In this third briefing we explore Part 4 of the Bill, which aims to better protect consumers from unfair commercial practices. The focus of this briefing is on the proposed introduction of new measures to:
- Tackle “subscription traps”
- Tackle emerging harms, such as fake online reviews
- Protect consumers who pay into unregulated savings schemes
- Reinforce alternative dispute resolution
In addition to new duties, businesses should be aware of the increased risk in terms of potential fines, with the Bill giving the Competition and Markets Authority (CMA) the power to decide whether there has been a breach of consumer law and to impose substantial fines of up to 10% of global annual turnover.
Tackling “subscription traps”
There's been a notable increase in subscription contracts in recent years. The government reports that estimated consumer spending on subscriptions is between £21 billion and £34 billion a year across multiple sectors. But the Department for Business and Trade estimates that consumers spend £1.6 billion per year on subscriptions they don't want. The Bill includes new provisions with the objective of reducing spending on unwanted subscriptions.
Various legislation has been introduced previously to help consumers make informed decisions before purchasing goods, services or digital content and to enhance their rights in the context of “distance selling” (when the consumer is buying something online or over the telephone, for example). At the time the Consumer Contracts (information, cancellation and additional charges) Regulations 2013 were introduced, many businesses had to revise their sales processes to ensure comprehensive information is provided to consumers prior to the sale being made and to implement longer cooling off periods with specific cancellation rights information being made available.
The Bill builds upon themes from the Consumer Contracts Regulations for subscription contracts. As drafted:
1. Before consumers subscribe, businesses will need to provide clear “pre-contract information”, with prescriptive rules setting out when and how the information must be communicated to consumers.
In more detail:
- As close in time to entering into the contract as is practicable, businesses must provide consumers with “key” information about the charges that will apply after any initial trial period, the amount and frequency of payments, any auto-renewal mechanism and how to exit the contract
- “Full” information that broadly replicates existing pre-contract information requirements under the Consumer Contracts Regulations must be provided before the consumer enters into the contract
2. Before a contract auto-renews, businesses will need to provide clear reminders that, for example, a free or reduced cost offer is due to come to an end.
In more detail:
- The Bill prescribes what information a “reminder notice” must include and when it should be issued (ie, within 3-5 working days before the cancellation date, with an additional reminder notice 10-14 working days before the cancellation date for contracts that renew for 12 months or more
3. Consumers must be allowed to exit a subscription contract in a straightforward, cost-effective and timely way, with the proposed introduction of new cancellation rights during the contract term and renewal cooling-off rights after an auto-renewal has taken effect.
Businesses which provide subscription services outside the exempt sectors (ie, utilities, financial services, certain healthcare and medical contracts and package travel contracts) will need to review their existing terms and processes to ensure that they will be able to minimise the risk of substantial fines and contracts becoming void and unenforceable.
Businesses will also need to take care not to fall foul of the laws on direct marketing when sending their reminder notices though. Data protection laws and the Privacy and Electronic Communications Regulations will not stop businesses from telling consumers important information that they need to know as part of the customer relationship. Those types of messages are often referred to as “service messages”. A reminder notice sent purely for the purpose of complying with the Bill would be a “service message”. However, if the reminder notice also includes elements that are sent for marketing purposes, to promote the business’ products or services, or to promote any special offers, then it will count as a direct marketing communication. Specific rules, usually requiring consent from the consumer, apply to sending direct marketing communications.
Tackling emerging harms
The Bill is intended to replace the Consumer Protection from Unfair Trading Regulations (‘CPRs’), but will restate the general prohibition under the CPRs on traders in all sectors from engaging in unfair commercial practices. The list of banned practices that was included in the CPRs is repeated in Schedule 18 of the Bill.
The Bill proposes granting the Secretary of State the power to amend the list of banned practices. The government’s view is that this will enable the law to be updated swiftly to reflect new business practices and emerging harms to consumers. The government plans to use the power to tackle fake reviews and has said it will be consulting on the detail of commercial practices around ‘fake reviews’ during the passage of the Bill. It's understood this will include consultation on whether the following practices should be banned:
- Commissioning or incentivising any person to write and/or submit a fake consumer review of goods or services
- Hosting consumer reviews without taking “reasonable and proportionate” steps to verify that the reviews are genuine
- Offering to submit, commission or facilitate fake reviews (or advertising to do the same)
It is anticipated, therefore, that businesses will need to ensure they have appropriate procedures in place in relation to their use and verification of online reviews. Given the widespread use and volume of online reviews, for many businesses it would be worth starting to review the adequacy of their procedures.
Protecting consumers paying into unregulated saving schemes
Saving clubs are schemes in which a consumer makes a payment which is held by a business on behalf of the consumer for a period of time/specific purpose. A well-known example is Christmas savings clubs. Such clubs give consumers the opportunity to save up some money but they are unregulated. Consumers therefore risk losing their savings if the trader gets into financial difficulty, which is what happened when the Farepak Christmas Savings Club when into administration in 2006 which resulted in 114,000 consumers losing their savings.
To protect consumers from this risk, the Bill imposes obligations on businesses that operate such schemes to:
- Protect payments via a trust arrangement or insurance
- Provide prescribed information to consumers about such protections
It's worth noting that the need for insurance or a trust arrangement will be an implied term of any consumer savings scheme, and the costs of such must be met by the trader.
The Bill sets out requirements for an appropriate insurance arrangement. For instance, the policy cannot contain any condition that removes liability, in whatever form. For this reason, it might be expected that the costs of running saving clubs will increase. This may reduce the commercial attraction of providing such a service.
Reinforcing Alternative Dispute Resolution (“ADR”)
It's reported that seven out of ten disputes are resolved directly between the consumer and the business. Where this isn’t the case, ADR offers another opportunity for the dispute to be resolved without litigation. ADR includes processes like mediation, arbitration and early neutral evaluation. ADR providers are independent third parties and accreditations and standards can vary. Some sectors already impose mandatory requirements on ADR providers, but currently accreditation for ADR providers involved in consumer disputes is voluntary.
To encourage ADR and maximise consumer confidence in the process, the Bill proposes to introduce limitations on who can provide ADR services, and the level of accreditation needed to do so.
Under the Bill as currently drafted, ADR providers will only able to work in relation to a consumer contract dispute if they are:
- One of the twelve listed ‘exempt providers’ (for example The Consumer Council for Water, The Financial Ombudsman)
- An ‘accredited provider’ – the Secretary of State will determine the procedure to be followed for applications for accreditation
- Acting under special ADR arrangements that are made by an exempt or accredited provider
Accreditations can be revoked on notice, or enforcement notices can be provided to ADR providers if the provider breaches their obligations.
The government also propose new restrictions to ADR fees. The providers operating under special arrangements cannot charge the consumer, and even the exempt and accredited ADR providers must have their fees approved by the Secretary of State and publish them in a way that is accessible to potential consumers.
Further details of the accreditation procedure are currently awaited. Until then it is difficult to know how far-reaching the effects of this change will be.
What's next?
The Bill is currently at committee stage in the House of Commons and will also need to pass through the House of Lords, so is likely to become law next year. Secondary legislation may then well follow, particularly in relation to fake online reviews.