Making the right call: Making Brexit work for UK consumers of communications

01 December 2016

Speech by Sharon White to the Institute for Government

1 December 2016

Introduction

Good evening.

I’m delighted to be at the Institute, which has generated so much thought on the area I’d like to discuss tonight – the UK’s exit from the European Union. It is a particular delight to be hosted by Bronwen. Congratulations to her on an inspired appointment as Director.

Much of the IfG’s work has considered how the machinery of government should be organised to implement Brexit.

Businesses and economic commentators have largely focused on the issue of overseas trade, our membership of the single market, freedom of movement and what would represent the best deal for the UK.

These are clearly matters for the Government, which will determine the nature of Brexit. The UK hasn’t yet begun the formal part of that process. But the Prime Minister has said that Article 50 will be triggered by the end of March 2017, with the UK expected to leave the EU within two years.

As the communications regulator – politically neutral, independent of Government and of the companies that we regulate – Ofcom takes no view on the means or merits of Brexit.

But as the Government seeks the best deal for the UK, it is vital for British consumers that communications features at the heart of the negotiations.

Let me explain why.

Brexit will be crucial in shaping the UK’s economic future. And communications is a vital pillar of our economy.

The industries that Ofcom regulates – telecoms, broadcasting, postal and wireless services – have a combined yearly revenue of £57 billion and make up 3 per cent of GDP. Collectively, they are second in size only to financial services.

They are also, inextricably, Europeanbusinesses.

BT provides services to every EU country, and is 12-per-cent owned by Deutsche Telekom. O2 is owned by Spain’s Telefónica. Vodafone Group is headquartered here, but generates half of its revenues – some £20bn – from the EU. In post, Royal Mail operates a £2 billion European business across 41 countries.

It’s a similar picture in broadcasting. Our country is home to the largest number of pan-European media companies, and some of the most respected creative and technical talents in the world.

Many work here under EU permits; some estimates suggest up to 40% of people working in the creative industries may be EU nationals born outside the UK.

Broadcasters rely on talented people from overseas; and equally on exporting the programmes they help create to the rest of the world.

The BBC generates hundreds of millions of pounds from EU markets. ITV is Europe’s leading independent TV producer. Discovery, based here, broadcasts across the EU. And Sky provides satellite services far beyond the UK – in Italy, Germany, Austria and Ireland.

Yet the importance of our sector extends far beyond its enormous scale and economic worth. Making Brexit a success matters for communications – because these services are fundamental to our lives.

When Ofcom was established in 2003, a reliable internet or mobile phone connection was a ‘nice to have’. Now, they are essential to run a small business, keep up with friends, watch catch-up TV, or achieve a family balance by working from home. We need them like gas, electricity and running water.

People expect more from their communications than ever before. They deserve strong protection from bad service, high prices or outages that might lead to lost business – or social isolation for people who are vulnerable or living in remote communities.

At the moment, these safeguards stem from European legal frameworks that provide the basis for regulation in our sectors. Frameworks that the UK has had a substantial hand in shaping.

So leaving the EU presents an opportunity – indeed a necessity – to consider fundamentally whether those frameworks continue to serve the interests of all British people and businesses.

And crucially, leaving the EU will mean choices about replicating, or replacing, those laws.

Today, I want to set out our priorities for how that should work.  

We believe the overriding objective must be to ensure that UK consumers and businesses continue to enjoy competitive, affordable TV, phone and broadband.

Let me start by setting out how communications are regulated today.

Most of our telecoms and broadcasting work sits under European law, transposed into UK statutes such as the 2003 Communications Act.

In telecoms, a common EU framework defines the broad duties, powers and independence of national regulators such as Ofcom.

For example, the framework requires us to keep certain markets – like mobile or superfast broadband – under regular review.

We must act to address the power of dominant players, working for consumers and consulting on our plans. Our decisions are subject to appeal within the UK – under the aegis of UK courts or our sister regulator, the Competition and Markets Authority, with whom we share competition powers.

Television sits under a different EU framework, with its own important aims to ensure freedom of reception, protect audiences and preserve cultural diversity.

Ofcom has worked closely with other EU regulators to shape the current frameworks.

We’ve helped deliver positive change. To take one example, we’ve argued that rules protecting children from harmful content on broadcast TV should be extended to TV on demand. This summer, the Commission confirmed plans to do exactly that.

What we need after Brexit

Now, as the UK prepares to leave the EU, decisions will be made about the laws that should apply here in the future.

This is an important process: one that will determine the future direction of our communications services, and their impact on people and businesses, for years to come.

So I believe a triple test should be applied when deciding which EU laws should continue to apply in the UK. Of each and every measure, we should ask ourselves three crucial questions.

  • Does it prioritise the interests of UK consumers and the wider public?
  • Does it promote competition and investment?
  • And it does it support UK companies’ ability to trade successfully in the EU, and globally?

So how do we ensure that new UK laws, and future regulations, pass that triple test?

The answer lies in our approach to the EU frameworks. For us, that should mean three things:

  • Retaining what works in the EU framework;
  • Improving it, where it may be deficient; and
  • Avoiding making things worse, by inadvertently weakening powers or protections.

To judge what that means in practice, let me take each of these in turn.

First, how do we preserve the best of the EU frameworks?

Think of broadcasting. EU rules recognise that this is not just a domestic business. Internet and satellite TV signals span national borders.

Reflecting this, EU law enshrines a ‘Country of Origin’ principle. This allows broadcasters to transmit across the entire EU, provided they comply with the rules of the country where they originate.

Equally, some global broadcasters are based here without ever transmitting to a UK audience. The Swedish satellite group Viasat transmits from London to Nordic and Baltic audiences.

These broadcasters all comply with Ofcom’s UK rules. That means impartial and accurate news; free speech, combined with a right to privacy; and protection of children.

So we license around 1,200 TV services; but almost a third of these are not broadcasting to UK viewers. Conversely, around 35 channels that can be received here are not licensed in the UK.

We believe the Country of Origin principle should endure in the UK after Brexit, so that media companies based here don't face new hurdles. Or worse, feel compelled to set up in another European country.

Clearly, we want to encourage – not undermine – the growth and vibrancy of our cultural industries.

The Country of Origin rule is a good example of an EU law that benefits member states and supports broadcasters – providing a mass audience, and promoting cultural exchange by transcending borders.

But keeping this principle after Brexit will demand constructive discussions with European neighbours. Country of Origin cannot endure merely by virtue of existing in UK law.

It will stand if the EU 27 continue to allow UK-based companies to broadcast to their markets under UK rules; and if the UK allows companies based overseas to broadcast here under EU rules – over which we’d no longer have direct influence.

Second, we must seize the chance to improve the EU framework where it is deficient.

The European telecoms framework is currently under review, and the UK has set out the reforms we want to see. Leaving the EU might allow us to secure these changes more readily – and to go further.

Under current rules, Ofcom has to re-examine our regulation in each and every telecoms market – broadband and mobile – every three years. This is a mammoth exercise. New measures have barely bedded in before the next review is due. That creates enormous uncertainty, and needless bureaucracy, for industry.

As a domestic regulator, we have argued for flexibility to examine markets when merited, over longer cycles. That would give companies more security, and encourage investment. Indeed, the Commission is now proposing five-year reviews. But this illustrates the kind of change for which the UK might take direct responsibility in future.

We should also remove loopholes or ambiguity. For example, the EU framework applies to TV broadcasting networks, but not to TV content. Some believe this makes it harder to ease switching for ‘bundle’ customers – those who take TV with their phone and broadband. We are pleased to see that the Commission has proposed to address this, reflecting our arguments.

Brexit is also an opportunity to ensure that we have the right rules in place to assess mergers and takeovers.

Our sector is witnessing a dramatic shift towards fewer, bigger players selling television, phone and broadband in packages.

Earlier this year, BT’s purchase of EE was cleared by the UK Competition and Markets Authority. The CMA had jurisdiction here because two-thirds of each company’s revenue is generated in the UK.

When Three tried to acquire O2, the companies didn’t meet this domestic revenue test, so the deal went to the European Commission. We strongly supported its decision to block the deal, which we argued would worsen competition and raise prices for British consumers.

Now there is speculation over other deals. Brexit means that some future mergers and takeovers involving UK based companies would be presided over by UK regulators, based on domestic merger law. That raises important issues.

For a start, UK regulators must have the expertise and capability to referee these complex transactions. Our regular market reviews may require a deeper level of analysis. Decisions may hinge on that evidence.

Second, we have the opportunity to introduce a wider set of considerations in merger decisions, including policy or public-interest concerns where a company is deemed to have particular strategic significance for the UK.

Third, the UK and European competition authorities could both have jurisdiction over some mergers, as Brussels would still review those that met its revenue test. Clearly that would need close coordination.

What about if consolidation in the sector led to a small number of big players, with concentrated power – an oligopoly? Here, I think we have the chance to introduce new protections. If these markets become uncompetitive, Ofcom should be able to step in to protect UK consumers.

We and other regulators made this argument to the European Commission, without success. The EU laws in this area remain unclear. We now have the opportunity to put this right in UK law.  

This is not regulatory creep. Nor is it about new powers for the sake of it. Rather it is about ensuring that, in a rapidly evolving sector, UK laws protect UK consumers from new, anti-competitive threats.

We also want to safeguard people who are vulnerable to dominant players yielding market power. So this morning, Ofcom has announced a review of retail prices for the millions of people who have a landline telephone but no broadband.

Many of these are elderly customers who have never switched their phone company. These customers have simply not felt the benefits of strong competition in our sector.

Over the last five years, they have seen line rental rise by 30 per cent in real terms. By contrast, the wholesale charges that operators like BT, Sky and TalkTalk pay to the network operator, Openreach, have actually fallen in that time by 22 per cent.

The European Commission is cautious about retail regulation. Since Ofcom lifted remaining retail regulation in 2009, we’ve relied on competition to deliver successive years of cheaper telecoms services.

But we feel the European framework will suffer if the Commission imposes a planned ban on retail regulation by 2020. We believe any future UK laws should keep the door open to retail intervention, if it’s the best way of protecting people left behind.  

Equally, improving the framework offers an opportunity for deregulation. A prime case for reform is EU-wide state aid rules, which currently impose a lengthy approval process on projects – such as public funds for rolling out broadband to rural communities and small businesses.

Finally, we should avoid making things worse.

Roaming charges are being reduced for mobile phone users across the EU. Progress of this kind must be reflected in agreements between the UK and member states. Otherwise our mobile operators may be exposed to unfair costs, and our people and businesses could end up paying more than our European neighbours.

More widely, European frameworks secure our ability as a regulator to act independently – with neither fear nor favour – of the Government and of the companies that we regulate. Our independence must remain clear in new UK laws.

Likewise our ability to reform BT.

Ofcom is midway through a once-in-a-decade review of digital communications. One major conclusion is that Openreach, the part of BT that develops and maintains the national telecoms network, must become more independent from BT Group, to best serve the interests of consumers.

We want a newly empowered Openreach, legally separate from BT, with its own Board. An Openreach that serves and takes decisions on behalf of the entire telecoms industry and all its customers, not just BT.

We will closely monitor legal separation, and reserve the right to revisit the option of forcing BT to sell Openreach, so-called ‘structural separation’.

As we explained on Tuesday, we are preparing to take detailed plans to the European Commission, unless BT agrees voluntarily to our proposals for legal separation.

We do so in the knowledge that EU law provides us with powers to impose these changes.

So whenever the UK leaves the EU, it's important that our powers to reform BT – by whichever means, legal or structural separation – are unaffected.

Conclusion

I hope today I've given a flavour of how Brexit might influence the regulation of our communications sector, and how that affects us all.

Preserve, improve, and handle with care – our vision for how EU communications law should be reflected in UK law.

While the timing and manner of Brexit remain uncertain, the Government has indicated that a single Parliamentary Act – a ‘Great Repeal Bill’ – would incorporate EU laws when the UK leaves.

One might then expect that the legal frameworks that apply in telecoms and broadcasting – as in other sectors – might be amended, through further legislation tailored to UK consumers.

Naturally, this process will take time. It will require parliamentary resources, and decisions about how to prioritise between different sectors.

It will raise challenging questions. For example, how might any new UK laws, designed to address the needs of UK consumers, diverge over time from the EU laws that still apply to our companies’ European operations?

We will engage constructively with the Government throughout, providing technical advice where helpful.

And after Brexit, there must be proper oversight of domestic regulation, so that Ofcom remains accountable to the UK Parliament and courts in the absence of European check points. There must also be a voice for the devolved administrations.

But whatever the outcome, one thing is clear. We must retain our influence at the heart of European and international discussions around the communications sector.

Ofcom will seek to be a constructive and influential voice, sharing our expertise with international partners to meet common challenges.

We’ll keep collaborating with our neighbours to ensure that 5G mobile devices work across borders, keeping the UK at the forefront of mobile technology.

We’ll help ensure that rules governing global online services like YouTube and WhatsApp continue to protect openness and innovation.

Above all, we must ensure the right outcome for UK consumers. That means: good legislation that works for them; and regulators with legal powers to protect them.

As the Government seeks new trading opportunities in a world outside the EU, we want to see a framework for TV and telecoms that protects the future needs of consumers, businesses, viewers and listeners.

And strong relationships that maintain our role in a global debate over how these fast-moving sectors should be regulated, and how they evolve.

Those are our goals. We will keep working with Government, Brussels and fellow regulators to deliver them, for the benefit of everyone in the UK.

END