Out-Law / Your Daily Need-To-Know

OFT issues warning over personalised pricing transparency

Out-Law News | 20 May 2013 | 10:17 am | 3 min. read

Businesses must be more transparent about the way they collect information about consumers in order to offer personalised prices for goods and services online, the Office of Fair Trading (OFT) has said.

The consumer protection regulator said it has written to 60 "leading online businesses" in a bid to "ensure they are transparent with consumers about how they collect and use their data". The OFT said it would consider taking enforcement action against the firms if it finds "evidence of misleading or unfair practices".

In a report into personalised pricing, the OFT said that it had not uncovered any evidence that businesses are collecting information about consumers in order to set higher prices for goods and services when they promote them to consumers online. It said, though, that it would "keep under review" whether businesses are transparent enough about personalised pricing activities and whether they are offering consumers sufficient choice about being exposed to it.

"We use the term personalised pricing to refer to the practice where businesses may use information that is observed, volunteered, inferred, or collected about individuals’ conduct or characteristics, to set different prices to different consumers (whether on an individual or group basis), based on what the business thinks they are willing to pay," the OFT said in its 'Personalised Pricing: Increasing Transparency to Improve Trust in the Market' report (44-page / 618KB PDF).

"Our evidence indicates that businesses are not using information about individuals to set higher prices to them. Rather, businesses are offering personalised discounts, and increasingly using information collected about consumers in order to refine their pricing strategies," it said.

"However, we were disappointed with the level of transparency by businesses about what information businesses were collecting and how it is used," the watchdog added. "This lack of transparency harms consumers’ trust in traders and business practices. We found that businesses could do a lot more to make their practices more transparent about what information they are collecting, how it is being used and give consumers real choice about this. This is an area that we want to keep under review."

The OFT report detailed the results of an investigation it launched last November into whether businesses monitoring consumers' online behaviour and using the information to offer individualised prices were acting fairly and within consumer laws.

Rules governing unfair business practices are set out in the Consumer Protection from Unfair Trading Regulations (CPRs).

The regulations state that a practice is unfair if it fails to meet the standard of "professional diligence", which is the standard of skill and care that would reasonably be expected of a trader in its field of activity, and it materially impairs an average consumer's ability to make an informed decision, causing him to make a decision he would not otherwise have made.

Under the CPRs 31 practices are deemed to be unfair in all circumstances. A trader carrying out any one of these will have breached the CPRs, whether or not it had any effect on the average consumer. One of those practices prohibited is where businesses rely on materially inaccurate market information to persuade the consumer to buy something on less favourable terms than normal market conditions.

The OFT said that it still holds some concerns about personalised pricing, such as if "consumers cannot easily avoid personalisation if they wish to ...; consumers do not know [personalised pricing] is occurring, or consumers cannot easily see prices paid by other customers – such as where prices are dynamic, or most consumers receive some form of discount".

The watchdog said that negative consumer outcomes from personalised pricing are more likely to occur in markets where competition is not "effective".

"Our study has shown that there is clearly public concern about how personal information, a valuable commodity in online markets, is being collected and used," Clive Maxwell, the OFT's chief executive said in a statement. "We are therefore calling on businesses to make sure they are being fully transparent and giving consumers appropriate control. Maintaining consumer trust online is important to growth and innovation, and we will consider enforcement action if we see evidence of misleading or unfair practices."

Simon Entwisle, director of operations at the Information Commissioner's Office, said that businesses operating unfair personalised pricing activities may also find themselves subject to enforcement action from the ICO. The ICO has the power to issue fines of up to £500,000 against organisations that breach the Data Protection Act or Privacy and Electronic Communications Regulations.

"Businesses need to be open about how they're using customers' information," Entwisle said. "It's clear that using that information in the right way can benefit both parties, but businesses that use data inappropriately risk alienating customers and put themselves in line for enforcement action by the ICO. The OFT's work reminds businesses how to get this relationship right, and informs our own guidance on this issue."

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