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Cashback Contracts

Volume 472: debated on Wednesday 5 March 2008

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

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; 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.

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?

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”.

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.

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.

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:

“Ofcom welcomes new code on mis-selling in mobile markets but warns of consequences of failure.”

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:

“Ofcom has discussed the nature of these complaints with MNOs directly and industry has responded”—

the industry responded, not the regulator—

“with a code of practice which defines the best approach to promoting and selling mobile services.”

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:

“Mobile operators do not, however, underwrite the obligations of other legal entities”.

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:

“As promised, here is confirmation of our belief that many retailers currently operating cash-back schemes are experiencing a 40 per cent. redemption rate. This is based on feedback from a range of businesses operating both a Distant Selling model and a high street retail model. Perhaps the highest profile success story of a business operating this model is Dialaphone, whose results speak for themselves”.

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

“The directors of Dial a Mobile told us that any documents—any contracts—were shredded and never passed onto the MNOs—and that was routine.”

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:

“They said the network providers knew this, and that this has been the case for a few years, and they’d been happy to accept customers via a phone call”—

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 air time providers are getting upset at the advice we put out and are putting pressure on us to remove our advice.”

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 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:

“to find a permanent fix to these problems.”

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:

“Mr. Godsiff, in answer to your questions as to whether I have got any powers, as Dial a Mobile has gone out of business there are no Dial a Mobile contracts to tear up.”

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

“The problem is, rather, that the Dial a Mobile contracts were supposed to give money to customers to part compensate for the money customers were paying to the mobile operators. Now that Dial a Mobile has gone out of business, customers are often having to pay the full amounts to honour airtime contracts with mobile operators, even though they are no longer in receipt of cash-back payments from the retailer who sold the contract to them.”

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 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:

“good value for money for their shareholders”.

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

“Ofcom is now agreeing to launch a formal review to see if formal regulations backed by the full weight of Ofcom’s legal powers would provide better protection for customers”.

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:

“We would love to ban cashbacks, but legally we can’t.”

He went on to claim:

“Cashback is really last year’s problem. Cashback is always going to create problems”.

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.

The mobile network operators could have acknowledged that they were aware of what some retailers were doing in pursuing unsustainable business models. They also could have acknowledged that they themselves were sitting on a mountain of contracts worth up to £50 million, and they could have said something to their customers to the effect of, “We would like to help you.” They have said that they will consider any representations that customers make “on their merits”, but they deny any responsibility whatsoever for the shambles that has occurred.

I should make it clear that I not only recognise that the mobile telecommunications industry makes a valuable contribution to the UK economy but know that there are mobile phone retailers who will not offer cashback deals, because they know how flawed the business model for such deals is and they are prepared to forgo business rather than adopt a business model that could place their customers in difficulty if they themselves went bust. Many retailers, including some small family firms, contacted me when this furore arose over Dial a Mobile. They wanted it to be known that there are retailers who will not touch cashback deals, but they also wanted the general public to know that the mobile network operators, despite their protestations of innocence, are fully aware of the unsustainable business models being operated and pushed by them on to some retailers, and they are quite happy to turn a blind eye as long as the customers keep getting connected to their networks.

Following the representations that I have received, I have developed a great respect for those reputable retailers who have been prepared to say, “I’m not going to con my customers, even if I lose business.” Such dealers deserve respect; they are the sort of people Ofcom should be talking to and encouraging, and I very much hope that it will talk to some of them as part of its review.

I have endeavoured to set out the background to this sorry saga, which has impacted on a large number of my constituents and on many other people around the country. Ofcom should have been much more rigorous and should have drawn up a code of practice that gave customers far greater protection, instead of letting the mobile network operators run rings around it.

It is still not too late for the big five to make a gesture towards their customers, and I do not have in mind the two-fingered gesture that they seem to be making at the moment. Before Christmas, I had a meeting with the parliamentary representatives of the big five, where I suggested—it was the season of good will—that they at least tear up the alleged contracts of people who had not even signed a contract or received the cashback promised by the retailers. I said that the operators could keep the rest and that they were making a fortune, but I suggested that they could at least tear up the alleged contracts of people who had signed nothing. In retrospect, I acknowledge that I was naive to think that fat cats would give up even a drop of their milk, and, sadly, that proved to be the case.

I suspect that the Minister will say that he has sympathy for the many people who are suffering, but that this is a matter for Ofcom, and he is of course right, because it is the regulator. However, he, with parliamentary approval, is responsible for setting the parameters within which the regulator operates, and I hope that he will be prepared to raise a number of matters with Ofcom.

First, if the regulator was so concerned about slamming and cashbacks because of the number of complaints that it received each month, why did it take until July 2007 to ask the mobile network operators to come up with a voluntary agreement? Secondly, why did it think that a voluntary code was acceptable, only to state that it was flawed and needed reviewing seven months later?

Thirdly, I hope that the Minister will emphasise to the regulator that cashback schemes should be scrapped, as even some mobile network operators, such as 3, now suggest they should be. If such schemes are allowed to continue, operators must insist that all retailers who sell mobile phone contracts must get customers to sign and forward contracts to them. Most importantly, I hope that the Minister will emphasise that the mobile network operators must be made responsible for underwriting cashback offers made by retailers who are pushing their goods.

I hope that the Minister will also ask Ofcom proactively to engage with the European Commission, which, as I said, is unhappy about the relationship between the regulator and the mobile network operators. I hope that he will instruct Ofcom to make known its yearly contributions from the operators, rather than allowing it to hide behind the cloak of commercial confidentiality.

Finally, I very much hope that, as a result of this debate, the mobile network industry will soon be properly regulated by a vigilant regulator that protects the customer from the dodgy business practices and rampant greed that have, I regret to say, characterised the industry over the past few years.

It is a pleasure to be under your watchful eye today, Mr. Benton.

Let me start by saying where I come from on this issue. My constituency contains the world headquarters of Vodafone, of which I am a great admirer. The company has a very good corporate responsibility record, and there is a scarcely a school, arts body, sporting institution or voluntary organisation in the area that has not received funds or help from it. Although I am great admirer of Vodafone as a business, that is not to say that I come to the House as a mouthpiece for it or, indeed, any of the other network operators. In fact, I consider myself a challenging friend, and I have at times raised issues that would be of particular interest to the hon. Member for Birmingham, Sparkbrook and Small Heath (Mr. Godsiff).

I have great respect for the hon. Gentleman, who has been a worthy campaigner for his constituents, many of whom are on low incomes and who have undoubtedly suffered extremely badly as a result of some dodgy dealings by Dial a Mobile. That said, he and I probably look at business issues from different ends of the telescope, and I will seek in my few remarks to add a tone of caution as we perhaps move towards a new regulatory framework for the industry.

I recently saw early-day motion 696, which is in the hon. Gentleman’s name, but one phrase leaped out and caused me such concern that I was unable to sign it. Speaking of cashback deals, the hon. Gentleman said that he believed

“network providers to be complicit in the active promotion of an unsustainable business model”.

That is a sweeping statement. There are five major network providers, and I have not had time to speak to them all since I heard that this debate had been called. However, I have spoken to Vodafone, which takes great exception to the hon. Gentleman’s assertion.

We must recognise that mobile phones are now cheaper and more reliable, that they cover much more of the British isles and that they do more—we can access the internet with them, and they have all sorts of other uses. Many of those advances in technology and provision have been achieved through competition. The marketplace is highly competitive, which is a good thing because it has given a lot of people on low incomes access to mobile communications and transformed their lives. I entirely concede, however, that that has resulted in some pretty dodgy dealing, as in all highly competitive marketplaces.

In seeking to sift out the bad guys, however, we need to look at the actions of the independent dealers. As we seek to secure value for money and consumer rights for our constituents, we should ensure that our fire is directed at the real culprits, and it is open to debate whether the networks are complicit. In fairness, the hon. Gentleman made a good case, and some network providers may have encouraged activities among independent dealers that might, in the wrong hands, be open to question. However, we are certainly not talking about all network companies and we should all be careful about the words that we use.

The hon. Gentleman referred to the mobile networks’ self-regulatory code. I have read the code, which I believe was a genuine attempt by the networks to do what they could to set out the principles governing the behaviour of independent dealers. However, anti-competition rules limit the extent to which operators can restrict independent dealers’ freedom to set out their own deals. In other industries, such as the airline industry, we have seen how a cartel of large companies can set prices and establish business models in an entirely illegal way, and they pay a heavy price for that. It is not in our interests for network providers to behave in that way; indeed, they should not and would not want to do so. In attacking them, however, the hon. Gentleman might be taking them down a route that is illegal under the EU’s very strict competition rules.

The Independent Mobile Phone Dealers Association does not think that the code is enough or that it will work. If that is the case, perhaps Ofcom should look at the statutory regulations of the independent dealers. The independents have been offering the deals that have caused consumer harm. People close to me often tease me for my financial caution. The only cashback deal that I would take is the one that put cash in my hand at the time that I was purchasing the contract. Even then, I would question who was getting the money back at another time in another way. I have always been dubious about such arrangements and of snake oil salesmen who may, from time to time, try to sell me things beyond the area of telecommunications. Any cashback deal is surely an area for question.

I commend the hon. Gentleman’s caution. It is very true that if something looks too good to be true, then it usually is too good to be true. However, the hon. Member for Birmingham, Sparkbrook and Small Heath (Mr. Godsiff) has described people who do not have the same commendable financial acumen that the hon. Gentleman has. Does he not feel—and I am asking an open question—that there should be some form of protection for such individuals?

I think that there should be. Indeed, there is already a considerable amount of protection. It is a question of balance. How far should Parliament and the regulator go to hold the consumer’s hand throughout the whole process? The hon. Member for Birmingham, Sparkbrook and Small Heath rightly mentioned the clarity of contracts and the implications of the so-called small print. However, there is a point at which one has to say “caveat emptor”. I recognise that some people find it hard to read the small print. For example, they might have literacy problems or a shortness of attention span. Certain dealers and businesses across the whole commercial sector can take advantage of such people. However, it is very difficult to legislate for everybody. We have to recognise that if we go too far in one direction, we could achieve something that is much more damaging.

I am interested in the Independent Mobile Phone Dealers Association, which has an impressive website. I recommend that hon. Members look at it. However, it is hard to tell from that website how many members it has and what percentage of the independent dealers it represents. My understanding is that it has yet to have a formal meeting with the networks to discuss this matter, which seems extraordinary. I know that communications are a two-way street, but this matter seems to call for an urgent meeting between this organisation and the networks.

I welcome—and we should all welcome—any attempt by an industry or a commercial sector to police itself and to set standards. I hope that that is what the IMPDA will do. It is the rogues in the sector who are blighting the whole industry and blackening the name of telecommunications sales across the board, but we and the IMPDA should be careful what we wish for. If we go too far down a regulatory route, it could result in fewer dealers, less choice and a higher cost to people on low incomes for whom mobile telecommunications are increasingly important.

Let me give hon. Members an analogy related to the Financial Services Authority. A large number of independent financial advisers operated in an able and capable way, giving advice to individuals on a one-to-one basis. They went to people’s homes and talked about pensions, life insurance and so on. They provided a very good service. Among them, however, were some rogues who were involved in some very bad cases of mis-selling. The FSA went in very hard and has regulated that industry to within an inch of its life. Now, the only people who can provide the kind of financial services that are wanted are the large operators. Those small one-to-one, one-man-band financial advisers come to our surgeries and tell us how the FSA has ruined their business. I worry that if we go down the wrong regulatory route, it could work in a similar way in the mobile telecommunications sector.

Regulation is good if it is pitched right and targeted at where the problem lies. I suggest to the hon. Gentleman that his attack on the networks is slightly missing the target. The real rogues exist among the independent dealers, the vast majority of whom are entirely honest—and many want nothing to do with cashback deals—and provide a good service. Nevertheless, that is where the problem lies. The networks undoubtedly have a role to play in ensuring that the rogues are not buying into them.

The hon. Gentleman said that he has looked at the voluntary code of practice, which was drawn up by the mobile network operators. If he looks at that code, he will see that the operators say very clearly that they will come down very hard on the sort of rogues that he is referring to. But they will not do so because, as letter after letter from reputable retailers says, they are quite happy to turn a blind eye all the time that those rogues get connected up to their networks.

If you will forgive me, Mr. Benton, that is a simplistic view. Undoubtedly, such people sign up to the networks; that is their only means of operation. I have spoken to one company and it is not the case that it is encouraging them in any way that it can. Strict competition rules prevent companies from imposing on the dealers a business model that is too prescriptive.

In conclusion, regulation, if it is done correctly—not as it has been done by the Financial Services Authority in financial services—is the way forward. Otherwise, the perfect will become the enemy of the good and many people on low incomes will suffer a higher cost for their telecommunications provision.

I congratulate the hon. Member for Birmingham, Sparkbrook and Small Heath (Mr. Godsiff) on securing the debate. He has raised the lid on a particularly unsavoury can of worms, and I am sure that hon. Members will have been quite shocked by some of his stories. I appreciate the points made by the hon. Member for Newbury (Mr. Benyon) in relation to how far regulation should go. It is true to say that if something looks too good to be true, it probably is.

The question that we should consider is how far one should go to protect the gullible. Gullible people are not only those on low incomes who may or may not have the opportunity to read the small print in the first place, but ordinary people such as myself. Two members of my family have taken out cashback contracts, so I have personal experience of this. One of those family members is an organised person. He arranged his cashback through a reputable retailer and gets his money back. I am a disorganised person and often realise to my cost and chagrin that I have forgotten the relevant date, and that that date has gone by. Deals under which claims must be made on, for example, the third, ninth and 10th month—if the day falls on a Monday and it is not raining—are not sensible.

The problem is that even organised and sensible people who enter into contracts with their eyes open will find that sometimes it is virtually impossible to get their money back, and that cannot be right. I understand that, under the deal offered by Dial a Mobile, individuals were paid back the whole of their £35 monthly rental. Customers would have been given an agreed number of free calls and texts, but of course there is no such thing as a free lunch. The company’s business model obviously miscalculated the number of people who would claim back that cash, and that smacks of being disingenuous. Operating a business model that relies on people not claiming what they are entitled to is an inappropriate way in which to carry out any form of business dealings.

The hon. Member for Birmingham, Sparkbrook and Small Heath talked about the role of mobile operators. Certainly, Orange and T-Mobile insist on the honouring of contracts even when the middleman has gone, which is a fact that we should publish to make consumers aware of the pitfalls of contracts into which they might consider entering. The Mobile Broadband Group has mounted a defence of the situation. It says that the activities of less than 10 per cent. of dealers have been complained about, which it seems to think is highly commendable. As I see it, it means that we have a core of disreputable organisations. I agree with the hon. Member for Newbury that some of the larger retailers operate entirely honourably, but I do not think that it is a good thing that 10 per cent. of retailers are being complained about.

Ironically, the Mobile Broadband Group says that the voluntary code of practice is not voluntary for the dealers, but forms part of their contract with mobile operators. So there is one rule for operators, for which the code is voluntary, and another for dealers, for which it is compulsory. It says that there are no more complaints about mobile companies than about fixed-telephony ones, which apparently now have a smaller client base and are formally regulated. However, that again suggests that there is a nub or niche of businesses operating inappropriately, which raises the question of whether some form of formal regulation would be appropriate to rid the market of those who bring everybody else into disrepute.

Has the Mobile Broadband Group cleaned up its act? It claims so by pointing to the introduction of the voluntary code On examples coming to light, it says, “Well, it takes some time to flush through existing contracts,” which might be the case. However, I have concerns, particularly in light of the comments of the hon. Member for Birmingham, Sparkbrook and Small Heath about the lack of clarity from Ofcom itself on how long we should wait for that process to take place. Of most concern is the fact that the Mobile Broadband Group will not take responsibility for the actions of its dealers. It still claims to have a contractual relationship with people whom it has never met, even though the middleman—the dealer—has gone out of the equation. It also claims to be considering the matter on a case-by-case basis. I am not a lawyer, but I am dubious about whether that is appropriate, given that whole classes of individuals have clearly been affected.

The concept of what is going on in the market has a peculiar odour to it, which would not be the case if there was a straightforward deal from which everybody could benefit. Ofcom is considering whether regulation is needed, but perhaps we should wait and see whether the problem will flush through, as the Mobile Broadband Group claims that it will. In the meantime, mobile operators should take their fair share of the flack and publicity and be made to appreciate that they cannot just enforce what legally might be contractual arrangements with users without considering the consequences of people’s caution over, and annoyance with, the practices that they operate.

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 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.

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

“a requirement that the customer submits their original statements—copies of statements should be accepted as proof; a charge for processing a cash back claim; a requirement that cash back claims are submitted within an unreasonably short period, such as anything less than 60 days”.

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.

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:

“From our perspective, at the time of taking this out, the cash back and network provision were intrinsically linked, and portrayed as this”

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.

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.

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.

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.

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.

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.

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’ 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.

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 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:

“We expect this new voluntary code of practice to stamp out mis-selling in mobile; if it does not, we will not hesitate to step in to protect consumers.”

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 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 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.

Sitting suspended.