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Summary

1.1 Inappropriate and misleading sales and marketing behaviour can undermine consumer confidence in markets and cause individuals harm. Complaints to Ofcom about the mis-selling of mobile communications services have risen sharply since 2006. Problems experienced by consumers include being given false or misleading information when purchasing services and ‘slamming’ where consumers have found themselves with a new contract without their knowledge and consent.

1.2 An additional feature of mis-selling around certain ‘cashback’ schemes, being sold by independent retailers of mobile service providers’ services, became an increased cause for concern during 2007. Cashback is a commonly available offer, where an independent retailer undertakes to pay an amount of money to the customer when they take out a mobile phone contract from a mobile service provider. Problems have arisen where the consumer has been unable to obtain the cashback, typically either because the terms for claiming are too onerous or because the independent retailer has gone out of business.

1.3 Consumers who are mis-sold services can suffer significant anxiety, distress and inconvenience. Financial harm can also occur if consumers find themselves on inappropriate price or service packages. Where the consumer is unable to redeem the cashback deal, significant financial loss can occur, particularly if the consumer is still bound by the separate monthly contract for the mobile service.

1.4 Following an enquiry into sales and marketing practices, Ofcom worked with five of the mobile service providers (3, O2, Orange, T-Mobile and Vodafone) to develop and introduce in July 2007 an industry code of practice aimed at tackling misleading sales and marketing practices (‘the code’) including the fairness of the terms of cashback deals being offered. At the time of its introduction, Ofcom 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.

1.5 By October 2007 there had been no significant change in the level of complaints to Ofcom and we began a review of sales and marketing practices in the mobile retail market to consider the case for further action.

Our review

1.6 The evidence we have collected indicates the introduction of the code has brought about some positive changes in practices by mobile service providers and retailers. However, these have not been uniformly applied and have not brought about an adequate reduction in consumer complaints or consumer harm.

1.7 Mobile service providers have reviewed their sales and marketing procedures, and those of the independent retailers, including the terms of cashback offers. The code appears to have been disseminated widely through the retail chain.

1.8 Some mobile service providers have ceased selling their services through certain independent retailers following compliance reviews. In addition, some retailers have ceased trading following the application of new rules under the code requiring the cashback terms to be fair.

1.9 However, we have found that the extent of monitoring and compliance activity varies between mobile service providers. And where monitoring and compliance activity has taken place, its main focus appears to have been to address cashback and slamming problems rather than more general mis-selling.

1.10 Complaints to Ofcom have continued at broadly the same high level as at the introduction of the code. The number of complaints in both January and February 2008 exceeded those in July 2007.

1.11 We have carried out research into consumers’ experience of cashback. This shows that in most cases cashback deals work well, stimulating competition and providing benefits to consumers. Around 80% of cashback customers are happy with their offers and have found the process for claiming them relatively easy. However, a significant minority of customers have experienced problems with certain deals where making claims is complex or where the retailer has ceased trading. In many of these cases, the amount the customer has not been able to redeem has been large resulting in a significant level of overall harm.

Proposals

1.12 In light of the continuing high levels of complaints, the varying levels of monitoring and enforcement of the code by the mobile service providersand the extent of consumer harm involved, we are concerned that reliance on the ‘voluntary’ code does not appear to provide adequate protection for consumers.

1.13 We are therefore proposing to introduce a new General Condition on sales and marketing practices that will apply to all mobile service providers.

1.14 Amongst other things, the proposed condition requires 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.

1.15 While this proposal is an important intervention to protect consumers, we consider it is proportionate and should not create significant additional costs for those mobile service providers and independent retailers who are already complying with the code. It will, however, ensure that Ofcom can formally investigate the extent to which the rules are being followed and ultimately impose sanctions for breaches of the regulations. We will also be able to make sure that the rules are being applied consistently by all mobile service providers.

1.16 We consider that by requiring cashback offers to be provided on reasonable terms, independent retailers’ businesses should be more commercially sustainable and instances of insolvencies due to unsustainable cashback offers and the consequent harm to consumers should be reduced over time.

1.17 We have considered more interventionist options, including banning cashbacks or making mobile service providers responsible when independent retailers do not pay customers under a cashback scheme. However, we believe these options risk restricting consumer choice by affecting not just problematic cashback offers but also those (the majority) that work well. More intrusive interventions may result in mobile service providers reducing the number of retail outlets they use.

1.18 We are inviting comments on our proposals and on the other options we have considered by 29 April 2008.

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