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Westminster Hall

Wednesday 5 March 2008

[Mr. Joe Benton in the Chair]

Cashback Contracts

Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Michael Foster.]

9.30 am

Mr. Roger Godsiff (Birmingham, Sparkbrook and Small Heath) (Lab): It is always a pleasure to initiate a debate under your wise and experienced chairmanship, Mr. Benton. I am particularly pleased to have the opportunity to raise the issue of the way in which the mobile phone industry operates, its acquiescence to mobile phone retailers who offer unrealistic cashback offers, and the consequences for customers when retailers go into liquidation.

I should first like to talk specifically about Dial a Mobile, which was an independent retailer of mobile phones in the Bordesley Green area of my constituency. It ceased business on 30 August 2007 with, it was subsequently revealed, debts of £12 million and more than 90,000 customers who were connected through the company to the networks of the big five providers, Orange, T-Mobile, O2, Vodafone, and 3.

Prior to being contacted by constituents who were affected by the collapse of Dial a Mobile, I confess that I did not know much about the mobile phone industry or how it operated. Like an ever-increasing number of people, I use a mobile phone, and I had a contract with an airtime provider, but I did not know how the cashback system operated, the relationship between the airtime provider and the retailers, or the powers of the regulator, Ofcom. Having spent several months dealing with issues arising from the collapse of Dial a Mobile, I now have a good knowledge of how the industry operates, and I find what I have learned extremely disconcerting.

My concerns are not mine alone; they are shared by the European Union’s Communications Commissioner, Viviane Reding, who has serious concerns about how the mobile phone industry operates, particularly in this country and, as she calls it, its cosy relationship with Ofcom. She is also—rightly—extremely concerned about the vulnerable position in which many customers find themselves when mobile phone retailers go into liquidation.

I should explain that cashback is one of a range of incentives offered by mobile phone retailers to attract new customers or to poach customers from the network airtime providers—the big five to which I referred. In a highly competitive industry, the retailer is paid lucrative commission by the airtime provider for each new customer signed up for the provider’s network. To entice customers to sign up, the retailer will offer part of its commission to the customer, which is payable, usually in stages, when the customer has been with the network for a certain period, in most cases 12 or 18 months. That sounds quite innocent;
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indeed, the customer could, in theory, have a sizeable amount of their contract payment reimbursed by the retailer.

However, there is a catch, and it is a very big catch. The retailer in the mobile phone industry is under huge competitive pressure to offer bigger incentives to get customers to sign up to the network that pays the biggest commission. To retain business, therefore, the retailer will offer bigger cashback offers to the customer. Slowly, as happened with Dial a Mobile, a business model evolves whereby if more than four out of 10 new customers claim their cashback, the retailer loses money and goes bust.

If a mobile phone retailer simply went into liquidation and could not honour its customers, and the contract—this is important—with the customer became null and void, it might not matter too much. It could be put down to the normal cut and thrust of business—some you win, some you lose. However, there is a clear difference in the mobile phone industry because of the way in which the system operates. To all intents and purposes, two contracts are involved. The contract that includes incentives such as cashback is between the retailer and the customer, but a network supplier insists on a contract with the customer when a customer hooks up to it. Also, as with Dial a Mobile, the network supplier disclaims responsibility for incentives such as cashback that are offered by the retailer. It insists that the customer pays the full amount to the network provider; otherwise, it will take legal action against the customer. That could, as is the case with many customers of Dial a Mobile in my constituency in east Birmingham, result in bailiffs being sent in and the customer getting an adverse credit rating.

Fiona Mactaggart (Slough) (Lab): My hon. Friend is talking about a similar problem to one that occurred in my constituency with Cell Fones UK; indeed, local trading standards officers have been liaising closely with those in Birmingham. Is he aware that his constituents, like mine, have often not signed, or even seen the terms of, the contract to which they are tied with the mobile phone companies?

Mr. Godsiff: My hon. Friend makes an excellent point on a matter to which I shall refer in a moment.

Some 90,000 customers were affected when Dial a Mobile went into liquidation, but since it went bust in August 2007, a number of other retailers have gone into liquidation. There are now hundreds of thousands of people who had contracts with mobile phone retailers that have gone bust who thought that those contracts were null and void because the retailer had not honoured its cashback obligations. Yet some network suppliers insist that they have contracts with customers, whether written or unwritten, and that customers should pay airtime contracts in full, and threaten legal action. Of course, mobile network operators—the big five—say that they will consider any representations that customers make “on their merits”, but they have not disclosed how many contracts they hold through retailers that have gone bust, such as Dial a Mobile, nor have they disclosed how many individual cases they have considered “on their merits”.

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However, a large number of people are being taken to court by the mobile network operators and a large number are being pursued by bailiffs.

Mr. Jim Devine (Livingston) (Lab): Is my hon. Friend aware of the Sunday Mail campaign in Scotland? Jane Barrie, the leading reporter, has highlighted the fact that the companies involved targeted the poorer people in our communities, who are now being pursued by the bailiffs to whom he referred.

Mr. Godsiff: My hon. Friend, as always, makes an excellent point. The mobile network operators target the most vulnerable and disadvantaged. They also target people who think that there is such a thing as a free lunch—but those people then find out that there is no such thing as a free lunch but that a price tag is attached.

As my hon. Friend said, many of the customers being pursued, such as those with Dial a Mobile, did not sign a contract with either the retailer or the airtime provider. However, the airtime providers say that once a customer has been linked by the retailer into their network, a contract exists. They expect full payment under that alleged contract—full stop, no argument.

One would have expected Ofcom, the regulator, to have been aware of the problem before the end of 2007, when Dial a Mobile and several other retailers went into liquidation. Ofcom was indeed aware of the problem. On 31 July 2007, it issued a press release stating:

It went on to say that the five mobile network operators had more than 66 million active customer accounts, and that Ofcom was receiving in the region of 400 complaints a month from people who believed they had been misled by mobile phone retailers. It said:

the industry responded, not the regulator—

That is commendable.

The code of practice, written by the mobile operators, sets out minimum business standards on prohibited sales and marketing practices, details of proactive monitoring, due diligence, and how complaints to mobile network operators should be monitored. Furthermore, it says that mobile operators can determine how to apply those principles to their own retail channels. It also refers to selling incentives. But as is often the case with written documents, the devil is in the detail. One should always read the small print. In my opinion, the code of practice makes the voluntary code not worth the paper it is written on. The most important sentence in it is to be found on page 5, which states:

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In a nutshell, it means that the five mobile network operators are happy to encourage retailers to use business models such as the 40 per cent. redemption rate, which everyone knows is unsustainable.

The network operators are not interested in whether a retailer goes bust and cannot honour his obligations, because there will always be another one prepared to chance his arm to get business. Once the retailer has linked the customer up to the mobile network operator, the customer is, to use a fishing expression, hooked and netted. If the customer tries to escape, the mobile network operators send in the barristers and bailiffs. Of course, the mobile network operators—the big five—will say, “Oh, what you are saying is grossly unfair,” and that they do not expect retailers to use 40 per cent. business models, which are unsustainable. As someone once said, “They would say that, wouldn’t they?” One of the five—3—certainly encourages its retailers to do just that. In a letter to a retailer, 3 says:

The retailer to whom that letter was written tried it—and he went bust.

The power of the mobile network operators and their absolute determination not to give up these highly lucrative contracts, however they were obtained, can best be seen in their attempts to pressurise local authority trading standards departments, which have valiantly tried to help affected customers. Birmingham’s trading standards department was inundated by calls after the collapse of Dial a Mobile. Chris Neville, the head of the department, told the trade magazine Mobile on 13 September that

That is the firm in my constituency that went bust. It did not even pass contracts on to the mobile network operators; it shredded them. Chris Neville continued:

presumably a mobile phone call.

I pay tribute to Chris Neville and his colleagues. Based on the lack of written airtime contracts, they advised customers to give notice to their airtime network provider of their intention to terminate their airtime contracts. Chris Neville said:

The trading standards department was being told by the mobile network operators that it was not serving the best interests of their clients—the people who live in Birmingham—but that the operators were doing so.

The mobile network operators say that they have what the Independent Mobile Phone Dealers Association, a reputable body, calculates to be more than 1 million customers of failed retailers since 2005. Mobile network operators are saying, “We have them over a barrel. We don’t want trading standards or Government Departments
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interfering, and Ofcom’s in our pocket. We want to be left alone to pursue them through the courts for the millions of pounds that these contracts are worth.” I therefore ask, what is the regulator, Ofcom, doing? It is supposed to be looking after the interests of consumers.

I said that the regulator issued a press release in July 2007, saying that mobile network operators had produced a voluntary code, which they hoped would work. Seven months later, Ofcom launched an investigation into cashback and slamming. Slamming is a separate issue, but we all know what it is. Its true name is “erroneous transfers”; that is the posh expression. To mere working- class lads such as myself, it is called thieving of business. Nevertheless, I welcome the Ofcom investigation.

In a letter to me dated 23 October 2007, Ofcom said it wants:

Although I welcome Ofcom’s review of the voluntary agreement, that will not help the hundreds of thousands of people, including the 90,000 customers of Dial a Mobile, who are being pursued by the mobile network operators. Indeed Ofcom has already made it clear that the voluntary code of July 2007 is inadequate and has failed, and that Ofcom itself does not have the powers to compel the mobile network operators to tear up Dial a Mobile contracts.

The regulator sent me a very blunt e-mail in November, in which he said:

This is the regulator, Ofcom, talking. The e-mail continues:

So here is Ofcom, the regulator, saying, “I am powerless. I know what the mobile network operators are doing and I cannot do anything about it.”

I would like to pose some questions. First, why did it take Ofcom until July 2007 to announce a voluntary code of practice, drawn up by the mobile network operators, which it now admits is inadequate? Secondly, why has Ofcom now acknowledged that it has no powers to force the mobile network operators to underwrite the unsustainable business models that they are encouraging retailers to adopt?

It may come as something of a surprise to many mobile phone users, particularly the many hundreds of thousands of people who have been affected by retailers going bust, that one mobile network operator—Orange—contributes £2.5 million a year towards Ofcom’s running costs. The other mobile network operators are believed to contribute to Ofcom’s running costs too. I say “believed”, because when my office sought the information on this from the regulator, Ofcom refused to release it on the grounds that, if it did release that information, it would reveal the turnover of the mobile network operators. So here we have a regulator, which receives £2.5 million from Orange, one of the companies that it is supposed to regulate, and quite possibly receiving other amounts
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of money from other mobile network operators, refusing to put that information into the public domain on the grounds that, if it did so, it might reveal the turnover of the mobile network operators.

I find that very interesting, particularly in the light of Orange’s memorandum to the House of Lords Select Committee that looked at the mobile phone industry. In that memorandum to the Select Committee, Orange questioned, quite bluntly, whether the £2.5 million that it was putting into Ofcom every year was:

So Orange is saying there, “We give £2.5 million a year, but we are not so sure that we are getting good value for money.” Well, it hit the jackpot over these cashback contracts, did it not?

This sorry saga began with the belated recognition by Ofcom in July 2007 that the industry needed a code of practice; it continued with the inevitable collapse of Dial a Mobile and other retailers who had been encouraged to operate 40 per cent. cashbacks, which were unsustainable business models, and it resulted in hundreds of thousands of customers being ruthlessly pursued by the big five mobile network operators for at least £10 million that is allegedly owed to them. However, if the big five were to reveal the true number of people who have been connected to them through firms that have subsequently gone bust, the independent assessments are that they would have to reveal that the amount that they are pursuing from customers is about £50 million.

Finally, there was a belated acceptance by Ofcom that what has happened over the last six months, including the failure of the voluntary code, has, in its own words, “highlighted certain weaknesses”, and that is the reason why

If Ofcom is saying, as a justification for now launching a review, that it might use “the full weight” of its powers, that prompts the question as to why it has not used those powers before.

In my opinion, what I have said this morning clearly shows that the mobile phone industry is not only an industry that is out of control but is operating a system—the cashback system—that is a totally discredited relic of the past. Indeed, when the furore arose at the end of last year, even some of the network operators themselves backtracked. Mr. Bernie O’Beirne, 3’s dealer and distributor chief, said:

He went on to claim:

Basically, he was saying that cashback had reached its sell-by date. There is nothing like a sinner who repents, but it does not help the large number of people who are being pursued for money by 3 and the other mobile network operators.

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