Background
The Office of Fair Trading (OFT) remains as a Non-Governmental Organization(NGO) whose mandate lies that protecting consumers from business malpractices. OFT is responsible from cushioning consumers against anti-competitive or illicit business behavior (Office of Fair Trading 2012). The OFT extracts gets its powers from The Enterprise Act 2002 (Becket 2012). In addition, the OFT works concurrently with around 250 bodies to censure consumer rights are protected. In relation to The Competition Act 1998, two prohibitions can be separated, namely Chapter 1, which is concerned with discouraging any co-ordinated actions that exists between firms that subsequently leads to an anti-competitive business environment, and Chapter 2, which refers to a given firms’ abuse position as a dominant figure (Competition commission 2012).
The case
The OFT referred the UK private motor insurance market for further investigations by the Competition Commission (CC) (Competition commission 2012). After doing investigations, the OFT became concerned about the private motor insurance market not working well for the given motorists (FitzGerald 2012). The UK motor insurance market in 2010 was estimated at 9.4 billion pounds. In September 2011, the In September 2011, the OFT decided to launch a call for evidence regarding the UK private motor insurance market following reports of having significantly risen premiums. The OFT wanted to assess the reasons behind the increase. The OFT has powers of referring markets to CC for further investigations in case of suspecting any market feature that may be preventing, restricting or distorting competition (Farrow 2012)
The OFT launched a market study on the possibility of making or not making a market investigation reference (MIR) through gathering evidence. A market study report became published in 2012 May and the OFT further invited submissions on the given proposed MIR. 28 parties submitted responses and included government, industry participants, consumers and representative groups (Insurance Age 2012). The OFT on having reasonable grounds on suspecting market features that prevented, restricted or distorted competition in the UK, referred UK motor insurance market to CC for further investigations (Insurance Age 2012).
The findings
The OFT discovered the following findings after investigations. They discovered that after following an accident, the insurers of the not-at-fault drivers were found to be adding an average 560 pounds to the cost of replacing a car (Susan 2012). This was done over a given typical hire period. In addition, the OFT discovered payment of referral fees, 400 pounds to credit hire organizations, which were the business which provided replacement vehicles to accidents involved drivers (Easier Fiance 2012). Furthermore, a typical 155 pounds was also received as referral fees from paint suppliers, repairers, parts suppliers, resulting in the money clawing back resulting in higher repair charges (Insurance Age 2012).
Business
Referral amount in pounds
Credit hire organizations
Paint suppliers
Parts suppliers
The OFT further discovered that the credit hire agreements ran for longer periods than the usual direct hire arrangements (Easier Fiance 2012). The delay in some cases resulted from the credit hire companies deliberately delaying repairs. It was concluded that all these costs were passed on to the at-fault driver in the insurance company, thereby reflecting as increased care insurance premiums (Massey 2012).
The outcome
The OFT after getting substantial evidence forwarded the matter to CC for further investigations as evidence of market failure exists (Insurance Age 2012). The outcome of the case could result in several outcomes. When the CC conducts its investigations and finds the motor insurance company guilty of causing market failure, it can take further actions (Farrow 2012). CC can advise the UK government or some other regulatory bodies to take further actions or the CC can take action itself. Remedies to ensure such a market failure is corrected can be implemented (Easier Fiance 2012). This include reducing market barriers through increasing know how in the market, by increasing accessibility in terms of planning permission or the given CC might advice on a certain behavior to be taken to the market, for instance, displaying noticeable prices so as to minimize on overpricing the premiums. Referral fees can also be cut down or eliminated so as to reduce costs that fall back to cause high premiums in the private motor insurance (Eleftheriou-Smith 2012).
Comments
The market failure in this case appears to be due to lack of information on the consumers and the market structure (Eleftheriou-Smith 2012). The market structure can be blamed due to a number of firms jointly collaborating in causing the high premiums in the motor insurance due to high referral costs (McGrath 2012). Consumers were also not informed of the reason for the high premiums thereby contributing to the market failure as they were not given a choice but to pay once they have entered an agreement with the motor insurance market. The OFT gathered enough evidence and that is why they referred the motor insurance market for further investigations by the CC.
References
Becket McGrath, T. R., 2012, May, Edwards Wildman Client Advisory: OFT provisionally
decides to refer private motor insurance market to Competition Commission, Retrieved November 3, 2012, from Edwards Wildman: http://www.edwardswildman.com/newsstand/detail.aspx?news=2905
Eleftheriou-Smith, L.-M., 2012, September 28, OFT sends car insurance problem to
Competition Commission, Retrieved November 2, 2012, from Marketing: http://www.marketingmagazine.co.uk/sectors/autos/article/1152424/OFT-sends-car-insurance-problem-Competition-Commission/
Farrow, P., 2012, May 31, OFT refers 'dysfunctional' car insurers to Competition Commission,
Retrieved November 2, 2012, from The Telegraph: http://www.telegraph.co.uk/finance/personalfinance/insurance/motorinsurance/9301966/OFT-refers-dysfunctional-car-insurers-to-Competition-Commission.html
FitzGerald, J. O., 2012, October 2, OFT refers private motor insurance market to Competition
Commission, Retrieved November 3, 2012, from Lexocology: http://www.lexology.com/library/detail.aspx?g=ab52a4d2-87d9-4dcb-9f45-7552d097acc1
Massey, R., 2012, September 28, Rip-off motor insurance firms face competition watchdogs
probe over £225million racket, Retrieved November 3, 2012, from Daily Mail: http://www.dailymail.co.uk/news/article-2209856/Rip-motor-insurance-firms-ramp-cost-policies-merry-round-referral-fees-face-investigation-competition-watchdogs.html
McGrath, B., 2012, July 12, OFT Provisionally Decides To Refer Private Motor Insurance
Market to Competition Commission, Retrieved November 3, 2012, from Martndale.com: http://www.martindale.com/insurance-law/article_Edwards-Wildman-Palmer-LLP_1524002.htm
Morrison, C., 2012, June 1, Fitch hails OFT decision to refer motor market to Competition,
Retrieved November 3, 2012, from Insurance Age: http://www.insuranceage.co.uk/insurance-age/news/2181616/fitch-hails-oft-decision-refer-motor-market-competition-commission s
OFT provisionally decides to refer private motor insurance market to Competition Commission.
(2012, May 31). Retrieved November 3, 2012, from Office of Fair Trading: http://www.oft.gov.uk/news-and-updates/press/2012/44-12
OFT refers private motor insurance market to CC. (2012, October 1). Retrieved November 3,
2012, from Competition commission: http://www.competition-commission.org.uk/media-centre/latest-news/2012/oct/oft-refers-private-motor-insurance-market-to-cc
OFT refers private motor insurance market to competition commission. (2012, September 28).
Retrieved November 3, 2012, from Office of Fair Trading: http://www.oft.gov.uk/news-and-updates/press/2012/85-12
OFT refers private motor insurance market to Competition Commission. (2012, September 28).
Retrieved November 3, 2012, from Easier Finance: http://www.easier.com/107649-oft-refers-private-motor-insurance-market-competition-commission.html
Susan Hankey, C. H. (2012, October 2). Private insurance market referred by OFT to
Competition Commission. Retrieved November 3, 2012, from Lexocology: http://www.lexology.com/library/detail.aspx?g=c4f3c35e-3527-4a01-bdf4-f8bbd8c0a893
