OFT says it has concerns over reference pricing, advertising, refunds, unfair terms, and interactions with merchants.
An Office of Fair Trading investigation has found Groupon guilty of "widespread" breaches of consumer protection laws, relating to issues including the pricing, advertising and unfair terms attached to its daily deals.
Groupon, which offers promotional deals to subscribers on anything from restaurant meals to beauty treatments, was referred to the OFT by the advertising watchdog in December.
The Advertising Standards Authority was prompted to make the referral after Groupon was found to have broken UK advertising regulations more than 50 times in less than a year. The OFT secretly launched its own investigation into Groupon in July.
The fair trading watchdog said on Friday that it had "found widespread examples of Groupon's practices which in the OFT's view breached consumer protection regulations".
"The OFT has specific concerns over practices involving reference pricing, advertising, refunds, unfair terms, and the diligence of its interactions with merchants," it added.
The OFT said that Groupon had "engaged openly and constructively" during the investigation and that its parent company, MyCityDeal, had signed undertakings to make sure that its business practices comply with the law.
The OFT said that Groupon had three months to make the required changes to its business practices and that it will "monitor complaints numbers closely".
"Should evidence emerge of a breach of any of these undertakings, the OFT will consider appropriate measures, including applying to court for enforcement orders," it said.
Roy Blanga, UK managing director at Groupon, admitted that as a "young and innovative" company its "processes and procedures have not always kept pace with our rapid growth".
"While we've endeavoured to meet the massive public demand for our offers while maintaining our bar for service, there are times we've failed," he said. "We take their concerns very seriously and will be willingly implementing the recommended changes."
In a blogpost on the Groupon website Blanga apologised to customers and explained: "where we messed up and how we're making it right".
"We're sorry," he said. "We believe that the only way to build a company that lasts is to provide the best customer experience in the world, and it pains us when we fall short".
The OFT found issues with practices including exaggerating savings, merchants becoming swamped and unable to deliver deals and only giving consumers 24 hours to make decisions on serious procedures such as laser eye surgery and cosmetic procedures.
Other issues included making errors in deal descriptions when they are first posted, such as misleading on the value of the offer and not properly substantiating marketing claims made by merchants about products, especially relating to health and beauty products.
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(Homepage of Groupon.com, the largest and fast growing internet discount website, controversial for its recent TV campaign, on April 7, 2011 in Los Angeles California. Juan Camilo Bernal / Shutterstock.com)