A Closer Look at the FTC’s New Junk Fee Rule

On October 11, the Federal Trade Commission (FTC) announced a proposed new rule that, if adopted, would completely transform the manner in which businesses disclose their pricing to consumers. Intended to provide more transparency to consumers, the rule addresses the following “junk fee” practices:

• Hidden Fees: According to the FTC, many businesses routinely engage in dishonest “bait-and-switch” pricing tactics that hide mandatory fees and thus deceive consumers into believing that a price to be lower than it actually is. The proposed rule would prohibit businesses from advertising prices that hide or leave out any mandatory fees.
  
• Bogus Fees: The FTC also notes that many businesses tack on mysterious fees to their services and routinely misrepresent or obscure their nature and purpose. The rule would prohibit such companies from misrepresenting fees and require them to disclose upfront the amount and purpose of the fees and whether they are refundable.

Background for New Junk Fee Rule

The FTC initially announced its intent to create a rule addressing junk fees on October 20, 2022, at which point it requested input from consumers on the nature and extent of the fees they found troublesome. After reviewing more than 12,000 comments submitted by the public, the agency identified nine market sectors in which junk fee practices are widespread:

1. Hotels and short-term lodging: Consumers stated that hotels, online travel agencies, and vacation rental providers often obscure costs such as resort fees and cleaning fees in advertised nightly rates, artificially lowering the true cost of hotel rooms and vacation rentals.
   
2. Live event tickets: Numerous comments described the difficulty of purchasing tickets at advertised prices because ticket sellers inflate these prices with fees, which can increase the price of tickets by as much as 30% to 40%. Commenters also questioned the vague meaning of “convenience” fees, and the stated purposes of other ticket fees.
   
3. Restaurants and prepared food and grocery apps:Consumers submitted numerous comments about restaurants and prepared food and grocery delivery services. They noted that restaurants routinely add fees to bills that were not previously disclosed, using various names (e.g., “service fee,” “hospitality fee,” “kitchen fee,” “equity fee,” “economic impact fee,” “temporary inflation fee”) that do not identify their nature or purpose.
   
4. Transportation: Commenters made similar observations about transportation-related goods and services. They noted that airlines fail to include mandatory fees in advertised prices and frequently misrepresented fees. They also described advertising for car rentals that misrepresented total costs to consumers by delaying the disclosure of mandatory fees that inflated amounts consumers had to pay.
   
5. Telecommunications: Individual comments about telecommunications, including internet, television, and telephone services, noted that consumers are confronted with advertised rates that do not include mandatory fees, which are only disclosed after consumers contract for services and in ways that consumers find difficult to understand.
   
6. Rental Housing: Comments from individual consumers and consumer protection organizations stated that leasing companies frequently advertise monthly rents that do not include fees for mandatory ancillary services of unclear purpose that unexpectedly and significantly increase renters’ monthly expenditures.
   
7. Education: The comments noted that higher learning institutions often charge additional fees that are not included in their advertised tuition fees, and that the rate of these ancillary fees is increasing faster than the cost of tuition. It was further observed that mystery tuition and fee pricing models particularly affect Black and Indigenous communities and other communities of color.
   
8. Financial services: Many comments concerned excessive and obscure fees charged in connection with bank accounts, credit cards, and other financial products. The FTC also took note of a 2018 Consumer Reports national survey in which 37% of consumers reported being charged a hidden fee for personal banking, and 36% reported hidden fees for credit cards and 24% for investment services.
   
9. Correctional services: Consumer and policy groups also commented on a number of unfair or deceptive practices regarding fees imposed on incarcerated people by private correctional services.

The Mechanics of the Junk Fee Rule

Under the proposed rule, businesses are prohibited from offering, selling, or advertising a price that consumers must pay without “clearly and conspicuously” disclosing the “Total Price,” which must be displayed more prominently than any other information relating to the price the consumer may pay.

Total Price Definition and Placement

While the definition of “clear and conspicuous” falls in line with the FTC’s use of that term in other rules, the expansive definition of Total Price in the proposed rule is worth a close look, as it appears to require significant changes to the manner in which many businesses currently display their pricing information. Total Price is defined as the maximum total of all fees or charges a consumer must pay for goods or services, plus any mandatory ancillary good or service (i.e., a good or service that is part of the same transaction and is necessary to render the primary good or service fit for its intended purpose), but shipping charges (i.e., those that reasonably reflect costs for sending physical goods through the mail) and government charges (i.e., taxes) may be excluded.

In addition, the proposed rule requires the Total Price must be displayed more prominently than any other pricing information. If the rule becomes final in its current form, businesses will be prohibited from discussing any discounts or rebates that might apply to a price without prominently displaying the Total Price before the discounted price that consumers will actually pay. This has the potential to cause serious disruption absent any changes, as it runs contrary to many commonly accepted marketing practices.

Prohibited Misrepresentations under the Junk Fee Rule

The proposed rule makes it unlawful for any business to misrepresent the nature and purpose of any fees, including whether such fees are refundable, and the precise product or service covered by the fee. It also requires businesses to clearly and conspicuously disclose the nature and purpose of any amount that is excluded from the Total Price before a consumer consents to pay the listed amount.

To illustrate how this aspect of the rule might play out, the FTC provided an example: If a meal delivery app includes a mandatory service charge as part of the Total Price, and one portion of the “service charge” covers a payment for the delivery driver and another covers the maker of the app, a blanket “mandatory service charge” description would violate the rule. Instead, those specific amounts must be specified, along with providing accurate information about any other fees that are excluded from the Total Price, such as shipping charges, government charges, optional fees, and tips, and whether those amounts are refundable.

Relationship With State Laws

Despite the sweeping nature of this proposed rule, the FTC expressly stated that the rule would not supersede or affect any state statutes, rules, or regulations concerning unfair or deceptive fees except to the extent there is any inconsistency, and also made it clear that if a state law provides greater protection for consumers than the FTC rule, then the state law would prevail.

Inter-Agency Coordination

Significantly, the FTC timed its announcement of the new proposed rule to coincide with a White House press release discussing the Administration’s efforts to “crack down on junk fees and bring down costs for American consumers.” Also on October 11th, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion stating that large banks and credit unions must provide basic information to consumers without charging any fees.

It has also been reported that other federal agencies, including the Federal Communications Commission (FCC), the Department of Housing and Urban Development (HUD), and the Department of Transportation (DOT), are working on their own efforts to combat junk fees in the areas they regulate.

Key Takeaways for the New Junk Fee Rule

While some companies are more transparent than others when it comes to the fees they charge, few if any businesses provide the level of detail required by the current version of the rule as proposed by the FTC. If adopted in its current form, a significant percentage of consumer-facing businesses would need to make significant changes to how they market and advertise their goods and services to the public.

Any company with a stake in the eventual outcome should take the time to review the proposed rule in its entirety to ensure that compliance will not present an insurmountable obstacle. If any potential compliance-related issues are identified, they should be described in comments to the proposed rule, which the FTC will then consider before issuing the final rule.

Unless the deadline is extended, the FTC will be accepting comments for 60 days following the publication of the proposed rule in the Federal Register.

FAQ

1. What are junk fees? Junk fees are additional charges that companies add to the price of a product or service, often without clear disclosure or justification. These fees can include mandatory service charges, processing fees, or other costs that are not included in the advertised price and can significantly increase the total amount paid by consumers.
   
2. What is the Junk Fee Prevention Act? The Junk Fee Prevention Act is proposed legislation aiming to eliminate various excessive fees that consumers face. It focuses on curbing unnecessary costs in online ticket sales, family seat selection on airlines, early termination of services, and unexpected resort or destination fees. It's supported by prominent consumer groups such as the Consumer Federation of America, National Consumers League, and Consumer Reports, which underscores its commitment to protect consumer interests.
   
3. What are hidden junk fees? Hidden junk fees are additional costs that are not clearly disclosed to the consumer at the time of advertising or initial price quotation. These fees can be buried in the fine print, only to be revealed at the time of purchase or billing, making it hard for consumers to know the true cost of a service or product upfront.