If your business, whether it is a start-up, SME or multi-national, provides consumer-based services via a subscription model, or plans to do so, it is essential that your company understands and complies with auto-renew provisions.
Nowadays auto-renewal contracts are not just the preserve of tech and digital companies but mainstream business retention. In this article our commercial solicitors take a practical look at how to automatically renew a customer's contract or subscription.
- What are auto-renew provisions?
- Regulatory provisions and auto-renewal
- What might be unfair renewal terms?
- Acceptable terms in subscription contracts
- Best practice tips for auto-renewal provisions
What are auto-renew provisions?
Auto-renew provisions are where a customer’s contract is automatically renewed unless the customer takes active steps to cancel the subscription. Whilst the focus of many subscription complaints has been their automatic renewal, and the ease of cancelling (contracting out of) automatic renewal, the reality is that many sectors use auto-renew provisions in contracts to enhance customer ‘loyalty’.
You should be aware that whilst subscription models may make some consumers continue their contract, as it is easier than shopping around or taking positive steps to end the contract, the inappropriate use of auto-renew provisions can breach guidance and damage your brand.
In its 2018 report ‘Tackling the loyalty penalty Response to a super-complaint made by Citizens Advice’, the Competition and Markets Authority (CMA) said ‘Overall, we have found that the loyalty penalty is significant and impacts many people, including those who can least afford it. Customers rightly feel ripped off, let down and frustrated. They should not have to be constantly ‘on guard’ or spend hours negotiating to get a good deal. This erodes people’s trust in markets and the system as a whole’.
If your business is already using auto-renewal provisions, or is considering doing so, it is important to ensure that your contractual terms are fair and that general legislation and industry specific regulations and guidelines are followed to avoid penalties. Adherence to best practice should hopefully avoid consumers coming to the view that overuse of the subscription model is a deterrent to contracting with your business because of the difficulty of ending the agreement. It is best to take contract legal advice, that is both commercial and pragmatic, about the use of subscription model consumer contracts and developments in best practice.
Regulatory provisions and auto-renewal
Regulatory provisions and auto-renewal depend on the nature of the contract and how it is made. For example, the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013/3134 (CCRs) refer to contracts made on site or off site and distance selling.
For more information on distance selling, take a look at our article on Distance selling regulations: returns, refunds and consumer rights.
Whilst for some auto-renewal delivers convenience, for others it has the potential to exploit. That’s why, after a 2018 super-complaint into loyalty penalties by Citizens Advice, the CMA began an investigation into 5 sectors:
- Cash savings
- Household insurance
A loyalty penalty can occur when a company charge subscribing auto-renewal customers more than they would charge either new customers or a customer who negotiates a new contract rather than remains on an auto-renewal contract. The last update into the section 11 Enterprise Act 2002 generated Citizens Advice investigation by the CMA was published in December 2020. For more information, read the full report.
What might be unfair renewal terms?
Subscription model contract terms may be considered unfair to consumers if they are unclear or ambiguous. For example, a customer will have a legitimate complaint if:
- The contract does not specify the length of the contract.
- The pre-contract information does not say that the contract will automatically renew unless cancelled.
- There is no explanation about how a consumer can cancel the subscription. This can be referred to as the ‘subscription trap’ where customers have to go through loopholes to find out how to cancel a subscription that will otherwise automatically roll over by default. The subscription cancellation steps may be particularly hard for a vulnerable customer. For example, one who is elderly or disabled.
- No reminder is sent to advise that the contract is due to automatically renew unless cancelled by the consumer or the reminder does not explain the steps to be taken to cancel the subscription.
- The charging of an unreasonable cancellation fee to end the contract.
- The customer is not told about a price hike at the end of the contractual period with the contract automatically renewing on revised terms that are at a significant disadvantage to the customer in comparison to a new customer. This can be referred to as the ‘loyalty trap’.
Any unclear term that ties a customer into a subscription contract could be deemed unfair if the business has not made the subscription nature of the contract and the precise terms clear to the consumer. This has to be done by providing the consumer with the terms before they are asked to commit to the contract. Whilst few customers may read the detailed fine print of their broadband or mobile contract, the key point is that the detailed contractual terms were drawn to the consumer’s attention before purchase, with a request for confirmation that the consumer read and understood the binding terms.
Acceptable terms in subscription contracts
When it comes to acceptable terms in subscription model contracts, companies need to ensure compliance with industry specific regulations as well as with standards laid down by regulatory bodies and the updated CMA core principles. In some situations, the CMA is recommending that core principles are made a legal requirement to prevent those companies that do not follow the CMA core principles gaining an unfair advantage over those businesses that comply with the CMA principles.
Choice on contract entry
The CMA core principles say choice on contract entry should be the default position. This means on contract entry the consumer should be able to choose whether to agree:
- a fixed term contract, or
- a contract with automatic renewal.
The CMA preferred move to customer choice on contract entry and opt-in subscription contracts is intended to give consumers greater choice. Meaning they can either have the peace of mind of auto-renewal or can elect a fixed term contract without having to engage in what can amount to a time-consuming process to end the auto-renewal, with penalties if the customer forgets to cancel or gets their cancellation timing wrong.
The CMA core principles make it clear that choice on contract entry should be the case even in sectors and industries where there is a legal requirement to have a contract. The most obvious example is that of a car owner with a vehicle on the road as motor insurance is a legal requirement.
In regulated sectors, such as energy, the subscription auto-renewal model may not be the model of choice for companies. Instead, indefinite term contracts with discounted prices for an initial period may be the preferred option. However, companies then need to make it clear how prices will change at the end of the discounted period and how a consumer can end their contract with their supplier.
Some companies continue to sell their services using an auto-renewal model with no provision for opt-out prior to purchase. In the digital and technology sector, the antivirus services provided by McAfee and Norton are the subject of undertakings that allow the companies to only offer the one option of an auto-renewal contract. There is no provision to opt-out of auto-renewal on contract entry. However, the undertakings are intended to provide consumer safeguards such as informing consumers about the auto-renewal nature of the contract, the costs should the contract be renewed, and importantly how to opt out of the subscription model auto-renewal after taking out the fixed term contract. Notwithstanding the undertakings, the CMA Anti-virus Compliance Principles suggest getting opt-in to auto-renewal for antiviral products.
Prior to a customer committing to a contract, the customer needs the following pre-contract information:
- The length of the contract
- Whether the contract will automatically renew
- How the subscription will renew
- If the customer will receive a reminder about the subscription renewal
- Price increases on contract renewal
- The length of the renewed contract
- How to stop the automatic renewal of the contract
- Cancellation and refund rights
It is important that pre-contract information is clear and visible. The customer ideally should be asked to confirm that they have read, understood and agree the pre-contract information.
Price increases and changes to product
Generally, businesses should not make any price increases or changes to the product or service without consumer consent. This is not as difficult as it sounds as most subscription model contracts contain a price increase clause setting out the methodology to calculate an increase to the contract price and specifying how frequently the price will rise. Likewise, many contracts contain a clause that allows them to substitute goods to the same value or make minor product changes.
The key point is that the contract must clearly set out the mechanism for price rises and changes to the product. In addition, when a contract is due for auto-renewal a business should provide information about the fees post renewal of the contract.
Exit fees can be charged after the expiry of a cancellation period but should not be charged after the expiry of the initial minimum contract term. Exit fees should not be excessive and notice periods (where contracts permit notice to be given to end the contract early) should be reasonable. For example, a 9-month notice period to cancel and exit a 12-month contract appears excessive.
No renewal when not in customer’s best interests
The principle of no renewal of subscription contracts when it is not in the interests of the consumer has been the focus of the CMA. This is because some companies have automatically renewed contracts when it would have been easy for the business to check to ascertain consumer usage to see if use had been made of the services on offer or products available for supply. For example, in the sports sector, if there had been no use of gym membership or, in the tech sector, if there have been no film, book or game downloads.
Companies should not automatically renew consumer contracts with a fresh minimum term unless this is clearly in the customer's interests. Nor should a business take advantage of auto-renewal provisions where the consumer does not expect to continue receiving the product or service at the end of the initial contract. Business owners should have systems in place to prevent auto-renewal if their products and services are not being used.
There are particularly sensitive issues when a consumer may have become vulnerable through age, ill-health or if a customer has passed away without relatives being aware of the subscription model contract. In the July 2021 CMA Reform Consultation, the government asked the question whether companies should be required, after a reasonably long period of time and where there is evidence of inactivity, to give notice of suspension of the contract and to cease to charge the subscription fee.
Right to cancel
There should be a right to cancel most subscription model contracts on initial contract entry and on auto-renewal of the contract.
The CCRs contain cancellation right for most auto-renew contracts depending on whether the contract was entered into online (distance selling) or off premises. The CMA recommends that even if the CCRs do not give a right to cancel that business owners provide a right in all cases. The CMA Unfair Terms Guidance says cancellations should not be subject to financial sanction and the cancellation procedure should not result in the consumer being unfairly tied into the contract.
Best practice tips for auto-renewal provisions
Our commercial contract solicitors have the following best practice considerations and tips for auto-renewal contracts:
- Take a long view – whilst it can be tempting to try to tie consumers into a subscription model contract and make it hard for them to exit the contractual relationship because of the auto-renewal nature of the contract, the fact is that customer loyalty based on difficulty in extrication from a contract is not really the type of loyalty businesses want to attract when compared to positive based loyalty. Whilst most companies want to scale-up, or maintain their market share, speed of gaining clients on auto-renewal contracts can create cost and damage to a company reputation, so it is best to take a long view.
- Be positive – auto-renew contracts are often seen as a way to create consumer loyalty by tie in. There are ways to create loyalty that do not risk customer dissatisfaction or allegations of unfair terms. Examples of positive based loyalty include excellent customer service, competitive pricing, innovative products, speed of delivery or a unique selling point that makes a brand stand out from the crowd and their competitors.
- Plain English – whilst you may think some commercial solicitors draw up complex commercial contracts, when it comes to auto-renewal provisions in consumer contracts, the auto-renewal terms need to be written in clear and easy to understand English. This is so a consumer has less chance of successfully arguing that they did not understand what they were signing up to, or if they do complain, your business has the evidence to show that you made your contractual terms clear and obvious at a pre-contract stage.
- Don’t hide information – there is little point in writing a really clear auto-renew contract if the information is then hidden from view so a customer cannot easily locate the information before committing to the subscription model.
- Simplicity of provisions – the auto-renewal clause may be written simply but if the deadlines and procedures to cancel a contract are complicated, the company risks the contractual terms being found to be unfair. It is just as important that the provisions to cancel are easy to follow and do not result in a consumer becoming so frustrated that they write a poor review or complain to a regulatory body.
- Know your market – if your product is aimed at the digitally savvy twenty something market you may want to adopt a different approach to the provision of pre-contract information on auto-renewal provisions than if your target market is predominately the elderly or vulnerable. For example, stairlift insurance products may attract a particularly vulnerable client base where special care has to be taken to address and meet the specific needs of consumers who are vulnerable in a way that could reasonably be expected to be foreseen. Thought should be given to the requirements of the Equality Act 2010 and the need to make reasonable adjustments to ensure a website can accommodate all users.
- Look at the cost of customer complaints – complaints and complaint handling cost a company money, so whilst auto-renew contractual provisions may generate customer tie in, the benefits of auto-renew provisions need to be assessed against the cost of customer auto-renewal related complaints. By carrying out a cost benefit analysis, your company can check to see it is getting the maximum benefit of subscription model contracts and assess the non-obvious costs to the business, such as complaint handling, the greater risk of contract disputes and reputational or brand damage through tying consumers up in contracts they do not want to renew.
- Review subscription model contracts – CMA guidance, sector specific regulations and competitor practices are constantly changing, so your auto-renewal provisions need to be reviewed and kept up to date with industry standards and best practice. Commercial solicitors talk a lot about the contract life cycle and the importance of regularly reviewing commercial contracts but it is equally important to ensure that consumer contracts, including subscription model contracts, are reviewed and meet current best practice.