Examination of Witnesses (Questions 71-79)
Mr Mike Haley
26 JULY 2007
Q71Chairman: Good morning, Mr Haley, and welcome
to the Committee. I do not know whether you have given evidence
here before to any of our committees, but we do have one or two
points which we need to explain before we go further. We are very
glad that you could make the time to come and talk to us while
we are doing this inquiry which is of course into the proposed
new Directive on timeshare and related holiday products. We know
about your business and what you do and we also know that you
have been active in protecting consumer interests in the area
of timeshare and similar products, so it would be very useful
for us to hear your views, as a regulator, as it were, and protector
of consumer interests. We have an hour, the session is open to
the public and it will be recorded for possible broadcasting or
webcasting. You will get a verbatim transcript of the session
and, if you feel the need to correct what you have said, please
do so, but do so as quickly as possible. We sometimes get to the
end of our hour and we perhaps have not finished the discussion
or there are further points which have arisen and we always welcome
an additional piece of written correspondence where you can lay
out what you would have liked to have said, had you had the time
to say it. Can you start by stating your name and your official
position and then, if you want to, you can make an initial statement
relating to what we are talking about today, and welcome once
again to the Committee.
Mr Haley: My name is Mike Haley and I
am Head of Consumer Protection at the Office of Fair Trading.
My introductory comments are very brief, just to explain the role
of the Office of Fair Trading and to put into context the answers
to the questions which you may pose. The Office of Fair Trading
is the United Kingdom's lead consumer protection and competition
enforcement agency and our role is to make markets work well for
consumers and we see that markets work best when there are well-informed
consumers who can make choices from honest businesses who are
in competition. Our powers are to protect the economic interests
of consumers and, more generally, the collective interest of consumers;
we do not act for individuals and we do not seek redress for individuals.
Our powers are entirely civil in terms of timeshare enforcement
and they arise from the Enterprise Act 2002, but the Injunctions
Directive, which is a piece of European legislation from which
the Enterprise Act powers arose, does give us the locus to approach
businesses in other Member States of the European Union whose
activities harm the collective interests of UK consumers. Previous
to my job as Head of Consumer Protection, I was Head of European
Enforcement at the Office of Fair Trading, so I have some experience
of using those cross-border powers. As part of my presentation,
we have brought a pack of information which we hope that your
Lordships will find useful which it may be useful to hand round
and I will be referring to that from time to time if it assists
in explaining some of the answers to your questions.
Q72 Chairman: Thank you for that. I think
we had better start by asking what beneficial effects you feel,
if any, have resulted from the existing Timeshare Directive and,
in particular, do you have any evidence in terms of level of complaint
or whatever it might be which can serve to support your feeling
about how well it is working? In the light of the problems experienced
with the current Directive and aside from holiday clubs, what
is your view of the proposed new Directive? That is a rather general
question to start off with.
Mr Haley: I thank you for that. In our
opinion, the Directive has put an end to the most problematic
practices which were notorious in the timeshare industry. To give
you an example of how effective it has been, complaints to the
Office of Fair Trading and Trading Standards declined from a peak
of over 11,500 a year in 1990, 1991 and 1992, before the Directive
came into play, to under half of that amount by 2000 and in 2006
enquiries and complaints to the Office of Fair Trading and Consumer
Direct, which is our new advice line where consumers can get advice
about consumer problems, had declined to under 1,000, so there
has been a reduction from over 11,500 to 1,000 in that period
of time, which I think is a mixture of the Directive itself and
better enforcement of the Regulations. In 2006 though, we have
had twice as many complaints to the Office of Fair Trading about
holiday clubs compared to timeshare and a smaller, but, I would
say, significant number of complaints regarding timeshare resale.
To put it in perspective, although that is a significant problem,
the number of complaints is small compared to other sectors that
the Office of Fair Trading regulates. From January to date, Consumer
Direct recorded 372 complaints or enquiries about timeshare, 696
about holiday clubs and 363 about timeshare resale, but during
that same period we had over 40,000 about the home maintenance
sector, 30,000 about furniture and 17,000 about personal computers.
I would put a caveat on that because it sounds that it is rather
small in comparison to the everyday purchases, but I think there
is a qualitative difference in the type of complaints. A timeshare
or holiday club purchase is a very significant purchase, could
be £10,000 or more, so the consumer detriment is rather high
even though there is a relatively small number of complaints compared
to other purchases. We also know that bogus holiday clubs and
scams are rather rarely complained about. We had some independent
research that an independent marketing company did for us about
the extent of scams which interviewed over 11,500 people and they
found that only 5% of consumers who had a problem in this sector
would report whether they had been ripped off and they found also,
by extrapolating the complaints from those interviews, that the
holiday club sector attracted the largest amount of detriment
of over £1 billion and that 400,000 had been affected by
these practices which put it at the top of our list of scams to
be investigated. Moving on to your question about the strengths
and weaknesses of the existing legislation before moving on to
the new legislation, the main strength of the Timeshare Directive
and why we think it has been effective has been the introduction
of the cooling-off period. I think it is essential that consumers
have that right to reflect on a purchase which has been made often
on holiday and in a situation where they are unprepared to compare
prices or enter into contracts, and I think that has protected
consumers from the situations of pressure that they might have
been in when they made the purchase. Secondly, pre-contractual
information provisions have been required in the Directive so
that consumers know more about what they are buying and what services
are associated with the timeshare, and we think that that has
been successful in pushing fraudulent operators out of the market
and for largely cleaning up legitimate or traditional timeshare
purchases. The main weaknesses have been that the definition of
"timeshare" has been found to be lacking. It has been
circumvented in a number of ways, for example, in what they call
`entry programmes' which are programmes for under three years,
and the existing timeshare law defines a timeshare contract as
36 months or more and some inventive entrepreneurs have invented
products which are 35 months and, therefore, are quite clearly
designed to evade the law. It did not encompass timeshare products
in non-fixed properties, such as canal boats, and it does not
cover these long-term holiday products, so that is where we have
seen the major issues occur which is around the fringes of what
the definition of "timeshare" is. Moving on to the new
Directive, we particularly welcome the ban on upfront fees for
resales, which is a particular issue of fraudulent conduct, and
we do believe that it addresses the remaining timeshare issues,
in particular, the introduction of a common 14-day cooling-off
period left and that is the cooling-off period in the UK timeshare
law and we find that that is clear to consumers. We would have
preferred, I think, at the time of the first consultation for
it to be a 21-day period and that is because people's holidays
are much longer now and we do believe that people need to come
back with the contract, consult a lawyer and also make sure that
they have all the information to hand which they can check on
the Internet, which are things they might not be able to do when
they are still on holiday. We do know that timeshare operators
and holiday club operators look for people with white legs which
means that, as soon as you come off the plane and before you have
talked to other people in the resort, they will try to sell these
products and, therefore, you may only have one day of that 14-day
cooling-off period by the time you get home. However, it is an
improvement and we welcome that. We also welcome the removal of
the three-year element of the definition, as I said. We found
that they have created these entry programmes which are basically
programmes of less than three years in which you are put in resorts
and you have then to go to further presentations and pressure
sales to sign up to a longer contract, so once in and without
a cooling-off period, you are then put under further pressure
during that period, so that again we very much welcome. It does
extend to non-fixed properties, such as canal boats, which again
we welcome. As to the clarity on the prohibition of taking deposits,
the law at the moment does put a ban on taking deposits within
the cooling-off period, but in reality that has been circumvented
by businesses asking for deposits to be made to a third party
rather than to the vendor, so in almost all cases businesses continue
to take deposits, and I think that puts consumers under a psychological
pressure to continue with the contract; they have already given
their credit card details, they have already had money taken off
them and they are more committed to the purchase. Also, the improved
information provisions within the new Directive are all very welcome.
Chairman: Thank you. There are some interesting points
which you have made, but I do not think I am going to go straight
into those, but I think we will take questions in the order we
have them.
Q73 Lord Moser: You gave some interesting
figures about the numbers of complaints, et cetera. Do you have
in your head a sort of broad picture of the size of the industry,
whether it is declining and whether the proportion between holiday
clubs and timeshare is changing, just a quick overall picture?
Mr Haley: I think there are something
like 400,000 owners of timeshare in the UK and probably 1½
million across Europe, so we are one of the largest purchasers
of timeshare. That has been a stable number for a number of years
and I think it is a maturing figure.
Q74 Lord Moser: It is fairly stable?
Mr Haley: Yes. Holiday clubs we kind
of look at as a different sector because there is no immovable
property. That has been growing between 2000 and 2005 and I think
that again has stabilised with five or six major players who provide
holiday clubs, but many more, dozens and dozens of marketing companies,
all with different names. If you go to resorts in Tenerife, like
Playa de las Americas, you will come across holiday clubs much
more frequently than you will timeshare because of the marketing
methods that they use, so I think at the moment they are both
stable, although holiday clubs are probably increasing slightly
and it is certainly more visual to the consumer in that they are
more likely to encounter a holiday club now than a timeshare.
Q75 Lord Moser: And on the whole there
is more trouble with the holiday clubs than with the timeshare?
Mr Haley: Absolutely, yes.
Q76 Baroness Gale: You mentioned the
cooling-off period and we have had two conflicting views on this
from the Consumer Group witness we had two weeks ago, Sandy Grey,
who would prefer a 28-day cooling-off period and last week the
OTE who felt that a shorter cooling-off period would be more beneficial
and they did not see much purpose at all in having a longer one.
You have suggested 21 days as a preferred option, so do you think
there is any chance of it coming to 21 days?
Mr Haley: I do not believe there is a
consensus across Europe on the 21 days. Because the Directive
says ten days at the moment, to increase it to 14 days, I think,
probably is a consensus. I suppose our view is trying to balance
consumer and business interests and we come somewhere in the middle,
but I think ours is rational on the basis that the purpose of
the cooling-off period is to give consumers the opportunity to
reflect, and I think you can only do that when you are out of
the situation when you first went into that contract. I think
you are a bit more reflective when you get home from a holiday
and you think, "Do I really want that product that I've signed
up for?" and, if you do, fine, sign the contract and return
it, but I would not think that a shorter cooling-off period would
achieve that level of consumer protection which is needed in this
sector.
Q77 Chairman: On the upfront payment,
the point was made to us that when you buy a fridge or a motorcar,
you very often make an upfront payment, so what is the difference?
This is a consumer good that somebody is buying.
Mr Haley: I think the difference is that
the consumer can shop around. If you want to buy a car, you can
go from showroom to different showroom, you can take a test-drive,
you can compare whether you are getting the best deal and the
best car and then, to secure the particular car that you know
you want because you have experienced the product, I think it
is fair enough to be asked for a deposit to secure that. With
timeshare and long-term holiday products, you do not have the
opportunity to try that and you might not try it for a year in
a timeshare situation, so you need to be in a situation where
you can compare, and you will not be able to go from one resort
to another or compare within resort, so you might need to go to
other sources of information which could be consumer groups or
the Internet and make some further research into the wisdom of
a sizeable purchase.
Q78 Baroness Greengross: I am just fascinated
by all the ingenuity of the scams, from what you were saying.
Can you tell us a bit more about how these scams affect the holiday
clubs and the different role in that, the providers of the holiday
clubs that have agents that sell membership of those clubs and
the relationship between them.
Mr Haley: Yes, I think I will take it
in two parts, firstly, to explain how they operate and how consumers
are entrapped or enticed into that situation before moving on
to the complex relationships between the different businesses
in the sector. A typical scenario is where consumers in a resort
in Spain or the Canary Islands are approached while they are in
a high street or on the promenade at the front of a beach by what
is called an `outside premises canvasser', an `OPC' in the trade,
and it has another name, the `on-site pavement canvasser', but
somebody you might think of as a tout, often using a ruse, such
as a winning scratch-card competition. A young, attractive person
jumps up in front of you and says, "Free scratch-card competition",
and the first one will inevitably be a loss, but for your partner,
because they will usually pick couples, it will be a winning scratch-card.
To collect the prize, which could be a bottle of champagne, a
CD player or a holiday, you would attend a presentation which
they would say would be for a short period. They would then organise
a taxi ride perhaps to some distance away from where you were
to begin with in order to collect that prize, so that immediately
puts the consumer at some psychological disadvantage that they
are in a situation where they do not know where they are and,
to get back, someone else has to organise the transport. Then
the consumer is taken into a marketing suite, known as the `sales
deck', and these are generally very professionally run, and I
have visited many of them, with banks of computer terminals, glossy
posters and brochures. They are then subjected to an intensive
three- to four-hour sales pitch and passed from one person to
another and kind of softened up to begin with. They go through
a questionnaire about their details to sift for people who can
afford it because they are looking for a particular type of customer.
Then it moves to someone who will go through the product with
you and ask questions in such a way that the consumer can only
say yes, so, "Do you like taking holidays?", "Do
you think it is a good deal if you can get savings on your holidays?"
I think these are sales techniques which are common, but I think
they have honed them into a particular sales pitch which is quite
expert. The problem has really been with that process and then
after three or four hours they have an expert `finisher' who will
come in to close the deal and then the contract will be signed
on the day. The problem is that the sales staff are provided with
very high financial incentives, maybe £1,000 or £2,000,
on that day to make that sale and, therefore, it is very ripe
for pressure tactics to be applied. These tactics often take the
form of a vast gap between the promises that the salesman makes
about the product and what it actually delivers. Examples would
be that you can get cheap Club-class flights to Australia for
£150 and that seems like an extraordinarily good deal to
entice you in. Of course there is nothing like the cooling-off
period and the terms and conditions in the contract are often
so ill-defined that any promises that they have made to you would
not be delivered within the contract. Various incentives are also
used, for example, cashback schemes, so they try to reduce the
risk. At the end, they say, "It's a rather sizeable sum",
but they never tell you that it is going to cost £10,000
upfront, but by the end of the process they keep that cost and
go for what they call the `pencil pitch' of working out how much
you spend on each holiday every year in order to come to a figure
where, after ten years, you may, say, have spent £2,000 per
year, so that will be £20,000, so £10,000 to get those
holidays is saving you £10,000. It is quite difficult sometimes
to understand why somebody would sign up to a contract for £10,000
unless they have been through that whole process. An incentive
such as cashback is where 10% goes into the scheme and after 50
months or so you will get most of your money back and usually
there is a promise made to get all of your money back so, therefore,
it seems that this is a very low-risk deal, that you pay your
money upfront now and you get your money back, plus you get this
access to holidays. The complex relationships between the various
parties we have tried to map out, and in your pack I will refer
to a document. As you can see from the document, it looks rather
complex and to try and explain it in words would probably take
longer than the hour, but, if I take you quickly through this,
in the bottom, left-hand corner is the OPC, the outside premises
canvasser, or what we call the `fly-by operator', which is another
way you can be taken to a presentation for timeshare or holiday
clubs where companies have incentives for you of free holidays
from some direct marketing campaign and, if you sign up, they
will take you out to resorts, so to some of these you might think,
"Wonderful", but in fact it is free holidays on the
proviso that you will go to a presentation, so they are the two
main ways of attracting a consumer to a presentation. Then, if
you go to the top, left-hand side, which is the marketing company,
the marketing companies are authorised sales agents. In our view,
they are agents of the holiday club operator, but they often believe
themselves to be very independent and in almost like a retail
wholesale situation. All they provide is the sales pitch, they
do not provide you with anything, and we find often that the contract
you are signing through the marketer cannot provide you with any
service. The cashback scheme is an ancillary product provided
by yet another company, so you then have a second contract here
with the cashback operator. Cashback operators tend to be registered
in places like Gibraltar, marketing companies in places like Panama.
Once they have taken the upfront fee from you, usually a deposit
of £500 or £1,000 and then they chase you further on
for the other amounts, you are put in touch with the club operator,
which is here at the middle top. The club operator puts the pack
together. That can be the right to accommodation, maybe four weeks'
accommodation at £72 a week over a year, plus other incentives,
like access to golf links and to cheaper air travel, and you pay
them an annual membership fee. However, in order to actually get
your holiday, you then have to call through a booking agent. Now,
the booking agent is another company and it is usually a registered
travel agent in Spain and that is where you would actually have
a contract for your holiday. Therefore, having spent £10,000,
£1,000 going to another company which is the cashback operator,
and £75 to the club operator, you then have to pay for your
holidays through a travel agent and this is where they often say
they are ABTA-bonded and give the impression that it is a very
legitimate business. All of that, we would say, a consumer could
normally get via the Internet or via Ceefax or just by going into
a travel agent, but the difference is that you have paid £10,000
for the privilege of a direct line to a travel agent. The consumer
is then put into the timeshare resort and this is where there
is a grey line between holiday clubs and timeshare resorts because
the holiday club is based on the premise that there is excess
inventory, unused weeks in timeshare resorts, so they have either
engaged with timeshare companies to purchase those weeks in bulk
or they have obtained people's timeshares which often are on a
kind of part-exchange basis, so, if you want to join a holiday
club or have them take your timeshare off your hands, holiday
clubs cost £10,000 and they give you £5,000 for your
timeshare and they take £5,000. We have had one case where
someone did that and then, when they were put on holiday, it was
back in the same timeshare resort and the same timeshare apartment
which they had given up in part exchange, so it is a complex relationship.
Q79 Chairman: I wish I was as clever
as that!
Mr Haley: Some of these people are very
rich and you can see why. It is a complex arrangement and I think
that the key issue in order to understand the business is that
the holiday club provider, the pack operator, there are only five
or six real companies who actually put a pack together, but there
are dozens of, maybe even 100, different marketing companies,
all with different names, so we can get complaints about XYZ company
and really they are coming back to a rather small amount of people
who put the packs together, and that is trying to put in a nutshell
how the relationships work.
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