Policy Advice Outputs
Consumer Affair's work is aimed at creating the conditions in which consumers can transact with confidence and give both direct consumer benefits and greater economic efficiency and innovation. The Ministry advises on consumer and consumer-related policy, provides consumer information directly, builds the capability of other organisations to address consumer issues and administers the trade measurement and product safety regimes.
The Consumer Affairs branch is headed by Liz MacPherson and is organised into five functional groups, namely Policy (Consumer and Energy Safety), Research, Information and Capability, Measurement and Product Safety, Energy Safety Operations, and Strategic Branch Support. Energy Safety (policy and operations) and Measurement and Product Safety are funded solely through Vote: Energy and Vote: Consumer Affairs respectively. The other three functional groups contribute to the outputs of and are funded by both Votes.
The discussion of the key outputs for Vote: Consumer Affairs over the next three years follow the headings provided in the Overview:
- Consumer policy framework
- Monitoring and enforcement of consumer policy and law
- Consumer representation
- International dimensions of consumer policy and law
A further discussion is provided on the operational aspects of Measurement and Product Safety.
Consumer Policy Framework
Improving the living standards of New Zealand consumers is the ultimate goal of a thriving, innovative and sustainable economy. Consumers are not simply the beneficiaries of such an economy; they also play an active role in its development and growth through their purchasing or transaction decisions. By demanding higher quality products and services, making effective choices among the offerings of competing suppliers and seeking satisfaction where their purchasing expectations are not met, consumers can stimulate greater economic efficiency and innovation.
Helping to create the conditions in which consumers can transact or purchase with confidence - where they get what they reasonably expect from a purchase, and if not, have access to redress - is the role of consumer policy. Confidence in transacting is important. When consumers are not confident:
- They may avoid transacting in the future to avoid the possibility of a bad deal and its consequences. This may have far-reaching implications. For example, New Zealanders have a relatively small proportion of their net wealth invested in financial products. There is some evidence that this is due, in part, to a lack of confidence in the range of products on offer (due to their complexity) and the quality of advice received from investment advisors.
- It may result in consumer inertia. Consumers may opt for an existing supply arrangement because of the perception (real or not) that they will face risk or costs by switching to another supplier or means of supply, even though another supplier or means of supply may offer a better deal. This can lessen the competitive pressures on suppliers, resulting in higher prices, less choice and lower quality products or services. There is some overseas evidence that this situation may apply to energy supply services and banking services.
- They may spend considerable time and effort investigating or will accept higher costs attempting to avoid a bad deal.
Information barriers are a significant reason why consumers do not get what they expect when making a purchase. Generally, consumers have less information about the product or service they are purchasing than the producer or supplier. Some product defects may not be obvious or may only become apparent through use or over time. New products may be unfamiliar or transactions may be very complex. Information may be costly or difficult to obtain.
Suppliers may also withhold information or make misleading claims about a product or service for competitive advantage. Consumers also vary in their ability to absorb and make effective use of information. They are more likely to make a bad deal when they under or over-estimate the relevance or importance of information about a particular product or service. For example, they may under-estimate the importance of the interest rate when entering into a credit contract or over-estimate the importance of the nominal odometer reading when purchasing a used car.
Next Three Years
Developing a deeper understanding of consumer and trader behaviour and its implications for the effectiveness of consumer and competition policies is a key strategic issue for this Ministry. Currently, information about how consumers and traders behave and make decisions is lacking. New thinking in behavioural economics, however, is beginning to redress this issue.
- Within the wider Economic Development Ministry, this Ministry is leading a project that will assess common assumptions about the way consumers make decisions. For example, there is an assumption that consumers want and need full information to enable sound decision-making. It will also consider the role of regulation in changing behaviour. In particular, this project will address the challenge of designing regulation so that people's responses further the social and economic objectives that regulation is seeking to achieve.
As economies seek to become more innovative, questions about what drives innovation are becoming increasingly important. Assumptions have been made about the way consumers transact and the impact that consumer behaviour has on sustainable economic development. A key assumption is that in competitive markets, i.e. those markets where consumers have a choice, confident consumers drive innovation by rewarding innovative firms with their business. While this assumption underpins consumer policy in both New Zealand and other countries, the evidence to support it is largely theoretical. Understanding what happens in practice is critical to unlocking barriers to innovation and competition.
- Within the wider Economic Development Ministry, the Consumer Affairs Ministry is leading a project looking at the linkages between consumers, competition and innovation. This work, drawing on information from a variety of disciplines, including behavioural economics, will allow us to examine whether changes to competition or consumer policy could foster entrepreneurship and innovation in New Zealand firms.
Concerns about sustainable economic development are leading to a greater focus on the role of the consumer in sustainable management of our resources. Questions are increasingly being asked about the appropriate role for public policy in encouraging people to make sustainable consumption choices. We are currently reviewing the approaches that are being taken to promote responsible consumption in other international jurisdictions to ascertain what role, if any, a Ministry of Consumer Affairs might play in this area, particularly given the existence of agencies such as the Energy Efficiency and Conservation Agency and the Ministry for the Environment.
Monitoring and Enforcing Consumer Policy and Law
Creating incentives for good and accurate information flows between consumers and suppliers is the primary aim of consumer policy. To help create good and accurate information flows, government:
- establishes and enforces market rules
- promotes and provides access to redress mechanisms
- provides information
- promotes consumer representation on decision-making bodies
Establishing Market Rules
Consumer law generally seeks to address three broad consumer issues - information availability pre-sale, undue surprises post-sale and duress or undue pressure when purchasing. Three overarching pieces of consumer legislation form part of the basic framework for effective markets and govern all consumer transactions. These are the Fair Trading Act 1986, the Consumer Guarantees Act 1993 and the Weights and Measures Act 1987.
The Fair Trading Act focuses primarily on the pre-sale environment. Its main aim is to ensure that consumers are not misled about what to expect about a transaction. It therefore requires that all trading activities are based on honest and accurate information. It also allows for bans and recalls of unsafe products and the imposition of mandatory information or product safety standards where necessary. The Consumer Guarantees Act focuses on the post-sale environment and provides statutory guarantees if a good or service does not meet certain standard consumer expectations (including being safe, fit for purpose and durable). The Weights and Measures Act aims to ensure that consumers get the quantity of goods they have been led to expect.
A number of transaction-specific laws also cover certain purchases or selling methods that present special risks to consumers. For example, the recently enacted Credit Contracts and Consumer Finance Act 2003 aims primarily to ensure that consumer expectations and choices regarding credit are based on clear, accurate information. The Motor Vehicle Sales Act 2003 aims to ensure that consumers have confidence in transacting in the purchase of vehicles through establishing a trader registration regime and ensuring good and accurate information is provided on which to base their purchasing expectations. The pressure associated with door-to-door selling methods can cause consumers to make unwise decisions that they later regret. The Door to Door Sales Act 1967 provides a seven-day cooling-off period in which consumers can unmake these decisions in un-pressurised conditions.
Enforcing Market Rules
The incentives on businesses to behave according to market rules largely depend on those rules being effectively enforced. Most consumer law relies on consumers taking action themselves by seeking redress from the supplier and, if this is not forthcoming, through the court system (usually referred to as self-enforcement). Where consumer law is publicly enforced, this is generally through the Commerce Commission (as with the Fair Trading Act and the Credit Contracts and Consumer Finance Act). An exception to this is the Weights and Measures Act which is enforced by Consumer Affairs. In addition Consumer Affairs has a complaints handling/investigation role that supports Ministerial decisions on the product safety banning and recall provisions of the Fair Trading Act.
Promoting and Providing Access to Redress
Having effective redress mechanisms available can reduce consumers' assessment of the risk of purchasing from a supplier they do not know or trust (or have imperfect information about). This is because they know they can seek a remedy if things go wrong. The requirement to provide redress can also reduce levels of product and service failure because suppliers have an incentive to meet consumer expectations.
The primary redress mechanism available to consumers is through the court system. The Disputes Tribunal and Motor Vehicle Disputes Tribunal (provided through the Ministry for Justice) aim to provide accessible, lower cost disputes resolution for consumers who are unable to afford District Court action. Government also seeks to improve access to redress by promoting complaints mechanisms run through industry self-regulatory schemes such as the Banking Ombudsman, Electricity and Gas Complaints Commissioner, Insurance and Savings Ombudsman and the Advertising Standards Complaints Board.
Providing Information to Consumers and Businesses
Good and accurate information flows between consumers and businesses at the point of sale is the most effective way of ensuring consumers get a good deal. In addition to providing the incentives for this to occur, this Ministry also provides access to certain types of information. The most important of these are:
- general information about consumer and business rights, obligations and avenues for remedy and redress, which is provided for example through the internet, printed information resources and through partnering with community organisations such as the National Association of Citizens Advice Bureaux
- the Scamwatch section on the Ministry website, which has information on specific types of current scams and how to avoid them
- Powerswitch, a Consumers' Institute service funded by this Ministry, which allows domestic consumers to compare the deals offered by electricity and gas retailers. Addressing information barriers and enabling consumers to compare alternative energy options is one of the government efforts to stimulate competition in the energy industry
Certain groups of consumers are disproportionately affected by bad deals. Such groups' need for general consumer information is met by using tailored strategies to ensure the information reaches them and is seen to be relevant.
Next Three Years
To assess whether the desired outcome of consumer programmes and laws are achieved, their impact has to be monitored and evaluated. Where improvements or amendments are needed, recommendations to change current practice or amend the legislation will be proposed. The Ministry distinguishes between those projects that aim to generally understand consumers and their issues, and those reviews of specific programmes or laws.
- During 2005, the Ministry commissioned two major baseline surveys. The first consumer survey involves interviewing 1,000 consumers about their knowledge and attitudes to the consumer protection legislation and their experiences of seeking redress. The second survey will focus on traders. They will be questioned on their knowledge of the consumer protection legislation, how it applies to their business and their experiences of working with the legislation. The data gathered from these surveys will provide us with baseline information and will be used in the review of the enforcement of consumer protection law.
- A key part of our research strategy is to access available data and qualitative information about the issues of concern to consumers. The primary source of this data is Citizens Advice Bureaux, which provide free consumer advice to the general public under the terms of a partnership agreement between the National Association of Citizens Advice Bureaux and the Ministry. The 75,000-plus consumer enquiries the Bureaux handle annually are potentially a rich source of relevant data and information about consumer issues and how consumers behave in the marketplace. Our data-capture project will enable 12 selected bureaux to collect and deliver data electronically on all the consumer enquiries that they handle.
The Ministry is responsible for a number of specific programmes and laws and is currently reviewing these, or particular aspects of them, to ensure that they are effective, taking into account new ways of buying and selling (such as internet-based trading) and do not place unnecessary compliance costs on business. Key projects:
- Reviewing the enforcement of consumer protection law. The review is to measure the effectiveness of the current redress and enforcement provisions in the Fair Trading Act and the Consumer Guarantees Act and identify any need for amendments. An initial think-piece document that outlines the scope of the project, and provides a summary of the theoretical and conceptual literature that underpins the review's subject matter, was released in July 2005. A discussion document comparing the redress and enforcement provisions in the two Acts with those found in consumer protection legislation in other similar jurisdictions, is due to be released later this year.
- Reviewing the Motor Vehicles Sales Act. This Act came into force in December 2003. The new regulatory regime moved away from an industry-controlled licensing framework to a registration process, administered and enforced by government agencies. A Motor Vehicle Disputes Tribunal was also established with authority to consider all complaints relating to the purchase of a motor vehicle. There is a statutory obligation to review the operation of the Act after two years and this may give rise to recommendations on amending the Act or its administration.
- Monitoring and evaluating the Credit Contracts and Consumer Finance Act 2003. The Act, which came fully into force on 1 April 2005, regulates the provision of consumer credit - home loans, personal loans, credit sales/hire purchase, credit cards, long-term leases and housing buy-back schemes. The Ministry intends to monitor and evaluate the effect that the Act has had on the credit contracts into which consumers enter. The review will be in two parts: assessing whether the Act has been properly and timely implemented; and whether the Act has achieved the policy objectives that were defined during the review of the consumer credit legislation.
- A study into the scope of measurement activity and legal metrology in New Zealand. A report on this is currently being finalised. This report will outline what legal metrology1 contributes to economic and social well-being, and identify future legal metrology capability issues and opportunities for New Zealand to use its membership of the International Organisation of Legal Metrology to achieve better health, safety, environment and trade outcomes.
- Reviewing the Ministry's information strategies. Consumers are confident only if they have a basic understanding of their rights and obligations under consumer law. Certain vulnerable groups of consumers (those with low levels of education, English language and income) are less likely to have this understanding or know where to go to obtain information. Consumer Affairs has a number of information strategies in place specifically aimed at these groups. In the coming year, it will review these information strategies to ensure that they remain relevant, are focused on the right groups and are penetrating to right target audiences.
- Reports on information strategies focused on vulnerable consumers. The State Services Commission recently led a review of targeted programmes. The Ministry tailors its delivery of information to meet the needs of different audiences and the review concluded this was appropriate as the same information is made available to all consumers. However, the Commission recommended assessing whether certain vulnerable groups may require improved access to information. Accordingly, Cabinet has directed the Ministry to report to the Minister of Consumer Affairs on:
- how effectively it provides this information to other vulnerable groups
- how to better meet the information needs of Pacific peoples and any resourcing issues in doing so.
Industry-led approaches to regulation include voluntary codes of conduct and consumer dispute resolution schemes. Industry-led regulation covers schemes such as the Banking Ombudsman, and the Electricity and Gas Complaints Commission.
- The Ministry is examining the effectiveness of current practices in industry-led regulation, as well as its role in the broader mix of regulatory approaches to consumer protection, redress and enforcement. The first discussion document on this review, which sets out a framework to help consumers and industry establish, operate and evaluate industry-led regulatory schemes, was released in July 2005. Submissions on the discussion paper close 14 October 2005.
Over the last few years, the Ministry has been progressively focusing on particular sectors of the market where significant consumer detriment exists. An area, in recent times, where consumers are experiencing increased detriment is the financial services market. Financial products and services create particular problems for consumers. Key issues impacting on consumers are how the financial services market operates, the complexity of this market and the costs involved. Consumers may find information on financial products and services, produced by independent sources, particularly difficult to source or to understand.
Even when financial providers supply a large amount of information, it may not assist consumers to make the best decisions because they may not be able to interpret the information and easily apply it to their own financial situation. Financial products can be particularly difficult to choose between because it is often not until some future date that consumers can easily determine the real returns on their investments.
- The Ministry is part of an inter-departmental team that is undertaking a major review of financial products and providers. This review includes considering the Financial Intermediaries Task Force report. This report proposed a range of measures from better access to disputes resolution and enforcement and clearer disclosure, to the need for consumer literacy education and information. We are taking the lead on consumer dispute resolution, as well as contributing to the broader policy work.
- The Ministry is closely associated with a national financial literacy survey, expected to be reported on in December 2005. The main sponsors of this survey are ANZ Bank and the Retirement Commission, with the Ministry of Economic Development also contributing financially. Our interest in the survey is in the area of consumers' financial literacy skills when it comes to reading and making sense of investment statements, brochures and prospectuses. The Ministry also wants to know how consumers evaluate financial advisory services.
- KiwiSaver, a new work-based savings scheme, was announced in the 2004 Budget. The Ministry of Economic Development, together with other relevant agencies, has been directed to develop a communications strategy aimed at those with lower levels of financial literacy so that they can make informed decisions about whether opting out, other savings approaches, or paying off debt is the right choice for them. This Ministry, because of its experience in tailoring information to vulnerable consumers, is leading this work on behalf of the wider Economic Development Ministry. It will be working in partnership with the Retirement Commission and the Inland Revenue Department.
- The Ministry, together with the Commerce Commission, is leading a whole-of-government effort to raise consumer awareness of consumer fraud. This term is being used to describe a range of fraudulent investment activities perpetrated against consumers, from identity theft and internet banking fraud through to pyramid schemes and so-called Nigerian scams. Globally, consumer agencies are designating February or March 2006 as Fraud Awareness Month. Planning is underway for New Zealand's involvement.
Consumer Representation
Effective consumer representatives on decision-making boards and committees add value because they can assess problems from the consumer perspective and identify the consequences of both the problems and any proposed solutions.
The Minister of Consumer Affairs makes appointments to schemes such as the Electricity and Gas Complaints Commission, the Banking Ombudsman and the Insurance and Savings Ombudsman. The Ministry also makes nominations of potential consumer representatives to a range of other boards and committees.
The Ministry has developed a description of the qualities of an effective consumer representative. This has been seen as critical to the success of consumer representatives, has been accepted by Cabinet and has greatly assisted ministerial decisions on appointing lay or consumer representatives.
The Ministry has also developed publications to assist officials to identify effective consumer representatives, help chairpersons guiding consumer representatives to be effective, and assist those representatives to be effective board members.
The Ministry convenes a consumer representative network, which provides easy access for consumer representatives to advice, information exchange, training, support and mentoring. We also run a consumer representatives' reference group that assists us to select and nominate people who are closely matched to the requirements of a particular board or committee. We have recently undertaken recruitment and training to increase our pool of nominees, in particular, to locate good potential consumer representatives in the provinces.
International Dimensions of Consumer Policy and Law
One of the Ministry's strategic priorities is improving international linkages that allow firms to benefit from trade, knowledge transfer and investment. Consumer policy and law can help or hinder international linkages. We work closely with our Australian counterparts within the single economic market framework, and through international fora such as the Organisation for Economic Cooperation and Development (OECD) and the International Organisation of Legal Metrology, (OIML),2 to develop a better understanding of the trade and consumer impacts of more liberal international markets and the effect of new trading approaches, such as internet trading. This is also leading to particular initiatives to facilitate trade while, at the same time, managing risks to consumers.
The Minister of Consumer Affairs is a member of the Australia and New Zealand Ministerial Council on Consumer Affairs. The Council is supported by the Standing Committee of Officials of Consumer Affairs that, in turn, oversees technical advisory committees carrying out projects relating to operational and enforcement issues. The advisory committees on which the Ministry participates are:
- Consumer Products Advisory Committee (product and consumer safety)
- Fair Trading Offices Advisory Committee (enforcement and consumer protection operations)
- Trade Measurement Advisory Committee (legal metrology)
The Ministry holds New Zealand's full membership to the International Organisation of Legal Metrology. This is an inter-governmental body, approved by the WTO, which aims to harmonise international requirements for legal metrology (systems of weights and measures).
The Ministry is also a member of the Asia Pacific Legal Metrology Forum, a specialist regional body reporting to the APEC Sub-committee on Standards and Conformance. A sub-group of this Forum is the South Pacific Legal Metrology Forum, set up principally to ensure the developing economies in the South Pacific are able to operate to internationally acceptable levels of measurement accuracy.
Next Three Years
- The Commerce Commission (Information Disclosure and Fees) Bill will allow the Commerce Commission to share information with competition, fair trading and consumer finance authorities overseas and other regulators in New Zealand and overseas, and where breaches of competition, fair trading or consumer finance laws are suspected. This will facilitate cross-border enforcement of consumer laws.
- The Ministry is participating in the Review of the Ministerial Committee on Consumer Affairs and the Standing Committee of Consumer Affairs with a view to advancing trans-Tasman cooperation and coordination of consumer protection policies and operational activities.
- The Australian Productivity Commission is currently reviewing the Australian Consumer Product Safety System. The review is being undertaken in close association with the Ministerial Committee on Consumer Affairs, and New Zealand is taking a close interest. The review will be completed in early 2006.
- In its review of the enforcement of consumer protection law, the Ministry will explore the issues of cross-border enforcement and consumer protection law.
- The Ministry's trade measurement area is currently working towards developing mutual acceptance arrangements with a number of International Organisation of Legal Metrology member countries, for a range of non-automatic weighing instruments and load cells (components used in weighing equipment). These agreements will assist in the reduction of technical barriers to trade for the member countries that sign these agreements.
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