Companies must build trust with customers or face the consequences
Modern businesses that don't look after their customers have to worry as much about regulatory action as a loss in sales.
June 11, 2014 at 06:21 AM
4 minute read
With consumer activists becoming more empowered, businesses that mistreat customers are exposing themselves to regulatory intervention and reputational damage
Modern businesses that don't look after their customers have to worry as much about regulatory action as a loss in sales. New, more powerful regulators are emerging around the world – from the Competition and Markets Authority (CMA) in the UK to the Consumer Financial Protection Bureau (CFPB) in the US – all with a mandate to protect consumers.
The UK CMA's remit to protect both competition and consumers is indicative of the way things are changing. Companies and their lawyers are familiar with the need to comply with competition law but, if the CMA sees a market that isn't working, it will consider consumer law to rectify the problem.
There is recognition that even in very competitive markets consumers can get a bad deal, and that some businesses use unethical tactics, rather than innovation, to gain market share. The Consumer Rights Bill, which is currently going through Parliament, will give the CMA and other bodies the power to require companies to compensate the alleged victims of unfair business practices.
The sums involved could be huge, as exemplified by the financial services sector, where UK regulators already have several ways of securing consumer redress.
Consumer law enthusiasm
Pressure groups, non-governmental organisations (NGOs) and even consumers themselves are now pursuing consumer law enforcement. In many countries, NGOs now have a much stronger standing in court and act as an extension of the competent authorities, often backed by intense media coverage and well-publicised campaigns.
So where has this newfound zeal come from? In part, it is driven by the politics of recession (standing up for consumers won't lose you votes). Tackling 'rip-off Britain' may be a good way of helping the 'squeezed middle' at minimal (direct) cost to the public purse, while also currying favour with an anti-big business electorate.
The financial crisis hit consumers of financial products and customers of banks, and the common response across the EU and the US has been stricter regulation to protect them. The creation of the European banking union, the European Central Bank's new role as a single supervisory authority in the eurozone, and the formation of the CFPB in the US are paradigmatic of crisis-driven consumer protection legislation.
Big data and behaviour
Technology is also behind the shift in attitude. Big data analysis means companies 'know' their customers much more intimately than in the past, and they can use that knowledge to tailor their promotional and pricing practices with ever greater sophistication.
At the same time, the study of behavioural economics, in which both regulators and governments are well-versed, suggests that we consumers are not as 'switched on' as we think when it comes to protecting our own interests. Politicians seem to have decided that more powerful regulators will help redress the balance. Certainly, those regulators are focusing on any conduct that seems to risk misleading consumers by playing on behavioural weaknesses – for example, our inertia; our willingness to grasp for a headline price; our optimism about how often we will use that gym subscription.
With consumer activists empowered by digital media, a company that mistreats those who consume (or make, or sell) its products badly risks its corporate reputation.
By auditing consumer-facing activities, engaging with regulators and improving transparency, companies can reduce the risk of regulatory intervention, reputational harm and significant financial exposure. And, more positively, they can build trust with their customers and reap the rewards.
Andrew Austin is a partner at Freshfields Bruckhaus Deringer.
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