Subscription-based contracts are common. They provide certain benefits to businesses, such as offering predictable revenue. These types of agreement often contain ‘auto-renewal clauses’, whereby the agreement will auto-renew unless the consumer cancels.
However, The Competition and Markets Authority (CMA), the UK regulator responsible for the enforcement of consumer protection legislation, has taken an interest in this area because these clauses and surrounding practices can be problematic from a consumer law perspective if they are not drafted well or conducted properly.
The CMA’s view is that whilst these types of contract can provide certain benefits to consumers (such as allowing them to pay a small monthly fee, rather than a large sum at the outset), the danger is that consumers may find themselves: (i) locked into contracts they no longer want or need; and/or (ii) being charged renewal fees they did not expect or at a price which is much higher than expected. They can become so-called ‘subscription-traps’. The CMA is particularly concerned about contracts that auto-renew onto a subsequent contract of one year or more, where the CMA considers that consumers especially require protection to prevent them from being locked into an unwanted contract.
It is worth noting that this is not the only investigation that the CMA has carried out in this context, it has also looked at ‘loyalty penalties’ (an investigation into concerns that long term consumers who stay with their provider can end up paying significantly more than new customers).
In the context of ‘subscription traps’, the CMA recently took enforcement action, ‘which led to leading anti-virus software providers (as part of the CMA’s McAfee investigation and Norton investigation) – giving formal commitments to make changes designed to make their automatically renewing contracts easier to understand and exit, as well as ensuring customers who auto-renew have extended refund rights’.
Following this investigation, the CMA released new practical Guidance (Guidance) for businesses offering subscription services, which is based on the CMA’s interpretation of consumer law. Consumer law aims to protect consumers against unfair contract terms and notices. If a term is considered unfair, it will not be legally binding on the consumer.
In particular, the Guidance sets out the regulator’s recommendations on what is necessary to be ‘professionally diligent’ (a standard required by consumer protection law). The CMA explains that ‘professional diligence is an objective standard and applies to all aspects of the business’ activities. It is intended to reflect what a reasonable person should be able to expect from a fair dealing business. It requires businesses to approach transactions professionally and fairly, to take into account the legitimate interests of consumers and to deal fairly and openly with them. For example, businesses should not design their websites or marketing practices to ‘nudge’ a customer to act in a way that is not really in their interests, or put barriers in customers’ way to hinder them from acting’.
The Guidance sets out nine ‘Compliance Principles’ alongside useful examples on terms that are ‘more likely to comply’ and those ‘unlikely to comply’. For example:
- Customers need to be able to make a fully informed choice about auto-renewal.
The CMA suggest that a way of complying with this principle is to ensure that businesses give customers clear and prominent information about the auto-renewal (including how much they will be charged for the product upon renewal, the length of the renewed contract period and how auto-renewal works). Such information should be placed next to offer details on the relevant website’s home page and product pages. Whereas the CMA suggests that providing this information in a way that customers have to go looking for it, such as by clicking a hyperlink, is unlikely to comply.
- Customers should be reminded about auto-renewal in good time before it happens.
The CMA suggests that reminders should be sent in good time before the money for the renewal is taken, and business should use communication methods that customers are likely to read (question whether this applies to certain ‘service message’ emails that may be sent?). Whereas hiding renewal messages amongst other marketing messages is unlikely to comply. Best practice would therefore seem to be to send a stand-alone renewal communication, and to duplicate the messaging with either information send by post or by SMS message, where practicable. Navigating data / privacy laws in this respect is also key to compliance.
Status of the CMA Guidance
CMA guidance is not legally binding. However, as we have seen, the CMA does have powers to take enforcement action if it considers that there has been a breach of the law.
Readers should also note that the UK government is currently consulting on reforming competition and consumer policy. The government has recognised the problems surrounding auto-renewal of subscription contracts as highlighted by the CMA and is looking at the CMA’s recommendations in order to update the law.
It is therefore important that businesses operating this type of model have robust terms and conditions in place, together with renewal practices, that take into account the CMA’s Guidance to reduce the risk of enforcement action.
Squire Patton Boggs specialises in consumer law and regulation. For more information contact partner, Carlton Daniel and associate, Ailin O’Flaherty.