CFA News

CFAnews Update – December 15, 2016

Digital Communications Consumers Pay $60 Billion a Year in Overcharges

The typical American household is overcharged $540 per year for digital communications services, according to a new CFA report describing a “tight oligopoly on steroids” in the digital communications market.

The report, Overcharged and Underserved: How a Tight Oligopoly on Steroids Undermines Competition and Harms Consumers in Digital Communications Markets, demonstrates that four firms (ATT, Verizon, Comcast and Charter) dominate all four major digital communications product markets (wireless, broadband internet access, video, and business data services). This concentration of market power leads to abuse of consumers through overcharges totaling almost $60 billion per year.

“The harms inflicted by the tight oligopoly on steroids are not limited to its anticompetitive and anti-consumer impact,” CFA Director of Research Mark Cooper noted. “We also show that it undermines important social goals like universal service and protection of consumer privacy online.”

The concentration of market power in the digital communications market and the attendant abuses are magnified by several factors, according to the report. In the case of market structures, the same four firms which dominate all the markets have failed to compete with one another in the core franchises’ service territories where they were granted monopolies prior to the Telecommunications Act of 1996. Alongside rapidly declining costs, which allow for surpluses to be captured as excess profits, there is a significant degree of geographic separation, technological specialization, and product segmentation which enables the top four firms to dampen head-to-head competition.

“Stockholders love the astronomical rate of return, but consumers hate it,” said Cooper, “which is reflected in the very low ratings that these products get in consumer satisfaction surveys.”

Consumers do not have much leeway to exercise choice in these uncompetitive markets, Cooper noted. In the few markets where there is some degree of choice, switching suppliers is often difficult and costly for consumers. Additionally, digital communications services are frequently bundled, adding another layer of complexity for consumers seeking to exercise choice in the market.

Cooper noted that the proposed ATT/Time Warner merger has brought all of the negative aspects of the “tight oligopoly on steroids” to the forefront. In many respects, ATT is the dominant player in the tight oligopoly, and allowing it to acquire a major content producer would give it even stronger incentives and ability to leverage its market power to harm consumers and competition, he said.

There is a broad consensus that the ATT merger would harm consumers and the economy, and antitrust and regulatory authorities have in the past half dozen years built up the analytical and legal basis for rejecting such a merger, he added. While rejecting the merger would not fix the bigger problem in the digital communications markets, it would be a step in the right direction.


DOL Successfully Defends Fiduciary Rule in Court

In an important win for retirement savers, the Department of Labor (DOL) has won the first two legal challenges to its new conflict of interest rule. The rule, which is due to be implemented in April, would require all financial professionals to act in their customers’ best interests when providing retirement investment advice and would require firms to eliminate practices that encourage and reward harmful advice.

In the first decision, issued on November 4, 2016, a judge in the United States District Court for the District of Columbia ruled against the National Association of Fixed Annuities (NAFA), a trade association that represents companies that manufacture and sell fixed annuities.  In the second decision, issued on November 28, 2016, a judge in the United States District of Kansas ruled against the Market Synergy Group, a marketer and distributor of fixed indexed annuities.

In both cases, the challengers made broadly similar claims, including that the DOL: exceeded its authority in regulating fixed indexed annuities; didn’t conduct an adequate economic analysis proving the case for its rulemaking, particularly with regard to how fixed indexed annuities were treated; and didn’t provide adequate notice relating to a change in treatment of fixed indexed annuities between the proposed and the final rule.

CFA, along with Better Markets and Americans for Financial Reform, submitted amicus (friend of the court) briefs in support of the DOL in both cases. The briefs detailed why fixed indexed annuities can be particularly harmful products for retirement savers and why, given the perverse conflicts of interest associated with these products, they would almost certainly fail the best interest standard applied to retirement investment advice under the rule.

Both courts were unpersuaded by any of the industry opponents’ claims and arguments. The courts’ rulings explained in detail why the DOL acted well within its authority, why the DOL’s undertook an exhaustive and thorough Regulatory Impact Analysis that supported the DOL’s conclusions, and how the DOL provided a detailed explanation for its regulatory actions. The courts also concluded that the DOL did in fact provide adequate notice of the changes it made to the final rule, including by explicitly asking commenters on what the appropriate treatment of annuities under the rule should be. Both courts also rejected the industry opponents’ claims that the rule is “unworkable.”

“These rulings confirm what we’ve known all along – that the DOL was on solid ground in promulgating this rule,” said CFA Financial Services Counsel Micah Hauptman.

However, the litigation is not over yet. NAFA has already appealed the district court’s decision and other cases challenging the conflict of interest rule are pending in Texas and Minnesota.

Meanwhile, some rule opponents, including the Chamber of Commerce, are reportedly working with the Trump transition team in an effort to get the rule over-turned in the new Administration, and House Republicans have announced plans to overturn the rule through legislation. “While we know the rule will come under attack, we believe it is still possible that the rule will survive these attacks,” said CFA Director of Investor Protection Barbara Roper. “The rule has passed its effective date, so many of the tools for overturning pending regulations will not be available. And we have strong champions who are prepared to defend the rule in Congress,” she added.

“Furthermore,” Roper added, “the rule directly pits the interests of average working Americans against the most powerful special interests. At stake is whether we will operate our retirement system to benefit workers and retirees or to pad the profits of powerful Wall Street firms. If President-elect Trump was sincere when he said he wants to make Washington work for the ‘forgotten man,’ the rule should be safe.”


CAFE Standards Protect the “Forgotten Americans”

The Environmental Protection Agency (EPA) has decided to maintain current Corporate Average Fuel Economy (CAFE) standards, a decision that CFA believes will go a long way to protect both consumer pocketbooks and U.S. car company competitiveness. These CAFE standards have been in place since 2012 and are supported by 13 of the 15 major automakers.

According to CFA’ auto expert and Director of Public Affairs, Jack Gillis, “The biggest beneficiaries of the current fuel-efficiency standards are the ‘forgotten Americans,’” referring to the average working citizens President-elect Trump said should be the primary beneficiaries of federal policies. “The average household spends about $1,500 a year on gasoline. By maintaining these standards, the hard working, economically struggling, American households will be the beneficiaries,” Gillis added.

According to a series of consumer surveys conducted since 2011, the vast majority of Americans are in favor of fuel-efficient vehicles. The latest study, which was released in March 2016, shows that 81 percent of consumers support federal fuel economy standards, in spite of current low gas prices.

“What is particularly remarkable about the standards is that they pay for themselves in the very first month of car ownership,” said CFA Director of Research Dr. Mark Cooper.  “The cost of the technology needed to meet the standard is outweighed by the pocketbook savings in gasoline costs even at today’s low gas prices.  As the cost of gas goes up, these savings will multiply.”


USDA Urged to Take Stronger Action on Empty Labeling Claims on Meat and Poultry

CFA submitted comments earlier this month to the USDA Food Safety and Inspection Service (FSIS), urging the agency to protect consumers from misleading labeling claims concerning how animals are raised. FSIS is updating the agency’s compliance guideline on documentation needed to support animal-raising claims on product labels. The guideline clarifies the requirements that producers must meet when making claims such as “grass fed” and “no antibiotics.”

“FSIS has made some important efforts to ensure that consumers receive meaningful and accurate information on product labels with respect to claims such as ‘grass fed,’” explained CFA Director of Food Policy Thomas Gremillion, “however, the guideline will continue to allow vague claims, such as ‘Humanely Raised’ or ‘Sustainably Farmed,’ without providing consumers with the information to evaluate whether those claims are meaningful.” CFA’s comments note that FSIS has an important role to play in empowering each American consumer to support the practices that most reflect his or her values. The comments recommend that the agency steer producers toward third-party certification and give consumers access to documentation of claims in a searchable online database.

CFA also joined a separate letter submitted by members of the Keep Antibiotics Working Coalition (KAW), which asks the agency to implement stricter standards regarding antibiotics claims on meat and poultry product labels. CFA and other KAW members urged FSIS to prohibit the use of labeling terms without a commonly recognized meaning, such as “raised without subtherapeutic antibiotics.” The groups also urged the agency to make available a list of approved labeling claims, along with the information submitted to FSIS in support of those claims, in a searchable online database that is open to the public.