Behavioural advertising and customised pricing face OFT scrutiny

Out-Law News | 15 Oct 2009 | 3:55 pm | 3 min. read

The Office of Fair Trading (OFT) will investigate whether behavioural advertising and individually-targeted prices on the internet violate the rights of UK consumers'.

The Government body announced two investigations today which will probe whether online retailers' use of tracking and targeting technology and advertising are unfair on consumers.

"[An investigation] into online targeting of advertising and prices will cover behavioural advertising and customised pricing, where prices are individually tailored using information collected about a consumer's internet use," said an OFT statement.

The probe could derail the sales strategies of online retailers who increasingly gather data on potential customers' web activities and use it to target them with advertising and in some cases to set the price charged for goods.

Companies might use data collected on a person's location, likely income, buying preferences or age to offer them prices that are higher or lower than those offered to other customers.

OUT-LAW.COM is running a series of free seminars on behavioural advertising across the UK on how companies can use behavioural advertising and stay on the right side of the law.

Struan Robertson, a technology lawyer with Pinsent Masons, said customised pricing could fall foul of the Consumer Protection from Unfair Trading Regulations.

"The Regulations say that commercial practices will be unfair and illegal if they contravene 'the requirements of professional diligence' and are likely to 'materially distort the economic behaviour of the average consumer with regard to the product'," said Robertson.

"While we don't have guidance from British courts on either behavioural advertising or customised pricing, any guidance on the back of the OFT study will be influential," he said.

The Regulations have been in force since last May. They also prohibit misleading actions. If a commercial practice is likely to deceive the average consumer in relation to "the price or the manner in which the price is calculated" and cause the average consumer to place an order, there will be an offence.

"If two consumers see different prices for the same product at the same site, and that difference is based on their browsing history or location, a court might say that there's deception going on," said Robertson. "Websites that engage in customised pricing simply can't afford to ignore this risk."

An offence under the Regulations can be punished by a maximum sentence of two years' imprisonment.

Discriminatory pricing based on a customer's location may also fall foul of a European Directive due to come into force across the EU by 28th December.

Article 20 of the Services Directive states: "Member States shall ensure that the general conditions of access to a service, which are made available to the public at large by the provider, do not contain discriminatory provisions relating to the nationality or place of residence of the recipient, but without precluding the possibility of providing for differences in the conditions of access where those differences are directly justified by objective criteria."

The potential of this rule to operate as a prohibition on some forms of customised pricing in e-commerce was raised in a European Commission consultation paper on Data collection, targeting and profiling of consumers for commercial purposes in online environments (29-page / 352KB Word doc), published in March.

The OFT said its studies will ensure that it keeps up to date with how new pricing and advertising practices are emerging and evolving online.

The OFT could take enforcement action against any companies it thinks have broken the law. It could also refer its investigations to the Competition Commission.

The regulator may also encourage companies to self-regulate through a code of practice or publish information to help consumers understand the practices used by firms.

A second study will investigate the way that internet businesses commonly advertise their prices. It will question whether or not these deceive customers.

"It will examine practices including: 'drip pricing', where price increments 'drip' through during the buying process; 'baiting sales', where only some products are available at the discount price and consumers may ultimately purchase a full-priced product; 'reference prices', where there is a relatively high reference price compared to sale price, for example 'was £50, now £20', or '50% off'; time-limited offers, such as sales which finish at the end of the month or special prices which are available for one day only; [and] complex pricing, where it is difficult for consumers to assess an individual price, for example 'three-for-two' or 'non-inclusive' prices."

The OFT said that it would in particular investigate price comparison websites and their use of these kinds of advertising practices.

"It is very important that the OFT's approach to potentially misleading practices remains well-informed by a sound evidence base, so we effectively protect consumers while allowing firms to compete freely," said OFT senior director Heather Clayton.

The OFT said that it would investigate behavioural marketing and online advertising earlier this year, but the two studies now announced are a result of consultation on how it should proceed.

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