Are You Unfair or Deceptive?

As I mentioned last month, there is a new surge of activity within the banking industry in the name of UDAP. This surge of activity shows that the bank regulators have also been tasked with not only evaluating whether the bank they are examining is being neither unfair nor deceptive when providing services to their consumers, but these examiners have been mandated with protecting all consumers.

This means that any activity of any merchant at that bank is under scrutiny by those examiners and the onus is on the bank to defend your business practices as being neither unfair nor deceptive. It seems that the measure they begin with is, “Has there ever been a chargeback or unauthorized transaction?”

Based on the information above, one can conclude that the focus remains on protecting the consumer regardless of any deception the consumer may utilize in defrauding merchants, such as, claiming that they did not authorize their purchase.

To examiners, a chargeback is an indication that a consumer has been harmed and if there is more than one chargeback then this is viewed as a pattern and creating significant risk to a bank.

If U.S. merchants are going to be judged by the FTC Act it might be good for merchants to gain an understanding regarding it. To facilitate this understanding, let us look at what the FTC has shared publicly about it.

Understanding who the FTC is and their focus on illuminates the basis for their bias when evaluating merchants business practices. As stated on their website,

“When the FTC was created in 1914, its purpose was to prevent unfair methods of competition in commerce as part of the battle to “bust the trusts.” Over the years, Congress passed additional laws giving the agency greater authority to police anticompetitive practices. In 1938, Congress passed a broad prohibition against “unfair and deceptive acts or practices.”

Since then, the Commission also has been directed to administer a wide variety of other consumer protection laws, including the Telemarketing Sales Rule, the Pay-Per-Call Rule and the Equal Credit Opportunity Act. In 1975, Congress gave the FTC the authority to adopt industrywide trade regulation rules.

In a nutshell, the FTC is there to protect consumers from businesses, and businesses from each other.

The FTC produced a written statement in 1980 that addresses Section 5 of the FTC Act as well as defines what constitutes “unfair” consumer practices. The entire statement can be found at bcp/policystmt/adunfair.htm.

There are three factors the Commission considers when evaluating consumer unfairness. They are:

  1. whether the practice injures consumers;
  2. whether it violates established public policy;
  3. whether it is unethical or unscrupulous.

When determining consumer injury, the event must satisfy three tests: It must be substantial; it must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and it must be an injury that consumers themselves could not reasonably have avoided.

Regarding the second factor, public policy violation, they write “To the extent that the Commission relies heavily on public policy to support a finding of unfairness, the policy should be clear and well-established. In other words, the policy should be declared or embodied in formal sources such as statutes, judicial decisions, or the Constitution as interpreted by the courts, rather than being ascertained from the general sense of the national values. The policy should likewise be one that is widely shared, and not the isolated decision of a single state or a single court. If these two tests are not met the policy cannot be considered as an “established” public policy for purposes of the S&H criterion. The Commission would then act only on the basis of convincing independent evidence that the practice was distorting the operation of the market and thereby causing unjustified consumer injury.”

The Commission determined that that third factor of unethical or unscrupulous was redundant as those behaviors would have surely resulted in consumer injury or been dealt with in public policy and as the Commission has never relied on the third criteria, they will only act upon the first two in their activities.

The Commission was kind enough to provide a statement regarding deceptive acts. This statement was published in 1983 and you can find it online at

Three elements were determined to formulate deception. “First, there must be a representation, omission or practice that is likely to mislead the consumer. Second, we examine the practice from the perspective of a consumer acting reasonably in the circumstances. If the representation or practice affects or is directed primarily to a particular group, the Commission examines reasonableness from the perspective of that group. Third, the representation, omission, or practice must be a “material” one. The basic question is whether the act or practice is likely to affect the consumer’s conduct or decision with regard to a product or service. If so, the practice is material, and consumer injury is likely, because consumers are likely to have chosen differently but for the deception.”

Based on the information above, one can conclude that the focus remains on protecting the consumer regardless of any deception the consumer may utilize in defrauding merchants, such as, claiming that they did not authorize their purchase. As Johann G. Seume muses, “Nothing is more common on earth than to deceive and be deceived.”

Ironically, it is this very consumer act of deception at one bank that causes the merchant to be investigated at another bank and ultimately by the Commission. Since this is today’s reality, ensure that your business practices are both fair and clear to the average consumer.


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