Draft Consumer Rights Bill - Business, Innovation and Skills Committee Contents

Conclusions and recommendations

In the report conclusions are shown in bold, recommendations are shown in bold italics. In this list, recommendations are shown in italics.

Consumer Rights Directive

1.  We agree with the Government that the Consumer Rights Directive does not address quality rights in relation to digital content, and we broadly support the Government's proposals in this area. In our consideration of the draft Bill, we have been mindful of the need to avoid gold plating of EU legislation. (Paragraph 22)

Alternative Dispute Resolution Directive

2.  Given that the ADR Directive covers any contractual dispute between a trader and a consumer within the EU, we expect the Government to explain the extent to which the key requirements of the ADR Directive could have been included in the draft Bill, and why that approach was not taken. (Paragraph 32)

Definition of a "consumer"

3.  We conclude that the advantages of a simplified, clear and consistent definition of "consumer" justify the definition used in the draft Bill. However, we are mindful of the issues that small and micro businesses experience in relation to their bargaining power. (Paragraph 41)

4.  We recommend that the Government considers the case for small businesses to be treated as consumers. (Paragraph 42)

5.  We further recommend that the Government provides a substantive response to the research commissioned by the Federation of Small Businesses on small businesses as consumers. (Paragraph 43)

The early right to reject—clauses 19, 20 and 21

6.  We recognise that there are circumstances in which it would be appropriate to extend the 30 day time limit for the early right to reject goods, for example where it is reasonably foreseeable that a longer period would be needed to inspect the goods and to try them out in practice. We are not persuaded that the draft Bill would adequately protect consumers in such circumstances. (Paragraph 53)

7.  We recommend that the Government reconsider an exception to the time limit for the early right to reject where it is reasonably foreseeable that the consumer would need a longer period to inspect the goods and to try them out in practice. (Paragraph 54)

Tier 1 remedies—repairs and replacements—clause 23

8.  We are satisfied that the draft Bill protects consumers from being trapped in a failed cycle of repairs or replacements through its fixed limit, which addresses the main concern of consumer representatives and the Law Commissions. On balance, we were not persuaded that a fixed time limit for repairs to be made would be workable or desirable because of the huge range of products and circumstances covered by this regime. (Paragraph 59)

9.  We conclude that the consumer should only have to accept one repair or replacement attempt before being able to move to Tier 2 remedies, since this would address the key consumer concern of being trapped in a cycle of failed repairs and replacements. (Paragraph 60)

Methodology for calculating deduction for use

10.  We conclude that neither the policy behind nor the drafting of the draft Bill's provisions on deduction for use is clear. We do not believe that the exception to the rule that there may not be deduction for use in the first six months is workable. Although the Government's evidence base and policy examples appear to rely exclusively on the motor industry, a second hand value and an active second hand value can be proven for almost any good. Therefore, there is a risk that deductions for use within six months will be routine and that consumers will be far less likely to receive full refunds. (Paragraph 76)

11.  As currently drafted, the proposals risk introducing unintended consequences. In particular, they risk establishing the second hand value of the goods as a standard, rather than a minimum, for the refund made to the consumer. Basing any deduction for use on retail value, when it is highly unlikely that the consumer would have intended to sell at that point, places an undue burden on consumers. (Paragraph 77)

12.  We recommend that clause 24(5) (which relates to the "deduction for use" that may be made if the consumer exercises the final right to reject) should be removed, in line with the recommendation of the Law Commissions. (Paragraph 78)

13.  Should the Government retain "deduction for use", we recommend that the proportion of any deduction should be based on the lifespan of the good, not on the retail or second hand market value, since the consumer would not have intended to sell the good at this stage. (Paragraph 79)

A bespoke regime for digital content

14.  We support the proposals to apply satisfactory quality rights to digital content. However, the evidence we received indicates that the Government has failed to communicate clearly its intention to create a bespoke set of rights and remedies for digital content. As a result, the industry remains confused about the intended flexibility of the proposed digital content regime. The Government will need to address this as a priority if it is to convince the industry of the merits of its proposals. (Paragraph 87)

Digital content to be of satisfactory quality—clause 36

15.  We believe that the Government's intention as to whether "freedom from minor defects" would be applicable depends on the complexity of the digital content. Stakeholders displayed very low awareness of the flexible nature of the quality standard, and did not appear to be aware that it would be qualified by "reasonableness". We conclude that to date the Government has not adequately communicated the intended flexibility of the quality standard applicable to digital content. (Paragraph 93)

16.  We agree with the Government that there are some circumstances in which a reasonable consumer might expect digital content to be free from minor defects. However, we do not believe that the draft Bill achieves adequate clarity on when this quality aspect will be relevant. (Paragraph 94)

17.  We recommend that the Government expressly state in the Explanatory Notes to clause 36 ('digital content to be of satisfactory quality') that the application of the quality aspect "freedom from minor defects" to digital content will depend on reasonable expectations of quality. (Paragraph 95)

Digital content to be as described and rights to modify digital content—clauses 28 and 42

18.  We conclude that if clause 38 ('digital content to be as described') is implemented as it stands, there is a risk that traders and manufacturers of digital content will cease to provide trial versions that have only limited functionality. (Paragraph 99)

19.  We therefore recommend that the Government thoroughly examines market practice in this area to assess the impact of clause 38 ('digital content to be as described') on consumers and businesses. (Paragraph 100)

Time when, and period for which, digital content is provided—clause 41

20.  The Government's 2012 consultation and final impact assessment explained the proposal to apply quality rights to digital content after the performance of surrounding services using the terms "related" and "enabling" services. We believe that those concepts do not cover the range of services that surround digital content. (Paragraph 107)

21.  Furthermore, the draft Bill does not use or define the terms "related" and "enabling" services, although it would draw a distinction between those categories. We conclude that the scope of the services that the Government intends to be subject to an outcomes-based liability standard is unclear and uncertain, and therefore that clause 41, as it stands, would be unworkable in practice. (Paragraph 108)

22.  We recommend that the Government should include in clause 41 clear definitions of the services which will be subject to an outcomes-based liability standard. Furthermore, it should be explicit in how these will be applied to "related" and "enabling" services, and to other services that surround interactive digital content. (Paragraph 109)

23.  We believe a technical and legal distinction may be drawn between the application of an outcomes-based liability test (that is, the application of satisfactory quality rights) to digital content after the performance of "related services", and the application of that standard to the "related services" themselves. Given the different rights and remedies that apply to fault-based and outcomes-based liability standards, we conclude that clause 41 would be likely to increase uncertainty and confusion for traders and consumers. (Paragraph 112)

24.  We recommend that the Government clarifies the liability standard that is intended to apply to "related services" under the draft Bill. (Paragraph 113)

25.  The Government's impact assessment does not specifically address the potential cost to businesses of applying a satisfactory quality standard to related services. Under the proposals, a trader may be liable if a problem with services supplied by another supplier under the trader's control results in the digital content being substandard. We conclude that it is foreseeable that this reform may impact on business to business contracts, which may affect pricing and availability of digital content and services, which ultimately affects consumers as well as businesses. (Paragraph 115)

26.  We recommend that a full cost benefit analysis should be undertaken of the proposal to apply an outcomes-based liability standard to the services surrounding digital content described in clause 41. (Paragraph 116)

27.  Therefore, we believe that the requirement for digital content to be available for a "reasonable period of time" would not override express limitations in the contract. However, under the Unfair Terms provisions, any such term may be assessable for fairness. (Paragraph 118)

28.  We recommend that the Government clarifies how clause 41(3) (a) ('time when, and period for which, digital content is provided') is intended to operate. (Paragraph 119)

Statutory remedies

29.  The Government proposes to provide a right to a refund if the trader did not have the right to provide the digital content (whether tangible or intangible). There is no requirement on the consumer to return or delete the digital content, which is justified by the Government on the basis that "existing legislation adequately protects IP rights." However, consumers who have brought faulty intangible digital content will not have a right to reject, a decision that the Government justifies on the basis of potential threat to IP rights and copyright. We conclude that this is a clear inconsistency in the draft Bill. (Paragraph 128)

30.  To remedy the existing inconsistency in the draft Bill, there should be a short-term right to reject and a final right to reject in relation to intangible digital content. We recommend that the draft Bill states that there is an obligation on the consumer to delete the relevant intangible digital content. This would achieve consistency in the Bill which would be valuable for both consumers and businesses. (Paragraph 129)

31.  We do not consider that the case has been made to justify the Government's proposal to introduce varying remedies for tangible and intangible digital content, and to have inconsistent remedies for intangible content dependent on which statutory right has been breached. If the Government is to proceed with this approach it must set out in detail the evidence base for its proposals alongside legal advice on the risk to intellectual property rights. (Paragraph 130)

Compensation for damage to device or to other digital content—clause 48

32.  The Government must clarify whether or not a claim can include any device damaged by such content. This is not clear in the Explanatory Notes relating to clause 48 of the draft Bill. (Paragraph 136)

Cost to business: familiarisation costs and legal advice costs

33.  We believe that the complexity of the proposed digital content regime, especially in the inconsistency between the rights and remedies that the draft Bill would apply to tangible and intangible digital content, is likely to give rise to uncertainty amongst businesses, consumers, and their advisers. The Government's estimate that business staff would need only 10-20 minutes of familiarisation training in these reforms is not convincing. (Paragraph 140)

34.  We recommend that the Government clarify the proposals in relation to digital content to ensure that the familiarisation costs and legal costs incurred by businesses in respect of the draft Bill, are in line with the Government's estimates. (Paragraph 141)

Service to be performed with reasonable care and skill—clause 51

35.  We believe that the potential benefits of adopting an additional outcomes-based liability standard for services are significant for businesses and consumers. One of the risks of creating a statutory right that services must be provided with reasonable care and skill is that this is seen by traders and consumers as a standard to meet to ensure compliance, rather than as a statutory minimum. We have considered the circumstances in which the courts have been willing to imply outcomes-based terms into services contracts, and we are not persuaded that the Government has done enough to assess the potential risk that standards of service provision will be subject to downward pressure by the introduction of the statutory guarantee. (Paragraph 162)

36.  In conclusion, we do not believe that the Government has given due consideration to adoption of an outcomes-based liability standard for services. Specifically, the Government has not addressed the options and recommendations on this issue set out in the 2010 report it commissioned on reform of consumer law. There is a lack of detailed analysis in the Government Response to consultations and in the impact assessment on this issue. Consequently, the evidence we received shows very low awareness amongst stakeholders of the flexible nature of outcomes-based liability standards. (Paragraph 163)

37.  The proposals in the draft Bill to apply such an outcomes-based standard to related services surrounding digital content strengthens the argument for the Government to look again at the liability standard it is proposing for services. We believe the draft Bill risks creation of a statutory two tiered approach to services liability. This risks widening the existing gap between consumer expectations and consumer protection in relation to services, and exacerbating uncertainty and confusion for consumers and businesses. (Paragraph 164)

38.  We recommend that the draft Bill should apply an additional outcomes-based liability standard to services that requires service provision to achieve the stated result, or one which could reasonably be expected, as well as to any product resulting from the service. This would simplify and align UK consumer law, and increase certainty and confidence among consumers and businesses. (Paragraph 165)

Right to repeat performance (clause 57) and right to price reduction (clause 58)

39.  The Government has identified a risk that businesses that currently may offer a full refund would be incentivised to switch to the proposed statutory remedies which offer less protection for the consumer. We note that for services, as with goods, there was similar evidence of consumers bring trapped in a failed cycle of repairs or replacement services. We conclude that, if implemented without acceptance of our recommendations, clause 57 ('right to repeat performance') and clause 58 ('right to price reduction') could result in increased consumer detriment. (Paragraph 170)

40.  We recommend that where there is to be a price reduction (clause 58), this should be calculated based on the value received by the consumer under the contract, not the costs incurred by the trader. This means that any price reduction should not be linked solely to the element of the contract that has not been performed with reasonable skill and care, as that will not provide appropriate redress to the consumer. (Paragraph 171)

41.  We recommend that the Bill should clarify that in appropriate circumstances a price reduction could be as much as a full refund, in particular where the consumer has obtained no benefit or no substantial or meaningful benefit under a contract for services. (Paragraph 172)

Exemption for subject matter and price

42.  We conclude that the draft Bill must make it absolutely clear that incidental or ancillary payments do not form part of the exemption, and are therefore assessable for fairness. Furthermore, we conclude that the "prominence" requirement in clause 67(2) is uncertain and would be difficult to apply in practice. (Paragraph 184)

43.  We recommend that the price exemption should be narrowed to exclude only the main price that a reasonable consumer would take into account during the purchasing process. This would not automatically render any other clauses unfair, but would make them potentially assessable for fairness which would allow genuine consumer detriment to be tackled. (Paragraph 185)

44.  The definition of "average consumer" for Part 2 (Unfair Terms) of the draft Bill is a relatively high standard. "Prominence" is defined in the draft Bill by reference to the awareness of an "average consumer". As such, we recommend that clause 67(4) should be amended to provide that for a term to be "prominent", it should be "brought to the consumer's attention in such as way that an average consumer would be aware of the term and would appreciate its significance". (Paragraph 186)

45.  We have seen robust evidence in the Bank of Ireland case that consumer detriment arises if the right to terminate the contract does not offer the consumer the genuine ability to avoid the adverse impact of the change. (Paragraph 193)

46.  We therefore recommend that the following term is added to the grey list (Schedule 2 Part 1):

A term (including those within the scope of paragraph 22 of Schedule 2 Part 1) which has the object or effect of permitting a trader to increase the price of, or alter unilaterally any characteristics of, goods, digital content or services during any minimum contract period or before the end of a contract of a specified duration without a valid reason or where the consumer is not free to dissolve the contract without being disadvantaged. (Paragraph 194)

47.  We recommend paragraph 25 of Schedule 2 should be amended so that it only exempts price variations to the extent those changes are caused by changes to a financial market rate or index that the trader does not control. (Paragraph 195)

48.  We conclude that there is a risk that clause 71 ('other requirements for contract terms') might operate in practice to modify the fairness test. As drafted, clause 71 confuses rather than clarifies the concept of "prominence". (Paragraph 200)

49.  We therefore recommend that clause 71 ('other requirements for contract terms') is struck out. (Paragraph 201)

Order making powers

50.  We note that the order making power in clause 66(3) would allow primary legislation to be amended. We believe that any amendments to the grey list or the existing list of limitations should be subject to an appropriate level of scrutiny, to ensure adequate protection for both consumers and businesses. (Paragraph 203)

51.  We therefore recommend that the affirmative procedure should apply to the order making power in clause 66(3). (Paragraph 204)

Enforcer's Investigatory Powers

52.  We conclude that the safeguards in relation to powers of entry are more restrictive in the draft Bill than corresponding terms in recent legislation, and in the context of significant cuts to Trading Standards this risks placing an undue burden on enforcers which could decrease protection for consumers and compliant businesses. We believe that providing the example of reasonable suspicion on the face of the Bill qualifies the test for the exemption for notice which introduces unnecessary and undesirable uncertainty. (Paragraph 215)

53.  We recommend that the relevant exemption to the requirement to give written notice before exercising a power of entry without warrant should be amended to "the officer reasonably considers that to give notice in accordance with this paragraph would defeat the purpose of the entry". (Paragraph 216)

Power to require the production of information

54.  Given the difference in views between the OFT and the Government, we look to the Government to clarify the legal position. In particular the Government must demonstrate that the proposed provision against self-incrimination in relation to civil proceedings is lawful. Given the potential burdens on enforcers as described by the OFT, the Government must provide further detail on the provision against self-incrimination in consumer law. (Paragraph 218)

55.  We are not persuaded that the Government has adequate evidence that the downgrading of the offence of obstructing an officer is in the interests of consumers or businesses. The Government has stated that there is approximately one such offence per annum. Therefore, this cannot be said to impose a burden on businesses, while it does offer consumer protection. Downgrading the offence would potentially reduce the deterrent effect that the current maximum fine could reasonably be expected to produce. (Paragraph 221)

56.  We therefore recommend the offence of obstruction of an officer in the generic set of powers proposed under the draft Bill is maintained at its current level. (Paragraph 222)

Enhanced consumer measures

57.  The enhanced consumer measures, which would be available throughout the UK, have been proposed by the Government in response to an identified gap in the remedies available to consumers who have suffered as a result of infringement of consumer law. We heard convincing evidence to suggest that the enhanced consumer measures may not address consumer detriment because in practice they are unlikely to be widely used by public enforcers. (Paragraph 245)

58.  We recommend that the enhanced consumer measures are extended to private enforcers, subject to appropriate safeguards, to increase the likelihood of their use, which in turn would benefit consumers and compliant businesses. (Paragraph 246)

Fast-track cases (Paragraph 19(3) Schedule 7 of the draft Bill/proposed new section 14(1A) Enterprise Act 2002

59.  We conclude that while in relation to some fast track cases it may be appropriate for the Competition Appeal Tribunal to consist of a chairman only, that will not be the case for all such proceedings. (Paragraph 259)

60.  We recommend that proposed new Section 14(1A) Enterprise Act 2002 (which would be amended by paragraph 19(3) Schedule 7 of the draft Bill) should be amended to provide that in relation to fast track claims "the Tribunal may consist of a chairman only". (Paragraph 260)

Limitation periods

61.  We conclude that it is not clear what limitation period would apply to competition law claims arising before the commencement of the relevant provisions in the draft Bill. This risks creating uncertainty for the courts, claimants and defendants, and consequently raises the risk of litigation. (Paragraph 262)

62.  We recommend that the Government clarifies the limitation periods that will apply to stand-alone and follow-on claims, as well as in relation to collective proceedings. Furthermore, the Government should explain the rationale for its proposal for new Sections 47A Competition Act 1998 (allowing stand-alone claims to be brought in the Tribunal) and 47B Competition Act 1998 (allowing collective proceedings to be brought in the Tribunal) to have retrospective effect. (Paragraph 265)

Competition Appeal Tribunal Rules of Procedure (hereafter, the "Tribunal Rules")

63.  We conclude that the CAT's Tribunal Rules will have a key role in setting out how the intended reforms to the CAT's jurisdiction and power will work in practice, and will be vital to their effectiveness and clarity. (Paragraph 266)

64.  We recommend that the CAT should publish draft revised Tribunal Rules before the Bill is introduced to Parliament. (Paragraph 269)

65.  The draft Bill would extend the Secretary of State's order making powers in relation to the making of Tribunal Rules. Given the importance of the Tribunal Rules to the operation of the proposed collective redress regime, we recommend that the affirmative rather than the negative resolution procedure should apply, to ensure an appropriate level of scrutiny. (Paragraph 268)

Proposed collective proceedings regime (Paragraph 5 Schedule 7 of the draft Bill/proposed new Section 47B Competition Act 1998)

66.  We support the proposals on collective proceedings in the draft Bill. However, we are concerned about the proposed process for certifying collective proceedings. The draft Bill provides that in order to be eligible for inclusion in collective proceedings, claims must raise the same, similar or related issues of fact or law. We have seen evidence to suggest that the uncertainty of this requirement could lead to proceedings in the CAT being tied up in procedural litigation, which would undermine the efficient operation of the proposed collective proceedings regime. We consider that entirely removing this eligibility requirement from the draft Bill would risk compromising the transparency of the certification process. However, we believe that the proposed eligibility requirement should be amended to avoid unintended consequences. (Paragraph 276)

67.  We recommend that the Government clarifies the eligibility requirement that cases raise the same, similar or related issues of fact or law. The draft Bill should be amended to clarify that "all end consumers of a product, where the price of that product has been affected by an infringement of competition law, are affected by the infringement in the same way, such that their claims raise the same, similar or related issues of fact and law". We consider acceptance of this recommendation to be crucial to the ensuring the effectiveness of, and preventing abuse of, the new collective actions regime. (Paragraph 279)

Proposed safeguards to the collective proceedings regime

68.  The Government has said that collective proceedings should not be brought by law firms, third party funders or special purpose vehicles. Under the draft Bill, any non-class member can be appointed as the representative in the collective proceedings provided that the Tribunal considers it "just and reasonable" for that person to act as a representative. We conclude that this safeguard should be strengthened to reflect the Government's stated intention to restrict representation in collective actions to claimants or to genuinely representative bodies. (Paragraph 280)

69.  We recommend that revised Tribunal Rules should clarify that collective proceedings cannot be brought by law firms, third party funders or special purpose vehicles. (Paragraph 281)

70.  The draft Bill would allow any class member to be appointed as a representative. We conclude that it is foreseeable that there may be circumstances where a claimant, though a class member, would not be an appropriate representative in collective proceedings. (Paragraph 282)

71.  We recommend that the draft Bill should be amended to provide that a class member may be appointed as a representative for the purposes of collective proceedings provided that the Tribunal considers it just and reasonable for that person to act as a representative in those proceedings. (Paragraph 283)

72.  We heard concerns from some stakeholders that opt-out collective actions would risk creation of a US style litigation culture. However, subject to the Government's acceptance of the relevant recommendations of this Report, we consider that the safeguards in the Bill are robust, appropriate and proportionate. (Paragraph 285)

Proposed collective settlements regime (Paragraphs 10 and 11 Schedule 7 of the draft Bill/proposed new Sections 49A and 49B of the Competition Act 1998)

73.  On the basis of the evidence we have seen, we conclude that there is a risk that representatives will not be in a position to assess if a settlement offer is reasonable, but in order to avoid risk in relation to costs, may be incentivised to accept an offer that may not give satisfactory recompense to those who have suffered loss. (Paragraph 290)

74.  We recommend that proposed new Sections 49A and 49B Competition Act 1998 (inserted by Paragraphs 10(1) and 11(1) Schedule 7 of the draft Bill) should be amended to provide that the party who makes a settlement offer must demonstrate to the CAT that its terms are just and reasonable. (Paragraph 291)

75.  We recommend that where the CAT is not satisfied that the terms of the settlement are just and reasonable, the Tribunal Rules should specify that the benefit of costs consequences does not attach to such offers. (Paragraph 292)

Proposal 3: To provide for voluntary redress schemes which are designed to encourage cases to be resolved outside of court (using Alternative Dispute Resolution)

76.  We agree that the CMA should not be responsible for calculating compensation offered under voluntary redress schemes. However, the draft Bill would prohibit the CMA from taking into account the amount or value of compensation offered under a voluntary redress scheme when considering an application for certification. We believe this is unduly restrictive and is likely to prevent the CMA giving genuine consideration to whether the scheme should be approved. (Paragraph 295)

77.  We recommend that the proposed new Section 49C(3) Competition Act 1998 (inserted by Paragraph 12 Schedule 7 of the draft Bill) should clarify that in deciding whether to approve a redress scheme, the CMA may not calculate compensation offered under the scheme, but may take into account the amount or value of compensation under the scheme. (Paragraph 296)

78.  The CMA must monitor the impact on its resources of dealing with applications for approval of voluntary redress schemes. The Government must evaluate this data to establish whether resources are diverted away from the CMA's core public enforcement role. (Paragraph 299)

Educating consumers and business

79.  We conclude that lack of information about and understanding of consumer rights is a key cause of disputes and consumer detriment. In respect of improving consumer awareness and understanding of their legal rights and obligations, we agree with Citizens Advice that there is little point in requiring businesses to provide consumers with a reminder of the existence of a legal guarantee of conformity. (Paragraph 309)

80.  We recommend that the Government, in conjunction with Citizens Advice, the Trading Standards Institute and the Competition and Markets Authority, must set out a clear and detailed education strategy for both businesses and consumers in relation to the draft Bill and its wider reforms to consumer law in the UK. (Paragraph 310)

81.  We support the recommendation of Citizens Advice for inclusion of an express requirement, in clauses 10 and 38 (Goods and Digital Content to be as described) and clause 52 of the draft Bill (Information about the trader or service to be binding), for a trader to provide information about the relevant core statutory rights at the point of sale. (Paragraph 311)

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Prepared 23 December 2013