Federal Regulators Cracking Down on Hidden Fees
Last updated February 22, 2023
Junk fees are everywhere, especially prevalent with online commerce, travel, cable and internet service providers, automobile dealerships, cell phone services, concert ticket sellers, insurance, and banking and investment services.
Many companies use hidden fees to obtain bigger payments from customers without having to increase their advertised prices. These bait-and-switch schemes cost consumers “tens of billions of dollars each year,” make comparison shopping difficult, and “leave consumers feeling powerless and cheated,” according to the Federal Trade Commission (FTC).
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Junk fees are not new. Hotels began charging per-night “resort” and “facility” fees, which are usually poorly disclosed, in the late 1990s. By 2019, hotels were raking in nearly $3 billion a year by sneaking in these extra fees, according to Consumer Reports. A 2019 Checkbook study found that, among 205 hotels in eight cities, two-thirds charged poorly disclosed resort fees. On average, these junk fees added $29—an extra 13 percent—per night.
“Just about everyone I know, including myself, has begun a transaction based on an advertised price, and somewhere along the way—a couple of screens through—you realize there's some fee at the end that wasn't disclosed upfront,” said Sam Levine, director of the FTC’s Consumer Protection Bureau. “Sometimes that fee can be quite significant; sometimes there can be multiple fees.”
Through its recent enforcement actions, and current proposal for specific rulemaking about junk fees, the FTC is putting companies on notice that “Tricking consumers into paying junk fees is against the law, especially when it involves deception,” Levine told Checkbook.
A few examples of FTC lawsuits settled in 2022:
- Ed Napleton Automotive Group: This multi-state dealership was accused of “sneaking illegal junk fees” for unwanted “add-on” products—such as payment insurance and paint protection—into its purchase contracts. These fees often cost consumers hundreds or thousands of dollars, the lawsuit alleged.
- Vonage: The FTC alleged this internet phone company “surprised customers with expensive junk fees” when they tried to cancel. Often, they were told they would have to pay an early termination fee—sometimes hundreds of dollars—that “was not clearly disclosed” when they signed up for the phone service, according to the complaint.
- Benefytt Technologies: The FTC said the company sold “sham health insurance plans” that were “bundled with unwanted products,” such as life or accident insurance plans, telemedicine access, and fitness programs. “Consumers were often unaware they were purchasing any additional products,” because the separate cost for the bundled products was not disclosed clearly, the lawsuit noted.
Companies “must be clear” about the cost of a purchase, and they cannot “just sneak on terms at the end,” Levine said. “Transactions are two sided; both sides need to agree.”
New Rules Are Needed
In October 2022, the FTC announced its Advanced Notice of Proposed Rulemaking (ANPR) for junk fees, seeking public comment on “unfair or deceptive fees that are charged for goods and services that have little or no added value to the consumer, including goods or services that consumers would reasonably assume to be included within the overall advertised price.”
“It’s beyond frustrating to end up spending more than you budgeted because of random arbitrary fees,” FTC Chair Lina Khan said in a statement announcing the ANPR. “No one has ever felt that a ‘convenience fee’ was convenient. Companies should compete to provide the best quality at the best price, not to see who can squeeze the most added expenses out of consumers. That’s especially true at a time when families are struggling with the effects of inflation.”
The commission is asking for public comment on “the harms stemming from junk fees and associated junk fee practices,” and whether a new rule “would better protect consumers.” So far nearly 6,000 comments have been submitted. The comment period ends on Feb. 8, 2023. An FTC news release summarized the types of fees the commission wants comments on:
- Unnecessary charges for worthless, free, or fake products or services: Consumers may be slammed with charges for products or services that cost companies nothing to provide, are available for free, or should be included as part of the purchase price. Companies might also upsell consumers on fake products or services that either have no value or never materialize.
- Unavoidable charges imposed on captive consumers: Consumers may be forced to pay junk fees because they have no way to avoid or opt out of them. They might be dealing with a company that can extract fees because there is no competing option. Or consumers might get hit with fees after they’ve purchased a product or service and can’t easily walk away.
- Surprise charges that secretly push up the purchase price: Consumers can experience “junk fee shock” when companies unexpectedly tack on mystery charges they did not know about, consent to, or factor into the purchase. Companies can hide these fees in the fine print, cram them on at the end of a purchase process, or use other forms of deception, such charging fees after the purchase was made.
FTC Also Targeting Junk Fees Charged by Car Sellers
The FTC has already started the process of banning junk fees and bait-and-switch advertising in the auto industry; tactics the commission said “can plague consumers throughout the car-buying experience.”
As outlined in the Notice of Proposed Rulemaking (released in June 2022), the commission drafted a rule that would, among other things, ban two types of junk fees that can drive up the price of buying a car:
- Fraudulent junk fees: This would prohibit dealers from charging consumers junk fees for fraudulent add-on products and services that provide no benefit to the consumer (including “nitrogen filled” tires that contain no more nitrogen than normal air).
- Surprise junk fees: The proposal would prohibit dealers from charging consumers for an add-on without their clear, written consent and would require dealers to inform consumers about the price of the car without any of optional add-ons.
The FTC received more than 11,000 comments about its proposed Motor Vehicle Dealers Trade Regulation Rule before the comment period ended.
A Call for Congress to Act
In his State of the Union Address, President Biden called on Congress to pass a Junk Fee Prevention Act to crack down on four types of junk fees that cost American consumers billions of dollars a year:
- Excessive online ticket fees for concerts, sporting, and other entertainment events. The White House says these “massive” service fees—that average more than 20 percent of the ticket’s face value, according to a 2018 GAO report—are not disclosed until check-out. Mr. Biden wants Congress to prohibit excessive fees, require the fees to be disclosed in the ticket price, and mandate disclosure of any ticket holdbacks that diminish available supply.
- Fees for family members to sit with their young children on airplanes. With some airlines, parents can be surprised to find themselves not seated with their young children, or paying large fees to sit next to them. In July 2022, the DOT issued a notice urging U.S. airlines to ensure that children 13 or younger are seated next to an accompanying adult with no extra charge. The DOT has a dashboard that reports whether airlines meet its guidelines.
- Eliminate exorbitant early termination fees for internet, cable TV, and mobile phone service. In some cases, it can cost $200 or more to cancel service before the end of the contract period. The President wants Congress to eliminate “excessive early termination fees” that lock in customers and reduce competition based on price and quality of service.
- Resort and destination fees. Mandatory “resort” or “destination fees” that are not disclosed upfront are a way to mislead consumers about the true price of that room and limit their ability to comparison shop. These fees, which can be $50 a night or more, cost Americans billions of dollars a year. The president wants Congress to require hotels to include these fees in the advertised price of the room, so travelers can budget accordingly.
The president said the Junk Fee Prevention Action would save Americans billions a year, and make our markets more competitive, creating “a more even playing field so that businesses that price in a fair and transparent manner no longer lose sales to companies that disguise their actual prices with hidden fees.”
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.