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5 Mar 2008 : Column 433WH—continued

10.27 am

Charles Hendry (Wealden) (Con): It is a pleasure to serve under your chairmanship, Mr. Benton. I congratulate the hon. Member for Birmingham, Sparkbrook and Small Heath (Mr. Godsiff) on securing the debate and on the way in which he introduced it. His commitment and passion were clear from the way in which he spoke, although I caution him about damning an entire industry, particularly one in which Britain is a world leader, because of problems in one small part of it.

I also pay tribute to my hon. Friend the Member for Newbury (Mr. Benyon) for the way in which he spoke. He presented an extremely balanced view and spoke with great clarity. He is indeed a critical friend of his constituency company, Vodafone. I had the privilege to visit that company with him a while ago. It has made an incredible investment in that community, which is typical of the industry. As I said, we must be careful that if we have concerns about failings in one sector of an industry, we do not simply damn the entire industry.

There are about 70 million mobile phone customers in the UK—more than one per adult. That is a huge penetration, and it is one of the success stories of British industry. As we have heard, cashback deals are a way in which to attract customers from one company to another, which is an entirely legitimate business practice. It happens in every walk of life and it is understandable that businesses would seek to do that, particularly in a largely saturated market. Clearly, there are not many people out there who want a mobile phone and have not yet bought one, which means that the only way in which companies can increase business is to attract customers from other companies. That does not mean, however, that they should do so by any means available. There still have to be rules and fairness.

As we heard from the hon. Member for Birmingham, Sparkbrook and Small Heath, Dial a Mobile went bust last year, and it is quite clear that its business plan was flawed. It put out into the network too much money and, ultimately, it was unable to honour its commitment. The hon. Member for Solihull (Lorely Burt) said that it was bad business practice to put out more than one could honour, but that is the way in which many business deals work. It is exactly the way in which Airmiles works, for example. One reason why British Airways moved Airmiles into a separate company was because if everybody had sought to redeem their Airmiles entitlement, BA would technically have been insolvent. BA relies on the fact that some customers will collect Airmiles and never redeem them, or redeem them in many years’ time. That is the way in which the business world works, and to stop such a thing absolutely would be rather damaging.

Clearly, people have been affected by the situation, and in some cases they have made their concerns known and complained to Ofcom. I understand that
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the number of complaints peaked last year with 569 in August, and 813 in September, which relates to the spike when Dial a Mobile went out of business. We must put the issue in context: 800 out of 70 million customers made complaints. I accept that this is a matter of great importance to those 800 people and others who have been affected, but one must put the issue in context. Let me draw an analogy. The Liberal Democrats got about 6 million votes at the last election, so the situation under discussion is similar to about 50 of those voters being unhappy about the outcome. I imagine that all Liberal Democrats were unhappy about the outcome, but in the situation under discussion, the number is relatively small when compared with the total market.

We also heard from the hon. Member for Birmingham, Sparkbrook and Small Heath that on 31 August last year, the code for the responsible selling of mobile telephony came into effect. That is a responsible action by the industry and, generally, it is the right way forward. The major companies—O2, Orange, T-Mobile, Vodafone and 3—have signed up to it, and although the Independent Mobile Phone Dealers Association wants legislation to force full cashback payments within 90 days, with penalties for failure to comply, we must understand what the right process is when something goes wrong.

First, local trading standards officers should investigate to ensure that nothing has been done illegally—from what the hon. Gentleman said, that has clearly happened in Birmingham. Secondly, once a problem has been identified, it is right that the industry involved tries to produce a voluntary code for better practice, and that has clearly happened. There might be debate about how effective that is, but it has happened. Thirdly, it is also right that the regulator should investigate the problem. Once it has had the chance to investigate, it should decide whether it needs to use its full powers to bring about change. The regulator can do several things: it can enforce a tougher code of conduct; stop cashback payments completely; and, probably, require repayments when people have lost out in the way in which the hon. Gentleman outlined. However, we must go through that process, and only if it fails should we consider legislation.

Ofcom will have to examine the issue of contracts. We will all have been concerned by what the hon. Gentleman said about the lack of contracts, but I suspect, although I am not sure, that the practice will have been driven by customers. They will have said, “I want a phone, I want it today and I want it to work today. I do not want to have go through the process of having a contract sent off, submitted, approved and everything else.” Businesses, therefore, might have been trying to react to the demands of their customers. I do not know that for certain, but I suspect that that has been the case.

We must also have cognisance of the principle of caveat emptor, however, and the fact that at the end of the day, people did a deal with their local phone shop, not with the company itself. Similarly, if I go into a travel agency and buy an airline ticket, I realise that I am doing business with the travel agency, and if I go into a garage to buy a car, I deal with not Mini directly, but the garage. This is the same sort of relationship, and we must have clarity about it.

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The code of practice says that the offer must clearly state in writing which legal entity—the dealer or the mobile operator—is making the offer, and who will undertake to meet the obligation. It also sets out a number of unreasonable practices, such as

The code has a number of powers, such as a power whereby dealers that breach the code could have their contracts with the networks terminated.

The hon. Gentleman highlighted one aspect of the contract that states that companies would not be responsible for the losses of other business operators. I thought about that and wondered in what business sector that would apply. To return to my analogy of buying a car, would Mini be responsible for the losses of a garage in Birmingham? Would Zanussi be responsible for the losses of a high street electrical retailer that went bust? If they are not responsible, what is the opposite position? The company that provided the major service would be responsible for the losses of the companies that dealt with it. However, that would be a recipe for bad practice. It would allow companies to take risks in the knowledge that a large multinational company would step in to cover them if everything went wrong. Although I understand why the hon. Gentleman drew attention to the phrase, the alternative would be something that no business could contemplate.

Mr. Godsiff: Is the hon. Gentleman really suggesting that the mobile network operators did not know that retailers were operating unsustainable business models that pushed those operators’ products? With reference to the code of practice, the operators themselves did not root out retailers that operated unsustainably and used bad practice. I have a letter from a couple who live in Chesterfield. I have read it, and they do not strike me as particularly disadvantaged people. They signed up with a firm that went bust, and they say:

by the retailer. The retailer says, “I am selling you a product of one of the mobile network operators, and myself and the network operator are part of the contract.” The hon. Gentleman says that the mobile network operators’ argument is that there are in fact two contracts. What the retailer does is his business, but once there is a link to us, we want full payment.

Charles Hendry: I am grateful to the hon. Gentleman for his intervention, but it would be quite inconceivable that a network operator could be liable legally for the individual business decisions taken by every single retailer throughout the country selling its products. There must be a separate legal arrangement between the customer and the retailer, and the customer and the service provider. Clearly, the mobile operators will have known of the practices, but they could not then determine that they were unsustainable because, in some cases, they clearly were not.

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Companies have managed to offer such a service and not go into liquidation. To make a decision on whether the situation was unsustainable, we would have to know how much money the directors took out of the company, the leases that they undertook and whether they were affordable, how much they paid in rates, and their staffing costs. A range of costs would determine whether a business model was sustainable, not just the ratio between the cashback that was offered and the take-up that was expected.

Lorely Burt: I fully understand, and agree with, the hon. Gentleman’s points. However, the problem has been exacerbated by the mobile operators’ insistence on prosecuting their contract with the retailer and then transferring it to the end user. That is the issue that we should examine, because the operators appear to have been acting very inflexibly and not exercising any discretion. They now have a new relationship with the end user, and they should examine the circumstances with that end user.

Charles Hendry: My recollection is that I signed a mobile phone contract with Carphone Warehouse, not directly with Vodafone, so the contract was made specifically with the retailer. However, I would have assumed that I had formed a contractual arrangement with the network operator the moment that I started using the network—in other words, I would not have been allowed to start making phone calls without some implicit contract relating to how the calls would operate and what charges would be imposed. To return to my point about caveat emptor, there is a point at which members of the public ought to think, “Well, if I’ve started using my mobile phone, I must, de facto, have some contract with the network operator.” Those are exactly the issues that Ofcom should investigate.

I am pleased that Ofcom is looking into the matter and I hope that it will not be long before it provides the evidence from its investigations, but I think that the comments made by the hon. Member for Birmingham, Sparkbrook and Small Heath about Ofcom, particularly its “cosy relationship”, were regrettable. I have had a lot of dealings with Ofcom and have found it absolutely objective and fair in all of them. When Ed Richards became its chief executive, some people were concerned, because he had worked at No. 10, that his appointment might be political. From everything that I have seen, I must say that he is an expert in his field and scrupulously objective and fair, and that he and the people who work with him do a great service to the industry.

Mr. Godsiff: I should make it clear, as I thought that I did in my speech, that the comment about the cosy relationship was not mine, but that of Viviane Reding, the European Commissioner with responsibility for telecommunications, who has made it perfectly clear that she is unhappy about what she calls the close-knit and cosy relationship between the regulator and mobile network operators in the UK.

Charles Hendry: It is my sense that we have one of the toughest regulatory regimes in Europe. Our system is the envy of many other countries. Ofcom is an expert organisation. I always find that it puts consumers’
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interests first and is not afraid of a fight with the industry when it feels that that is appropriate. I want to put that firmly on record.

I hope that the Minister will answer a number of questions about his Department’s position on the matter. Does the Department monitor complaints, and to what extent have cashback sales been an issue of concern in the complaints that it has registered? What discussions have he and his colleagues had with representatives of the telecoms networks and dealers? Has he had discussions with Ofcom about the issue, and does he believe that the code of practice is generally working satisfactorily?

To return to the points made by my hon. Friend the Member for Newbury, the British telecoms industry is a world leader. We lead in innovation, we have one of the highest rates of market penetration in the world, and we have a very good geographical spread, as many hon. Members know from having opposed masts being put up in our constituencies. We have a system that works better for those on lower incomes than systems in many other countries because handsets are often given away free, which gives people access to mobile telephony who would not otherwise have that. Our system is also highly competitive. We have almost too many different tariffs on the networks; I find it incredibly confusing to look at the tariffs available to see whether I am getting a good deal.

Clearly, the system is not flawless, and some schemes will be mistaken, but it does not help to denigrate an entire industry and all its operations because of failings in one small sector. We have a blame-and-legislate culture in this country: whenever anything goes wrong, we find somebody to blame and pass a new law to address it. All too often, the newspapers that say that Parliament legislates too much are the same ones that call for the next law to be introduced. The right way forward is to identify the problem, which has clearly been done, and to create a voluntary code, which has also been done, although it does not work as well as it should. The regulator should then investigate and use its powers as necessary. Only if that fails should we look to legislation.

10.44 am

The Minister for Energy (Malcolm Wicks): I, too, congratulate my hon. Friend the Member for Birmingham, Sparkbrook and Small Heath (Mr. Godsiff) on securing this debate. I think that all of us have been struck by his commitment and concern on behalf of his constituents, particularly those on low incomes. Many have certainly been badly treated, and I was struck by his comments on the consequent financial distress that some are suffering. I thank him for continuing to highlight the issue.

My hon. Friend is right to be concerned; thousands of people feel aggrieved that they have lost money by agreeing to cashback deals. I hope that he will understand that I shall not comment in any detail about the particular case of the collapse of Dial a Mobile, as that would not be appropriate. However, he has raised wider issues, so today’s debate is welcome.

Consumer protection is a key role of the Department for Business, Enterprise and Regulatory Reform. I know from my constituents and the many people who write to the Department that consumers expect to be
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treated fairly and expect their voices to be heard by business. Most importantly, they expect the best consumer protection regime that we can provide.

Regulation of the telecommunications market in the UK falls to the independent regulator, Ofcom, a statutory corporation set up under the Office of Communications Act 2002 with duties to further the interests of citizens in communications and relevant matters. Ofcom introduced the voluntary code of practice last July with the aim that consumers should be able to trust those who sell to them. As Ed Richards said at the code’s launch:

The Department monitors complaints, which have, unfortunately, continued at a relatively high rate, peaking at an average of 665 per month in September 2007. Given the continuing complaints to Ofcom, it is absolutely right that it has reviewed the voluntary code of practice. I understand that the conclusions of the review will be made public shortly, and I look forward to seeing them. I hope that before Ofcom finalises its voluntary code, it will listen carefully to the voices in this debate, which I know it is monitoring, particularly the complaints of my hon. Friend. That seems the best way of tackling mis-selling and cashback deals that do not materialise in practice.

Part of the role of an independent regulator is talking regularly to mobile network operators and retailers about enhancing mechanisms to give consumers improved protection. As we have heard, the mobile telecommunications sector is one of the most intense and competitive in the UK. By the end of 2006, there were nearly 70 million active mobile phone subscriptions in the UK. Further growth is being driven by multiple handset or SIM card ownership. That intense competition has given us one of the most dynamic markets for mobile telecommunications in the world, and it puts pressure on everyone—vendors, customers and regulators—to ensure that business is done fairly and contracts are honoured.

The Office of Fair Trading can take action against standard terms used by traders in contracts with consumers, seek assurances from anyone using terms that it considers unfair and, if necessary, seek injunctions forbidding the use of specific terms. A term may be unfair not merely in substance but, equally, by being so obscurely worded that the consumer cannot reasonably be expected to understand it. If a trader uses standard terms and conditions but hides away important or onerous contract conditions in the depths of the document, that may be unfair. There are also controls on misleading trading practices. If a trader knowingly misleads a customer about what is on offer or the conditions of the sale, that may be a false trade description or misrepresentation.

In a couple of months, we shall bring into force new regulations implementing the unfair commercial practices directive. The regulations will repeal much of the existing law in this area and replace it with a simpler, more general framework. The essence of the new system will be simply that the trader should not mislead the consumer or omit important information if
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those actions or omissions might lead the consumer to take a different decision. I give that information as general background, as it is not clear that those aspects of the law are of particular relevance to this issue. The central problem in most cases seems to be that the reseller has gone out of business. In those circumstances, the general consumer protection regime is unable to offer any practical assistance.

Cashback has been a commonly available offer from independent mobile retailers for the past five years: retailers undertake to pay an amount of money to customers when they take out mobile phone contracts. Cashback contracts are with retailers and are separate from customers’ airtime contracts with mobile providers such as Vodafone, Orange and O2. Ofcom recognises and welcomes Vodafone’s rescue package for its Dial a Mobile customers. It has offered contract exits and downgrades to affected customers, and Ofcom has urged other providers to adopt similar, generous rescue packages. In most arrangements, cashback is funded by retailers from the commission that they receive from mobile providers for making sales. There has been a welcome focus on operators supplying customers without using third-party suppliers. By May 2007, direct sales accounted for nearly 60 per cent. of sales.

It is important that customers ensure that they have as much information as possible before agreeing to anything. However, I recognise that my hon. Friend would argue that people on low incomes who do not have information that many other people might have can be particularly vulnerable. We need to think through the implications of that. My Department is
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committed to putting knowledgeable, empowered consumers at the heart of a strong UK economy, and to ensuring that the UK has a first-class consumer policy framework. We want confident, well-informed businesses and consumers, because they are key to ensuring that competition benefits us all. We are determined to maintain and, crucially, to enhance a robust, effective consumer and competition regime that gives consumers the knowledge and information they need to shop confidently at home and overseas. We want it to educate consumers so that they know their rights and where to turn for protection.

On 26 May 2008, the new consumer protection regulations will usher in the EU’s unfair commercial practices directive. The new rules will help consumers by banning all types of unfair selling and marketing methods and by tackling unfair conduct that is not currently illegal. The directive will ban misleading statements or omissions, and deceptions about the value of cashback deals or the conditions necessary to qualify. It will not, however, ban cashback or other incentives.

My hon. Friend has raised an interesting issue. I do not think that my words will satisfy him entirely, but it is important to re-emphasise that Ofcom has recognised that the voluntary code needs reforming and strengthening. Although the code is near to publication, I hope that Ofcom will step back for a few moments and consider today’s debate and the different contributions that have been made. We should consider in particular the important issues that my hon. Friend has raised.

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