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Summary

1.1 Tackling the mis-selling of communications services is an important Ofcom priority. Sales and marketing behaviour that is misleading and inappropriate can undermine consumer confidence in markets and cause individuals harm. Consumers mis-sold services can suffer anxiety, distress and inconvenience. Financial harm can also result if consumers are on inappropriate price or service packages due to mis-selling.

1.2 Complaints to Ofcom about the mis-selling of mobile communications services began to rise sharply in 2006, from about 50 per month in 2004/5 to 200/250 per month in 2006. Problems experienced by consumers included being given false or misleading information when purchasing services and slamming where consumers find themselves with a new contract without their knowledge and/or consent.

1.3 One aspect of mis-selling around certain cashback schemes became an increased cause for concern during 2007. With cashback, an independent retailer undertakes to pay an amount of money to the customer when they take out a contract from a mobile service provider (MSP). Problems arose where the consumer had been unable to obtain the cashback, typically either because the terms for claiming were too onerous or because the independent retailer had gone out of business.

1.4 In light of the increased number of complaints, we worked with Mobile Network Operators (MNOs) to develop and introduce in July 2007 a voluntary code of practice for the sales and marketing of subscriptions to mobile networks aimed at tackling misleading sales and marketing practices (the Code). On its introduction, we made clear that unless the Code resulted in a significant and rapid reduction in consumer complaints we would consider the case for formal regulatory intervention.

Review and consultation

1.5 By October 2007 there had been no significant change in the level of complaints to Ofcom and we began a review to consider the case for further action. In a consultation in March 2008 (the 2008 Consultation), we reported the introduction of the Code appeared to have brought about some positive changes in practices by some MNOs and retailers, particularly in respect of cashback offers. However, we found that the extent of monitoring and compliance varied between MNOs and that it appeared to address cashback problems rather than general mis-selling.

1.6 In light of the continued high levels of complaints, the extent of consumer harm involved and the varying levels of monitoring and enforcement of the Code by the MNOs, we proposed to introduce a new General Condition (GC) on sales and marketing practices that would apply to all MSPs. GCs are rules imposed by Ofcom on Communications Providers in accordance with the Communications Act 2003 (the Act). Amongst other things, the proposed condition would require MSPs:

• not to engage in dishonest, misleading or deceptive conduct and to ensure that those selling their products and services do not mis-sell (a general prohibition on mis-selling);
• to make sure customers get the accurate information they need when they buy the product;
• to make sure the customer is authorised to, and intends to, enter into a contract;
• to ensure that the terms and conditions of all sales incentives offered by their retailers are not unduly restrictive; 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.

Conclusions

1.7 We have considered comments received to the 2008 Consultation, continued to collect and analyse complaints data from Ofcom and other sources, carried out further market research to understand the extent and nature of the harm. We have also requested further information from MSPs and a number of independent retailers on the potential costs of, and required time for, implementing our proposals.

1.8 On the basis of this further analysis, additional evidence and consultation responses (in addition to the evidence and analysis carried out pre-consultation), we have decided to proceed with the introduction of a GC. The main provisions of such a GC are as proposed in the 2008 Consultation. In reaching this decision, we have taken account in particular of:

• The level of complaints. Complaints to Ofcom relating to general mis-selling have not decreased significantly from the levels just before the Code was introduced. In the six months prior to the introduction of the Code general mis-selling complaints averaged 228 per month; between August 2008 and January 2009 complaints averaged 212 per month. They have however fallen from a peak of above 300 per month reached during the 2008 Consultation.
  In addition, Consumer Direct report that mobile phone service agreements are the second most complained about item in the UK (behind used car sales). Of all mobile phone related complaints in 2008 (51,400), we estimate that around 10,600 complaints may include mobile mis-selling issues (up from 9,000 in 2007).
• The level of consumer harm. On the basis of market research and information from independent retailers, we estimate the current ongoing value of financial harm to consumers from general mis-selling at 21million a year, from cashback mis-selling at 8million a year and from the cost of time spent dealing with mis-selling and cashback problems 3million per year.
• The additional provisions in the GC. The GC includes a general prohibition on mis-selling and requires specific information about the service being purchased to be provided to the customer. These or similar provisions are not explicitly included in the Code and are intended to provide additional protection for consumers and reduce the instances of mis-selling.
• The additional enforcement powers that the GC will provide. The range of remedies available to Ofcom to enforce compliance with a GC are different from the remedies currently available under the Enterprise Act 2002 (EA). These include the ability to issue a fine or require a company to remedy the consequences of contravention, for example by providing compensation. This should help address ongoing harm and act as a deterrent to mis-selling in the future. In addition, small and medium enterprises (SMEs) are covered by a GC whereas the EA covers only consumers.
• The costs of implementing the GC relative to the benefits. Our analysis suggests that the introduction of the proposed GC is likely to result in net benefits. We estimate the potential net present value of the benefit could be 45million over five years.

1.9 The GC (General Condition 23) will come into force six months from the date of the publication of this statement.

• Protecting consumers from mis-selling of mobile telecommunications services [pdf]
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