Shein to face EU's strictest rules for online marketplaces

Ultra-fast fashion e-commerce giant Shein will be subject to an additional layer of governance rules targeted at very large online platforms (VLOPs) under the European Union's Digital Services Act (DSA), the Commission announced Friday.

Shein had reported passing an average of 45 million monthly users in the region -- which is the threshold for the EU to designate VLOPs under the DSA.

The designation is important as it means the Singapore-headquartered marketplace will soon have to comply with the strictest level of online governance -- requiring it to take steps to identify and mitigate systemic risks, such as related to the sale of counterfeit or illegal goods or other types of content which could pose harms to consumers' well-being.

Other DSA obligations for VLOPs include a requirement to publish an ads library, as well as providing access to platform data to external researchers studying systemic risk.

Shein joins roughly two dozen platforms already designated as VLOPs or VLOSE (very large online search engines) by the EU. Other VLOP marketplaces include the likes of AliExpress, which is already under investigation by the Commission for suspected breaches of the DSA; Amazon, which has challenged its designation (but remains subject to the rules in the meanwhile);; and Zalando.

The DSA's general obligations already applied to Shein, as one of likely thousands of online services in scope of the general rules. But being named a VLOP amps up the regulatory risk for the fast-fashion giant. The EU will expect Shein's first risk assessment report to be submitted in four months' time.

Penalties for failing to comply with the DSA, meanwhile, can reach up to 6% of global annual turnover. The maximum fine does not increase for VLOPs, but with more obligations piled on them the level of regulatory risk they're subject to certainly rises.

So far no platforms or services have been found to have breached the DSA so it remains to be seen how penalties might be meted out in practice. But it's logical that larger platforms could also face stiffer fines for any compliance failures.

While fashion was Shein's initial product focus the e-commerce giant has been rapidly expanding its inventory into a far broader marketplace, covering a growing range of lifestyle and homeware categories (such as cosmetics, supplies for schoolkids and products for pets).

Its tactic of offering a vast range of fashion-focused goods, typically at bargain basement prices, means the marketplace is especially popular with young users. However it's a dynamic that could amp up the regulatory risk for Shein as the Commission has said its priorities in enforcing the DSA include honing in on risks related to child protection and marketplace safety. Cheap goods may also not have the highest safety standards.

"The Commission services will carefully monitor the application of the DSA rules and obligations by the platform, especially concerning measures to guarantee consumer protection and address the dissemination of illegal products," the EU wrote in a press release accompanying Shein's designation. It added that it is "ready to engage closely with Shein to ensure these are properly addressed".

Prior to Shein being designated a VLOP, oversight of its compliance with the DSA fell to the Irish Digital Services Coordinator (IDSC), as its EMEA HQ is located in Dublin. But the Commission enforces the subset of DSA rules that apply to VLOPs so it will be taking up the oversight baton on the marketplace -- alongside the IDSC's ongoing supervision of Shein's compliance with the rulebook's general obligations.

Responding in a press release, Shein's global head of public affairs, Leonard Lin, wrote: “We share the Commission’s ambition to ensure consumers in the EU can shop online with peace of mind, and we are committed to playing our part. We also share a commitment to the principles of transparency and accountability that are at the core of the DSA, as reflected in our supply chain governance standards and our engagements with our users. We will continue to work constructively with the European Commission to ensure that we deliver a safe and compliant environment for our online community.”

This report was updated to include Shein's statement.