Regulating consumer behaviour, or: why one might wait getting an iPad and other lessons from behavioural studies

Last Friday and Saturday, 25 and 26 June, an international and interdisciplinary symposium on ‘Behavioural economics, consumer policy and consumer law’ took place at the European University Institute in Florence. The symposium was organised by Professor Hans-W. Micklitz (EUI) and Professor Lucia Reisch (Copenhagen Business School) on behalf of the Journal of Consumer Policy and brought together experts in the fields of law, economics, law & economics, psychology and sociology, as well as policymakers from the EU and US.

The more empirically oriented presentations gave interesting insights into the effects of information on consumer decision making and behaviour, addressing the shaping of consumer preferences (an iPhone introduced at a price of $600 will seem a bargain if some months later it is offered for ‘merely’ $200), the possible counter-effects of full disclosure of information (consumers paradoxically acquiring more financial products after having been informed of a conflict of interests of the seller), the psychology of impulsive buying (the understanding of which could, for instance, help nudge consumers towards healthy food and away from unhealthy snacks on display in stores), the impact of health policies on eating behaviour (e.g. governments signing agreements with the fashion industry to increase the size of fashion models, in order to prevent eating misbehaviour by young people trying to conform to the beauty ideal portrayed in the media), and the relation of a client’s financial knowledge to the quality of financial advice obtained from a bank (clients with high knowledge obtaining better advice than those with less expertise).

From a more theoretical perspective, the question was confronted of how to implement the results of these behavioural studies in policy making. To what extent is it possible to predict errors that consumer contracting parties will make? And should these be translated into a framework of limited choices for consumers? To what extent does this involve both the legislature and the judiciary? In other words, to what extent can normative guidelines be derived from behavioural studies?

These questions were addressed in the remaining presentations and the discussion. In very broad lines, one could say that EU consumer policy has so far concentrated on redressing the information asymmetry between consumers and professionals. As Professor Micklitz pointed out, a radical self-assessment would be called for in order to find out what has so far been achieved with legal tools in consumer policy – in particular, have the remedies available to consumers in case of breach of contract, damage, etc, been useful? (a topic that is also being discussed in the context of the proposal for a Consumer Rights Directive, as was signalled in an earlier post on this blog)

The direction that the development of consumer policy on the basis of behavioural law & economics, psychology and sociology should take mostly seemed to puzzle the lawyers in the audience, well, in any case the undersigned. Is it only one-way traffic or can legal scholarship also contribute to behavioural studies?

As a conclusion to this (way too long) post: it is clear that behavioural studies have an impact on consumer policy making in Europe, as one can see in the importance awarded to monitoring instruments such as the Consumer Markets Scoreboard, the development of an OECD Toolkit for policymakers, and the general emphasis on information duties in the existing consumer Directives. Surprisingly enough, however, it seems that researchers from the different disciplines have hardly begun the dialogue on how to combine forces to reach better results in the field of consumer protection. This conference managed to get one started. The floor is open…

NB: The Journal of Consumer Policy will publish a special issue on the topic and invites the submission of papers.

Branding - a candidate for unfair commercial practice?

In the past few years more and more attention is being devoted to branding and its (negative) effects on consumers. I have just read about another research that shows even more clearly how big the influence of branding on consumers is.

Melanie Dempsey and Andrew A. Mitchell tested the power of branding by conditioning consumers to like or dislike certain brands that they made up. The consumers were not aware of the conditioning, however, when they were later asked about brands they were supposed to 'get to like' - indeed, they liked them without being able to give a reason why. The researchers called it 'I like it, but I don't know why' effect. This sounds alarming, but what is even more worrying is that when later the consumers were given facts about these brands that contradicted their conditioning, they still preferred products of the brands that they 'got to like'. This means that they chose certain inferior products only because they had received positive branding message about them.

Shouldn't branding be considered an unfair commercial practice then and banned? Apparently it materially distorts the economic behaviour of an average consumer whom it reaches - which is the definition of the unfair commercial practice (Article 5 of the Directive 2005/29/EC on Unfair Commercial Practices). Oh, yes, the other part of the definition mentions that commercial practice needs to be contrary to the requirements of professional dilligence to be considered unfair. So far branding has been allowed and is not seen as contrary to the requirements of professional dilligence. Hopefully, with more research, that will change.

The article on this research may be found at the website of neurosciencemarketing and science daily. The paper of the two researchers has been published in the Journal of Consumer Research:

Melanie Dempsey and Andrew A. Mitchell. The Influence of Implicit Attitudes on Consumer Choice when Confronted with Conflicting Product Attribute Information. Journal of Consumer Research, December 2010

New targets for consumer rights – hit or miss?

The debate about the Consumer Rights Directive, on which we reported earlier on this blog, continues now that the European Parliament is revising the proposal. Recently, two draft reports have been produced under the direction of MEP Andreas Schwab, one dated 31 May 2010 and one dated 9 June 2010. Glancing through these, the many stakeholders that were dissatisfied with the initial proposal can take comfort, it seems, from Schwab´s efforts to “completely change the original Commission proposal”.

Which are the main changes then? The most significant change of direction relates to the decision to let go of the intention to opt for full harmonisation for every part of the Directive. As Commissioner Viviane Reding indicated, this approach does not seem appropriate nor feasible in light of the needs and wishes of Member States with regard to consumer law. Instead, a shift to ‘targeted full harmonisation’ for those issues where this degree of harmonisation would be of benefit to the single market may be welcomed. In the draft reports we see this reflected in the new proposal for Article 4, which reads: “Save as otherwise provided by this Directive, Member States may not maintain or introduce, in their national law, provisions diverging from those laid down in this Directive” combined with a range of exclusions at various places in the draft (e.g. in Article 4 itself, and in Article 5(3a), (3b) and (3c), Article 19, Article 22(2a), Article 26(5b), Article 28(5a), Article 34(1a), Article 35(1a)). The overall purpose appears now to be to put in place a uniform set of rules on distance and off-premises contracts, consumer sales and unfair terms which applies to simple sales and services transactions. The exclusions ensure that the Member States have a lot of leeway to diverge in cases where contracts are either specific (e.g. relating to immovable property, transport, or financial, healthcare and welfare services) or where it is deemed on other grounds that stricter provisions are required to ensure a high level of consumer protection (e.g. by designating additional terms as terms presumed to be unfair).

In the draft reports, this new plan for targeted harmonisation is backed-up with an evaluation scheme that requires Member States to report back to the Commission on actual diverging measures that have been taken in order to ensure a higher level of consumer protection. The advantage of this could be, one presumes, to at least be able to chart the remaining differences in national laws; and perhaps to encourage the Member States to conduct a review of their national consumer laws to see if and how greater alignment with EU law and policy is something that should be pursued.

For now, it seems to early to say whether these drafts should be regarded as a hit or a miss. One thing that is clear is that they open up the debate on the Directive in a positive way, giving interesting suggestions as to how the further revision of the acquis should unfold. And more importantly: placing the emphasis back on the substantive consumer rights that EU legislation seeks to ensure.

More developments on this are expected later this year, so stay tuned…

End of information era close?

The SECOLA (Society of European Contract Law) congress was this year devoted to the failure of contracting in respect of the financial crisis of last years. Various speakers discussed European and national regulations of the financial market and how gaps and unclarities in them might have contributed to the worsening of the financial crisis.

One of the most interesting presentations was given by Omri Ben-Shahar, professor at the University of Chicago Law School, on the failure of mandated disclosure. Last year he published an interesting article in the European Review of Contract Law: "The Myth of Opportunity to Read in Contract Law". In this article he explains why, according to him, there should not be a legal obligation on the service providers and sellers to present, prior to the conclusion of the contract, standard contract terms that will bind the consumers who do business with them. It has been widely researched that consumers tend not to read the standard contract terms, even if they are given them and have a theoretically unlimited time to read them. Why then do we insist to obligate service providers to deliver these standard contract terms to the consumers? The well accepted argument is - 'so that the consumers have a possibility to read these contract terms if they want to use it. Omri Ben-Shahar in his article is sceptical about the positive value of leaving this opportunity open (e.g. he mentions that while most of the consumers will not make use of it, the courts might then easier dismiss consumers' arguments as to the unfairness of a clause by saying that they did not do enough to prevent it prior to the conclusion of the contract). Still, he considered then certain forms of disclosure that could be effective, e.g. labeling. In his presentation at the SECOLA congress Omri Ben-Shahar presented shortly his new article on the failure of mandated disclosure in which he goes even further with his conclusions, basically rejecting the possibility of information duties having any positive effect for the consumers. He talked about regulatory failure, putting more and more information duties on the professional parties, while the behavioral research shows that the consumers are overloaded with information and don't know what to do with it.

I, like many others, were fascinated by his speech and the discussion that followed afterwards. Still, I cannot help but remain hopeful as to the future of the information duties. Why not work on the form of information first before he completely dismiss it? We could make information forms more legible and more approachable. Of course, that might be a naive view but it feels like we would open a Pandora's box if we just let the professional parties to reveal whatever they wanted to, without any directions nor boundaries. Anyways, I am looking forward to the forthcoming article by Omri Ben-Shahar.

SECOLA conference

I am currently in Istanbul at the SECOLA conference which this year is devoted to the financial crisis and and consumer protection in these times.

Sweat the small stuff - TED talk by Rory Sutherland

Fantastic TED talk by Rory Sutherland on how companies and governments think big in order to either make profit or influence people (or both) while they sometimes could achieve more by thinking small - 'Sweat the small stuff'.

A part of his presentation:

'So there seems to be a strange disproportionality at work, I think, in many areas of human problem solving, particularly those which involve human psychology, which is: the tendency of the organization or the institution is to deploy as much force as possible, as much compulsion as possible, whereas actually the tendency of the person is to be almost influenced in absolute reverse proportion to the amount of the force being applied.'

It is an interesting point of view and I can see its appeal in the area of consumer regulations. The simplest thing, like making the professional parties use language that is understandable by consumers on forms and in documents used by them, would not cost the professional parties much, but instead they prefer to invest in more technology development or more advertisment. The idea introduced in this presentation - to start paying attention to the details and try looking for ways to increasing consumer satisfaction with small things - is definitely worth thinking about. After all, we hear more and more often, from various media, the phrase: "Enjoy the little things".

Mobile phone bills without shocking factor (II)

The Roaming Regulation is valid. In its judgment of 8 June 2010, the CJEU determined that the adoption of the Regulation was justified on the basis of Article 95 EC (now: Article 114 TFEU) in order to protect the proper functioning of the Internal Market.

The Roaming Regulation puts a limit on the amount of roaming charges that mobile phone operators may charge consumers when they make phone calls outside their own network. Moreover, it imposes a ceiling for wholesale roaming charges, i.e. the price the consumer’s network pays to the foreign network the consumer uses when travelling abroad (see also an earlier post on this blog about the amendment of this Regulation).

Good news for consumers, but not for mobile phone operators. Four of the main European operators (Vodafone, Telefónica O2, T-Mobile and Orange) challenged the validity of the Regulation before the High Court of Justice of England and Wales. That Court sent a preliminary question to the Luxembourg Court concerning the validity of the legal basis of the Regulation and its compliance with the principles of proportionality and subsidiarity.

According to the CJEU, Internal Market interests justified EU intervention in the regulation of roaming charges, given the high level of retail prices at the time the Regulation was adopted, and the likelihood that Member States would adopt diverging measures in order to lower these charges. Therefore:

‘As regards the functioning of the roaming market (…) and taking into consideration the considerable interdependence of retail and wholesale charges for roaming services, it is clear that a divergent development of national laws seeking to lower retail charges only, without affecting the level of costs for the wholesale provision of Community-wide roaming services, would have been liable to cause significant distortions of competition and to disrupt the orderly functioning of the Community-wide roaming market, as is clear from recital 14 in the preamble to Regulation No 717/2007. Such a situation justified the Community legislature’s seeking to protect the proper functioning of the internal market (…).’ (para. 47 of the Court’s judgment)

This conclusion seems to follow the line of the opinion of Advocate-General Maduro, who analysed the risk of different price control measures in the absence of Community legislation and suggested that ‘it would be possible to justify Community intervention under Article 95 on the fact that national rules did not prevent the discriminatory treatment of cross-border mobile communications’ (para. 24).

Concerning the proportionality of the Regulation, the CJEU finds that maximum retail charges could be considered appropriate and necessary for the protection of consumers against high levels of roaming charges. I cite from the Court’s judgment (paras. 68 and 69):

‘In those circumstances, and particularly in the light of the broad discretion which the Community legislature has in the area at issue, which involves choices to be made of an economic nature, requiring complex assessments and evaluations, it could legitimately take the view that regulation of the wholesale market alone would not achieve the same result as regulation such as that at issue, which covers at the same time the wholesale market and the retail market, and that the latter was therefore necessary.

Finally, in the light of the importance of the objective of consumer protection within the context of Article 95(3) EC, intervention that is limited in time in a market that is subject to competition, which makes it possible, in the immediate future, to protect consumers against excessive prices, such as that at issue, even if it might have negative economic consequences for certain operators, is proportionate to the aim pursued.’

As regards the compliance of the Regulation with the principle of subsidiarity, the CJEU determines that given the interdependence of retail and wholesale charges, the Community legislature could legitimately take the view that a common approach at Community level was necessary to ensure the smooth functioning of the Internal Market, thus allowing operators to act within a single coherent regulatory framework (para. 77).

In sum, this leads to a reassuring conclusion for all EU consumers who will be roaming through other Member States in the coming (holiday) months.

Where consumers fear to tread...

In a speech given at the occasion of the 2nd Consumer Rights Directive Forum, on 2 June 2010, Commissioner Viviane Reding once more expressed her intention to enhance consumer trust in the single market. She especially indicated the Internet as an area of attention, pointing out that only few EU e-shoppers order from other European countries, and referring to the Commission's Digital Agenda of May 2010.

According to Reding, the proposed Consumer Rights Directive will help the further progress of the market. Rather than the initially proposed maximum harmonisation, this Directive should provide for targeted full harmonisation of certain topics (on which an earlier post appeared on this blog). In her speech, Reding indicates the following strategies for the regulation of distance and off-premises contracts:

- full harmonisation of rules on precontractual information for these contracts;

- a 14-day cooling-off period;

- and standard withdrawal forms.

With regard to remedies, however, Reding suggests not to make a distinction between these types of contracts and on-premises contracts:

'In particular, I accept the case for common rules on the remedies and legal guarantee for faulty goods for all transactions. To this end, I would be prepared to raise the level of protection and introduce new remedies if this is accompanied by a breakthrough for the single market through full harmonisation.'

This sounds promising, especially given the fact that the current proposal for a CRD does hardly (if at all) provide any common remedies. Moreover, it would bring the CRD closer to the (Draft) Common Frame of Reference for European Contract Law, for the further development of which the Commission has recently appointed an expert group.

Finally, in order to ensure that the Internet does not remain a place 'where consumers fear to tread', Reding highlights the importance of fundamental rights protection (e.g. privacy on the Internet). Food for thought, in particular in relation to other imminent changes in the safeguarding of fundamental rights in European law, such as the accession of the Union to the ECHR.

Cereal is good for you says Kellogg... says who?

The Consumerist has an interesting story about Kellogg's being ordered to stop saying its cereals make people healthier (supposedly Rice Krispies were to help support 'your child's immunity').

It is the second time (previously Frosted Mini-Wheats were advertised as bound to increase children's attentiveness) when Kellogg, a brand known worldwide for its various cereals, has been caught on misleading the consumers in its advertisements by making them believe in cereals unproven health benefits. As previously, US Federal Trade Commission settled with Kellogg ordering them to stop marketing their products by using health claims unless they were backed up by scientific evidence. The FTC believes that:

“As a trusted, long-established company with a presence in millions of American homes, Kellogg must not shirk its responsibility to do the right thing when it advertises the food we feed our children,”

However, the settlement does not provide for any financial nor legal sanctions for Kellogg (read more on that here). The company just promised to do better next time. Which, by the way, they have already done the previous time. I guess FTC believes that companies, like people, learn on their mistakes and change with time. This has to be the reason why the FCT gave Kellogg not the second but the THIRD chance to do good. Call my a cynic but I believe that the fourth time awaits around the corner...

In Europe this type of advertising would be considered to be misleading based on the Unfair Commercial Practices Directive 2005/29/EC. The sanctions for using such an advertising are determined in national laws of the Member States, however, one would expect that at least certain fines would be applied.

Unfair core terms in consumer contracts - ECJ case C-484/08 Caja de Ahorros v. Ausbanc

3 june 2010: ECJ case C-484/08 Caja de Ahorros v. Ausbanc

Today ECJ decided a case on the interpretation of the Directive 93/13/EEC on unfair terms in consumer contracts.

A Spanish company Caja de Madrid enabled consumers to enter into variable-rate loan agreements for the purchase of residential property. The contracts concluded between Caja de Madrid and the consumers contained a written clause, introduced in advance in a model contract, pursuant to which norminal interest rate laid down in the contract, variable from time to time in accordance with the agreed reference index, is to be rounded up, with effect from the first revision, to the next quarter of a percentage point. This is so-called 'the rounding-up term'. A Spanish organization protecting clients in the banking sector - Ausbanc - brought an action seeking annulment of the rounding-up term in loan contracts and prohibition of its use in the future.

The Article 4(2) of the Directive on unfair contract terms excludes from the assessment whether the contract term is unfair such terms which concern, in particular, the subject-matter of the contract, in so far as these terms are in plain intelligible language.

The Spanish legislation implementing the Directive on unfair contract terms did not implement this Article 4(2) of the Directive, which means that in Spain all contractual terms are subject to the test of unfairness, regardless whether their pertain to the core of the transaction or not, and regardless the language in which they have been drafted. (Par. 15)

The Spanish courts had no doubts that the rounding-up term was unfair to the consumers, even if it constituted an essential element of a contract for a bank loan. The question referred in these proceedings was whether the Spanish legislation is in accordance with the provisions of the Directive if it submits such a term to the test of unfairness as established in the Directive.

The ECJ clearly stated that the Directive on unfair terms in consumer contracts does not preclude national legislation which authorizes a judicial review as to the unfairness of contractual terms which relate to the definition of the main subject-matter of the contract, even in the case where those terms are drafted in plain, intelligible language. (Par. 44)

The ECJ reminded that the Directive introduces a system of partial nad minimum harmonisation, which means that the Member States may afford consumers a higher level of protection than that for which the Directive provides. (Par. 28) Article 8 of the Directive clearly gives that possibility to the Member States. (Par. 29)

It has been argued by Caja de Madrid that Article 8 of the Directive should not apply to Article 4(2) since: (Par. 25)

'That provision, it argues, defines, in a binding way, the scope of the system of protection provided for by the Directive, thereby excluding any possibility for Member States to derogate from it, even in order to provide for national legislation which is more favourable to consumers.'

However, the ECJ does not see Article 4(2) of the Directive as defining the scope of it, instead it is concerned: (Par. 31-35)

'(...)solely with establishing the detailed rules and the scope of the substantive assessment of contract terms which have not been individually negotiated and which describe the essential obligations of contracts concluded between a seller or supplier and a consumer.'

Caja de Madrid made also an argument based on its interpretation of the ECJ's earlier case C-144/99 Commission v. Netherlands in which the Netherlands were held to have infringed the provisions of the Directive by incorrectly implementing Article 4(2) of the Directive, that the Article 4(2) is binding and mandatory. Therefore, according to Caja de Madrid, provision of Article 8 of the Directive should not apply to it. ECJ had no problem rejecting this argument. The Netherlands, originally, excluded from the unfairness test all core contractual provisions, regardless whether they were drafted in the plain language or have been obscure and ambiguous. This led to the decrease in the consumer protection. (Par. 36-40) In contrast, Spain offers more protection to the consumers by submitting all core contractual terms to the unfairness test. The Article 4(2) is binding and mandatory for the Member States in as far as they need to introduce the minimum protection that it grants to the consumers, it does not, however, exclude the possibility for the Member States to give more protection to the consumers based on Article 8 of the Directive. (Par. 42-43)

Interestingly enough, the new proposal for the Directive on consumer rights contains Article 32(3) according to which the unfairness test is not supposed to be applied to the assessment of the main subject matter of the contract, provided such terms have been expressed in plain, intelligible language. According to the proposal, the Directive on consumer rights is supposed to introduce maximum harmonization, which would mean that Member States may not adopt other rules in their national consumer law than those expressed in the Directive, even if such national rules would grant more protection to the consumers. According to the comparative research on the impact of introduction of the new Directive on national consumer protection, not only Spain, but also: Austria, Denmark, Finland, Greece, Latvia, Luxemburg, Poland, Slovenia and Sweden subjected core contract terms to the unfairness test. The new proposal might then significantly lower consumer protection in such countries and enable companies like Caja de Madrid to make free use of this gaphole. This judgment of the ECJ is, therefore, interesting and important but may have a short life of application ahead of it...