The US Federal Trade Commission (FTC) recently proposed an update to the Negative Option Rule, mandating businesses to offer a straightforward cancellation process, potentially featuring a “Click to Cancel” button for customers with recurring billing or subscriptions. Upon implementation, businesses providing recurring products or services could incur penalties for non-compliance with the rule.
The “Click to Cancel” rule is designed to prevent deceptive and unfair practices associated with subscriptions such as requiring customers to go through a long and tedious process to cancel their subscriptions, automatically renewing subscriptions without the customer’s consent, and not providing clear and important information before asking customers to subscribe.
- The FTC Click to Cancel initiative, proposed in March 2023, aims to make it easy for customers to cancel recurring payments such as those for subscriptions.
- An online informal hearing was held Jan. 16, 2024, where business organizations presented their positions on the proposed Click to Cancel rule, to help in FTC’s evaluation and decision.
- When implemented, the Click to Cancel update will require businesses to have a simple cancellation process, ask for customers’ consent before presenting additional offers, and send annual reminders before automatically renewing subscriptions.
- Businesses may face penalties for non-compliance when the update is implemented.
What Is the Negative Option Rule?
The term “negative option” refers to a business model or practice where a consumer’s silence or failure to take explicit action is interpreted as consent to be charged for goods or services. In other words, unless the consumer actively declines or cancels, they are automatically enrolled or auto-renewed in a subscription or service and charged accordingly.
This model contrasts with a positive option, where customers actively choose to sign up for a service, make a purchase, or continue to stay enrolled in a subscription. In negative option scenarios, consumers might be enrolled in ongoing subscriptions, memberships, or other recurring payment plans without their explicit and affirmative agreement for each renewal.
What Is Click to Cancel?
Negative option practices have been a concern for consumer protection because they can lead to unexpected charges and difficulties in canceling subscriptions. In March 2023, the FTC proposed the “Click to Cancel” update to the Negative Option Rule.
Under the proposed Click to Cancel provision, companies would be required to implement a simple and accessible cancellation mechanism for consumers. The essence of this rule is to ensure that the process of terminating a subscription is as straightforward as the initial sign-up process. If a consumer can subscribe with a click, they should be able to cancel with a similar level of ease.
FTC Click to Cancel Implementation
The Click to Cancel proposal marked FTC’s ongoing efforts to address deceptive practices associated with recurring subscriptions and memberships. In May 2023, FTC called for feedback and comments from consumers on their experience with free trials, memberships, subscriptions, and anything that they get billed for regularly.
The implementation of the FTC Click to Cancel moved forward when the FTC announced in December 2023 that an informal hearing would be held Jan. 16, 2024. Five organizations publicly presented their positions on the proposed rule during the hearing. Among the organizations were the Interactive Advertising Bureau, the International Franchise Association, NCTA – The Internet & Television Association, the Performance Driven Marketing Institute, and TechFreedom.
The hearing provided each of these organizations, representing various industries and interests, the opportunity to voice their perspectives on the proposed rule. Each presenter shared insights, concerns, and recommendations regarding the potential impact of the “Click to Cancel” provision on their respective sectors. More detailed information can be found in the hearing transcript.
The feedback from consumers and industry representatives will contribute to the FTC’s evaluation of the rule’s viability, effectiveness, and potential consequences. The outcome will have implications for how subscription-based services operate and how consumers interact with recurring payment plans.
New Requirements for Businesses
The FTC “Click to Cancel” update to the Negative Option Rule will introduce new obligations for businesses engaged in subscription-based services. These requirements are designed to enhance transparency, protect consumers, and create a more straightforward subscription management process. Here are the possible key components of the new requirements when implemented:
- Simple Cancellation Mechanism: The cornerstone of the proposed rule is the implementation of a simple cancellation mechanism. If consumers can sign up for a subscription online, the new rule mandates that businesses must provide an equally easy and accessible online method for cancellation. This aligns with the core principle of making it as effortless for consumers to cancel as it is to subscribe, eliminating arduous and deliberately convoluted cancellation processes.
- Additional Offer Protocol: While businesses are permitted to present additional offers or modifications when a consumer attempts to cancel, they must adhere to a specific protocol. Before making any additional pitches, sellers must seek explicit consent from consumers, ensuring that consumers have the option to decline further offers. This means asking the customer if they would like to know about additional offers. If the answer is no, then businesses are required to proceed with the cancellation without showing any other offers or propositions to the customer. This requirement aims to prevent coercive tactics during the cancellation process and emphasizes respecting consumers’ choices.
- Reminders and Confirmations: The proposed rule introduces obligations related to reminders and confirmations. Sellers engaged in negative option programs, excluding those involving physical goods, must provide an annual reminder to consumers before automatic renewals take place. This proactive measure aims to keep consumers informed about upcoming renewals, promoting transparency in subscription practices.
Businesses may face penalties such as a fine of up to $50,000 per violation per day for not following the new rule when implemented.
Why Is There a Need for Easy Cancellation?
This update to the Negative Option rule addresses deceptive and unfair practices related to subscriptions. The goal is to ensure that consumers have clear and accessible means to opt out of automatic renewals and recurring charges.
Issues with the Current Negative Option Rule
Outlook with the Click to Cancel Update
This move acknowledges the challenges consumers often face when attempting to discontinue subscriptions due to cumbersome cancellation processes intentionally designed by some companies. The Click to Cancel requirement will streamline the cancellation process, allowing consumers to opt out with minimal hassle.
If implemented, the update will include penalties for companies that fail to adhere to the “Click to Cancel” provision. This serves as a deterrent against businesses employing deceptive tactics or making it intentionally difficult for consumers to terminate recurring payments. FTC’s goal is to address the immediate concern of user-friendly subscription termination, enforce its mandate of broader consumer protection goals, and ensure transparency, fairness, and ease of choice in the business-consumer relationship.
Why Are Businesses Pushing Back?
While the “Click to Cancel” proposal aims to empower consumers and simplify subscription management, it has faced notable resistance from various industry stakeholders. Trade groups representing publishers, advertisers, and other businesses have expressed the following concerns and opposition to the proposed rule:
- Complexity Concerns: One of the primary arguments against the “Click to Cancel” rule comes from trade groups such as the Association of National Advertisers and the Entertainment Software Association. They contend that simplifying the cancellation process to a single click may seem simpler but would miss the complexities of canceling. According to their viewpoint, consumers might inadvertently terminate subscriptions without fully understanding the consequences, potentially resulting in missed essential services or deliveries.
- Accidental Cancellations: Trade groups argue that requiring a single click for cancellation could lead to consumers missing out on additional offers or personalized deals often presented during the cancellation process. The fear is that consumers might hastily cancel subscriptions without exploring alternative options or understanding the potential benefits offered to them.
- Industry-Specific Challenges: The News/Media Alliance, representing publishers, asserts that the use of automatic renewals in newspaper and magazine subscriptions has not resulted in widespread dissatisfaction among consumers. They argue that introducing a simplified cancellation mechanism may create new challenges for both consumers and companies, disrupting existing processes that are deemed functional.
- Business Freedom of Speech: Some trade groups, including the Internet & Television Association, have raised concerns about potential infringements on freedom of speech. They argue that the proposed rule’s vagueness might lead to excessive disclosures, inundating consumers with information and potentially impeding businesses’ ability to communicate effectively with their customers.
Impact on Small Businesses
Although this update will majorly affect big businesses that offer subscription services, any small business that offers products or services with recurring payments will also be impacted.
Regardless of FTC’s final decision, following the requirements of the Click to Cancel rule will provide ease and control for your customers in managing their subscriptions. These will promote better relationships with your customers and strengthen customers’ trust.
If you offer any product or service that comes with recurring billing, you could jump-start implementing the Click to Cancel rule by making the necessary changes to your website and cancellation process.
When implemented, the FTC’s Click to Cancel update to the Negative Option Rule will require businesses to make it easy for customers to cancel products and services with recurring payments. It will impose penalties on businesses not complying, emphasizing transparency, fair practices, and user-friendly interactions. There is industry pushback against this new rule but businesses would benefit from preparing for its implementation by updating their cancellation process.