Advice Note on The Consumer Protection from Unfair Trading Regulations 2008

Across the EU, a new regime to protect consumers is taking effect. In the UK, The Consumer Protection from Unfair Trading Regulations 2008 ("the Regulations") become law on 26 May 2008. The Regulations apply to “traders” who are engaged, commercially, in the promotion and sale of “products”. Properties are considered to be products like any other under the Regulations. The commercial practices of traders, who may be in-house sales teams or external agents, come under the umbrella of the new rules of engagement in the consumer market. With criminal and civil penalties available to enforcing authorities, housebuilding companies, selling to consumers either directly or indirectly, need to be aware of the changes and how they might impact on their procedures before, during and after the sale of a newly built home.

The General Prohibition

The Regulations contain a blanket prohibition on unfair commercial practices employed by traders. A practice will be considered to be “unfair” if it:

• contravenes the requirements of “professional diligence” in the area of the trader’s operation; and
• materially distorts, or is likely to materially distort, the economic behaviour of the “average consumer”.

Professional diligence refers to the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers which is commensurate with either (a) honest market practice in the trader’s field of activity, or (b) the general principle of good faith in the trader’s field of activity, or both. The simple question which a trader must ask himself is, “am I acting to a standard that a reasonable person would expect?”

In normal circumstances, the average consumer is someone who is generally well informed and reasonably observant and circumspect. However, the average consumer can be determined by reference to a smaller group than the UK population as a whole. Therefore, the average consumer for new build flats may be first time buyers, students, or lower income people who may find procurement of credit in the current market more difficult.

The unfair practice prohibition is designed as a “catch-all” to cover conduct which is not covered by specific prohibitions set out as “automatically unfair practices” in the Regulations (see below).

The use of builders’ missives, normal incentives and non-refundable deposits are unlikely, on any reasonable view, to fall foul of the general prohibition. Builders’ missives are not a sales technique or practice caught by the Regulations because they do not, objectively, distort the economic behaviour of the average consumer. The use of Builders’ missives and non-refundable deposits are uniform practice throughout the market. These practices do not impact on whether a consumer buys or does not buy a new build property. Whether or not there is a concerted practice in the use of builders’ missives which impacts unfairly on the rights of consumers is a competition law issue which is not altered or changed by the Regulations.

In the current climate, however, care should be taken with the types of incentive which push a consumer towards using a certain mortgage provider with the house builder undertaking to pay the finance payments for a limited period of time. That type of sales incentive will require particular proofing in light of the Regulations. It is arguable that incentives of this nature could distort the economic behaviour of the first time buyer group of consumers.

Misleading actions

Any sales procedures which are misleading will be regarded as unfair under the Regulations. In particular:

• the giving of false or misleading information about a product or service;
• the creation of confusion with competitors’ products, trade marks or trade names; or
• a failure to comply with a code of conduct with which a trader has undertaken to comply.

If the house builder states, in sales material to a consumer, that it complies with industry standards in terms of building quality materials, sustainability and pre and after sales procedures and it does not so comply, then that builder is exposed under the Regulations.

It is also worth noting that the Regulations do not deal with issues covered by Health and Safety law which, of course, stands alongside these new measures for consumer protection.

Aggressive sales techniques

The Regulations make it an offence to employ overtly aggressive sales techniques when engaging with consumers. The use of threatening language would be a simple example of a prohibited technique. In addition, it will also be an offence to exercise undue influence over consumers. Repeated cold-calling on a visitor to a show home or website visitor with the offer of incentives to induce reservation of a plot would be caught by this prohibition.

Misleading omissions

Perhaps the most important development contained in the Regulations, is the prohibition against failing to give sufficient information about a product or service. Sales materials may contain misleading omissions if they omit or hide material information which the consumer needs to make an informed decision about a purchase, or if they contain information in an unclear or ambiguous manner (for example where material information is only included in obscure hyperlinks or footnotes). Builders need to be careful to be clear and up front about all charges for extras and any charges for factoring in their sales materials.

If a trader issues a commercial communication which provides the key characteristics of a product and details of its price in such a way as to enable consumers to make a purchase (known as an “invitation to purchase”), the Regulations set out a mandatory list of information requirements which will be considered to be “material”. There is a greater onus to be detailed about the information given here if the product is a complex product like a new build house. If a house builder were to employ a technique which included a glossy reservation form, either mailed or web based, to be filled in for a plot, then such forms should clearly set out the steps involved in the transaction and the consumers’ rights to withdraw before Missives are finally concluded.

Automatically unfair practices

The Regulations set out a ‘blacklist’ of 31 practices which will be taken to be automatically unfair. Whilst the other practices prohibited by the Regulations should be looked at in the context of whether they would have an adverse affect on a consumer’s behaviour, the “don’ts” on the blacklist will always be considered unfair. The salient ones, in the housebuilding industry, are:

• Claiming to have adopted a code of conduct (e.g. NHBC "Customer Service: A Code of Conduct for Housebuilders") when the builder has not. It is worth noting that a claim to membership of a recognised body which promotes sustainable homes where no such membership exists would be contrary to this prohibition.
• Displaying a Trust Mark, Charter Mark or other quality mark without having obtained the necessary authorisation. The use of branding on advertising materials which falsely indicate the sustainability credentials of the materials used in the build process would contravene this prohibition.
• Claiming that a code of conduct has an endorsement from a public or other body which it does not have. A claim from a Homes for Scotland member that the Code of Conduct had the approval of the OFT would be an incorrect statement caught by this prohibition.
• Claiming that a trader or a product or its commercial practice has been approved, endorsed or authorised by a public or private body when the trader, product or the commercial practice has not been so approved. It is also unfair to make a claim that the trader or the product has been approved without complying with the terms of any such approval.
• Falsely stating that a product will only be available on particular terms for a very limited time in order to elicit an immediate decision and deprive consumers of sufficient opportunity or time to make an informed choice. Clearly, this may be relevant in the current climate and guidance for direct sales personnel should be carefully considered.
• Stating or otherwise creating the impression that a product can legally be sold when it cannot.
• Using editorial content in the media to promote a product where a trader has paid for the promotion without making that clear in the content of the editorial. Care needs to be taken where coverage of a trader’s range of products on a development appears in a newspaper or journal and the trader has, in fact, paid for the space and the comment. The fact that the coverage has been paid for needs to be made clear in the coverage.
• Passing on materially inaccurate information on market conditions or on the possibility of finding the product with the intention of inducing the consumer to acquire the product at conditions less favourable than normal market conditions. If a selling agent says that he has sold 3 plots (just like the one the consumer has just viewed) recently at £200,000 and the statement is untrue and is made in order to persuade the consumer to buy at that inflated price, that would be contrary to the Regulations.
• Hard sell by visiting a consumer’s home, ignoring the consumer’s request to leave or not return save to the extent justified to enforce an existing contractual obligation.
• Making persistent and unwanted approaches by telephone, fax or email to consumers except in circumstances and to the extent justified to enforce an existing contractual obligation. A reservation form which is "Subject to Contract” or “Subject to Missives” will not amount to an existing contractual obligation.
• In snagging periods etc, requiring a consumer who wishes to claim on an insurance policy to produce documents which could not reasonably be considered relevant as to whether the claim was valid or failing systematically to respond to relevant correspondence, in order to dissuade a consumer from exercising his contractual rights.
• Any bait and switch scheme where, say, for flats, an invitation is made to buy at a specified price and then the seller refuses to show the advertised flat and to take a reservation within a reasonable time indicating that it is not suitable with the intention of promoting a different property.
• Creating the false impression that the consumer has already won or will win, on taking a particular step, a prize or equivalent benefit when in fact either (a) there is no prize or equivalent benefit or (b) taking any action in relation to claiming the prize or other equivalent benefit is subject to the consumer paying money or incurring a cost. The type of incentive scheme that could be caught here is that historically run by timeshare sellers where a letter is sent to the consumer saying that a prize has been won and requiring attendance at a venue to pick up the prize. Technically, in this type of scheme, the consumer incurs a cost in order to get the prize i.e. the cost of his travel to the given location.

Look to your procedures

Though the Regulations do not materially alter the general legal protections available to the consumer in the UK and most builders’ sales procedures will already be up to speed, they serve as a code of conduct which the consumer authorities can enforce. To that end, builders should check:

• whether they employ any of the 31 practices named in the Regulations which are automatically unfair (detail of the 31 practices is contained in Schedule 1 of the Regulations accessible here);
• whether they are making any misleading omissions in any of their sales’ materials and commercial communications with consumers; and
• whether their practices could be considered to be potentially unfair for any other reason.

Enforcement of the Regulations

Only local trading standards officers and the OFT can enforce the Regulations – not consumers direct. Nevertheless, the Regulations have substantially increased the investigative and enforcement powers available to those regulators, by removing existing restrictions and limitations on their powers. Trading standards officers and the OFT now have the power to enter business premises, with or without a warrant, to investigate any breaches. This is regardless of whether they suspect that a criminal (or merely a civil) offence has been committed. As a result, there is much greater scope for the authorities to exercise their powers of entry to seize documents.

To ensure compliance with the Regulations, the enforcing authorities can (a) use informal compliance mechanisms; (b) enforce codes of conduct: and (c) take civil and criminal proceedings under the Regulations.

Most breaches under the Regulations will be strict liability criminal offences, however, the general prohibition not to act “unfairly” requires proof of criminal intent. Conviction under summary procedure can result in a fine up to £5,000. Conviction on indictment can result in a fine or imprisonment for a term not exceeding 2 years or both.

The Future

Though most marketing and sales processes employed by builders will already be in tune with the new requirements, some more aggressive techniques employed in a difficult market may need to be considered with care. Each builder should take time to consider their own procedures in light of the Regulations. Given the ever increasing competition in the industry to offer market relevant incentives, it will be good practice to proof all new incentives and new sales techniques against the Regulations.

The Consumer Protection from Unfair Trading Regulations 2008 can be accessed here

The OFT Guidance on The Consumer Protection from Unfair Trading Regulations 2008 can be accessed here

 

Disclaimer

The material contained in this Alerter is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this Update without taking appropriate professional advice upon their own particular circumstances.

 

For further information email Iain MacDonald at i.macdonald@bellscott.co.uk

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