In a recent judgment, the High Court recognised a care home operator’s right to charge an “administration fee” to new residents at the point of their admission to the home, in addition to the charges for residential care.
The operator, Care UK, argued that the fee reflected their costs in handling relationships with prospective residents and administering new residents. These costs included:
- employing customer relationship managers;
- showing prospective residents around the homes;
- buying specialist equipment;
- carrying out risk assessments;
- initial care planning;
- room preparation; and
- consultation with the resident (and / or their relatives / other third parties).
Before Care UK introduced this fee, new residents had been required to pay a refundable deposit amounting to four weeks’ residential fees. The non-refundable administration fee was then introduced as a separate payment to be made, with residents still required to pay a deposit (albeit the deposit amount was reduced).
The Competition and Markets Authority (CMA), which is responsible for consumer law enforcement cases, had investigated this change of practice as part of its investigation into the residential care market, which more generally highlighted consumers’ concerns with pricing transparency.
The CMA’s position was that the administration fee was unfair, misleading, and exploitative. It said that the purpose of the fee was not to recover the costs of the services but to simply boost profits, and that Care UK’s standard residential fees were sufficient to cover these costs without the need for a separate administration fee.
The CMA said that the fee breached the:
- Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs);
- Consumer Rights Act 2015 (CRA); and
- Consumer Protection from Unfair Trading Regulations 2008 (CPRs).
The CMA also wanted Care UK to pay back the historic administration fees it had charged residents and hence brought enforcement action in the High Court.
The key legal issues before the court were whether the administration fee constituted:
- an “unfair” term under the UTCCRs and CRA. A term is “unfair” if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer and contrary to the requirement of good faith (the first issue); and
- an “unfair commercial practice” under the CPRs. Firstly, this required a consideration of whether the fee was misleading in terms of the price of the care services, or was omitting material information, or was an aggressive commercial practice. If so, then the question was whether that caused or was likely to cause the average consumer to take a transactional decision that they would not have taken otherwise (the second issue). For example, if Care UK was hiding these extra fees, consumers may have been more willing to sign up because they thought the costs were cheaper than they in fact were.
Before breaking down both issues, the court had to establish who the relevant average consumer was in this case. Based on the available evidence (including an Ipsos MORI poll), it was held that the average consumer was a family member or other representative of the prospective care home resident. The court noted, potentially quite decisively, that these consumers are “increasingly well-informed…(and) able to make a rational and carefully considered decision”. The decision to send a loved one to a care home is of course a not insignificant emotional and financial decision.
First issue: was the administration fee unfair?
The CMA argued that the fee was an unfair term on the basis that Care UK had not provided sufficient services at the point of charging the fee.
The court disagreed and noted the copious (and often bespoke) services which Care UK undertook in advance of admitting a new resident, as listed above. Care UK had, therefore, already provided a distinct set of services in return for the administration fee. The court did note that generic marketing costs (for example, the cost of a website and/or other advertising activities) and the costs of handling initial enquiries would probably not constitute chargeable services.
Note that Care UK stopped charging this fee in 2018, in light of the CMA’s concerns. The court also noted Care UK’s general practice of discussing the administration fee during consumers’ first care home visit (rather than hiding it until the last minute). Care UK trained their staff to be aware of the financial sensitivities which consumers may have when approaching these contracts. Additionally, very few complaints were made to either Care UK or the CMA regarding the administration fee.
Second issue: was the administration fee an unfair commercial practice?
The court first considered whether the fee was misleading/omitting material information / an aggressive commercial practice. The CMA had argued: (i) Care UK’s website and telephone hotlines did not explicitly mention the administration fee (omission); (ii) consumers were misled into believing the administration fee corresponded with a particular resident’s admission (misleading); and (iii) Care UK only revealed the administration fee when a consumer was seriously considering admission when they were “emotionally committed” (aggressive commercial practice).
The court rejected all of these arguments. It said that the initial online / telephone fee guidelines were purely illustrative. Care UK’s website indeed stated that these guidelines were just an indicative starting point and telephone staff reiterated this to prospective consumers. Therefore, no average consumer would seriously believe that the indicative fee represented what they would have to pay.
The court also found it implausible that an average consumer would ever believe the administration fee was calculated on an individual basis. A consumer would be fully aware that the administration fee was set on a standard basis.
Finally, the court found that Care UK’s policy was to explain the administration fee to consumers after their first visit, and before they could really be described as “emotionally committed” to the home.
Even though it did not need to assess whether the average consumer had taken a different transactional decision, the court found the way Care UK introduced and handled the administration fee would not have - in any event - impacted consumers’ decisions. Because Care UK told consumers about the fee well in advance of any decision needing to be taken (ie consumers were armed with the requisite information before making a decision rather than being misled). In addition, according to survey data, prices and fees played very little role in consumers’ residential care decisions. Factors such as a home’s overall atmosphere, location, facilities, care quality, and cleanliness were far more critical. The pricing was very rarely the determining factor. And moreover, the administration fee only accounted for around 2 per cent of Care UK’s overall fees.
The case provides a number useful of useful considerations for care home providers and other organisations with similar fee structures for consumers (such as independent schools in the context of registration and acceptance fees on top of the deposit):
- organisations can charge administration fees which are separate to the fees charged for the services and are levied as part of the sign-up process. However, if you want to charge such a fee, it must be linked to tangible preparatory services which directly facilitate a consumer’s business with you. Whilst the court deemed items such as consultations with prospective residents, the purchase of specialist equipment, and room preparation as acceptable services for which to charge an administration fee, it noted that marketing materials and handling initial enquiries should not be charged back to the consumer.
- Care UK’s marketing practices definitely influenced the court’s decision: timely provision of fee information; an indication of how their fees were calculated; and clear signposting of purely indicative / illustrative prices, were all noted as indicators of good practice. Survey evidence demonstrating the features of the relationship between the trader and consumer can be very persuasive and therefore organisations should ensure they understand their customer base and the types of factors that are taken into account by them when deciding to sign up.
- Although it was addressed directly in the case, a connected factor is the size and proportionality of the administration fee. Care UK’s administration fee was only around 2 per cent of their overall fees. It was also calculated as a non-refundable proportion of the upfront deposit, rather than being added on as a wholly separate charge.
- Whilst Care UK were fortunate that the average consumer was deemed reasonably well-informed, this case highlights the importance of providing accessible fee information. This is especially pertinent in businesses such as care homes and schools where consumer decision-making can be influenced by emotional triggers. You should tailor your information too, especially in cases where you are not dealing with an “average” consumer. The court praised Care UK’s internal training documents, which stated that staff should “never assume the contract has been read or thoroughly understood as it is often signed during an anxious time for the customer…step-by-step support and guidance is required in some cases…nothing should come as a surprise when they read it (the contract) through at their own leisure later”.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2021