NEW FEDERAL TRADE COMMISSION RULE TO PROTECT CONSUMERS FROM DECEPTIVE AND ABUSIVE TELEMARKETING PRACTICES

Beginning Dec. 31, 1995, telemarketers must promptly tell the consumers they call several key pieces of information -- the fact that they're making a sales call, the nature of the products or services being offered, and in the case of prize-promotions, that no purchase is necessary to win. Telemarketers must also disclose cost and other information before they ask consumers for any money. In addition, telemarketers will be required to have consumers' express, verifiable authorization before debiting their checking accounts. The provisions are part of a new Telemarketing Sales Rule, announced by the Federal Trade Commission today, to protect consumers from deceptive and abusive telemarketing practices. The FTC promulgated the new rule pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act, which was signed into law in August 1994.

The new rule will prohibit telemarketers from calling before 8 a.m. and after 9 p.m., and from calling consumers who have said they don't want to be called. It will prohibit misrepresentations about the cost, quantity and other aspects of the offered goods or services. And it will ban telemarketers who are offering to arrange loans, provide credit repair services or to recover money consumers lost in a telemarketing scam from seeking payment before rendering the promised services, and will prohibit credit card laundering and other forms of knowing assistance to deceptive telemarketers.

"This rule will allow consumers to choose whether telemarketers can continue calling them, and give them information that is helpful in deciding whether an offer is legitimate and the seller is above board," said FTC Bureau of Consumer Protection Director Jodie Bernstein. "Its language is flexible so that it allows us to target the deceptive and abusive practices we know about as well as those we have not yet seen. But it's also concise so that we've minimized the regulatory burdens on legitimate industry. The final rule reflects extensive FTC experience in targeting telemarketing fraud as well as many of the more than 700 comments we received, and the ensuing discussion at a public workshop, on our earlier drafts of the rule. This process gave all parties -- consumers, industry and other law enforcers -- a role in its development, resulting in a tough but well-targeted tool for protecting consumers from telemarketing fraud."

The Telemarketing Sales Rule will cover most types of telemarketing calls to consumers, including calls to pitch goods, services, "sweepstakes" and prize-promotion and investment opportunities. It also will apply to calls consumers make in response to postcards or other materials they receive in the mail (except catalogs), unless the materials contain the information required to be disclosed under the rule. Violations of the new rule may result in civil penalties of up to $10,000 per violation. It is enforceable by the FTC, and also the 50 state attorneys general who, for the first time, will be able to get orders that apply nationwide against fraudulent telemarketers.

Required Disclosures:

Under the new rule, telemarketers will have to promptly disclose to consumers the fact that it's a sales call, the identity of the seller, the nature of the goods or services being offered and, if it's a prize-promotion, the fact that no purchase is necessary to win. In addition, before telemarketers can ask consumers for any credit card or bank account information or before they make arrangements for a courier to pick up payment, they will have to disclose to consumers (either orally or in writing):

• the total costs of the goods or services being offered and any material restrictions or conditions on obtaining or using them;
  
  
• the terms and conditions of any refund, exchange or repurchase policy mentioned in the offer or the fact that the sale is final and nonrefundable; and
  
  
• how to enter any prize promotion and the odds of winning.

Prohibited Misrepresentations:

The new rule contains broad prohibitions against misrepresentations regarding any of the information required to be disclosed and regarding any material aspect of the performance, efficacy, nature or central characteristics of the goods or services.

According to the FTC, almost 75 percent of its cases against telemarketing fraud since 1991 have involved either prize promotions or investment opportunities. To help combat these frauds, the new rule will impose additional prohibitions against misrepresentations in these situations. Specifically, it will prohibit telemarketers from misrepresenting any material aspect of:

• a prize promotion, including the odds of winning, the nature or value of the prize, or that payment is required to win; and
  
  
• investment opportunities, including the risk, liquidity, earnings potential or profitability.

Collecting Payment from Consumers:

A new provision (not included in draft versions of the rule) will prohibit telemarketers from debiting a consumer's checking account without the consumer's express, verifiable authorization. For example, the authorization could be in writing, or a telemarketer could tape record the sales call, but in that instance the tape will have to evidence that the consumer received certain disclosures and the telemarketer will have to make the tape available to the consumer's bank on request. (Debiting involves using a "demand draft," a check created by the seller and imprinted with the account number provided by the consumer, to be presented to the consumer's bank for payment.)

Telemarketers will be prohibited from making false or misleading statements to induce consumers to pay for goods or services, regardless of the payment method consumers use. This provision will give law enforcers the flexibility to address new ways that telemarketers engaged in fraud might attempt to take consumers' money.

As noted above, the new rule will mandate that telemarketers make the required disclosures before making arrangements for a courier to pick up payment from a customer. The rule also retains from the earlier proposals prohibitions against seeking payment before rendering credit repair services, obtaining or arranging credit or loans, or recovering money lost or prizes not received in a prior telemarketing scam.

Assisting Telemarketing Fraud:

The Telemarketing Sales Rule will bar anyone from giving substantial assistance -- such as providing "sucker" lists, scripts or promotional materials, or providing appraisals of gems, metals, art, or other goods -- to a telemarketer when the person "knows or consciously avoids knowing" that the telemarketer is engaged in conduct that would violate the rule. The final rule also retains the prohibition against credit card laundering, which is how fraudulent telemarketers gain unauthorized access to the credit card system using another entity's merchant account. Fraud operators cannot get their own merchant accounts with reputable financial institutions, so they must use launderers.

Finally, the rule will require telemarketers to maintain various records that will assist the FTC and state attorneys general in enforcing the rule, but retains provisions that afford industry substantial flexibility to minimize their recordkeeping requirements. Telemarketers selling office and cleaning supplies will be exempt from these requirements so as to minimize any disparate impact the rule's requirements have on legitimate sellers in this industry compared with other business-to-business telemarketers not covered by the rule.

The Telemarketing Sales Rule will exempt calls where the transaction is completed after a face-to-face sales presentation or where the call is subject to extensive requirements under other FTC rules (such as the 900 Number Rule and the Franchise Rule), as well as calls initiated in response to advertisements in general media such as newspapers. Catalog sales also will be exempt, as will business-to-business calls except those involving the sale of office or cleaning supplies.

The Commission vote to issue the final rule and approve a statement of basis and purpose in support of it was 5-0, with Commissioner Mary L. Azcuenaga issuing a separate concurring statement in which she said that, although she joins the Commission in promulgating the rule, she remains concerned about the legal basis for the exemptions to the rule. She noted that the statute does not give the Commission the express authority to grant exemptions and that the better reading of the statute is that the commission does not have the authority to grant some of the exemptions included in the rule. "Although the exemptions may be reasonable as a matter of policy, the Commission does not have the authority to second-guess the Congress," she said.

The rule and statement will be published in the Federal Register shortly.

Free copies of an FTC "Tips Sheet" and a "Bookmark" containing information about the new rule and consumers rights under it are now available, along with copies of several consumer brochures on related issues -- "Swindlers are Calling," "Telemarketing: Reloading & Double-Scamming Frauds," and "Automatic Debit Scams."

Copies of these consumer materials, the new Telemarketing Sales Rule, the statement of basis and purpose for the rule, and Commissioner Azcuenaga's statement are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580: 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web Site at: http://www.ftc.gov

(FTC File No. R411001)