As a Service | Selling to consumers using a subscription model

The trend of offering goods and services on a subscription basis – or "as a Service" – began with digital content such as music and films. More recently, gaming has joined the trend, and physical products are increasingly available on a subscription basis, from recipe boxes to socks, cars and coffee. A poll at our recent client webinar on switching to a subscription model found that it was already the main pricing model for 34% of the audience's businesses – and 30% had started to introduce it into their business.

"Subscription law" does not exist as a distinct field. Instead, a range of legal considerations come together, including consumer law, advertising law, data protection and marketing law, plus financial services regulation in some cases.

The 'subscriber journey'

What needs to be done to get the subscriber journey right? When designing the user interface for subscription services, e-commerce legislation must be complied with. This, for example, includes requirements around the provision of pre-contractual information, which must include (amongst other things) a description of the good or service and the terms of the subscription including the price, the contract duration, how the price changes depending on the length of the subscription, information about any additional delivery fees, as well as the consumer's cancellation rights and any cancellation fees. The payment button must also make it clear that on clicking, a purchase will be made and payment taken (a legal requirement that has been the subject of enforcement action in Germany).

Other requirements include making sure the full terms and conditions of the subscription are available for consumers to read and accept before entering into the agreement. The business's privacy policy must also be made available and, depending on its data processing position, either acknowledged or accepted by the consumer.

It is important to take a front-loaded, "compliance by design" approach to these legal requirements. The detail in this area is important: failure to meet legal requirements may mean that the consumer may not have entered into a valid contract, or may only be bound by certain terms, or may be given certain enhanced rights, such as a significantly extended cancellation period.

Free trials

The Advertising Standards Authority (ASA) has issued guidance on free trials, which is specifically tailored for subscription services and which should be followed. Prominent wording must be included next to or close to the subscription or order button, that makes it clear whether a paid subscription will start automatically after the trial (unless cancelled), the price and financial commitment after the trial period, and any other significant conditions.

Retaining subscribers

It is very important for the business to set out its position clearly and in advance in relation to renewals and termination, in order that the terms are enforceable and consumers know where they stand. This approach will also enable the business to take advantage of options that may be available to mitigate the effects of consumers leaving.

The first point at which a subscriber might be lost is during the 14-day statutory cooling-off period, which enables consumers to cancel most contracts entered into online within the first two weeks. For services, the effects of cancellation can be mitigated: consumers can be required to pay for the services used during the cooling-off period, or a free trial period could be aligned with the cooling-off period. For digital content, the right to cool off can be waived.

Automatic subscription renewal mechanisms also need care. It is very important to make sure consumers are aware of the auto-renewal in advance of entering the contract, in order to avoid any suggestion of seeking to trap consumers in a subscription. Not only could this create legal compliance problems but it can also generate damaging publicity around the brand.

The Competition and Markets Authority (CMA) considered the issue of auto-renewals as part of its consideration of the so-called "loyalty penalty", including setting out its views on what constitutes "fair" terms for auto-renewal. Some of its proposals are onerous, such as obtaining an active opt-in from the consumer for auto-renewal, reminding the consumer about the renewal point in advance, and taking steps to prevent the auto-renewal if the customer is not actually making use of their current subscription. These provisions are not mandatory or have any legal status, but were seen as a warning shot across the bows and some businesses are voluntarily aligning their terms and conditions with the CMA's analysis.

Marketing to subscribers

When supplying to consumers, the marketing angle should always be borne in mind.

Clearly, general General Data Protection Regulation (GDPR) compliance around the handling of customers' personal data is essential, as is ensuring that the operation of cookies and other website tracking techniques are compliant with e-privacy and general privacy regimes. Wider issues range from the basics – such as whether marketing consents are structured around soft opt-ins or general consents and managed opt-outs – to more complex questions such as how to categorise the types of marketing messages planned to be sent to subscribers, and whether separate permissions are needed for each category.

Such considerations are particularly relevant for the promotion of related goods and services to the subscription and for identifying whether the consumer has given consent to being sent that type of message. It is critical to make sure that the line between marketing and service messages is not blurred.

This can be particularly difficult where users have opted out of marketing messages but the business wishes to let them know about an upgrade offer. The UK data protection regulator, the Information Commissioner's Office, recently issued a significant fine against a mobile phone network. Users had received texts about their contracts expiring and the texts also encouraged the use of an app that contained information about upgrades.

Care is also needed around campaigns to win back former subscribers.

'In life' issues

It is not unusual for a provider to want to make changes to the terms of a subscription part way through the contract term. Consumer protection law may deem certain changes to be unfair and therefore unenforceable unless the consumer has the right to get out of the contract and has given their express consent to the change.

These requirements will usually apply (amongst other things) to any increase in price and to any change to the service provider. Depending on the extent and impact of the change, they may also apply where the service itself is changed or to other terms of the contract.

It is important that business teams understand these legal constraints and that it can be difficult to change the terms of an "in life" subscription. Changes may be easier to manage for subscriptions that operate on the basis of monthly renewal, since the provider can simply say to the consumer that changes will come into effect in the next month and, if the consumer does not like them, they can cancel the subscription.

Financial services regulation

Where a subscription concerns goods, equipment or other physical assets, the long-established financial services concepts of regulated hire, hire purchase and credit come into play (as we have previously discussed in relation to gaming hardware subscriptions).

If ownership of the asset remains with the provider, but the subscriber takes possession for three months or more, the subscription is treated as a regulated hire agreement. Where the asset becomes the property of the subscriber when the subscription begins, the arrangement is essentially a "buy now, pay later" consumer credit arrangement, with the loan repaid during the course of the subscription.

These legal classifications are important because (subject to certain exceptions) they trigger authorisation requirements from the Financial Conduct Authority (FCA). It may be possible to pass the regulated activity to an FCA-authorised third party, but care is required in structuring such partnerships to ensure regulatory compliance. Carrying on a regulated activity without the requisite authorisation from the FCA is a criminal offence, so this is a high-risk area in compliance terms and is an important consideration in evaluating the benefits, risks and potential costs of moving to a subscription model.

International launches

Many businesses seek to offer the same subscription model across a number of regions and jurisdictions. It is important to recognise that there will be differences in the applicable laws between each jurisdiction – even between EU Member States where the thrust of the rules is likely to be similar, but the detail will often diverge. This can create difficulties where a single customer interface is the aim across various territories.

There is a commercial decision to be made whether to aim for full compliance in each jurisdiction or to take a risk-based approach and find a balance between the strict legal requirements and the business's needs, in line with the broader risk appetite of the business.

Osborne Clarke comment

Subscriptions are valued by both suppliers and consumers alike, whether for the steady revenue stream or their "on tap" approach, but care is needed to avoid the various legal and regulatory pitfalls. Subscriptions are potentially long-term, ongoing contracts, with payment taken at different times. Accordingly, clarity around the terms of the subscription and any related offer is particularly important, to avoid confusing or misleading the consumer or offering contracts terms which consumer protection will treat as unfair.

This is an area where enforcement bodies are active. The CMA has investigated subscription auto-renewal terms under consumer law, and (as noted) is developing principles around fair consumer contract terms. The ASA has taken action where customers were given misleading information about what they were signing up to, and has issued guidance on offering a subscription box.

EU regulators are similarly active. For example, German authorities have a strong record of enforcement in relation to consumer protection, and the Italian regulator is also very active and has powers to fine up to 5 million. The EU's New Deal for Consumers will introduce GDPR-style heavy fines for breach of consumer protection law and is likely to mean increased regulatory attention and consumer awareness.

If you would like to discuss any of the issues raised above, please contact the authors, or your usual Osborne Clarke contact.