Fair Trading Act reform – New "safe harbour" for suspected scam activity

This second instalment on proposed consumer law reforms in the Fair Trading Amendment Bill (Fair Trading Bill) focuses on a safe harbour for online service providers under the Fair Trading Act (FTA) to help disrupt suspected scam activity.

Telcos, digital platforms, website hosting services and internet domain name registration services will be able to rely on the proposed safe harbour.

What will the safe harbour do?

Providers will have a defence to any civil proceedings against them if they have reasonable grounds to believe activity on their service is a scam and take reasonable steps to disrupt it.

To be considered a reasonable response, the provider must:

• act in good faith;

• ensure its response is proportionate;

• act within 28 days of forming a view the activity is (or was) a scam; and

• promptly reverse its response if it no longer believes the activity is a scam (and it is reasonably practicable to do so).

The safe harbour is intended to address industry concerns that online service providers could face claims if they mistakenly remove a legitimate customer or website from their service. That risk has meant online service providers have often acted cautiously in the absence of clear evidence of a scam.

Victims (and potentially law enforcement) often have limited ability to disrupt a scam themselves, particularly where it involves individuals based outside New Zealand, and so the proposed reforms are intended to enable a practical way to disrupt scams quickly, reducing the risk to the public.

What counts as a scam?

The Fair Trading Bill sets out that a “scam” is “a scheme to deceive or threaten a person for the purpose of obtaining a financial or other benefit, such as money or personal information, from that person or a person associated with that person”.

The definition is broad enough to capture fraudulent schemes and deception, as well as extortion and blackmail, which aren’t traditionally considered “scams”.

To be a scam, it needs to be for the purpose of obtaining a “benefit”, which is likely to exclude purely harmful behaviour that does not benefit the scammer. However, other legislation like the Harmful Digital Communications Act 2015 or Crimes Act 1961 could apply in that situation.

Is this a new idea?

No, not really. Safe harbour provisions and similar defences exist in other legislation:

• The Harmful Digital Communications Act includes safe harbour for online content hosts who receive a complaint about digital content, if they follow a prescribed statutory process involving:

    • engaging with the author of a post (communication) regarding the complaint; or

    • if the author can’t be contacted, taking down or disabling the content within 48 hours of receiving the complaint.

• Under the Copyright Act 1994, internet service providers (ISPs) have a defence to copyright infringement where a person uses their services to infringe copyright. There is also a defence where the ISP stores infringing material provided by a user. That defence is unavailable if the ISP knows, or has reason to believe, the material is infringing and fails to delete or prevent access to it as soon as possible. New Zealand has not yet implemented a statutory regime to allow blocking orders for (overseas) websites that infringe, or facilitate infringement of, copyright. However, there are current discussions about wider copyright reform in New Zealand which are likely to address this issue.

• Again, while not a safe harbour per se, publishers have a defence under the Defamation Act 1992 if they can prove that, without negligence on their part, they did not know that the material they published contained defamatory material, and did not know that it was likely to contain that material.

Importantly, the proposed safe harbour provisions in the Fair Trading Bill do not require providers to give prior notice to a customer or user before acting. Not requiring notice is understandable: providing notice could introduce delay at a critical time and, in cases of actual fraud, tip off the suspected scammer.

The more difficult issue is what happens if it’s not a scam? While the provider must reverse the action if reasonably practicable, the customer or user may already have suffered significant loss. The safe harbour is likely to leave the customer or user with no recourse against the online service provider and so potentially out of pocket.

Online service providers can still be liable if their response is not reasonable, and the Fair Trading Bill proposes that the provider must show it can rely on the safe harbour. So, despite the safe harbour, the prospect of potentially being drawn into litigation may mean providers remain cautious, even if less so than currently.

The reforms are likely to lead to faster and more effective disruption of scams, but the focus is clearly on stopping the scammer’s actions. Many scams involve a scammer convincing an innocent person to take action, such as transferring funds to the scammer. The reforms would protect online service providers acting against suspected scammers, but are unlikely to extend to providers intervening in the activity of a victim or potential victim in an effort to prevent loss.

Part 3 of our update on the proposed FTA reforms, focusing on product safety regulations, will be published shortly.