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Lawmakers in the UK are targeting firms that trap consumers into costly subscription plans, as losses from "Hotel California" deals climb to more than £1.6bn a year.
A new bill introduced this week aims to promote growth and strengthen consumer protection by cracking down on firms that use misleading and predatory marketing practices to “rip off” consumers.
According to regulators, the Digital Markets, Competition and Consumers (DMCC) Bill will ensure “fair-dealing” among firms while encouraging “free and vigorous” competition.
Sponsored by Kemi Badenoch, secretary of state for business and trade, the bill will give greater power to the Competition and Markets Authority (CMA) and its new sub-unit, the Digital Markets Unit (DMU).
The bill will require that firms offering “subscription contracts” make clear disclosures both when subscriptions are first entered and each time they are set to renew.
For example, before a consumer is charged for a renewal, the subscription provider must send a reminder to the consumer between 3-5 days of their last chance to cancel the subscription without being charged.
In cases where the consumer is on a rolling 12-month subscription, the subscription provider must send two reminders to the consumer: one 10-14 days before their last chance to cancel, and one 3-5 days before.
For early cancellation fees, the bill outlines a consumer’s right to cancel a fixed-term contract before the end of the fixed term without incurring “any penalty which is more than nominal”.
In a statement, several ministers said that “by clamping down on subscription traps” and “making it easier for consumers to opt out”, Brits could save up to £1.6bn a year.
Rocio Concha, director of policy and advocacy at Which?, said the consumer watchdog has long campaigned for stronger powers for the CMA to tackle subscription traps.
“Whether it is fake reviews by dishonest businesses or people getting trapped in unwanted and costly subscriptions, our consumer protections are overdue for an upgrade,” she said.
“The empowerment of the CMA’s Digital Markets Unit will also be a major step forward. It needs the right powers to loosen the vice-like grip of a handful of tech giants that will foster innovation and give consumers more choice and lower prices.”
Sarah Cardell, chief executive of the CMA, said the bill has the potential to be a “watershed moment” in the way the CMA protects consumers and supports innovation and investment.
“This bill is a legal framework fit for the digital age,” she said. “It will establish a tailored, evidenced-based and proportionate approach to regulating the largest and most powerful digital firms to ensure effective competition that benefits everyone."
“Digital markets offer huge benefits, but only if competition enables businesses of all shapes and sizes the opportunity to succeed,” she said.
For the first time, the bill will enable the CMA to directly impose fines on firms that break consumer law — a move that Cardell said is “crucial” to ensure the CMA can crack down on “rip-offs and underhand deals”.
In order to issue fines directly, the bill will allow the CMA to make its own judgement as to whether consumer law has been broken, rather than having to prove each case of wrongdoing in court.
The CMA said this will help it to move at speed when penalising firms and preventing further wrongdoing, while ensuring that fair-dealing businesses are not disadvantaged.
As per the bill, the CMA will be able to fine firms up to 10 percent of their global annual revenue per offence.
Strategic market status
The CMA will be authorised to enforce a new “targeted regime” that aims to prevent large firms from using their size and influence to limit digital innovation or restrict market access.
This will be done by introducing a new designation known as “strategic market status”.
Strategic market status, or SMS as it is referred to in the bill, will be applied based on a mixture of quantitative and qualitative criteria.
The first requirement is that the firm offers a “digital activity” that has a “significant number” of users in the UK.
In addition, the firm must have “significant and entrenched” market power with respect to the digital activity.
To make this designation, the CMA will carry out a forward-looking review of at least five years hence, considering whether the firm could influence how other firms conduct themselves or whether it could extend its market power into other activities.
Finally, the CMA will apply a “turnover condition” to apply the designation. The turnover condition will be met if the CMA estimates that the firm, or its parent group, will generate either £25bn in global revenue over the relevant period, or over £1bn in UK revenue over the relevant period.
The relevant period is defined as the most recent 12-month period, or the preceding 12-month period if the CMA estimates that revenue was higher during that time.
An SMS designation will be valid for five years.
Misleading sales activity
The bill also lists 31 types of commercial sales activity that it deems “unfair” and would warrant enforcement action from the CMA.
These mostly relate to false statements made about the product or about the trader, such as false claims that a trader is a signatory to a professional code of conduct, or false claims that a product has received a certain trust or quality designation.
The bill proscribes “using editorial content in the media to promote a product where a trader has paid for the promotion without making that clear”.
As covered by VIXIO PaymentsCompliance, this practice has been widespread among crypto firms and their “influencer” and “ambassador” partners — many of whom (including celebrities) have paid fines and settlement fees to regulators.
Finally, the bill proscribes “direct appeals” for children to buy a product or for children to persuade their parents to buy a product.
