What is an 'Unfair Trade Practice'

Unfair trade practice refers to the use of various deceptive, fraudulent or unethical methods to obtain business. Unfair trade practices include misrepresentation, false advertising or representation of a good or service, tied selling, false free prize or gift offers, deceptive pricing and non-compliance with manufacturing standards. Such acts are considered unlawful by statute via Consumer Protection Law, which opens up recourse for consumers by way of compensatory or punitive damages. An unfair trade practice is sometimes referred to as a "deceptive trade practice" or an "unfair business practice."

BREAKING DOWN 'Unfair Trade Practice'

Unfair trade practices are commonly seen in the purchase of goods and services by consumers, tenancy, insurance claims, and settlements and debt collection. Most states' unfair trade practices statutes were originally enacted between the 1960s and 1970s. Since then, many states have adopted these laws to prevent unfair trade practices. Consumers that have been victimized should examine the unfair trade practice statute in their state to determine whether they have a cause of action.

In the United States, unfair trade practices are addressed in Section 5(a) of the Federal Trade Commission Act, which prohibits "unfair or deceptive acts or practices in or affecting commerce." It applies to all individuals engaged in commerce, including banks, and sets the legal standard for unfair trade practices, which may be deemed unfair or deceptive, or both. Below are lists of unfair and deceptive practices as per the rule:

Unfair Practices: An act is unfair where it:

  • causes or is likely to cause substantial injury to consumers;
  • cannot be reasonably avoided by consumers;
  • and is not outweighed by countervailing benefits to consumers or to competition.

Deceptive Practices: An act or practice is deceptive where:

  • a representation, omission or practice misleads or is likely to mislead the consumer;
  • a consumer’s interpretation of the representation, omission or practice is considered reasonable under the circumstances; and
  • the misleading representation, omission or practice is material.

Unfair Trade Practices and Insurance

Unfair trade practices can happen in any industry but are significant enough to prompt the National Association of Insurance Commissioners (NAIC) to issue guidance related to the sale of insurance products. The NAIC defines unfair trade practices as:

  • Misrepresents the benefits, advantages, conditions or terms of any policy; or

  • Misrepresents the dividends or share of the surplus to be received on any policy; or

  • Makes a false or misleading statement as to the dividends or share of surplus previously paid on any policy; or

  • Is misleading or is a misrepresentation as to the financial condition of any insurer, or as to the legal reserve system upon which any life insurer operates; or

  • Uses any name or title of any policy or class of policies misrepresenting the true nature thereof; or

  • Is a misrepresentation, including any intentional misquote of premium rate, for the purpose of inducing or tending to induce the purchase, lapse, forfeiture, exchange, conversion or surrender of any policy; or

  • Is a misrepresentation for the purpose of effecting a pledge or assignment of or effecting a loan against any policy; or

  • Misrepresents any policy as being shares of stock.

The NAIC considers a deceptive trade practice to be any of the above acts coupled with the conditions below:

  • It is committed flagrantly and in conscious disregard of the act or of any rules promulgated hereunder; or

  • It has been committed with such frequency to indicate a general business practice to engage in that type of conduct.

RELATED TERMS
  1. UDAAP

    UDAAP is an acronym referring to unfair, deceptive or abusive ...
  2. Best Practices

    Best practices are a set of guidelines, ethics or ideas that ...
  3. Accounting Practice

    An accounting practice is a routine manner in which the day-to-day ...
  4. Regulation N

    Regulation N is a regulation which oversees financial transactions ...
  5. Consumer Financial Protection Act

    The Consumer Financial Protection Act is an amendment to the ...
  6. Federal Reserve Regulations

    Federal Reserve Regulations are rules put in place by the Federal ...
Related Articles
  1. Insights

    A Short History of the US Federal Trade Commission

    Since the early 1900s, the Federal Trade Commission has preventing anticompetitive, deceptive, and unfair business practices.
  2. Tech

    Unfair Employee Treatment Cost Companies $16 Billion

    Survey finds tech industry employee turnover is impacted by their job experiences.
  3. Financial Advisor

    Buying an Advisory Practice? These Tips Will Help You Get it Right

    Before purchasing a financial advisory practice, ensure due diligence is done and that you understand the business and culture of the organization in question.
  4. Investing

    Fred Wilson on Amazon.com’s Unfair Advantage

    Fred Wilson of USV tells StockTwits Howard Lindzon that Amazon Prime has unfair advantage in content.
  5. Investing

    5 Reasons Why Currency Manipulation Matters for Average Investors

    Find out why the Treasury Department identified five potential offenders of currency manipulation, and see how this affects investors in the United States.
  6. Financial Advisor

    Tips for Advisors Who Retire & Sell Their Practice

    Many financial advisors are leading a practice without ideas about how it will continue after they retire. Here are a few tips on how to jumpstart the process.
  7. Financial Advisor

    Key Metrics to Measure Your Advisory Practice

    These key metrics can help financial advisors measure their success.
  8. Investing

    Google Probed For Tracking Users' Location

    Google is facing a probe in Arizona for its alleged recording of users' locations, a practice that breaches consumers' privacy rights
  9. Small Business

    What are antitrust laws?

    Learn about antitrust laws or "competition laws." These statutes protect consumers from predatory business practices by ensuring fair competition exists.
  10. Personal Finance

    5 Unethical Collection Scams That Consumers Should Be Aware Of

    Here are a few of the ways that scam artists prey on those in debt.
RELATED FAQS
  1. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  2. Do I still owe debt collectors for a debt that's past the statute of limitations ...

    Learn more about the statutes of limitations that govern certain personal debts and why you maintain obligations as a debtor ... Read Answer >>
  3. How can a creditor improve its Average Collection Period?

    Read about some of the ways that a business can improve its accounts receivable management practices to shorten its average ... Read Answer >>
  4. How does revenue sharing work in practice?

    Find out how revenue sharing works as profits are distributed among associated business partners. Learn how revenue sharing ... Read Answer >>
Trading Center