When the Consumer Financial Protection Bureau (CFPB) issued the Consumer Financial Protection Circular 2023-01: Unlawful Negative Option Marketing Practices on Jan. 19, it addressed the question, “Can persons that engage in negative option marketing practices violate the prohibition on unfair, deceptive, or abusive acts or practices in the Consumer Financial Protection Act (CFPA)?”
Negative option is a term or condition under which a seller may interpret a consumer’s silence, failure to take an affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer. For example, if a financial institution offers a trial marketing plan in which the consumer receives a product or service for free or at reduced costs for a trial period, but at the end of the trial period, consumers are automatically charged a fee or higher fee unless the consumer affirmatively cancels.
The CFPB stated in their circular that “negative option programs can cause serious harm to consumers who do not wish to receive the products or services for which they are charged.” Harm is most likely to occur when sellers mislead consumers about terms and conditions, fail to obtain consumers’ informed consent, or make it difficult to cancel, the CFPB said. The circular is intended to emphasize that covered persons and service providers who engage in negative option marketing are required to comply with the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices.
A seller offering a negative option program risks violating the CFPA if the seller:
- Does not clearly and conspicuously disclose material terms of the negative option offer,
- Does not obtain the consumer’s informed consent, or
- Misleads consumers who wish to cancel, erects unreasonable barriers to cancellation, or impedes the cancellation procedures.
Sellers may be in violationof the CFPA’s prohibition on deceptive acts or practices if they misrepresent or fail to clearly and conspicuously disclose the material terms for a product or service with a negative option feature. Making partial disclosures about the nature of the product or service and failing to disclose other material information is deceptive per the CFPB. For this determination, the CFPB looks to the overall, net impression of the communication. The material terms of a negative option offer may include the following:
- That the consumer is enrolling in and will be charged for the product or service.
- The amount or range of amounts that the consumer will be charged.
- That charges will be on a recurring basis unless the consumer takes affirmative steps to cancel the product or service.
- That, in a trial marketing plan, charges will begin or increase after the trial period unless the consumer takes affirmative steps to cancel.
The circular provides examples of where disclosures have been deceptive. For instance, a consumer reporting agency deceptively misrepresented that credit related products were free when, in practice, consumers who signed up for the trial were automatically enrolled in a subscription program with a recurring monthly fee unless they cancelled. The CFPB in its enforcement action noted that disclosures about the negative option features were often displayed in fine print and low contrast, and were placed in less prominent locations and grouped with other disclosures.
Sellers that are engaged in negative option marketing are likely to violate the CFPA when they fail to obtain the consumer’s informed consent before charging the customer. The circular lists examples of where consent is not likely to be informed, such as if the seller mischaracterizes or conceals the negative option feature, if the seller provides contradictory or misleading information, or if the seller interferes with the consumer’s understanding of the agreement. Per the CFPB, a deceptive practice occurs when the card issuers falsely represented to consumers that they were agreeing to receive information rather than purchasing the product. An example of an unfair practice would be a debt relief company engaged in charging consumers on an automatic, recurring basis where the recuring charges were not clearly explained or disclosed at time of purchase.
Sellers must retain existing customers in a manner compliant with the CFPA by not misleading consumers wishing to cancel. The CFPB cites as an example a credit card issuer engaged in deceptive practices when it represented that consumers could cancel an add-on product immediately and with no questions asked. However, in practice, the credit card issuer directed sales representatives to repeatedly rebut requests to cancel. Misrepresentations about the costs or benefits of the product or service to avoid cancellation is also a deceptive practice.
If a financial institution engages in negative option marketing practices for its products or services, including add-on products, we encourage you to review the procedures and processes in place with respect to the product or service. Additionally, financial institutions that offer negative option plans should review the recent click to cancel proposal for comment issued by the Federal Trade Commission (FTC) in anticipation of regulatory changes for negative option plans.
This article is excerpted from a Regulatory Advisory Services Client Alert. For the complete article, email Regulatory.Services@capco.com