Unhappy with industry attempts at self regulation, the communications regulator has started a process which could lead to fines of 10% of turnover for mobile service sellers who breach a new “General Condition” imposed under the Communications Act 2003. Anna Montes reports.
When: March 2008
Where: United Kingdom
Law stated as at: 17 April 2008
Ofcom are in the throes of a new consultation which focuses on misleading marketing practices in the mobile market. The reason for this latest consultation? Prior to January 2008, it is reported that Ofcom received approximately 700 complaints each month from consumers relating to the mis-selling of mobile services. Such complaints often related to consumers being provided with false or misleading information when purchasing mobile services or to the practice commonly referred to as 'slamming' whereby consumers find they have a new mobile contract in place without their prior knowledge.
Ofcom are also concerned about the apparent mis-selling of 'cashback' schemes by independent retailers of mobile service providers' services. Cashback schemes are common within the mobile market and involve the independent retailer undertaking to pay an amount of money to a customer when they take out a mobile phone contract. However, some consumers have found they are unable to obtain the cashback as promised, either because the terms for claiming the cashback are onerous or because the independent retailer has gone out of business.
As we reported back in August 2007, Ofcom worked with 3, O2, Orange, T-Mobile and Vodafone to develop and introduce (in July 2007) an industry code of practice aimed at tackling the problems evident with the sale and marketing practices associated with mobile services. The aim of the code was to develop best practice. Ofcom welcomed the mobile operators' new code of conduct but made it quite clear that it would still consider formal intervention if the code did not lead to a significant reduction in the number of complaints Ofcom received from consumers. The code did not have the desired effect, so Ofcom duly conducted a review of mobile sales and marketing practices which resulted in this consultation process.
The outcome of Ofcom's review:
Ofcom's review indicated that although the mobile operators' code of practice did affect the selling of mobile services in a positive way, it is not uniformly applied and has not resulted in the required level of reduction in consumer complaints. Ofcom's review also highlighted differences in the way the mobile operators monitored the code and that the majority of monitoring activity predominantly focused on cashback and slamming problems only. So far as cashback schemes were concerned, the review highlighted that in general such schemes stimulate competition in consumers' best interests and yet approximately 20% of consumers have experienced problems claiming their cashback because either the claim process is complex or the retailer has ceased trading. Following its review, Ofcom decided that reliance on the code of practice would not provide adequate protection for consumers.
Ofcom's suggested solution:
In the interests of consumers, Ofcom are proposing to introduce a new General Condition on sales and marketing practices that will apply to all mobile service providers. The Communications Act 2003 places a duty on Ofcom to set general conditions to ensure that communications providers establish and maintain procedures to, amongst other things, handle complaints and resolve disputes between them and their customers. The new General Condition proposed by Ofcom would require mobile service providers:
- not to engage in dishonest, misleading or deceptive conduct and to ensure that those selling their products and services do not mis-sell;
- to make sure the customer is authorised to, and intends to, enter into a contract;
- to make sure customers get the information they need when they buy the product;
- to ensure that the terms and conditions of all sales incentives offered by their retailers are not unreasonable; and
- to carry out due diligence and a number of checks in respect of their retailers to ensure the soundness of the company and its directors.
The penalties for breaching a General Condition can include a fine of up to a maximum of 10 per cent of relevant turnover. However, Ofcom considers the proposed General Condition to be proportionate to the problems concerned and believes that it will not create significant additional costs for those providers and retailers who already operate within the remit of the code of conduct.
The introduction of the condition will mean that Ofcom will be able to investigate compliance with the rules formally, ensure their consistant application and impose sanctions for breaches. So far as cashback offers are concerned, Ofcom wants to see them provided on reasonable terms and by independent retailers who are more commercially sustainable so that the number of insolvencies caused due to unsustainable cashback offers are reduced over time.
Why this matters:
Before deciding to propose a General Condition as being the answer to consumers' problems, Ofcom also considered banning cashback schemes altogether and making mobile service providers responsible for outstanding payments when independent retailers could not or did not pay up for whatever reason.
The mobile sector could consider itself lucky therefore as in the end Ofcom decided against such an approach on the basis that it could restrict consumer choice as legitimate businesses and cashback schemes would also be affected and fewer retailers could be involved in the retail chain.
Ofcom plans to move quickly
So far as the proposed General Condition is concerned, interested parties had until 29th April 2008 to provide their response to the consultation. Ofcom have made it clear that they intend to move quickly and hope to publish a statement detailing their conclusions by July 2008. We will therefore not have to wait very long to learn the outcome of this matter and whether service providers will have yet another General Condition to comply with. If they do, this will no doubt be reflected in their agreements with retailers to reduce the risk of a compliance investigation by Ofcom – not to be sniffed at with the potential penalties that could lie in wait.
What with the potential introduction of such a new General Condition and the introduction of the Consumer Protection from Unfair Trading Regulations 2007 due in May 2008 prohibiting "misleading actions" and "misleading omissions" amongst other things, mobile service providers and their retailers are certainly advised to review their marketing practices.