Protecting businesses against marketing scams

27 November 2012
by eub2 -- last modified 27 November 2012

The European Commission has outlined a series of actions to tackle marketing scams, such as those of misleading directory companies. The aim is to better protect businesses, professionals and NGOs across Europe from dishonest traders who do not play by the rules and use misleading marketing practices, such as sending out forms asking businesses to update details in their directories, seemingly for free, and then charging them annual fees. Small companies are particularly vulnerable to fraudsters, who are frequently operating from another jurisdiction within the EU. This makes enforcement difficult. The Commission therefore announced that it plans to beef up the existing legislation (the Misleading and Comparative Advertising Directive 2006/114/EC) to explicitly ban practices such as concealing the commercial intent of a communication, while at the same time stepping up enforcement of the rules in cross-border cases.

What is a marketing practice?

A marketing practice is any representation or communication made by a trader in order to promote goods and services. It can be a TV commercial or press article, information on the website, an e-mail, or even direct marketing through a telephone call. It is similar to the concept of advertising, but includes also certain practices that are not easily recognised as advertising because the commercial intent is hidden (for example fake invoices that are in fact offers to conclude a contract).

What are the most common misleading marketing practices affecting businesses?

Most common are the practices of misleading directory companies who send out forms asking businesses to update details in their directories, seemingly for free. If the targeted traders sign the form, they are then told that they have signed a contract and will be charged a yearly sum.

Many other schemes exist, such as misleading payment forms disguised as an invoice for services that the trader has purportedly already ordered. In another scheme a fraudster pretends to offer a specialised service for a very high fee, while in reality only conducting a simple and cheap task, such as a web domain registration or inclusion in the list of trademarks.

All these scams are rather similar and based on a common scheme. A culprit deceives a victim into giving consent and, purportedly, a contract is concluded with little or no service in return, but with an exorbitant price and abusive contractual conditions. Afterwards, the rogue trader uses all possible means to enforce the payment.

Who is affected by misleading marketing practices?

The problem concerns mostly small and medium-sized enterprises, independent professionals, like doctors, and non-governmental organisations. They have fewer resources and are rarely able to effectively protect themselves as the misleading marketing practices often involve cross-border situations. Nevertheless, even big multinational companies are affected by these practices and suffer losses.

What is the scale of such business-to-business practices in Europe?

This is difficult to precisely quantify, as many misleading marketing practices go unreported. Nevertheless, there is no doubt that this is in a big problem for businesses. With the spread of mass-marketing techniques, the most notorious operators of misleading directories can reportedly send up to 6 million forms a year. A survey carried out by the European Parliament in 2008 documented 13,000 complaints about company directory scams. The European Commission's public consultation in 2011 revealed that 2 883 complaints were received by the Belgian authorities and 1 318 by the UK authorities between 2008 and 2010. The Czech business protection association estimates that around 2 000 people were victims of various scams of this type between 2007 and 2010 in the Czech Republic. Many companies that replied to the public consultation were directly affected by misleading directory schemes. In their responses to the Commission, many small businesses also underlined having suffered constant psychological harassment.

Do misleading marketing practices have an impact on the economy?

Indeed misleading marketing practices affect the economy in general and may have a negative effect on economic growth, especially for small and medium-sized enterprises. The financial damage to individual companies that results from misleading directory scams is estimated to be between €1,000 and €5,000 per year for each company.

Due to such practices, businesses in the course of their trade make ill-informed and hence inefficient, decisions. Also, competition is distorted because a trader using unfair marketing practices may win business customers away from honest competitors or because affected businesses have higher cost due to payments for useless services of little or no value. In addition, misleading marketing practices may have a knock-on effect on consumers as they have to pay more for products and services.

What action is the Commission planning on taking?

As an immediate step, the Commission will step up enforcement by improving coordination between Member States. National authorities (such as competition or consumer protection agencies) will be able to share information on existing misleading practices and set common priorities. This should already improve the situation.

In the course of 2013, the Commission also plans to take legislative action to solve the problem of misleading marketing practices affecting businesses. Although the vast majority of practices are already prohibited by EU law, the rules can be imprecise with regard to some newly emerging schemes. In addition, national authorities from different EU countries face problems when they want to cooperate.

The proposal to amend the Misleading and Comparative Advertising Directive will

• strengthen the protection by clarifying rules and explicitly banning certain harmful practices,
• improve cooperation between the responsible authorities of the different Member States,
• ensure that the authorities have the necessary powers and,
• ascertain that sanctions are dissuasive and appropriate.

Any legislative proposal will first be subject to a strict impact assessment to check how any future rules will affect businesses and whether a legislative proposal is really the best option for addressing the situation.

Why is the Commission only addressing businesses? What about consumers?

Consumers are protected in Europe by a different piece of legislation, namely Directive 2005/29/EC on Unfair Commercial Practices. This broadly encompassing EU law protects consumers before, during and after a commercial transaction and requires that traders operate in accordance with professional diligence, do not mislead consumers and that they display in a clear, intelligible and timely manner all material information that consumers need in order to make informed choices. The Commission intends to present a comprehensive report on the Unfair Commercial Practices Directive early in 2013.

Source: European Commission