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The US Federal Trade Commission (FTC) is proposing a rule change to make it easier for consumers to cancel recurring subscriptions.
The agency has released a proposed rule to strengthen consumer protections in certain subscription-based services and consolidate the existing patchwork of laws and regulations.
The new rule takes aim at a certain type of subscription-based service called negative option plans, where consumers’ silence or lack of affirmative action means they agreed to receive a service.
Automatic renewals and free trial conversion offers are among those that fall into this category.
Subscription-based services skyrocket during the pandemic, accentuating a trend that was already emerging. It is not just streaming services that have boomed. Everything from food and drink, cosmetics, even socks and more can now be purchased for a regular fee.
In 2021, UBS predicted the global “subscription economy” to expand into a $1.5trn market by 2025, while Statista estimated that Americans had on average 12 paid subscriptions per consumer in 2020.
As many of these automatically renewing services only cost a few dollars per month, consumers can easily lose track of how many subscriptions they have and how much is being withdrawn from their accounts.
Last May, market research firm C+R Research found that 42 percent of American consumers had forgotten about a subscription that they were still being charged for and an average consumer spends $133 more on subscriptions than what they estimated.
The way the subscription economy works has changed a lot since the FTC adopted its negative option rule in 1973. The agency says the rule needs to be amended to strengthen consumer protections around company disclosures, consumer consent and cancellation.
At present, the negative option rule applies only to prenotification plans, an old concept in which sellers ship merchandise such as books, CDs or tapes automatically to their subscribers for a fee unless the subscriber expressly opts out within a set time.
The existing rule, however, does not apply to newer methods, such as automatic renewals, free trial conversion offers and continuity plans, which the FTC now seeks to address.
If the rule becomes final, it would mean that these subscription-based services must disclose important information to customers about their recurring payments before billing them.
This information must include whether the consumer’s payments will be recurring, the deadline for stopping charges, the date and the amount of the charges and information about how consumers can cancel.
It would also require businesses to make it at least as easy to cancel a subscription as it was to start it. For example, if the consumers can sign up online, they must be able to cancel on the same website, in the same number of steps.
The proposed rule would allow sellers to pitch additional offers or modifications when a consumer tries to cancel their enrollment. But before making such pitches, sellers must first ask consumers whether they want to hear them and if the answer is no, they must immediately cancel the subscription.
“Some businesses too often trick consumers into paying for subscriptions they no longer want or didn’t sign up for in the first place,” said FTC chair Lina Khan.
“The proposal would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties,” she added.
Addressing a patchwork of rules
With the proposal, the FTC aims to harmonise a patchwork of laws and regulations and bring the relevant consumer protection rules under one framework.
Currently, subscription-based services are subject to a number of federal and state laws, including the agency's own statute, the FTC Act, as well as the Electronic Fund Transfer Act (EFTA), the Restore Online Shoppers’ Confidence Act (ROSCA) and others.
Except for ROSCA, these laws are not tailored to subscription-based services and they all address only various aspects of it.
In 2014, the FTC found gaps in how well these laws and related regulations cover consumer protections in subscription-based services.
At that point, the agency decided to wait and see whether changes that came into effect around that time could fix these issues. But five years later, in 2019, it concluded that the situation only worsened.
The FTC says it receives thousands of complaints each year related to negative option marketing and, since 2014, more than 100 federal class actions have been filed in the US which involve various negative option terms.
“Problematic negative option practices have remained a persistent source of consumer harm for decades, saddling shoppers with recurring payments for products and services they never intended to purchase or did not want to continue buying”, the notice reads.
Interested parties have two months to comment on the proposal.
