The International Conference on Consumer Policy sponsored by the Japanese Economic Planning AgencyÊ
Consumer protection plays a vital role in a free market economy. The exercise of informed choice by consumers in making purchase decisions is critical in determining the prices at which sellers will offer goods and services and what goods and services will succeed in the marketplace. The more fully and accurately consumers are informed, the better they will be able to make purchase decisions that reflect their individual preferences and needs. In general, advertising improves the efficient functioning of a market economy by providing useful information to consumers and encouraging competition among providers of goods and services. But if advertising or other forms of marketing are deceptive or fraudulent, or artificially restricted, consumers' ability to make appropriate purchase decisions suffers.
The role of the U.S. Federal Trade Commission (FTC) is to challenge unfair or deceptive practices that distort or prevent informed consumer choice and impede the provision of accurate information to consumers. In doing so, however, the Commission recognizes that the important role of consumers and industry in developing and supporting good consumer practices. Accordingly, the Agency encourages businesses to self-regulate and to work in partnership with government to educate consumers about how to protect themselves. Education is one of the most useful and effective consumer protection tools. By empowering consumers to protect themselves, and supporting industry self-regulatory efforts, the FTC can have a more significant impact than by relying solely on regulations and law enforcement.
As market economies become further integrated, both within regions such as Europe or Asia, and across continents, it will become increasingly important for agencies like the FTC to share information and to develop a common understanding for providing consumer protection. This paper provides a basis for understanding the FTC's role in the American economy and highlights some of the Commission's high priority actions.
The FTC's Mission and Powers
The FTC is a law enforcement agency. It's mission is (1) to prevent business practices that are anticompetitive, deceptive or unfair to consumers; (2) to enhance informed consumer choice and public understanding of the competitive process; and (3) to accomplish these missions without unduly burdening legitimate business activity. Both the consumer protection and the competition missions promote the larger goals of facilitating informed consumer choice within the market and preventing consumer injury.
The Federal Trade Commission is the only U.S. agency at the national level with broad consumer protection law enforcement powers. Section 5 of the Federal Trade Commission Act (FTC Act) prohibits unfair or deceptive acts or practices in or affecting commerce. The Commission also enforces a variety of other consumer protection statutes that prohibit specific practices. In addition, the Agency issues regulations which have the force of law, guides and policy statements interpreting the law and describing its enforcement, and, on occasion, advisory opinion letters.
It is important for government to reevaluate periodically whether existing regulations remain useful and necessary, or, instead, create burdens on competitive conduct and impose unnecessary costs on industry and, ultimately, on consumers. For this reason, the Commission has an active program of reviewing its regulations and guides. The Agency rescinds those that are obsolete or impose unnecessary burdens on businesses, and revises those that need to be modified to remain useful to consumers and not unduly costly to businesses.
The Commission's consumer protection law enforcement actions attempt to prevent future harm to consumers, usually through court or Commission orders that prohibit misleading practices. The Commission also may seek orders that require law violators to return money to consumers or release their illicitly obtained funds to the government. If a court order is violated, the violators may have to pay additional fines or, in some circumstances, may be imprisoned as a result of what is called a contempt action. Those who violate Commission orders may also have to pay fines to the government.
The FTC's competition (or antitrust) mission is integral to the consumer protection mission. I n the broadest terms, both missions seek to ensure that free markets work by facilitating informed consumer choice in the marketplace. The basic objective of the FTC's competition mission is to keep the marketplace free from anticompetitive business practices and from accumulations of market power that make those practices possible. The Commission seeks to prevent anticompetitive mergers, price fixing, and other activities that limit competition, while striving to maintain a balance between restraining illegal activity and permitting legitimate business activities. Competition cases often challenge conduct that illegally restricts consumer information and choice in the marketplace.
The FTC's Bureau of Consumer Protection is the office within the Agency which is specifically charged with protecting consumers against unfair, deceptive, or fraudulent practices. The Bureau enforces a variety of consumer protection laws enacted by Congress, as well as trade regulation rules issued by the Commission. Its actions include individual company and industry-wide investigations, administrative and federal court litigation, rulemaking proceedings, and consumer and business education. In addition, the Bureau contributes to the Commission's on-going efforts to inform Congress and other government entities of the impact that proposed actions could have on consumers.
The Bureau of Consumer Protection is divided into five divisions, each with its own areas of expertise: the Division of Advertising Practices, the Division of Enforcement, the Division of Financial Practices, the Division of Marketing Practices, and the Division of Planning & Information.
Targeting fraud, deception, and unfair practices that cause the greatest consumer injury
The FTC's consumer protection work is aimed at preventing deception and unfairness. The Commission's standard for deception is that a deceptive representation, omission, or practice is likely to mislead consumers acting reasonably under the circumstances and is "material" -- that is, likely to affect consumers' conduct or decisions with respect to the product or service being marketed. A claim may be explicit or implied, and an advertiser is responsible for all material claims that consumers take from the ads, not just the claims that the advertiser intended to make. For example, an ad that explicitly states that a food product is low in cholesterol is likely to imply that the product also is low in fat.
Advertisers must have substantiation -- which is simply a reasonable basis -- for any material, objective claim at the time they make the claim. What constitutes a reasonable basis for a particular claim can vary, depending upon the nature of the claim, the product, the consequences of a false claim, the benefits of a truthful claim, the cost of developing substantiation for the claim, and the amount of substantiation that experts in the field believe is reasonable. Health and safety claims generally require a high level of support, in the form of competent and reliable scientific evidence.
An unfair practice is one that causes or is likely to cause substantial injury to consumers, where that injury is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits of the practice. Unfair practices include, for example, the debiting of consumer bank accounts without the consumers' authorization. In assessing whether injury is reasonably avoidable, the Commission looks at how susceptible the affected audience may be to the act or practice in question. Children, for example, tend to imitate other children and often cannot foresee and avoid dangers. Thus, ads that show young children engaging in potentially hazardous activities, such as cooking hot foods or using a hair dryer next to a bathroom sink filled with water, are unfair even though adults might reasonably avoid injury when engaging in similar activities.
Collecting and Analyzing Consumer Complaint Data
Much of the FTC's information concerning unfair deceptive or fraudulent practices comes directly from American consumers. The Agency's Consumer Response Center (CRC), established in 1997, is feeding nearly 5,000 consumer complaints each week into Consumer Sentinel, a new database that offers law enforcement agencies in the US and Canada fast access to telemarketing, direct mail and Internet complaints. The database, which now has over 130,000 complaints, is being used in targeting law enforcement and consumer education programs. This year, funds provided by the U.S. Congress will allow the establishment of a toll-free 800 number service for consumers to register complaints. Future priorities include expanding data collection and analysis.
Stopping fraud, deception and unfair practices through law enforcement
Stopping fraud is a top priority to which both the Bureau and the Regional Offices dedicate substantial resources . Law enforcement is targeted using CRC data, Consumer Sentinel, and other information from law enforcement and consumer organizations. Consumer education is and will continue to be an important component of all these efforts.
Focusing on "Frontier" Issues
As technology has continued to change the marketplace and raise new consumer protection issues, the Commission has created new law enforcement and education programs. Not surprisingly, the issue that poses the greatest challenge now is the Internet and related high technology services.
The Internet holds great promise for the American consumer. Originally the domain of academicians, scientists, and the techno-elite, the Internet now offers an infinite array of ideas, entertainment, and commercial products to every consumer with a computer and modem. The installation of faster lines, better search engines, and more security for online transactions surely will prompt even more consumer use.
By December 1998, 80 million adults (defined as ages 16 years and older) already were online in the United States. Of those, 48 million reported that they had shopped for product information on the World Wide Web, and as many as 16 million reported that they had purchased a product or service online. Internet advertising totaled approximately $1.3 billion for the first three-quarters of 1998, a 127 percent increase over the same time period in 1997.
Consumers and commercial marketers are not the only groups to see the value and power of the Internet. Perpetrators of fraud also are online, hoping to take advantage of low startup costs; the possibility of "real-time" immediate payments; a nearly infinite number of places to "hide" from law enforcement; unparalleled ability to mimic legitimate business; and instant access to a global customer base. Today's fraud peddlers can confuse consumers more easily through web sites that are as sophisticated and appealing as those of many legitimate businesses.
Since 1994, the FTC has brought over 60 law enforcement actions challenging fraud and deception on the Internet. Most of these cases challenged deceptive claims that the FTC would pursue in any medium. To date, only one FTC enforcement action has involved the deceptive use of technology itself, but it is only a matter of time before technology-based fraud becomes more prevalent.
To combat Internet fraud, the Agency has relied on what are called "Surf Days" -- referring to the slang term "surfing" the Internet -- in order to track common schemes as well as to educate consumers and businesses. Commission staff and other law enforcement agencies and consumer groups search the Internet and Usenet newsgroups for misleading promotions including pyramid schemes, deceptive health claims, and fraudulent business opportunities. Surf Days identify sites that may be engaging in law violations, educate the site operators about legal requirements, deter future illegal activity, and generate publicity to educate consumers and other businesses.
The FTC has significantly expanded its staff in this area just within the last few months, and also works closely with law enforcement partners to coordinate cases, sweeps, and surf days, and to improve criminal case referrals and conviction rates. Another new element of the Internet fraud program is partnering with technology firms to provide FTC staff with the best information and resources available to combat these offenses.
Increased commercial use of the Internet will generate more personal information about more online transactions, and will make that information much more readily accessible to participants in a global marketplace. While the very real benefits of this information flow to consumers and businesses, the proliferation of readily available personal information online could jeopardize personal privacy.
Public opinion polling demonstrates that consumers are very much aware of these risks, and since 1995, the FTC has been actively working with business and consumer groups to encourage the development of online privacy protections through our Consumer Privacy Initiative. The Commission has consistently supported self-regulation as a solution for protecting consumer privacy on the grounds that self-regulation provides the best opportunity for the development of clear and effective policies while at the same time supporting innovation.
Last June, the FTC issued a report to the Congressional Commerce Committees reporting on the results of a major "web surf" and examination of industry guidelines, assessing the extent to which self-regulation has adequately protected the public, and offering specific recommendations on children's privacy.
The Commission found that industry's efforts to self-regulate in this area to inform consumers about what their information practices are and to provide some choice to consumers have fallen short. The Commission analyzed more than 1,400 Web sites, broken down into six samples.
While 85% of the Commission's random sample of commercial web sites collected personal information from consumers, only 14% provided any notice with respect to their information. 89% of the 212 children's sites surveyed collected personal information from children and only one percent required parental consent before the information is collected or used.
As a result, the Commission recommended that Congress take legislative action, to provide for parental consent before information is collected from children 12 and under, and to provide parents of children 13 and over an opportunity to have their children's information removed from a web site's database after it has been collected. Congress passed the Children's Online Privacy Protection Act in 1998 and the Agency is currently drafting the regulations to implement it.
In addition, the Commission is working with industry and the academic community on a follow up survey that will be used to assess industry progress on self-regulation. The FTC may recommend other legislative options that go beyond children's issues.
But the FTC is not waiting to take other action to protect children and adults in the online world. A few months ago, the Commission brought a well-publicized enforcement action against a popular on-line information site known as GeoCities. The Commission's complaint alleged that GeoCities represented that certain personal identifying information it collected on its Web site was to be used only for internal purposes or to provide consumers with the specific advertising offers and products or services they requested, and that certain additional "optional" information would not be released to anyone without the consumer's permission. In fact, this information was disclosed to third parties who used it to target members for solicitations beyond those agreed to by the member.
The complaint also charged that GeoCities engaged in deceptive practices relating to its collection of information from children. According to the FTC's complaint, GeoCities represented that it operated a children's area on its Web site and that GeoCities maintained the information collected there. In fact, those areas on the Web site were run by third parties that collected and maintained the information.
The settlement prohibits GeoCities from misrepresenting the purpose for which it collects or uses personal identifying information from or about consumers, including children. The order requires the company to post on its Web site a clear and prominent Privacy Notice, telling consumers what information is being collected and for what purpose, to whom it will be disclosed, and how consumers can access and remove the information. To ensure parental control, the settlement also requires GeoCities to obtain parental consent before collecting personal identifying information from children 12 and under. Under the order, GeoCities is required to notify its members and provide them with an opportunity to have their information deleted from GeoCities' and any third parties' databases. The settlement requires GeoCities to notify the parents of children 12 and under and to delete their information, unless a parent affirmatively consents to its retention and use. Finally, GeoCities is also required to contact third parties to which it previously disclosed the information and request that those parties delete that information as well.
Telecommunications and Emerging Technology
With advances in technology and deregulation of telephone services in the United States, consumer deception and fraud have risen dramatically in this area. Specifically, we are experiencing problems in three different areas, which in the U.S. are commonly known "slamming", "cramming", and "spamming".
Slamming is the practice of unauthorized switching of phone service from one telephone company to another. Federal law and the Federal Communications Commission's (FCC) rules and policies prohibit slamming and require carriers to verify a carrier change. Some unscrupulous marketing techniques may cause consumers to switch services unintentionally.
Cramming refers to unexplained charges on a consumer's phone bill for services never ordered, authorized, received, or used. Sometimes a one-time charge for entertainment services will be crammed onto the phone bill. Other times, monthly recurring charges are included. Cramming of monthly recurring charges falls into two general categories: club memberships, such as psychic clubs, personal clubs, or travel clubs; and telecommunications products or service programs, such as voice mail, paging, and calling cards. Most of these scams occur through the use of an 800 number.
The FTC is proposing revisions to a federal regulation called the "Pay-Per-Call Rule" to prevent fraud in marketing audiotext (services ordered over the phone), and to provide dispute resolution for all telephone-billed purchases. We have also undertaken a major education campaign to make consumers and businesses aware of their rights and obligations under the new rule.
Another high-tech consumer problem the FTC confronts is commonly known as "spamming," otherwise known as unsolicited commercial e-mail (UCE). Last fall, the FTC set up a special electronic mailbox, "email@example.com," for consumers to send spam that they had received. This mailbox was advertised through the FTC website, the Consumer Response Center, and by "word of mouth" on the Internet. To date, the Agency has received over 300,000 pieces of spam to firstname.lastname@example.org, and consumers continue to send it at a rate of between 1,000 and 1,500 spams per day. This e-mail is put into a searchable database so that staff can study it and identify possible targets for law enforcement actions. To date the Commission has brought ten such actions.
Having reviewed the spam in the database, staff quickly realized that many spammers who make deceptive claims in their e-mail simply imitate what they see others doing, and do not necessarily know that there are federal and state laws that prohibit deceptive advertising claims in all media, including e-mail. To make certain that these spammers understand what the law requires, and to let them know that the FTC is on the beat, the Agency sent letters to over 1,000 spammers identified through the database. These spammers most frequently sent "chain-letters" by e-mail. Some have expressed appreciation that the FTC took time to warn them that they were treading on legally shaky ground.
Year 2000 Initiative
The Commission has also been working with the President's Council on Year 2000 Conversion to develop strategies to encourage Y2K compliance and provide consumer education about the problems. In the coming year, the FTC will take the lead in developing consumer.gov as the government's central site for information about Y2K, and develop consumer education materials in partnership with other organizations
The Agency has also conducted a review to assess improvements in manufacturers' disclosures of the Y2K status of their products and will conduct a follow up review this year.
Other Major FTC Law Enforcement Initiatives
Telemarketing fraud is one of the most pervasive deceptions the Agency encounters. Although most phone sales pitches are made on behalf of legitimate organizations offering bona fide products and services, many sales calls are frauds. Consumers lose more than $40 billion a year to telemarketing fraud. The heart of a fraudulent telemarketing operation is usually a "boiler room," a rented space with desks, telephones, and experienced sales people who talk to hundreds of people across the country every day. Telephone fraud knows no race, ethnic, gender, age, education or income barriers. Telemarketing scam artists can victimize anyone with a phone.
The FTC's Telemarketing Sales Rule (TSR), implemented in 1996, requires certain disclosures and prohibits misrepresentations. The rule gives the Agency and state law enforcement officers the authority to prosecute fraudulent telemarketers who operate across state lines. The Rule covers most types of telemarketing calls to consumers, including calls to pitch goods, services, "sweepstakes," and prize promotion and investment opportunities. It also applies to calls consumers make in response to postcards or other materials received in the mail.
Although it is impossible to target every offender, the FTC focuses on major players (indicated by dollar loss and number of consumers injured) through the information received at the Consumer Response Center and through other reports. The staff has implemented a "Rapid Response Team" which has made it possible to target offenders and process Commission action in as little as 30 days. In most cases, the Agency is able to secure refunds for consumers who have lost money through these scams.
Last summer, the Commission targeted marketers of fraudulent investment opportunities who promised their investors high profits and a high rate of success. One series of cases involved marketers who encouraged average citizens to help finance potential movie projects. Consumers were shown very professional looking video clips or documentation and told that well-known talent had agreed to star in these movies when, in fact, no such commitments had been made. Other enforcement efforts included cases involving communications technology, foreign construction projects, precious metals, and oil-drilling ventures. Working with other law enforcement agencies, the Commission brought dozens of cases and launched a major consumer education campaign, including production of a brochure to alert potential investors to some of the false claims a fraudulent investment promoter might make. The FTC is also working with the U.S. Securities & Exchange Commission (SEC) to evaluate online investment fraud.
Employment and Career Training Fraud
Scam artists offer a wide array of "get-rich-quick" and self-employment schemes that target consumers who are looking for an investment opportunity, part-time employment, or the chance to start a home-based business. The FTC has taken action against in a variety of these cases, including multi-level marketing plans, also sometimes known as pyramid schemes, deceptive wealth building offers, such as advertisements touting easy ways to make money in real estate, and offers of low-interest government loans or grants to start a business or go to college. These are now targeting consumers on the Internet through unsolicited e-mail.
Ensuring Broad-Based Protections for Consumers
Given the FTC's broad jurisdiction, resources must be targeted carefully, (a) focusing on the most serious problems, (b) using all of available tools (cases, regulations, guidelines, education and publicity) and (c) encouraging industry self-regulation. The Agency's overall goal is to achieve the greatest possible compliance with statutes, regulation, and orders.
The Commission enforces a broad range of rules and regulations covering health and safety, credit and lending, advertising and marketing, and product use and labeling. In the area of drug advertising and marketing, it sets and maintains national advertising standards for products such as analgesics, smoking cessation aids, and prescription products not addressed by FDA. Another significant enforcement project involves weight loss products and services. The FTC has pursued numerous actions against deceptive claims for weight loss products as well as claims made by companies offering weight loss counseling. The Bureau of Consumer Protection is also working with the Food and Drug Administration, State attorneys general and research institutions on evaluating the health claims made by the growing number of nutritional supplements available in the United States.
The FTC also monitors health claims made more broadly. The Internet has made this task more difficult as it has provided a major new medium for advertising products and services which claim to provide health benefit or cure serious disease. Staff is developing education materials to help consumers shop online for health related products.
Perhaps the most high profile part of the Agency's work in health claims is its jurisdiction over advertising for alcohol and tobacco. The FTC monitors cigarette advertising (for deceptive claims and targeting children); cigar advertising (for targeting underage smokers and misrepresenting health effects) and has developed warning labels for cigarettes and smokeless tobacco. This year, the Agency will issue a report to Congress on alcohol advertising and underage drinking, using data we collect as well as consumer research. The Commission has challenged deceptive promotions (online, in traditional media, and on college campuses) aimed at underage consumers, or involving health/safety claims.
The Federal Trade Commission also plays an important role in monitoring and pursuing fraud in other financial programs that affect consumers. Although the FTC does not have jurisdiction over banks, it does enforce lending regulations for other non-bank finance companies which provide credit for home mortgages, auto loans, and other major purchases.
Section 5 of the FTC Act prohibits unfair or deceptive acts or practices in or affecting commerce. The FTC has used its authority under this act to challenge home equity fraud. The FTC also enforces the Truth In Lending Act (TILA), which requires that accurate disclosure of the cost and terms of credit be provided to the consumer before the consummation of the transaction. Charges that consumers are required to pay in order to obtain credit, including mandatory credit insurance, must be disclosed as a part of the annual percentage rate and finance charge. For certain high rate or high fee loans, a portion of the TILA known as the Home Ownership and Equity Protection Act (HOEPA) provides greater protections.
The Equal Credit Opportunity Act (ECOA) prohibits discrimination in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, age, because an applicant derives income from public assistance, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Lenders who target elderly homeowners or residents of minority areas for high cost loans, while lending on more favorable terms to others, may violate the ECOA.
The Fair Debt Collection Practices Act (FDCPA) prohibits certain unfair and deceptive collection practices by third party debt collectors, including the collection of fees not provided for in the loan contract or state law.
Preventing Consumer Injury through Education
The FTC's consumer and business education program constitutes a significant part of the entire law enforcement program. Through publications, Web sites, and media events, the Agency is reaching tens of millions of consumers and businesses each year. Education is a key tool to prevent consumer injury.
Where possible, consumer education campaigns are coordinated with law enforcement actions to maximize the public attention drawn to the particular deceptive practice being challenged. Consumer education campaigns, like law enforcement efforts, are focused on unlawful practices that have the potential to inflict the most injury on consumers.
All of the Agency's consumer education materials are available on the Commission's Web site at http://www.ftc.gov. This page itself, of course, is part of the consumer education effort. It brings information about the Commission, its activities, and its consumer resources to anyone's computer. The ease with which we can post educational materials on the Internet -- and the ease with which consumers can access those materials -- make consumer education on the Internet particularly cost effective. Consumer education materials are online so that consumers, libraries, teachers, and others may view or download them at their convenience. Staff also typically post special pages that relate to law enforcement efforts.
Another site -- http://www.consumer.gov -- is a new consumer education Web site the Commission started along with several other federal government agencies charged with protecting the health and safety of consumers. The site is arranged topically, so users can look for information about food safety, money, automobile air bags, the stock market, or education without knowing which agency handles what subject.
The Bureau's consumer education staff produce specialized materials and target audiences based on the characteristics of persons likely to fall prey to the specific types of deceptive practices addressed in the materials. Ideally, messages are directed to consumers at times when they are most likely to become victims of fraud. Last year, the FTC announced several actions against companies that guarantee scholarships to high school or college students. Although scholarships cannot be guaranteed, staff learned that many families were spending money for useless information about how to obtain purportedly guaranteed scholarships. Extensive media coverage by newspapers and radio and television stations across the country helped alert consumers. Although publicity about these law enforcement actions was extremely useful, it was critical to make sure that students, their parents and their guidance counselors had ongoing access to information about recognizing these scams. A number of government and private organizations joined with the FTC to publicize this message.
Other targeted messages include public service messages sized like classified ads. These ads range from 20 to 60 words, similar to a standard classified ad, and cover a number of the subjects that an actual classified ad could address, such as employment, travel, real estate, vacations, or advance fee loans. These public service messages are sent to each state press association with a request to provide them to member newspapers (or at the very least to let members know that the FTC has such ads).
Finally, one of the most innovative targeted messages the Agency has created is "sting pages" on the Internet. A "sting page" is a site that simulates a fraudulent Web page by mimicking the representations that might be made on a Web site offering, for example, fraudulent business opportunities. Once a consumer clicks on several of the options and reaches a point at which he or she might well have been duped if the site had been real, the consumer discovers that the ad is a fake, posted by the FTC to raise awareness about the hazards of fraud on the Internet. The sting page then explains the type of fraud it mimics how to avoid such fraud, and where to obtain additional information.
In addition to relying on its own targeted messages, the Commission tries to enlist the support of private organizations that have a vested interest in consumer education. In this way, limited government resources are maximized. For instance, the Partnership for Consumer Education -- an umbrella group of over 80 consumer organizations, corporations, industry associations, and federal, state, and local agencies -- helped to inform consumers about the FTC's Telemarketing Sales Rule.
By participating in these partnerships, the FTC is also educating the private businesses that serve as our partners. In addition, staff engage directly in more formal efforts to teach businesses how to comply with the laws the Agency enforces.
The Commission has created a media education campaign about deceptive advertising so that clearly fraudulent ads cannot easily reach large numbers of consumers exposed to media advertising. The government and self-regulatory groups may take action after a misleading ad is published, but only the media are in a position to stop a deceptive ad before it becomes public. For years, major television networks in the United States have been quite successful in stopping the spread of blatantly deceptive television advertisements through a formal screening process. Some magazines and newspapers also have adopted media screening programs.
For 1999, the staff have planned a number of special education projects, including National Consumer Protection Week, which just took place on February 1-5, 1999, further work on the Y2K Project, a joint conference with State Attorneys General on financial literacy for young adults, and new outreach programs to better communicate with traditionally underserved communities such as racial and ethnic minorities, the elderly and new immigrants.
As the business education program suggests, the FTC also emphasizes self-regulation to protect consumers. Direct intervention by government in the marketplace -- whether by regulation or by law enforcement -- is generally the solution of last resort.
The National Advertising Division (NAD) of the Council of Better Business Bureaus is an excellent example of a successful self-regulatory program with which the FTC has a close supportive relationship. The Council is an organization of local business organizations that promote ethical business practices through voluntary self-regulation and consumer and business education. With help from a local Better Business Bureau, consumers often can achieve satisfactory resolutions of their complaints against members. The NAD is the advertising industry's own self-regulatory organization. It runs a formal advertising review program and mediates hundreds of advertising disputes every year. The NAD monitors advertising in all media, including the Internet; resolves complaints by competitors or consumers about allegedly false or misleading claims in advertising; and writes decisions that it publishes and publicizes.
When an advertiser refuses to stop making claims that the NAD finds deceptive or refuses to give the NAD information, the NAD sends the case to the FTC and we address the dispute with our law enforcement powers. In response to NAD findings, most advertisers agree to modify or delete offending claims.
The Commission has encouraged self-regulation by holding a number of public forums or "workshops" to study consumer protection issues raised by new technologies, particularly the Internet. These workshops help educate consumers and businesses, and by attracting attention to consumer protection issues have encouraged business associations to engage in self-regulation in areas such as consumer privacy on the Internet.
Of course, the success of self-regulation depends on whether members of an industry perceive it to be in their interest. If consumers demand information about privacy policies, for example, the market is likely to respond. But if industry fails to address consumer protection issues, government regulation of new technologies eventually may be needed.
This is exactly what happened with pay-per-call (900-number) technology during the last decade. 900-number technology -- which entails calls to publicly-available numbers, for which the consumer incurs a per-minute charge in return for information or entertainment -- was the first interactive technology to be widely available. It had huge potential as an alternative payment system, since every telephone could serve as a payment terminal. In 1991, 6 billion U.S. dollars were spent on pay-per-call transactions. But fraud operators quickly moved to exploit the technology, and the industry was slow to respond. Fraud and abuse tarnished the industry's reputation, and sales fell to 300 million U.S. dollars annually.
The FTC brought several law enforcement actions challenging deceptive and unfair pay-per-call practices in the early 1990s. And in 1992, at the direction of the U.S. Congress, the FTC and the Federal Communications Commission (FCC) began regulating the pay-per-call industry to ensure that consumers would receive price and other material information before incurring costs and would have the right to dispute allegedly incorrect or unauthorized charges. Annual sales have finally begun to climb again.
The Federal Trade Commission is first and foremost a law enforcement agency. Even in a highly competitive market economy like the United States, there is strong public sentiment that it is a federal responsibility to provide a framework for consumer protection in the United States through statutes and rules like those enforced by the FTC. However, it is clear that law enforcement efforts alone will not guarantee the level of information that consumers need to make informed choices. Self-regulation can be an extremely effective way to protect consumers, particularly when it is complemented by carefully selected government law enforcement actions. In addition, consumer and business education empower consumers to protect themselves. The Commission looks forward to working with its international colleagues to share information about its success and to develop strategies for joint action as globalization continues.