FEDERATION OF EUROPEAN DIRECT MARKETING
Public Affairs & Self-Regulation

FEDMA RESPONSE TO THE
UNITED STATES FEDERAL TRADE COMMISSION NOTICE:
US PERSPECTIVES ON CONSUMER PROTECTION
IN THE GLOBAL ELECTRONIC MARKETPLACE

26 MARCH 1999

INTRODUCTION

The Federation of European Direct Marketing (FEDMA) welcomes the opportunity to respond to the Federal Trade Commission Notice "US Perspectives on Consumer Protection in the Global Electronic Marketplace". The debate on how best to provide consumer protection, or to put the issue in another way, how to encourage trust and confidence and empower the consumer to make the right, well-informed choices in the global electronic marketplace, is in full swing in Europe as well as the USA. Different emplois and in some cases different arguments are to be found, and we therefore hope our views below will contribute positively to the debate.

FEDMA represents the direct marketing sector at European level. Its national members are 16 Direct Marketing Associations (DMAs) representing users, service providers and media/carriers of direct marketing. FEDMA also has 550 direct company members. The direct marketing sector represents an expenditure of over 27 billion ECU and employs over 500,000 people directly, and many more indirectly, within the EU.

CONSUMERS IN THE ON-LINE WORLD

The Internet is proving to be a powerful tool for empowering consumers interests by opening up new avenues of information and education. It can also offer consumers greater choice, convenience and value for money. As the UK Consumer Association pointed out in their issues paper for the 19-20 March Rome Forum on Political Change for the Information Society ⁽¹⁾ "the growth of the Internet and other interactive electronic forms of communications is an unequivocally good thing for consumers and society at large. Increasing participation in the electronic marketplace will empower consumers, putting them in control of the purchasing process rather than suppliers as has traditionally been the case. […]Consumers in the electronic marketplace will be much better informed, drawing upon a range of sources to get information. Cyber shopping will provide a "my time, my place, my way to shop. […]Consumers will have sufficient trust and confidence to participate in the electronic marketplace. Enlightened electronic traders will recognise the importance of such trust and ensure that mechanisms are in place to reassure customers e.g. self-regulatory initiatives".

THE MAIN ISSUES AT STAKE

The various positions(2) presented by consumer organisations in an international context, concentrate on the following main concerns:

1. Consumer Information and Business Transparency: ensuring that online shoppers know who they are dealing with, where the vendor is located and what exactly they are agreeing to;

2. Respect of existing consumer rights: on-line businesses must be legally obliged to respect basic consumer rights just as other businesses;

3. Commercial communications: clear distinction between commercial and editorial messages;

4. Redress: effective complaint and dispute resolution procedures for consumers, both within organisations and outside them, consumer recourse to the laws and courts of their home country, in the event of unresolved disputes with foreign vendors. This goes side by side with the recognition and enforcement of judgements with respect to international consumer transactions

• In relation to the first concern, FEDMA is supportive of the draft OECD Consumer Protection Guidelines which recommend business to provide clear and accessible information about the identity and physical location of businesses engaged in e-commerce. In that context, FEDMA comments on these Guidelines (incorporated into the comments of the Business and Industry Advisory Committee to the OECD, BIAC) stress that it is essential that the consumer knows the place of establishment (country) of the business in order to recognise under which law s/he is contracting. FEDMA also supports the need to identify clearly the characteristics of the main product in the offer, its price, time of delivery and other essential information, if relevant, such as after-sales guarantees, right of withdrawal, cancellation terms.
• In relation to the second concern, FEDMA is a firm supporter of the principle that Internet trading is not a "free zone" where no legal obligations or rights need to be respected. The essential question for on-line global trade is which consumer rights need to be respected. In that respect, FEDMA strongly supports the draft E-commerce Directive(3), which, in line with EU case law on the Internal Market, establishes a clear obligation for Information Society service providers to respect the law (obviously including all relevant consumer protection law) of the country where they are physically established. The draft Directive also places a supervisory obligation for the Member State in which such a service provider is established. This last requirement is essential for consumer protection since the Member State in which the company is established should protect not only the consumers resident in its country, but also other consumers resident elsewhere in the EU.

The European Parliament, in its current debate on this Directive, has also stood for the application of the Internal Market principles as the only solution for electronic commerce. We believe that it is worth quoting the opinion of the European Parliament Consumer Protection Committee on this Directive since it insists on the fact that Member States have to protect all EU consumers: "the country of origin principle has been criticised by consumer groups. They argue that it is inappropriate and inflexible as a catch-all regulation for the horizontal nature of e-commerce, since there are major differences among Member States over the protection of consumers in commercial commerce. […] However there are pressing reasons why the Community's internal market should set its house in order swiftly as e-commerce expands. In this context the service provider has to be tackled at source so that all the Member States, in their respective roles as countries of establishment, take joint action to protect the consumer from malpractice".

It may be argued that at international level the situation is quite different since it lacks the scope of legal integration achieved among the EU countries. However, as we will argue in the next section, we do not see any other way forward to ensure adequate consumer protection and at the same time enable the unrestricted development of e-commerce. This can only be achieved by applying the principle of control at source at an international level complemented by international co-ordination of law enforcement agencies and specific effective self-regulatory mechanisms. As visits to web-sites still are undertaken upon the initiative of an 'active' consumer towards a 'passive' supplier of goods and services, the basic premise should be that the consumer travels to other jurisdictions than his/her own, not the other way round.

Moreover, FEDMA would support the idea of companies providing links to web sites that inform the purchaser about their rights in the country where the company is established. Such information web sites already exist(4) and undoubtedly consumer demand will result in several competing services to elaborate those. This will allow the consumer to take an informed decision about his/her rights when concluding a transaction with a foreign supplier.

• In relation to the third concern, FEDMA would like to point out that the concerns on the distinction between editorial and commercial messages have already been taken on board by industry self-regulation for some years in the off-line world and have been also adopted for the on-line world by the International Chamber of Commerce (ICC) Guidelines on Advertising and Marketing on the Internet(5). We would also like to stress that commercial communications by its nature forms part of most electronic commerce services and "it is recognised internationally that the development of information society services and electronic commerce are, and will continue to be, largely financed by revenues earned from carriage of these services"(6). Commercial communications are and will be a major source of employment, especially with the development of internet related commercial communications.
• Finally, in our view consumers should not have problems in concluding an electronic transaction with a foreign business if they could be guaranteed that, if there is problem with the product purchased, they can effectively pursue their complaint and obtain satisfaction. Moreover, experience shows that most consumers are not interested in costly and lengthy court proceedings if they could do obtain relief by more efficient, fast and free means. A recent study undertaken for the European Commission has shown that the legal costs and the time in cross-border court actions in the EU are out of proportion even for claims up to 50,000 EURO(7). In this context, we could talk about a three-level approach to consumer disputes resolution: a) industry self-regulatory mechanisms; b) arbitration systems; c) law enforcement agencies.

In relation to the first level, all our member national Direct Marketing Associations (DMAs) have systems in place to solve consumer complaints from members at national level. Last October, the International Federation of Direct Marketing Associations (IFDMA) agreed to set up a mechanism to investigate complaints about their members' activities coming via other national DMAs. Such a mechanism will take due consideration of the existing system of solving cross-border advertising complaints set up by the European Advertising Standards Alliance (EASA)(8). Of course, the effectiveness of the system is based on the fact that the DMA at origin can more effectively assist in the solving of a complaint than the DMA at the country of reception. In relation to non-member activities, research is in place to investigate how DMAs could act against a non-member company.

Arbitration systems have been an effective way of dealing with consumer complaints since such a mechanism is normally cheaper and faster than recourse to law courts and are actually being promoted by law enforcement agencies(9). We are aware of some projects being developed in Europe to establish a cyber-arbitration system.

Finally, most law enforcement agencies also include in their web sites the possibility for a consumer to file a complaint on-line(10). In the case of cross-border complaints, the International Marketing Supervision Network (IMSN) (11) operates an informal dispute resolution system to assist consumers in resolving disputes arising out of cross-border transactions. The consumer can send the complaint to the IMSN contact of their country of residence who will then forward the complaint to the IMSN contact in the country where the seller is located. The latter will forward the complaint to the seller and will attempt to mediate a voluntary resolution.

A high degree of co-ordination and commitment between industry organisations, law enforcement agencies and consumer organisations is needed to ensure that the consumer is informed about the existing and future dispute resolution mechanisms.

In the first and third systems(12), the consumer may file a complaint in their country of residence but the complaint would be solved at the source (the country of the supplier). One could expect that if the information is effectively co-ordinated, the consumer might in the future be able to file directly a complaint at the source in order to allow for a faster resolution.

In relation to court actions, within the EU, the consumer may sue a company in his/her country of residence (if s/he has been maltreated in that country) and the court in the country of residence will solve the case (even if it needs to apply the laws of other EU countries). The consumer, once a judgement has been obtained, will then need to go to the court of the Member State of the supplier to seek recognition and enforcement of the judgement. The EU is working on agreements to seek an efficient mutual recognition of judgements. Even at the risk of being simplistic, it would seem to us that the consumer would be in a better position and would obtain quicker redress if s/he could file a complaint directly at the court of origin (supplier), or at least get the court of origin to decide on the case (the court of residence acting as an intermediator). This will avoid the need to seek recognition and execution in another country. This is the approach of the Access to Justice Directive(13) which allows certain qualified entities such as consumer organisations to file a case in the country of origin. It is worth noting that in a recent Eurobarometer(14) (European Commission surveys on consumer attitudes), consumers respondants strongly favour the adoption of measures to ensure that every European citizen has an easy access to the legal system in other Member States in case of consumer problems. At an international level, the approach proposed may be the only solution.

THE DIFFERENT POSSIBLE SCENARIOS

1. An International Charter of rights and obligations

It may seem that the best solution will be for governments all around the world to agree on a set of common rights that consumers should be guaranteed when purchasing on-line and a common set of obligations that companies should respect when promoting and selling their products.

However, we consider that such an approach is unrealistic in the short term due to the divergent legislation and government approaches to consumer protection, quite apart from the sovereignty aspect. Moreover, if such an agreement is possible, it is clear that a solution will not be reached in time to solve the current legal uncertainty and consumer confusion. Nonetheless, it may be worth considering such a project in the longer term.

2. The application of the principle of country of destination control

This principle will mean that web sites have to adapt their web sites to the regulations of all the countries in which they can be accessed so that the consumer, when buying on the Internet, has the same regulatory framework, which will include not only consumer protection measures, but also protectionists measures designed to keep out foreign companies, and cultural measures (such as the use of language) as if s/he was purchasing on their home country.

Of course, this will mean that a company wanting to conduct transactions with consumers throughout the world, would have to undertake a legal assessment⁽¹⁵⁾ of the different consumer protection laws in place and then decide to construct their offers supposedly to the highest standard of consumer protection.

Only big players will be able to undertake such an assessment and Small and Medium Sized entreprises (SMEs), which do not have the expertise and investment needed to "export their products on-line" will be forced to include a warning message in their web site and to refuse any on-line transaction from consumers not residents in their country. This will result in the return to national fragmented markets that global trade and e-commerce was blurring, and will mean the end of electronic commerce as an accessible and competitive tool for SMEs and the loss of consumer choice.

This approach seemed to be favoured by some consumer bodies, but, aware of the consequences, an unconditional application of the country of destination control has now been excluded as the solution to guarantee consumer confidence on the Net.

3. The application of a pull/push approach

An intermediate approach between an unconditional acceptance of country of origin control and an unconditional acceptance of country of destination control, based on the concept of "pull/push" has been proposed in some circles, namely by some countries in the discussions on the OECD Guidelines on Consumer Protection.

Such an approach would mean that when the consumer goes to a web site, the principle of the country of origin control would apply (the consumer initiates) and when the consumer is being targeted (the supplier initiates), the country of destination principle would apply.

The Nordic ConsumerOmbudsmen, aware of the problems of deciding when a consumer can be considered to be targeted, have worked out a list of criteria which includes: the language and currencies used, to what extent the business or service in question is being marketed at the national market, whether there is a connection between marketing on the Internet and marketing activities in the market of that country, whether the business accepts concluding contracts with consumers resident in the country concerned.

We believe that such criteria are easily challenged:

• The language criteria will only work for web sites designed in a language which is only spoken in one country, and in any case it will not be applicable within the EU since targeting consumers, for example, by providing the information in different languages, is part of the Internal Market⁽¹⁶⁾. In relation to currency, with the advent of the Euro and world-wide use of the US dollar, it would seem difficult to work out such criteria.
• In relation to the connection between the marketing on-line and the marketing off-line of a product, it would also seem excessively disproportionate to decide that if a product is available in one national off-line market, this would automatically mean that the different web sites that the company may have are all targeting one specific country.
• The fact that the business accepts to conclude contracts with consumers resident in a particular country is irrelevant to the "targeted" approach, and in any case, how can the business be sure that the consumer is resident of a particular country?

Moreover, the whole concept of push/pull poses difficulties in the on-line environment since it is not easy to determine where a transaction is initiated. As electronic advertising techniques become increasingly sophisticated, being incorporated into search engines and banner ads on web-sites, the definition of initiator becomes increasingly blurred. Also what about a transaction initiated firstly by the consumer and continued afterwards by the supplier? The push/pull approach would lead to the situation in which the company would first apply the country of origin principle and afterwards the country of destination. In a continuous business-customer relationship between the same consumer and same business such a solution is, in our view, confusing and unworkable in practice.

4. The application of the principle of country of origin control backed by an international consensus on certain principles and by self-regulation

Having outlined the obstacles of these four different solutions, we would like to present what we consider one suitable solution to solve consumer concerns and to fulfil both the business and consumer expectations of e-commerce. In doing that, we should first have a quick look at what the OECD Consumer Policy Committee has considered as the objectives of the OECD Consumer Protection Guidelines:

• to clarify the situation for all parties to a transaction;
• to ensure that suppliers cannot use a "jurisdiction of convenience" as a means of escaping a reasonable measure of consumer protection;
• to minimise the burden on businesses in terms of the requirement to be familiar with the consumer protection law in all jurisdictions;
• to ensure that consumers who have need to resort to law have a practical and inexpensive means by which to do so;
• to further small business interests through increased consumer confidence: unless consumers can be confident that they can obtain effective redress from smaller vendors, they are likely to buy only from much larger vendors, and the on-line potential for small business will be lost.

We believe that these objectives could be fulfilled by:

• adopting at international level a basic set of principles that companies should abide by. Such principles should include clear and accessible information about the physical location of the business (ensuring that the law applicable has a connection with the transaction), information about the product (including price and basic contractual conditions); the provision of a link to national or international web sites which will allow the consumer to know which his/her rights are when entering into a transaction with a particular country; clear identification of commercial messages;
• a global recognition that consumer redress is best tackled at the source and that the governments have a clear supervisory control over companies established in their countries;
• an encouragement of international self-regulatory instruments to create consumer confidence which will develop the agreed set of international principles; such self-regulatory mechanisms should include effective dispute resolution mechanisms and appropriate sanctions;
• the facilitation of networks of law enforcement agencies such as the International Marketing Supervision Network and its co-ordination with industry self-regulatory practices.

FEDMA is working on some European Guidelines for On-line Marketing (which could be implemented at international level via the International Federation of Direct Marketing Associations, IFDMA) which will be taking into consideration these proposals and will deal with the different issues at stake (including data protection). Companies that abide by the provisions of these Guidelines will be granted a "guarantee" logo. An effective monitoring mechanism (sweeps) for the use of such a logo will be included. A supervisory and control committee (which will include consumer representatives) will also be put in place.

CONCLUSIONS

Developing trust and confidence for on-line commerce is to the mutual benefit of both the consumer and the marketer. The global nature of on-line services challenges traditional national responses to regulation. FEDMA therefore welcomes this opportunity to give its views to the FTC, and shares its vision of how consumers can enjoy a high level of protection, while avoiding placing a straight-jacket on business through restrictive and unnecessary laws.

FEDMA is convinced that on-line services require a mixture of different approaches, including information, software solutions, codes, complaint mechanisms, and international co-operation by governments (e.g. IMSN). There is no one easy solution, but through dialogue and co-operation governments, consumers, and business can rise to this challenge.

As Louise Sylvan, Vice-President of Consumers International said during the OECD Ottawa Conference on E-commerce "the best way to build consumer trust and confidence is to produce a framework that is satisfactory. If e-com is offered in the right way then consumers will just grab it and run".

CONTACT PERSONS:

Alastair Tempest, Director General: info@fedma.org
Asunción Caparrós, Director EU Affairs: acaparros@fedma.org

1. http://www.poliseurope.org/basic/global_elec_mark_uk.html