Getting new clients is a vital key to growing your business. Referrals are a common way for businesses to increase their customer base and future sales. This is done by offering your customers a reward to get their acquaintances, friends and family to buy your product or services. Before you introduce such a referral program to increase your sales or customer base, you, as a responsible entrepreneur, should first make sure that the marketing strategy you are about to implement in the business is in line with the current consumer protection legislation.
You may be planning to introduce a referral program into your business. However, be careful to ensure that your referral program is not considered as unlawful ‘referral selling’. This is because referral selling is illegal under the Consumer Protection Act (Act 68 of 2008). Below, we will thoroughly explain what referral selling is and how you can deal with referrals in your business.
What does the Consumer Protection Act state about referral selling?
The Consumer Protection Act seeks to protect consumers (and by extension businesses) and regulate consumer transactions. Some of the ways the legislation does this, for example, is by making unfair contract terms and conditions unenforceable, preventing unfair practices, etc. One such unfair practice, according to the CPA, is referral selling.
What is considered as referral selling?
Referral selling involves a business persuading a consumer to buy goods or services with the promise that they will receive a particular benefit, rebate or commission if they refer others successfully.
Referral selling is clearly defined in the Consumer Protection Act in Section 38:
- (1)“A person must not promote, offer, supply, agree to supply, or induce a consumer to accept any goods or services on the representation that the consumer will receive a rebate, commission or other benefit if –
- (a) the consumer subsequently—(i) gives the supplier the names of consumers; or (ii) otherwise assists the supplier to supply goods or services to other consumers;
- (b) that rebate, commission or other benefit is contingent upon an event occurring after the consumer agrees to the transaction. “
So, the way to interpret this is – a consumer will receive a discount, commission or another benefit after the purchase has been made. The consumer will only receive this benefit if the referrals provided by the consumer result in further sales.
This kind of sales practice is frowned upon by law because there is no assurance that such sales will eventuate or occur. Also, there’s no guarantee that the consumer will receive the reward that they were expecting. The promised referral benefit does not need to be the main reason a customer buys the goods or services. It simply needs to be a “real” or “significant” inducement.
Some examples of what unlawful referral selling may look like:
- A Gym advertises that if you refer four friends and provided they each then sign up with gym contracts of their own – then the gym will give you 25% off your next two months’ gym fees;
- An Insurance broker tells you that if you refer five of your family or friends to him as a broker, you will receive a portion of the insurance broker’s commission if those referrals become paying customers.
There are many similar examples as the above.
The Consumer Protection Act specifically state we may consider similar international consumer legislation to interpret sections of the Act itself.
With that in mind, if one looks at international consumer law in Australia, the above examples of referral selling are illegal because the consumer could not control the outcome of future sales. Also, the consumer should not be sold something on the basis that they will only receive a particular benefit if something else occurs (i.e. their friends or the individual so-referred also making a purchase).
Referral marketing is acceptable if you offer a referral benefit to a new or existing customer if you only request the names of prospective customers from your customer. There should be no requirement that those referrals actually become paying customers. It is also important to consider the newly implemented Protection of Personal Information Act (Act 4 of 2013) and to ensure that all personal information is collected and processed in strict compliance with this important privacy-protecting legislation. POPIA will make referral selling even more tricky to do, for the prospective client you contact will now surely ask you how you came to be in possession of their name and contact details.
For example, the Australian Consumer Law allows you to offer a benefit to a customer if they refer a friend who successfully signs up for your product or service. However, that customer must be an existing customer.
There has to date not been many court cases regarding referral selling in South Africa, so one should always refer to the applicable Consumer Ombudsman (e.g. The Consumer Goods and Services Ombudsman) for clarity and guidance – or even the National Consumer Commission if there is any doubt that the referral idea you plan to implement is in line with the CPA.
If your business is planning on introducing a referral scheme, a good rule of thumb is that you should not be providing prospective or current customers with monetary or other similar benefits on the condition that they refer you to their friends and family and then make a further a condition for obtaining that reward/benefit – be that those referrals, then also tangibly have to lead to a real purchase from your business (or entering into a subsequent contract agreement with you).
Contact your SEESA Consumer Protection & POPI Legal Advisor to assist your business with any referral selling related queries you might have. Alternatively, SMS the word “SEESA” to 45776 for an expert legal advisor to contact you.
About the Author:
Charl Fourie is a Senior Legal Advisor for SEESA Consumer Protection & POPI. He obtained an LLB degree and is an admitted attorney in the High Court of South Africa. Prior to joining SEESA he practiced as an attorney specialising in Criminal and Civil litigation.
Resources:
- East Coast Radio – referral selling: Is it legal to share your contacts’ details, 14 December 2017 by Wendy Knowler
- Online Article: https://contractcompany.com.au/blog/what-is-referral-selling by The Contract Company – Australia law