Ofcom attempts to tackle the ‘mis-selling’ minority

Angus Evans, is a senior solicitor with the EU & Competition team
at law firm Maclay Murray & Spens.

Mobile phone contracts are jockeying for the top spot with second hand cars in the list of the greatest consumer irritations, according to the government’s consumer advisory service, Consumer Direct. Perhaps this is unsurprising when one considers the recent wave of so-called ‘mis-selling’ deals involving some retailers reportedly using dishonest or unorthodox methods to sell mobile products.

No doubt with an eye to these problems, the communications regulator Ofcom has recently proposed new regulations aimed at cracking down on the mis-selling of mobile phones. This follows a string of complaints from consumers regarding cash back offers which did not materialise, as well as issues regarding misleading tariff information and other unscrupulous selling tactics. While Ofcom’s final view is not due until later this summer, the key proposal is the introduction of new regulations covering the operations of mobile service providers (O2, T-Mobile, Orange, Vodafone and 3).

In essence, the providers would be required to use their best endeavours to ensure their independent retailers do not get involved in dishonest, misleading or deceptive conduct. In addition, providers would also be forced to carry out a long list of checks on retailers’ credit history, with the aim of reducing the

risk of cash-back offers becoming worthless if a company ceases trading through insolvency.

Although mis-selling problems lie primarily with the independent retailers, Ofcom feels forced to focus on the mobile service providers, as it does not have the power to regulate retailers directly. While it could use its consumer powers to investigate individual examples of mis-selling, it also believes the fragmented nature of sales channels in the mobile sector would make for an impractical option.

Ofcom argues the move to regulation is necessary as the current voluntary code of conduct, introduced in July 2007, has yet to lead to a significant reduction in the level of complaints. This in itself is a somewhat troubling statement, as Ofcom only waited until October 2007 before concluding the voluntary system was not working. To many observers, this suggests the regulator had written off the voluntary approach from day one.

This being said, there is, undoubtedly, a problem with the mis-selling of mobile phone services in the UK. However, it is questionable whether imposing an additional layer of regulation is an appropriate way to tackle this problem.

In particular, requiring mobile service providers to use their best endeavours to ensure independent retailers comply with the new regulations is a very tall order. In practice, this would require a rigorous audit of the activities of each individual retailer. Given the fragmented nature of sales channels, it would create a heavy burden on business and could lead mobile service providers to reduce the size of their distribution chain, which would not benefit the consumer.

Similarly, given the range of different companies selling mobile phones, the requirement to carry out detailed credit checks on each individual retailer is likely to prove unworkable in practice. The upshot is, while mobile service providers could undoubtedly amend their contractual terms with retailers to take into account Ofcom’s requirements, there is no guarantee this will bring about compliance. There is a real danger the new regulations will simply end up increasing the burden on business, without any obvious benefit to the consumer.

It is clear that Ofcom is in a difficult position as it cannot regulate independent retailers directly and believes it does not have the resources to investigate individual infringements as widely as it would like. However, this does not mean the regulation of mobile service providers is necessarily the most effective approach towards solving the mis-selling conundrum. There are clearly viable alternatives to Ofcom’s proposals.

An option would be to give the existing voluntary code of conduct sufficient time to be bed in and to engage actively with all parties to develop practical solutions to mis-selling. Another alternative would be the more targeted use of Ofcom’s current investigatory powers, for example, investigations into serious breaches of the rules, thus sending out a clear message to industry. Indeed, Ofcom already appears to have partially accepted this last point by starting a mis-selling probe into Phones 4U in May of this year. Both these options could be at least as effective as blanket regulation of the industry, while being far less burdensome on business.

Clearly then, it can be argued using the mobile service providers to police the market is not the most effective or proportionate approach to the mis-selling problem. Although it seems unlikely Ofcom will backtrack from its initial proposals, it should consider again the problem of misselling and should develop more workable and imaginative solutions which are less burdensome to industry.