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China – Addressing The E-Commerce Market: Online Retailing Conducted On Third-Party Platforms, Concluding Thoughts.

5 December, 2013

 
 

3. Online Retailing Conducted On Third-Party Platforms


Administrative Procedures Transaction Rules On 26 September 2013, MOFCOM released the Draft Transaction Rules Procedures, which propose to regulate the transaction rules set by third-party platform providers. Unlike the Draft Online Trading Procedures which are essentially an update of existing rules, the Draft Transaction Rules Procedures appear to cover new legislative ground, no doubt prompted by numerous consumer complaints.


The Draft Transaction Rules Procedures require third-party platform providers to include the following in their transaction rules:


a) basic rules for transactions;
b) rules for obligations and risk allocation;
c) rules for intellectual property protection;
d) rules for credit ratings;
e) rules for consumer rights protection;
f) rules for information and real-name system disclosure;
g) rules for handling unlawful information;
h) rules for disputed transactions resolution and handling of violations;
i) rules for application, scope and term of transaction rules; and
j) rules for modification of transaction rules.


These seem to be essentially common sense measures which a set of professionally drafted transaction rules would be likely to cover: the implication is that not all online third-party platforms have these basics in place. Under the Draft Transaction Rules Procedures, any third-party platform provider who wishes to adopt or modify its transaction rules must display the transaction rules or the revisions thereof on its website for at least 15 days for the solicitation of public opinion. Reasonable measures must be taken to ensure the relevant parties are aware of the transaction rules and the revisions and all comments made by the public must be published for a reasonable period after expiry of the solicitation period. There is, however, no requirement for the third-party platforms to take into account comments from the public. However, third-party platforms are made accountable by being required to respond to the public’s opinions and by making their responses publicly available. In addition, the third-party platform provider must publish its adopted rules or revisions (trade secrets excluded) in a prominent place on its website for 15 days before implementing the rules or the revisions. Any new rule that would significantly affect online vendors will require a transition period before being implemented. Furthermore, the third-party platform provider must register and file its transaction rules and revisions, together with public comments received and responses made to the public comments, with MOFCOM through its online system, within 30 days of the implementation of the rules or the revisions. Any person who believes that the transaction rules of a third-party platform provider do not comply with the Draft Transaction Rules Procedures has the right file a report with their local MOFCOM office, thus introducing a public supervision concept. Failure to abide by the Draft Transaction Rules Procedures will attract a penalty of between RMB 10,000 and RMB 30,000.


The Draft Transaction Rules are the first administrative regulation targeted at governing the transaction rules of third-party platform providers; they are almost certainly a reaction to market behaviour and consumer reactions to that behaviour. They hint at the fact that there are issues with the current transaction rules of certain third-party platform providers. However, while the Draft Transaction Rules demonstrate a positive and laudable attempt to protect consumers of online goods and services, the fines seem very modest and may be too low to make a difference to the bottom line of the larger third-party platforms.


4. Concluding Thoughts – What Is The Significance Of The New Legislation?


China has placed consumption at the core of its new five year plan as a means of sustaining growth in its economy as it transitions from a manufacturing-based model to a more service and consumption-driven economy. The biggest barrier to e-commerce in China is simply lack of trust in cyberspace and cyberspace vendors, due to consumers having had unreliable or unpleasant experiences in this regard. These ‘bad apples’ also make it more difficult for legitimate, compliant vendors and third-party trading platform operators to persuade Chinese consumers to use their services.


Many Chinese consumers also appear to have been unable to have enjoyed any meaningful recourse against online vendors who have sold defective products or services and given false or unreliable contact information – hence the rather odd-sounding requirement that online vendors have to register using their real names. Only when confidence in Chinese cyberspace is restored can e-commerce (and hence econsumerism) achieve its full potential in China (which is clearly enormous). This goal can only be realised if adequate legal rules are in place to regulate and foster development of e-commerce and, more critically, the rules are enforced and the punishments imposed act as a deterrent to other would-be online fraudsters or fly-by-night operators. While the current amendments represent a worthy attempt to achieve the former, anecdotally at least, issues relating to breach of contract, delivery, misrepresentation of products and low product quality still persist, thereby indicating that bolstering consumer trust remains the more challenging longer-term goal: Chinese consumers will need to see more enforcement action on the ground against violators to rebuild trust.


What is beyond any doubt, based on the Singles Day trading performance, is the depth of demand for consumer-led ecommerce in China. The overall aim of the Draft Online Trading Procedures and Draft Transaction Rules Procedures is to provide a fairer and more competitive trading environment, with a focus on safeguarding consumer rights. Most notably, the abovementioned draft measures illustrate a delegation of supervision duties to third-party platform providers in monitoring online trading activities, as well as giving consumers rights to protect their interests through a reporting mechanism for violations. It is envisaged that these new measures, once enacted, will boost confidence amongst Chinese consumers, but are they enough to overcome the mistrust by the Chinese consumer of e-commerce borne out of harsh experience? That remains to be seen.


The question comes down to whether legislation by itself is enough to change behaviour. If there was clear evidence of consistent enforcement against violators, then that would send a strong message that the non-compliant will be weeded out and shut down. Given that the fines all seem to come in below RMB30,000, it is difficult to predict whether the new legislation will really help consumers to combat the unlawful behaviour of certain online vendors and third-party platforms who do not act lawfully or responsibly. Those vendors and platform operators who wish to build consumer trust and a reputation for compliance in cyberspace over the longer term will no doubt seek to comply with the new legislation, regardless of the size of the punishments. The issue is the small group of vendors and platform operators who wrongfully see the internet as a way to make money without consequences or responsibility. At the end of the day, consumers may still have to rely on the ‘bigger guns’, namely other more general legislation, which may not be specifically targeted at e-commerce, to seek redress against this group rather than the legislation likely to result from the Draft Online Trading Procedures and the Draft Transaction Rules Procedures.

 


2. Aims of the Tentative Online Trading Procedures (Part 1)

 

3. Aims of the Tentative Online Trading Procedures (Part 2)

 

4. Online Retailing Conducted on Third-Party Platforms, Concluding Thoughts

 

Hogan Lovells

 

For further information, please contact:

 

Roy Zou, Partner, Hogan Lovells
roy.zou@hoganlovells.com


Sherry Gong, Hogan Lovells
sherry.gong@hoganlovells.com


Stephanie Tsui, Hogan Lovells
stephanie.tsui@hoganlovells.com


Andrew McGinty, Partner, Hogan Lovells
andrew.mcginty@hoganlovells.com

 

Hogan Lovells TMT Practice Profile in China

 
 

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