DMU Insight #3: Digital economy - beware and prepare, consumer protection is growing teeth

Consumer protection in the UK has historically been underweight compared to the competition regime – the CMA has not had direct enforcement powers meaning that any breach of consumer law must be tried and proven in a court of law. Historically the CMA has rarely taken firms to court over consumer law, preferring to negotiate undertakings with infringing firms to bring the conduct to an end. The draft Digital Markets, Competition and Consumers bill (DMCC) will change this, giving the CMA direct enforcement powers including the power to fine infringers up to 10% of their global turnover.

The consumer protection regime has grown teeth, and while the reforms apply economy wide, the new powers will doubtless be used aggressively in the digital economy, and not just against firms designated as having strategic market status (SMS).

A regime with teeth

The DMCC builds on the UK’s existing (court-based) consumer law regime, introducing new, direct enforcement powers for the CMA. Pursuant to its new powers, the CMA may decide itself whether consumer law has been broken and impose directions or fines without having to go through the courts. Specifically, the CMA will be able to fine businesses:

• up to £300,000, or 10% of a businesses’ annual turnover (whichever is higher) for breaching consumer laws;
• up to 5% of a business’s annual global turnover, with an additional daily penalty of 5% of daily turnover during non-compliance for failing to comply with a direction.

The introduction of steep penalties for non-compliance, alongside existing criminal penalties (punishable by fines or imprisonment of up to two years) for individuals found to have engaged in misleading commercial practices or engaged consumers in unfair contractual terms, should focus the minds of companies subject to consumer protection laws.

The substantive rules - a focus on tech?

Recent years have seen tech emerge (arguably alongside ESG) as one of the major focus areas in consumer protection policy, and the CMA’s experience is directly reflected in the DMCC. While the DMCC introduces relatively few brand new consumer law obligations, it brings together and clarifies a disparate set of laws which have been primarily enforced by individuals through the courts or by the CMA negotiating undertakings with firms alleged to have infringed consumer law (with relatively limited consequences for breach of those undertakings). 

At its core, the DMCC is expansive and inclusive – susceptible to catch any firm (regardless of size) which engages in behaviour likely to cause the average consumer to take a transactional decision that they would not have otherwise taken, for example, through misleading actions or omissions. 

With a new central enforcer, companies may want to review their compliance with consumer law obligations, in particular:

• Unfair commercial practices. This applies to an exceptionally broad range of practices which the CMA, along with other consumer protection enforcers, could consider to unfairly impact consumers’ decision-making. Under this umbrella, the CMA has already tackled hidden advertisements, urgency claims, greenwashing, price reductions, subscription traps and fake reviews).
• Unfair contract terms. The DMCC gives the CMA direct powers to enforce against contract terms and notices which it deems to be unfair (i.e. where these cause a significant imbalance in the parties’ rights and obligations, to the detriment of the customer).

In addition to these broad stroke prohibitions, the DMCC creates new, specific obligations in relation to subscription traps. The DMCC introduces obligations on companies to make it easier for customers to provide informed consent before subscribing, and efficiently opt out, in each case to ensure that consumers have the necessary information and opportunities to make independent decisions. The CMA looked at subscription contracts in its 2017 investigation into online dating, and the DMCC represents a legislative statement of the CMA’s position on how subscription contracts should operate for the benefit of consumers. The obligations will change the way in which technology is deployed by all firms – regardless of size or sector – to communicate effectively and transparently with consumers.

Although not actually mentioned in the DMCC itself, online reviews are also in the firing line. The Government has indicated that it is seeking to use its delegated powers to protect consumers by prohibiting businesses from: (i) commissioning or incentivising any person to write and/or submit a fake consumer review of goods or services; (ii) hosting consumer reviews without taking reasonable and proportionate steps to check they are genuine; and (iii) offering to submit, commission or facilitate fake reviews (or advertising to do the same). 

Whilst the CMA’s current investigation into online reviews focuses on platforms’ responsibilities in relation to online reviews, the new rules against online reviews will likely impact smaller firms as well as those with SMS, and enforcement may look more akin to the CMA’s approach in its hidden advertisements investigation, with a range of stakeholders implicated by consumer reforms.

Preparing for change

Once adopted, the DMCC will significantly raise the stakes of compliance with consumer protection laws. All consumer facing firms (not just designated SMS firms) need to understand the impact that the proposed regulatory changes will have on their business.

Smaller companies who host online reviews and advertisements, and those which make use of subscription contracts, need to be cognisant of their consumer protection obligations and the potential consequences of non-compliance introduced by the DMCC, when interacting with consumers digitally. In doing so, they can be mindful of the guidance provided by the CMA in respect of hidden ads, urgency and price reduction claims and subscriptions and automatic rollovers, much of which specifically addresses small and medium-sized enterprises, but there is also an obligation to consider much more broadly whether conduct may amount to an unfair commercial practice or whether contract terms may be considered unfair.

Online platforms are likely to face scrutiny for their own behaviour, but also that of third parties on their platforms (as we have seen in the social media endorsements investigation). An exercise in shaping business models, strategy and algorithmic design to be both compliant and commercial may prove challenging. The proposed changes mean that the CMA is well-equipped to take action against players who fail to take the necessary steps to remain the right side of the DMCC.