FTC's new rule on fake reviews: Implications for cosmetics and personal care industry

The Federal Trade Commission (FTC) recently announced a new Trade Regulation Rule aimed at curbing deceptive online reviews and testimonials, a significant development with far-reaching consequences for cosmetics and personal care product manufacturers and suppliers. This Rule, which comes into effect on October 21, 2024, grants the FTC the authority to impose civil penalties of up to $51,744 per violation for deceptive practices, including AI-generated fake reviews and false testimonials.

We spoke to Katherine Armstrong, Deputy Director of the National Advertising Division (NAD) at BBB National Programs, who provided insights on the Rule's potential impact. Armstrong emphasized that this regulation is designed to address growing concerns over misleading consumer reviews, which have become a vital source of marketplace information.

A response to increasing deception in online reviews

According to Armstrong, the new FTC rule is part of an effort to "combat the growing problem of deceptive practices associated with consumer reviews," an issue that has gained attention due to the reliance of consumers on online reviews to make purchasing decisions. Armstrong noted that this action was spurred, in part, by the Supreme Court's 2021 AMG Capital Management decision, which limited the FTC's ability to seek monetary relief.

As a result, the new Rule allows the FTC to impose civil penalties and seek monetary redress for consumers affected by fraudulent advertising.

Armstrong highlighted that the Rule "builds on existing truth-in-advertising principles," reinforcing that endorsements, testimonials, and reviews must be both genuine and transparent. This focus is particularly critical in an industry where consumer trust is central to brand loyalty and product success.

Key implications for cosmetics and personal care brands

For the cosmetics and personal care sectors, this regulation represents a significant shift. Companies in these industries must now take immediate steps to ensure compliance.

Armstrong advised brands to "review how they use reviews and testimonials" and emphasized that offering incentives for reviews that express a specific sentiment, either positive or negative, will no longer be permissible. Furthermore, brands must avoid using insiders to write reviews without clearly disclosing the relationship to the business.

"The Rule requires brands to ensure that all endorsements and testimonials are genuine and reflect the honest opinions of consumers," Armstrong stated. She also noted that the FTC's focus extends beyond direct advertising practices and places responsibility on third-party platforms that host consumer reviews to take an active role in combating fake testimonials.

Compliance strategies for brands

To avoid potential penalties, Armstrong recommended that brands start by aligning their marketing practices with the new regulations. "Brands should ensure that reviews reflect real consumer experiences and stop any practices where reviews are compensated," she advised. This guidance is particularly relevant as the Rule prohibits incentivized reviews, a common practice among cosmetics companies.

Armstrong elaborated on compliant versus non-compliant practices and explained that "compliant practices include asking for genuine feedback without offering rewards and clearly stating when a review comes from someone with a connection to the company." Conversely, non-compliant activities include offering incentives for specific reviews, failing to disclose insider connections, and using fake or misleading reviews and testimonials.

The cost of non-compliance

The penalties for non-compliance with the new Rule are severe. Armstrong warned that "the FTC can seek civil penalties of up to $51,744 for each instance of non-compliance."

In addition, companies may face monetary redress claims from consumers harmed by deceptive advertising. This heightened enforcement power signals the FTC's commitment to aggressively pursue violators and ensure fairness in the marketplace.

For cosmetics and personal care brands, Armstrong sees this as a pivotal moment to review internal practices. "This is a great time for brands to make sure their house is in order," she said, and emphasized that the FTC is expected to enforce the Rule vigorously.

Long-term impact on industry practices

The broader implications of the new Rule extend beyond just compliance. Armstrong predicted that the threat of enforcement actions would serve as a deterrent to companies considering deceptive practices.

She noted that the Rule "will help create a level playing field" and ultimately benefit both consumers and businesses by promoting fair competition.

While the FTC’s new regulation specifically addresses reviews and testimonials, Armstrong suggested that other regulatory changes could be on the horizon. For instance, the FTC is expected to release revisions to its Guides for the Use of Environmental Marketing Claims, which could impact how cosmetics companies market their products' environmental benefits.

The new FTC Rule on deceptive reviews and testimonials marks a significant development for the cosmetics and personal care industry. As Armstrong noted, compliance is not optional—brands must act swiftly to revise their marketing strategies and ensure that all consumer reviews and testimonials are transparent, genuine, and free from incentives.

With the potential for hefty fines and consumer redress, cosmetics and personal care product manufacturers and suppliers face a critical opportunity to build trust through more authentic and ethical advertising practices.

In light of these changes, Armstrong urged companies to stay informed about regulatory developments and to be proactive in adapting to emerging guidelines. By fostering transparency and honesty in their marketing practices, cosmetics brands can not only avoid penalties but also strengthen consumer trust and enhance their competitive standing in the marketplace.