Why companies don't just target the rich - because the poor have most of the cashflow

Just because you aren’t rich doesn’t mean you aren’t rich-pickings. Just as in nature, so it is in the marketplace. The biggest of the beasts feed on the smallest morsels. The largest elephants munch on the delicate little leaves of trees, the biggest whales suck up microscopic plankton. One of the great secrets of Britain is though the rich have almost all the wealth, it is ordinary Britons from the moderately well off to the poor who have most of the cashflow. From the banks, insurance companies, and energy companies, with boards adorned by chivalrous knights, noble lords, and right honourable politicians, all the way across to the loan sharks, counterfeit market traders, and doorstepping shysters, they all pursue the cashflow – in the form of your average ripped-off Briton.


According to government statistics, although the poorest 50% have virtually no wealth,  they do 30% of the spending. Although the richest 10% have over 70% of the wealth, they only do 20% of the spending.

It is the biggest companies, with lovable adverts, catchy “da da da daah da daah da da da daah da daah” theme tunes, and high powered compliance-avoidance teams, that are the greatest villains. Those that understand their mutual interest gang up in associations and consortia to see off the regulators.  In it’s release in March 2011, OFGEM stated

Ofgem found that the industry response to its 2008 Probe reforms [relating to issues with the retail energy market] has been patchy, and in some cases poor. We have been disappointed with the reaction of suppliers to many of the Probe reforms and formal investigations have been launched into whether suppliers are complying with their licence obligations.

The big players as a matter of informal policy show their contempt for regulators by simply ignoring them. They have learned that the penalties they face are a fraction of the profits they rake in. This has been learned from the rarefied heights of providing dubious tax-avoidance services to the high rollers down to ripping off single parents putting pound coins into their electricity meters.

“Based upon our analysis of the applicable penalty sections, we conclude that the penalties would be no greater than $14,000 per $100,000 in KPMG fees”… “For example, our average [OPIS] deal would result in KPMG fees of $360,000 with a maximum penalty exposure of only $31,000.

Given as evidence to a US Congressional committee, revealing how fines are a fraction of earnings.

After all, British consumer law states that 50% of consumers are fair game to be ripped off . Not so much a loophole, more of an open gate through which the banks strode arms akimbo with full brass band “da da da daah da daah da da da daah da daah” when they beat the OFT in court over the unfair overdraft charges which make up 30% of their revenues generated from current accounts. Throwing out the OFT’s case, their lordships stated:

“Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplied in exchange, on the other, in so far as these terms are in plain intelligible language.”

This means, in plain intelligible English: so long as the contract says somewhere, regardless of how well hidden, what the scam is, then it doesn’t matter what the scam is. In law it cannot be said to be “unfair”, and is therefore “fair”.

With the law backing up the scammers, it is for the buyer to beware – ‘caveat emptor’ for those with a classical education. The consumer needs to compare and contrast, read the contract, do the maths. But is your average Briton any more able to avoid predatory companies than a leaf is able to avoid the grazing elephant, or the drifting plankton to avoid the whale’s gaping maw? OFGEM’s own analysis shows that they are, on the whole, not.

It is these biases, these weaknesses in the average Briton’s decision making, that drive companies’ marketing. In search of confusing complexity, the energy providers have been growing the number of different deals on offer.

The implication is that companies don’t have to mis-sell – they don’t need to lie to their consumers. They can rely on the consumers making mistakes. In their paper, “Do [electricity retail] consumers switch to the best supplier?”

this paper has rejected an explanation suggesting that firms’ misleading sales activities may have been responsible for the inaccuracy of consumers’ choices.….. Instead, consumers’ poor choices seem more consistent with an explanation of pure decision error, perhaps as a consequence of the particularly complex market environment involving the use of complicated non-linear tariffs.

Energy companies know that they actually don’t have to compete on price, and don’t have to tell fibs – so long as they can keep the consumer confused. OFGEM/IPSOS surveys indicate:

·        60% of consumers never switch.

·        Of those that do switch, up to a third switch to a worse, more expensive, tariff.

·        Of those that do switch, only one in five switch to the best tariff, with the rest switching to less good deals.

The number of deals on offer has nearly doubled between January 2007 and January 2011.

  

Lie-free gotchas range from banking to insurance, to gym membership to mobile phone contracts, to just about everything. Use ‘competition’ as a cover for ‘complexity’. The Bill Monitor service, “invented by mathematicians in Oxford approved by Ofcom”, shows that there are 3,704,859 possible deals for someone wanting a £15 per month mobile phone contract from a UK provider (figure taken in March 2011). 


Banks, as always, are in on the ripping-off with complex formulae for paying interest and 'teaser rates' which offer you a decent interest for the first year followed by something derisory - knowing that billions of investor money will be left earning next to nothing because the saver never gets round to shifting their cash.


The Lloyds Bank Vantage account makes the promise of upto 4% interest on savings of upto £7,000 paid in tiers. If you do the maths, this means by keeping £7,000 continuously in your account you get an effective gross rate of 2.59%. If you have less than £5,000 then your rate drops to 2.02%, less than £3,000 your rate drops again to 1.37%. And 0.1% if you have less than £1,000.


Complexity is the mother of profit - but the profit is not for you.

Could ripping-off confused Britons be related to why Britons don’t save? Is the key issue around poverty and pensions not so much that Britons are profligate, and more that we are ripped-off?

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database