Consumer issues with loyalty schemes

Customer Loyalty Schemes are an increasingly popular form of marketing and are recognised as effective promotion tools.  Consumers earn points, discounts or other incentives when they participate in a brand’s Loyalty Scheme.  By being rewarded for their purchases, customers are incentivised to make repeat purchases and develop brand loyalties.

These Schemes are not without issues.  In the last five years, Australian regulators have received approximately 2000 complaints.   As a result, the Australian Competition and Consumer Commission (ACCC) has undertaken a critical review of these Schemes.

The ACCC’s draft report was released in September.  It assessed the complaints received through a consumer, data and competition lens.  Stakeholder submissions were due on 3 October with the ACCC reviewing those to develop its final report.

We elaborate on the ACCC’s preliminary view on the consumer law issues and the data and competition issues identified below.  The issues are likely to be looked at closely by the New Zealand Commerce Commission.

Consumer law prohibitions

The ACCC’s concern is that Loyalty Schemes do not comply with consumer law.   The ACCC identified the following prohibitions in the Australian Consumer Law 2010 (ACL) that, in its view, are engaged in this space:

  • Unfair contract terms – standard form consumer contracts must not contain unfair terms. A term is unfair if it would cause a significant imbalance in the parties’ rights and obligations, it is not reasonably necessary to protect a legitimate interest of the party advantaged by the term, and it would cause detriment to the other party if it was relied on.
  • Unconscionable conduct – a brand must not engage in conduct that is against good conscience (determined by reference to the norms of society). Unconscionable conduct goes beyond mere unfairness.

With the exception of the prohibition against unconscionable conduct, the above prohibitions mirror those in New Zealand’s Fair Trading Act 1986.  We note too that our government has recently indicated its intention to amend the Fair Trading Act to include an unconscionable conduct prohibition.  Given our similar regulatory frameworks, the ACCC’s concerns are highly relevant to how Loyalty Schemes operate in New Zealand.

Consumer issues

The ACCC is concerned that consumers are not adequately informed about the terms and conditions of the Loyalty Schemes in which they partake.

Consumers have complained that:

  • they have not earned, maintained or redeemed points or benefits in the manner that they anticipated;
  • they are confused as to how they earn points or benefits, particularly with a brand’s affiliates;
  • they are unexpectedly faced with barriers to using their points or benefits, such as the payment of a fee;
  • they are not adequately advised about critical components of their Loyalty Schemes, such as the need to remain ‘active’ or that points or benefits are about to expire; and
  • brands have unilaterally changed the way points or benefits are earned, maintained or redeemed.

The ACCC’s preliminary view is that:

  • lengthy and unclear terms make it difficult for consumers to find the relevant information and to make informed choices;
  • brands do not do enough to communicate to consumers critical components of their Schemes;
  • terms that provide for the expiry of points might be unfair contract terms; and
  • a contractual right to unilaterally change the way points or benefits are earned, maintained or redeemed may also amount to an unfair contract term.

The ACCC recommends that brands:

  • improve how they communicate with consumers to facilitate a genuine opportunity for consumers to review and understand their Scheme and its operation;
  • review their approach to presenting terms and conditions to consumers to ensure that changes are fair and adequately notified;
  • ensure that Schemes comply with the consumer law by avoiding statements that are incorrect or likely to create a false impression;
  • ensure that Schemes do not operate so as to mislead consumers; and
  • do not include or rely on terms that are unfair contract terms.

Data practices

Loyalty Schemes benefit brands in a myriad of ways.  As well as influencing the buying behaviours of consumers and fostering brand loyalty, brands are able to collect consumer’s data.  That data is then used to inform brands, and their affiliates, of consumer preferences.

The ACCC is particularly concerned that Loyalty Schemes deny consumers meaningful control over the use of their data.  Schemes lack transparency, are inaccessible and do not adequately inform consumers as to how their data is being used.

Competition issues

The ACCC has also signalled that Loyalty Schemes may give rise to competition issues given their propensity to dictate consumer’s buying behaviours.  Competition issues may arise when operators of Loyalty Schemes ‘lock up’ customers and introduce switching costs that increase barriers to entry and accordingly, expansion for rival firms.


The ACCC’s preliminary view is that Customer Loyalty Schemes are problematic.  This report provides an important head start for New Zealand brands operating Loyalty Schemes.  The ACCC’s views provide an opportunity for New Zealand brands to be proactive, take stock and reflect on the operation of their Loyalty Schemes and review their terms and conditions for unfair contract terms.  No doubt the Commerce Commission will be taking notes and will be awaiting the ACCC’s final report which is due before the end of the year.

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