Subscription contracts are common. They offer certain benefits to businesses, such as providing predictable revenue. These types of agreements often contain “automatic renewal clauses”, whereby the agreement will automatically renew unless the consumer cancels it.
However, the Competition and Markets Authority (CMA), the UK regulator responsible for enforcing consumer protection law, has taken an interest in this area because these clauses and the practices surrounding them can be problematic from a consumer law point of view if they are not are not well drafted or applied correctly.
The AMC’s view is that while these types of contracts may offer some benefit to consumers (such as allowing them to pay a small monthly fee, rather than a large sum upfront), the danger is that consumers may find themselves : (i) locked into contracts they no longer want or need; and/or (ii) being charged a renewal fee that they did not expect or at a much higher price than expected. They can become what are called “subscription traps”. The CMA is particularly concerned about contracts that automatically renew on a subsequent contract of one year or more, where the CMA considers that consumers are particularly in need of protection to avoid being locked into a contract. not wanted.
It should be noted that this is not the only investigation the CMA has conducted in this context, it has also looked into “loyalty penalties” (an investigation into concerns that consumers who stay with their provider may end up paying a lot more than new customers).
In the context of “subscription traps”, the CMA recently took enforcement action, ‘ which led to major antivirus software vendors (as part of the CMA’s McAfee Survey and Norton Survey) – formally committing to making changes to make their auto-renewing contracts easier to understand and terminate, as well as providing auto-renewing customers with expanded refund rights‘.
As a result of this investigation, the CMA issued new practice guidelines (Advice) for businesses offering subscription services, which is based on the CMA’s consumer law interpretation. Consumer law aims to protect consumers against abusive contract terms and notices. If a clause is considered unfair, it will not be legally binding on the consumer.
In particular, the Guide sets out the regulator’s recommendations on what is required to exercise “professional care” (a standard required by consumer protection law). The CMA explains that ‘professional care is an objective standard and applies to all aspects of business operations. It is intended to reflect what a reasonable person should be able to expect from a business that demonstrates fairness. It requires businesses to approach transactions in a professional and fair manner, to take into account the legitimate interests of consumers, and to deal with them in a fair and open manner. For example, companies should not design their websites or marketing practices to “trick” a customer into acting in a way that is not truly in their best interest, or put barriers in the way of customers for prevent action.‘.
The Guide sets out nine ‘compliance principles’ with helpful examples of which terms are ‘most likely to comply’ and which are ‘unlikely to comply’. For example:
Customers should be able to make an informed choice regarding automatic renewal.
The CMA suggests that one way to comply with this principle is to ensure that companies give customers clear and prominent information about auto-renewal (including how much they will be charged for the product upon renewal). , the length of the contract renewal period and how auto-renewal works). This information should be placed next to the offer details on the homepage and product pages of the relevant website. While the AMC suggests that providing this information in such a way that customers have to search for it, for example by clicking on a hyperlink, is unlikely to comply.
Customers should be informed of the automatic renewal in good time before it occurs.
The CMA suggests that reminders be sent in good time before renewal money is taken, and that businesses use communication methods that customers are likely to read (consider if this applies to some “service message” emails that can be sent?). While hiding renewal messages among other marketing messages is unlikely to be compliant. Best practice therefore seems to be to send a stand-alone renewal communication and duplicate messaging with information sent by post or text, where possible. Navigating data/privacy laws in this regard is also critical to compliance.
CMA Guidelines Status
CMA guidelines are not legally binding. However, as we have seen, the AMC has the power to act if it considers that there has been a violation of the law.
Readers should also note that the UK government is currently consulting on competition and consumer policy reform. The government has acknowledged the problems with automatic renewal of subscription contracts highlighted by the CMA and is considering the CMA’s recommendations to update the law.
It is therefore important that companies operating this type of model have solid terms and conditions, as well as renewal practices, that take into account the CMA guidelines in order to reduce the risk of enforcement actions.
© Copyright 2022 Squire Patton Boggs (USA) LLPNational Law Review, Volume XII, Number 53