Business Regulation and Consumer Protection:

Feasibility of Requiring Financial Assurances for the Recall or Destruction of Unsafe Consumer Products

GAO-09-512R: Published: Apr 22, 2009. Publicly Released: Apr 22, 2009.

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In 2008, the Consumer Product Safety Commission (CPSC) announced that it had obtained the voluntary recall of 563 unsafe or potentially unsafe products by the companies that manufactured, imported, distributed, or sold the products--the largest number for the agency in the past 10 years. In the prior year, CPSC announced 472 recalls--which was also an increase from the previous year and included some high-profile recalls of lead-tainted toys--leading some consumer groups to call 2007 the "year of the recall." Consumer products can be recalled for a variety of reasons, including violations of safety standards, incidents of injuries that can occur from the design or manufacture of a product, or other conditions that present an imminent or substantial hazard to consumers. Since 1979 there have been few instances in which CPSC could not obtain cooperation from manufacturers or importers to conduct recalls, either because these companies did not have the financial resources to conduct a recall or because the companies refused to assume responsibility for a recall. This included troubled recalls involving more than 1.5 million imported cribs associated with multiple deaths of children. Another recall of imported tires, conducted under the National Highway Traffic Safety Administration, was the responsibility of a small importer that did not have the resources to conduct an effective recall. These, and similar events, have raised concerns from consumer groups and others about the ability of businesses to conduct effective recalls and of the federal government to ensure consumer safety. In addition to these concerns, CPSC reports that more than two-thirds of recalled products in 2008 were imported. The proportion of consumer goods sold in the United States that are manufactured abroad has shifted significantly since CPSC was created in the 1970s. From 1997 to 2007, for example, the amount of imported consumer goods sold in the U.S. has more than tripled--an increase of 217 percent--according to CPSC. In response to these issues, Congress in 2008 passed the Consumer Product Safety Improvement Act (CPSIA), which greatly expanded CPSC's authorities over recalls and its ability to ensure the safety of products under its jurisdiction, including imported goods. Our objectives were to describe (1) the potential policy options for assuring CPSC that companies have adequate resources for the recall or destruction of consumer products, (2) the factors affecting implementation of these options, and (3) the potential consequences of implementing a financial assurance requirement, as one policy option, including potential benefits and disadvantages.

We identified a variety of approaches to assure the federal government that companies have the financial resources to recall or destroy unsafe products. Many of these approaches took the form of financial instruments that companies could be required to obtain in amounts established by statute or regulation to cover, for example, the projected costs of a recall. These financial instruments included an escrow account, insurance policy, or surety bond to guarantee a company's financial stability or ability to perform a recall, as well as line of credit guaranties, guaranties of personal or corporate assets, or liens on personal or corporate assets. Alternatively, many roundtable participants supported providing CPSC with funds to assist companies in conducting a recall, citing the approach as a potentially more efficient and suitable approach for industry and the federal government given the low incidence of troubled recalls in CPSC's history. Nonfinancial options suggested by several sources we interviewed include requiring companies to document their strategies for ensuring product safety or conducting product recalls. Another option is to make no change, according to some roundtable participants and others we interviewed, citing the low number of inadequately funded recalls under CPSC and the ability of companies to generally fund recalls. They said CPSC should use its existing authorities to compel companies to conduct effective product recalls. For example, some participants said CPSC should strengthen efforts to obtain cooperation from companies throughout the supply chain, as well as act more quickly on its mandatory recall authority by filing an administrative complaint when a consumer product company says it has no resources to conduct a recall. Several roundtable participants and those we interviewed identified challenges that could complicate efforts to implement financial assurance options involving the use of financial instruments or a CPSC fund. Although they suggested various strategies for mitigating some of these challenges, significant limitations exist in using the proposed options as financial assurance for the recall and destruction of unsafe products. Representatives of consumer product companies said many companies--especially small businesses--would be unable to afford the cost of posting assurance, especially during difficult economic times and if the required amount of assurance were high. Those representing financial services firms asserted that many of the proposed financial instruments are not currently designed for consumer product recalls and that a firm's willingness to underwrite consumer product recalls would depend on a variety of factors, including the risk profile of companies seeking coverage and the amount of coverage sought. Enforcement of a financial assurance requirement presents challenges in that CPSC does not have the resources or experience to administer and enforce this type of requirement. Furthermore, there is no program or process that tracks all domestically produced consumer goods or companies, making it difficult to identify companies that may need to comply with a requirement. The proposed financial instruments also present challenges because firms may not make them available to consumer product companies that are financially unstable. In addition, it is unclear whether a requirement to post assurance using any of the financial instruments we studied would fully address cases involving companies that refused to assume responsibility for the recall of products produced by manufacturers it purchased, or recalls companies find to be financially catastrophic. We also note that a requirement targeted to the destruction or recall of goods under CPSC's jurisdiction would not address some of the troubled recalls that have occurred involving other industries such as food, drugs, and automotive parts.

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