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Protecting citizens and consumers from mis-selling of fixed-line telecommunications services

Notification of Modification to a General Condition

Summary

S.1 ‘Ofcom’ (the Office of Communications) exists to further the interests of citizens and consumers through a regulatory regime which, where appropriate, encourages competition. Effective competition delivers choice and lower prices to consumers as well as opportunities for new services and providers. However, consumers may need protection from inappropriate behaviour by certain providers that may undermine confidence in the market as well as causing individual detriment.

S.2 An example of such inappropriate behaviour concerns the mis-selling of fixed-line telecommunications (‘fixed-line telecoms’) services which covers a range of sales and marketing activities, and includes ‘slamming ’, which is where customers are simply switched from one company to another without their express knowledge and consent.

S.3 Ofcom is committed to preventing problems with mis-selling of fixed-line telecoms services. It adopts a proactive role in tackling such problems by monitoring complaints data, and seeking to resolve problems with those companies whose activities generate the greatest volume of complaints. However, in the light of concerns that mis-selling of fixed-line telecoms services had been growing as a problem, Ofcom decided last year to consult on the effectiveness of current consumer safeguards.

S.4 In April 2004, Ofcom published a consultation document on the effectiveness of current consumer safeguards which had been designed to protect consumers from mis-selling of fixed-line telecoms services. It is available on the Ofcom website at: http://www.ofcom.org.uk/consult/condocs/mis_selling/mis_selling.pdf

S.5 In the light of comments received in response to that document, Ofcom concluded that the balance of evidence, together with the risks to consumers should a serious problem arise, supported the conclusion position that the current safeguards do not are inadequate to provide satisfactory consumer protection against the risks of mis-selling of fixed-line telecoms services. Accordingly, Ofcom published a statement and further consultation document in November 2004. This document included a consultation on a notification of a proposed modification to General Condition 14 on Codes of Practice and Dispute Resolution. It is available on the Ofcom website at: http://www.ofcom.org.uk/consult/condocs/mis-selling/mis-selling.pdf

S.6 The effect of the proposed modification was to impose requirements upon all Communications Providers (‘Providers’) who engage in sales and marketing activities for fixed-line telecoms services to establish, and comply with, codes of practice on sales and marketing, in accordance with published guidelines.

S.7 In the light of further comments received in response to that consultation, Ofcom remains persuaded that the balance of evidence suggests that mis-selling of fixed-line telecoms services is a problem at present, and that this, together with further risks to consumers should mis-selling grow as a problem, supports the introduction of additional regulatory safeguards. Ofcom is, therefore, today giving effect to the proposals set out in the November 2004 consultation document with a modification of General Condition 14 on Codes of Practice and Dispute Resolution under section 48(2) of the Communications Act (“the Act”) by means of a publication of a Notification. The published guidelines for sales and marketing codes of practice for fixed-line telecoms services are set out in the Annex to the Schedule to the Notification, published at Annex 1 to this document.

S.8 The Notification sets out the following:

that there is an obligation upon all Providers who engage in sales and marketing of fixed-line telecoms services to establish, under set guidelines, codes of practice, and to comply with the provisions set out in those codes;
that the requirement to establish, under set guidelines, codes of practice on sales and marketing, and to comply with the provisions set out in those codes, is subject to a ‘sunset’ clause. The effect of such a clause is that the modification will lapse two years after the date of introduction unless a positive need is demonstrated to reinstate the requirement;
the guidelines for sales and marketing codes of practice for fixed-line telecoms services; and
that there is an obligation to provide codes of practice on sales and marketing on request, and free of charge, to customers.

S.9 This measure will ensure that codes of practice for sales and marketing are enforceable. Ofcom will have the power to take enforcement action against those providers who breach the provisions of their code, including ultimately imposing a financial penalty on the relevant Provider.

S.10 Ofcom proposes that the requirement will take effect six weeks from the date of publication of this document.

Introduction

What is mis-selling/slamming?

2.1 The development of competition for fixed-line telecoms services, notably Carrier-Pre Selection (‘CPS’)¹ and Wholesale Line Rental (‘WLR’)² , continues to bring benefits through changes in the way in which services are marketed and delivered. This includes much greater use of direct selling techniques such as selling via the doorstep, by telephone and in public places such as supermarkets.

2.2 Such sales and marketing techniques are used widely throughout the energy industry and, while they have made a significant contribution to the development of competition in that sector, they have also resulted in instances of irresponsible sales and marketing activity, specifically mis-selling (as defined below). This has the effect of undermining consumer confidence in the transfer and switching process, and causing consequential damage to the industry as a whole.

2.3 The term ‘mis-selling’ covers a range of sales and marketing activities that can work against the interests of both consumers and competition and undermines confidence in the industry as a whole. It can include:

the provision of false and/or misleading information (for example, about potential savings or promising offers or gifts which do not actually exist);
applying unacceptable pressure to change Providers, such as refusing to leave until the customer signs, or using threatening or otherwise intimidating behaviour; and
'slamming', an extreme form of mis-selling, where customers are simply switched from one company to another without their express knowledge and consent. Forms of slamming can include, for example, passing off (i.e. where representatives claim to represent a different company from the company they are actually working for), customers being told they are merely signing for information and then being switched from one provider to another, or forging of customers’ signatures on contracts without the customer being aware.

The regulatory framework and basis for Ofcom involvement

2.4 A new regulatory framework for electronic communications networks and services entered into force on 25 July 2003. The framework is designed to create harmonised regulation across Europe, and is aimed at reducing entry barriers and fostering prospects for effective competition to the benefit of consumers.

2.5 Section 3(1) of the the Act states that “It shall be the principal duty of OFCOM, in carrying out their functions –

to further the interests of citizens in relation to communications matters; and
to further the interests of consumers in relevant markets, where appropriate by promoting competion.”

2.6 In particular, section 3(3) of the Act states that “in performing their duties under subsection (1), OFCOM must have regard, in all cases, to -

the princples under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed; and
any other principles appearing to Ofcom to represent the best regulatory practice.”

2.7 Section 4 of the Act requires Ofcom to act in accordance with the six European Community requirements for regulation, including, in particular, to:

promote competition in the provision of electronic communications networks and services, associated facilities and the supply of directories;
contribute to the development of the European internal market;
promote the interests of all persons who are citizens of the European Union; and
not favour one form of, or means of, providing electronic communications networks or services, i.e. to be technologically neutral.

2.8 Under the new framework, Providers are subject to a number of general conditions which apply to all persons providing electronic communications networks and services. Matters to which general conditions can relate include conditions appropriate for protecting the interests of end-users of public electronic communications services (‘PECS’) (section 51(1)(a) of the Act). Section 52(2)(e) of the Act states that it is Ofcom’s duty to set such general conditions as are appropriate for securing that Providers establish and maintain procedures, standards and policies necessary to secure the effective protection for domestic and small business customers of such Providers.

2.9 Accordingly, the basis for Ofcom’s involvement is to ensure that the regulatory enviroment provides appropriate safeguards to protect the interests of citizen and consumers as well as the reputation of the industry as a whole. However, this needs to be balanced by the application of Ofcom’s regulatory principles and, in particular, the requirement of proportionality, the ‘bias against intervention’ and the obligation to make the ‘least intrusive’ form of regulation .

Current consumer safeguards

2.10 As set out in Ofcom’s April 2004 consultation document, there are currently a range of measures that are available to consumers to protect them from mis-selling of fixed-line telecoms services. These include general consumer protection legislation which is enforced by a number of different institutions, albeit this legislation is not specific to telecommunications services, as well as guidelines that have been agreed with the industry and consumer representatives in respect of sales and marketing codes of practice for fixed-line telecoms services. These guidelines are currently voluntary, however, and Ofcom does not have any enforcement powers in relation to such codes.

2.11 There is also a telephony consumer guide, Promoting competition in fixed-line services: a customer guide to using different phone companies for your line and phone calls, which aims to ensure that customers are adequately informed about the nature of these services. It is available on the Ofcom website in the Help and Advice section.

2.12 The industry-agreed CPS/WLR transfer process also provides additional safeguards to protect consumers from the affects of mis-selling of fixed-line telecoms services by providing for a ten-day switchover period before a customer’s order can be activated, and the customer switched. During the switchover period, the customer should receive two letters – one from the losing provider and one from the gaining provider – notifying the customer of the details of the transfer. This process is intended to ensure that customers are not transferred without their express knowledge and consent.

2.13 Where customers have been ‘slammed’, and contact BT, or other Providers, during the switchover period, Providers are able to use ‘Cancel Other’, which is a functionality which enables Providers to cancel orders for CPS and WLR in certain defined circumstances, primarily where slamming has occurred. Ofcom considers that ‘Cancel Other’ plays a useful role as a consumer protection mechanism.

2.14 Ofcom published its final Direction specifying when BT is permitted to use Cancel Other and what information BT must provide to its competitors about its use of Cancel Other on 21 January 2005. Ofcom’s Direction and Determination permitted BT to use Cancel Other in cases of slamming as well as other certain specified cases. In the Direction, Ofcom provided further detail on the definition of slamming and clarified the types of behaviour covered by the definition. This clarification is expected to lead to a reduction in the number of cases in which BT uses Cancel Other.

2.15 Ofcom also made clear that it intended to review BT’s use of Cancel Other in the light of the proposed obligations on Providers to establish sales and marketing codes of practice. That is because, if slamming is not occuring, the need for Cancel Other as a consumer protection measure would be redundant.

2.16 The Direction and Determination is available for viewing on the Ofcom’s website at: http://www.ofcom.org.uk/consult/condocs/cancel-other/codir/

2.17 However, Ofcom recognises that the CPS and WLR transfer process and Cancel Other functionality deal primarily with the consequences of mis-selling. They have not been specifically designed to prevent mis-selling occurring. Rather, they ensure that the transfer is prevented before any material harm is done to the consumer’s interests.

Ofcom’s commitment to tackling mis-selling

2.18 Alongside these consumer safeguards, Ofcom continues to adopt a proactive role to tackling problems related to mis-selling and, in particular, continues to monitor complaints data, both derived from consumers contacting Ofcom directly, and also data submitted by BT on a monthly basis about the number of alleged selling issues. In light of that data, Ofcom has initiated a series of meetings with companies over the course of the last year in order to discuss their sales and marketing activities, and to identify various strategies aimed at reducing the volume of complaints arising from such activities.

2.19 Ofcom has also facilitated various bi-lateral meetings between Providers to discuss the issue of mis-selling and, in particular, to provide an opportunity to the parties involved to engage constructively on the issues in order to seek to resolve the areas of disagreement.

2.20 More recently, Ofcom has initiated further discussions with companies on an individual basis to discuss research findings into BT’s reported instances of apparent mis-selling. That research, conducted by Schema, a management consultancy to the communications and media industry, examined the extent to which BT’s ‘Unfair Trading Incidents’ (‘UTI’) data accurately reflects levels of mis-selling. The data Schema evaluated gave a strong indication of a number of key service, customer and process issues relating to different sales and marketing activities employed, including the use of off-shore call centres, UK call teams, field sales agents, the internet and direct mail. Ofcom’s report on Schema’s investigation is being published today. This report is available on the Ofcom website.

2.21 Ofcom views these discussions as an important part of its commitment to minimising the potential for mis-selling and considers that the various discussions have proved extremely valuable. In particular, they have provided an opportunity for Ofcom to work with companies in reviewing sales processes, copies of sales scripts, sales literature and procedures for handling complaints. Such discussions have, for example, resulted in changes to sales scripts, changes to incentive schemes in order to introduce greater control on sales agencies, various commitments by companies to record all future sales calls as well as the introduction of other agreed quality measures being introduced.

The April 2004 Consultation

2.22 In April 2004, Ofcom published a consultation document on the effectiveness of current consumer safeguards which have been designed to protect consumers from mis-selling of fixed-line telecoms services. It put forward two options for consideration:

consumers are adequately protected, and there is no need to make any changes; and
consumers are not adequately protected, and there is a need for additional regulation in the form of mandatory guidelines for sales and marketing codes of practice.

2.23 The consultation document made clear that option 2 would only be preferred if there was evidence and support for the view, both that mis-selling of fixed-line telecoms services was a serious problem and that the current measures did not provide sufficient protection to consumers.

2.24 In addition, and separate to the issue of the effectiveness of consumer safeguards, Ofcom also sought views in relation to the need for clarification of certain provisions contained within the existing guidelines for sales and marketing codes of practice for fixed-line telecoms services.

2.25 Ofcom’s April 2004 consultation document is available on the Ofcom website - see Related Items.

The November 2004 Consultation

2.26 In the light of stakeholder responses to the April 2004 consultation document, Ofcom considered that the balance of arguments, together with the risk to consumers should the problem of mis-selling continue to increase, supported the conclusion that the current consumer safeguards do not provide adequate consumer protection against the mis-selling of fixed-line telecoms services.

2.27 Ofcom therefore concluded that a requirement should be imposed upon Providers who engage in sales and marketing activity for fixed-line telecoms services to establish codes of practice on sales and marketing in accordance with published guidelines, and to comply with the provisions of those codes. It was proposed that the obligation should be subject to a ‘sunset’ clause, such that it would lapse two years after the date of introduction unless a positive need could be demonstrated to reinstate the obligation.

2.28 In order to make this obligation enforceable through a modification to the relevant General Condition (“GC 14”), it was necessary to follow the procedure for setting, modifying or revoking conditions as set out in section 48 of the Act. This required the publication of a Notification of the proposed modification. The November 2004 consultation document therefore included a consultation on a notification of a proposed modification to GC 14. It is available on the Ofcom website at: http://www.ofcom.org.uk/consult/condocs/mis-selling/mis-selling.pdf

Explanatory Statement and Notification under section 48(1) of the Communications Act

2.29 The Explanatory Statement and Notification, published today, gives effect, with modification, to the proposals set out in the November 2004 consultation document. The Notification and Schedule to the Notification, published at Annex 1, sets out the following:

that there is an obligation upon all Providers who engage in sales and marketing of fixed-line telecoms services to establish, under set guidelines, codes of practice, and to comply with the provisions set out in those codes;
that the requirement to establish, under set guidelines, codes of practice on sales and marketing, and to comply with the provisions set out in those codes, should be subject to a ‘sunset’ clause. The effect of such a clause is that the requirement will lapse two years after the date of introduction unless a positive need is demonstrated to reinstate the requirement;
the guidelines for sales and marketing codes of practice for fixed-line telecoms services; and
that there is an obligation to provide codes of practice on sales and marketing on request, and free of charge, to customers.

2.30 This measure ensures that codes of practice for sales and marketing are enforceable. Ofcom will have the power to take enforcement action against those providers who breach the provisions of their code, including ultimately imposing a financial penalty on the relevant Provider for non-compliance.

2.31 Ofcom is satisfied that the modification to GC 14 on Codes of Practice and Dispute Resolution are in accordance with the tests of proportionality, transparency, and non-discrimination, and are objectively justifiable. For clarity, Ofcom has modified GC 14 by deleting GC 14 in its entirety and replacing with the modification included.

2.32 Ofcom has also considered, and acted in accordance with, its principal duty in section 3, as well as the six community requirements in section 4, of the Act.

Footnotes

“ Carrier Pre-Selection ” ( CPS ) means a facility which allows a Subscriber to whom a Publicly Available Telephone Service is provided by means of a Public Telephone Network to select which Pre-selected Provider of such Services provided wholly or partly by means of that Network is the Pre-selected Provider he wishes to use to carry his calls by designating in advance the selection that is to apply on every occasion when there has been no selection of Provider by use of a Telephone Number;
“ Wholesale Line Rental ” (WLR) means a facility which allows Communications Providers without Significant Market Power in the Relevant Market to provide an integrated service comprising calls and access by renting the exchange lines on wholesale terms from the Communications Provider with Significant Market Power in the Relevant Market, and sending customers a single bill for both calls and line rental;