FTC’s Proposed Ban on Junk Fees: Advocating for Fee Transparency

by Reagan Hanna, Associate Member, University of Cincinnati Law Review Vol. 92

I. Introduction

Across the country, consumers and the American economy have been adamant that hidden junk fees have taken over, becoming excessive and increasingly costly.¹ These hidden junk fees are continuing to chisel away at the saving accounts of many American families.² Across a multitude of products, industries, and services, junk fees have creeped into the purchase and payments of just about anything. While these junk fees may seem miniscule and seem to make up only a small percentage of payments, the cumulative fees and total costs have consumers up in arms.³

Junk fees are often fees or additional charges that are almost always unexpected by consumers and poorly explained by companies.⁴ Generally, junk fees are the hidden and surprise fees small enough that consumers are not always totally aware, but also large enough to increase costs and profits while hindering market competition throughout a multitude of industries.⁵ For example, junk fees are hidden in or added onto the cost of concert tickets, bills, and other goods and services such as hotel rooms or banking services.⁶ Typically, junk fees do not appear until the late stages of a checkout or payment process, making it difficult for consumers to deduct the actual price of goods and services.⁷ For example, the service charges or convenience fees that are tacked onto the price of event tickets or hotel room charges at the end of a transaction are considered junk fees and may even be labeled as convenience fees without specifications to what that particularly means.⁸

President Biden is joining forces with the Federal Trade Commission (the “FTC”) as well as the Consumer Financial Protection Bureau (the “CFPB”), to implement a new scheme to curb junk fees and lower unnecessary costs for consumers.⁹ Together these organizations aim to eliminate junk fees to promote industry competition; but separately, are targeting different problematic sectors.¹⁰

While the FTC and the CFPB have their focus on different types of junk fees, the same goal remains in line with the Biden Administration.¹¹ Inevitably, that goal is to keep as much money as possible in the pockets of American consumers by cracking down on junk fees and promoting market competition.¹²

This article explores the proposed rules geared towards eliminating junk fees and the effects those rules could have on both consumers and the government. Part II provides a deeper background on the FTC and the CFPB, what they both do generally, but with a focus on what each proposed new law says. Part III discusses and interprets what these proposed laws could mean and how they could affect the economy, businesses, and consumers. Additionally, potential penalties are discussed regarding non-compliant businesses and companies. Finally, Part IV concludes by focusing on the true effect of these proposed laws and the overall long-term goal of these agencies.

II. Background

The FTC and the CFPB are uniquely positioned with the government and have the power to make a change for American consumers. Both agencies were created with the goal of benefiting consumer’s financial interests in mind. While the purpose of each may differ slightly and each attacks different elements of or types of junk fees, the end goal for both is to do what is within their power to make a change for consumers.

A. The Federal Trade Commission and Proposed “Junk Fee” Rule

President Woodrow Wilson signed the Federal Trade Commission Act into law on September 26, 1914.¹³ In doing so, he effectively created the FTC to combat the administrations trust busting efforts.¹⁴ Over time the focus of the FTC shifted, becoming more robust after Congress passed a variety of additional laws enabling increased agency authority over anticompetitive practices.¹⁵ After Congress passed a general prohibition against unfair and deceptive acts or practices, the FTC began to administer a wider variety of consumer protection and antitrust laws.¹⁶

Concerned with how competition and business practices affect commerce, the FTC investigates and prevents unfair methods of competition and deceptive acts or practices.¹⁷ The FTC focuses on protecting and providing relief to consumers and encouraging fair competition in the marketplace by imposing various potential penalties on wrongdoers.¹⁸ This includes imposing penalties for those charging junk fees.¹⁹ As the only federal agency with consumer protection and competition jurisdiction in vast sectors of the economy, it engages and pursues efficient and intense enforcement, sharing expertise with federal and state legislators to advance consumer interests.²⁰

These goals and strategies back and drive reform policies and laws like the junk fee rule into fruition. Under the Federal Trade Commission Act (the “FTC Act”), the FTC has the authority to essentially regulate trade regulation rules and classify practices as potentially unfair or deceptive trade practices affecting the economy and commerce.²¹ In late 2022, the Commission published an Advance Notice of Proposed Rulemaking (the “NPRM”). Based off over 12,000 comments the FTC received based off this notice, most participants wanted more transparency regarding deceptive practices, fees, and pricing on goods and services.²² The comments also reveal that the issue is in fact widespread.²³

The proposal of the junk fee rule addresses a variety of prevalent unfair or deceptive practices regarding junk fees.²⁴ The areas of concern include bait-and-switch tactics and misrepresentation of the nature and purpose of fees.²⁵ Activities like these are in direct violation of Section 5 of the FTC Act, due to their very nature of being unfair and deceptive practices.²⁶ If finalized, this new rule will become codified in the Code of Federal Regulations.²⁷ Those subject to this rule include individuals, corporations, partnerships, associations, and generally, any entity offering goods or services both in physical locations and online applications.²⁸ If this proposed rule is finalized, the FTC will be allowed to seek and enforce civil penalties against those violating the rule.²⁹

Under the new rule, bait-and-switch tactics are synonymous to hidden fees covered in proposed section 464.2.³⁰ Businesses must clearly and conspicuously disclose the total price a consumer will finitely pay for a good or service, otherwise displaying, offering, or advertising otherwise will be deemed unlawful.³¹ The total cost must be portrayed in full amount and include all charges for a particular good or service, as well as any charges related to make a good or service complete.³² Businesses are required to make the overall total price more noticeable to consumers than any other pricing information.³³ While shipping costs need not be included since they are considered required charges from the government, a business may not increase that shipping cost above what it reasonably costs.³⁴

Additionally, misrepresentation of the nature and purpose of the fees a consumer will have to pay would also be prohibited under proposed section 464.3.³⁵ Specifically, this portion of the rule requires that within the total cost of goods or services, the fee refundability and breakdown must be accurately represented and explained regarding each individual fee’s nature and purpose.³⁶ The breakdown of each fee clearly expressed to a consumer is intended to prevent fault on businesses by requiring disclosure of all mandatory fees and the breakdown of such.³⁷ Therefore, for any fee excluded from the total price especially, the nature and purpose of that fee must be disclosed such as shipping charges, government charges, and other optional fees or tips.³⁸

Overall, with the release of the NPRM, the FTC is looking to determine the true scope of this new rule and whether there should be any exclusions regarding total price disclosure.³⁹ Inevitably, the FTC is looking to clarify how this rule may affect the markers and prevent further unfair and deceptive trade practices.⁴⁰

B. The Consumer Financial Protection Bureau’s Similar Focus on Junk Fees

In 2010, President Obama created the CFPB by signing the Dodd-Frank Wall Street Reform and Consumer Protection Act into law to increase consumer financial protection.⁴¹ The primary purpose of the CFBP is taking charge to enforce federal consumer financial laws to protect consumers.⁴² Like the FTC, the CFPB is doing its’ part to cut down on junk fees specifically in banking, auto loans, and remittances.⁴³ More specifically, the CFPB is uncovering junk fee scams like fake paper statements, add-on products for paid auto loans, messy international money transfers being processed, and service providers aiding in some of these activities.⁴⁴

Last year, the CFPB issued guidance to banks regarding overdraft fees when there was ample money in accounts and charging depositor fees to those depositing checks that bounce.⁴⁵ Banks were warned that these two practices were likely unlawful.⁴⁶ The CFPB believed that banks were competing over fees, creating even more concern around junk fees.⁴⁷ After cracking down on businesses and securing consumer refunds for illegal junk fees, the CFPB announced that it was able to return roughly $140 Million back to consumers.⁴⁸

Lastly, the CFPB takes initiative after uncovering problems and violations to work with businesses to act and fix the identified problems.⁴⁹ Many businesses take their own initiative when it comes to correcting unlawful fee issues.⁵⁰ However, as the violations get more serious, the CFPB may open investigations and employ more hefty enforcement actions against those businesses.⁵¹

III. Discussion

President Biden, along with the FTC and CFPB, agree that the proposed regulation on unfair and deceptive trade practices are intended for the benefit of consumers. The goal is to improve the financial well-being of Americans and to create positive outcomes for consumers affected by unnecessary junk fees.

In the most general sense, consumers typically search the internet or physical stores for the cheapest goods and services whenever possible.⁵² The FTC has received comments and concerns about certain goods and services that tend to exemplify the problem of unfair and deceptive trade practices.⁵³ A handful of those goods and services include hotel fees, event ticket fees, food delivery apps, rental transportation fees, and financial services fees.⁵⁴ Essentially, a consumer may go to pick out a good or service merely because it is the cheapest, only to find out three steps in the process later there are hidden junk fees not clearly disclosed at the beginning of the process.⁵⁵

This causes a few problems for consumers. The first likely being irritation. Consumers think they are getting a deal compared to other market competitors.⁵⁶ However, realistically, the good or service from that site is comparable or even more expensive than a competitor.⁵⁷ The second issue escalates from the first when a consumer spends time and effort doing their research only to get to the end of a purchasing process and find out it is not cheaper.⁵⁸ While the good or service price suddenly gets more expensive due to excess fees, the consumer could likely bite the cost of the good or service and pay the extra fees anyway.⁵⁹ At that point a consumer has spent time and effort, annoyed that it would likely happen with another site or competitor, and go ahead and purchase the item.⁶⁰

More specifically, when consumers are looking to book a hotel, they will likely view multiple advertisements for hotels in the same area, likely gravitating towards the hotels with the cheapest nightly rate.⁶¹ However, after clicking on the cheapest room or hotels, consumers may see additional fees continue to be added on to the total price the further they get into the booking process.⁶² The advertised price is rarely the true total price consumers ultimately pay. Similarly, when concert goers are looking to buy concert tickets, the price is unlikely to be the price advertised for.⁶³ This leaves consumers accustomed to expecting additional fees to be added to the price at checkout.⁶⁴ For event tickets especially, consumers could potentially buy another ticket with the amount they pay in fees if it were the true advertised price.

Additionally, when these miscellaneous fees are added on towards the end of the purchasing process, consumers may not understand the purpose and nature of the hidden fees.⁶⁵ While government-imposed fees or shipping costs are likely to be clear, the business must state clearly if fees fall into that category or another.⁶⁶ Knowing what the fees apply towards could make consumers more likely to still purchase a good or service even after finding out there are fees. The transparency could be key.

These examples are exactly what the FTC wants to shut down and impose penalties on businesses for. Displaying the true and accurate total cost at the beginning of the purchasing process eliminates the waste of time and frustration for consumers later. This bait-and-switch tactic can be frustrating for consumers.⁶⁷ However, if businesses abided by this proposed rule, consumers may be better off in the long run and more inclined to purchase those goods or services.

The other primary goal of the FTC is to promote good market competition.⁶⁸ Overall, by requiring all businesses that advertise or display a good or service, to abide by the same principles, it leaves the rest up to the consumer. The consumer can fairly choose between products and make their own decision while businesses compete to have the lowest price.⁶⁹ While businesses are competing to have their goods or services at the lowest price, consumers and the economy would benefit. Consumers could benefit from getting lower total prices all around which attracts them to particular goods and services and helps the economy at the same time. It is a small change for businesses that could change the market for the better.

However, some do not believe that this new rule is all that beneficial to consumers or the economy.⁷⁰ While opposers of this new junk fee rule do believe that junk fees are harmful and unlawful towards consumers, there is the potential for regulation to cause more regulatory costs and other pitfalls that could outweigh the benefits of junk fee regulation.⁷¹ The idea is that some markets and industries are inherently complex and disclosing a total price might be difficult, which could create an unfair burden on the business.⁷² While this may not be the case for a lot of businesses, there may be some out there where the burden would be unavoidable.⁷³

The goal of the FTC’s NPRM on unfair or deceptive trade practices like junk fees, is to ascertain what the scope of this rule should be.⁷⁴ As far as consumers are concerned, it is fair to say that the purchasing process leaves a bit of distaste with the consumer, especially when they get to the point of purchase and the price of the good or service increases significantly. There could be a blurry line drawn where businesses may disclose a fee, but in the same breath accused that it is not clear enough and misleading.

As civil penalties are the threatened penalty for misuse of junk fees, businesses could be subject to interpretation of any disclosure, advertisement, or display of pricing they make for a good or service.⁷⁵ Not only will businesses incur civil penalties, but they will be required to reimburse consumers unfairly or deceptively tricked in the process.⁷⁶ The spiral effect these penalties could have on these businesses may even reach the reputation of the business if it continues to violate these new provisions.

IV. Conclusion

While the Biden Administration works with both the FTC and the CFPB, a united goal is clear. With the finalization of the Trade Regulation Rule on Unfair or Deceptive Fees, not only will it solidify the requirements of any business partaking in the sale of goods or services but will allow the government and its’ agencies to hold businesses accountable for their actions.

If this rule is finalized, some businesses may not be happy with it; however, that says a lot about the business in the first place. Businesses cater to consumers. When consumers are unhappy due to the realization businesses are charging bogus fees, that likely will create a riff in the economy. Consumers may be less likely to put their hard-earned money back into the economy if they are not receiving legitimate prices on the goods or services they want to purchase. If businesses are operating in an honest and legitimate way and operating with proper and ethical business practices in mind, they should not be worried about the implementation of this rule. Requiring business transparency should not be a question and consumers have the right to all information when their money is at play.

Additionally, this new law should not create an undue burden on businesses to comply with. Requiring that businesses accurately and clearly represent the nature and purpose of fees, is the minimum a business should be doing anyway. Otherwise, even without the proposed law in place, that creates bad business practices and if consumers catch wind of that, could still make them less likely to contribute to that business, industry, or economy in general. While like any working law, there could be exceptions. But there are so many industries, it maybe be hard to parse them apart to see what should get an exception until the law is finalized and in action.

The implementation of laws like this needs support from more than just the FTC. Notably, the CFPB recently focused on aiding consumers affected by junk fees in the banking industry.⁷⁷ By targeting an industry like banking, the CFPB has been able to recover fees for some consumers that they likely did not know were coming out of their bank accounts.⁷⁸ For example, banks had been charging customers a fee to receive a paper statement.⁷⁹ While those fees are not illegitimate, they become illegal if the bank does not follow through to print and mail them to customers.⁸⁰ If businesses know that the CFPB will likely come after them to recover funds for consumers, and knowing they may face civil penalties under proposed laws, then hopefully, that could act as a deterrent from charging inflated, unnecessary, and outright illegal junk fees.

Ultimately, this law benefits consumers, the market, and businesses. If businesses, were obligated to comply with this law if finalized, they will benefit from the lawful sales they make. Consumers will reap the benefits from lower prices for goods and services from business competition. Lastly, the overall market economy will benefit if consumers believe in businesses and contribute to it. Therefore, this law could create a chain reaction with businesses for the betterment of all parties involved.

Cover Photo by Ian Hutchinson on Unsplash

Reagan Hanna

As a Double Bearcat, Reagan Hanna attended the University of Cincinnati for undergrad, receiving her Bachelor's degree in Criminal Justice, a minor in Paralegal Studies, and a Certificate in Crime and Intelligence Analysis. Reagan is most interested in Corporate, Sports, and Intellectual Property law. Outside of law school, Reagan enjoys watching Cincinnati sports, working out, skiing, and spending time outside.

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