Business, Innovation and SkillsFurther written evidence submitted by the Department for Business, Innovation and Skills

Pre-legislative Scrutiny: Draft Consumer Rights Bill

Thank you for your consideration of the draft Consumer Rights Bill. I welcomed the opportunity to discuss the Government’s proposals in more detail with you last week. I hope you also found this useful and I am writing to follow up on some supplementary questions in your letter of 24th October.

European Consumer Rights Directive (the “Directive”)

1. The extent of overlap between the draft Bill and the EU Consumer Rights Directive on digital content

Let me reassure you that the draft Bill is entirely consistent with the Directive. Indeed we have sought to ensure there is appropriate cross-references and the use of the same definitions and concepts specifically so that the two pieces of legislation fit well together.

Other than specifying what pre-contractual information is required, and making that part of the contract (see clause 38), the Directive sets out how withdrawal rights apply to digital content bought over the internet. The Directive does not therefore directly address the issue of quality nor of the appropriate forms of redress when the quality standards are not met. These are dealt with in the draft Bill.

2. The draft Bill may disrupt the level playing field that the Directive is intended to create within the EU

It is important to recognise that the quality of digital content is not expressly covered by current European law or any proposed new Directives. There is therefore already differential treatment of digital content across Europe.1

The proposal for a Common European Sales Law (“CESL”) includes digital content quality rights, but it could be years before that becomes law, if at all, and then it may only be optional. The CESL was first published in October 2011 and is still currently being negotiated. The current draft includes very similar provisions to those we are proposing in the draft Bill.

I do not believe that the digital content provisions will result in a two tier system in Europe (any more than already exists). This is because the provisions have been carefully drafted to reflect existing good practice in the sector. In essence, the rights are quite simple: if a consumer buys some digital content, it should work as they expected it to. If it doesn’t, the consumer should be able to get the problem fixed or get some money back. Our research into current business practices showed that this is what most businesses are already doing.2 Furthermore, Matthew Fell of the CBI, giving evidence to the committee on 8th October agreed that, if a business can show that they are following this good practice by complying with the law, it could be a competitive advantage for UK firms. We do not therefore think that our proposals will have an adverse effect on competition.

3. The decision to go ahead now rather than wait for the Directive to be implemented

As I have explained above, the Directive does not directly address quality issues relating to digital content. The provisions in the draft Bill therefore provide clarity in an important area where it is currently lacking. It is absolutely right that consumers who have paid for digital content should be entitled to a remedy if that digital content is substandard. Under the current situation, it is unclear how the law would apply to such transactions, leading to disputes between consumers and traders.3

The law is currently covered by case law. The leading case for England and Wales held that, if digital content on a disk does not work as expected and the disk is sold, the rights in the Sale of Goods Act 1979 would apply. It also indicates that, even if the current statutory rights that apply to goods would not apply, the courts are likely to imply a term that the content should be reasonably fit for its purpose. Case law is not accessible to most consumers or businesses and this lack of transparency is clearly unsatisfactory. This is not good for consumers or business. Again I refer to Matthew Fell’s evidence to the Committee:

“…having an environment that is very well-trusted and where there is clarity around that would be a positive, rather than a negative.…. the UK is one of the most advanced online marketplaces, and we have the most advanced set of consumers in the UK in terms of their use of online. It ought to be possible to extend those strengths to be a competitive advantage and do more business overseas. If there are measures that will help to enable that through commonality of rule and approach, then that logic would suggest that would be a good point.”

Digital Content

4. Why not apply a “reasonable care and skill” test for digital content?

We consulted at length on the policy approach before publishing the draft Bill, and specifically considered in some detail the question of how to treat digital content. We commissioned research on the topic4 and have discussed it extensively with stakeholders. Our conclusion is that creating a bespoke regime for digital content, based largely on the existing regime for goods, is the right approach.

I do not think “reasonable care and skill”, which we use in relation to services, is an appropriate standard for digital content for two reasons.

Firstly, the average consumer views digital content as “goods”. Put simply, they view themselves as buying a digital product rather than paying for the skill of the trader. Furthermore, digital content is marketed and sold as a commodity, for example, Bradgate (see footnote 4) argues that “the supply of software by sale is not conceptually a supply of services”. Even for cloud computing which is arguably the closest form of digital content to a service, Bradgate argues that the average consumer would “see the contract to licence the digital product as more closely analogous to one for the hire of a chattel than to one for the provision of services.”5

Indeed, some jurisdictions (such as New Zealand, Australia and South Africa) have taken the approach of including digital content within the definition of “goods” and within the EU, for example, the application of sales law to digital products has been the prevailing view in Germany.6 Aligning the rights for digital content as far as possible with those for goods builds on consumer expectations, and on familiar concepts for consumers and businesses.

Secondly, the “service” element of a digital content product is not at all transparent to a consumer. If I might illustrate this with an example, we think it is unreasonable to expect a consumer to judge whether a digital content company, such as a software manufacturer, has used reasonable care and skill in producing its software, by anything other than an outcome-based standard.

5. How and why the draft Bill’s statutory rights and remedies for digital content are different from goods

We believe that digital content should be a bespoke category, modelled on goods but differing from it in some important aspects. The specific changes that we have allowed for digital content, are:

Making it clear that updates, which are within the terms of the contract, must not reduce the quality of the digital content (or if they do, the consumer is entitled to an appropriate remedy);

Recognising the role played by the supporting services that allow digital content to be accessed across the Internet;

No right to reject digital content (if not embedded in a physical product), recognising that intangible digital content cannot be “returned” in any meaningful sense;

Not applying the quality rights to “free”7 digital content (but with a separate provision where it causes damage to the consumer’s device or other digital content), giving a light-touch approach for emerging business models which provide digital content to consumers free of charge;

No strict limits on the numbers of repairs or replacements of faulty intangible digital content, recognising that updates and patches are a commonly accepted feature in some parts of this sector (they must be undertaken “within a reasonable time” and without significant inconvenience).

6. Where in “appropriate cases” the aspects of quality of digital content listed at clause 36(3) would be taken into account

Satisfactory quality is a concept that must be taken in the context in which the goods or digital content have been bought. It is a flexible, principles based approach, based on the expectations of a reasonable person, taking into account factors such as the price paid for the digital content or the description of the digital content. This approach has been taken specifically so that it can be applied across a wide range of types of digital content, just as it has been for goods ranging from pencils to cars for many years.

I believe that this is the right balance, and many digital content stakeholders agree. For example, the Publisher’s Association in their written evidence to the Committee8 say:

“…the Clauses of particular interest to our sector—those included in Chapter Three relating to Digital Content—strike an appropriate balance between ensuring consumers have appropriate redress, whilst recognising the unique nature of digital content.”

Also, as Chris Warner from Which? said in his evidence to the Committee on 8th October:

“consumers are very accepting of updates and patches within the software development world and when purchasing apps …... in any given situation, you would be able to tell the difference between a faulty piece of software and one that is just evolving.”

I have listened to concerns from some that the “freedom from minor defects” aspect of satisfactory quality should not be applied to complex digital content such as software. However it is not right to say that the provision requires that all digital content must always be free from minor defects, as some have suggested.

As set out above, satisfactory quality is judged by what a reasonable person would expect, and reasonable consumers do not expect all complex forms of digital content, such as software and games, to be completely bug free. I agree with Robin Walker MP who in the Select Committee suggested that such an expectation could adversely impact on the iterative nature of the development of such products. That is why the draft Bill states that “freedom from minor defects” is only an aspect of satisfactory quality “in appropriate cases”, and so this aspect may not apply to complex forms of digital content.

It is nevertheless important to have a provision that digital content should be “free from minor defects”. There are some types of digital content, such as MP3 files or e-books, where we believe that it is right that consumers should reasonably expect to be free from minor defect, even where functionality and usability has not been impacted. For example, a music file that jumps a couple of times in the middle is still functional and usable, but in this context it may be seen as having a minor defect that renders it not of satisfactory quality. Similarly, an e-book would not be expected to have a page jumbled, or a film would not be expected to have a scene which stutters.

Having a provision on “freedom from minor defects” but explaining in the explanatory notes that this may not apply to complex forms of digital content, has been accepted as a way of satisfactorily addressing this issue by many of the digital content stakeholders that Government has consulted. For example, UK Interactive Entertainment (UKIE), the trade body for the games industry, say:

“The explanatory notes published alongside the draft Bill have accepted the point that games and other forms of complex digital content cannot be made subject to the “freedom from minor flaws” quality standard (paragraph 141). This is a vital point that must be retained.”

I think it is important that the draft Bill itself does not specify where “freedom from minor defects” would or would not apply, as this would significantly impact on the flexible, principles based approach that is vital to give the law flexibility to accommodate future innovations.

We must also not lose sight of the importance in today’s world of flexibility of the remedies provided for in the draft Bill. For example, even if, in some cases, a minor defect could mean that the digital content was not of satisfactory quality, the remedy would be a repair or replacement of that digital content9 and, if that is not possible (or cannot be done within a reasonable time or without significant inconvenience to the consumer), the consumer would be entitled to require the trader to reduce the price by an appropriate amount. To be appropriate, the amount will reflect the minor nature of the defect.

7. Where software is modified….there is a risk that it would not meet the requirement for “digital content to be as described”

I think that this question is best addressed by means of some examples. I have heard concerns that the requirement, that digital content should still meet the description following an update, would prevent necessary changes to digital content for security purposes. For example, an update may remove a feature because it is taking up too much processing capacity and is slowing down the rest of the digital content, or because it has become vulnerable to a security attack.

This will largely depend on how the trader describes the product to the consumer. For example, take an anti-virus software described as “Detects and removes spyware and unwanted software monitoring”. If this feature has to be temporarily suspended while an update is being developed, because it has become vulnerable to a security attack, then the provisions on updates would apply because the software no longer meets the description. However, the remedy would be a repair—defined as bringing the digital content into conformity with the contract—and in effect the update to the function that re-instates it would probably provide that repair.

If, however, this feature is removed and not replaced with something else that does the same function, it is reasonable that a consumer should be entitled to a remedy, because the software is no longer fulfilling the purpose for which the consumer bought it. At the extreme, leaving consumers without this remedy could allow digital content providers to change fundamentally the digital content by removing features that the consumer relied upon when he/she purchased it, without any redress for the consumer.

The provisions on updates do not prevent the provider from changing the way the feature works (if that is not specifically described). Nor do the provisions on updates prevent traders from going beyond the description given to the consumer—in adding or enhancing features.

8. Will the Bill cover payment engines and their behaviour towards consumers?

I agreed to write to the Committee on the question of payment engines, and in particular Paypal’s terms and conditions when it intervenes where there are problems with goods but not with digital content.

The legal obligations on credit providers which could be relevant here is under section 75 of the Consumer Credit Act 1974 where creditors are jointly and severally liable to debtors for breaches of contract by the supplier. This would apply to any breach of contract, within certain financial limits.10 At the moment, since it is not clear that by providing unsatisfactory digital content the supplier would be in breach of contract, creditors might try to argue that there is no liability. Our provisions would make clear that where digital content was not of satisfactory quality (as defined) or was provided in breach of the other statutory rights and it fell within the financial limits, creditors could be liable.

However, it is not clear that PayPal is a creditor within the meaning of the Consumer Credit Act 1974. It may be that Paypal are providing this distinction as a matter of their operating policy rather than because it relates to any statutory requirements they would be required to follow. We are in the process of contacting Paypal to find out more and will write again on this if we find out anything that is different to the above position.

Enforcers’ Investigatory Powers

9. Rationale behind reducing the maximum penalties for the offence of obstructing an enforcer or an officer of an enforcer

Currently, the summary maximum penalties for obstruction vary from £1,000 to £5,000 (ie from level 3 to 5 on the standard scale for fines) across consumer law with no clear rationale.11 In contrast, the maximum penalty for obstructing a police officer, immigration officer or an officer of HM Revenue and Customs is generally set at a maximum £1,000 (level 3). Our aim is to align the maximum penalties for obstruction of officers to ensure consistency across consumer law and other law enforcers.

Evidence from the survey by Trading Standards carried out in 2012 indicates that these offences of obstruction are rarely prosecuted separately or alongside other offences. Prosecutions are reserved for the really egregious cases, which are extremely infrequent (less than one per annum). Nevertheless the Government believes it appropriate to maintain obstruction as a criminal offence. The aim is to bring consistency to this approach both within consumer law and compared to the obstruction of other officials.

10. Details of the timing and scope of the Government’s consultation on introducing a minimum competency standard for trading standards officers

We know that businesses value well-trained and competent Trading Standards Officers who are able to provide them high quality regulatory advice. In 2012, Government consulted on whether this is best provided under a statutory generic competency requirement for Trading Standards officers12 which would require officers to be suitably qualified and to maintain their competency over time.

The proposal was that this would be similar to the broad based competency frameworks developed by the Food Standards Agency and Health and Safety Executive for officers enforcing similar regulatory legislation. We considered that the competency requirement in section 19 of the Health and Safety at Work etc Act 1974 in relation to the appointment of Health and Safety Inspectors was a good model. This states:

“Every enforcing authority may appoint as inspectors (under whatever title it may from time to time determine) such persons having suitable qualifications as it think is necessary for carrying into effect the relevant statutory provisions within its field of responsibility, and may terminate any appointment made under this section.”

We always envisaged that the generic competency requirement would be fulfilled through the existing Trading Standards Institute qualification framework and Trading Standards Practitioner definitions;13 and the Better Regulation Delivery Office’s (BRDO) Common Approach to Regulatory Competence initiatives.14

The vast majority of responses to the consultation were from front-line Trading Standards officers, although we also heard from businesses and others. The majority of respondents supported the introduction of a more general competency framework provided that the standard and professionalism of officers is maintained.

In their response to the consultation the Local Government Association (LGA) said:

“councils are best placed to determine [….] the competency of their officers. ….modern councils require a flexible workforce [to reflect] new models of delivery or collaborative approaches with businesses and other Councils.”

I think it is important to recognise that relevant competencies may vary from authority to authority, depending on the local priorities for that area. Therefore, local authorities are best placed to determine what competencies its officers need to carry out their duties. Further, listing specific qualifications in primary legislation is unlikely to be flexible enough to keep pace with the skills officers would need to tackle the changing priorities they face.

The Government’s proposal for a generic competency requirement has been taken forward through the Government’s statutory Regulators’ Code, published in July 2013. The Regulators’ Code, subject to Parliamentary approval, is due to replace the statutory Regulators’ Compliance Code. Regulators, such as local authority Trading Standards Services, must have regard to this statutory Code. The Code requires regulators, including Trading Standards Services, to ensure their officers have the necessary knowledge and skills to support those they regulate to enable enforcers to choose proportionate and effective approaches.

This approach is also supported by the LGA and provides a flexible, cost-effective means for enforcers to address development needs and maintain the professional competency of officers.

Enhanced Consumer Measures

11. Why does the draft Bill place the burden on the enforcer to assess the loss suffered by consumers rather than the infringing business?

Our aim is for public enforcers and traders to work together to identify a suitable approach, depending on the circumstances. There is nothing in the draft Bill that prevents the trader(s) affected from taking the initiative to propose measures that will help provide appropriate redress where consumer law has been breached or measures to help prevent future breaches. I believe there is an incentive for businesses to be cooperative and innovative—it is in everyone’s interests to avoid recourse to the courts to enforce these measures. We expect this will particularly be the case where businesses have accidentally breached consumer law, want to put the position right and maintain their reputation for good customer service.

I accept that there may be cases where businesses are not cooperative. One model proposed by the Committee for these instances was the example of the Financial Services and Markets Act (FSMA) redress scheme. Under this scheme, before consumers get redress, the onus is on the business to investigate the breach and propose the measures which are then consulted on. While this may be suitable in some instances, particularly for large financial businesses, I believe using the FSMA style model could be disproportionate in many cases, particularly for small businesses.

I believe a better aim is for enforcers and businesses to work together to create the quickest response to the problem. I also believe the incentives are there in most cases for cooperation to happen and for the business to be instrumental in the solution. Many cases involving rogue traders who will never cooperate are also more likely to be suitable for criminal prosecution.

Small and Micro Businesses as Consumers

12. Sole traders, microbusinesses and SMEs are very often consumers in the same way that individuals are. Why doesn’t the draft Bill treat any of these entities as consumers?

We propose to follow the recommendations of the Law Commissions who consulted publicly on the UK and EU definitions of “consumer” that we should define a consumer by reference to acting for purposes “which are wholly or mainly outside their business, trade or profession.”

In the 2008 Consumer Law Review, the Government asked whether the definition of consumer should be extended to include small or micro-businesses whose bargaining power in a contract is often similar to that of the consumer. All business groups were opposed to the idea, questioning how a definition of “small business” would be drawn up and preferring the clarity of the current distinction between business and consumer. We concluded that including small or micro businesses in the definition of consumer would risk undermining the clarity we are seeking to achieve in the Bill, and lead to unintended consequences, including increased costs for larger traders in particular. For example to resolve a dispute with a small or micro business, a larger trader would need to obtain information about the size or category of the business it had traded with, and then adjust its response to the dispute accordingly. This would mean that resolving business to business disputes would be likely to be more costly than at present.

Small (and large) businesses contracting with other businesses will continue to benefit from statutory protection under the Sale of Goods Act 1979 (and associated legislation) and the Unfair Contract Terms Act 1977.

I hope that you will find this additional information helpful. Please do let me know if you have any further questions.

Jo Swinson MP
Minister for Employment Relations and Consumer Affairs

31 October 2013