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Key legal issues when operating a subscription service
With predictable revenue streams, it is understandable why a subscription business is attractive. Recent years have seen the launch of various innovations, such as monthly recipe boxes, coffee pods or health products, with numerous digital apps adding to established subscription services such as magazines or a wine club.
Online trading platforms, such as Shopify or Kofi, make it easy to set up a new business and the subscription model has taken on new life, but there is a web of legal considerations that businesses need to comply with. As yet, there is no prescribed ‘subscription law’ but this area of business could be the focus of more regulation in the future.
Now is a good time to audit your terms and conditions to ensure that your business is compliant and protecting your consumers as it should. Taking some pre-emptive steps now will ensure you are ready for any regulatory changes and will put you one step ahead of your competitors.
Here we look at the key legal considerations where a subscription business needs to ensure compliance.
Consumer laws, such as the Consumer Rights Act 2015 and the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013, require terms and conditions to be available to the consumer for their agreement, and they need to set out all pertinent details such as pricing, rights to cancel, length of any subscription etc.
Care needs to be taken when planning your promotional strategy, especially if you offer a free trial.
There has been a rise in misleading advertising campaigns which lure customers into starting a subscription with a free trial which often then leads straight into charges at the end of the trial period.
The Advertising Standards Authority has published guidance about this, but the key recommendations include ensuring there is clear and prominent wording next to the ‘buy’ or ‘start trial’ button so the consumer is absolutely clear on:
- cancellation rights associated with the free trial;
- what the paid subscription will look like if the trial is not cancelled; and
- other commitments and conditions associated with the subscription.
The subscription model relies on retention of customers, so it is no wonder that auto-renewals are a popular technique.
However, a lack of clear laws around this can mean consumers end up in what is known as a ‘subscription trap’ – a consumer may get busy and has forgotten to cancel a subscription they hardly used and, before they know it, another year’s charge has hit the credit card. While the business owner may not have technically breached any laws, the customer will not be happy and this may have an impact on reputation and retention.
Pre-emptive action, such as reminding the consumer about the renewal date well in advance, or having an active opt-in for the consumer could address this growing source of consumer complaints.
‘In life’ contract amendments
You may wish to make changes to the terms and conditions during the life of the contract.
Some models offer the consumer the right to pause their subscription at any time, delaying the delivery of products for another month or so, as a consumer-friendly mechanism designed to maintain retention.
Alternatively, as the business owner, you may wish to make changes such as increasing prices or discontinuing certain products. This can be easier if the subscription life is shorter, for example monthly rather than yearly. However, it is important to seek legal advice about how this can be done in a transparent and legally compliant way.
Privacy and data protection
As well as compliance with the handling, storing, and processing of personal consumer data, businesses ought to consider how marketing will play out given the fluidity of the customer base. It can be a fine balance to ensure the lines of data privacy are not blurred, for example:
- If a consumer has unsubscribed to the products, did they continue to consent to receiving marketing messages so you can bring them back?
- When a consumer signs up, do they only consent to receiving messages in line with the provision of the subscription service itself?
- How does marketing work with a ‘paused’ customer?
The Government is currently looking into tightening up laws around subscription models with a focus on protecting consumers. The aim is to capture as wide a range of subscription businesses as possible and introduce changes to three key areas:
- Pre-contract - there is expected to be more specific requirements that businesses will need to make consumers aware of before any contract is entered into, and this will extend to making auto-renewals more of a choice.
- Renewal - in addition to more prescriptive changes requiring businesses to connect with the consumer before any renewal, the Government is looking at putting the onus on business owners to monitor and be pre-emptive in cancelling inactive subscriptions.
- Cancellation - the focus is on making the process as simple as possible for consumers, with the onus on the business owner to take steps to be compliant.
While the above changes are not yet law, and the proposals could change further, it highlights the key considerations and steps you can potentially take to make your subscription model more consumer friendly.
Getting your subscription business set up correctly, or to keep it running properly, requires compliance across a span of legal issues.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.