Leading article: A successful free market needs a watchdog that will show its teeth

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The Independent Online

A paradox of the free market is that it needs a strong state authority to make it free. That is why the phrase laissez-faire fell into disuse: supporters of liberal economics, such as this newspaper, realise that simply allowing capitalists to get on with it leads to price fixing, cartels and abuses of market power. Hence the importance of the Office of Fair Trading; and hence our welcome for the evidence this week of its more aggressive posture in promoting the interests of the consumer.

The OFT is the first line of defence against anti-competitive practice. The way the organisation goes about its task makes a huge practical difference, not just to the interests of defined groups of consumers in the short term, but also to the long-term interest of society as a whole. If it is responsive, quick and robust in its approach, large companies will be more likely to behave in ways that put consumer interests first. If, on the other hand, the OFT tends towards a laissez-faire attitude, we all suffer.

That is why we welcome yesterday's decision by the OFT to go after the supermarkets and tobacco companies over cigarette pricing; just as we welcomed Thursday's court ruling for the OFT over bank charges. The OFT's defamatory errors in accusing Morrisons of fixing the prices of milk products, for which it had to pay £100,000 to charity on Wednesday, was an embarrassment. But it should not be allowed to overshadow the fact that the same OFT probe last year uncovered that Sainsbury's and Asda did indeed fix milk prices.

The opening of hostilities over cigarette prices yesterday is not, therefore, of interest only to smokers. As John Fingleton, the OFT's chief executive said, "It is a fundamental principle that pricing decisions should be made independently." If companies get away with co-ordinating (rather than fixing – there is a legal distinction) the prices of cigarettes, which is what the OFT alleges occurred between 2000 and 2003, they will try it on other products.

Equally, the OFT's victory in the High Court over bank charges is not of interest only to those customers that are often overdrawn by mistake. Some have reacted to our campaign against unfair bank charges by suggesting that the result of our success would be to cut charges for disorganised and imprudent customers and to raise them for prudent and responsible ones. Yet this is to miss the point. By charging extortionate fees for overdraft breaches, the banks have been, quite simply, breaking the law.

There is evidence that the banks use unauthorised overdraft charges as a £3.5bn-a-year free lunch. If the banks really want to discourage customers from taking out unauthorised overdrafts, they can refuse to allow them at all. Instead, they rely on inertia, embarrassment and the cost in time of switching accounts to generate an easy stream of revenue.

The point is that if bank charges were more transparent – and that includes the interest earned while money takes up to four working days to clear – everyone would benefit. If costs and prices are more closely aligned, everyone's behaviour in a market tends towards greater efficiency – the banks included.

For all these reasons, we welcome this week's evidence that Mr Fingleton, halfway through his first term at the helm of the OFT, is moving the organisation towards the American model of more aggressive championing of consumer rights. And corporations that might be minded to curse Mr Fingleton's zealousness should bear in mind that a transparent and genuinely competitive free market is not just good for consumers – it is ultimately good for business too.