The Competition and Markets Authority (CMA) is on a steadfast mission to clamp down on unfair or misleading practices that disadvantage UK consumers.
And it’s fair to say that the CMA has been exceptionally busy in its pursuit of this mission. Even since our last briefing in June, the CMA has opened five further investigations, involving:
- Euro Car Parks and its imposition of parking charges at petrol forecourts, as well as its wider appeals process;
- Microsoft and its marketing of certain of its subscription plans;
- Virgin Atlantic, the Red Driving School and Trainline and their respective presentation of mandatory fees connected with their sale of goods and services.
This brings the total number of investigations opened since the Digital Markets Competition and Consumers Act (DMCCA) launched the CMA’s direct consumer enforcement regime, to a whopping 21.
The CMA also recently appeared in the High Court in connection with its consumer case against Emma Sleep. Whilst the original dispute covered several practices, the trial focused specifically on Emma Sleep’s presentation of promotional prices, and whether a business must satisfy the CMA’s “fixed volume requirement” as a prerequisite to establish a genuine reference price.
When is a reference price genuine?
More commonly understood by consumers as “was/now” prices, a reference price is a mechanism deployed by retailers to signal a “good deal” to customers. “Was £5, now £2.50. Save 50%” is a formulation widely-used by retailers and easily understood by customers – or is it?
The commercial logic underpinning a “was/now” pricing formulation is straightforward: the higher “was” price becomes a reference against which a customer can gauge the value of an item, and thus calculate the available discount if that item is purchased at the “now” price.
The potential harm here is equally clear. Retailers can manipulate the higher reference price to artificially inflate the apparent discount available. For example, the “was” price might be outdated, inaccurate or even wholly fabricated, rendering the discount claim fake.
But this is not a new risk. Guidance has been in place for many years to help retailers ensure their reference prices are “genuine”, and are not arbitrary, phoney, temporary or otherwise inflated. Both the Chartered Trading Standards Institute’s (CTSI) Guidance for Traders and the Advertising Standards Authority consider a range of factors in an assessment of “genuineness”, including both volume and duration. For instance, were significant sales made at the higher reference price; when was the reference price applied and did it apply for a significant duration?
The debate in the Emma Sleep case centred on the CMA’s proposed introduction of a “fixed volume requirement” to assess “significant sales”. In effect, this would require a retailer to sell no more than two products at the lower “now” price, for every one that is sold or will be sold at the higher “was” price, for that reference price to be considered “genuine”.
Arguably, there are some practical challenges with the imposition of such a rigid volume requirement, primarily because actual sales are often not within the sole control of the retailer. Competitor action, economic uncertainty, and the weather are among the factors that can affect demand in ways that are difficult to predict. Indeed, the retail sector would be fundamentally more buoyant if retailers could predict precisely when, and in what quantities, consumers would purchase particular products.
Consider a retailer selling paddling pools, for example. A cold spell during early summer might mean that a retailer sells fewer units than expected at full price. During a subsequent promotion when the weather improves, the CMA’s fixed volume requirement could invalidate the “genuineness” of the higher reference price, if promotional sales of the pools more than double the volume of full price sales. Arguably, the requirement could have the inadvertent effect of stifling competition and leaving consumers worse off, by keeping prices higher for longer.
Similarly, a promotion could perform in a way that exceeds a retailer’s initial expectations. If a retailer plans to adhere to the 1:2 ratio, but a spurt of exceptionally warm weather results in substantially higher promotional sales than anticipated, is the retailer required to terminate the promotion prematurely to avoid exceeding the 1:2 ratio?
A more nuanced approach
The High Court declined to endorse the CMA’s 1:2 fixed volume requirement. Effectively, it considered that the CMA’s focus on the volume threshold left insufficient room for other factors that an average consumer would consider relevant to the assessment of whether a reference price is “genuine”. The High Court considered that the assessment should also consider the very nature of the product, the duration for which the reference price has or will apply, as well as the retailer’s subjective belief as to whether the higher reference price is realistic and has been achieved, or is achievable, for that product.
The High Court has ordered Emma Sleep and the CMA to seek to agree terms of an appropriate enforcement order that would address the comments it makes in its judgement. Although this case was initiated and assessed under the pre-DMCCA consumer protection regime, any resulting enforcement order is likely to be persuasive in illustrating the boundaries of acceptable reference pricing practices under the CMA’s current regime.
Are “everyday fixes” the fix?
Less than a fortnight after the publication of the Emma Sleep judgement, the Prime Minister (PM) announced his roll–out of a series of “everyday fixes” to help people with the cost of living crisis, including measures aimed at banning “pretend prices and deceptive deals”.
The PM’s fixes take two forms:
- First, a consultation will launch in the autumn to consider whether fake “was” prices, invented discounts and misleading recommended retail prices ought to be added to the list of automatically banned practices under the DMCCA. These additions would make it easier for the CMA to “crack down” on misleading reference pricing tactics, as it would remove the obligation to prove consumer harm to establish a breach of the rules. Much of the CMA’s enforcement action to date has focused on automatically banned practices (like drip pricing), for which financial penalties of up to 10% of global annual turnover can be imposed.
- Second, the PM has brought forward the start date for the new rules relating to subscription contracts. Intended to eliminate subscription traps, the new rules will now come into force in January 2027, instead of spring 2027. Even though secondary legislation and additional guidance is still expected on these rules, the acceleration of the start date reduces the business time available to prepare for the regime. Many of these rules will require changes to back-end systems and refund processes, as well as to the content and frequency of subscriber communications. Businesses that offer subscription contracts should ensure they understand the rules, and are working towards compliance.
What does this mean for retailers
These developments offer several important takeaways for retailers:
- Multi-layered and sustained scrutiny. Pricing practices – particularly those that affect “everyday spend” – continue to attract regulator and now, political scrutiny. The CMA and the PM are likely to direct their focus to areas where their efforts are most impactful. The upcoming “Golden Quarter” – traditionally characterised as a period of extensive customer deals and bargains – is an obvious candidate for heightened scrutiny. Retailers should take steps to ensure their pricing practices pass muster, and that their reference prices are realistic and genuinely reflect the commercial history of the product.
- Refreshed guidance? In the wake of the Emma Sleep judgement, the CMA withdrew its online pricing guidance for mattresses. Refreshed guidance (potentially issued post the promised autumn consultation) clarifying the CMA’s approach to reference pricing would provide welcome certainty for retailers. It will be interesting to see whether any future CMA guidance mirrors the high-level, sector-agnostic, principles based approach adopted in the CTSI guidance; or whether the CMA will apply its own colour to the principles, as was its intended approach in the mattress guidance.
- More to come. The PM’s announcement also makes it clear that more “everyday fixes” can be expected to “…put more money in people’s pockets and give people hope that politics really can work for them and their everyday lives”. The DMCCA regime and the CMA’s work in this space seems well-placed to support the delivery of this political aspiration. Ultimately, the direction of travel is clear: retailers should expect greater scrutiny, more intervention and less tolerance for commercial practices that create a misleading impression of value.
Amy McMeekin
