Following numerous consumer complaints, Shein and Temu face early EU scrutiny for DSA compliance

It was only recently confirmed that ultra-low-cost e-commerce giants Shein and Temu are subject to centralised enforcement of the EU’s strictest tier of digital services rules, the Digital Services Act (DSA), but on Friday the Commission announced that a series of requests for information (RFIs) had been sent to both platforms regarding their compliance with various requirements of the law.

The DSA is the bloc’s recently relaunched online rulebook that aims to raise standards for digital services, including marketplaces, with lawmakers touting the regime as a preferred tool for reducing risks to consumers in areas such as the sale of illegal or unsafe goods.

Both markets have been subject to the general rules of the regime since mid-February, but were recently designated as so-called very large online platforms (VLOPs) under the DSA in April and May respectively, further increasing their regulatory risk as Commission enforcement authorities join in supervision.

Just before being designated as a VLOP, Temu also found itself in the crosshairs of a series of complaints filed by consumer protection groups across the bloc – alleging that the platform was rife with manipulative design tricks that they said could pose a range of risks to children. The complaints also accused Temu of running “unclear recommendation systems” and failing to ensure seller traceability, arguing that consumers had no way of knowing whether the products it sold met EU safety standards.

The commission said today’s enforcement actions are based on concerns expressed in complaints.

EU information requests highlight areas where both markets are subject to early DSA scrutiny, which could trigger formal investigations if EU law enforcement authorities believe they do not meet legal consumer protection standards.

The system carries penalties of up to 6% of global annual turnover for confirmed violations, so any failure to comply with the rules could prove costly for buy-high-flog-it-low online sellers. Strict enforcement of higher standards in markets could even – potentially – force changes to business models that clearly rely on generating high sales volumes.

At the very least, the pair’s very cheap and mass-market approach raises questions about the quality and safety of the product. Enforcing EU regulations in this area therefore seems like an interesting test case for the DSA.

The Commission appears to have had some concerns about both markets early on. In a press release, the EU said it was asking Shein and Temu for more information on the measures taken to comply with the DSA’s obligations related to so-called “notice and action” mechanisms, which should allow users to notify markets about illegal products.

It also requested information on the design of their online interfaces, which must not be deceived or manipulated by EU-wide rules, for example through so-called “dark patterns”. Other areas where the Commission said it expected additional information from both companies related to the protection of minors; transparency of recommender systems (that is, the algorithms used to reveal things such as related products); traceability of traders; and “compliance by design.”

While Shein and Temu were designated as VLOPs for only a few months, as noted above, most DSA requirements apply to both from mid-February. And while enforcement of the general rules is typically decentralized to a network of digital service coordinators (DSCs) located at EU Member State level, as designated VLOPs Shein and Temu may also face enforcement of the general rules by the Commission – i.e. in addition to Irish DSC oversight, as their regional headquarters are in Dublin.

EU lawmakers designed this two-tier enforcement structure to avoid the risk of forum shopping being used to undermine DSA enforcement on larger platforms, as was the case with the bloc’s decentralized enforcement of the General Data Protection Regulation.

As for the additional set of DSA requirements for VLOP – which covers issues such as algorithmic transparency and systemic risk mitigation in areas such as minors’ mental health – the Commission is the sole implementing body.

Both markets, however, still have several months before they are expected to comply with these additional obligations: Shein is due to submit its first risk assessment report to the Commission in August, while Temu has until the end of September to submit its first risk report.

However, with these early requests for information, the Commission wants to be at the forefront of assessing future reports and is keen to respond quickly to consumer protection concerns that are already widely expressed.

Shein and Temu have until July 12 to provide the requested information. The EU said it would then “assess next steps”, noting that this “may involve” the formal opening of proceedings, i.e. if any breaches of the rules are suspected.

Shein and Temu were contacted for comment on the Commission’s information requests.

A spokesperson for Shein confirmed it had received a request for information from the Commission, telling us the company is “working to quickly resolve this issue.” “We share the Commission’s aim to ensure that EU consumers can shop online with peace of mind, and we will continue to work closely with the Commission to ensure compliance with the Digital Services Act,” they added.

A Temu spokesperson also told us: “We fully cooperate with the EU. We would also like to reiterate that we are fully committed to complying with all applicable laws and regulations in the markets in which we operate.”

https://techcrunch.com/2024/04/26/shein-dsa-vlop https://techcrunch.com/2024/05/31/chinese-marketplace-temu-faces-eu-rules-very-large-online -platforma