Trade Practices Issues arising from the rapid growth of E-Commerce
Outcomes from the SOCAP Computer Summit
12 May 1999
Mr Allan Asher
Australian Competition & Consumer Commission
Internet commerce can provide considerable benefits to consumers, in terms of improvements in transaction convenience, choice, range and even price. For businesses, Internet commerce is attractive because it offers access to a global market, has low start up and operating costs, has few regulatory burdens, and provides cheap and efficient marketing and distribution mediums.
However, the development of Internet commerce also brings with it certain competition and consumer protection concerns. In addition, the international nature of some Internet commerce transactions can make consumers susceptible to difficulties unique to cross border transactions.
Today I want to discuss those electronic commerce issues, as well as touch on customer satisfaction in the computer industry as a whole and discuss the outcomes of the recent Computer Industry summit held in Melbourne at the end of March.
The current regulatory framework for consumer protection in electronic commerce is comprised of federal and state/territory consumer protection legislation and some self regulatory initiatives.
The Australian Competition and Consumer Commission is the agency responsible for the enforcement of consumer protection laws in Australia at the federal level.
THE TRADE PRACTICES ACT
Among other legislation, the ACCC administers the primary piece of consumer protection legislation in Australia – the Trade Practices Act 1974. The objective of the Act, as set out in the legislation, is to enhance the welfare of Australians through the promotion of competition and fair trading and providing for a consumer protection framework. It contains a range of provisions aimed at protecting consumers and corporations that qualify as consumers.
A general statement of the application of the Trade Practices Act is that what is a breach ‘off’ the Internet remains a breach ‘on’ the Internet. Indeed, matters such as pyramid selling schemes become far more serious when perpetrated on the Internet, as the operators are able to directly access millions of consumers worldwide. Previously these approaches were limited by the cost of postage and stationary.
At the International level, many consumer protection enforcement agencies internationally have similar legislation in place to regulate market conduct. This legislation applies in the particular country to protect that country’s consumers.
Electronic commerce, including Internet transactions, is fast becoming and will quite possibly become the principal means by which consumers transact their business. Already, consumers purchase goods and services via the Internet, and mechanisms such as EFTPOS are a way of life. While these new methods of consumer transactions can offer many benefits to consumers in terms of accessibility, choice, price and convenience, they will only achieve their full potential if consumers have confidence in them
The growth of on-line commerce is part of a wider growth in global commerce. The emergence of the ‘global market place’ raises jurisdictional problems for consumers and national consumer protection agencies alike.
The development of e-commerce as a means whereby consumers transact across borders has thrown up new challenges for consumer affairs agencies. Unless we rise to meet the challenge, a growing black hole in the traditional basic protection consumers expect will emerge. Consumer affairs agencies will need to develop new paradigms to ensure that consumers can transact on the global market with real confidence. To do nothing will mean that a potential for increased consumer welfare will be dissipated.
Consumer affairs agencies can no longer indulge in a “beggar thy neighbour” approach. If a fraudulent Internet trader is domiciled in Country A and commits fraud, misleading conduct or sharp practices on citizens of Country B, then the consumer affairs agency or agencies in Country B should have the expectation that the consumer affairs agency in Country A take appropriate remedial action, such as stopping the behaviour, securing compensation for consumers, and, if appropriate, seeking penalties. If this situation was reversed, then similar expectations would arise.
Internet Sweep Days
I must say that I am already heartened by the co-operative approach taken by consumer affairs agencies through such initiatives as the International Marketing Supervision Network and the annual international Internet sweep days that the ACCC have conducted to date.
The sweep days involved more than 70 agencies from 30 countries “sweeping” the Internet for get-rich-quick schemes, miracle cures and other health products. Those websites that offered the targeted activity were sent educational email messages telling them about the existence of relevant consumer protection legislation and how to comply. The sites were then revisited one month later, with the result that approximately one quarter had been removed or amended in order to comply with the relevant legislation.
With the advent of the Internet, fraud, misleading conduct and scams know no boundaries. These sweep days have not only shown that consumer affairs agencies can work co-operatively towards reducing scam operators, but also that they are responsible for setting the groundwork for an effective network.
The ACCC has also set up a slam a scam facility on its homepage, so that consumers can ‘dob in’ scam sites. We are also planning to conduct another sweep day this year.
CONSUMER PROTECTION ISSUES
As is the case in any consumer market, from time to time things can go wrong in global commerce transactions, and consumers who buy services or goods on the Internet and other global mechanisms are confronting the following type of consumer protection issues:
After sales difficulties, such as failure to supply the goods or services after payment has been made, problems with the delivery of goods, unsatisfactory goods or services, or goods or services that present health or safety risks;
Information deficiencies, such as the inability of the consumer to find out basic information about the product or service, and the trader,on which to make informed decisions;
Fraud and unethical conduct, such as identity deception, false advertising, receiving payment without intending to supply , and scams like pyramid seeling schemes, and some work from home or investment schemes; and
Problems with privacy issues.
The potential for problems also exists when consumers make payments over the Internet, including loss, errors and unauthorised transactions. A critical issue in undertaking on-line transactions is the security of payment details such as credit card numbers and bank account details.
There are also consumer protection issues associated with domain naming and the protection of intellectual property on the Internet. In fact, for only a few hundred dollars, an unrelated body can own the domain name of an entity that has spent considerable time and money to develop its reputation in the traditional market place.
ENFORCEMENT ACTIONS BY THE ACCC
I believe that regulatory agencies like the ACCC must react quickly and effectively in the formulation of new enforcement strategies for the global market place.
As the national competition and consumer protection regulator for Australia, the Australian Competition and Consumer Commission has a keen interest in how consumers will be protected in the new global marketplace.
In recent years the Commission has increasingly found itself in the position of trying to deal with complaints by Australian consumers about products and services which they have purchased directly from other countries. The Commission has also had to deal with complaints by overseas consumers about products and services they have purchased by direct selling techniques from Australia. These complaints have raised a series of enforcement challenges for the Commission and have driven the ACCC to investigate new ways of enforcing consumer protection legislation. They have also led to us working in closer collaboration with our overseas counterpart agencies who are experiencing similar challenges. In some instances we have been able to provide a measure of redress for consumers, in others we have not had the jurisdictional reach or remedies needed.
These circumstances have led the Commission, together with overseas agencies, to consider how best we can protect the interests of consumers in the increasingly global marketplace. We are learning how we can improve our enforcement techniques and improve cooperation levels with overseas consumer protection agencies, how we can encourage ethical traders to take self-regulatory action to ensure that the interests of consumers are protected and how consumers themselves can avoid the ever growing number of international scams targeted at them.
Strategies for addressing consumer protection issues
Alternative mechanisms for consumer protection will be required, in addition to legal remedies, if consumers are to operate safely within the global market place. The following initiatives are essential to the development of a satisfactory framework for consumer protection for Internet commerce.
Coordinated law enforcement and compliance strategies
Cooperation by enforcement agencies is vital at both the national and the international levels, and can allow for the sharing of enforcement techniques and information, cooperation in investigatory and enforcement actions, and a united approach to the development of consumer protection strategies for Internet Commerce.
International cooperation can be achieved through international networks of consumer protection agencies, like the OECD Committee on Consumer Policy, the International Marketing Supervision Network (IMSN), and the International Society of Consumer and Competition Officials (ISCCO).
In fact, the OECD is currently working on and debating the Guidelines on Consumer Protection in Electronic Commerce. The Guidelines state that governments, businesses, and consumers should work together to ensure that equivalent protection for electronic consumer transactions is applied by reviewing and adapting laws and practices, if necessary, to address the special circumstances of electronic commerce.
Improved enforcement and compliance strategies
The quickly evolving, technical nature of problems found associated with Internet commerce requires enforcement agencies like the ACCC to take new approaches and maintain new tools in order to enhance consumer welfare. Cooperative action between enforcement agencies needs to allow the development of enforcement tools and processes such as:
Information sharing systems
Joint enforcement action
Reciprocal enforcability of orders; and
Statutory powers to obtain temporary funds freezing and/or cease and desist orders, pending court review.
Industry based solutions
Both domestically and globally, an important element of any overall solution to the consumer protection problems associated with Internet commerce should involve industry associations and their members seeking appropriate remedies rather than waiting for a regulatory response from government.
At the corporate level, industry associations are well placed to oversee and encourage the adoption of both national and International industry-based consumer protection mechanisms, such as codes of conduct, consumer issues committees, certification/accreditation schemes and industry level dispute resolution schemes.
It also makes sense to target consumer protection mechanisms at other industry participants that have an association with, and may inadvertently assist fraudulent and unethical traders. For instance, regulatory or self regulatory efforts may best be directed at Internet service providers, credit card and other finance and payments systems industry members, and international delivery services.
Regulation of on-line commerce
The rapid development of new marketing methods, such as the Internet, has led some national and state governments to introduce legislation to protect consumers. An example is the recent Californian Assembly Bill, which expanded regulations applying to the sale and lease of goods, so that they applied equally to Internet commerce. In addition to the problems associated with the extraterritorial reach of domestic consumer protection laws, the special features of the new world of global comerce, in terms of size, speed and anonymity, largely render conventional domestic consumer protection measures inadequate from a practical point of view. As an alternative, national governments can contribute to the creation of International norms or rules for consumer protection, while also encouraging the industry itself to undertake self regulatory efforts
COMPUTERS AND CUSTOMER SERVICE – THE RECENT COMPUTER SUMMIT IN MELBOURNE
Turning to the computer retailing industry, there was the recent computer summit in Melbourne which addressed the issue of computers and customer service and satisfaction.
This summit was the culmination of an alarming level of consumer dissatisfaction with computer sales and service. It is an area of rapidly growing concern, for not only the ACCC, but other consumer affairs agencies as well.
The retail supply of personal computers, peripheral devices and software in Australia is a multi-billion dollar industry. It is characterised by the importation of almost all of its products and the ceaseless distribution of new technologies. It services all levels of computing, from multi-million dollar corporate and government accounts, the small business sector, through to home and personal consumers. The industry is also highly fragmented, and is characterised by both direct and indirect methods of sales and distribution. Sales are conducted through general merchandise sellers, value added resellers, fax/phone/online resellers, PC stores and PC superstores. The industry is characterised by the core elements of fierce competition, low profit margins and consumer inexperience. The financial pressures of competition and low profit margins on a business have led to retailers being involved in more than one form of disreputable trading behaviour.
Over the past few years the industry has been the subject of an increasing number of consumer complaints. Specifically, the NSW Fair Trading Advisory Council identified a massive 264% increase in the levels of complaints in New South Wales about the computer retail sector in the 1997/98 financial year. This unprecedented level of complaints precipitated the inquiry by the Advisory Council into personal computers, peripheral devices and software, the results of which are damming on any interpretation.
The Inquiry found that the nature of consumer complaints generally fall into two broad categories:
non-delivery of pre-paid or partly paid equipment; and
poor computer product performance and service delivery.
Indeed the ACCC has, in the last year, been inundated by more than 300 complaints of a similar nature. This compares dramatically with the 20 or so complaints we received in the preceding year.
It appears that the most frequently occurring consumer problems relate to delivery, defective products, warranties and complaint resolution. However, problems arising from the poor supply of information, advertising and methods of payment have also contributed to the high levels of consumer detriment and financial loss.
One of the main reasons why consumers experience these problems is their general lack of familiarity with computer products. Whilst many consumers of personal computers, peripheral devices and software are highly computer literate, this is not true of the vast majority of consumers. Not surprisingly, many traders seize on this vulnerability.
The Fair Trading Advisory Council Inquiry found that problems arising as a result of methods of payment required by retailers are a significant source of consumer grievances, particularly in the context of retailers taking deposits or pre-payments, usually in the form of cash, to then either close before supplying the ordered goods, or refusing a refund once a problem with the purchase developed.
Other practices by suppliers which the Inquiry found to be unfair to consumers, and indeed about which the ACCC has received numerous complaints include:
the supply of goods with less than their quoted componentry or capacity;
the selling of second hand and reconditioned products as new;
the avoidance of warranty obligations; and
the failure to establish complaint handling mechanisms.
Retailers’ supply of information
It is less than pleasing that fierce competition in the industry and low profit margins create an environment in which intentionally dishonest practices are nurtured. Parliament has, however, recognised in the Trade Practices Act, that the promotion of competition may result in such a situation and, as such, has attempted to counter this problem by the enactment of consumer protection provisions which are designed to ensure that traders do not gain a competitive advantage from the provision of misinformation to consumers.
From the complaints received by the ACCC, it appears that misleading advertising is a significant contributor to consumer angst. Such tactics include two price advertising and other forms of misrepresentation as to price; misrepresentations as to the value, grade, compatibility or use of both hardware and software; misrepresentations as to the availability of spare parts and repair facilities; and non-disclosure of important, and often qualifying, conditions of offers.
The Fair Trading Inquiry found that prevalent forms of intentional misleading advertising for computer products include:
products marked down in price which have never been sold at a higher price;
advertising of products ‘at cost price’ when they have been marked up;
advertising of reconditioned and second hand products as new;
false representations of a PC’s capacity, componentry and manufacturer;
false description of monitor size;
offers of free extras which have actually been included in the price;
retailers’ claims that only they can supply custom-built units;
false representations about the age of a computer; and
promises of software but only shareware is provided.
In addition, countless consumers have complained bitterly that their warranty rights do not exist in the manner as they were led to believe. The Inquiry found that many advertisements for warranties are intentionally overstated to attract and mislead potential consumers, and that problems arise when consumers seek to enforce their warranty and are informed that their warranty does not cover what they expected. The Inquiry noted that a staggering 54% of consumers surveyed did not have their warranty honoured by the retailer.
Another common cause of consumer grievance relates to how retailers handle consumer complaints. The Inquiry has identified the following common problems:
being refused a refund, even when assured of one at the time of purchase;
traders reneging on promises to provide money back guarantees;
technical support not being readily available, telephone assistance not provided due to consumers being put on hold for excessive periods of time, despite claims it would be provided;
general low level of service provided;
excessive time taken for repair;
refusal to repair goods under warranty;
being charged for repairs under warranty;
repairs under warranty being done using second-hand components;
repair parts not being available within a reasonable time after purchase;
failure to address customer complaint; and
traders not having any formal complaint mechanisms in place.
It is obvious from the number of complaints now being made that many computer retailers do not have adequate complaint resolution procedures in place.
Current legislative protection
Current State and Commonwealth legislation adequately addresses most issues within the computer retail industry. For example, the Trade Practices Act prohibits the making of false representations as to quality, price and use.
However, there are a number of obstacles which may prevent appropriate investigations, sanctions being enforced, and protection or redress for consumers. Specifically, obtaining redress for misrepresentations can prove costly and, in a wide range of cases, practically impossible to prove that a representation is false. Expert evidence, tests and court proceedings are time consuming and expensive for both the ACCC and private litigants.
The ACCC is of the view that strengthening the existing provisions of the TPA may go some way towards assisting litigants in seeking redress. For example, the ACCC has suggested that section 51A of the Trade Practices Act, which provides a defence to an allegation of the making of a misrepresentation on grounds of a reasonable expectation as to a future event, should be amended to require a person who has made representations about certain matters to substantiate those representations. The Inquiry supported this submission.
Rectifying the problems
A recent survey conducted by Brian Sweeney & Associates has revealed that approximately 90% of consumers surveyed believed there should be greater industry regulation. These are industry-wide problems, so we need an industry-wide solution. Unfortunately the ACCC does not have the resources to pursue every complaint made by disgruntled customers, but this does not mean that we can sit back and do nothing. The ACCC is charged with ensuring that consumers are given a fair deal - this can be achieved by such means as enforcement and/or education - the two are by no means mutually exclusive.
What options, then, are open to the industry and enforcement bodies? As I mentioned previously, enforcement action may not always be appropriate, particularly in an industry where insolvency is rife, often defeating the purpose of the action. A more sensible approach is to prescribe minimum standards of conduct for the industry as a whole. These standards must apply to small and large players alike.
At the corporate level, organisations can seek to become ’quality traders’ by adopting means such as compliance programs, customer charters and complaints handling systems.
Whatever the form of the code, it is imperative that it contain core rules setting standards of business practice that would protect the financial interests of consumers. The Fair Trading Inquiry has devised a list of pertinent inclusions covering:
terms and conditions of supply;
guarantees and warranties;
advisory service for customers;
retail incentive schemes;
education of members and employees about fair trading practices;
Y2K product compliance;
complaints and dispute procedures;
It is absolutely essential that a code administration body be set up to administer the scheme to ensure it delivers real benefits for the Australian public.
To summarise, the phenomenal rise in consumer complaints against computer retailers can no longer go unactioned by both enforcement agencies and the industry. There is mounting pressure on bodies such as the ACCC to adopt some form of heavy handed regulation. Whilst the ACCC favours are more cooperative approach to regulation, it will be forced to abandon such a strategy if the industry does not concede that problems exist and continues to refuse to act in its customers’ best interests. Ideally, the industry could achieve a more consumer responsive focus through market sensitive means such as a code of conduct, and individual firms can strive to attain ‘quality trader’ status through the effective adoption of service charters, complaints handling mechanisms and compliance programs. The industry must recognise that it must take responsibility for the problems encountered by consumers and weed out any ‘cowboys’ ruining the good reputation of a solid industry. The Commission is ready, willing and able to work with those companies wishing to comply with the law. However, the Commission is equally ready, willing and able to work against those who don’t.
The outcomes of the summit
The SOCAP Computer Summit held in Melbourne on 30-31 March addressed a number of the issues I have just raised. SOCAP have collated the suggestions made by the various presenters and audience participants to come up with the following list of recommended actions for the computer industry:
Establish a national working party to assess the feasibility of developing a Code of Conduct foe the industry covering
Large computer vendors should work with consumer affairs agencies to develop better reseller practices;
Education of consumers and the industry on consumer issues is vital;
PC user groups should be involved in addressing the issues and positing solutions
Whilst it is recognised that there are many components of the industry, and that the majority of problems emanate from some resellers, they are not confined to this group, and the reputable resellers and large companies and suppliers need to set the example and the standards;
All concerned should take not of the Computer Users Bill of Rights developed by Dr Claire-Marie Karat;
The industry must grow up, as have other industries, and face its consumer responsibilities;
Self- regulatory bodies are appropriate at this stage, as long as there is transparency and an appropriate Code of Conduct;
There should be a system of Quality Endorsements for technology products;
Thorough consideration should be given by all parties to the NSW Fair Trading Advisory Council’s recommendations arising from its Inquiry into the Retail Supply of Personal Computers, Peripheral Devices and Software;
Resellers generally require far greater education, skilling and training than is currently the case;
Industry participants should develop customer service charters, which should be in plain language, and should include clear and practical remedies;
Vendors and resellers should identify first time consumers and then offer something extra in identifying their actual needs, and to explain the operation of the technology chosen;
Urgent work should be undertaken to develop a standard warranty document;
Federal, State and Territory consumer affairs agencies should take action to prosecute those responsible for the grossly falsely and misleading advertising increasingly appearing in the print media;
The Australian Securities and Investment Commission (ASIC) should give higher priority to preventing the continual re-emergence of ‘phoenix’ traders.
There will also be a follow up meeting to discuss these outcomes at the end of May.
The issues involved in electronic commerce and the computer are complex, diverse and continually evolving. The recent summit came up with a lot ‘food for thought’ as well as some practical answers. I urge the industry to support these outcomes. Australians are enthusiastic users of technology and have a right to expect high standards in this industry.
It is the ACCC’s hope that, in protecting consumers and ethical on-line businesses and network operators, the Commission will have a close and constructive relationship with the on-line industry in Australia and internationally. After all, it is in the industry’s best interest to impose order and protect its consumers as much as it is the ACCC’s responsibility.