On our compliance hotline, we hear daily from banks who have customers interested in exercising their Regulation E right to dispute errors. Most of the time, these errors take the form of unauthorized Electronic Fund Transfers, and these transactions often are the result of the customer unknowingly signing up for a subscription which will continually debit their account. When many consumers dispute these transactions, they’re completely unaware that they’ve even signed up for anything. In a recent circular, the Consumer Financial Protection Bureau (CFPB) targeted these sort of tactics by the sellers of subscription services, warning of violations of the Consumer Financial Protection Act.
The CFPB issued a circular last week stating that companies which offer subscription services with a negative option must comply with applicable federal consumer financial protection laws. Negative options refer to a situation in which a seller interprets a person’s silence or failure to cancel as a continued acceptance of the initial offer. According to the CFPB, negative option programs include subscription services that automatically renew unless the consumer cancels the service and trial programs that charge reduced fees for the trial period and begin charging a higher fee automatically after trial period.
Companies, including banks, risk violations of the Consumer Financial Protection Act (CFPA) if they: a) do not disclose the terms of their subscription services clearly and conspicuously, b) do not obtain informed consent, or c) make it difficult beyond reason for consumers to cancel services. These three are explained in a little more detail below.
- a) Failure to disclose material terms of the negative option. Companies risk violating the CFPA when they misrepresent or do not disclose information that a consumer is likely to rely on when making a decision about whether or not to enroll in a negative option service. This information includes the total of all charges and whether the charges will continue unless the consumer cancels the service.
- b) Failure to obtain informed consent. Companies should ensure that consumers actually agree to the terms of a negative option program. According to the CFPB, companies were found to have engaged in UDAAPs when they misrepresented or failed to disclose that they were offering negative option programs. The result was that consumers did not understand that they were enrolling in services which would continue to charge their account.
- c) Mislead or hinder consumers wishing to cancel. This is commonly done by requiring consumers to navigate a complicated process for cancelling subscriptions, such as having to talk to multiple customer service agents or speak to an agent for a long time before cancelling the service.
This circular is the latest effort from the CFPB to focus on behaviors in the marketplace that they deem harmful to consumers. Financial institutions may benefit from the positive effects this could have on Regulation E disputes, but banks should also be aware of any potential problems with subscription services banks offer to customers. Reach out to us on the Hotline to discuss any potential Regulation E implications, potential problems with subscription services, or anything else compliance related.