Supplementary memorandum by Department
for Business Enterprise & Regulatory Reform
Thank you for your letter of 23 October 2007
which followed the evidence I gave to the Chairman and members
of EU sub-Committee G at their meeting on 18 October.
This letter addresses your questions following
the points covered in my letter to you of 16 October.
DEFINITION OF
TIMESHARE—"OVERNIGHT
ACCOMMODATION"
The intent behind the Commission's proposed
amendment to the definition of timeshare in Article 2 is to extend
the coverage of the current directive to timeshare contracts which
relate to more than accommodation in real property, as is currently
the case. For example, the Timeshare Act 1992 went further in
this respect and included caravans.
However we are concerned that other arrangements
which grant rights to repeated periodic access to accommodation,
in its widest sense, over a period of more than one year should
not be inadvertently caught. For example, access to boxes in theatres
or seats in sports stadiums. It would not be appropriate that
these arrangements should be considered timeshare agreements and
subject to the requirements of the directive. Another element
of the proposed change is that the qualifying period of occupation
of at least seven days is gone, which would have discounted the
arrangements we have in mind.
We are also concerned that the definition should
be broad enough to take into account accommodation of the type
which we know is currently the subject of timeshare arrangements,
for example, caravans (already covered in the UK) and accommodation
in boats, such as canal boats, cruising yachts or cruise ships.
The element which all of these different arrangements have in
common, in terms of timeshare contracts, and which those arrangements
which we do not believe should fall within the directive do not
share, is that they incorporate overnight accommodation.
The Presidency has now proposed using the term
"overnight accommodation" in the definition.
DEFINITION OF
EXCHANGE
We are concerned that the currently proposed
definition does not properly describe the nature of exchange contracts,
relying as the proposal does on the concept of modification of
a timeshare owner's contractual rights.
In our view, and the view of the two main exchange
companies who have their European bases in the UK, the service
can be far more accurately expressed, and, as currently drafted,
the definition would not catch exchange services as we understand
them.
We have therefore proposed a definition which
is based on the feature that exchange allows the consumer to use
the timeshare rights of others (or sometimes other benefits) in
exchange for others using their timeshare rights. We believe this
captures what actually happens. It will be appreciated that there
is no modification of timeshare owners' rights; it is simply that
the timeshare owner makes his rights available for the use of
other participants in the exchange system.
It is also important to ensure that the definition
does not tie the system just to overnight accommodation which
is the subject of other consumers' individual timeshare rights.
A proportion of the accommodation in an exchange system's portfolio
might well consist of unoccupied or unsold timeshare weeks which
are deposited by resort operators as a means of providing for
higher occupation rates in their resorts. This is an additional
service to enable the timeshare owners in their resort access
to an exchange system via mechanisms such as "points"
purchase without depositing their own rights.
EXCHANGE CONTRACTS
An exchange contract is, by its nature, an ancillary
contract to a main timeshare contract. Without a timeshare contract
a consumer has nothing to deposit into an exchange system and
so cannot exchange.
As currently drafted, the proposal imposes a
cooling off period on exchange contracts separately from a main
timeshare contract. In my letter of 16 October 1 outlined the
circumstances that have been identified as the source of consumer
detriment and the relatively low costs associated with exchange
contracts. This detriment has been identified in relation to the
promises about the possibility for exchange within a system during
the sales process.
You ask about the issues of principle underlying
our approach to the coverage of exchange. The principle we are
seeking to apply is that of proportionality; to ensure that the
provisions provide consumers with adequate protection against
the identified nature of detriment while not imposing unduly onerous
or unnecessarily complex provisions on the exchange systems.
The proportionate approach to dealing with this
detriment is not in our view by applying a separate cooling off
period to these contracts, but by applying the information requirements
in the proposal, which in turn applies that information to the
contract. These seek to ensure that consumers are provided with
accurate descriptions of how the system works and what their individual
membership will entitle them to in terms of exchange possibilities
in the system. In addition, we are proposing that the information
requirements should also include details of restrictions on access
to particular exchanges which might be the result of peak periods
of demand for particular resorts, and that the exchange operator
should be obliged to inform the consumer when any particular exchanges
which they might apply for attract any additional charges over
and above the exchange fee, for example for the use of facilities.
In our view, the rationale for imposing a ban
on payment before the completion of a separate cooling off period
does not apply to the exchange situation. As an ancillary contract,
the proposal ties the cooling off period for a timeshare purchase
to an exchange contract agreed at the time of the timeshare sale.
The exchange companies advise us that the consumer is provided
with a copy of the exchange contract at the same time as they
agree a timeshare contract. Under the proposal, the consumer will
have been provided with the required information at this time,
and that information will be included in the contract. If they
withdraw from their timeshare contract within the cooling-off
period, the exchange contract will automatically fail. It should
be noted, however, that, while the exchange contract is provided
to the consumer when they agree their timeshare contract, that
contract is rarely concluded at that stage in case the consumer
withdraws from their timeshare contract. The exchange contract
is generally concluded once the cooling-off period has passed
so that the consumer then owns something they can exchange. It
will be appreciated therefore, that a separate cooling off period
for exchange would only begin when the timeshare cooling off period
has been completed—effectively doubling the period during
which a consumer might withdraw from an exchange contract in circumstances
where we doubt that a cooling off period is justified by the evidence
of detriment in any case.
The issue of possible demands for advance payments
for exchange contracts at the point at which the consumer signs
a timeshare agreement and whether that might produce a loophole
has not been raised in Council Working Group discussions. Of course,
advance payments for timeshare contracts are already banned under
the current directive, the proposal seeks to clarify and tie down
this ban more thoroughly because I understand that in some countries
payments into trust-type accounts have been permitted. Those arrangements
have been criticised by the Commission in terms of implementation.
At the same time, exchange contracts have not been regulated and
have not been subject to that ban. To our knowledge exchange contracts
have not been exploited as providing an alternative means of achieving
up-front financial commitment from consumers for timeshare purchases
in the way you have described.
While we understand that there are some small
exchange systems operated between groups of resorts, the main
systems, accounting for by far the greatest number of exchanges,
are separate organisations from timeshare operators. As mentioned
above, the exchange contracts are unlikely to be entered into
without something to exchange and the companies are unwilling
to enter into contracts until the timeshare sale is completed,
post cooling-off period. Any contractual arrangement for payment
for exchange membership would not therefore generally apply until
the completion of the associated timeshare contract and subsequent
conclusion of the exchange contract. In these circumstances an
advance payment for the exchange contract would not therefore
appear to carry any benefit from the "tying-in" effect
for a timeshare company because the consumer would already have
had the "no-strings" opportunity to withdraw within
the cooling-off period for the timeshare contract. We have no
evidence, therefore, which suggests that exchange contracts have
been or would be used as described.
In discussion, the Commission have raised a
different concern; that timeshare sellers might somehow masquerade
as exchange companies to benefit from the lighter regime. Our
view on that is that, if the end result is that a consumer owns
a timeshare, then, irrespective of what it looks like, the seller
is selling timeshare and will be caught under the rules which
apply to selling timeshare, not exchange. The Commission's comment
is an argument for seeking to ensure that the enforcement authorities
keep abreast of developments in this market and remain alert to
opportunities to deceive.
RESALE CONTRACTS
The definition in the Commission proposal covers
contracts where a trader helps a consumer to buy or sell timeshare
or long-term holiday products. In our view this does not cover
the situation where a trader might acquire a timeshare contract
from a consumer and then chooses to sell that timeshare contract
on. It covers the services of an intermediary who undertakes,
on behalf of the consumer, to identify a buyer and arrange for
the sale by the consumer of the timeshare contract, in much the
same way as a real estate agent acts for the seller of real property.
I can confirm that it is our view that where
a trader acquires a pre-owned timeshare contract for onward sale
on his own behalf to a consumer, then he will be selling a timeshare
contract as a trader and will be subject to the provisions of
the directive as they apply to timeshare sales, including in respect
of the cooling-off period. We support this position.
The Committee is not quite correct in concluding
that the Government's objection to a cooling-off period in respect
of resale contracts applies only to the sale of a timeshare by
a consumer to a trader. Rather, our objection is to a cooling-off
period applying to the arrangement between the consumer and the
resale "agent" whose role is as intermediary between
the consumer and the buyer, be that another consumer or another
trader. We support that the proposal denies any payment to the
resale "agent" before a sale is concluded or the agency
contract is otherwise terminated.
I hope this helps to clarify the Government's
approach to the matters you have raised, and look forward to your
Committee's report in due course.
10 November 2007
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