FITNESS SERVICES (PRE - PAID

							    REVIEW OF THE NSW
FITNESS SERVICES (PRE-PAID
      FEES) ACT 2000


      ISSUES PAPER




                  OCTOBER 2006
ABOUT THIS PAPER
The Office of Fair Trading has released this issues paper to assist individuals
and organisations wishing to make a submission to this review.

The issues paper identifies a range of matters for consideration and comment
by interested parties. Preliminary consultation was conducted with key
interest groups to assist in identifying these issues.

Additional hard copies of the paper can be obtained from the Office of Fair
Trading by calling (02) 9338 8915.

This issues paper is also accessible on our website
www.fairtrading.nsw.gov.au

The issues and options identified in this paper are not intended to be
exhaustive. Submissions are welcome on other matters relevant to improving
the effectiveness of the legislation that may not have been raised here.

HOW TO HAVE YOUR SAY
There is no specific format for a submission. Submissions may range from a
short letter outlining your views on a particular topic to a substantial document
covering a range of issues. Where appropriate, you should provide evidence
to support your comments, such as practical examples or documentation.
Although every submission is welcome, multiple, identical submissions do not
carry any more weight than the merits of an argument in a single submission.

To assist with the assessment process it would be helpful if, where applicable,
you make reference to the relevant issue number/s in your submission.



        Written submissions should be posted, faxed or e-mailed to:

        Project Manager, Fitness Services Act Review
        Policy & Strategy Division
        Office of Fair Trading
        PO Box 972
        PARRAMATTA NSW 2124

        fax:      (02) 9338 8929
        e-mail:   policy@oft.commerce.nsw.gov.au

        The closing date for submissions is 1 November 2006




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TABLE OF CONTENTS

About this Paper ..............................................................................................2

How to Have your Say .....................................................................................2

Table of Contents.............................................................................................3

The Need for this Review.................................................................................4

Background......................................................................................................4

Objectives of the Act ........................................................................................6

Coverage .........................................................................................................7

Pre-payment of Fees .......................................................................................8

Do the Terms of the Act Remain Appropriate for Securing the Objectives? ....9

Other Issues...................................................................................................10

List of Issues Raised in this Paper .................................................................12




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THE NEED FOR THIS REVIEW
The Fitness Services (Pre-paid Fees) Act 2000 has statutory review
requirements under section 21. This provision requires the Act to be reviewed
to determine whether the policy objectives of the Act remain valid and whether
the terms of the Act remain appropriate for securing those objectives.

Following the assessment of submissions made, and further consultation with
key interest groups, a report on the outcome of the review will be prepared for
the consideration of the Minister for Fair Trading, the Hon. Diane Beamer MP.
This report will be tabled in Parliament by 13 December 2006.


BACKGROUND
There is strong evidence that participation in regular physical activity provides
members of the community with substantial physical, social and mental health
benefits. The fitness industry is an important sector in providing physical
activity opportunities to the community.

The Code of Practice for Fitness Centres in NSW was developed and
implemented in July 1998 to give an assurance to consumers that they were
protected physically and financially when choosing to purchase the services
offered by fitness centres. The Code’s introduction was in response to a
number of gym closures and industry concern about the lack of industry
standards.

The voluntary code is administered and promoted by the State industry body,
Fitness NSW. Following a review and relaunch, the updated and improved
Fitness Industry Code of Practice replaced the Code of Practice for Fitness
Centres on 1 July 2005.

The Fitness Services (Pre-paid Fees) Act 2000 commenced in March 2001 to
give effect to the core recommendation of an independent review of the
Code's first year of operation, undertaken by the New South Wales Sports
Advisory Council in 1999.

A major factor in the development of the legislation was the Government's
concern about the number of operators who did not comply with important
aspects of the Code. The 1998 Code limited long-term membership pre-
payments and a segment of the industry, arguing that the clause was too
restrictive, chose not to become signatories to the Code. These operators
continued to sell low-cost, long-term, pre-paid membership plans. For
example, memberships of five years were sold for $1,500, often before the
centre had opened. The concern was that operators selling long term
memberships may not remain viable for the duration of the memberships and
could go out of business, with resultant losses to consumers and decreased
industry confidence.




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The Fitness Services (Pre-paid Fees) Act seeks to reduce the risk of
consumer loss by limiting fitness centre membership pre-payments to a period
of 12 months.

The legislation is aimed at the suppliers of fitness services for a fee. It
provides for the exclusion of specific organisations and individuals who may
provide fitness services in the course of delivering sporting or certain
therapeutic services (eg, general medical practice) but whose business is not
based on the provision of fitness services for a fee.

The core provision of the Act prohibits suppliers from seeking or accepting a
pre-paid fee for agreed fitness services for a period that exceeds 12 months
whether that 12-month period is consecutive (an unbroken 12-month period)
or cumulative (broken in accordance with any ‘time stop’ arrangements that
may form part of the fitness services agreement). To do so is to commit an
offence.

It is also an offence for a supplier of fitness services to fail to hold the money
received as a pre-paid fee for fitness services at a fitness centre that has not
commenced operations in a trust account for the consumer and in accordance
with the regulations, until the centre commences operations.

The Act provides for the termination of a fitness service agreement if the
supplier does not commence to provide the agreed service to the consumer
within 3 months.

The Act also provides for a consumer to sue a supplier for recovery of pre-
paid fees that were accepted or received in breach of the legislation or under
an agreement terminated pursuant to the Act.

Investigation and Complaint Statistics

The Office of Fair Trading administers the Act and, in accordance the
functions of the Commissioner for Fair Trading under the Fair Trading Act
1987, receives and deals with complaints relating to the supply of goods and
services and takes action to remedy infringements of the provisions of fair
trading legislation.

Fair Trading began collecting data on complaints related to health clubs/gyms
in 2000.      Prior to that date there was no separate product/service
classification and complaints would have been recorded among other
personal services.

Between 2000 and 2005 a total of 1,070 formal, written complaints were
received about health clubs/gyms. In the years since the Fitness Services
(Pre-paid Fees) Act commenced, the complaint intake was:

Total
complaints    2001          2002          2003          2004          2005
received
997           149           180           185           228           255


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These figures represent less than one per cent of the complaints received
about fair trading transactions generally. Following intervention by Fair
Trading, 50 per cent of the 997 complaints were categorised as complaint
satisfied, clarified, withdrawn or not justified and 25 per cent as ‘referred to
Tribunal’. ‘Referred to Tribunal’ is recorded as an outcome when informal
negotiation with the trader does not resolve the complaint and the consumer is
advised of the option of applying for a determination by the Consumer, Trader
and Tenancy Tribunal.

The remaining 25 per cent of complaints were recorded as resulting in a wide
range of outcomes, including provided for information only, referred to other
agencies, lapsed while awaiting further information from complainant, unable
to contact trader, trader in liquidation, publications provided.

Some complaints are referred for investigation and possible compliance
action. These are matters where there is an alleged breach of legislation or
where unfair or unjust practices may have occurred. Fair Trading’s immediate
objectives are to ensure that the particular conduct ceases and that affected
consumers obtain redress. In the case of the Fitness Services (Pre-paid
Fees) Act, an investigation will be undertaken when a fitness centre closes
without warning and members are unable to obtain the services they paid for,
or there is an allegation that memberships are sold in breach of the Act.

Since the Fitness Services (Pre-paid Fees) Act commenced, nine
investigations have been undertaken. No major instances of consumer
detriment were recorded.


OBJECTIVES OF THE ACT
One of the purposes of this review is to determine whether the policy
objectives of the Act remain valid.

The Act does not explicitly state its objectives. The Second Reading Speech
stated that the object of the Act is to protect consumers against financial loss
caused by the failure of fitness centres. In particular, the Act aims to tighten
consumer protection with respect to long-term pre-paid memberships.

Issues regarding the effectiveness of provisions aimed at achieving these
objectives are discussed in this Paper. However, submissions are also
sought on the question of whether the objectives, as stated above, remain
valid.

Issue 1:
Is there a need to change the current objectives of the Act in any way?




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COVERAGE
What the Act says (Sections 3, 5):

Section 3 defines a ‘fitness service’ to mean the provision of any one or more
of the following:

(a) a fitness assessment,
(b) an exercise program or other program for promoting fitness,
(c) an exercise class,
(d) the use of exercise equipment,
(e) any other facility or service prescribed by the regulations,
(f) membership rights in relation to the use of premises for anything referred
    to in paragraphs (a)–(e).
Section 5 provides that the Act does not apply to the following:

(a) the leasing of fitness equipment,
(b) a fitness service provided by a medical practitioner in the practice of his or
   her profession,
(c) a fitness service provided by or on behalf of:
    (i) the New South Wales Institute of Sport constituted by the Institute of
        Sport Act 1995, or
    (ii) the Australian Institute of Sport referred to in section 9 of the Australian
         Sports Commission Act 1989 of the Commonwealth,
(d) any other person or body belonging to a class of supplier of fitness
   services that is specified by the regulations in such circumstances as may
   be specified by the regulations,
(e) any other fitness service, or fitness services, belonging to a class of
   fitness services that is specified by the regulations in such circumstances
   as may be specified by the regulations.
The following service providers are prescribed for the purposes of section
5(d):
      registered physiotherapists, and
      accredited occupational therapists.

Identified issues:

Comments are sought on whether the definition of ‘fitness service’ is
sufficiently comprehensive, the services and service providers excluded from




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the Act are appropriate and whether there are any other services or providers
that should be exempt.

Issue 2:
Is the coverage of the Act appropriate?



PRE-PAYMENT OF FEES
What the Act says (Sections 8 - 11):

Section 8 makes it an offence for a supplier to seek or accept a pre-paid fee
for a fitness service to be provided by the supplier under a fitness service
agreement for a period that exceeds 12 months, whether or not that period is
to be, or might be, consecutive or cumulative.

Section 9 makes it an offence for a supplier to seek or accept a pre-paid fee
for services at a fitness centre that is leased and the period of the fitness
service agreement exceeds the unexpired term of the lease, unless the
supplier has notified the consumer in writing of the expiry date of the lease
and the consumer has acknowledged that notification in writing.

Section 10 makes it an offence for a supplier to seek or accept a pre-paid fee
for services at a fitness centre if the supplier does not intend to provide the
agreed services within 3 months or if there are reasonable grounds, of which
the supplier is aware, or ought reasonably to be aware, for believing that the
supplier will not be able to provide the agreed services within 3 months.

A supplier who accepts a pre-paid fee must refund the fee within 7 days of the
expiry of 3 months if the fitness centre has not commenced operations within
3 months after the date on which payment is accepted.

Section 10 also provides for the termination of a fitness service agreement if
the supplier does not commence to provide the agreed service to the
consumer within 3 months.

Section 11 requires a supplier who receives a pre-paid fee to hold the money
exclusively for the consumer in a trust account until the supplier commences
to provide the agreed service to the consumer.

Identified issues:

Where a fitness centre is under construction or major refurbishment, and has
not commenced providing agreed fitness services, the legislation limits the
supplier to selling memberships not more than three months before providing
those services. It has been suggested that the period for pre-sales should be
6 months rather than 3 months, subject to a prohibition on accepting pre-paid
fees prior to the opening of the fitness centre.




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It is argued that a longer pre-sales period would mean there is a greater
likelihood that the new centre will have a membership level on opening that
ensures its continued viability. If no pre-paid fees are accepted, new
members will have the use of their money (instead of it being paid into a trust
account as is now the case) until they can actually receive fitness services
from the centre.

Issue 3:
Are the prohibitions on pre-payments necessary and effective?

Issue 4:
Should the rules about sale of memberships, before a fitness centre has
commenced providing agreed fitness services, be changed?



DO THE TERMS OF THE ACT REMAIN APPROPRIATE FOR
SECURING THE OBJECTIVES?
One of the purposes of the review is to determine whether the terms of the Act
remain appropriate for securing the Act’s objectives. As stated earlier, the
object of the Act is to protect consumers against financial loss caused by the
failure of fitness centres.

The Act does this by:
•   prohibiting suppliers from:
       o seeking or accepting a pre-paid fee for agreed fitness services for a
         period that exceeds 12 months;
       o seeking or accepting a pre-paid fee for services for a period that
         exceeds the unexpired term of the fitness centre’s lease without
         notifying the consumer of the expiry date;
       o seeking or accepting a pre-paid fee where services will not be
         supplied within three months; and
•   requiring suppliers to hold the money received as a pre-paid fee in a trust
    account for the consumer until the centre begins to provide the agreed
    fitness services.

From 1995 until the commencement of the Act in March 2001, the Office of
Fair Trading and its predecessor had conducted 16 investigations into the
closure of fitness centres. The majority of closures involved consumer
detriment through the loss of pre-paid fees.

Since March 2001, six investigations into fitness centre closures have
commenced and three investigations were undertaken into the alleged sale of
memberships beyond the lease period. In no case was major consumer
detriment established, although in some instances individual members were
unable to obtain refunds.



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Submissions are invited to comment on whether the terms of the Act remain
appropriate for securing the Act’s objectives. Comment is sought on the
efficiency and effectiveness of the measures designed to protect pre-paid
fees. Where possible, submissions are encouraged to include practical
examples or evidence in support of the comment being made.

Issue 5:
Do the terms of the Act remain appropriate for securing the Act’s objectives?



OTHER ISSUES
Fair Trading complaint statistics

Complaints received by the Office of Fair Trading are recorded under
product/service, practice and outcome codes. An analysis of the 1,070
complaints about health clubs/gyms made during the calendar years 2000 –
2005 showed that the two major complaint categories concerned
cancellation/cooling off (246) and refund (199) practices. Within those
practice codes, the most common outcomes were ‘complaint satisfied’ (158),
‘referred to Tribunal’ (101) and ‘complaint clarified’ (71) – a total of 330
matters.

Since 2003 the Fair Trading Customer Assistance System On-line has
recorded complaint details as well. Of the 330 matters, 142 were received
between 1 September 2003 and 31 December 2005. A more detailed
analysis of the subject matter of these complaints was therefore possible.
This revealed that the largest category (30 per cent, or 42 out of 142)
concerned periodic billing membership contracts which provide that monthly
debits will continue from the consumer’s account until the consumer gives the
fitness centre one month’s written notice of their intention to terminate the
contract. Consumers complained about deductions continuing even though
they were no longer using the services. In 27 of these cases the outcome
was ‘complaint satisfied’ or ‘complaint clarified’ and in 15 the outcome was
‘referred to the Tribunal’.

The remaining complaints concerned a range of issues, including cancellation
in the event of medical condition or incapacity, delays in processing a
cancellation and poor understanding of contract terms.

Issues raised by these consumer complaints include:

•    Failure to understand the structure of membership contracts. Generally
     there is a minimum period of membership, but the membership agreement
     continues after the expiry of the minimum period, unless the consumer
     gives advance notice of a desire to terminate membership at that time.
     Consumers who do not comply therefore continue to pay for services they
     are no longer using.




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•    Difficulty in cancelling the contract. Some centres require consumers to fill
     out particular forms or attend in person to complete a form. This can have
     the effect of delaying termination of membership, with the result that
     consumers continue to pay for services they are no longer using.

•    Inability to cancel during the minimum period.         If the consumer’s
     circumstances have changed for reasons beyond their control, the result is
     that the consumer continues to pay for services they are no longer using.

•    Charging a cancellation fee which is in excess of the loss caused to the
     centre if a consumer cancels the contract during the minimum period of
     membership.

Submissions are invited to raise any other matters concerning the Act’s
provisions or operation.

Issue 6:
Are there any other issues you wish to raise about the legislation?




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LIST OF ISSUES RAISED IN THIS PAPER


Issue 1:   Is there a need to change the current objectives of the Act in
           any way?

Issue 2:   Is the coverage of the Act appropriate?

Issue 3:   Are the prohibitions on pre-payments necessary and
           effective?

Issue 4:   Should the rules about sale of memberships, before a
           fitness centre has commenced providing agreed fitness
           services, be changed?

Issue 5:   Do the terms of the Act remain appropriate for securing the
           Act’s objectives?

Issue 6:   Are there any other issues you wish to raise about the
           legislation?




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