An Overview of the Consultation Paper on Mandatory Cooling-Off Period

The Government introduced various new offences relating to unfair trade practices into the Trade Descriptions Ordinance (“TDO”) in 2012 with a view of enhancing the protection of the rights and interests of consumers. Breach of the TDO may attract criminal penalties. Enforcement efforts by the Customs and Excise Department and the Communications Authority, together with publicity and education campaigns run by these bodies and the Consumer Council, have helped raise awareness among businesses and the general public.

Changes to the TDO is however only one piece of the puzzle. In 2018, the Consumer Council received a total of 3,718 consumer complaints regarding sales malpractices, a record high in recent years. Whereas, since the implementation of the changes to the TDO and up until the end of 2018, Customs has received a total of 1,124 complaints involving suspected aggressive commercial practices of which 77 percent of these complaints related to beauty and fitness services. Some cases involve complaints against traders deploying high-pressure sales tactics to lure consumers into signing contracts and forcing them to make a substantial one-off prepayment. Other complaints concern aggressive sales practices such as preventing consumers from leaving the traders’ premises and withholding consumers’ personal belongings, taking advantage of consumers’ vulnerability eg sickness or disability; or obtaining consumers’ payment details under pretext and wrongfully collecting payments without authorisation.

It is against this backdrop that the Hong Kong Government sees the need to legislate for a mandatory cooling-off period for certain types of consumer contracts to further enhance consumer protection and deter unscrupulous trade practices.

By comparison, many other jurisdictions have already established mandatory cooling-off regimes for certain types of consumer contracts under their laws. For example, the UK entitles consumers to cancel certain distance contracts and off-premises contracts within 14 days and traders are required to refund within 14 days. Whereas in Australia, a cooling-off period of 10 business days is applicable to unsolicited consumer agreements with value over AUD$100 and traders are not allowed to accept payment during the cooling-off period. In Mainland China, there is a mandatory cooling-off period of seven days where traders supply goods to consumers by means such as Internet, television, telephone or mail order and traders must refund the price of goods to consumers within seven days of receipt of the returned goods.

On 15 January 2019, the Commerce, Industry and Tourism Branch of the Commerce and Economic Development Bureau issued the Public Consultation Paper on Statutory Cooling-Off Period for Beauty and Fitness Services Consumer Contracts (“Paper”) to seek public views on the introduction of a statutory cooling-off period for consumer contracts relating to beauty and fitness services. The consultation period ends on 16 April 2019.

Current State of Affairs

A cooling-off period is a period of time during which a consumer could cancel his or her purchase unilaterally without providing any reasons and seek refund after a contract is made. At present, some industries and retailers already offer cooling-off periods of different durations for certain goods and services on a voluntary or self-regulatory basis. For example, the Hong Kong Federation of Insurers implements a 21-day cooling-off period for life insurance products on a self-regulatory basis; the Code of Practice for Telecommunications Service Contracts issued by the Communications Association of Hong Kong stipulates a cooling-off period of no less than seven days and all major fixed and mobile network operators in Hong Kong have implemented the Code. However, there is not a universal or statutory cooling-off regime. Thus, sometimes one may see a cooling-off period on paper, but in reality the cooling-off term may be unfair or difficult to enforce, eg extremely short cooling-off periods eg 24 hours, no cancellation after commencement of services or acceptance of gifts, substantial cancellation fees, etc.

Some say that a mandatory cooling-off period can complement the enforcement efforts under the TDO. Prosecuting wrongful traders have to satisfy the criminal standard of proof of beyond reasonable doubt, which is not always straightforward. Also, at the end of the day, there are consumers who do not have a case under the TDO and do not want to complain, but only want to cancel the contract after second thoughts.

Summary of Key Points under the Proposal

In April 2018, the Council published A Report to Advocate Mandatory Cooling-off Period in Hong Kong (“Report”) which sets out the Council’s recommendation on the scope of application and operational arrangements of a mandatory cooling-off regime. Having considered the recommendations in the Report and the views expressed by different stakeholders, the Government launched a three-month public consultation period on its proposed framework for the implementation of a mandatory cooling-off period on beauty and fitness contracts. A summary of the key operational arrangements proposed by the Government in the Paper are as follows:

  • Proposed scope of application: the Government proposes to stipulate a statutory cooling-off period only to certain beauty and fitness service consumer contracts (see below our summary table on the applicable contracts and exemptions); according to the Government, statistics show that most consumer complaints relate to beauty and fitness services.
  • Value of pre-payment of contract: the consumer’s total potential payment obligation under the contracts is HK$3,000 or above, and all or part of the services are to be provided in the future.
  • Cooling-off and refund periods: the Government proposes two options: (a) three working day cooling-off with a seven working day refund period; or (b) seven calendar day cooling-off period with a 14 calendar day refund period. A balance should be struck between minimising any adverse impact of contract cancellation on the cash flow of traders and allowing sufficient time for consumers to act on their right to cancellation.
  • Information to be provided: traders are required to inform customers in writing of their right to cancel the contract within the cooling-off period; otherwise, the cooling-off period will be deemed a maximum of three months after the contract is concluded. Traders are also required to provide certain prescribed information including cancellation procedures, price payable by consumers for consumed service and cancellation fee.
  • Contract cancellation forms: forms provided in the legislation or by traders.
  • Contracting-out/waiver: curtailment or waiver of cooling-off periods is not allowed.
  • Refund arrangement: traders are required to give a refund by the same means as that used by the customers for payment; refund is done when refund instruction is given to the relevant payment service providers for non-cash transactions.
  • Deduction from refund: Traders are allowed to deduct from the refund sum:
    • Charges for services provided, calculated on a pro-rata basis;
    • Administrative fee up to three percent of the transaction amount for non-cash refunds;
    • Administrative fee up to five percent of the transaction amount for non-cash instalment payment plans.
  • Ancillary contracts: Ancillary contracts such as credit card instalment payment plans are automatically cancelled when the main contract is cancelled within the cooling-off period.
  • Enforcement regime: civil but not criminal sanctions. Customs may conduct investigations and issue enforcement notices. Contravention of enforcement notices will be a criminal offence. Appeals may be made to the Administrative Appeal Board.

Questions to be Addressed

There may however be operational issues or trade practices that have to be further addressed.

Whilst traders may charge consumers for consumed services on a pro rata basis on the total contract sum, in reality the costs for providing one-off services is usually higher than that of package services. Sample scenario: the price of one nail treatment session costs HK$300 whereas nail treatment package for 10 sessions costs HK$2,000. If the customer decides to cancel the contract within the cooling-off period and after consuming one treatment session, the consumer will only need to pay HK$200 and an administrative fee of 3-5 percent (if applicable). The beauty centre will need to bear the cost difference of HK$100. This may incentivise consumers to take advantage of cooling-off periods to get better deals at the expense of traders who will have to bear extra administrative costs in arranging refunds.

Also, if a customer exercises his or her right to cancel the contract, will traders be allowed to persuade the customer to re-consider or offer discounts and gifts during the cooling-off period? Or do they have to simply comply with the customer’s instructions and cannot offer any alternatives?

Furthermore, the Paper does not recommend any arrangements between merchants and banks or credit card companies or address credit card chargeback requests. Although it is proposed that traders will be regarded to have made a refund at the time when they have given the refund instruction to the relevant payment service providers, there may be a need for further guidance to traders, banks and credit card companies on dealing with customer refunds via merchants or chargebacks in light of the cooling-off regime.

Implication on Businesses

While the scope of the proposal is confined to specific contracts in the beauty and fitness service industries, what are the potential wider complications?

  • The Government’s initiative is yet another signal that consumer rights are on the rise. In recent years, the government has introduced legislative reforms (eg Competition Ordinance, unfair trading practices under the Trade Descriptions Ordinance) which, to various extents, enhance consumer rights.
  • This also means businesses and traders must pay more attention to compliance with the increasingly complex consumer regulatory regime.
  • The Government has left open the possibility of expanding the mandatory cooling-off period to other industries to cater for changing market practice. Indeed, some businesses are already thinking ahead and voluntarily offer customers cooling-off periods in their contracts.

In light of the Government’s initiative to improve consumer protection laws, we anticipate there to be tougher legislations against unfair trade practices and consider it important that businesses’ trade practices comply with consumer protection regimes. Meanwhile, here are a few things businesses may consider doing:

  • Review and revise consumer contracts to ensure no unfair/unreasonable terms against consumers.
  • Consider implementing voluntary cooling-off periods for lengthy and high monetary value services contracts.
  • Develop effective customer refund mechanisms.
  • Consider payment /refund /chargeback issues with banks and credit card companies.
  • Provide staff training on consumer rights.
  • Review marketing and sales policies.

Jurisdictions: 

Partner, Intellectual Property, Technology and Media, Hogan Lovells

Eugene’s practice covers the full spectrum of contentious and advisory IP and TMT work. He also advises and speaks extensively on privacy, data protection, consumer protection and advertising – areas which are rapidly-changing. He features regularly in journals and seminars concerning intellectual property, data privacy, domain names and advertising laws. He is recognised as an outstanding practitioner by various publications including Chambers Asia Pacific and Managing Intellectual Property.

Associate, Intellectual Property, Technology and Media, Hogan Lovells

Catharine has extensive and practical experience in both contentious and non-contentious IP matters with a focus on trade marks. She regularly advises on IP protection, litigation and portfolio management regionally and globally. Apart from IP, Catharine also advises on issues concerning advertising and trade descriptions, data protection and privacy laws.