Yesterday the Government made announcements which formalise several of its proposals in the field of employment law reform.  Its stated aim is to “safeguard workers’ rights, while deregulating to reduce the onerous and unnecessary demands on businesses” (Vince Cable, 23 November 2011).  The main provisions are that:

• From 6 April 2012, the qualifying period for unfair dismissal will increase from 12 months to 2 years.  If you are considering a recruitment drive in the near future, particularly for senior positions, it would be prudent to delay the employment start date to a date on or after 7 April 2012 so as to protect your business from unfair dismissal claims for an additional 12 months.
•  The Government has recognised that employers find the current Tribunal system “far too costly, and time consuming, and complex”.  In order to reverse the tendency for the Tribunal to be the first option, rather than the last resort, it will become compulsory to attempt to mediate all claims with ACAS prior to pursuing a claim in the Employment Tribunal.
• Hand in hand with this, the decision has been made to consult about introducing fees in order to lodge a Tribunal claim.  The Government will be consulting about the idea of imposing a fee for lodging a claim in the first place or, alternatively, for proceeding to a hearing – with those seeking to claim £30,000 or more paying a larger fee to have their claim heard.
• There will be consultation about introducing ‘protected conversations’, as the Prime Minister explained in a speech on 10 November 2011, “so a boss and an employee feel able to sit down together and have a frank conversation – at either’s request”.  Vince Cable expanded upon this suggestion yesterday by saying that “These will allow employers to raise issues such as poor performance or retirement plans in an open way, free from the worry it will be used as evidence in a subsequent Tribunal claim”.  If such a concept is introduced, it is likely to be the source of significant relief to line managers and HR professionals who currently face the difficult task of orchestrating a ‘without prejudice’ conversation with employees (who often misunderstand the concept) whilst having little certainty that the scene will not be replayed before a Tribunal at a later date.
• The Government will consider evidence for or against reducing collective redundancy consultation periods from the current maximum of 90 days (in relation to proposed dismissals of 100 employees or more) to 60, 45, or 30 days.  It will also consider evidence for reducing the scope of the TUPE Regulations – to the extent that it is possible to do so without breaching European legislation.

 Additionally, the Government published following proposals:

• It will be considering options for a ‘rapid resolution scheme’, to enable simple claims such as a dispute over holiday pay to be settled without the need for a Tribunal hearing.  The example given was that perhaps an independent legal expert might be able to decide such a case on the basis of paperwork alone.
• There will also be consultation about simplifying the way in which employee and employer can settle a dispute by means of a compromise agreement, for example by introducing standard form documents which will be renamed ‘settlement agreements’.  Legislation will be amended so as to satisfy parties that compromise agreements can be validly used to settle discrimination claims.
• It will close a loophole (created by the case of Parkins v Sodhexo) which exists in whistleblowing cases which permits employees to bring whistleblowing claims about breaches to their own contracts of employment.
• Employment Tribunals will be able to levy financial penalties against employers who breach employment rights, payable to the Exchequer, subject to the discretion of the Tribunal judges to waive the penalty where there has been no deliberate breach of rights.  The maximum amount payable will be £5,000.
• Mr Justice Underhill (who is currently President of the Employment Appeals Tribunal) has been asked to conduct a fundamental review of employment tribunal rules of procedure, and has been asked to produce a revised code by the end of April 2012.  The aim of this review is to modernise Tribunals and reduce the number of instances where an employer settles a case not as a result of its merits but instead because it elects to save itself the time and expense of defending itself against a claim.  It has already been decided that, from April 2012, the maximum amount a business can recover from a vexatious claimant will increase from £10,000 to £20,000 and that the maximum deposit order a judge can make against a claimant (where it is considered that part of a claim is unmeritorious) will be increased from £500 to £1,000.
• The Home Office has agreed that, from 2013, CRB checks will be accessible online so that one person’s record can be updated from time to time and be “universally portable” instead of a fresh application having to be made every time that person moves jobs or starts a new contract.
• Even though the Agency Workers Regulations have only just come into force, the Government has said that it will review these in 18 months’ time with a view to simplifying them.  It has said that it will also be looking to do the same with the National Minimum Wage Regulations by, amongst other things, merging the current 17 different regulations into one consolidated set.
• The Government will also be looking at ways of simplifying (and presumably making less expensive in terms of time if not money) the dismissal process.  First, the Government will be seeking views on the idea of creating ‘compensated no-fault dismissals’ for micro-businesses – i.e. those with 10 employees or fewer.  The idea here is to seek to address the criticism that dismissal procedures are too onerous, particularly for small businesses.  However, at this point in his speech Mr Cable was at particular pains to stress that it would be important to seek views from those on the side of both employer and employee.  Secondly, it will seek to make the dismissal process for all employers “simpler, quicker and clearer”, for example by making changes to the ACAS Code of Practice.
• There are plans that maternity and paternity leave should be “modernised … so that it becomes shared and flexible parental leave”.  Mr Cable suggested that the right to request flexible working could be extended to everyone – to assist those who might be looking after not only children but also elderly relatives, a sick partner or grandchildren.

As you can see, there is enough here to keep a lot of civil servants (and Mr Justice Underhill, for that matter) busy for a very long time to come!  In relation to the latter points, and those currently subject only to an evidence gathering exercise, it is to be anticipated that some of the proposals will fall by the wayside in the months or years that follow.   Having said that, there is much here that is positive news for employers in that some changes will be made to the current regime that will have the effect of making it simpler and cheaper to manage and dismiss employees and, if necessary, defend claims that might subsequently arise.

Further to my update on 16 November, the Government has today made announcements which formalise several of its proposals in the field of employment law reform. The main provisions are that:

•  The qualifying period for unfair dismissal will increase from 12 months to 2 years from April 2012
• It will become compulsory to attempt to mediate all claims with ACAS prior to pursuing a claim in the Employment Tribunal
• As explained in my note of 16 November, there will be consultation about introducing ‘protected conversations’, “so a boss and an employee feel able to sit down together and have a frank conversation – at either’s request” – albeit that these will not extend to discrimination matters.
• The Government will consider evidence for or against reducing collective redundancy consultation periods from the current maximum of 90 days to 60, 45, or 30 days.

A press release providing more information about these proposals is available here. 

 …. well, it seems that the Government is going to try to help employers by making such conversations less risky.

 At the moment, if an employer tries to have a frank conversation with an employee there is a risk that the employee could regard the employer as having breached the implied term of trust and confidence enabling the employee to resign and claim constructive unfair dismissal – relying on the words said in court. Alternatively, an employer who attempts to have an ‘off the record’ or ‘without prejudice’ conversation – i.e. one which should not subsequently be referred to in a future Tribunal – is only properly protected if that conversation takes place in circumstances where a genuine dispute has already arisen.

 Last week the Prime Minister gave a speech in which he said he would initiate a consultation on introducing “protected conversations, so a boss and an employee feel able to sit down together and have a frank conversation – at either’s request“. It is not yet known what form these “protected conversations” might take but, taken together with the forthcoming increase in the qualifying period for unfair dismissal from 12 months to 2 years, they should provide additional protection for employers and it is news that HR professionals are likely to welcome.

A full transcript of the speech is available here.

North Surrey’s internet-based Brooklands Radio has partnered with Suzanne Dibble, award-winning business lawyer and Consultant Solicitor with Virtual Law, to create a new monthly radio programme, “Real Life Business Law.”

Each month Suzanne will be in the online station’s studio discussing with local entrepreneurs how business law can help small businesses.  The programme launched in April and featured well-known Surrey businesswoman Samantha Jones and her prestige homes sales agency Home Truths.  Discussion focussed on how she could protect her brand.

“Before speaking to Suzanne I was really in the dark about how to best protect my brand and I’m sure lots of local business people are in the same position,” says Samantha. “I am positive other local businesses can benefit from invaluable advice like this simply by listening to Suzanne’s Real Life Business Law programme.”

The show deals with topics that really matter to small businesses.  These include, how to structure your business; what to think about when entering into a partnership agreement; the first steps in setting up a franchise; what duties you have as a director; taking on affiliates; what to do about Intellectual property infringement; and taking on an assistant and outsourcing considerations.

Brooklands Radio’s Graham Laycock, the programme’s producer, commented, “Brooklands Radio is really building up a reputation for valuable business-focussed shows and we are delighted that Suzanne is sharing her many years of experience with our business listeners.”

Real Life Business Law is monthly on Fridays at 12.30pm, repeated Wednesday at 6.0pm. Go to www.brooklandsradio.co.uk to check the programme listings and press the Listen Live button. If you would like to talk to Suzanne about how business law can help your business on the Real Life Business Law programme, email graham.laycock@brooklandsradio.co.uk.

I was recently asked to comment on the titanic struggle between Alfa Telecom and Cukurova in the BVI for the Wall Street Journal.  It is in an article by Guy Chazan of 4 March.  You can find it on WSJ.com, though I think you have to be a subscriber in order to get the full text of the article.

This case is obviously of no little commercial significance, but there are also some interesting legal points.

For those of you in need of a recap, Alfa is the business empire of Russian Oligarch Mikhail Fridman.  An equally newsworthy magnate, Mehmet Emin Karamehmet, is chairman of Turkey’s Çukurova Holdings.  The dispute is, ultimately, all about who ends up controlling Turkey’s largest cellphone company, named delightfully to the point, “Turkcell”.

The WSJ article does not really go into the background of the dispute, but, in February last year, the colourful Turkish tycoon found himself convicted of embezzlement and sentenced to 11 years in Turkish Chokey as a result of his bank’s collapse in 2002.  The collapse had also left him owing rather a lot of money ($5.1 billion).  To cut a long story short, in order to keep up the payments an indirect interest in Turkcell was put in hock to the Russians.   Alfa acquired a block of shares and a further block was given as security for Alfa’s loan.  If these further shares were added to what Alfa already held, it would give Alfa a controlling interest in Turkcell.

All this greatly annoyed  Scandinavian telecoms outfit TeliaSonera, who rather though it had been promised the same shares; TeliaSonera obtained an arbitration award to prove it, which everyone promptly ignored.

In due course Alfa alleged breaches of the loan agreement and accelerated the loan, calling for repayment in full.  Inter alia, Alfa seized upon the damages award to TeliaSonera.  This, it was said, had a material adverse effect on the value of Çukurova and that was an event of default that entitled Alfa to accelerate the loan and then enforce against the shares.  Subsequently Çukurova tendered payment of the loan in full.   Alfa seems to have taken the view that it would rather have control of Turkcell than its money back.  In the words of the WSJ article:

After a series of legal actions in London, the case was referred to the High Court of the British Virgin Islands, which ruled that Alfa was not entitled to demand Cukurova repay its loan. Alfa appealed that decision in the Eastern Caribbean Court of Appeal, based in St. Lucia. The court held a hearing on the case in Antigua last December, and then proceeded to take written submissions. It’s expected to announce its decision in the coming weeks.

Legal observers say Alfa is in a strong position. “Alfa has very reasonable prospects for a successful appeal,” said James Hilsdon, an expert on British Virgin Island law who has followed the Alfa-Cukurova case. “It got tantalizingly close to victory last time.”

He said Alfa had been able to show that it didn’t act in bad faith, that it was entitled to appropriate the shares, and had the right to enforce the security on the loan. Alfa had failed by only a narrow margin to establish an event of default on the part of Cukurova that would trigger exercise of these rights, he said. This aspect of the decision, however, was susceptible to challenge.

Whatever the result of the Court of Appeal’s deliberations may be, I will standby the comment that the first instance judgment was certainly worth an appeal on the merits.

Power of Appropriation

One of the interesting aspects was that Alfa relied upon the “power” (or, rather, right) to appropriate the shares pledged as security pursuant to the Financial Collateral Arrangements (No. 2)  Regulations of 2003, implemented pursuant to an EU Directive.   This means that, where Çukurova was in breach, Alfa was perfectly entitled to rely upon right to appropriate the shares and to do so in preference to accepting repayment of the loan.  This issue went right up to the Privy Council, who pronounced in Alfa’s favour on the point.

This EU-derived law is somewhat contrary to the attitude taken by English law, which will always tend to allow the court to grant relief from enforcement of the security in cases such as this, where the sum due could ultimately be paid.  The BVI common law is steeped in such principles and the first instance judge is himself an English Chancery Silk.   Whatever, the EU-derived Regulation may say, the English legal mind will tend to the view that the mortgagee should be satisfied by repayment and not seek to obtain the security in preference.  While, the judgment does not find that Alfa was in bad faith and accepts that, in an event of default by Cukurova, it would be entitled to act to perfect and enforce its security, there is nevertheless a sense that the Court was not in sympathy with what it perceived were Alfa’s commercial aims.

In contrast, the Court adopted a generous view of Cukurova’s position in relation to certain alleged Events of Default.  These related to debts said to have been incurred by Cukurova.  Despite the size and sophistication of the Cukurova Empire, the Court had no apparent issue with contradictory and imprecise descriptions in Cukurova’s accounts of payments received by Cukurova and variously described as “loans” and “capital contributions”.  The Court had no apparent difficulty in accepting such “Turkish” accountancy practices.

Alfa had some very strong points.  True, it did rather dilute their impact by a somewhat “kitchen sink” approach, which caused it to include some less compelling allegations of breach (it had given notice of some 16 breaches to Cukurova).  Even so, Alfa got tantalisingly close to victory and the question is, should it not have succeeded?

Material Adverse Effect

The BVI High Court appeared to accept that the Teliasonera arbitration award did have a materially adverse effect on Cukurova’s finances.  Why, then, did Alfa lose?

Under the terms of the agreement between Alfa and Cukurova, an Event of Default occurs on the occurrence of any event or circumstance that, in the opinion of Alfa, has, or is reasonably likely to, have a Material Adverse Effect.  This, in essence, means an adverse effect on Cukurova’s finances and the Teliasonera arbitration award was said to represent such an adverse effect.

The BVI High Court accepted that the arbitration award could be considered as having a material adverse effect.   Indeed, t would be hard to argue that the arbitration award was not a circumstance that had, or was likely to have had, an adverse effect on Cukurova.   By the award, Cukurova was liable to transfer shares to Teliasonera and it could no longer do so.  The result was likely to be a very substantial damages award given that the consideration for the transfer of the shares to Teliasonera was US$ 3.1 billion.

What the BVI High Court did not accept was that “in the opinion of Alfa” the award had, or was reasonably likely to have had, such an effect.  This calls for some explanation given that Alfa were alleging this as one of (quite a number of) the events of default on the part of Cukurova.

In Alfa’s letter accelerating the loan (sent on 16 April 2007), the sole director of the Alfa entity concerned expressed Alfa’s view that the arbitration award was an event likely to have a material adverse effect.  It might reasonably be thought that such a letter could, indeed must, be definitive of Alfa’s view; a letter has been sent by Alfa expressing this view, signed by its director.

Rather than accept this, the Court embarked upon a lengthy exploration of the internal decision-making process of Alfa before coming to the conclusion that the relevant directing mind and will for the purpose of establishing what opinions were held by Alfa did not form the opinion that the award was a material adverse effect for the purpose of accelerating the loan.

While the finding of fact that the author of the 16 April letter was not Alfa’s directing mind and will may be impossible to disturb, it is certainly open to Alfa to assert that the Judge misdirected himself on the issue of whether that was a legally relevant matter.  There must be a very strong argument in Alfa’s favour to the effect that the letter, sent on Alfa’s behalf with apparent authority, must be taken to be that company’s view.  Could it seriously be argued that, if such a letter had contained a concession, Alfa would not be bound by it?

If there was a lack of authority on the part of the author of the letter, that would seem to be an internal matter to be taken up between its author and the “directing mind”, which, in any event, could have ratified any decision that might have been made by the author in excess of his authority.

It is not at all clear how any defect in actual authority in this instance could render the contents of the 16 April letter invalid as an expression of that company’s views to an external party.

Perfecting the Security

Independent of whether Cukurova was in default, triggering loan acceleration and then appropriation, Alfa maintains that it was entitled to perfect its security by having the shares registered in its name.  The registered agent in the BVI failed when called upon to do so and this was cited as a further instance of breach.

The BVI High Court’s rejection of this alleged default seems equally wobbly.  The Judge actually found that the failure of Cukurova to perfect Alfa’s security was an Event of Default.  The Court accepted that Alfa was entitled to perfect its security by the registration of the charged shares in its name.  The Court found that a request had been made to Cukurova’s BVI agent to do so and that the agent had undertaken to seek instructions on the request.  The request was never complied with.

The Court, however, went on to hold that Alfa could not rely upon this Event of Default.  The reason given for this was that the notice of acceleration was a breach of contract on Alfa’s part, one that had a detrimental effect on Cukurova.  This is an odd result.  It is uncertain why issuing a notice such as this would be a breach of contract as opposed to a notice that was simply invalid and had no legal effect.  It is not clear why such a breach would necessarily displace Alfa’s right to perfect its security or prevent Cukurova being in breach of contract for refusing to transfer the shares.

Conclusion

It seems in the light of this analysis that there are at least two points, out of the many raised by Alfa, that, perhaps, should have got it home before the BVI High Court and that might well found a successful appeal, if taken.  Whatever actually happens, I would not be surprised to see the losing party on the appeal attempting to take the matter to the Privy Council.  It is that sort of case.

James Hilsdon is Lead Consultant for Virtual Law’s Dispute Resolution, Business Protection and Insolvency practice.  He spent some 4.5 years working in offshore magic circle firms in the British Virgin Islands and retains many contacts.  He is also a Director of Virtual Law.

James Hilsdon, Lead Consultant for Virtual Law’s Dispute Resolution, Business Protection and Insolvency practice spent almost 5 years working for offshore magic circle firms in the British Virgin Islands.  His expertise was called upon for comment on the dispute between Russia’s Alfa Group and Sweden’s Altimo and TeliaSonera over the ownership of Turkcell currently being fought in the BVI courts.  The results have been recorded in the 4 March 2011 Wall Street Journal article “Fight for Turkish Cellphone Firm Nears End” by Guy Chazan.

There are further developments following on from the article on CRC in Virtual Bulletin 3. It is becoming clear that very little of the original scheme may survive the review by the Government that is in hand at the moment.

Announcements already made include:-

• Postponement of the scheme by a year.
• There will be no recycling of funds back to participants – this was the part of the scheme whereby moneys received from the sale of Allowances would be paid back by reference to performance in a league table drawn up by the supervising body. That money will now be used “to support public finances”, in other words, a tax. And, of course, as there will now be no repayment element, the cost to participants will be very much greater than under the original proposals.
• Allowances will  not now be bought at the start of each CRC year on the basis of expected CO₂ emissions; instead, participants will buy them at the end of the year by reference to their actual CO₂ emissions.
• This, suggests that the “trade” element of the “cap and trade” feature of the original scheme will not be implemented, since no participants will have surplus Allowances to sell and other participants will have no need to buy Allowances in a market as they will not find themselves short of Allowances. The fate of the “cap” element is unclear at present.

CRC is a scheme for medium to large CO2 emitters. Will it merge with the big emitters' Climate Change Agreements Scheme?

CRC is a scheme for medium to large CO₂ emitters. The massive emitters found in heavy industry are within the scheme of Climate Change Agreements and are excluded from the CRC scheme. Under Climate Change Agreements the cost of CO₂ emissions is considerably less than under CRC. The Government is currently considering whether the “simplification” announced at the Comprehensive Spending Review should lead to alignment or, perhaps, amalgamation of the two regimes.

For the time being, the CRC league table seems likely to survive but will have reputational force only as a stimulus to reducing emissions. The importance of this should not be underestimated as many participants are concerned to be seen to be doing well in the league table.

More commentary from:

The Built Asset Blog

Low Carbon Economy Blog

FT’s Energy Source Blog

For a wide variety of reasons many people from other countries wish to come to Britain to live and work or study.

This may reflect well on Britain, or less well on the would be immigrants’ home countries, or both. Whatever the reason, it might be argued that if Britain is to have an effective immigration policy then the rules must work, and it is key that those who go on to seek British citizenship abide by the rules. Allegations in recent months against some colleges suggest that at least one of those rules might be easy to evade.The accusations are of colleges effectively selling English language certificates to hundreds of mainly Asian immigrants, thereby fraudulently assisting them to access  British citizenship.

Anyone applying for British citizenship must have and be able to demonstrate adequate knowledge of the English language and British society. Passing an exam – either the ‘Life in UK’ test, or the ‘ESOL Skills for Life’ certificate – is one of the requirements for immigrants seeking to become British citizens. However, it is alleged that some immigrants, speaking little or no English, have been able to buy ESOL certificates without attending any lessons. If true, these
cases would demonstrate a serious failure of the immigration rules.

Cases such as these can act to reinforce the view held by some, that immigrants are manipulating the system. This is unfortunate, as the truer and happier picture is that most of the 200,000 immigrants granted citizenship last year will add to British society and many will contribute hugely.

The rules are, in brief:

Indefinite Leave to Remain (ILR)

• Live legally in the UK for between 2 and 5 years;
• Pass Life in UK test, or ESOL Skills for Life;
• Partner and dependent adult relatives of British citizen or someone with ILR can apply;
• £767-£1930 fee.

Citizenship

• Must be 18yrs or more;
• Must have had ILR for 1 year;
• Must have been resident for at least 5 years, and not spent more than 450 days outside the UK in that period (nor more than 90 days in the final 12
  months); a partner of British citizen needs only 3 years;
• Must intend to continue to live in the UK;
• Must be able to communicate in English ‘to an acceptable degree’; have sufficient knowledge of life in the UK; and be of good character;
• Citizenship ceremony;
• £735 fee.

Michael English
Lead Consultant

The Norwich & Peterborough Building Society and the Potential Mis-selling of Financial Products

Sorting the Sheep from the Goats

A storm is blowing across the Fens in the direction of the Norwich & Peterborough Building Society. The Society sold failed Keydata investment products to 3,500 of its customers. As we know, investments go down as well as up and financial products, we now realise, sometimes go kaput. So, what makes customers of the N&P think that the Society, not the insolvent Keydata, should answer for their losses?

Many investors have taken the view that the Society mis-sold the Keydata product to them, but how realistic is that claim? For investor claims, the aftermath of the Credit Crunch got off to a bad start when the Springwell decision came out in 2008. The court held that no duty of care arose on the part of the bank being sued; there were disclaimers, the claimant was “commercially astute” and, crucially, the bank had not agreed to advise Springwell on his choice of  investments. The court made an interesting distinction between advice given as part of a service expressly offering financial advice and the “advice” given
by financial institutions when they are simply trying to sell you something.

How does the N&P debacle stack up against such stern legal criteria? For one thing, the N&P did assume responsibility for advising their customers on the choice of investments. In N&P branches, counter staff were in the habit of directing customers to the advisory service. Once there, information was collected
from the customer and a recommendation resulted. The customer’s attitude to risk was assessed, which, in theory, was to lead to investment advice consistent with it. Many were advised to invest in a product provided by Keydata. The Keydata structured product was unusual for a structured product
inasmuch as the capital invested could be lost. Though this was pointed out in the literature, the Society’s investors do not always seem to have appreciated the risk to their savings.

N&P’s Chief Executive, Matthew Bullock, has made the point that “just because you advise somebody and the product fails doesn’t mean to say you’ve  mis-sold it”. True, but the Financial Ombudsman has already found mis-selling in one case, where the N&P was ordered to pay £28,000 to an elderly couple
whom he found had been exposed to inappropriate risk.

The N&P have appealed the decision. Keydata remains in administration and its affairs are under investigation. Eventually, some investors may have losses of up to £50,000.00 met by the Financial Services Compensation Scheme. Naturally, the N&P would prefer it if the FSCS picked up the tab and would prefer not to be asked for money in the meantime. As Mr Bullock put it “I’d rather the FSCS stepped in than us try and sort out who we think we’ve mis-sold to”, a process Mr Bullock describes as sorting the sheep from the goats. He has not explained whether, in his view, customers who are found to be victims of the Society’s mis-selling are the sheep or the goats. As with so much associated with the N&P’s Keydata saga, we will have to wait and see.

James Hilsdon
Lead Consultant, Dispute Resolution and Insolvency, and Director, Virtual Law.

The CAP code now protects vulnerable people from irresponsible advertising on hitherto unregulated on-line sites such as Facebook.

The Committee of Advertising Practice (CAP) was set up by and for the UK advertising industry as a means of self-regulation.  CAP is responsible for writing and updating the CAP code of practice (CAP code) – the rule book governing non-broadcast advertising, sales promotions and direct marketing, and which is designed to ensure fair competition and to develop ethical marketing and communications.

If you already advertise, therefore, you will be aware of the application of the CAP code to all non-broadcast marketing communications in paid-for online space and sales promotions wherever they appear.

What you may not be aware of is that the code has been updated with effect from 1 September 2010.  A six months’ grace period applies to enable companies, organisations or sole traders to become familiar with the new rules – but from 1 March 2011, they will be enforced.  Consequently you need to start getting to grips with the new rules now so that you can make any necessary changes to your advertising.

The changes are as a result of the growing social and political concern to protect children, young people and vulnerable adults from untruthful and irresponsible marketing communications posted  by advertisers on their own websites or through other non-paid-for-space online (e.g social networking sites such as Facebook and Twitter) which are under their control which hitherto have been unregulated.

What online activity is already covered by the code?

The current digital remit applies to promotions and publicising in advertisements and e-mails in paid-for space including, for example, paid-for search listings, banner and pop-up advertisements, paid-for listings on price comparison sites, commercial classified advertisements and advergames (video games designed to promote a product or organisation).

Does the advert or communication contain sufficient information for a potential customer to make a purchase on that basis?

What new activity is now going to be caught by the Code?

From 1 March 2011, the CAP Code will apply to:

“Advertisements and other marketing communications by or from companies, organisations or sole traders on their own websites, or in other non-paid-for space online online under their control, that are directly connected with the supply or transfer of goods, services, opportunities and gifts, or which consist of direct solicitations of donations as part of their own fund-raising activities.”

The new rules are designed to focus specifically on material which properly constitutes an advertisement or other marketing communication.  However, they are not intended to cover editorial or public relations materials e.g press releases and investor relations material; whilst these do clearly come under the ‘marketing communications’ banner and are regularly featured on websites, they do remain outside the CAP Code’s remit.

Given the fact that it is perhaps not so clear cut as to what is and isn’t covered, CAP has usefully highlighted its approach when assessing whether or not a particular advert or marketing communication is caught by the new rules:-

FIRST, look at the new Code wording:

1. Is the communication ‘directly connected with the supply or transfer of goods, services…?’ All that is needed here is for there to be a primary intent to ‘sell’ something.  It doesn’t matter if you don’t give a price, or that you are not overtly seeking to conclude a financial transaction either immediately or in the short-term.  Indeed the communication may not even refer to a transactional facility at all, e.g an advergame may be caught, depending on its nature.  It is all about the intention behind the communication.
2. Does it consist of ‘direct solicitations of donations as part of fund-raising activities?’  Whilst the new rules do not cover marketing communications promoting causes or ideas generally, it does cover those which consist of direct solicitations of donations as part of fund-raising activities.  CAP wants to avoid, for example, situations where people have been mislead as to the purpose of a charity or the use to which funds will be applied and donate accordingly; and
3. Are the adverts and other marketing communications on an advertiser’s website or contained in non-paid-for space online under the advertiser’s control e.g on a Facebook or Twitter page? The informal nature of social websites can easily lull the user into a false sense of security thereby rendering them more vulnerable to being mislead.

SECONDLY, CAP will take into account the following ‘additional assessment criteria’ and other factors when considering whether or not an advert or marketing communication on your website or on a non-paid-for social networking page is subject to the new rules:-

• Previous paid-for adverts or marketing communications you have sent out.  Do they bear any similarity with the particular advert or communication under review?;
• Whether the advert or potential consumer to make a communication contains sufficient information for a purchase on that basis; and
• whether it adopts and incorporates user-generated content from private individuals on a solicited or unsolicited basis.

THIRDLY, check to see whether the communication already excluded.  For a full list of marketing communications which are / are not currently covered by the CAP Code, see Section 5 (ANNEX: Changes to the CAP Code effective from 1 March 2011) of ‘Extending the Digital Remit of the CAP Code’ at http://bcap.org.uk/Media-Centre/2010/Extending-the-Digital-remit-of-the-CAP-Code.aspx.  They include (but not exhaustively):

• Political or classified private advertisements
• Press releases
• Editorial content
• Corporate reports

But there are two new exclusions which will be added to the CAP Code as from the 1 March 2011, namely:

1. Investor Relations: marketing communications by a company about itself for circulation within the financial community; and
2. Heritage advertising: historical adverts or communications which are no longer part of a current promotional strategy (and which would otherwise be in breach of the CAP Code), provided that they are placed in an appropriately identified part of the website.

Political or classified private advertisements are currently excluded from the new CAP code

Sanctions

If you are in breach of the code, in the first instance, you will be asked to amend or withdraw the offending advert or communication.  But CAP are authorised to impose sanctions in the event of non-compliance such as pre-publication vetting by the CAP Copy Advise team and the withdrawal of trading privileges (e.g media space).  Normally the prospect of adverse publicity arising from an ASA adjudication does the trick.  Ultimately, CAP may also refer offenders to the Office of Fair Trading.

As from 1 March 2011, these sanctions are going to be extended to include naming and shaming the offenders on an ASA microsite; the removal (with the cooperation of the relevant search engine) of paid-for search advertisements which link directly to the advertiser’s offending page; and the placing of paid-for advertisements on the web highlighting the non-compliance.

What does this mean to you?

You will need to have reviewed your entire website by 1 March 2011 to ensure that it complies with the CAP Code.

You will need to train all of your staff who are responsible for updating or contributing to your website or who are permitted to blog or tweet on your company’s behalf on your company’s social networking pages in the delights of the CAP Code.

Have your say…

In order to ensure that this new level of self-regulation continues to benefit consumers whilst balancing the needs of the marketing community, feedback on the new rules is being encouraged over the next two years.  So if you have any constructive comments in relation to the changes, you are invited to submit them to the Secretary of CAP at either one of the following addresses:

Email: codepolicy@cap.org.uk

Address:
Committee of Advertising Practice
Mid City Place
71 High Holborn
London
WC1V 6QT

For further information visit the CAP website at: http://www.cap.org.uk

Sharon Saywell
Lead Consultant, Commercial Services Practice
and Director, Virtual Law

Further Reading:

Virtual Law recommends the following blogs for more on the CAP code changes:

http://www.salespromotionblog.com/bigpicture/2010/03/new_cap_code_2010.html