Online Platforms and the Digital Single Market Contents

Chapter 7: Consumer protection and online platforms

260.This chapter focuses on two key consumer protection issues. First, we consider how existing consumer protection law applies to consumer-to-consumer transactions that are facilitated by online platforms. Second, we ask whether online platforms are sufficiently transparent in how they present information, such as search results or ratings and reviews, to consumers.

Consumer-to-consumer transactions

261.The Commission’s Digital Single Market Strategy said that “the only direct interface for users of e-commerce platforms is often in practice the platform itself … a user may consequently be under the false impression that the platform is the supplier, whereas in fact the user’s real counterparty is a private individual.” This distinction is important because in such cases “users will not have the benefit of protection under EU consumer rules, as this legislation only applies to contracts between businesses and consumers”.377 Citizens Advice agreed that consumer rights were “limited” in such cases, because consumer protection rights were introduced “at a time when such transactions were face to face, small-scale, informal and unmediated—the ad hoc seller in the local pub.”378

262.Box 9 outlines the relevant consumer protection law in the UK and EU.

Box 9: Consumers and Traders in Consumer Protection Law

Articles 4(2)(f), 12, 114 and 169 of the Treaty of the Functioning of the European Union (TFEU) provide the legal basis for EU legislation on consumer protection. Consumer protection is a shared competence between the EU and Member States, and EU law provides a common basic level of protection to all consumers.379

There are approximately 90 Directives relating to consumer protection issues in the EU. This legislation covers a wide range of sectors from product safety and financial services to food safety and labelling. This body of legislation is referred to as the “consumer protection acquis”.380

This body of legislation concerns contracts and consumer notices between a consumer and a trader.381 There is not one shared definition of a consumer in all Member States. In the UK Consumer Rights Act 2015 defines a consumer as “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”.382 The Act defines a trader as “a person acting for purposes relating to that person’s trade, business, craft or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf.”383

263.We heard that online platforms had fundamentally challenged the distinction between consumer and trader upon which the consumer protection acquis was based. Citizens Advice said: “the idea of a ‘trader’ itself is now hard to define.”384 The CMA agreed that “the current definitions of ‘trader’ and ‘consumer’ may be in need of revision.”385 Which? said: “we do not believe that applying existing legislation will necessarily be effective as these online platforms often operate differently through the C2C (consumer-to-consumer) lens”.386

264.The result, according to the CMA, was a “lack of clarity and certainty as to the legal relationship between users, and the legal relationship between platforms and their users”. This was problematic in instances “when something goes wrong, for example when a purchased product does not arrive, when there are surprising charges imposed, or when rogue actors are using a platform.”387

265.Collaborative economy platforms argued that they dealt effectively with consumer protection problems. Patrick Robinson, from Airbnb, said Airbnb employed around 450 people, “schooled in 22 European languages”, who were on call around the clock. While Airbnb encouraged users “to resolve things with their hosts when they check-in”, if this was unsuccessful they had a refund guarantee. He accepted that “consumer-to-consumer models present unique challenges in terms of redress”, but denied that there was “a gap in the law.” Instead he said it was important to “identify whether there is a problem that needs to be filled by regulation.”388 Etsy, an online marketplace for crafts, had similar processes in place to handle disputes between buyers and sellers.389

266.First Tutors said that it effectively had “to act as a trading standards mediator to try and seek resolution between tutors and clients on occasion”. They said they had “an obvious incentive to take on some responsibility for ensuring the services [which] we introduce run smoothly because it directly affects our reputation”, and concluded that further regulation was therefore unnecessary. 390

267.Mark McGann, Uber’s Head of Public Policy in Europe, said that “technology really has stepped in and taken on much of the burden with regard to consumer protection”, through rating and review systems.391 Which? said that while collaborative economy platforms “may disturb the basis upon which existing services are provided, it is not obvious that this suggests any material shortfall in the nature or extent of regulatory protections … in some cases, the new models look to significantly improve protection for consumers”.392

268.However, the Citizens Advice report Peer problems: an assessment of the consumer experience of online marketplaces found that 14% of those who responded to their poll, “were unable to resolve their most recent problem” in relation to a good or service purchased online. Citizens Advice said that “less than half of people know that they have fewer rights when buying from an individual than from a business.” Their findings raised “the question of how traditional consumer rights could be translated into an approach that works in the peer to peer economy.” Citizens Advice therefore recommended that the Law Commission “review the law covering consumer to consumer transactions, including reviewing the definition of a ‘business’ or ‘trader’ and the protections consumers enjoy in consumer to consumer transactions.”393

269.While the CMA recognised that “Technological advances may have made certain aspects of existing regulation less necessary”. Nonetheless, they also considered that “some specific improvements are possible around platform liability, clarifying responsibilities between the platform and the seller”. In particular, they believed that online platforms should supervise their users and ensure they were able to comply with consumer protection law. They also recommended more clarity about whether an online platform had to co-operate with authorities if there were allegations about the malpractice of a trader and whether it was appropriate to hold a “platform to account for infringements by its business users”. Such clarity was needed “in order that users can be confident of their rights and maintain trust in the market.”394

270.Claire Bury, from DG Grow, agreed that there was scope to clarify the EU rules that apply to the collaborative economy in the area of consumer law, citing in particular the Unfair Commercial Practices Directive, the Unfair Contract Terms Directive and the Consumer Rights Directive. The Commission was keen to “look at where there might be regulatory gaps and how they can be addressed”.395

271.Some online platforms take consumer protection issues seriously and dedicate significant business resources to addressing problems as and when they arise.

272.Nonetheless, the growth of online platforms and the collaborative economy raise important questions about the definitions of ‘consumer’ and ‘trader’, which form the cornerstone of consumer protection law. This creates uncertainty about the liability of online platforms and their users in instances where consumer protection concerns may arise.

273.We recommend that the Commission and the Government review the use of these definitions within the consumer protection acquis in order to determine whether gaps in legislation exist and if legislative change is needed. The Commission should also publish guidance about the liability of online platforms on consumer protection issues in relation to their users, including their trading partners.

274.We also recommend that online platforms clearly inform consumers that their protection under consumer protection law may be reduced when purchasing a good or service from an individual, as opposed to a registered trader.

Transparency in how online platforms present information

275.The provisions of the Unfair Commercial Practices Directive are outlined in Box 10.

Box 10: Unfair Commercial Practices Directive

The Unfair Commercial Practices Directive, implemented by the Consumer Protection from Unfair Trading Regulations (CPRs) 2008 in the UK, applies to any act, omission and other conduct by businesses directly connected to the promotion, sale or supply of a product to or from consumers. The CMA said that these Consumer Protection Regulations (CPRs) prohibited

  • misleading actions (where information is false or deceptive);
  • misleading omissions (where information the average consumer needs is left out, provided unclearly or is hard to find); and
  • aggressive practices (where the consumer is put under unfair pressure to make a decision).

According to guidance published by the Office of Fair Trading in 2008, a practice is unfair if it materially distorts or is likely to materially distort the economic behaviour of the average consumer—for instance, if the practice made it more likely that the average consumer would buy a product they would not otherwise have bought.

Source: Office of Fair Trading, Guidance on the UK Regulations implementing the Unfair Commercial Practices Directive (May 2008) p 8–10: [accessed 15 March 2016]

Transparency in search results

276.In its Digital Single Market Strategy the Commission said there was a risk that when consumers used search engines they “may not be able to distinguish between organic and paid-for search results.” It argued that the lack of transparency in search results extended to consumers’ understanding of the “approach taken to ‘rank’ (order) results or to select pricing information”, as well as to how this related “to the underlying business model of the service provider.”396 Which? agreed that there were concerns over whether “the basis upon which … search results were generated is clear to the consumer”. It said it was important for consumers to know whether search results were “influenced by promotional spending on the part of sellers (to make their offer more prominent)”, or “affected by information about the consumer in ways that the consumer would not reasonably have been able to expect.”397

277.The hotel chain that submitted evidence anonymously was concerned about a mismatch between how online travel agents (OTAs) presented search results, and consumers’ expectations. They said that 82% of consumers used OTAs in order “to get the lowest price”. However, they noted that OTAs “do not sort hotel search results by price by default”. Instead, “hotels are told the more commission they pay, the higher they will appear in the sort results”—the sort order “is entirely shaped by commercial factors”. These factors were “not made clear to the consumer”, and consumers “will rarely alter the default search on a website (ie, from the ‘our favourites’ or ‘recommended’ option’”).398

278.Similar concerns were raised in relation to insurance price comparison websites. Mr Alexander told us that when his 80-year-old mother “put exactly the same information into three comparison sites [she received] five different answers.” It was not clear to her that they were “tied houses”, meaning that the price comparison websites had links or contracts with specific insurance companies to whose offers they directed customers. Mr Alexander said that for the “average person in the street”, such practices were “unreasonable and unfair”.399

279.Regulators agreed that the practices of price comparison websites were unclear to consumers. Ms Bury, from DG Grow, said that the Commission’s recent research on comparison tools showed that: “Out of more than 1,000 comparison tools that we looked at, less than 40% of them were providing a description of their business model and only 37% were providing an indication of the relationship with the providers that they compare.”400 Mr Chisholm agreed that “the transparency of the business model to the user is very important”.401

280.Skyscanner recommended that price comparison platforms disclose “their business structure in order for consumers to fully understand the company that they are dealing with and the method of remuneration of an online platform.”402 Dr Plodowski agreed: “A clear graphic should be created for each digital platform to show the network of relationships it mediates in its business model, and [be] displayed on an easily accessible and explicitly named page on the website.”403

Disclosing the basis of algorithms to improve transparency

281.Witnesses were asked whether requiring online platforms to disclose their algorithms would improve the overall transparency of search results.

282.Which? said such a move “would seem an extremely heavy handed, and very likely unjustified, intervention.”404 Professors Broughton and Tambini said that forcing online platforms to disclose their algorithms would raise numerous practical difficulties: “Google estimated it carries out up to 20,000 experiments of changes in its search algorithms with 585 launching permanently. Would platforms be required to update regulators each time one of these changes was made?” They also raised concerns about how policymakers would “gain and maintain the technical literacy to understand the content and implications of often very complex algorithms and computer software”. Finally, they highlighted the “commercial sensitivities” of disclosing information relating to algorithms, which would normally be considered the intellectual property of online platforms, and the risk that disclosing this information could lead to the “gaming” of algorithms.405

283.As an alternative, witnesses proposed that online platforms be more explicit about the aims and intentions of the algorithms powering their search results. Mr Alexander argued for transparency that would allow regulators to “audit algorithms for delivering the outcome they were intended to deliver”. Achieving this would require greater transparency regarding the types of data used by the algorithm (“input parameters”) and transparency regarding the “corporate objective of the algorithm”.406 Professors Broughton and Tambini recommended that online platforms should “be required to inform regulators about the broad guidelines governing information prioritization and agree to abide by codes of conduct”.407 The British Hospitality Association said improved transparency was required in order to assist regulators in “identifying and combatting these effects in the online environment”, and “to enable regulators to assess whether they have at their disposal adequate tools to address the potentially harmful effects of these practices”.408

284.Mr Cohen, of Google, told us: “We have been dealing for some time with a perception that Google is a black box and that there is this magical algorithm that spits out a fantastic search result.” Google recognised “that helping people understand how your services work increases confidence in those services, and people are more inclined to use them in an educated and informed way.”409 Mr Cohen also said that over the last five years Google had built internal education pages to explain to its users how search results are derived and how their algorithms work. As an example of Google’s commitment to transparency, Mr Cohen explained that when Google recently decided to change their algorithms for searches on mobile phones to prioritise websites structured to appear better on mobile devices, Google communicated this change to its users and “helped websites adapt so that their sites were better for mobile devices”. Ensuring the right level of transparency was “a balance” and he added that “we are constantly playing with it to figure out where exactly it works best.”410

285.Concerns about the lack of transparency in how search and meta-search results are presented to consumers are well founded, especially in relation to price comparison websites, where the results of a search may be based on a commercial deal between the website and a business, rather than on the best possible price. However, we do not believe that this problem should be addressed by requiring online platforms to disclose their algorithms, which are their intellectual property. Instead, we believe that these concerns should be addressed through increased transparency.

286.We recommend that the Commission amend the Unfair Consumer Practices Directive so that online platforms that rank information and provide search and specialised results are required to clearly explain on their website the basis upon which they rank search results. We also recommend that the Commission amend the Directive to require online platforms to provide a clear explanation of their business models and relationships with suppliers, which should also be prominently displayed on their websites.

Personalised pricing

287.Which? raised a further concern, around so-called ‘personalised pricing’, whereby online platforms use “information provided by or revealed by the consumer” to determine prices.411 Professor Eric Clemons and the German Monopolies Commission also expressed concerns that online platforms’ use of personalised pricing was not transparent to the consumer.412

288.Professor Ezrachi outlined how online platforms could use personal data to personalise pricing in a particularly effective way: “If you are likely to spend more, you will just have to pay the display price, but if they know that you have some reservations—if your history, the data that were gathered on you, indicates not … you will immediately also get a coupon.”413 He believed the practice warranted greater attention, as it was likely to lead to “the transfer of wealth from the pockets of consumers to the pockets of operators”.414

289.In contrast, Professor Langlois said that “in most circumstances, price discrimination is economically efficient, since it encourages sellers to serve customers they would not otherwise be willing to serve; but those who are charged a higher price because they have a higher willingness to pay are seldom pleased to see others pay less.” Professor Langlois continued:

“Price discrimination is common and important in platform markets, because the services platforms provide often require high fixed costs but yield low (or even zero) marginal costs … Price discrimination, often in the form of multi-par tariffs, is a way to pay those fixed costs, and thus to provide a platform service that would not otherwise be profitable.”415

290.Patrick Misener, Global Vice President of Amazon, told us that fifteen years ago Amazon conducted random price testing by giving different prices for several dozen DVDs: “we were serving up discounts of anywhere between 20 per cent and 40 per cent and observing how consumers behaved: where they bought, where they did not”. Amazon did this over a five-day period, until it was discovered by two professors monitoring eBay variable pricing and using Amazon as the fixed price with which to compare it. They found when they signed in with different accounts, they got different prices and so “not unreasonably, they assumed that we were serving up different prices based on the demographic information that we had about our customers.” He told us that Amazon “will never use demographic information to price. We will not use purchase history or whatever other assumptions. We will not do that and never have … In the case of this random price test, there is no other word for it than stupid … We have not done it since. It was just dumb.”416

291.We note concerns that online platforms can and do engage in personalised pricing, using personal data about consumers to determine an individual price for a particular good or service, without clearly communicating this to consumers. This is another worrying example of the lack of transparency with which some online platforms operate. We recommend that DG Competition build on the work of the Office of Fair Trading and investigate the prevalence and effects of personalised pricing in these markets. We also recommend that online platforms be required to inform consumers if they engage in personalised pricing.

Ratings and reviews

292.Witnesses described the benefits of rating and review systems used by online platforms. TechUK said that the CMA “estimates that more than half of UK adults (54%) use online reviews”, and that “most buyers find that the product or service they have bought after researching it online matches their expectations”.417 Mr Misener compared the information provided to consumers through ratings and reviews with conventional high street retailers: “What happens if I walk into a high street store and buy a sweater or a cardigan? I take it home, I wear it and it starts to get holes in it. I take it and wash it, and the dye runs out. May I write a bad review of that sweater, walk into the high street store and put it on the shelf? Absolutely not.”418

293.Such reviews are critical to the functioning of collaborative economy platforms. Airbnb said peer-to-peer reviews were “Core to the experience of travelling on Airbnb … These kinds of mechanisms have become hugely powerful ways of regulating quality in marketplaces”.419 Mr McGann, of Uber, said the peer review system, whereby “every time you take a trip, you rate the performance of the person who has driven you, and the drivers rate the customer”, meant that there was “constant monitoring and momentum of better customer service, which is again very transparent.”420

294.However, concerns were raised about the integrity of rating and review systems used by online platforms. The CMA, Which? and Citizens Advice said they all had evidence of rating and review systems being misused. The CMA said that it found evidence of “fake reviews being posted on review sites, negative reviews not being published and businesses paying for endorsements without this being made clear to consumers.”421 Which? told us that “Different platforms have extremely different systems of reviews, and some seem inherently better than others.422

295.EU VAT Action said that “Online reviews … are rarely checked for validity”, and that “review systems are frequently abused.”423 The Bed and Breakfast Association said OTAs did not “check their ‘reviews’ were written by someone who actually booked the accommodation reviewed”; the fact that reviewers often “remain anonymous” meant that “consumers are being misled, and businesses often unfairly disadvantaged, as a result.”424 The British Hospitality Association was concerned that “customer reviews on websites, such as TripAdvisor … frequently give no right of reply to the establishment reviewed.”425

296.TripAdvisor acknowledged that “Fake or misleading reviews exist”, but described the issue as “overblown”. They had a “fraud investigation team”, which “tracks each review that we know has been submitted by an optimisation company to identify other clients”. As a result they had closed down “more than 30 optimisation sites” in 2015. They also imposed “strong penalties on business owners engaged in fraudulent activity, including reducing their popularity ranking and posting a large red penalty notice on our site explaining that the property’s reviews are suspicious.”426 Airbnb said that, as well as ensuring that only those who stayed at the property were able to leave reviews, it had introduced “a process of ‘double blind’ reviews where neither side gets to see the review before it is published—thus incentivising even greater levels of candour and honesty.”427

297.Which? recommended that all ratings and review systems used by online platforms should include measures for “fair handling of negative reviews, and appropriate safeguards against these being suppressed in any way”, and added that there should be “clear distinctions between user reviews and any form of paid for promotions.”428

298.Mr Rossoglou, from the online reviews platform Yelp, said that the existing consumer protection acquis already required a degree of transparency. He believed that all the problems described in relation to use of rating and review systems were covered by the Unfair Commercial Practices Directive.429

299.The rating and review systems used by online platforms are instrumental in creating the trust necessary for consumers to engage in online transactions. To ensure transparency, however, we believe that all online platforms should have publicly accessible policies for handling negative reviews, and clearly distinguish between user reviews and paid-for promotions. We recommend that the Commission publish guidance clarifying how the Unfair Commercial Practices Directive applies to the rating and review systems used by online platforms.

377 Commission Staff Working Document, A Digital Single Market for Europe: Analysis and Evidence, SWD(2015) 100 p 54

378 Written evidence from Citizens Advice (OPL082)

379 European Parliamentary Research Service, Consumer Protection in the EU: Policy Overview (September 2015) p 3: [accessed 15 March 2016]

380 European Parliamentary Research Service, Consumer Protection in the EU: Policy Overview (September 2015) p 5: [accessed 15 March 2016]

381 House of Commons Library, Consumer Rights Act 2015, Briefing Paper, SN 6588 October 2015, p 4

382 Consumer Rights Act 2015, section 2

383 Consumer Rights Act 2015, section 2

384 Written evidence from Citizens Advice (OPL0082)

385 Written evidence from the Competition and Markets Authority (OPL0055)

386 Written evidence from Which? (OPL0090)

387 Written evidence from the Competition and Markets Authority (OPL0055)

388 Q 165 (Patrick Robinson)

389 Written evidence from Etsy (OPL0063)

390 Written evidence from First Tutors Edunation Ltd (OPL0020)

391 Q 165 (Mark McGann)

392 Written evidence from Which? (OPL0090)

393 Written evidence from Citizens Advice (OPL0082)

394 Written evidence from the Competition and Markets Authority (OPL0055)

395 Q 107 (Claire Bury), Directive on Unfair Commercial Practices 2005/29/EC (OJ L 149, 11 November 2005), Directive on unfair terms in consumer contracts 1993/13/EEC, (OJ L 095, 21 April 1993) and the Directive on Consumer Rights 2011/83/EU (OJ L304, 22 November 2011, p 64)

396 Commission Staff Working Document, A Digital Single Market for Europe: Analysis and Evidence, SWD(2015) 100 p 54

397 Written evidence from Which? (OPL0090)

398 Written evidence from anonymous witness (OPL0086)

399 Q 138 (David Alexander)

400 Q 99 (Claire Bury)

401 Q 46 (Alex Chisholm)

402 Written evidence from Skyscanner Limited (OPL0006)

403 Written evidence from Dr Anna Plodowski (OPL0088)

404 Written evidence from Which? (OPL0090)

405 Written evidence from Sally Broughton Micova and Damien Tambini (OPL0053)

406 Q144 (David Alexander)

407 Written evidence from Sally Broughton Micova and Damien Tambini (OPL0053)

408 Written evidence from the British Hospitality Association (OPL0023)

409 Q113 (Adam Cohen)

410 Q114 (Adam Cohen)

411 Written evidence from Which? (OPL0090)

412 Written evidence from Professor Eric Clemons (OPL0071) and the Monopolkommission (OPL0046)

413 Q 26 (Professor Ariel Ezrachi)

414 Q 24 (Professor Ariel Ezrachi)

415 Written evidence from Professor Richard Langlois (OPL0073)

416 Q172 (Paul Misener)

417 Written evidence from TechUK (OPL0056)

418 Q 175 (Paul Misener)

419 Written evidence from Airbnb (OPL0061)

420 Q 161 (Mark McGann)

421 Written evidence from the Competition and Markets Authority (OPL0055)

422 Written evidence from Which? (OPL0090)

423 Written evidence from EU VAT Action Campaign (OPL0015)

424 Written evidence from the Bed and Breakfast Association (OPL0080)

425 Written evidence from the British Hospitality Association (OPL0023)

426 Written evidence from TripAdvisor (OPL0085)

427 Written evidence from Airbnb (OPL0062)

428 Written evidence from Which? (OPL0090)

429 Q133 (Kostas Rossoglou)

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