UK: Unfair Commercial Practices Directive

The key to the Directive is the harmonisation of differences in the Member States regulation of unfair commercial practices. It is aimed at clarifying consumers' rights and facilitating cross-border trade by establishing common, EUwide rules against aggressive or misleading business-toconsumer (B2C) marketing. This will give consumers the same protection against sharp business practices and rogue traders whether they buy from the shop around the corner or from a website in another Member State.

In order to harmonise provisions, the Directive will not allow stricter provisions in one country than the other, subject to a 6 year grace period for existing national provisions.

The Department of Trade & industry (DTI) has already issued one consultation document on the implementation of the Directive (which closed in March 2006) and aims to issue (in conjunction with the Office of Fair Trading (OFT)) a further consultation document in Autumn 2006 with some draft legislation.

Existing UK statutory provisions such as Part III of the Consumer Protection Act 1967 overlap with the Directive and the DTI are consulting on whether to amend or repeal such provisions. Their stated preference is to repeal overlapping legislation and simplify the consumer protection framework.

The DTI are consulting on whether enforcement should be limited to an injunctive regime through Part 8 of the Enterprise Act (already used for enforcement in respect of infringements which harm the collective interests of consumers) and whether there should be additional criminal sanctions, modelled on those under the Trades Descriptions Act, or even a possibility of civil action by consumers.

The enforcing bodies being considered are the DTI, the OFT and trading standards services.

There is a general prohibition on treating consumers unfairly, which is meant to plug gaps in consumer protection legislation.

In order to show that a commercial practice is unfair under the general prohibition:

• the practice must be contrary to requirements of professional diligence; and

• the practice must materially distort or be likely materially to distort the consumer's economic behaviour.

The benchmark consumer to be considered is assessing the impact is the ‘average consumer’ - but there are also measures to prevent the exploitation of consumers, such as children, who may be particularly vulnerable to particular practices.

Additionally the Directive defines two key types of unfair commercial practices - those which are misleading and those which are aggressive - and which are likely to cause the consumer to enter into a transaction which he would not have entered into otherwise.

Misleading includes providing false or information likely to deceive on defined material aspects of the product such as the existence or nature of a product, the existence of a specific price advantage, the IP rights of a trader.

A commercial practice may mislead either through action or omission. If 'material' information a customer needs to know before making a purchase is not provided or not apparent from the context, or unclear, this will be regarded as a misleading omission. Such material information includes the main characteristics of the product (e.g. availability, quantity, accessories, specification), the identity of the trader, the price inclusive of taxes and, where appropriate, delivery charges and the existence of a ‘right of withdrawal’ where one exists.

Specific areas of misleading practice are identified, namely comparative advertising causing confusion (e.g. with trade marks of other competitors), and non-compliance with codes of conduct the trader is stated to be bound to.

The Directive describes three ways in which a commercial practice can be aggressive, namely harassment, coercion and undue influence. The factors determining whether a commercial practice is aggressive include for instance any disproportionate non-contractual barriers to stop the consumer exercising a right e.g. to switch providers, or threatening to take legal action, when in fact none can be taken. The DTI guidance gives as an example of undue influence a consumer's debt to a trader being rescheduled in exchange for purchase of a second product.

A practice which is either misleading or aggressive is automatically unfair; if a practice does not fall within one of these two categories, the general prohibition will determine if it is unfair.

The Directive also contains an Annex which gives a blacklist of commercial practices - which are banned in all circumstances. These include:

• Falsely claiming to be a signatory to a code of conduct or to be approved by a recognised body.

• "Bait advertising" scams (advertising a product as a special offer without actually having it in stock, or having only a token stock of the product).

• Stating or creating the impression that a product can legally be sold when it cannot.

• Materially misrepresenting the risk to the consumer or his family if the consumer does not purchase the product.

• Falsely stating the product will be available for a very limited time to get an immediate decision.

• Falsely claiming the trader is about to cease trading or move premises.

• Describing a product as ‘gratis’, ‘free’, ‘without charge’ or similar if the consumer has to pay anything other than the unavoidable cost of responding and collecting or paying for delivery.

• Creating the impression that the consumer cannot leave the premises until a contract is formed.

• Conducting personal visits to the consumer's home ignoring the consumer's request to leave or not to return.

• Demanding payment for products supplied by the trader, but which were not solicited by the consumer (inertia selling).

• Obstructing a consumer trying to make an insurance claim e.g. by unreasonable requests for documents.

In the context of assessing whether a trading practice is unfair:

• Professional diligence is defined as the special standard of skill and care commensurate with honest market practice and good faith. Because this is viewed from the consumer's reasonable expectation, a market practice cannot be justified on the basis that it is prevalent in that market.

• Materially distorting the consumer's behaviour is impairing his ability to make an informed decision so that he is likely to enter into a transaction he would not have entered into otherwise.

• The consumer is normally an ‘average consumer’ either of the overall population or of the particular group which is targeted, unless there is a group of clearly identifiable vulnerable (physical or mental infirmity, age or credulity) consumers and it is reasonably foreseeable that their behaviour would be materially distorted.

The Directive applies only to businesses-to-consumer commercial practices. The DTI's view is that it will apply to an unfair practice further up the supply chain e.g. from a manufacturer who misleadingly labels his product even though direct contact with the consumer is through the retailer.

The Directive applies to any goods or services, including real estate and financial services, although these are not subject to the maximum harmonisation rule i.e. they are allowed to be more tightly controlled at national level. It is anticipated by the DTI that Financial Services Authority (FSA) Guidance and the Banking Code which both already address unfair practices will only need minimal changes to be compliant.

Existing UK statutory provisions such as the Trades Description Act 1968 (mis-description of goods, services), Part III of the Consumer Protection Act 1967 (misleading price indications) the Weights and Measures Act 1985 s29- 31 (misrepresentation, quantity less than stated), the Price Marking Order (food and drink prices to be shown at the entrance of premises where offered for consumption) and possibly the Food Safety Act s14 (selling food not to the nature, substance and quality demanded), overlap with the Directive.

Some of these provisions apply to business to business transactions as well as business to consumer transactions, so if they are disapplied, this may need to be limited to business to consumer relationships, unless there are provisions elsewhere already giving protection to business to business relationships.

Under the Directive, sanctions in the UK cannot be greater than those set out in the Directive. Currently under the Trades Descriptions Act 1968 it is an offence to apply any false trade description to goods. This is without reference to whether this would be likely to cause a consumer to enter into a transaction which he would not otherwise have done. For instance a chair may be incorrectly described as leather rather than bonded leather. Under the Trade Descriptions Act there would be an offence. Under the Directive, if the price of the chair was in line with the lower quality material, and the consumer would have purchased it irrespective of the description, it may well be that the incorrect description would not fall to be described as an unfair trading practice. The act would therefore need to be amended.

As the legislation will impact on many businesses including retail but also the likes of estate agents, financial advisers, insurers, manufacturers of consumer products, these businesses will need to keep up to date with and prepare for changes in the legislative regime, whatever these turn out to be. The new legislation by being more broadly framed and less prescriptive is also more flexible to allow enforcement against practices which may have passed muster by adhering to the letter of codes of practice but not their spirit.

However the benefit maybe that there will be less procedural enforcement where there is no real harm to the consumer.

There will also no doubt be problems of interpretation as regards average consumers, vulnerable groups and material distortion.

Pinsent Masons’ Regulatory Team advises clients on all aspects of risk management, crisis management and damage limitation. Our team of highly experienced lawyers has extensive experience representing businesses in their dealings with regulators including Trading Standards, Environment Agency, HSE and Food Safety Authority.