The sharing economy is a phenomenon which profoundly changes the way consumers buy or rent goods and services. It also allows consumers to enter the market to provide goods, services, time or skills themselves and become – what we call – prosumers. The benefits the sharing economy offers to consumers and prosumers are important, but so are the risks.
A promising story so far
Consumers like what is on offer and are adventuring themselves into this new world in great numbers. A recent poll by BEUC’s member organisations in Italy, Spain, Belgium and Portugal found that from April to July 2015, over 70% of respondents had participated in the sharing economy at least once. A recently published survey by the European Commission found that the two main reasons consumers jump on the wave of the sharing economy are its convenience and affordability: 42% of those who have used the sharing economy do so because it is more convenient, and 33% because services are cheaper or free.
The sharing economy puts innovative business models a few clicks away from consumers’ computers and smartphones. Business models where the traditional business-to-consumer relationship is no longer the norm but where trilateral relationships emerge: a consumer, a provider of a service or good, and the intermediating platform.
The sharing economy makes consumer markets more efficient by lowering transaction costs and offering products and services which are often cheaper than in the traditional economy. Sharing economy platforms disrupt traditional markets by pushing operators to modernise their offer and business models. In general, this kind of competition is good for consumers.
Entry barriers for prosumers who want to provide goods and services or offer their time and skills have decreased immensely. Provided a prosumer meets the platform’s requirements, any individual with an asset such as an apartment, a tool or a car, can join a platform and generate additional income. 32% of the people surveyed by the European Commission had already acted as prosumers on sharing economy platforms.
The sharing economy makes consumer markets more efficient by lowering transaction costs and offering products and services which are often cheaper than in the traditional economy.
Another important characteristic of sharing economy business models is that, unlike traditional markets, relationships are often based on trust between peers, making reputation and reviews systems crucially important. Therefore the transparency of this reputation and reviews systems is essential to strengthen trust among all market participants.
Time for forward-looking laws and policies
The sharing economy is much-talked about in EU and national policy-circles. EU and national leaders should embrace the sharing economy and the benefits it can bring about. But for the sharing economy to be a success in the EU, it is imperative to have a fit-for-purpose legal and policy framework.
The European Union’s legal framework, designed to protect consumers as the weaker party in an economic and legal relationship, contains laws that were drafted in the pre-internet era, and more recent ones which were conceived when the sharing economy was yet nothing but a distant concept.
[T]he Commission’s communication will prove insufficient to provide the necessary clarity and legal certainty for the sharing economy to succeed in Europe.
The main challenge ahead of EU legislators is to assess whether additional measures are needed. The European Commission’s communication on the sharing economy contains a useful overview of applicable EU legislation, as well as non-binding criterion that national regulators could follow when analysing legal questions that will inevitably arise. Yet the Commission’s communication will prove insufficient to provide the necessary clarity and legal certainty for the sharing economy to succeed in Europe.
A complex legal environment
In a typical sharing economy trilateral business model, there are at least two distinct services taking place. It is important to distinguish between these different services, the nature of the economic actors and the number of transactions between them.
The service which poses the biggest number of legal challenges is the service provided by a prosumer or trader to a consumer via the platform, or what the European Commission calls “the underlying service”. In many cases, these services take place offline, such as the sale of a good, transport, accommodation, or home assistance service. In other cases, these services are delivered entirely online, such as a counselling, language lessons or technical programming.
The most immediate questions that need to be addressed are: what is the legal nature of the service provider, is it a trader or professional or is it a prosumer? What is the role of the intermediary platform in the provision of this service, and therefore what should its responsibilities be?
The ability of EU and national policy makers to define a legal and policy framework that gives all participants in the sharing economy clarity about the above questions will be paramount to its success.
Trader or prosumer: a crucial distinction
Different laws apply depending on whether the party offering the service or selling the good is a trader or a prosumer. Under EU law, a prosumer is considered as such when he or she acts outside of his/her business or profession. The moment the economic activity becomes a business-model the person stops being considered a non-professional actor, and the entire body of consumer protection law is applicable.
National legal systems build on this approach and can set certain thresholds based on criteria such as frequency or profit size. For example, in accommodation platforms like AirBnB or HomeAway, users offering their private properties for short rental periods could be considered as businesses if certain conditions are met. These criteria differ from country to country, and might even vary within different regions or cities.
The European Commission’s communication outlines a series of examples such as the frequency of the service, the existence of a profit-seeking motive, or the level of turnover, that could be used by Member States to determine when a prosumer is to be considered a trader.
While the Commission’s analysis is reasonable, the proposed solution does not solve the problem of different approaches by different Member States, a legal and regulatory fragmentation that creates confusion and uncertainty. Differences in how Member States will treat this question risks a race to the bottom in terms of protection standards. For example, platform providers could decide to establish themselves in the country where compliance with consumer protection obligations might seem cheaper or more straight-forward for its users.
The rationale behind the application of consumer law only to business-to-consumer transactions is that it is the weaker party that needs to be protected, as the relationship is considered unlevelled because there is an asymmetry of information, experience and/or bargaining power.
On the other hand, consumer-to-consumer (C2C) transactions are covered by national contract law regimes, where it is assumed that there are no asymmetries in the parties’ positions. Yet even in C2C relationships, consumers should not be left unprotected, and there is a need to find a balanced framework. The role of the platform is important in informing the parties that even if the transaction is C2C, certain rules apply.
[E]ven in C2C [consumer-to-consumer] relationships, consumers should not be left unprotected, and there is a need to find a balanced framework.
The problem of uncertainty regarding the legal status of the service provider is not only an issue for consumers. Prosumers too may find themselves in risky situations if they are not aware of their rights and obligations towards the consumer and likewise of their rights and obligations towards the platform. This multi-sided lack of information can function as a disincentive for prosumers and as a source of mistrust for consumers.
Platforms play a key role in the sharing economy. The success of the sharing economy in Europe requires clear and enforceable rules that determine the platform’s responsibility stemming from its real role in all services involved. The key question therefore is how to determine when a platform is not a passive but an active participant with regards to each service.
First, regarding the intermediary service, the liability regime for third party content provided by the E-Commerce Directive applies and should be maintained. This regime has encouraged access to information and created the right environment for the proliferation of innovative business models that allow users to generate their content or advertise their products or services freely, a mechanism which has in turn allowed the surge of the sharing economy.
Other legal obligations are set out by EU consumer law and their application will depend on the role of the platform (active/passive), on whether the platform provider acts for purposes relating to its business, and whether contracts are concluded between the platform provider and the consumer/prosumer.
Second, regarding the “underlying service” (transport, accommodation, etc.), the legal regime and the rights and responsibilities of each actor largely depend on the concrete design of the business model behind the service/s offered and the design of the platforms themselves. A crucial distinction is to be made between models where the platform exclusively links sellers of products/services with buyers and models where the platform itself has an active role in the sale or provision of products/services. For example, considering that Uber obliges consumers to register on the platform, markets the transport service (calling them “Ubers”), negotiates the terms of service, sets the transport fare based on its own algorithm and handles the payment for both parties, it is clear that Uber is more than a mere intermediary between a driver and a traveller.
Some sharing economy platforms are not passive intermediaries but have an active role in the marketing, negotiating, contracting and/or delivery of the underlying service, and should therefore bear the legal obligations and liabilities associated with that type of activity. If the platform is also considered to be the provider of these services, it must respect EU consumer law and fulfil certain pre-contractual and contractual information duties. Yet some platforms that have such an active role waive all their responsibility for the safety, quality and fairness of the service.
The success of the sharing economy in Europe requires clear and enforceable rules that determine the platform’s responsibility stemming from its real role in all services involved.
The European Commission’s communication recommends analysing the ‘activeness’ of the platform by considering the degree of control or influence that it has over the provision of these services. In order to determine such control or influence, the Commission sets outs criteria such as the control over the price of the service, the existence of obligatory key contractual terms between the service provider and the consumer, the ownership of key assets or the existence of an employment relationship. According to the Commission’s communication, the presence of these indicators would determine that the platform itself is to be considered as the provider of the underlying service, and therefore directly responsible if something goes wrong.
While this seems to be adequate, the problem of fragmented national approaches also exists. A likely scenario will be that the same platform that is considered directly responsible for the services provided by its traders and prosumers in one country, is not considered responsible in another country. This does not help any of the market participants, and especially not prosumers and consumers, who will not necessarily have easy to understand information as to who is responsible when problems arise.
Third, many sharing economy platforms offer additional services to complement their intermediary role. Such services relate to insurances, travel guides, booking systems, secured payment facilities, identity verification systems, and so on. As direct providers of these services, platforms are directly responsible if something goes wrong.
Urgent action is necessary
Resolving the legal questions outlined above requires urgent, decisive action on the part of EU and national policy-makers. Issuing non-binding guidance on existing laws which might not be fit for purpose is not the best approach. Such guidelines cannot provide a formal interpretation of EU law and do not address uncertainties that might stem from national laws. In addition, there is no legal obligation, neither for enforcement bodies nor for courts or business to take these guidance documents into account or to abide by them when interpreting or enforcing EU law.
Fostering and incentivising the opportunities offered by the sharing economy and mitigating its risks will possibly require a combination of legislative changes, soft law mechanisms and potentially co-regulatory initiatives, but policy-makers need to act now.
This article was first published in the E-Commerce Law & Policy journal.