LCQ8: Unscrupulous sales practices and contracts involving pre-payment for services of fitness centres
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Question:
Earlier on, the Consumer Council has sent its staff to pose as consumers to conduct investigations at more than 10 fitness centres in the market, and found that the contract periods for membership of fitness centres were generally rather long (with 60 months being the longest), and that the pre-paid membership fees were as high as several tens of thousand dollars. The Consumer Council has also found that when a fitness centre chain was approaching closing down, the centres' employees allegedly contravened the Trade Descriptions Ordinance (Cap. 362) through employing various misleading or aggressive tactics to promote memberships and fitness courses among consumers. In this connection, will the Government inform this Council:
(1) whether the authorities have, since January this year, conducted investigations into and taken law enforcement actions against the various types of unscrupulous sales practices employed by fitness centres to promote services; if they have, of the details; if not, the reasons for that;
(2) as it has been reported that some fitness centres have, in promoting memberships, claimed that the contracts contain cooling-off period provisions under which a refund may be made if they are cancelled within five or seven days, and yet when consumers did request to cancel the contracts, the centres refused to refund or only partially refunded the payments on various grounds unheard of when the contracts were signed (such as refund arrangements are applicable only to cases in which the services have not been used or to members registered for the first time, and entrance fees and administration fees are deductible from the refund amounts), whether the authorities have assessed if such practices of fitness centres have contravened Cap. 362; if they have assessed and the outcome is in the affirmative, whether they will conduct investigations and take law enforcement actions; if the assessment outcome is in the negative, whether they will look into measures to curb such practices; and
(3) given that, in reply to a question of this Council on February 24 this year, the authorities indicated that the operators of some industries in Hong Kong (including insurance industry, beauty industry, telecommunication industry and retail banking industry) had currently implemented self-regulatory cooling-off period arrangements, whether they know the implementation and effectiveness of such arrangements; whether the authorities will consider amending Cap. 362 expeditiously to require that contracts adopting pre-payment mode of transactions must include cooling-off period provisions, and introduce a ceiling on the contract periods for such contracts, so as to enhance protection of consumers' rights and interests; if they will not, of the reasons for that?
Reply:
President,
The Government attaches great importance to consumer protection. With effect from July 2013, the Trade Descriptions Ordinance (Cap. 362) (the Ordinance) prohibits some commonly seen unfair trade practices, including false trade descriptions of services, misleading omissions, aggressive commercial practices, bait-and-switch, bait advertising and wrongly accepting payment. Convicted traders are liable to a maximum penalty of imprisonment for five years and a fine of $500,000.
My reply to the three parts of the question is as follows:
(1) The Government has been adopting a three-pronged approach to implement the Ordinance, including promoting compliance among traders, actively handling complaints and taking enforcement actions, as well as carrying out consumer education and publicity activities. The Ordinance covers a wide range of goods and services. As the primary enforcement agency of the Ordinance, the Customs and Excise Department (C&ED) adopts a risk-based approach under which priority is accorded to handling cases that may have significant implications on consumers, traders or the general community at large, in order to optimise the use of enforcement resources.
In promoting compliance among the fitness industry, the C&ED conducted large-scale seminars in July 2013, November 2015 and July 2016, with a view to strengthening understanding of the Ordinance by the management and frontline staff of the industry. Over 600 industry participants attended the seminars. The C&ED also convened a number of meetings with the management of several large-scale fitness centres in May and October this year. At the meetings, the C&ED reminded traders of their supervisory responsibilities, and encouraged them to train their staff and formulate staff codes of practices and guidelines, so as to prevent frontline staff from deploying unfair trade practices. The management of the fitness centres said they cared about the trade practices of frontline staff, and undertook to see to it that their staff complied with the law. A number of large-scale fitness centres began to offer cooling-off periods on a voluntary basis, allowing consumers to cancel contracts within a specified period of time.
As for enforcement actions, the C&ED has been exerting earnest efforts towards combating unfair trade practices deployed by the fitness industry. The department has so far made arrests in six cases involving fitness centres suspected of deploying aggressive commercial practices. The number of complaints received by the C&ED involving aggressive commercial practices in fitness centres has been on the decline in recent months, from an average of 23 cases per month from January to June this year, to an average of 8 cases per month from July to October.
On the other hand, following the closure of a chain of fitness centres in July, the C&ED has suitably deployed staff to expedite the handling of complaints. As at October 2016, the C&ED had received 1 670 complaints regarding the fitness centre chain wrongly accepting payment and applying false trade descriptions. The C&ED has contacted all complainants for case details and is currently conducting investigations. Arrests have been made accordingly.
On public education, the C&ED and the Consumer Council maintain close liaison and co-operation. In May 2016, the C&ED held a seminar for the members of all 18 District Councils and their staff to improve their understanding of the protection conferred by the law, as well as the points to note when reporting unscrupulous traders so that complaint referrals can be made more efficiently. The C&ED also distributed booklets on cases to participants of the meeting, so as to strengthen their understanding of the Ordinance. Moreover, taking into account the allegations in some complaints, the C&ED has held six seminars at rehabilitation centres for persons with mild mental handicap from February to June 2016, to help them and their family members understand common unfair trade practices. The C&ED and the Consumer Council also make use of various media to promote "smart consumption", enhance awareness of unscrupulous trade practices and remind consumers of the risk with pre-payment.
(2) Trade descriptions provided by traders to consumers must be accurate. According to the Ordinance, the definition of a trade description in relation to a service includes "the method and procedure by which, manner in which, and location at which, the service is supplied or to be supplied". Moreover, traders should also provide accurate information in a timely manner to avoid misleading consumers. For products in relation to which there is a right of withdrawal or cancellation, the existence of that right is also material information that may influence the purchasing decision of the consumer. According to the Ordinance, a trader who applies a false trade description, or omits or hides material information, may commit an offence of "applying a false trade description" or "misleading omissions" under the Ordinance.
Whether there is any contravention of the Ordinance in a case depends on the facts of the case. In its investigations, the law enforcement agency will thoroughly consider all relevant facts and evidence.
(3) We note that in Hong Kong, certain trades or operators provide for cooling-off periods in respect of their goods or services. The implementation situation is as follows:
- Since 1996, a cooling-off period is applicable to purchases of new life insurance products. This allows policyholders to scrutinise the terms and conditions in their policies, and to re-consider their decision to purchase the life insurance product. The policyholders have the right to cancel their policies during the cooling-off period and claim back any paid amounts (less market value adjustments, where applicable). The cooling-off period was initially 14 days. With effect from February 2010, this was extended to 21 days.
- In 2010, the Communications Association of Hong Kong promulgated the Industry Code of Practice for Telecommunications Service Contracts. The code, which is a self-regulatory initiative of the telecommunications industry, aimed at drawing up contracts that are balanced, fair and reasonable for both the consumers and the industry. The code stipulates that a cooling-off period of no less than seven days shall apply in telecommunications service contracts concluded during an unsolicited visit to a customer’s home. From July 2011, major fixed and mobile network operators have implemented the code. A fixed network operator even voluntarily implemented better cooling-off period arrangements, which include providing a cooling-off period for contracts concluded through other sales channels and setting a fourteen-day cooling-off period.
- In 2010, the Hong Kong Monetary Authority issued guidelines requiring retail banks to provide a pre-investment cooling-off period of at least two days when selling unlisted derivative products to certain retail customers, so that they have sufficient time to understand the product and consider the appropriateness of the investment before subscription. All retail banks have implemented this requirement since January 2011. Also, since the inception of the Code on Unlisted Structured Investment Products in 2010, issuers of any unlisted structured investment products authorised by the Securities and Futures Commission with a scheduled tenor of more than one year shall confer on investors a cooling-off or unwind right of at least five business days after the investor places an order for the relevant product.
In addition to the above, some retailers (such as clothing shops and department stores) and service providers (such as beauty parlours and fitness centres) also allow consumers to return their goods, obtain a refund or cancel their service contracts within a specified period of time.
We appreciate that consumers may have aspirations for a cooling-off period. However, considerations for a mandatory cooling-off period should be premised on respecting contracts for sale and purchase freely entered into between traders and consumers. The Government must have sufficient and reasonable grounds before intervening in a contract entered into between two parties, including conferring the right to one party to cancel a contract unconditionally, or to impose a ceiling on the contract periods for certain types of service contracts.
To impose a ceiling on the contract period of a prepayment contract is a direct intervention of the business plan of a trader. This may affect law-abiding traders of many businesses, as well as consumers who enjoy the discounts or stability offered by long term contracts, and may not be the most appropriate solution.
Generally speaking, the calls for imposition of mandatory cooling-off periods primarily target unfair trade practices deployed by certain traders in the context of accepting pre-payment. The C&ED has been sparing no effort in law enforcement. It has taken prosecution action against unscrupulous traders engaging in aggressive commercial practices and wrongly accepting payment in the course of accepting pre-payment, thereby combating unfair trade practices at source.
Certain fundamental issues that should be considered in relation to the imposition of mandatory cooling-off periods are not simple and are controversial, such as whether the mandatory cooling-off period should be imposed indiscriminately on all contracts of goods and services involving prepayment, how small-value transactions should be handled, whether consumers can enjoy the goods and services concerned during the cooling-off period, and whether consumers having enjoyed part of the goods and services concerned during the cooling-off period should be required to pay for the enjoyed part if they request to cancel the transaction, and how the payment should be computed, etc. Some practical issues also cannot be disregarded, including how consumers should exercise the contract cancellation right and how the refund should be made, etc. Some trades consider that a mandatory cooling-off period would only increase the costs for honest traders but would have little deterrent effect on unscrupulous traders. We consider that imposing a mandatory cooling-off period will change the course of transactions and have significant implications on both traders and consumers. It is necessary to consider the matter carefully.
The Government has provided resources to the Consumer Council to conduct research on cooling-off periods and will consider the findings of the research. Meanwhile, the Government will continue to monitor the effectiveness of the Ordinance in tackling unfair trade practices and keep a close watch on the community's views on imposing mandatory cooling-off periods.
Ends/Wednesday, November 23, 2016
Issued at HKT 14:30
Issued at HKT 14:30
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