UK: Sales Promotions - Staying On The Right Side Of The Law

Last Updated: 12 February 2009
Article by Charles Ouin and Matt Akers

Latest figures from the Institute of Practitioners in Advertising show that, with the exception of the internet, sales promotions are the leading form of marketing in the current financial downturn, underlining their importance in modern business practice. This article reminds businesses how to stay on the right side of the regulators by exploring what is and what is not good practice when, in this current testing climate, they will be doing all they can to sustain profits.

The Gambling Act 2005

Reacting to a surge in popularity and the general acceptance of gambling in the UK leisure industry, Parliament enacted the Gambling Act 2005. The Act reflected a change in social opinion and marketing practice by liberalising what was previously a draconian regime. The result is a combination of lighter touch statutory controls and a range of industry best practice models which serve to balance the competing interests of protecting the public and the stimulation of trade.

Although sales promotions are not addressed explicitly in the Act, the Act specifies that prize competitions (which may include promotions) will not be caught provided they do not fall within the definition of either gaming, betting or a lottery. Therefore any sales promotion must avoid being classed as one of these three forms of gambling.

What Constitutes A Lottery?

A particularly important question is what constitutes a lottery. The reason is two fold: firstly, that the definition of a lottery poses the greatest risk to catching traditional sales promotion techniques, and secondly, it is the least understood out of the three types of gambling. Under the Act a lottery is constituted by the following three elements:

  1. a payment;
  2. a prize; and
  3. the mechanic of winning based wholly on chance.

So as soon as one of these three factors is removed, the sales promotion is no longer an illegal lottery. It is common practice therefore for businesses to either remove the payment requirement i.e. make entry free or, alternatively, to introduce such an element of skill, judgement or knowledge from the participants as will remove the element of chance.

What Constitutes Payment?

The participant must be required to pay money or transfer money's worth. The Act makes it easier for businesses to avoid being caught by this by stating that if the purchaser pays the normal price for those goods it will not be regarded as payment for the promotion, provided the price is not a "loaded price" that includes a charge for participating in the promotion.

Payment for postage or telephone calls is also outside the notion of paying to enter, provided that these are at the normal rate. This can be contrasted with premium rate calls which constitute a payment. However, a transfer of money or money's worth required to establish whether the participant has been successful in the competition will be included within the definition of payment.

The Act also allows a promoter to offer free entry. This is to avoid any doubt regarding whether there has been a payment and thus a lottery. To ensure that this is effective, the Act states that there must be a genuine choice for the participants in whether they pay or not. This means that the free entry route must not cost more than the ordinary cost of a letter or an alternative form of communication which is neither more expensive or more inconvenient than paying for the promotion. The alternative free entry route must be adequately publicised and the prospect of success must be the same irrespective of the route taken.

Skill Or Judgement

Requiring skill, knowledge or judgement on behalf of the player removes the element of chance and therefore means the promotion is not a lottery. The test to determine whether the element of chance remains is whether the promotion cannot reasonably be expected to prevent a significant proportion of persons:

  • who wish to participate in that arrangement from doing so; and
  • who participate in the arrangement from receiving a prize.

So a straightforward question where the answer is obvious is unlikely to involve a sufficient element of skill to eliminate a significant proportion of potential participants. "Significant proportion" should be given its natural meaning and the proportion will vary according to the circumstances. This is a question of degree for those developing the sales promotion. The Gambling Commission has taken the view that the onus is on the competition organiser to prove that it is not an illegal lottery and to produce evidence to show that a significant proportion of participants were prevented from receiving a prize.

Betting

Although traditional sales promotion techniques generally do not involve any element of betting, it is prudent for businesses to consider this point, as the Act ensures that prediction competitions, such as fantasy football games, are regulated as betting products and can only be offered under a relevant betting licence.

Best Practice

Best practice guidance can be found in the International Chamber of Commerce Code, with specific sales promotion rules found in the CAP Code. The overarching principle is that promotions should "be seen to deal fairly and honourably with consumers". Despite the CAP Code being a voluntary code, the sanctions for breach are far reaching. The ASA can investigate businesses and publish their findings so as to make the public aware of bad practice. Should a business fail to comply with the ASA's ruling, the ASA can refer the case to the OFT for action. Failure to honour any undertaking imposed from this course of action may lead to an injunction, contempt of court or a fine.

Common Sales Promotions

"Free" Products (e.g. Free Gift Conditional Upon Purchase/Sample)

If goods or services are offered as "free", without any qualification, there can be no charges other than a charge not exceeding current public rates of postage, actual cost of freight or delivery of the goods, and the cost of travel, including incidental expenses of any travel involved if the consumer collects the goods on offer. The most significant problem area is that demand for the free product will outstrip supply. Promoters are expected to have sufficient promotional products to meet the likely demand. To ensure this is so, an estimate of anticipated demand must be made. Phrases such as "subject to availability" do not relieve promoters of their responsibilities.

"Extra Value Packs" And "10% Extra" Claims

This declaration is acceptable provided that the additional quantity is included in the declaration of contents. The additional quantity could be indicated by a band around the packaging which fairly represents the 10% of the capacity of the standard pack.

"10% Extra Free"

To make such a claim, it is necessary to ensure that there has been no recent increase in the price of the standard pack immediately before or coincidental to the introduction of the extra quantity pack, so that an allegation that the price has been increased to pay for the additional quantity cannot be made. The extra quantity must be offered at the same price as the standard pack and ideally the price of the product should have remained the same for at least 28 days before the introduction of the extra quantity pack.

Introductory Offers

The offer must have a reasonably short life or it could be misleading to call it an introductory offer. This period may vary depending on the product and its shelf life.

Comparisons With Other Traders' Prices

It is acknowledged that competition in the market is beneficial to customers and it is therefore necessary to permit fair comparisons with other traders' prices. However the following must be taken into account:

  • The quotes must be accurate and up-to-date (this is difficult to adhere to as it is common for a trader to reduce its price as soon as they hear about the comparison, thereby making the comparison misleading).
  • The name of the other trader must be clearly and prominently stated with the price comparison.
  • The trader's comparison must relate to the same products or substantially the same products or substantially similar products. Any differences between the products must be stated clearly.
  • In situations where the campaign uses the trade mark of the competitor, this may constitute an infringement of the mark.

Vouchers And Coupons

The offer of coupons and vouchers is free from statutory control because it does not relate to the indication of a price. However the Sales Promotion Code requires the following to be easily seen and understood by consumers:

  • The method of making use of the opportunity presented by the sales promotion, or obtaining the goods, services, facilities or refunds on offer.
  • The nature and number of any proofs of purchase required.
  • The cost and conditions of participation in the promotion, including methods of payment and amounts of any additional postage or delivery charges.

Promotions With Prizes

Promoters must set out clearly and fully a number of entry conditions including the closing date, any restriction on entries, a description of prizes, the criteria for judging entries, a description of prizes, and the availability of winners' lists. The name and business address of the promoter should also be identified. Complex rules should be avoided.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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