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Regulating premium-rate services

A summary of an Ofcom report for the DTI

Issued: 9 December 2004

Introduction

We have reviewed how premium-rate services (PRS) are regulated in the UK. The Department of Trade and Industry (DTI) asked us to carry out the review between August and November 2004.

Premium-rate services offer products or services through your phone line, and you’re charged for them on your phone bill. Typical examples include TV vote lines, scratchcards and competitions you have to respond to by phone, Adult Entertainment phone lines and websites, technical helplines, chat lines, mobile phone ringtones and logo downloads, horoscopes and interactive TV games. They’re usually available through ‘090’ numbers, with calls costing up to £1.50 a minute on the BT network.

Premium-rate services are generally welcomed by customers. The evidence of this is that calls to premium-rate services from home phone links are going up by around 30% a year. In 2003 alone, we spent around £850 million on them.

However, it isn’t all good news. In recent months, there has been a growing trend of premium rate services being used to mislead or even steal from customers. This has not only harmed people who have been billed for services unfairly, it has also dented people’s confidence in premium-rate services as a whole.

Our report was triggered by growing concerns over ‘rogue internet diallers’ (which dial expensive phone lines without you knowing) and other scams like them. They raised the question of whether the current rules were tough enough to deal with these kinds of problem. Our brief from the DTI was quite broad – we should look at:

• the role and effectiveness of the Independent Committee for the Supervision of Standards of Telephone Information Services (ICSTIS);
• the strictness of EU and UK laws; and
• the problem of rogue internet diallers.

Our review hasn't produced a ‘magic bullet’ or single answer to all the problems. However, we do have some detailed suggestions that will give customers much more protection and restore their faith in premium-rate services.

We also recognise that premium-rate services are changing fast and any regulations must be flexible enough to keep up with them. To make our ideas happen, we will need to work closely with ICSTIS and the DTI, and to fine-tune and develop your proposed improvements. That’s why we recommend that a steering committee is set up to get the new ideas up and running. We will then need to keep a close eye on the industry, and work closely together to make sure our regulations keep pace.

What we’re recommending

We have found a number of problems with how premium-rate services are currently regulated, and we describe them briefly later in this summary. That doesn’t mean we think the current regulatory system should change, but we have developed a series of improvements which will make the regulations more effective.

• Recommendation 1: we and ICSTIS should encourage phone companies to produce a voluntary code of practice for monitoring call patterns over their networks (to try to identify scams as soon as they start) and sharing information about possible scams. The new arrangements should help ICSTIS to identify, as quickly as possible, where its current code of practice has been broken. (The code of practice is available at: www.icstis.org.uk/icstis2002/pdf/code‗tenth‗edition‗january‗2004.pdf )
• Recommendation 2: the ICSTIS Code of Practice needs to be changed so phone companies have to give ICSTIS detailed information on the premium-rate providers (PRS providers) they do business with. This includes an address for the service, details of who to contact about the service and a customer service phone number in the UK. The phone companies should also give ICSTIS proof of the identity of the people in charge of the service, and have to take every step possible to make sure the information they give ICSTIS is accurate. The idea behind this recommendation is to make phone companies responsible for checking out, in detail, the PRS providers they let use their networks. These changes will make it more difficult for PRS providers to give false information, and should put off fraudsters who are thinking of entering the market. Also, when a complaint is made or an investigation has begun, the rules on phone companies needing to provide detailed information about numbers of calls, and the money they're receiving, should be looked at and tightened if necessary.
• Recommendation 3: the ICSTIS code of practice should make phone companies give ICSTIS information about premium-rate numbers they have transferred to other phone companies, and the phone companies they have been transferred to when they are asked for this information.
• Recommendation 4: in the code of practice there should be a new rule that says phone companies must hold back payments to their PRS providers for at least 30 days after a call has been made. This will give ICSTIS more time to investigate whether rules have been broken and, if necessary, to tell phone companies to freeze payments until their investigations are complete.
• Recommendation 5: if the proposed penalties aren’t strong enough to stop phone companies breaking the rules, ICSTIS should look again at introducing a deposit scheme for the phone companies who do business with PRS providers. Each phone company would have to pay ICSTIS an amount of money, known as a bond, to encourage good behaviour. The size of the bond would depend on the number of PRS providers they have on their network.
• Recommendation 6: the DTI should consider whether the maximum fine of £100,000 for breaking the code of practice, or the PRS Condition set by us under section 120 of the Communications Act 2003, is high enough.
• Recommendation 7: ICSTIS should continue to make PRS providers pay refunds when appropriate. ICSTIS should draw up guidelines about what circumstances would lead to refunds (that is, when consumers’ interests had been seriously harmed, or where it is clear that the PRS provider intended to mislead or defraud consumers).
• Recommendation 8: ICSTIS should be able to tell phone companies to make the money they hold back under recommendation 4 available to be claimed by consumers who have lost out. This money should be available for consumers for three months after ICSTIS have made a decision on an investigation.
• Recommendation 9: PRS providers should have to offer a reasonable level of customer service and have a UK phone number and a system for compensating customers who’ve unfairly lost out. ICSTIS should check that PRS providers keep to these rules by using ‘mystery shopping’, and work with providers to develop best practice in customer service.
• Recommendation 10: ICSTIS should continue to offer consumers an information service, and issue guidelines on exactly what services they provide. When developing these guidelines, ICSTIS should think about our statement on our ‘Strategy and priorities for promoting media literacy’ (at: www.ofcom.org.uk/consumer‗guides/Media‗literacy/ml‗statement/). They should also look at the ‘Exercising effective consumer choice’ section in our strategic review of telecommunications phase 2 consultation document (at: www.ofcom.org.uk/consultations/current/telecomsp2/). The ICSTIS guidelines should explain what information they will provide and when. ICSTIS should talk to everyone involved in the industry, including consumer groups, to make sure the guidelines will be effective. They should then show us the guidelines so we can agree to them.
• Recommendation 11: phone companies should take more responsibility for handling general enquiries about premium-rate services and questions about the premium-rate numbers which appear on their customers’ bills. These phone companies will have to produce a code of practice on how they’ll provide practical information on premium-rate services, their costs and services such as ‘call barring’, ‘number checking’ and so on.
• Recommendation 12: working with everyone in the industry, ICSTIS should take the lead in seeing whether they could create a central database of contact information on PRS providers. Phone companies would then use this when they’re dealing with enquiries from customers.
• Recommendation 13: the ICSTIS code of practice should be changed to give ICSTIS the power to fine or otherwise punish phone companies if they fail to meet their obligations under the code.
• Recommendation 14: ICSTIS should go ahead with the changes it proposed in its draft report on how it is run. The idea behind these plans is to make ICSTIS more accountable to everyone with an interest in the telecommunications industry. It will mean changing the current committee into a board, appointing a number of experienced experts to the board and creating an advisory committee made up of people from the premium-rate service industry to advise ICSTIS on the latest commercial and technical developments in premium-rate services.
• Recommendation 15: we and ICSTIS should write an agreement which makes clear our roles in regulating premium-rate services. It would cover how ICSTIS is accountable to us, and will include performance indicators (standards to measure how well ICSTIS is doing). These performance indicators would show how the ICSTIS Helpline is performing, and how they are handling cases. This information would then help them agree their yearly plans and budget.
• Recommendation 16: as they prepare their budget for 2005, ICSTIS should look carefully at the proposals in this report. They will need to allow for the proposals in their costs.
• Recommendation 17: changes to the code of practice could be speeded up if the DTI and ICSTIS carry out the necessary EU consultation required by the Technical Standards Directive 93/34/EC alongside the industry consultation. This could cut the time it takes to make the proposals happen by up to three months.
• Recommendation 18: a steering committee should be set up to get the proposals up and running. The committee should be made up of us, the DTI and ICSTIS.

The scale of the problem

In the last year or so the number of premium-rate service ‘scams’ has increased and the public are getting more worried. The scams have ranged from giving misleading information to outright fraud. They include competitions you respond to by making long calls at expensive rates to win a cheap or even non-existent prize. Or ‘spam and scam’, where text or fax messages are sent to hundreds of people, luring them into making expensive premium-rate calls. Most recently, ‘rogue internet diallers’ have hit the headlines. These are software programs that you download without even knowing it as you use the internet. They then dial a premium-rate number when you next connect to the web.

Between August 2003 and July 2004, ICSTIS received around 60,000 complaints. Two-thirds of them were about internet diallers. ICSTIS says that the customers who complained were overcharged between £50 and £100 each, although this could be much more in some cases. Taken as a whole, scams reported to ICSTIS have cost people between £3 million and £5 million in the past year. The true cost may be much higher, as these figures won’t include cases that haven’t been reported, or the harm done to people’s confidence in premium-rate services and the internet.

From January to September 2004, ICSTIS ordered 91 PRS providers to pay 95 fines totalling £2.03 million. By mid-September over half of the fines had not been paid, although that figure may have fallen since. Of the 17 fines which were over £50,000, 14 had to be paid by PRS providers abroad. Over two-thirds of the PRS providers fined were hosted by only five phone companies.

It seems that very few of the customers affected have received a refund, let alone compensation. The problem is that although ICSTIS can order a PRS provider to right any wrong, their decisions aren’t backed up by the law. The customers’ phone companies don’t tend to get involved either. BT, and most other phone companies, believe that any refunds should be paid by the offending PRS provider.

It’s clear that there is a real problem in the premium-rate services industry but, thankfully, it only exists in isolated pockets. There are currently around 30,000 to 40,000 premium-rate services, although the figure may be even higher. Most PRS providers work fairly and within the law, with many providing a proper level of customer service and giving refunds to dissatisfied customers. But there is a small minority of offenders, often based overseas, doing a large amount of damage.

When the problem of rogue internet diallers came to a head in April and May 2004, the ICSTIS helpline was overwhelmed with complaints. ICSTIS has since done a great deal to manage this heavier workload, by upgrading its helpline and its website. It has also introduced rules under which companies using internet diallers must get permission from ICSTIS before they start providing expensive services. But although these measures have been a big help in managing the recent problems, what’s needed now is an effective, long-term solution.

The reasons behind our recommendations

In the past year or so, the popularity of premium-rate services and advances in communications technology have put a real strain on the regulatory system.

Thanks to new technology, it’s getting easier to launch large-scale PRS scams. Thousands of people can be tricked into dialling expensive phone lines or, without even knowing it, premium-rate internet connections. Looking ahead, technology will give fraudsters even more options, so there will be more pressure than ever on regulators.

The number of PRS providers has also grown, to an estimated 3000 to 4000. (These are the ones ICSTIS knows about. There may be more.) The number of phone companies has also gone up sharply since the new regulations for telecommunications in 2003 made it easier to enter the market. This growth in the number of phone companies is especially significant for the future of regulating premium-rate services.

Until fairly recently, ICSTIS could protect consumers reasonably well. They worked with the small number of phone companies to spot scams, prevent dishonest service providers from setting up and, in serious cases, telling the phone companies to hold back payments. Usually, the phone companies were co-operative, partly because they ran the risk of being reported to Oftel (which we replaced), and partly to protect their good name.

However, there have been changes in the way telecommunications are regulated. It’s now very easy to set up as a phone company and get a bunch of 09 numbers to give people access to premium-rate services. We’ve also heard suspicions that some phone companies may actually be working with PRS providers to defraud consumers.

We firmly believe we should increase phone companies’ duty to spot and investigate cases where the code of practice has been broken, and to take action when necessary. This is one of the central themes of the report, which is why we’re recommending that phone companies should be responsible, as far as possible, for keeping accurate information on PRS providers. They must also make sure they hold back payments to PRS providers until 30 days after a call has been made.

With phone companies having to give ICSTIS accurate information on PRS providers, this will help ICSTIS to investigate complaints. Phone companies will also have more of an incentive to make sure PRS providers are genuine by investigating them thoroughly first. The risk of a fine should be enough for phone companies to follow the code of practice. The 30-day rule should give ICSTIS enough time to spot possible bad behaviour by a PRS provider and to start investigating. If necessary, ICSTIS will also be able to freeze payments much more easily while it carries out its investigations. Again, phone companies could be fined if they fail to play their part.

ICSTIS will also be helped by a number of other recommendations. For example, improving the way phone companies monitor call patterns to detect fraud, and the way they share information on possible fraud with each other and with ICSTIS, will help make sure that ICSTIS can identify, as quickly as possible, cases of the code of practice being broken.

Customers with questions or complaints are getting more and more unhappy with the way their own phone companies treat them. In an ideal world, customers would have their problems solved by dealing only with their own phone company. In reality, this doesn’t happen because the customer’s phone company will rarely have a contract with the particular PRS provider involved. However, we have several recommendations designed to improve the customer’s experience.

We think phone companies should do more to give their customers basic information on premium-rate services, and make sure they can give customers contact details of PRS providers. Customers will also benefit from new rules on refunds. If ICSTIS has ordered funds to be frozen, this pot of money can be used to repay customers who have been misled or defrauded.

We also believe that our and ICSTIS’s roles could be clearer, and that we can co-ordinate our efforts better. Some people in the industry also want to make sure that ICSTIS is fully accountable, and that their performance can be measured.

With these aims in mind, we support ICSTIS’s new proposals on how they should be run. We also want to see fast progress on a written working agreement between us and ICSTIS. This agreement will contain details of the standards ICSTIS’s helpline and activities should meet. It should also set how they and we can work more effectively together.

Overall, we believe these tighter plans will be enough to deal with the recent problems we’ve seen in regulating premium-rate services. However, this is a fast-moving industry and new problems can quickly replace old ones. If even stricter measures are needed, the next step would be to consider introducing a deposit scheme for phone companies.

We’ve stopped short of recommending this now, because it is an expensive scheme to set up and run. Also, at this stage, we’re not sure if it’s actually needed. A scheme like this would mean higher costs for both the telecommunications industry and ICSTIS. Smaller phone companies might be put off from entering the market and, in turn, this could reduce competition and slow down new ideas and services. However, the case for a deposit scheme could grow, especially if the new restrictions are not effective enough.

There is a possibility that the way premium-rate services are currently regulated – by ICSTIS through its code of practice which is agreed with the industry and then approved by us – may need to be changed in the future. This would need a change to the Communications Act 2003 (or an order under section 122 of the Act), and might involve us taking over responsibility for regulating premium-rate services, as well as introducing much tighter restrictions. At the moment, we do not think this should happen, but it is an option for the future if stronger action is needed.

Other options we’ve considered

As we have carried out the review, we have considered a range of options, including the following.

Making phone companies liable for PRS suppliers breaking the code of practice

At first glance, this seems to be a simple and effective way to make sure that phone companies thoroughly vet the PRS providers they do business with, that fines are paid, and that customers have some comeback. However, our lawyers say there would be a risk of inconsistency with human rights rules if a phone company were made liable for the wrongdoings of a PRS provider, when there were other ways to achieve the same end result.

A prior registration scheme

Under the code of practice, PRS providers must register basic contact details with ICSTIS before they can provide a service. However, recent history has shown that PRS providers are failing to register and that the information ICSTIS holds about them often is out of date, incomplete or wrong. As a solution, ICSTIS and others have proposed that PRS providers should first get a registration number from ICSTIS. PRS providers would then have to give the number to phone companies before they could get a premium-rate number.

We think this scheme risks blurring the line of who’s responsible for making sure that the information provided by PRS providers is accurate. In our view, this responsibility should lie with the phone companies, because they should be carrying out thorough checks on their PRS providers. A more formal scheme would only be useful if ICSTIS itself checked the accuracy of the information from the PRS providers. This would greatly add to ICSTIS’s workload and, in any case, it’s a job for the phone companies.

Phone companies holding back money

Rather than the phone company slowing down payments to the PRS provider they have a contract with (our recommendation 4), ICSTIS could get involved even earlier. If it suspects the code of practice has been broken, it could order the customer’s phone company to freeze payments to other phone companies on the network. This would give ICSTIS between one and two months to carry out their investigations. The customer’s own phone company could then pay any necessary refunds through the phone bill.

Unfortunately, there are two major problems with this plan. Firstly, it would be very complicated to run, because if just one PRS provider was found to have done wrong it would mean having to issue orders to every phone company on the UK network – and there are several hundred of them. Secondly, this would mean changing the Communications Act 2003, the Standard Interconnection Agreement and the code of practice, and so would take a long time. For these reasons, we don’t think that customers’ phone companies holding back money is realistic in the near future.

Thinking of the future, we would like all phone companies to consider changing the terms of their interconnect agreements to allow refunds to be paid to customers though their phone bills in cases of PRS fraud.

An ICSTIS scheme to give customers some comeback

ICSTIS already runs a compensation scheme for live entertainment services, with PRS providers contributing to a compensation fund and paying a bond to ICSTIS. This makes sure that valid claims can be paid, even after a PRS provider has finished trading. The same could be done to cover internet dialler services or other premium-rate services that are worrying consumers. However, Ofcom is concerned that running these schemes would mean a heavy workload for ICSTIS. There are many more PRS providers involved in premium-rate services than in live services.

If a deposit scheme was introduced, the way it is funded would be important. Heavy costs should not fall on honest PRS providers or companies providing different kinds of services. At present, we prefer the idea of refunds being possible through the phone companies holding back payments. However, the bond scheme would be an option if this didn’t work.

Holding back numbers from offending phone companies

Some people have argued we should be more active in policing premium-rate services by holding back, or taking back, premium-rate numbers from phone companies who repeatedly break the code of practice. However, our current legal advice is that this would go against the EC Authorisation Directive, so this is not an option open to us.

Making the changes and next steps

We would like to see customers protected by bringing in our recommendations as soon as possible. However, this process will take a number of months to complete as some of our ideas will mean changing the code of practice. This usually takes six to nine months, partly because there must be a three-month EU consultation under the Technical Standards Directive. However, we may be able to carry out the EU consultation at the same time as the consultation between ICSTIS and the premium-rate service industry. We’ve suggested to the DTI that they follow up this possibility.

We will need to consult the public on the proposed changes that require phone companies to provide basic information on premium-rate services. This will probably take six months to complete. The proposed increase in the maximum fine for breaking the regulations will need an order to be made by the Secretary of State. Again, this is likely to take some months. ICSTIS will take the lead in driving through the other proposals, in some cases working with the industry and us. We also recommend that a steering committee, made up of representatives of us, the DTI and ICSTIS, takes overall charge of making these proposals happen.

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