ACCC Customer Loyalty Schemes: Draft Report puts business on notice

Competition and consumer issues arising from customer loyalty schemes are a compliance and enforcement priority for the ACCC in 2019, and the ACCC has now released a draft report following its inquiry into customer loyalty schemes. As part of its inquiry, the ACCC commissioned an industry expert report on customer loyalty schemes and reviewed the terms and conditions, policies and practices of a number of loyalty schemes in Australia. The ACCC has raised concerns about widespread practices in the customer loyalty scheme industry which may raise concerns under Australian consumer and privacy laws, including:

• confusing and opaque terms and conditions and privacy policies, which is exacerbated by the widespread use of "clickwrap agreements" and failing to advise consumers of critical components of loyalty schemes such as points expiry or restricted redemption opportunities;
• rights to unilaterally vary terms and conditions (such as reducing earn rates or increasing redemption rates) which may be unfair contract terms; and
• lack of disclosure and consumer control over collection, use and disclosure of data (in particular, to third parties and targeted marketing).

There are a number of parallels between the findings and draft recommendations in the Draft Report and the ACCC's final report on its Digital Platforms Inquiry. For example, the ACCC has again called for the introduction of new prohibitions on unfair contract terms and unfair business practices, and reforms that strengthen consumer data protections in the Privacy Act.

The ACCC considers that the consumer loyalty scheme industry is now "on notice" and encourages consumers to report any concerns to the ACCC who will consider further enforcement action to effect broader change. If you are an Australian consumer-facing business which operates or is involved in a customer loyalty scheme, you should start reviewing your terms and conditions, privacy policies, data collection processes and trading practices and consider if there are any changes that need to be made in line with the ACCC's recommendations in the Draft Report. You may also want to consider putting in a submission in response to the Draft Report - submissions close on 3 October 2019.

Better consumer disclosures and stronger consumer protections required for loyalty schemes

The ACCC has raised industry-wide concerns that consumers are not being adequately informed about policies, operations and terms and conditions of loyalty schemes which may impact their ability to make well informed decisions about participation in those schemes.

Some of the key areas of concern include:

• terms that allow scheme operators to unilaterally reduce earn rates or reduce redemptive value of points, which can be detrimental to consumers and potentially unfair contract terms;
• confusion over earning loyalty points from affiliate or partner programs;
• lack of disclosure about expiry periods for points;
• imposition of taxes, charges or fees for redeeming rewards; and
• restrictions on redemption opportunities or availability of awards.

The ACCC considers that loyalty scheme operators need to do more to help consumers understand how the loyalty scheme operates and be provided with the right information at the right time to allow them to make informed decisions about participation in the program. Potential measures to assist consumers could include:

• simplifying terms and conditions, privacy policies and other consumer facing documents so that they are easier for consumers to understand;
• reviewing "clickwrap agreements" to make sure that the text of T&Cs and policies are prominently disclosed (eg. in an embedded window, box or table on the sign up page, and not just hyperlinked) so that consumers are given a genuine opportunity to review those documents before agreeing to them;
• introducing a summary of key features or terms on loyalty scheme sign up pages that draw out important matters, such as the collection, use and sharing of customer data;
• including prominent disclosures about terms of the loyalty program at the right place and at the right time (eg. disclosing expiry periods and any material restrictions on redemption opportunities on webpages relevant to redemption); and
• improving customer communications around important changes to loyalty schemes (particularly changes to earn rates or redemption periods), and consider giving consumers a grace period to redeem points at the higher rate before changes take place.

Consistent with the recommendations in the Digital Platforms Inquiry Final Report, the ACCC has repeated its call for amendments to the Australian Consumer Law to prohibit unfair contract terms (not just making them voidable) and introduce a new prohibition against certain unfair trading practices. These amendments, if passed, would give the ACCC a stronger basis for taking action against some of the types of practices and conduct of concern, many of which do not neatly fall under current prohibitions in the Australian Consumer Law.

ACCC remains concerned about data practices, including the collection, storage, use and sharing of consumer data

The ACCC has closely examined data practices around the collection, storage, use and sharing of consumer data and its preliminary findings are that consumers typically have little control over the collection, use and disclosure of their data, reflecting an imbalance of bargaining power and significant information asymmetries between consumers and loyalty scheme operators.

The ACCC has raised concerns about industry practices such as seeking broad consents from consumers and making vague disclosures about the collection, storage, use and disclosure of consumer data, particularly in relation to the sharing of consumer data to third parties, and limited ability for consumers to opt out of targeted advertising offered by third parties.

The ACCC's draft recommendations include measures to improve loyalty scheme data practices, including:

• reviewing clickwrap agreements and improving disclosures relating to data practices (including to whom consumer data is disclosed to, and for what purposes)
• increasing clarity, accessibility and readability of privacy policies
• ending the practice of automatically linking customers' payment cards to track activity and behaviour when their loyalty card is not scanned

Consistent with the recommendations in the Digital Platforms Inquiry Final Report, the ACCC has also repeated its call for reforms to the Privacy Act to strengthen protections over consumer data, including:

• Amending the Privacy Act to better enable consumers to make informed decisions by:
  • updating the definition of “personal information” in the Privacy Act to ensure that it covers technical data (eg. IP addresses);
  • requiring any APP entity collecting personal information (whether directly from the consumer or as a third party) to provide clear notice to the consumer setting out how the entity will collect, use and disclose the consumer’s personal information;
  • strengthening consent requirements and pro-consumer defaults by requiring consent to be obtained whenever a consumer’s personal information is collected, used or disclosed by an APP entity;
  • enabling the erasure of personal information upon request by the consumer;
  • introducing direct rights of action for individuals; and
  • increasing penalties for breach of the Privacy Act in line with penalties under the Australian Consumer Law
• Broader reforms to the Australian privacy regime to maintain effective protection of consumer personal information, including consideration of the current objectives and scope of the Privacy Act, and the introduction of a new statutory tort for serious invasions of privacy.

Loyalty schemes may harm competition if they lock in customers, reduce customer switching or increase barriers to entry or expansion, as has occurred overseas

The Draft Report acknowledges that loyalty schemes can have pro-competitive effects as it is an additional avenue for competition between suppliers which may lead to better loyalty discounts and lower prices for consumers.

However, the Draft Report also states the ACCC's view that in certain circumstances, loyalty schemes can have potential anti-competitive effects, including:

• locking up customers with a particular firm or increasing switching costs to prohibit or deter customers from purchasing goods or services from competitors;
• creating barriers to entry that induce rival firms to exit from the market or deter them from entering into the market at the expense of customers;
• reducing price transparency because it is cumbersome for customers to compare the value of loyalty scheme rewards with competing price-based offers;
• firms increasingly collecting and using data for analytical purposes to reduce the likelihood of the firm's competitors from effectively competing, entering or expanding.

The Draft Report states that the main competition concern is the potential for anti-competitive foreclosure, which is likely to occur where:

• existing rivals or new entrants are unable to match the ability of a loyalty scheme to compete for the total or near total requirements of a significant number of buyers leading to the exclusion or restriction of competitors, and
• once subject to less constraint by existing and potential competitors, the incumbent will find it profitable to raise its prices and, in response, firms will not likely enter, re-enter or expand their market shares.

The ACCC considers that the risks to competition could be concerning since loyalty schemes are prevalent in a number of concentrated markets in Australia. The ACCC will closely consider competitive effects of loyalty schemes on a case-by-case basis, both in its general monitoring and enforcement activity and in its review of mergers and acquisitions.

What to look out for in a customer loyalty scheme

If you are an operator of a customer loyalty scheme, here are some key issues to look out for:

"Clickwrap agreements": if your T&Cs and privacy and data policies are presented to consumers electronically and consumers consent to those terms electronically by clicking an "I Agree" button, you may want to consider:

• providing copies of T&Cs, privacy and data policies in an embedded window, box or table on the sign up page (and not just a click through link) to give consumers a reasonable opportunity to review those terms;
• separating privacy policies and data collection policies from T&Cs;
• including separate "I Accept" check boxes for the T&Cs and each policy, so consumers are made aware that they are agreeing to the terms set out in separate documents;
• including a summary of important terms such as restrictions on redemption (including expiry of points), what data is collected and how it is used or shared (including with third parties).

Collection of personal information before the consumer is given an opportunity to read and consent to T&Cs and privacy policies: ensure that the T&Cs and any applicable policies appear prominently on the sign up page, and that no information is collected until the consumer has consented to these terms;

Long, complex and confusing terms and conditions, privacy and data collection policies: avoid "information overload" by trying to simplify T&Cs and policies and presenting relevant aspects of T&Cs and privacy policies to consumers during key interactions, increase readability by using definitions consistent with the Privacy Act, and ensure that important documents and policies are hyperlinked to avoid consumers having to track down policies from different web pages.

Unilateral rights to vary contract terms, including changes to rewards earn rates or redemption rates: if these rights result in a significant imbalance in the rights and obligations of consumers and operators, is not reasonably necessary to protect legitimate interest of operators or causes financial or other detriment to consumers, they may be void.

Automatic opt-ins to targeted advertising: consumers should be given a reasonable opportunity to opt out of having their personal information shared with third parties before that information is actually shared, and privacy or data collection policies should be clear on the channels through which consumers may receive targeted advertising and how their consumer data may be used to generate leads.

The Draft Report also calls out a number of specific issues with loyalty programs in the airline, supermarket, financial institution, telecommunication and hotel and car rental industries. If you operate or are involved in loyalty schemes in these industries, the ACCC is likely to have received consumer input on your, or competitors', loyalty schemes, so you should pay particularly close attention to the findings and recommendations in the Draft Report.

The ACCC is monitoring and paying particularly close attention to consumer complaints about customer loyalty schemes. In the Draft Report, the ACCC says that the industry has now been put "on notice", so now is a good time to review your terms and conditions, privacy and data collection policies for compliance with competition and consumer laws and privacy laws.

Related Insights

• The ACCC’S Digital Platforms Inquiry Final Report Briefing Note