Cicero Policy Briefer

Issue 17, October 2007

Price comparison sites put under the microscope

By John Rowland

Journalist Martin Lewis is a self-styled inciter of ‘consumer revenge’. His website, moneysavingexpert.com, sends a weekly email circular to 1.5 million thrifty subscribers. Each Wednesday brings news of wheezes that consumers can employ to make or save a few pounds—often by exploiting loopholes in terms and conditions, or by using financial products in ways that banks did not intend. Lewis believes this is fair game: “Corporate Britain isn't the enemy,” he says, “but it is the opposition.” He goes on: “A company's job is to make money, nothing wrong with that. A consumer's job is to keep as much of their cash for themselves as possible. The problem is that companies spend billions on marketing, advertising and teaching their staff to sell—yet consumers get no buyers' training.”

One of the more interesting wheezes publicised by Lewis is known as the ‘stooze’. It’s not for everyone: it requires a good credit history and iron discipline. Stoozers, as they like to call themselves, apply for several credit cards with an introductory 0% rate for all purchases. They then use the cards for all their everyday purchases until they have reached the limit in the introductory period. They put the cash they would otherwise have used on those purchases in to a high interest savings account. Finally, they pay the cards off in full from those savings just before the offer expires and pocket the interest!

Stoozers are savvy consumers, and key weapons in their armoury are price comparison websites. These websites allow stoozers to quickly track down the most attractive credit cards (and often the highest interest savings accounts as well). This is a clear example of how the internet can empower the consumer. But they are a rare breed amongst a population that has low levels of financial capability and is not especially web savvy. Nevertheless, ordinary people are turning to these websites in huge numbers to find a deal—according to a YouGov poll, 45 per cent of people have used a comparison site to help them make a financial decision in the last year.

So how does the non-stoozing public get on with comparison websites? Are they well served by this rapidly growing market—or are they being ripped off? It is against this backdrop that the Resolution Foundation has published a timely report on the market. What emerges is a mixed picture. The websites perform an important role in informing consumer choice and perform well in terms of accuracy of pricing and product information (except for mortgages, where performance was significantly lower). They have also taken on board previous criticisms and made changes.

However, there are some legitimate concerns, which will have to be met head-on if the sector is to retain the trust of consumers. For example, focus group work revealed that some less web-savvy consumers felt they had been trapped into making choices they had not intended to make, or had not even been able to access the comparative tables because the site had steered the consumer towards a preferred provider. This should be taken seriously, as it could be the cause of significant consumer detriment if widespread.

Moreover, the research also showed that many sites fail to explain the commercial relationships they have with product providers. The authors argue this risks misleading consumers who might mistake promotional features such as ‘best buys’ and ‘editor’s choices’ as being the best value products on the market. At a time when the investments industry is soul-searching over the future, the fees and commissions it pays intermediaries mean it may not be too long before the price comparison sites—though in a different marketplace - will be under pressure to disclose fully how they are remunerated.

To head off some of these concerns, Clive Cowdery, chairman of the Foundation, has called for a voluntary code of practice to tackle these issues without the need for full regulatory intervention. Handily, the Resolution Foundation has put up a strawman, challenging the industry to take the agenda forward. Representatives of some of the firms that were present at the launch of the research pledged to enter talks. And with that, price comparison sites took their first, tentative steps towards self-regulation.

John Rowland can be contacted on +44 (0)20 7665 9539 or click here to email.

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