Business, Innovation and SkillsWritten evidence submitted by PhonepayPlus

Summary

1. PhonepayPlus, the UK regulator of premium rate services (PRS), welcomes the draft Consumer Rights Bill and is pleased to submit evidence to the BIS Committee to inform its pre-legislative scrutiny. We have an expertise and interest in this area because our role is to protect consumers who are purchasing value-added goods and services and charging them to their phone bills or pre-paid phone accounts. We have a particular interest in the digital content provisions of the draft Bill. The main points we make in response are as follows:

We welcome the consolidation and clarification of consumer law and in particular its specific application to digital content.

However, we believe that in order to be fully effective, the Bill will need to be supplemented by active enforcement and active awareness raising and information sharing with consumers. PhonepayPlus can work with other bodies to help achieve this.

We seek additional clarification that nothing in the Bill will supersede sectoral regulations that exist in the area of digital content.

We seek an amendment to the Bill to implement the clarification of PhonepayPlus’ fining powers that were proposed in the Government’s recent Communications Strategy Paper.

We consider that in addition to passing this Bill, further thought needs to be given to updating the regulatory framework for digital content, reflecting changes in technology and consumer behaviour and the growing convergence between the internet, payments and telecoms sectors.

PhonepayPlus is in the process of conducting consumer research looking at the range of harms consumers experience when purchasing PRS and other digital content, whether, when and to whom they complain and what their experience is when they do complain. This research is likely to be relevant to the Bill and we would be happy to provide the Committee with further details when the research has been completed.

About PhonepayPlus

2. PhonepayPlus is the independent regulator of PRS in the UK. We are a non-statutory body funded by industry and have over 25 years’ experience of regulating the market. Our aim is that anyone should be able to use PRS with confidence.

3. The Communications Act 2003 provides Ofcom with strategic responsibility and accountability for the regulation of PRS. PhonepayPlus, which has been regulating the market since its introduction in 1986, has been delegated by Ofcom to carry out the regulation of PRS using a Code of Practice. The Code, which is approved by Ofcom, gives us a range of powers to investigate and address consumer harm through robust sanctions.

4. For the purpose of this Bill, PhonepayPlus is listed as an enforcement authority within the meaning of section 120(15) of the Communications Act 2003 (regulation of PRS).

Premium Rate Services

5. PRS are value-added goods or services that consumers can purchase by charging the cost to their phone bill or pre-paid phone accounts. Popular PRS services include directory enquiry services, donating to charity by text, online games and TV voting and competitions.

6. In 2012, the UK PRS market was worth around £765 million, with some 3,000 registered providers located across 75 countries reflecting the global nature of the industry we regulate.

7. As we set out later in this submission, the PRS market is changing quite significantly in light of recent developments in technology and we consider that this has implications for the regulatory framework for digital content.

Consolidation and Clarification of Consumer Law

8. PhonepayPlus welcomes the draft Consumer Rights Bill. We consider an update to existing consumer law is much needed and will help to ensure that rights and remedies keep pace with where the market is now and where it is likely to be going. Our experience of regulating the PRS market tells us that a clear framework for consumer protection gives both businesses and consumers greater certainty about their obligations and rights and promotes confidence in markets. We particularly welcome the inclusion of a specific category of digital content, which should provide greater clarity that consumers purchasing digital content have the same rights as those purchasing physical goods.

9. Effective protection for consumers purchasing digital content is particularly important because in our experience, consumers purchasing PRS and some other digital content are typically exposed to a greater potential range of risks than consumers purchasing physical goods.

10. Risk factors in the digital marketplace can include:

Low barriers to entry and exit, which can encourage scams;

More complex value chains, which can make it more difficult for consumers to identify who is responsible for a problem and who to complain to or seek redress from;

The difficulty in verifying the quality of the content or service prior to purchase;

Low price points, which can encourage consumers to absorb losses rather than complain, even though the aggregate level of financial consumer harm can be considerable;

Appeal to children; and

The risk of inappropriate or harmful content.

11. General consumer law is not designed to deal with all these risks—appropriate regulation is also important—but effective consumer law is important in providing a base level of protection.

12. We welcome in Clause 35(2) the clarification that the Bill also covers digital content paid for through a facility for which money has been paid. This will ensure that intermediary payment mechanisms, such as stored value cards or virtual currencies, are covered by the Bill, as they should be.

Enforcement and Consumer Awareness

13. As stated above, we consider the Bill to be an important step forward for consumers, in particular in the area of digital content. However, the Bill can only be fully effective if the consumer rights set out in the Bill are actively enforced and actively brought to the attention of consumers, so that they have the information necessary to exercise them.

14. This is particularly important in the area of digital content, where there is a greater risk of consumer harm being de-prioritised both by enforcement bodies and by consumers because of the relatively low price points, the more complex value chains and the increased potential for providers to be based outside of the UK. In PhonepayPlus’s experience, the proportion of consumers who complain and seek redress when they have experienced detriment in a digital purchase is relatively low. Most consumers will tend to absorb their losses without complaining and this gives the potential for significant hidden consumer harm to emerge that can affect a large number of consumers and undermine confidence in the digital market place.

15. PhonepayPlus is in the process of conducting consumer research looking at the range of harms consumers experience when purchasing PRS and other digital micropayments, whether, when and to whom they complain and what their experience is when they do complain. This research is likely to be relevant to the Bill and we would be happy to provide the Committee with further details when the research has been completed.

16. Within its remit, PhonepayPlus is active in enforcing consumer rights through its Code of Practice and in informing consumers of the potential risks and how to protect themselves. For example, we operate an award-winning consumer education programme called PhoneBrain that informs children and young people about how to use PRS safely.

17. We are keen to work closely with bodies like the OFT, Trading Standards, Citizens Advice and Which? to help ensure that consumer rights on digital content in particular are enforced and brought to the attention of consumers in a way that is effective and joined up.

Relationship between Consumer Law and Sectoral Regulations

18. Clause 55 of the Bill sets out that:

“This chapter is subject to any other enactment which defines or restricts the rights, duties or liabilities arising in connection with a service of any description”.

19. This clause is important in establishing that the Bill does not supersede other sectoral regulations that are in place for services. However, it only appears to apply to the services chapter of the Bill and not to the digital content chapter. We consider that there is also a need to clarify that the Bill does not supersede other sectoral regulations for digital content, such as our code of practice, which has a statutory basis in the Communications Act 2003. This might require a version of Clause 55 also to be written into chapter 3 of the Bill.

PhonepayPlus’ Fining Powers

20. On 30 July 2013, DCMS published the Government’s Communications Strategy Paper, “Connectivity, Content and Consumers: Britain’s digital platform for growth”. As far as PRS are concerned, the document stated:

Low value transactions through mobile phones and tablets are becoming increasingly prevalent. This has been fuelled by the take-off in television participation services (like TV voting via text message or through the red button on a TV remote), subscription services such as online gaming or dating websites, the increasing use of apps, and services for downloading films, books and music, for example.

Where payments for goods or services or certain donations to charities, like a donation via text message to Comic Relief’s Red Nose Day campaign, are charged to people’s phone bill or pre-paid account, it is treated as a controlled premium rate service (CPRS), and such services are regulated by PhonepayPlus (PPP). While many of these services act within the law, some companies do not. For example, they may use intentionally misleading promotional material or fail to provide clear pricing information, leaving consumers out of pocket. PPP is active in holding companies to account for breaches of its Code of Practice, but we want to make sure that companies that breach the Code are issued with penalties that reflect the level of profit that can be made from such activities. We will therefore legislate to make it absolutely clear that the £250,000 maximum penalty for breaches of the Code of Practice is on a per breach, rather than a per case, basis, removing any doubt that where a company infringes several of the Code’s rules that they may be subject to a penalty of up to £250,000 for each breach.

21. PhonepayPlus welcomes the Government’s commitment to legislate to remove any doubts about how PhonepayPlus’ fining powers should be applied. This will require primary legislation, as it will require amending provisions in the Communications Act 2003. In the absence of a Communications Bill in this Parliament, we are seeking for amendments to clarify our fining powers to be incorporated into the Consumer Rights Bill.

22. We believe that it is appropriate to do this given the need to act quickly and the fact that the amendments would be relevant to the purpose of this Bill in that they will help to ensure effective consumer protection in relation to digital content. We would be happy to discuss with the Committee and BIS how best to translate this into specific legislative provisions.

Wider Regulation of Digital Content

23. For consumers purchasing digital content and services, general consumer law provides an important base level of protection. However, it does not and nor is it intended to deal with the full range of consumer harms that can occur in the digital marketplace. As set out in paragraph 10 above, PRS and some other digital services have a range of risk factors that can increase harm to consumers. It is therefore important that in addition to updating general consumer law, the regulatory framework for digital content should also keep pace with changes in technology, the market and consumer risks.

24. The PhonepayPlus regulatory model—which has proved effective in protecting consumers—was initially developed in an environment where value-added phone payments were distinct from other services in that the content or service was not only paid for on the phone bill, but was also delivered through and accessed by the phone, through a higher rate call or premium SMS.

25. However, what we are seeing now is an increasing convergence between the internet, payments and telecoms sectors. For example, digital content can now typically be downloaded via the internet on a PC, tablet, smartphone or other connected device and paid for through a range of payment options—such as on a phone bill, credit card, debit card, PayPal or other mechanism. Our concern is that in such a marketplace, consumers of digital content and services may be exposed to the same sorts of consumer harms we have experienced and acted against in PRS, but may not benefit from our regulatory protections because our remit only extends to phone payments.

26. We have raised with relevant government departments and other regulators the issue of how the regulatory framework for digital content can best keep pace with these changes in the market and ensure consistent protection for consumers and a level playing field for businesses.

27. This is not an issue that we expect the Consumer Rights Bill to address, as its focus is more narrowly on general consumer law. But we consider it important to emphasise that whilst passage of the Bill will clarify and improve consumer protections, it should, in our view, be seen as a welcome step on the journey, rather than the final destination, of ensuring that consumers have the range of protections and information they need to use digital content and services with confidence.

28. We would be happy to provide the Committee and BIS with any further information they may need in connection with any of the points in this submission.

2 September 2013