Business, Innovation and SkillsWritten evidence submitted by the Office of Fair Trading
Summary
1. The Office of Fair Trading (OFT)’s mission is to make markets work well for consumers. We aim for competitive, efficient and innovative markets where standards of consumer care are high, consumers are empowered and confident about making choices, and where businesses comply with consumer and competition laws but are not overburdened by regulation. In April 2014 the OFT and the Competition Commission will merge to become the Competition and Markets Authority (CMA).
2. We fully support and welcome the Government’s proposals to rationalise and modernise consumer law, particularly in goods and services. We welcome many elements of the draft Bill including the creation of a new category of digital content which has strong potential to reduce confusion for both consumers and businesses in a rapidly growing sector. The proposals to improve consumer redress through enhanced consumer measures and private actions under competition law can increase consumer confidence in purchasing goods and services.
3. Taking the package of measures as a whole, we consider that the Bill may require further improvements in order to fully achieve the stated aims of simplifying and clarifying consumer legislation. For example the combination of the limited new statutory remedies and existing common law remedies for services may confuse consumers and businesses about consumers’ rights. Without further clarification this could create problems for consumers when attempting to assert their rights and difficulties for enforcers and regulators when assessing compliance with the law.
Summary of Key Issues
4. Remedies within the goods, services and digital content proposals relating to price reductions/limitations on the levels of refunds and the lack of a right to reject for intangible digital content. As drafted these are likely to have a negative impact on the level of consumer protection available and are therefore unlikely to increase consumer confidence.
5. Clause 71(2) and (3)1 relating to unfair contract terms may have unintended consequences by suggesting that specifically drawing the consumer’s attention to a term may be sufficient to remedy any unfairness. Transparency alone cannot turn a substantially unfair term into a fair one.
6. Changes to the enforcers’ investigatory powers will limit the ability of enforcers, primarily Trading Standards Services, to obtain evidence in civil investigations through written requests for information. This is likely to result in more on-site visits, significantly increasing investigation costs for enforcers and the disruption caused to businesses.
7. The proposed enhanced consumer measures will require a complex cost benefit analysis before a redress scheme can be set up which many enforcers may find burdensome. This could result in them being unable, or reluctant, to use the proposed measures because of a lack of specialist resource.
8. For the reforms to competition private actions, we consider that the Bill as drafted should be capable of implementing the key proposals that we have previously supported. However, it will be important to ensure that the proposed redress role does not divert significant resources away from the CMA’s core public enforcement role.
Goods—Chapter 2
9. We recognise the benefit in consumers and businesses having the certainty of a fixed time period to reject the goods. However, the 30 day limit for the “early right to reject” will significantly reduce consumers’ rights unless balanced by an effective final right to reject with no deduction for use. The Bill preserves the current “deduction for use” which permits a business to reduce the level of refund to take account of the use consumers have had from the goods when they reject them after a failed repair/replacement. The proposals allow businesses to make such a deduction within 6 months of purchase if the goods have a proven “second hand value” in an active second hand market. We are particularly concerned that this may incentivise businesses to routinely base any deduction on “second hand value”, and unreasonably withhold a full refund from consumers who have had little or no actual use from the products. In addition a proven “second hand value” could be established in many sectors given the existence of internet market places for second hand goods like eBay. This would also reduce the likelihood of a full refund. We also consider that this proposal would have a damaging impact in markets where the value of a good depreciates quickly. For example, the new car market where consumers stand to lose out significantly given the rapid depreciation of car values once they are classed as “second hand”.
Digital Content—Chapter 3
10. We welcome the introduction of a new category of digital content as the status of digital products has become an increasing area of uncertainty. However the proposals in practice will create an imbalance in consumer rights. The Bill introduces different rights for digital content depending on whether the content is tangible or intangible. There is no right to reject intangible digital content, but instead, a right to a price reduction. In many cases it is unlikely to be cost effective for the business to repair digital content (particularly of small value) and, since a replacement is only a copy of an already unsatisfactory product, a full refund would seem to be a fairer outcome. While the Explanatory Notes acknowledge a price reduction may in fact be for the full amount, in our view the right to a full refund should be made clear on the face of the Bill (at Clause 46).
Services—Chapter 4
11. We welcome the new consumer right that information given by a business before a contract is agreed will be a binding term of the agreement. However we would have preferred to see the draft Bill include proposals which formed part of the BIS consultation2: (i) a new “outcomes-based”3 quality standard for services which we believe could have addressed difficulties consumers experience in service contracts that go wrong; (ii) a provision that if no specific time is agreed between the consumer and business, the service will be performed within 30 days4 of the agreement. This could have addressed problems of delay that consumers experience when businesses keep them waiting indefinitely and the consumer wishes to exit the agreement to find another service provider.
12. We are not convinced the new remedies regime will provide adequate redress in many cases. While the Bill correctly preserves consumers’ other common law remedies, combining the new statutory remedies together with the existing common law remedies will be complicated and difficult to understand. In practice, consumers and businesses may focus solely on the more limited new statutory remedies as representing consumers’ full entitlement.
Unfair Contract Terms—Part 2
13. The Bill provides an opportunity to address issues relating to the original implementation of the underlying Unfair Contract Terms Directive.5 It is widely recognised that there is a lack of clarity in the UTCCRs, particularly as regards the exemption covering core issues of price and value for money. We consider that the existing draft statutory language has left scope for interpretations which have (in our view) not been best calculated to enable markets to work well for consumers. These are addressed below.
14. Clause 71 (2) and (3) of the Bill referring to “Other requirements for contract terms” provides that if a term is especially “onerous” or “unusual”, the business must ensure that the term is drawn particularly to the consumer’s attention. We are concerned that this clause is unnecessary and could create a loophole which would harm consumers and be inconsistent with the requirements of the Unfair Contract Terms Directive. The clause is unclear, particularly as to how it relates to the ordinary test of fairness, and the prominence test in s.67 of the Bill. A lack of clarity is harmful to business as well as consumers though we think the main risk here is to consumers.
15. If a term is “onerous” it will create an imbalance to the detriment of consumers. It is not clear, however, whether onerous here means the same thing as an imbalance or if it just overlaps. Nor is it clear what kind of “prominence” is required, or when a term becomes “especially” onerous. It appears that there is meant to be a clear-cut threshold, but there is no guidance as to where it falls, nor why that is appropriate rather than a sliding scale.
16. It is unclear what should happen if the requirement in this clause is breached. An unfair term is already unenforceable against the consumer and there is no provision for any other sanction or remedy. It therefore appears that this is not meant to add to the fairness test, but rather to modify it. We interpret this to mean that where an especially onerous term is made sufficiently prominent, it is not caught by the fairness provisions, and so can be enforced against the consumer. That would lower consumer protection, since putting disadvantageous terms in large or bold print does not make them fair. Any other interpretations still create a significant problem because it is undesirable for unenforceable terms to be drawn to consumers’ attention.
17. There is a further potential implication arising from this provision, which is that if a term is both “onerous” and “unusual”, but not “especially” onerous and unusual, it does not need to be drawn to the consumer’s attention at all. We think this is a significant risk, both in terms of the likelihood of its happening and the potential adverse impact on consumers if it does.
18. We believe that the definition of the “average consumer” in Clause 67(5) of the Bill should be sufficiently flexible to take account of situations in which the average consumer of a particular product or service is vulnerable and will not become aware of a term unless it is made sufficiently prominent. We are concerned that the “average consumer” test (clause 67) sets the bar too high to include a case where the business has targeted its goods and services (and therefore its contracts) towards a particular group which includes vulnerable consumers. The Unfair Commercial Practices Directive provides a helpful model for a provision of this type.
19. We would welcome inclusion of an explicit statement that the more onerous a term is, the more prominent it needs to be. The proposed wording does not expressly create a clear-cut threshold, like clause 71(2) of the Bill, but equally does not expressly recognise that different levels of prominence may be needed for terms that impose different levels of burdens on consumers. We agree with the Law Commission6 that a sliding scale approach would be best as it addresses the concern that the practical benefit of prominence is lost if many terms are made equally prominent.
Enforcer Investigatory Powers—Schedule 5
20. We consider that the proposed changes to investigatory powers are likely to limit the ability of enforcers to obtain evidence in civil investigations. Many enforcers of consumer law have both civil and criminal enforcement functions and the Bill seeks to combine their civil and criminal investigatory powers. We are concerned about the way the Bill deals with the power to require a business to answer written requests for information (Schedule 5(16)). The privilege against self-incrimination only applies if a person might incriminate themselves in criminal proceedings. We are concerned that the safeguards against self-incrimination in the Bill will also extend this privilege to civil remedies. This will limit enforcers’ ability to obtain evidence in civil investigations through written requests for information, which will therefore result in more site visits. The outcome will be significantly increased investigation costs for enforcers and increased disruption for businesses, and a possible reduction in the use of civil enforcement powers.
Enhanced Consumer Measures—Schedule 6
21 This proposal aims to provide enforcers with a new means of ensuring consumers obtain redress from businesses that have breached consumer law. Courts and enforcers will only be able to use the measures where to do so would be “just, reasonable and proportionate”. All enforcers are already required to operate in line with better regulation principles and the regulators compliance code which provide adequate controls on how they undertake enforcement. We therefore consider that any further restriction is unnecessary. We also have significant concerns that the complex cost benefit analysis which enforcers will have to undertake to a standard to satisfy a court will be too burdensome in practice. Many enforcers will not use the measures as they will not have the specialist resource needed to undertake the cost benefit analysis. Assessing the benefit to consumers and costs for the business may be very difficult to estimate.
22 We consider that the restrictions placed on the setting up of a redress scheme are too onerous. The draft Bill requires the court or enforcer to be satisfied that the cost to the business of complying with the measures is unlikely to exceed the loss suffered by the consumer. There is a risk that enforcers may find it difficult to accurately assess (i) the loss suffered by consumers, (ii) the cost the business will be subject to, and (iii) the administrative costs associated with taking the measures. As such enforcer-led redress schemes may underestimate the total amount of detriment and the amount of redress available to consumers. Consumers and/or their representatives may challenge the basis of the redress scheme resulting in unintentional expense and delay, or simply decide not to claim redress under the scheme and pursue court action instead.
23 The OFT considers that a better structure for the redress provisions would be comparable to the Financial Services and Markets Act (FSMA) model which puts the onus on the business to carry out the investigations, provide the information to the enforcer and to carry out a consultation before the scheme is set up.
Private Actions in Competition Law—Schedule 7
24 We note that our 2012 response to the Government consultation on private actions7 expressed strong support for the proposals to make the competition private damages action regime more effective. We draw the Committee’s attention to our detailed reasoning and conclusions in that document and note that these continue to represent our views on the key proposals being taken forward. We restrict our response to the Committee to the following key points.
Opt-out Collective Actions
25. We think that there are significant benefits to introducing opt-out actions, including the following key points:
In appropriate cases—for example where individuals have suffered a relatively low level of harm compared to the time and costs involved in seeking redress (although there is significant aggregate harm)—opt-out actions should increase redress to consumers and businesses compared to the present “opt-in” system, which appears to be delivering a sub-optimal level of redress.8
The cost of an action brought on behalf of the entire group of those who have been harmed is likely to be lower than the sum of the costs of individual actions (and possibly also individual settlements).
Greater redress would increase competition law compliance incentives, strengthening the role of private actions as a complement to public enforcement, delivering productivity and competitiveness to the UK economy and ensuring more of a “level playing field” between businesses who comply with the law and those that do not.
Appropriate safeguards
26. We recognise the need to ensure that the possibility of opt-out actions does not lead to abusive litigation or impose unfair additional costs on businesses. We therefore welcome the key safeguards of prior judicial certification of opt-out actions and the retention of the “loser pays” principle. We would, however, prefer to see fewer restrictions. For example, we query confining opt-out actions to the CAT and prohibiting the use of Damages Based Agreements. We consider that the removal of such restrictions may help support the use of meritorious opt-out actions. However, overall, we recognise Government’s desire to do its utmost to minimise the risks noted above while still increasing access to justice.
27. Finally, we note the Bill proposes that opt-out actions may be brought by a potential claimant or a representative body that meets certain criteria. Law firms, third party funders or special purpose vehicles will not be permitted to be representative bodies, stemming largely from concerns that class actions are sometimes run in the interests of, for example, a law firm (the agent), rather than the claimants (the principals). However, we note that similar problems may arise if a single claimant is able to act as a representative—they may be less capable or less incentivised to minimise costs and maximise the efficiency of collective litigation in the face of an experienced law firm or funder than an appropriate representative body. In our view, the Government should give this point further consideration and, at the very least, consider how to mitigate this risk through appropriate CAT rules.
Relationship between Private Actions and Public Enforcement
28. We consider that it is important to ensure strengthening private actions does not undermine the role played, or the tools used, by competition authorities in their public enforcement work. We therefore welcome the Government’s proposal for CAT rules to ensure that the competition authorities will be notified of and able to intervene in private actions, as well as the potential for staying private actions in appropriate cases where there is parallel public enforcement action. We also welcome the Government’s intention to consider legislation to ensure that the OFT’s leniency programme—a crucial tool in the detection of and enforcement against cartels—is not undermined if the European Commission decides not to bring forward such legislation, or if the European provisions do not offer the necessary protections.
29. Finally, we support giving the CMA a discretion to approve redress schemes that are voluntarily set up by infringing parties, as it may increase incentives for parties to offer redress voluntarily in certain circumstances. However, we think it is vital to get the practical details of setting up, approving and enforcing schemes right in order to ensure that the CMA’s role does not divert significant resources away from its core public enforcement. In particular, we think that the CMA should not be responsible for calculating compensation, although when deciding whether to approve a scheme it should be able to have regard to the level of redress offered. We will be liaising with Government further as it works on the aspects of this that will be contained in secondary legislation.
14 August 2013
1 Clause 71(2) of the Bill states that if a term of a consumer contract is especially onerous or unusual, the trader must ensure that the term is drawn particularly to the consumer's attention. Clause 71(3) of the Bill says that whether a term of a contract is especially onerous or unusual is to be determined, in particular, by reference to the subject matter of the contract.
2 Enhancing Consumer Confidence by Clarifying Consumer Law: Consultation on the supply of goods, services and digital content (July 2012) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31350/12-937-enhancing-consumer-consultation-supply-of-goods-services-digital.pdf
3 See paragraph 6.122 of the BIS consultation
4 See paragraph 6.87 of the BIS consultation
5 Council Directive 93/13/EEC http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31993L0013:en:HTML
6 http://lawcommission.justice.gov.uk/docs/unfair_terms_in_consumer_contracts_advice.pdf (see paragraph 4.46)
7 See http://www.oft.gov.uk/713560/publications/reports/oft_response/OFT1434resp.
8 As evidenced, for example, by the single collective action that has taken place under the existing opt-in regime.