The Office of Fair Trading (OFT) has called on companies that use behaviour and targeted advertising to be more transparent, or face further action.
The regulator has been scrutinising the behavioural and targeted advertising market since October. It reported yesterday that "more could be done to provide consumers with better information about how personal information is collected and used".
The OFT called on the online advertising trade body, the Internet Advertising Bureau (IAB), to tighten up its voluntary code, saying objections "centre around privacy issues and the misuse of personal data".
The market is currently small, with the OFT estimating current revenues between £64m and £95m. This is just a fraction of the online ad market, which was worth £3.3bn in 2008. "But this looks set to rise significantly in the future," the regulator said.
The practice of online behavioural advertising involves tracking web users and tailoring specific advertising to their likely interests based on previous web pages visited. Targeted advertising has proved controversial. BT was forced to shelve plans to use the technology provided by the specialist company Phorm last year after it emerged it had tested the system without users' knowledge.
Yet yesterday's report found 40 per cent of consumers polled had no feelings about the issue. About 28 per cent disliked it and 24 per cent welcomed the move. Concerns decreased when the consumers could opt out of behavioural advertising.
The regulator said the IAB should work with the industry "to provide clear notices alongside behavioural adverts and information about opting out".
Companies are legally obligated to tell consumers about the purposes of storing a cookie file or other tracking system on their computers, enforced by the Information Commissioner's Office. The OFT added that the 2008 legislation Consumer Protection from Unfair Trading Regulations could apply to misleading users over the collection of information.
Heather Clayton, the OFT senior director in the consumer market group, said: "The OFT is keen to engage with industry players and consumer groups while behavioural advertising is in its relative infancy, and before targeted pricing takes hold, so that the market develops in a way that protects consumers from bad practice." The IAB's self-regulatory principles are supported by the biggest industry players including Google, Microsoft and Yahoo.
Debate over online privacy has raged in recent weeks. Yesterday Facebook said it would start rolling out simpler privacy settings this week after an outcry at recent changes from users, while Google apologised for harvesting data from private Wi-Fi hotspots.