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Competition between providers of Alternative Dispute Resolution. Can it be bad for consumers?

 

When consumers complain to a company but cannot reach a resolution, they are sometimes able to escalate their complaint to an independent third party to get things sorted, most often free of charge. This is called Alternative Dispute Resolution (ADR), and it is already mandatory for firms to be signed up to an ADR scheme in some regulated sectors e.g. financial services, energy and rail.  

 

In its recent consultation on reforming competition and consumer policy, the government has a range of proposals around consumer Alternative Dispute Resolution (ADR), including making it mandatory for businesses in more sectors to participate in an ADR scheme.

 

This certainly sounds good for consumers, but it does raise questions around the best way to deliver ADR in a way that leads to fair outcomes for businesses and consumers, without coming at great cost. Any economist would tell you that strong and effective competition is the best way to drive down costs and improve service, but can this be true of ADR services too?

 

 

 

A market for alternative dispute resolution

 

Often, there are multiple ADR schemes or providers operating in a market, and businesses are able to choose which provider they most prefer. This creates a market for ADR services where different providers compete to get businesses to use their services. 

 

In this scenario however, competition will be focused on delivering favourable outcomes for the businesses. Consumers must go with the provider chosen by the firm, and as such ADR providers do not have an incentive to win consumers over.

 

This is likely to be particularly problematic for a service like ADR because, by definition, the interests of the consumer and the firm are in dispute (after all, that’s what the D stands for). 

 

Ultimately, firms’ incentives with ADR provision are to minimise their costs. In the case of consumer disputes and ADR, these costs comprise two parts:

 

  • the total amount of redress paid to consumers in settled disputes; and 

  • the handling cost per case

 

That is, all else equal, a firm will prefer an ADR scheme which is cheaper (more efficient) and finds more frequently in their favour (biased). 

 

Clearly, competition to provide an ADR service which is biased towards firms would be bad for consumers. But with firms having freedom to choose which provider they use, there is every incentive for them to shop around to find the one most likely to give them an easy ride.

 

Competition on efficiency could lead to benefits for both consumers and firms. For example if case handling costs are lower for firms then they may be able to pass these savings onto consumers. A more efficient service might also lead to shorter case management times as the ADR provider finds more efficient ways to manage its caseload. 

 

However, in some circumstances competition for lower cost could also benefit the firm at the consumer’s expense. If the ADR provider tries to offer a lower cost service to firms for instance by cutting corners, lowering standards of customer service or hiring less experienced staff then this will not be in consumers’ best interests.

 

 

 

An ideal system is one that incentivises efficiency but without incentivising bias

 

Fundamentally ADR schemes should be seeking to find a fair outcome for both the consumer and the firm, and ideally should be doing this at a reasonable cost to both parties. An ideal system therefore preserves genuine incentives to run an efficient service, but prevents any competition on bias. 

 

Which? believes the simplest way to avoid such incentives is to have a single provider of ADR in an industry, appointed by a competitive process run by a competent authority representing both the consumer and business interest. Such a process could be run by a sector regulator, the Competition and Markets Authority or by the government itself. By appointing a provider through a competitive process, there will be scrutiny of the service provided to consumers while maintaining incentives for the appointed provider to run an efficient service.

 

You can read more about our positions on ADR in:

 

Our report Are Alternative Dispute Resolution schemes working for consumers?

 

Our response to the BEIS consultation on reforming competition and consumer policy

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