Two Major Problems with the BIS / EU Approach to Above Cost Surcharges

(by Pinar Akman) Following on from Morten Hviid’s recent blog post on above-cost surcharges, this comment seeks to point out two major problems with the Department for Business, Innovation and Skills’ plans to bring forward the EU ban on surcharges (due to come into force in 2014 by the EU Consumer Rights Directive 2011/83/EU). This ban will ‘prohibit traders from charging consumers, in respect of the use of a given means of payment, fees that exceed the cost borne by the trader for the use of such means’ (Article 19). This approach wrongly assumes that payment surcharges actually relate(d) to costs of payment methods, and fails to address the danger that companies will simply rename the surcharge and present it as relating to a cost other than payment processing.

The first major problem relates to a fundamental assumption apparently underpinning the consultation – that these so-called “payment surcharges” ever had anything to do with payment methods. This belief is, as a matter of fact, illogical. The Government wishes to take action because these “payment surcharges” do not reflect the costs of accepting the payment method in question. But if these surcharges did not reflect costs of accepting certain payment methods, why does the Government believe that the surcharges ever had anything to do with (the costs of accepting certain) payment methods? Evidence that, for example, a payment by debit card costing around £0.50 can attract a ‘payment surcharge’ of £5.00 exemplifies this. Just because the firms call it a fee for paying by a certain method does not actually mean that these surcharges are genuinely about the costs of accepting that method of payment. These surcharges are indeed “surcharges” but, as the Government itself has proved, they are not about the costs of accepting a certain payment method.  If they were, they would have reflected the costs of doing that! Instead, these “surcharges” should simply be viewed as a way of increasing the total price of the product/service as the consumer travels along the timeline of the transaction and reaches a point where it is too costly (due to search costs, time, etc) to start all over again with another firm (and there is always the risk that the other firm will do the same, too). Therefore, the surcharges do possibly distort competition since the consumer does not know the genuine price for the product/service until the very end of the transaction. This is not because they are ‘excessive’ or not cost-reflective; it is because they are hidden until the consumer has already invested too much time and effort into the transaction.

A second related problem is that the Government’s proposal does not deal with the issue of firms simply renaming the surcharges as “administration fees”. This is an easy way in which they could circumvent the prohibition, while still only disclosing the surcharge at a late stage in the transaction. This technique, already employed by some airlines, is entirely legal so long as the firms do not falsely represent (or create the false impression) at the beginning of the transaction, that these charges to not exist.  Consumer Protection from Unfair Trading Regulations 2008 (CPRs) are unlikely to help since the Regulations prohibit “misleading” or “aggressive” practices and if the firm has not promised otherwise, levying a charge is not “misleading”. One can think of the practice possibly being “unfair” (and fall under the general prohibition of unfair practices) but “unfairness” in the Regulations (and the EU Unfair Commercial Practices Directive on which the Regulations are based) is defined by making reference to “professional diligence” which is a factor of “honest market practice and/or the general principle of good faith in the trader’s field of activity”. This means that if all the other traders in the same industry also adopt the same practice, it would be difficult to argue that one’s practice is against “professional diligence”. This lies behind The Government proposes at [32] of the Consultation Document that “other surcharges will continue to be subject to rules in other consumer protection legislation including CPRs. They must therefore be presented clearly and fairly to consumers”.  However, the proposal does not deal with the problem: the legal application of CPRs to other surcharges might, at least arguably, not render the result that the Government is assuming it would.

The correct remedy concerning these surcharges would be to require all firms to include all administration fees, charges and surcharges in the headline price that they advertise at the beginning of the transaction. In relation to payment costs, this headline price can include the price for the cheapest widely-used payment method and it can be stated to the consumer that there are other charges for other payment methods (the level of which should also be provided at this point). This is the only way in which competition can do its job of matching the consumers with the prices and products/services that are suitable for their requirements. Simply requiring these charges to reflect costs, as the Government suggests as a solution, will not actually deal with the main problem here, which is that the actual price is being hidden from consumers until the transaction is almost complete. Unless the broader issue explained in this comment is not addressed, firms will simply circumvent the Government’s ‘solution’ by changing the name of the surcharge and the public money used to implement the proposal will be wasted.

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