Regulator threatens action against charges for claiming prizes

PhonepayPlus (PPP) said it could even refer companies to the UK's consumer protection regulator if it thinks firms have breached the law.

Last year the EU's highest court, the Court of Justice of the European Union (CJEU), determined that EU consumer protection legislation prohibits businesses from engaging in "aggressive practices" that "give the false impression that the consumer has already won a prize" when the consumer has to pay or incurs "any cost whatsoever" in order to claim that prize.

The PPP has now issued updated guidance in relation to the Code of Practice it enforces to reflect the judgment of the CJEU.

"Consumers should not be subject to any costs in order to claim prizes once draws have been made," the PPP said in its updated guidance. "For example, those services which require consumers to pay telephone or postal costs to claim prizes are likely to contravene the law. This remains the case whether or not the consumer has made an earlier separate payment to enter the competition. An example would be where consumers are required to pay to enter a prize draw, promoted as a competition service offering a chance to win, and are subsequently required to call a non-free telephone number or send a stamped addressed envelope to claim the prize they are said to have won."

The EU's Unfair Commercial Practices Directive prohibits businesses from using promotional material that gives a "false impression that the consumer has already won, will win, or will on doing a particular act win, a prize or other equivalent benefit, when in fact … taking any action in relation to claiming the prize or other equivalent benefit is subject to the consumer paying money or incurring a cost”.

The PPP said that the CJEU had "confirmed" that the Directive bans businesses from requiring "consumers to bear any cost in order to claim a prize", including minimal expenditure such as the cost of a stamp. It urged PRS providers to "seek legal advice before running PRS prize claim competitions" and said it would now enforce its Code of Practice with the CJEU's ruling in mind.

In its guidance the regulator has also updated its expectations in relation to the provisions of the Gambling Act, which has effect in England, Wales and Scotland, which relate to free entry routes.

"The distinction between a free draw and a lottery [under the Gambling Act] is that no one is required to pay over and above the normal rate to enter into a free draw," the PPP said. "The route of entry will be free if the participant does not have to pay any premium rate charge for entering the competition (e.g. entering a free draw by post, or by telephone where the standard network rates apply)."

Under the Gambling Act an arrangement which allocates a prize by chance is a lottery if payment is required to participate in that arrangement. Under the Act payment to participate includes a charge to discover whether a prize has been won or to take possession of a prize.

The Act requires operators of lotteries to hold a lottery operating licence, unless the lottery falls within very limited exceptions, and licences are only available to charities, local authorities or a third party acting on either's behalf.

However, under the Act payment to participate will not make something a lottery if there is "an acceptable alternative free entry route", gambling law specialist Susan Biddle of Pinsent Masons, the law firm behind Out-Law.com, said. For these purposes "free" includes paying "normal" communications costs.

"An arrangement which requires participants to claim a prize either by calling a normal rate telephone number or by submitting a written application through the ordinary post will not be a lottery, provided that the alternative free entry route is publicised in a way which is likely to come to the attention of all proposed participants and the system for allocating prizes does not distinguish between those who claim by different routes," Biddle said.

The expert said that, although the updated PPP guidance in relation to the Gambling Act reflected the Act by saying an entry route would be "free" if the participant did not have to pay a premium rate charge, the CJEU's ruling went beyond the Gambling Act provisions because the Court had given no exception for "normal communication costs such as standard rate calls or ordinary first/second class stamps" that do not constitute a 'payment to participate' under the terms of the Act in Great Britain.

Biddle said that the Court had ruled consistently with the provisions of the Gambling Act by determining that it was irrelevant whether consumers only had to pay a minimal amount compared with the value of the prize or the cost of providing it in order to claim a prize, or that the payment does not benefit the businesses running the promotion.

"The Gambling Act permits payment to participate, including payment to discover the winner or collect a prize, if the operator has a lottery operating licence or there is an alternative free route, and also permits normal rate calls and ordinary postage costs without requiring a lottery operating licence or alternative free route," Biddle said. "However, in future those operating a draw will need to ensure that – where that draw is open to consumers – there is no requirement for payment, even at normal rates, to collect the prize or discover the winner. This will be the case whether or not payment is required to enter, or there is also an alternative free route, or the draw is run under a lottery operating licence." 

"Since the CJEU's decision applies throughout the EU, this may indirectly standardise some of the arrangements for prize draws, even where the gambling regulatory regimes in different EU countries make different provisions in relation to payments to participate," she said. "Since there's no exception for normal communication costs, it looks like promoters will have to offer their consumer participants a free post address or free phone number to which to submit claims for prizes or to make requests for details of competition winners."