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Council Advocates Mandatory Cooling-Off Period for Specific Trades and Transactions – Consumer Contracts to be Unconditionally Cancelled within 7 days in a Move to Strengthen Consumer Protection
Unfair trade practices involving coercion and undue influence currently remain prevalent. Many consumers, whether reluctantly or when psychologically unprepared, are induced into purchases of goods or services of poor value or lengthy contractual commitments, causing them serious financial loss and mental stress. Such undesirable practices not only undermine the consumers’ rights and interests but also harm the industry reputation, particularly in sectors such as fitness, beauty and timeshare, resulting in a pressing need for enhanced consumer protection. (Please refer to A Report to Advocate Mandatory Cooling-Off Period in Hong Kong for the details)
Striking a balance between the impact on individual trade sectors and the overall economy, the Council proposes a pragmatic approach for the introduction of a mandatory cooling-off period targeting specific trade sectors and transactions. This proposal calls for the Government to impose a mandatory cooling-off period of not less than 7 days on unsolicited off-premises contracts, distance contracts (other than online shopping), and the contracts in the 3 aforementioned sectors which attract high volumes of complaints and involve transactions with high value and prepayment amounts, allowing consumers to cancel the transactions unconditionally without reason, and obtain a refund. The Council believes that such an approach will not only enhance consumer confidence and stimulate consumer appetite, but will also enable the community to have a smooth and gradual transition into the mandatory cooling-off regime, facilitating a healthy development of the relevant trade sectors in the long run, ensuring that there is a proper balance between enhancing consumer protection and maintaining a viable business environment.
The Council wants to emphasise that its in-depth study reveals that no jurisdiction has applied a mandatory cooling-off regime across the board for all trade sectors, as this would pose challenges on an implementation level, due to the fact that it would be extremely difficult to achieve unanimous consensus of all stakeholders involved. Instead, by focusing initially on the problematic sectors, support would be more readily given. If this implementation proves successful, then mandatory cooling off could be extended gradually in phases to other sectors in such need. In its study, the Council analysed the related enforcement situation and complaint cases, reviewed the existing voluntary cooling-off period provided by certain sectors, made references to the scope of application and the operational arrangements of the mandatory cooling-off regimes in 8 jurisdictions namely Mainland China, Singapore, South Korea, Taiwan, UK and EU, US, Australia and Canada. The Council has also taken into careful consideration the diverse views and concerns raised by the business community before putting forward its recommendations.
In 2013, after the Trade Descriptions (Unfair Trade Practices) (Amendment) Ordinance (“TDO”) 2012 came into force, the Council received over 30,000 complaint cases, representing a 10-year high. It was not until last year that the Council saw a slight decline to 25,000 cases. Nonetheless, the percentage share of complaints relating to sales practices remain at approximately 15% of the total number of complaints, reflecting that the continued prevalence of unfair trade practices in different sectors remains detrimental to consumer interests. Notwithstanding the achievements of the Customs and Excise Department in enforcing the TDO, the challenges of satisfying a high burden of proof of beyond reasonable doubt for criminal prosecutions, the fact that it takes time to collect evidence and also the reliance on the cooperation and will of the complainants mean that not every case could proceed to the prosecution stage. The introduction of an eagerly awaited mandatory cooling-off period will offer protection by giving aggrieved consumers the right to cancel the transactions in cases of malpractices, allowing them to recover their payments and keep their financial losses to a minimum.
Proposed scope of application of cooling-off
1) Specific transactions
- Unsolicited off-premises contracts
Most overseas jurisdictions have already imposed a mandatory cooling-off period on unsolicited transactions. When consumers are approached by traders away from business premises on an unsolicited basis, they are generally psychologically unprepared to make a purchase or indeed at times have no intention of making any purchases. Where unsolicited sales happen at the consumers’ home, consumers are under even greater psychological pressure because they cannot choose to leave. As such they are more prone to making involuntary and irrational purchase decisions.
The proposed mandatory cooling-off period on unsolicited off-premises contracts will include transactions concluded during an unsolicited visit to the consumer’s home or workplace, a cold call followed by a house visit for product demonstration, and transactions concluded at the trader’s business premises immediately after an uninvited approach by the trader’s salesperson in a public place.
- Distance contracts (other than online shopping)
In the context of distance sales, consumers are unable to inspect the products prior to their purchase, relying only on the written descriptions or images of the products, or the opinions of other consumers. Therefore, if the goods turn out to be substantially different, consumers should be able to cancel unconditionally the purchase during the cooling-off period. For mandatory cooling-off period to be applicable, the whole process should be conducted by means of distance communications, such as telephone, fax or mail, with distance selling being the usual sales channel of the trader. Mandatory cooling- off will not be applicable to distance selling on an occasional basis. For instance, a regular customer occasionally placing an order over the phone will not be afforded the protection of a cooling-off period.
2) Specific sectors
- Fitness services, beauty services, timeshare
Unfair trade practices have become rife in recent years, and in particular, complaints in relation to fitness services, beauty services and timeshare contracts have been the most noticeable. According to the Council’s complaint statistics for the past 5 years, the complaints received for fitness services and beauty services relating to sales practices represent 40% and 30% of the total number of complaints received in these two sectors respectively. Although the complaints in relation to both these sectors have shown a decline in the past 2 years, the average monetary sum involved was high, averaging over $30,000 per case with some individual cases exceeding a million dollars. The undesirable sales tactics deployed by traders invariably include harassment, coercion and sweet talk to lure consumers into buying exorbitantly priced services and extending repeatedly the contractual commitment to well over 10 years. The study therefore proposes that fitness services and beauty services contracts of not less than 6 months or requiring prepayments should provide a mandatory cooling-off period.
For timeshare contracts, although the joint efforts of the Council and the law enforcement agencies in education and enforcement have resulted in a drop in the number of complaints, there has been a resurgence in the past 3 years. Not only did the number of complaints increase but also the amount of money involved per case rose significantly to nearly $50,000, comparatively even higher than the fitness and beauty sectors. Last year, a timeshare company was publicly named by the Council for persisting in sales malpractices. As timeshare contracts are generally more complicated than other consumer contracts, involving large prepayments and lengthy contract periods as well as overseas properties, consumers tend to find it hard to possess sufficient information to make an informed decision. Referencing UK legislation, the Council recommends that timeshare contracts of over 1 year should be provided with a cooling-off period.
The imposition of mandatory cooling-off period targeting specific sectors is common in many jurisdictions. For instance, in the UK, US, Australia, Canada and Singapore, they have all imposed cooling-off periods on timeshare contracts to protect consumers while in Australia (Queensland), Canada (Ontario) and the US (New York) there is legislation imposing a cooling-off period on the fitness industry.
Proposed operational arrangements
Refund and return within 14 days
On the part of the traders, the Council recommends that the duration of the cooling-off period must not be less than 7 days. For service contracts, this period will commence from the day of the transaction while for product contracts, the period commences from the day after receipt of the goods. During this period, consumers may cancel the contracts unconditionally. Before concluding a contract, the trader should provide proper disclosure of information including contact details, method of cancellation (together with a cancellation form), the refund and return arrangements and any related costs. Traders should make refund within 14 days; and if the consumers pay by way of credit card, the traders should be allowed to charge an administrative fee of not more than 3% of the credit card transaction value. If the goods are delivered by express courier, traders should be allowed to deduct such costs, but the value of souvenirs or gifts are not deductible. If the consumer has enjoyed some service during the cooling-off period, then the trader should be allowed to charge a fee proportional to the total amount of the contract.
On the part of the consumers, cancellation of the contract within the cooling-off period should be effected in writing. As mentioned above, if service is provided upon the request of the consumer during the cooling-off period, the trader should be able to deduct the value of service used from the refund. Where the contract involves goods, in case of damage or mishandling, a reasonable amount of compensation should be paid by the consumer. Consumers should also return the goods within 14 days and bear any cost of return which may arise.
Further, should a main contract be cancelled within the cooling-off period, any ancillary contracts related to it should also be terminated automatically. Refund arrangements would depend on whether the consumer has made payment in the first place to the trader or the third party in the ancillary contract. In the case of the former, the trader should refund to the consumer the contract price and also the sum in the ancillary contract. In Hong Kong, a common example of ancillary contracts is through credit cards Installment Payment Plans (IPP). Upon the cancellation of the main contract by a consumer, the trader should settle with the bank offering the IPP and then the bank would adjust the credit card account balance of the cardholder or make refund where appropriate. To prevent unscrupulous traders from using various means to induce consumers to waive their cancellation rights, the Council recommends that the mandatory regime should not allow waiver or curtailment of this right under any circumstances.
Setting up a public body under civil regime for enforcement
On the issue of enforcement, the Council proposes that a civil enforcement mechanism be adopted with the establishment or appointment of a designated public body which should be empowered to seek undertakings from traders in order to stop or refrain them from continuing a breach of the law. If the trader is uncooperative, the enforcement body should apply to the court for an injunction. Breach of an injunction would constitute a contempt of court which could attract sanctions including fines or imprisonment. If civil sanctions prove to be an ineffective deterrent, consideration should then be given as to the need to introduce criminal liability.
Exemptions for certain trades & transactions
In this mandatory cooling-off period study, the Council makes reference to legislations of other jurisdictions and proposes exemptions for contracts relating to financial services (such as banking, credit and insurance); property transactions (such as sale of immovable property and tenancies); passenger transport services; professional services (such as accounting, legal); utility services (such as the supply of gas, electricity); and public services provided by the Government and public bodies.
In addition, with a view to ensuring practicality and preventing consumer abuse, the Council also proposes exemptions for a list of transactions including purchases involving not more than $500; custom-made goods; food and drinks; books and magazines; goods sealed for health protection or hygiene reasons once unsealed; sealed audio/video or other digital content products once unsealed; audio/video or other digital content products not supplied on a tangible medium; supply of accommodation, transportation and leisure activities if the contract provides a specific date of performance; urgent household repairs; fully performed services; and one-off fitness services or beauty services with a specific date of performance.
The questionable effectiveness of a voluntary cooling-off period
In Hong Kong, the current provision of cooling-off period by some industries is mainly through their own self-regulatory codes of practice. For example, life insurance products and certain telecommunication services contracts concluded during an unsolicited visit, provide a cooling-off period of 21 days and at least 7 days respectively; the Hong Kong Monetary Authority and the Securities and Futures Commission require financial institutions to provide a cooling-off period when selling certain investment products to specific customer groups.
A commonality among these examples is that these industries all have in place a credible and dominant trade association or a regulatory body, together with industry self-discipline and the determination to build a better reputation. However, as the provision of cooling-off period is voluntary in nature, the cooling-off period policy can possibly contain terms and conditions which are unfair and unreasonable to consumers, for instance, the imposition of a substantial administrative fee if the consumer were to cancel the contract; or a term stipulating that if the consumer had used some service or accepted a gift, the cooling-off period would be rendered invalid immediately. This has the effect of deterring consumers from exercising their cancellation rights and thus defeating the spirit of having a voluntary cooling-off period.
With advances in technology, online shopping has become more popular in the retail market. The imposition of a mandatory cooling-off period will allow consumers a reasonable period of time to inspect the goods, which will no doubt boost consumer confidence, and promote further development of e-commerce. Strengthening consumer protection for online purchases is a growing global trend. However, different jurisdictions have adopted different approaches for mandatory cooling-off period for online shopping: in the UK, Mainland China and Taiwan, there is legislation mandating cooling-off period for online shopping while in the US, Australia and Singapore, despite its booming e-commerce, there is no such kind of legislation. Furthermore, there is no legal definition of “online shopping” and online shopping in Hong Kong often involves cross-border transactions, which entail complicated legal and enforcement issues. Moreover, the Council’s previous study in 2016 relating to online shopping found that online shoppers in general are satisfied with their online shopping experience. At this stage, introducing mandatory cooling-off period for e-commerce may not be the most pressing issue. Therefore, taking into account the various factors and the divergent views of the community on introducing a mandatory cooling-off period, and adhering to the principle of first tackling the most problematic trade sectors, the report does not propose to introduce mandatory cooling-off period for online shopping. Clearly more time is needed for the community to discuss the need for and the pros and cons of providing a mandatory cooling-off period for online shopping.
Please refer to A Report to Advocate Mandatory Cooling-Off Period in Hong Kong for the details.