The Federal Trade Commission took action in August against Experian over the company’s marketing of credit watch services. I am unhappy about the FTC’s handling of the case, and I want to tell you why.
We begin with the facts. The FTC charged that, starting in 2000, Experian deceptively marketed free credit reports by not adequately disclosing that consumers would automatically be signed up for a credit report monitoring service costing $79.95 annually if they didn’t cancel within 30 days. The settlement was reported in the Aug. 15 issue of DM News. The case began with a complaint filed by the Electronic Privacy Information Center and with a report from the World Privacy Forum.
That WPF report, released in February 2005 and updated in July, is noteworthy. It found that the federal requirement for free credit reports was used by more than 200 Web sites as an opportunity to deceive and misdirect consumers. The method was to attract consumers seeking free credit reports, then collect personal information or send the consumers to for-pay credit report sites.
The WPF’s findings only add to the Internet’s reputation as a hotbed for sleazy operators looking to cheat consumers. The credit bureaus contributed to this by refusing to let legitimate organizations offer links to the one-and-only legitimate free credit report site (www.annualcreditreport.com). It wasn’t until the WPF report came out that the bureaus were embarrassed into allowing linking to the legitimate site. You can find the WPF report at http://worldprivacyforum.org/wpf_cdcstudy2_summary.html.
The FTC charged Experian under a statute that prohibits unfair or deceptive trade practices. Experian’s Web site said free all over the place, but consumers who accepted Experian’s pitch ended up buying a service that continued forever until the consumers objected. Experian had more than 9 million customers for this service, which began before the law requiring free credit reports was enacted.
Under the consent decree, Experian effectively promised not to continue with the deceptive practices, to pay a fine of just under $1 million and to offer refunds to some consumers. Other standard conditions apply as well, including compliance monitoring.
What’s so terrible here? From one perspective, it’s a standard set of conditions. The consumer refunds are a good feature. Too often, the FTC’s principal interest is in being able to pat itself on the back through a trophy press release. The commission rarely seeks to obtain recovery for consumers.
Here’s my problem. Experian reportedly had 9 million customers paying $80 a year. That’s $720 million in revenue. Since some of those customers paid for more than one year of service and many are continuing customers, the total revenue probably exceeds $1 billion. That’s a lot of money for a service based on an unfair or deceptive practice.
What’s the consequence of violating the law? A fine of less than $1 million, plus refunds that might be a few million dollars more. But let’s say that the fine and refunds total $25 million. That is a pittance relative to the revenue.
How many companies would have done the same thing if the worst result is a fine and a refund amounting to a few percent of the take? I wouldn’t be surprised if Experian rationally weighed the risk of prosecution against the potential revenue and decided that it would take the chance. I don’t have any knowledge of internal Experian deliberations, but I would bet that some of the honorable people at Experian raised the issue squarely.
History shows that any action from the FTC would take years to get started. In this case, the FTC settlement came five years after Experian initially offered the service. It also is clear that the FTC is a paper tiger. A big company with an army of lawyers knows that it can get away with anything, and any FTC action won’t hurt in the end.
The three national credit bureaus have a long history of consent decrees with the FTC involving activities that violated the law, were unfair or deceptive, or otherwise hurt consumers. Yet the FTC does nothing to continuously monitor credit bureau conduct or to seek pre-approval for any new marketing or data sales scheme. The FTC acts like each violation is the first by a company with clean hands otherwise. The lack of real consequences for violating the FTC’s statute only invites more exploitation of consumers.
I have to provide an extensive disclosure for this column. I’ve worked with and for both EPIC and the World Privacy Forum. I did not work on the complaint or with the WPF’s report. I also had a relationship with Experian. For some years, the company operated a Consumer Advisory Council that met several times a year. Members included consumer and privacy representatives, Experian customers and other industry folks. I was paid a small sum (plus travel expenses) to attend meetings. Experian discussed some of its products and services with the council. I may have participated in discussions about credit watch services, but I don’t have any specific recollection. The council provided a useful opportunity for people on all sides to share perspectives on many issues. You may not believe me, but I have a more sympathetic view of Experian as a result of my service on the council.
Finally, it will come as no surprise that I have no relationship with the FTC. I remain a constant critic of the agency for doing a lousy job protecting consumers.