Can the Regulators Remedy Rising Costs?

By Muhammad Ibrahim, Intern

Following the Bank of England’s decision to raise interest rates to 5% to curb inflation, Chancellor Jeremy Hunt has been spurred into action, asking UK regulators to investigate whether firms are exploiting price rises and fuelling inflation.

Despite Government pledges to reduce inflation, inflation has remained at 8.7%, prompting the Bank of England to raise interest rates to the highest they’ve been since 2008; with investors betting that interest rates will continue to climb to 6.5% by next March. However, with ONS figures showing that food and non-alcoholic beverage prices have risen by 18.4% in the last year, the Government and others are suggesting that this is “profit-led inflation”.

The Chancellor has suggested that companies, in order to restore their profit margins, are raising prices. This perception has been further reinforced by Prime Minister Rishi Sunak’s warning to retailers to ensure they have “fair and responsible” pricing. Companies’ desire to drive up prices has been attributed by some to an attempt to claw back profits following an underwhelming profit rebound post-covid. The largest supermarket grocer in the UK by market share, reported £1.24bn of profits for the 2022/23 financial year, compared to £1.923bn for the pre-pandemic 2019/20 year. Such assertions are evidenced by figures such as the widely reported climb in the retail mark-up for milk earlier this year, which hit 44p compared to the usual 25p mark. The allegations of food profiteering were, however, recently denied by representatives of the industry at the Business and Trade Select Committee.

Hunt’s action plan involved meeting with the five major regulators: the CMA, Ofgem, Ofwat, FCA and Ofcom last week to discuss the actions they could take. Following the meeting, and amongst other measures:

·      The FCA agreed to require the largest banks and building societies to explain the “pace and extent” of their pass through of interest rates, and how they are encouraging savers to switch to high interest rate products.

·      The CMA agreed to bring forward their grocery sector competition and unit pricing update.

·      Ofcom agreed to push suppliers to offer social tariffs and wave fees for customers who would like to switch providers to access a social tariff.

·      Ofwat agreed to introduce clear and binding license conditions for every water company on how to treat their customers, and vulnerable customers in particular.

·      Ofgem agreed to ensure suppliers pass on falling prices onto consumers, reflecting the new lower price cap which came in on 1 July. According to government figures, the new lower cap should see the typical annual household energy bill reduce by £426. Furthermore, Ofgem have agreed to scrutinise suppliers to retain new profit to meet new capital requirements, rather than paying out dividends.

The CMA also set out their recommendations to the government on fuel price competition. Having found that between 2019-22, average annual supermarket margins increased by 6 pence per litre, the recommendations involve a “fuel finder” scheme and a “fuel monitor” oversight body. The fuel finder scheme would bring the fuel market in line with other sectors where retailers’ price information is readily available online, giving drivers the data necessary to drive competition at the fuel pump. It is now in the government’s court to implement this, with the report suggesting that the Data Protection and Digital Information Bill as the most appropriate vehicle for implementation.

Price caps, such as those seen in France, are seen by many in the Conservative party as out of the question purely on ideological grounds and are warned against by the CMA in the aforementioned Road Fuel Market Study. Nonetheless, the measures, at face value, beg the question of why isn’t Hunt doing more, and why must he consult and pressure rather than command the regulators? This is because of the depoliticization of the regulators. Many regulators are children of the “Thatcher-Lawson Agenda” and were advanced under New Labour, seeking to depoliticise regulatory matters and “leave them to the experts”. When former UK Prime Minister Gordon Brown made the Bank of England independent, he referred to it as an ‘act of prudence’, a triumph of technocratic decision making over short term electoralism. However, as these recent events show, in the face of crisis, the government seem to be seeking more political influence over the supposedly independent technocrats to gain some form of relief.

The regulators’ perceived ineffectiveness has drawn significant criticism. One argument is that their statutory provisions are inadequate due, in part, to the permissive language and informal regulatory techniques used. For example, Ofgem’s capacity for regulatory techniques in the electricity act 1989 is defined as ‘the manner in which [Ofgem]… considers is best calculated’. Furthermore, when stating the duties of Ofgem, it states Ofgem must “have regard to” principles of proportionality, transparency, accountability and consistency. This lack of clear and authoritative power has led individuals such as Andrew Tyrie, the former chair of the post-2008 Commons Treasury Committee, to call for regulators to be given the clear and proper statutory powers they need.

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