows firms to create their own consumer protection processes; however, it is crucial that these compliance systems undergo thorough scrutiny If deficiencies are found, regulators must intervene to ensure companies meet acceptable compliance standards, with financial penalties imposed for non-compliance.

Consumer protection in the United States is reinforced not only by the Federal Trade Commission's enforcement capabilities but also through the judicial system, particularly class action lawsuits These collective legal actions allow consumers to unite against unfair practices, providing a mechanism for enforcement when individual claims may not be viable The potential for winning plaintiffs to recover attorneys' fees from losing defendants incentivizes individuals to participate in class actions, thereby enhancing the effectiveness of consumer protection regulations.

198 European Commission, Consumer protection in the Internal Market, 95 (2006), available at http://ec.europa.eu/public_opinion/archives/ebs/ebs252_en.pdf.

199 Chrintine Parker, Is there a reliable way to evaluate organisational compliance programs?, 1, 4 (2002).

200 Christoph Strünck, Claiming Consumers' Rights: Patterns and Limits of adversarial Legalism in European Consumer Protection, 4 German Policy Studies 167, 168 (2008).

In arguing for increased collective enforcement capacity in Europe, Boom and Loos argue that:

Individual consumers are ill-equipped to enforce their legal rights

Isolated individual consumers often face challenges against companies with superior legal resources, leading many to refrain from asserting their legal rights In contrast, organized consumer groups, whether through private organizations or public authorities, can confront traders more effectively By centralizing consumer interests and aggregating claims, these groups can enhance bargaining power, empowering consumers who would otherwise struggle to advocate for themselves.

Collective enforcement of consumer law may therefore be more effective 201

Many remain skeptical about American-style class actions, largely due to the preference for negotiation over litigation in European models, particularly in the Netherlands and Scandinavia This approach was highlighted during a 2007 conference on collective redress, where the European Commissioner for Consumer Affairs emphasized the importance of alternative dispute resolution methods.

Neelie Kroes, the European Commissioner for Digital Agenda, firmly stated, “To those who have come all the way to Lisbon to hear the words ‘class action’, let me be clear from the start: there will not be any Not in Europe, not under my watch.” This highlights the significant difference in consumer protection models, as the class action system, prevalent in the United States, faces rejection in Europe due to its adversarial nature.

Empowering government agencies and public service organizations to enforce private rights is a crucial strategy for achieving regulatory compliance and enforcement This approach also facilitates redress for minor harms that individual consumers might otherwise overlook According to Van Boom and Loos, this mechanism plays a significant role in protecting consumer rights and ensuring accountability.

Recent experiments have explored intermediate solutions aimed at enhancing compliance with consumer law, particularly through empowering public agencies to enforce private law rights for public benefit A key example is the Office of Fair Trading (OFT), which is authorized to seek injunctive relief against unfair terms in consumer contracts, thereby protecting consumers collectively This approach is similarly reflected in the practices of its Dutch equivalent.

201 William van Boom & Marco Loos, Effective enforcement of consumer law in Europe

(2007), 1, 1 available at http://ssrn.com/abstract82913.

202 Fabrizio Cafaggi & Hans-W Micklitz, Collective Enfocrement of Consumer Law: A

Framework for Comparative Assessment, 3 European Review of Private Law 391, 425

203 Christoph Strünck, Claiming Consumers' Rights: Patterns and Limits of adversarial Legalism in European Consumer Protection, 4 German Policy Studies 167, 167 (2008).

204 William van Boom & Marco Loos, Effective enforcement of consumer law in Europe

(2007), 1, 15 available at http://ssrn.com/abstract82913.

This method offers the advantages of class action lawsuits, such as regulatory compliance and the ability to address complaints that might not reach a courtroom, while avoiding the drawbacks associated with them, including a litigious culture, high costs, lost opportunities, and the potential for opportunistic claims.

In the Netherlands, interest groups enjoy a broad standing for both mandatory and prohibitory injunctions, as well as declaratory relief In contrast, countries like Germany restrict interest group standing to specific statutory provisions However, there is a trend towards more generalized standing rules for interest groups, with proposals for a comprehensive statutory framework emerging in Germany, as well as similar discussions in England and Wales This suggests a growing support for collective action aimed at securing consumer redress, even if U.S.-style class actions have not been fully adopted.

Interest groups should be permitted to claim exemplary damages, allowing them to create a fund that finances future litigation in the common interest, beyond just compensating individual plaintiffs for their losses This self-funding mechanism not only incentivizes businesses to adhere to regulations but also mitigates the risk of companies making calculated decisions to exploit consumers before facing legal action, particularly in cases where economic harm is difficult for individuals to quantify, such as misleading advertising.

Hodges critiques the collective action approach, arguing that it raises concerns about accountability, legitimacy, and transparency, and could lead to excessive enforcement and overdeterrence Instead, he proposes a model where private entities initiate complaints to public authorities, while the enforcement actions, such as fines and injunctions, are reserved for the public authority.

Enhancing regulatory enforcement can be achieved by empowering consumer activism Faure et al identify key procedural methods to facilitate this, including allowing consumers to initiate administrative proceedings for regulatory violations, enabling them to file information that could lead to criminal prosecution for such contraventions, and permitting consumers to unite in their efforts against regulatory breaches.

205 William van Boom & Marco Loos, Effective enforcement of consumer law in Europe 1,

11 (2007), available at http://ssrn.com/abstract82913.

209 Quoted in William van Boom & Marco Loos, Effective enforcement of consumer law in Europe 1, 15 (2007), available at http://ssrn.com/abstract82913.

A private right claim can coexist with administrative or criminal proceedings, allowing individuals to seek redress through adjudication However, the motivation for any single individual to pursue such claims may not be strong enough to encourage action.

Van Boom & Loos advocate for a comprehensive enforcement strategy that integrates private action, the empowerment of interest groups, the role of ombudsmen, and proactive government agencies This model aligns with practices in Nordic countries, which have been identified in a recent EU-wide survey as having the highest levels of satisfaction regarding their national consumer protection measures.

The Telecommunications Industry Ombudsman (TIO) serves a crucial role in safeguarding consumer interests by employing an inquisitorial model that facilitates thorough investigation of complaints However, some businesses may delay addressing complaints, opting to risk escalation to the TIO, either due to cost considerations or in the hope that frustrated customers will abandon their grievances.

Recommendation: A framework for regulatory enforcement

The blended approach proposed by Van Boom & Loos is the optimal choice for consumer protection, as it provides multiple enforcement mechanisms to mitigate the risk of failure This method has proven effective in countries where citizens express high satisfaction with their consumer protection systems While Australia partially employs this framework, it requires enhancement through clearer regulatory roles, stronger enforcement, and increased consumer awareness regarding their protective options.

Socialisation of norms in regulatory agencies is integral to regulation As Julia Black argues,

Research indicates that organizational socialization, peer pressure, and perceptions of an ideal enforcement officer significantly influence an officer's enforcement approach These norms are partly shaped by the regulator's objectives, which can sometimes conflict, as seen with the FSA's dual goal of promoting economic growth while ensuring compliance.

214 Black, Julia 2001 “Managing Discretion.” In ARLC Conference Papers, Sydney, p 1, 13; see also, Hutter 1988, 1997; Richardson et al, 1983; Hawkins 1984; Kelman 1984; Shover et al 1984; Hood et al, 2000

To enhance consumer welfare and ensure effective regulation, it is recommended to maintain a blended enforcement approach that includes a regulatory agency with enforcement authority, an ombudsman for consumer complaints, and access to the courts However, it is crucial to remain vigilant about the potential for employees to prioritize one interest over another, which could undermine overall efficiency.

The U.K Government has established the Consumer Protection and Markets Authority (CPMA) to enhance consumer protection, believing that the Financial Services Authority (FSA) prioritized economic efficiency over consumer interests The government argues that the FSA's broad responsibilities, which include overseeing global investment banks and local customer treatment, hinder its ability to effectively address consumer issues By concentrating on its primary missions of customer protection and market regulation, the CPMA is expected to foster a culture that better serves the public interest.

To effectively implement principles-based regulation, the ACMA’s Content, Consumer and Citizen division must be empowered with a clear mandate for stringent licensing to safeguard consumer interests This includes the authority to inspect and audit businesses for compliance, engage with stakeholders, provide formal and informal guidance, and enforce regulations through financial penalties, injunctions, or license suspension and cancellation for non-compliance Alternatively, establishing a new, independent consumer protection agency with a focused mandate to protect consumers could also achieve these goals.

Understanding who controls the interpretation of compliance principles is essential A regulatory dialogue involving regulators, the industry, and consumers is necessary, yet this conversation takes place within a business environment Consequently, businesses may have legitimate commercial or principled motivations for questioning these principles.

Enforcement should commence with negotiation and education; however, if a business fails to achieve substantial compliance, regulators must progressively escalate their enforcement actions, imposing increasingly severe sanctions until compliance is met.

‘enforcement pyramid’ is that the regulator starts of gently at the base of the pyramid in an

215 Five Questions About: The new consumer protection authority Available at: http://www.independent.co.uk/money/spend-save/five-questions-about-the-new- consumer-protection-authority-2039949.html [Accessed September 2, 2010].

Recommendation: The ACMA should establish a division with a clear and specific single mandate to protect consumers.

The regulator should maintain interpretive authority over the principles, ensuring that any actions are subject to judicial review for procedural fairness Initially, the regulator should collaborate with businesses to address issues, but if this cooperative approach fails, it may escalate to more stringent compliance measures, as illustrated by the pyramid model proposed by Ayres and Braithwaite.

Figure 1: Regulatory pyramid by Ayres and Braithwaite

Regulators initially seek to encourage non-compliant businesses to adhere to regulations If this approach fails, they escalate the process by issuing a public warning letter, followed by civil penalties, and continue to escalate measures as necessary.

The approach to regulatory enforcement presents significant concerns, particularly regarding the starting point on the pyramid of compliance strategies While one might assume that persuasion is the initial step, there are instances of severe non-compliance where imposing a fine may be more suitable Additionally, the model lacks clarity on whether it is lexically ordered, raising questions about the regulator's ability to bypass certain stages in response to egregious behavior For practical reasons, such as in cases of outright fraud, the ACMA should have the flexibility to skip steps or commence at a higher level on the pyramid.

For example, in a particular scenario the ACMA might take the steps depicted in the pyramid below, starting with the bottom and moving upwards:

217 Black, Julia 2008 “Forms and Paradoxes of Principles Based Regulation.” LSE Law,

Society and Economy Available at: http://ssrn.com/abstract67722, 1, 19 [Accessed

July 22, 2010]; see also generally, Ian Ayres and John Braithwaite, Responsive

Regulation (Oxford: Oxford University Press, 1992).

218 Black, Julia 2001 “Managing Discretion.” In ARLC Conference Papers, Sydney, p 1, 18.

License revocationLicense suspensionCriminal penaltyCivil penaltyWarning letterPersuasion

To foster genuine compliance, regulators should reward businesses demonstrating commitment by reducing enforcement actions However, regulators must be prepared to escalate measures when necessary, rather than relying solely on warnings or injunctions that may not yield compliant behavior The effectiveness of sanctions hinges on their credibility; if companies perceive minimal consequences, they may choose to violate regulations for profit Therefore, it is crucial for regulators to impose substantial financial penalties to deter willful non-compliance and ensure adherence to regulations.

To enhance regulatory enforcement, interest groups should be permitted to submit formal complaints to the regulator, regardless of their usual standing requirements This approach addresses the collective action challenges linked to numerous minor violations and provides these groups with an official channel to highlight concerns regarding potential regulatory breaches.

For effective enforcement, a regulator must possess clear and adequate power, ensuring access to a comprehensive range of remedies for non-compliant companies Additionally, the regulator should be properly resourced and independent, enabling it to operate without external influence Furthermore, it is essential for the regulator to establish clear policies and procedures that specifically address the most significant risks within the sector it oversees, particularly concerning consumer protection.

222 CHOICE, Good Practice in Consumer Protection Enforcement: A Review of 12

The regulatory body should implement a stricter regulatory framework that utilizes a comprehensive sanctions system, including penalties, to effectively deter non-compliance.

Recommendation: The regulator should publish the outcomes of its compliance and regulatory activities.

Recommendation: The regulator should have the power to order businesses to pay compensation to consumers.

Recommendation: Consumer groups should have standing to bring complaints to the regulator on behalf of aggrieved consumers.

License revocation License suspension Financial penalty Injunction

A public warning letter serves as a crucial tool for regulators in addressing consumer protection issues Without access to effective remedies, the primary goal of safeguarding consumers would be compromised, leaving them vulnerable It is essential for regulators to take decisive action to ensure consumer safety and uphold their rights.

Recommendation: The regulator should be able to:

 take enforcement measures when necessary, including financial penalties,

 commence proceedings to seek remedies and injunctions,

 grant, suspend or revoke licenses of businesses that fail to meet the requirements of the Principles.

Recommendation: Schedule 1, Part 7 of the Telecommunications

Legislation Amendment (Competition and Consumer Safeguards) Bill

2009 should be enacted because it will empower the ACMA to issue infringement notices for contraventions of regulatory civil penalty provisions.

Background

Adopting principles-based consumer protection regulation shifts the focus to consumer-benefiting outcomes, emphasizing that results matter most This approach is designed to ensure outcomes align with consumer interests while preventing regulatory loopholes that meet the letter but not the spirit of the law It enhances accountability among service providers, requiring them to demonstrate compliant outcomes instead of merely following prescriptive rules Additionally, principles-based regulation offers businesses flexibility by allowing them to achieve desired outcomes in the most efficient manner, without the burden of complex regulatory requirements.

While principles should serve as the foundation of regulation, certain prescriptive rules are necessary to support these principles Regulatory frameworks should not be viewed as an all-or-nothing approach; rather, a balanced combination of both principles and specific rules is essential for effective governance.

Adopting a lifecycle framework for products and services enables businesses to gain valuable insights from the customer's perspective This approach helps identify potential service failures and understand customer needs more effectively, ultimately enhancing overall business performance.

Effective regulation requires not only well-intentioned policies but also robust enforcement mechanisms To achieve this, regulators must possess a comprehensive set of tools and a clear mission focused on consumer interests The following recommendations are designed to empower regulators and provide the necessary flexibility for stakeholders to implement and sustain effective regulation that adapts to evolving market conditions.

The Proposed Principles

Principle 1: Businesses must treat their customers fairly.

Principle 2: Businesses must respect the privacy of their customers.

Principle 3: Businesses must provide their customers with clear, accurate and relevant information on products and services before, during and, where appropriate, after the point of sale.

Principle 4: Businesses must resolve customer disputes quickly and fairly.

Principle 5: Businesses must ensure that advertising and promotion of products and services is clear, accurate and not misleading.

Principle 6: Businesses must have appropriate policies and practices in place to assist customers who are disadvantaged or vulnerable.

Principle 7: A business that breaches the principles-based regulation will provide an effective remedy for the customer and may be liable to an effective sanction.

Principle 8: Businesses will develop ongoing monitoring and reporting measures designed to ensure successful implementation of the principles-based regulation.

Principle 9: Customers will behave honestly in their dealings with businesses and cooperate with businesses when seeking to resolve any problems or disputes.

Principle 10: For transparency and accountability, businesses will have their compliance with the principles-based regulation reviewed and reported by an external auditor.

To help give effect to the principles, businesses should focus on achieving the following five outcomes, which are adapted from the U.K Financial Services Authority’s Treating

Customers Fairly initiative These outcomes are not new principles or requirements They are goals to help businesses flesh out the objectives of the principles

Outcome 1: Consumers can be confident that they are dealing with businesses where the fair treatment of customers is central to the corporate culture.

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Outcome 3: Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Consumers receive products and services that meet their expectations, as set by companies, along with customer service that aligns with these anticipated standards.

Outcome 5: Consumers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.

The ACMA and enforcement

A regulatory scheme is ineffective without a regulator that possesses adequate resources and authority to enforce compliance Additionally, assigning dual missions, such as promoting market efficiency while protecting consumers, can jeopardize the regulator's focus and effectiveness, as one mission may overshadow the other To foster a cohesive regulatory culture centered on a singular goal, it is crucial to avoid these conflicting responsibilities.

The ACMA should create a dedicated division focused on consumer protection, endowed with comprehensive powers to ensure compliance with established principles This division would conduct regular audits of businesses, analyze complaint data to identify trends, and engage with stakeholders It would have the authority to accept enforceable undertakings, provide guidance, impose license conditions, and issue infringement notices Additionally, the division would develop standards as directed by the Minister, implement enforcement measures including financial penalties, initiate legal proceedings for remedies and injunctions, gather relevant information, and manage the licensing of businesses that do not adhere to the required standards.

If ACMA is not formed to create a specialized consumer protection division, it is essential to establish a new and independent consumer protection authority This authority should have a clear mandate and the necessary powers to enforce consumer protection effectively.

 The ACMA should offer clear career paths for consumer protection professionals to strengthen the regulatory culture.

The enactment of Schedule 1, Part 7 of the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009 is essential as it grants the ACMA the authority to issue infringement notices for violations of regulatory civil penalty provisions This change is crucial because, without it, the ACMA is required to pursue legal action in court to impose financial penalties on businesses that violate regulations.

When assessing a company's application for a license, regulators must evaluate its capacity to fulfill consumer protection obligations Additionally, the Australian Communications and Media Authority (ACMA) should make the ability to ensure consumer protection a key criterion for licensing decisions Businesses that consistently fail to meet these standards should face potential suspension or revocation of their licenses.

 The regulator should integrate compliance with the Principles based regulation into licence conditions.

 The regulator should require businesses to train staff about the principles as a condition of compliance.

Consumer groups should be empowered to file complaints with regulators on behalf of affected individuals, addressing collective action challenges when numerous consumers suffer harm but may not pursue independent action This capability enhances consumer protection and ensures that the voices of the aggrieved are heard effectively.

 Continue with the blended approach to enforcement in which there is a regulatory agency with enforcement power, an ombudsman to whom consumers can take complaints and the courts.

 The regulator should have interpretive control over the principles, subject to judicial review on the grounds of procedural fairness.

 The regulator should adopt a more stringent approach to the regulatory pyramid in which the sanctions, including penalties, are available and are used as necessary as a disincentive to non-compliance.

 To ensure consistency between the TIO and ACMA, they should initiate conversations and collaboration to ensure interpretations of the Principles do not differ.

 The regulator should publish the outcomes of its compliance and regulatory activities.

 The regulator should have the power to order businesses to pay compensation to consumers.

The TIO

The TIO plays an essential role in dealing with consumer complaints that have not been resolved with businesses.

The inquisitorial model employed by the TIO is beneficial for consumers as it alleviates the burden of conducting their own investigations and gathering evidence when filing complaints In contrast, arbitration places unnecessary obstacles on consumers, making it more challenging for them to seek resolution Therefore, the TIO's inquisitorial approach should be maintained to ensure consumer-friendly practices.

To enhance clarity for businesses and consumers regarding the TIO's interpretation of specific situations, it is essential for the TIO to publish key determinations and treat its decisions as persuasive authority Additionally, when the TIO diverges from its established precedents, it must offer clear and well-articulated justifications for such departures.

Determinations that indicate changes in interpretive policy should be published, with anonymised data, so that consumers and industry will understand the change in interpretation.

 To keep the obligations of business and the regulator aligned, and to expedite complaint resolution, the timelines for business to respond to complaints should also apply to the TIO.

When handling complaints, the TIO should continue to engage with consumers after referring them back to their service providers This follow-up ensures that the TIO can confirm the resolution of the complaint, alleviates the need for consumers to recontact the TIO if issues remain unresolved, and facilitates the collection of valuable data and statistics regarding complaint outcomes.

Consumer groups should be granted the authority to file complaints with the TIO on behalf of affected consumers This capability will address collective action challenges, enabling resolution for situations where numerous individuals are harmed but may not pursue independent action.

The decisions made by the Telecommunications Industry Ombudsman (TIO) should be mandatory for businesses, while consumers retain the right to seek legal recourse through the courts even after filing a complaint with the TIO.

Business-customer relations

ACMA and business should work together to devise a product lifecycle framework for consumer protection.

The ACMA should collaborate with businesses to provide guidance and best practice recommendations, enabling them to establish a comprehensive consumer protection framework that encompasses the entire lifecycle of their products and services.

 Customer protection frameworks should include strategies for maintaining fairness and achieving the Outcomes in all interactions with customers

The ACMA should establish advisory groups with diverse stakeholders to assist businesses in developing their customer protection frameworks Additionally, publishing case studies and examples of both good and poor practices will foster an interpretive community centered on the principles-based code.

Section 9.4.2 of the Telecommunications Consumer Protection Code mandates that businesses inform consumers about their options for escalating complaints internally and seeking external resolution through the Telecommunications Industry Ombudsman (TIO) This information should be provided proactively, rather than only upon request or when a consumer expresses dissatisfaction By ensuring consumers are aware of their escalation options from the outset, businesses can empower them to effectively address their complaints.

 Businesses should publish information about complaints and complaint management annually.

Implementation the principles

 The requirements for complaint handling in Section 9 of the current

The Telecommunications Consumer Protection Code is insufficient and lacks a comprehensive framework Companies need to embrace a customer-centric lifecycle approach for their products and services To facilitate this shift, the ACMA should provide best-practice guides and offer guidance on effective complaint handling and customer service throughout the entire product lifecycle.

Adopting a lifecycle approach alone does not guarantee consumer protection; it must prioritize consumer benefits by aligning products and services with their needs and desires Management should actively engage in marketing campaigns, ensuring that marketing staff's key performance indicators are linked to the levels of consumer satisfaction, rather than confusion or complaints.

 To best protect consumers, business should produce ‘key fact’ documents that contain essential information that customers should know about a product or service.

 Complaint data should be used both by businesses and the regulator to gauge how successfully a business has implemented the principles.

Options for adopting a principles-based consumer protection scheme

The regulator must possess the authority to impose civil penalties to ensure effective compliance enforcement Legal proceedings can be lengthy and costly, while revoking licenses is a severe measure, especially for national providers By enabling the regulator to impose financial sanctions proportional to the severity of a breach, it creates a strong incentive for adherence to regulations.

Conclusion

Adopting principles-based regulation offers several key advantages: it prioritizes consumer welfare over mere compliance with rules, enhances the efficiency of regulatory obligations for businesses, enables regulators to adapt to evolving circumstances and address emerging loopholes, and fosters the development of a comprehensive body of regulatory guidance and precedents.

The primary risks associated with regulatory principles include inadequate enforcement by the regulator, as seen with the Financial Services Authority in the U.K., and the perception of these principles as merely aspirational To mitigate these risks, it is essential that the regulatory body responsible for enforcing the principles-based code is exclusively focused on consumer protection and is equipped with the necessary authority to effectively fulfill its role.

Applying the principles will protect consumers and benefit industry.

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