Field, Chris --- "Codes of conduct: The new face of consumer protection" [1999] AltLawJl 29; (1999) 24(3) Alternative Law Journal 157

The Government encourages businesses to regulate themselves rather than rely on the Government to do it for them. Effective self-regulation has the potential to achieve greater and lasting improvements in business practices by using negotiation and consultation rather than prescriptive legislation and enforcement. Consumers can benefit from a greater focus by business on customer service and on being responsible for its behaviour. [2]

Codes of Conduct, as self-regulatory tools, have become an integral feature of the consumer protection landscape.[3] A number of industries have moved to adopt Codes of Conduct, including: life insurance, general insurance, smart cards, computerised check-out systems, electronic funds transfer and, most recently, direct marketing. This Brief will touch on the perceived problems with the principles underlying the development of codes using the Australian Direct Marketing Association’s (ADMA) recent Code of Practice as an example of what we can expect from codes as a form of consumer protection.

The assumption on which Codes of Conduct are built is worth serious examination. Prevailing economic theory discourages government regulation, preferring market participants themselves to set, make rules for, and run the ‘playing field’:

Since the late 1970s there has been a revival of what is variously called ‘free-market’ or ‘libertarian’ economics and political philosophy, whose basic premise is that state intervention is a bad thing. The proponents of these views appear to make the basic ... assumption that the free market is always the most effective regulator, which in the long run produces the most beneficial effect for consumers and for society as a whole.[4]

Codes are based on the economic theory that the market is best placed to provide good outcomes for consumers:

While the obvious mechanism to provide protection for consumers is state intervention, either by providing the means for the less powerful to restrain abuses of market power or by direct regulation, government regulation may sometimes be inefficient and, even though it prevents harm to consumers, may create a greater harm, especially lack of profitability for the providers of goods and services. The result is either that prices rise to the detriment of consumers or that businesses become unprofitable and fail, leaving the market, and either reduce the level of competition between suppliers of the particular commodity or simply make the commodity unavailable. The suggested solution is that the suppliers of the commodity should be left to develop amongst themselves voluntary codes of conduct ... [5]

The market, however, can and does fail participants and, as has been noted, has historically failed consumers in particular:

[T]he very existence of consumer protection laws both in legislative form, and as expressed in judgments of the courts which provide the basis for most of the rules of consumer protection, is evidence of the fact that the forces of the market have failed, often with disastrous consequences.[6]

Despite the prevailing economic theory that suggests the market is always the best regulator, it is, for example, a given that consumers have a right to product safety enshrined by legislation.[7] The right to privacy, however, appears to be a matter for the market place. If the ADMA Code is an example of the self-regulatory response to privacy protection, there may be real fears for the loss of privacy. Strong criticism has been levelled at the ADMA Code by virtually all privacy advocates in Australia. The ADMA Code presented for authorisation allowed, for example, unsolicited phone calls at practically all times of the day, each day of the week.[8]

The benefit of Codes is that they will drive best practice and increased consumer protection through mechanisms that are more flexible, targeted to a specific industry, less costly and more certain.[9] The great fear is that these schemes will create a facade of consumer friendliness while allowing such occurrences as a phone call on a Sunday at 8.00 am to sell you something you almost assuredly will not want and, further, that when disputes arise, industry members will adjudicate on themselves in non-transparent dispute resolution procedures.

There has also been significant criticism of the consultation process in developing the ADMA Code. One of the failings of Codes is that there is no mandated requirement that they be developed with consumers or consumer organisations.[10] In the present case, ADMA applied to the Australian Competition and Consumer Commission (ACCC) for authorisation of its Code on the basis that its effects may be anti-competitive (a typical problem of Codes). Having applied for authorisation under s.88 of the Trade Practices Act 1974, the ACCC must consult ‘interested parties’. It was this consultation, at the eleventh hour, that saw consumer advocacy organisations alerted to the problems with the ADMA Code. If an industry that develops a Code decides not to apply for authorisation (and there is no requirement in the development of a Code to apply for authorisation), it is possible that no consultation with a consumer or consumer organisation has taken place. This fundamental lack of accountability and potential disregard for those affected by Codes should be addressed. (It is a further difficulty that there was also strong criticism of the ACCC’s role in relation to the ADMA Code).[11]

The ADMA Code shows us that in practice many of these suggested benefits of Codes are not borne out, at least as far as the consumer is concerned. This, it is suggested, is very much a product of the flawed ideology that drives the development of codes. Clearly, the temptation to act with sheer self-interest is very high when government offers business the opportunity to regulate fair trading itself. As has been observed:

We do not accept that, as a general rule, self-regulation as the only or principal form of consumer protection is effective or desirable ... it sets up the suppliers or producers of the commodity as judges in their own cause and makes it likely that the balance of any scheme of self-regulation will favour the suppliers rather than the consumers: such is human nature.[12]

It is important to remember that the United Kingdom, which has a longer experience in self-regulatory consumer protection, and Codes of Conduct in particular, has already re-examined the effectiveness of Codes and come to conclusions that should have even the most ardent supporters of market-based regulation thinking again. The UK study found that industry by industry development had led to variable standards between Codes, lack of consumer awareness of Codes and lack of coverage of non-members (trends already apparent in Australia).[13] Coverage (or lack of it) is a fundamental problem for Codes of Conduct. The problem that self-regulatory Codes only work to regulate the behaviour of association members is all the more important when it is considered that it is generally the most marginal of businesses (who will mostly not be members of the Association in question) that cause consumers the greatest of problems. Coverage can also be a flexible concept. A criticism levelled at the ADMA Code is that whilst ADMA claimed it represented about 75-80% of the market by sales volume,[14] a large number of calls did not result in sales. It has been suggested that ADMA could represent only 50% of the market (or less) by volume of calls (which would be the proper measure of the ADMA Code’s impact on privacy).[15]

Knowing the history of the UK self-regulatory experience, it would be quite irresponsible of the Australian government to abandon consumers and allow a proliferation of self- interested Codes in place of proper government intervention to assist a fair market place.

Conclusion

Self-regulation has the potential to be an innovative and important part of the public policy mix that ensures fair trading. Unfortunately, the pursuit of market-based outcomes is seeing inadequate Codes of Conduct develop, with the approval of regulatory authorities, in a way that winds back the many protections gained for consumers over recent years. If this continues, self-regulation will become the government’s gift to those businesses which, wearing the badge of a ‘Fair Trading Member’, will relish the opportunity to continue, enshrined in a code, the sharpest of practices. Ineffectual codes of conduct simply tell us what we already know: the market place can’t necessarily be trusted to protect consumers. What a pity it is then that a century that saw the development of fundamental rights to protect consumers against the avarice and disregard of the market place, will be closed with a return to the rule of the market place.
References

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[1] For a discussion of this movement, see Asher, A., Going Global: A New Paradigm for Consumer Protection, Amercian Council of Consumer Interests, March 1998.
[2] A statement by the (then) Minister for Consumer Affairs, Truss, W., ‘Foreword’ in Department of Industry, Science and Tourism, Codes of Conduct — Policy Framework, March 1998, p.1.
[3] There is considerable confusion as to what self-regulation (as opposed, for example, to co-regulation) means. An attempt to define them is made in Codes of Conduct: Policy Framework, Ref 2 above, p.8.
[4] Goldring, Maher, McKeough, Pearson, Consumer Protection Law, Federation Press, 1998, p.4.
[5] Goldring and others, above, p.11. The Federal Government’s ‘general presumption is that competitive market forces deliver greater choice and benefits to consumers [Codes of Conduct: Policy Framework, Ref 2 above, p.3]’.
[6] Goldring and others, above, p.13.
[7] The (then) Minister for Consumer Affairs, The Honourable Geoff Prosser, stated that: ‘Product Safety is a clear government responsibility’ in Prosser, G., ‘Keynote Address’ in Department of Industry, Science and Tourism, Industry Codes of Conduct — The Way Forward, Proceedings of a Symposium on Codes, p.8.
[8] Australian Direct Marketing Association, Direct Marketing Code of Practice, p.12. Christmas Day, Good Friday and Easter Sunday are spared.
[9] Department of Industry, Science and Tourism, Fair Trading Codes of Conduct — Why have them, how to prepare them, 1998, p.1.
[10] Although it is certainly suggested that ‘community participation in developing a Code can improve its design and effectiveness’ in Fair Trading Codes of Conduct — Why have them, how to prepare them, Note 9, p.2. Community participation does not necessarily involve consumer advocacy organisations. Such was the case for the ADMA Code.
[11] This Brief does not examine those issues. Greenleaf, G., and Waters, N., ‘Direct Marketing Code of Conduct hits ACCC Snag’, Privacy Law and Policy Reporter, June 1999 discusses many of the criticisms.
[12] Goldring and others, above, p.13.
[13] UK Office of Fair Trading, Raising Standards of Consumer Care: Progressing Beyond Codes of Practice, February 1998. Goldring and others suggest that ‘despite some early enthusiasm [codes are] now generally regarded as a dismal failure’ Goldring and others, Ref 4 above, p.12.
[14] Edwards, R., ‘Direct Marketing Code of Practice’ in Department of Industry, Science and Tourism, Industry Codes of Conduct — The Way Forward, Proceedings of a Symposium on Codes at 47.
[15] Financial Services Consumer Policy Centre, The Proposed Direct Marketing Code: The Death of Privacy, A submission to the Australian Competition and Consumer Commission under s.90 of the Trade Practices Act 1974, November 1988, p.14.