Gadens partner Elise Ivory explains why offering your customers rewards in order to refer others can get you in trouble with the law
Customer referrals as lead generators are good for business, right?
Cheap commissions; efficient as once the referral is made you deal directly with the customer; and the more referrals you have, the more leads you can generate (equally, more customers and more profit for you). And isn’t it even better if you can get your customers to do the heavy lifting for you? Most potential customers would value the opinion of someone who has used your services and been happy with the result over a business referrer with a vested interest in sending customers your way.
But have you ever asked customers to refer family and friends and offered some kind of incentive for doing so? Perhaps you have offered them a discount off other services you offer, movie tickets, a rebate on the commission they paid, or maybe just a cash incentive? If so, you need to be aware of s49 of the Australian Consumer Law which prohibits ‘referral selling’.
Section 49 of the Australian Consumer Law (which is a schedule to the Competition and Consumer Act) states:
A person must not, in trade or commerce, induce a consumer to acquire goods or services by representing that the consumer will, after the contract for the acquisition of the goods or services is made, receive a rebate, commission or other benefit in return for:
(a) giving the person the names of prospective customers; or
(b) otherwise assisting the person to supply goods or services to other consumers;
if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made.
Take, for example, mortgage brokers providing credit assistance to a prospective borrower. As part of their sales pitch brokers cannot tell the borrower that if they refer family and friends they will receive a share of the commission that the broker receives from the lender if their family and friends also procure the services of the broker. In this instance the borrower is being enticed to obtain the services of the broker due to promises made that may or may not eventuate (ie the family and friends may not obtain services from the broker). This conduct is illegal because neither the borrower nor the broker can control the outcome. A consumer should not be sold something on the basis that they will only receive a reward if something else occurs.
What may not amount to referral selling is if the broker provides the incentive to the borrower regardless of whether the family or friends take up the broker’s services (that is, the borrower will benefit just from providing the names of family and friends with no conditions attached).
Similarly, a broker may be able to offer a reward for signing up family and friends after the borrower has already obtained the services of the broker. For example, once a broker has provided a borrower with credit assistance and that borrower’s loan has settled, the broker may be able to contact the borrower and say, “If you are happy with the services I provided, please tell your family and friends, and if they take up my services, you will be rewarded.” In this case the borrower has already obtained the services of the broker and so the reward is not acting as an inducement for the borrower to use that broker; it is merely a value-add.
However, as the penalties for breach of the section are hefty – $1.1m for a body corporate and $220,000 for an individual – getting this right is vital, therefore we recommend obtaining expert advice before offering any type of incentive to customers for providing referrals.
Cheap commissions; efficient as once the referral is made you deal directly with the customer; and the more referrals you have, the more leads you can generate (equally, more customers and more profit for you). And isn’t it even better if you can get your customers to do the heavy lifting for you? Most potential customers would value the opinion of someone who has used your services and been happy with the result over a business referrer with a vested interest in sending customers your way.
But have you ever asked customers to refer family and friends and offered some kind of incentive for doing so? Perhaps you have offered them a discount off other services you offer, movie tickets, a rebate on the commission they paid, or maybe just a cash incentive? If so, you need to be aware of s49 of the Australian Consumer Law which prohibits ‘referral selling’.
Section 49 of the Australian Consumer Law (which is a schedule to the Competition and Consumer Act) states:
A person must not, in trade or commerce, induce a consumer to acquire goods or services by representing that the consumer will, after the contract for the acquisition of the goods or services is made, receive a rebate, commission or other benefit in return for:
(a) giving the person the names of prospective customers; or
(b) otherwise assisting the person to supply goods or services to other consumers;
if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made.
As the penalties for breach of the section are hefty – $1.1m for a body corporate and $220,000 for an individual – getting this right is vital
Put more simply, a business cannot entice customers to purchase goods or services from them by promising the customer a reward on the basis that they refer other customers and those customers take up the services of the business.Take, for example, mortgage brokers providing credit assistance to a prospective borrower. As part of their sales pitch brokers cannot tell the borrower that if they refer family and friends they will receive a share of the commission that the broker receives from the lender if their family and friends also procure the services of the broker. In this instance the borrower is being enticed to obtain the services of the broker due to promises made that may or may not eventuate (ie the family and friends may not obtain services from the broker). This conduct is illegal because neither the borrower nor the broker can control the outcome. A consumer should not be sold something on the basis that they will only receive a reward if something else occurs.
What may not amount to referral selling is if the broker provides the incentive to the borrower regardless of whether the family or friends take up the broker’s services (that is, the borrower will benefit just from providing the names of family and friends with no conditions attached).
Similarly, a broker may be able to offer a reward for signing up family and friends after the borrower has already obtained the services of the broker. For example, once a broker has provided a borrower with credit assistance and that borrower’s loan has settled, the broker may be able to contact the borrower and say, “If you are happy with the services I provided, please tell your family and friends, and if they take up my services, you will be rewarded.” In this case the borrower has already obtained the services of the broker and so the reward is not acting as an inducement for the borrower to use that broker; it is merely a value-add.
However, as the penalties for breach of the section are hefty – $1.1m for a body corporate and $220,000 for an individual – getting this right is vital, therefore we recommend obtaining expert advice before offering any type of incentive to customers for providing referrals.
Elise is a partner in Gadens’ Financial Products and Services group at Gadens, where she works as part of the Regulation and Compliance team. consumer and commercial credit regulation, compliance, distribution and licensing.
