Potential breach of the Consumer Protection from Unfair Trading Regulations 2008 by competitions, prize draws, and/ or repeat download services that carry a repeat charge

PhonepayPlus recently carried out its Emergency procedure (“EP”) against a number of PRS quiz, competition and content download services that were promoted using affiliate marketing. The relevant Tribunals were held on 25 July and 8 August 2013, and the adjudications were published on the PhonepayPlus website on 22 August 2013.

The majority of services involved in the recent EP cases were competition or quiz services which were widely marketed using online affiliate marketing techniques. Such services typically offer a cash prize or the latest tablet or smartphone device as an inducement to enter, and suggest by answering a simple question, along with supplying a mobile number “you can have a chance to win”. These competitions can have an extended entry period of up to 3, 6 or 12 months and are priced in varying ways. Entry to the service often involves a recurring charge, most often subscription, or demands repeated entries leading to accumulated costs over time.

The issues identified below during the investigations and adjudications have also been observed with subscription services that enable users to download content to their mobiles.

Description of consumer risk
In the course of the recent investigations and adjudications, the focus was on the promotion of these services through affiliate marketing channels. PhonepayPlus remains very concerned about the potential use of affiliate marketing to mislead consumers and we will be issuing final Guidance on the use of affiliate marketing in the near future.

However, in addition to the concerns around affiliate marketing, PhonepayPlus has also identified a range of consumer risks that these services present. Our overall concern with many of these services is that we consider that the value and total cost to consumers is not made sufficiently clear and can therefore mislead them into using services which, were they better informed, they might choose not to use. We consider that in many cases, consumers are misled in any or all of the following ways:

(a) Thinking that the service is free when in fact they are being charged.
(b) Not realising that by entering their mobile phone number, they are being entered into a subscription or other service with the potential for repeat charges.
(c) Not realising that consumers have very little, or in some cases no, real chance of winning the prize unless they make a substantial payment (either through repeat purchases or by subscribing for an extended time period).
(d) Not realising that the costs incurred are disproportionately high given the value of the prize being offered and the chance of winning it.

In our view, consumers are being misled by a range of practices, such as:

• The use of inducements such as “enter your phone number to win an iPad”.
• Key information about the service, that would better enable consumers to evaluate the value and the cost of the service, being presented only in the small print terms and conditions rather than being prominent and clearly displayed in close proximity to the call to action.
• Competitions may also operate in ways which demand additional activities by the user, or an extended period of engagement, in order to ensure any of their entries are placed into the final draw for the prize. Again, this is not sufficiently clear prior to the consumer incurring a charge.
• The promotions of these services fail to make sufficiently clear the nature of the service – i.e. that it carries a repeat charge or the potential for a repeat charge - and the total cost of a full and valid entry.
• The potential for consumers to run up high bills in a short space of time and experience bill shock. Level 2 providers have an obligation to identify and alert consumers to excessive use and should not rely on Network operators to limit a consumer’s daily or cumulative spend.
• Promotional material that gives the false impression that the service is free, or a particular element of a service is free, where the reality is that engaging in the activity results in subscription to the service and premium rate charges being levied over time.
• The use of popular brands to provide additional inducements, often involving false claims, which lead consumers to engage with services which otherwise would not be engaged with.

These examples are not exhaustive. The overall objective is to ensure that consumers are clearly given the information they need to evaluate the value and total cost of a service and must not be misled.

Breach of Consumer Protection from Unfair Trading Regulations 2008
Following these adjudications, PhonepayPlus has sought independent legal advice on whether services which use the mechanic described above might also breach the Consumer Protection from Unfair Trading Regulations 2008 (the “Regulations”).

Having considered the advice received, it appears to us that these services are very likely to be operating in contravention of the Regulations, therefore illegally. Specifically PhonepayPlus has concerns regarding the potential contravention of Regulation 5 (misleading by action), and/or 6 (misleading by omissions), and/or 7 (aggressive commercial practices) and/or the banned practices set out in Schedule 1 of the Regulations.

Next steps
PhonepayPlus would strongly recommend that industry members operating competitions, prize draws or other repeat charge services that potentially carry the risks outlined above, urgently review them in order to ensure that they are not breaching, or likely to breach, the PhonepayPlus Code or the Regulations.

We recommend that Level 2 providers do the following:

• Cease operation and promotion of any relevant services in their current form until they have taken steps 2), 3) and 4) directly below.
• Review the PhonepayPlus Guidance, in particular Guidance on Promotions and Promotional material and, where relevant, Guidance on Competitions, to ensure that their services are not likely to mislead consumers about the price, potential for repeat charging, and/or the terms and conditions of the service including, where relevant, the terms of entry to a competition or other prize draw.
• Seek appropriate legal advice as a matter of some urgency as to whether their services are, in their current form, likely to breach the Regulations.
• Take appropriate and urgent steps to ensure that they are not running a service that is likely to be in breach of the Regulations and/or the Code – this may involve withdrawing the service altogether or amending its structure and/or promotion to ensure that it is compliant with the both the Regulations and the Code.

In addition to any enforcement action PhonepayPlus may undertake for breaches of our Code, we also draw attention to the fact that where we suspect the Regulations have also been contravened we reserve the right to refer the matter to the appropriate enforcement authorities for further action under the Regulations, including both criminal and/or civil proceedings through the courts where appropriate.

We recommend that Level 1 providers whose clients operate such services as outlined above note these risks and the banned practices set out in the Regulations, and satisfy themselves as part of their risk assessment and control obligations, that their clients are operating such services in a manner that is compliant with the Code and the Regulations. Level 1 providers need to be confident they have not facilitated such banned practices through the provision of premium rate numbers and shortcodes.