Communications Act 2003 (Maximum Penalty for Contravention of Information Requirements) Order 2011
Baroness Rawlings
That the Grand Committee do report to the House that it has considered the Communications Act 2003 (Maximum Penalty for Contravention of Information Requirements) Order 2011
Relevant documents: 23rd Report from the Joint Committee on Statutory Instruments
Baroness Rawlings
My Lords, telecommunications are a vital part of the UK economy, worth over £35 billion in GDP alone. Perhaps more significantly, they help to underpin our online and internet economy—the largest per capita ICT market in the world and the driver of innovation and growth in the UK. It is absolutely critical that in this fast-moving and dynamic sector we have the necessary regulatory framework capable of keeping pace with market developments and technological change. This is why the Government have implemented the European framework on electronic communications. Those changes became law on 26 May this year. The changes to the framework are, first, good for business, which will benefit from the improved regulatory framework to encourage investment, and, secondly, they will provide greater competition and innovation among electronic communications providers. They will be beneficial, too, for consumers, who will gain from access to higher-quality and lower-cost communications services. Benefits for the former will include improved, reasonably priced choice of supplier and contract terms. For the latter, they will include strengthened rights on privacy and confidentiality, with faster switching processes and improved accessibility.
The UK approach to implementation has been light touch and has the support of business. It has been informed by a comprehensive and open dialogue with the people concerned, as well as a determination to avoid all over-regulation.
The framework contained a number of amendments granting new powers to Ofcom, the independent regulator. The powers will make certain that Ofcom has the appropriate tools to carry out its statutory functions effectively. These functions include the ability to make regulatory decisions on the markets. In order to make them effective, Ofcom needs access to information held by communications providers.
If the providers do not comply with information requests, it will hinder Ofcom in fulfilling its duty as the communications regulator. This could prevent Ofcom making informed decisions relating to remedy of the market and consumer protection. This could have detrimental impacts on both the communication markets and the consumer.
Amendments to Article 10(3) of the authorisation directive as well as to Article 21a of the revised framework directive require that Ofcom be able to levy dissuasive financial sanctions for most breaches of the regulatory obligations, including its information-gathering powers under Sections 135, 136 and 191 of the Communications Act 2003. Ofcom already has powers to impose financial penalties for breaches of these provisions, but the current limit for such penalties is only £50,000. Having reviewed the maximum level of the penalty, the Government no longer believe that this level of penalty is sufficiently dissuasive to prevent non-compliance with information-gathering requests.
The Government see the ability to levy an increased penalty for failure to comply with an information request as key to making certain that Ofcom has the necessary information available to make effective and correct regulatory decisions. Recent changes to the Ofcom enforcement regime in relation to silent calls raised the maximum level of penalty that Ofcom can levy for breaches from £50,000 to £2 million. This amendment to the Communications Act 2003 will mirror that increase in the maximum level of penalty in respect of non-compliance with requests from Ofcom for information. Other financial penalties in the Communications Act have been increased, too, to sums above the current penalty. For example, there will now be no financial advantage to companies refusing to answer an information request and taking a £50,000 penalty, as the maximum level of penalty will be £2 million. The use of this power by Ofcom must be appropriate and proportionate to the breach of the information-gathering powers under the relevant sections of the Act. The Government are clear that the UK has no discretion on the implementation of these provisions. We must therefore provide for dissuasive penalties, as they are the law and are required by the European directive.
The Government consulted on a change to the level of penalty as part of our wider consultation last year on the implementation of amendments to the European framework for electronic communications. Respondents from across both the telecommunications sector and the consumer rights groups were broadly supportive of this proposal. They recognised that it is of fundamental importance to the conduct of Ofcom’s regulatory functions under the framework that it is able to gather whatever information it needs.
Respondents also agreed that it is important that Ofcom is able to levy dissuasive penalties, particularly on those operating short-term scams where the potential gains can exceed the amount of the fine. The people concerned also struck a cautionary note, arguing that, given the high level of the potential fine, its levy should be proportionate to the type of breach of the information requests. I am pleased to say that this is recognised in our approach.
The Government are aware, however, that not all the people concerned agreed with the proposed increase in the level of sanction. Some suggested that the current level of penalty for failure to comply is already dissuasive and claimed that there is little evidence that companies are not complying with information requests.
The Government have looked long and hard at the level of the sanctions available to Ofcom under its information-gathering powers. We have worked closely with the regulator, Ofcom, to analyse and test its powers, including its current enforcement powers. We firmly believe that Ofcom’s enforcement powers in relation to the information-gathering requests made under Sections 135, 136 and 191 of the Communications Act 2003 are not equivalent to the other enforcement powers available to Ofcom and are not genuinely dissuasive. Therefore, we will increase the level of fine that Ofcom can levy for failure to comply with an information-gathering request up to a maximum of £2 million.
This will be done for the following reasons. First, the Government are aware that some communications providers have refused to comply with an information request or have provided inaccurate information on a number of occurrences during the years 2009 and 2010. Some respondents claimed that the current level of sanction available to Ofcom was already sufficiently dissuasive. The Government, however, have seen evidence that suggests that there is a lack of deterrent effect in the current regime. This means that businesses can, and do, take the risk of not providing accurate information as requested or providing any information. Potentially, therefore, they gain financial and other business advantages through the delay, and even the avoidance, of the full effect of Ofcom’s enforcement powers under the Act. This in turn can have significant detrimental impacts on both markets and consumer protections.
Secondly, non-compliance or delayed compliance with information requests under Sections 135, 136 and 191 of the Communications Act 2003 hinders Ofcom in fulfilling its duty as regulator. We see the ability to levy an increased level of penalty for failure to comply with an information request as key to making certain that Ofcom has the necessary information available to make effective and correct regulatory decisions.
Thirdly, increases in the level of sanction in other areas—for instance, silent calls—could provide communications providers with an incentive to refuse to respond to an information request and face a penalty of a maximum of £50,000 rather than answer the request, demonstrate a breach of other regulatory burdens and risk a far higher penalty.
Fourthly, the penalty will apply only to those who do not comply properly with Ofcom’s information requests. Two million pounds is the maximum level of fine that Ofcom will be able to levy, and the penalty imposed in any specific case must be, as I said, proportionate to the breach.
Her Majesty’s Government believe that this order is a necessary and important change to the powers of the regulator, Ofcom. This change will help to make certain that Ofcom is able to make fully informed decisions on the market it regulates; this can only be good for business and good for consumers. Therefore I commend this order to the Committee.
Lord Clement-Jones
My Lords, I understand the purpose of this order; the reasons for it were very cogently set out by my noble friend. European directives in the telecoms area have been extremely important in making sure that we have a level playing field in telecommunications across Europe. I doubt anybody would deny that the European framework is extremely important. However, this is only one part of the implementation of the changes to the European framework of directives. The question that occurs to me is: why are we not dealing with all the other aspects of the changes at the same time? One could then see the full context in which those changes are being made. I wonder whether I may have missed three statutory instruments this month, which is easily done, especially in this House. I may not have missed them—they may be coming down the track—but it would seem convenient for us to deal with them and this rather draconian order at the same time. The impact assessment that comes with the Explanatory Memorandum deals with the whole slew of other changes being made to the European framework and the other five directives that are part of it. Therefore, it would have been convenient to deal with them at the same time.
As the Minister says, the consultation broadly supported raising the level of the sanction to £2 million. However, “dissuasive” is, on the face of it, quite a subjective word. I wonder whether the Minister could define “dissuasive”—a word she used three or four times in the course of her excellent introduction. For instance, what is dissuasive about a penalty of £2 million as opposed to £1 million? I wonder whether this is less of a legal definition and more of a value judgment. I am perfectly okay with it being a value judgment, but we need to accept that it is and that it is a judgment made by the Government, who are not really objective in the circumstances.
I fully understand the nature of the changes being made to the authorisation directive in terms of specific sanction. However, I find parts of the impact assessment confusing. Looking at the impact assessment that deals with the authorisation directive, policy option 1 is:
“Implementation of the Authorisation Directive—articles for which there are no options in implementation”.
Then we move swiftly on to policy option 2, which is:
“Preferred implementation of the Authorisation Directive—articles for which there are options in implementation”.
Which option have we chosen? It is not clear to me from this impact assessment which option we have chosen. I assume that we have chosen policy option 2, but there was no explanation of that in the Minister’s introduction. It would be extremely valuable if she could explain which of the policy options has been adopted. Indeed, perhaps I was not even looking at the right impact assessment; that is always a possibility.
Lord Moynihan
My Lords, my intervention on this will be very brief. I echo my noble friend’s comments about the Minister’s excellent introduction. I should like the Minister to give us a little more clarity, if possible, on the consultation outcome. The rise from £50,000 to a maximum of £2 million, based on a value judgment, is large. Descending on the £2 million is the issue that I shall focus on. Could the Minister, in replying, let us know a little more about the level of response to the consultation exercise which was supportive of the figure of £2 million? The Explanatory Note includes a breakdown of small groups and groups that took different views, but I should be grateful if the Minister could tell us whether there was overwhelming or significant majority support for the proposal that she has brought to the Committee today.
Lord Stevenson of Balmacara
My Lords, I, too, welcome the Minister’s introduction, which was extremely fulsome and interesting. Like other noble Lords who have spoken, I understand and broadly welcome the objectives of the order. However, I, too, have a number of points that I want to draw out and the Minister to respond to when she is able to do so.
We understand that the need for the order is the EU directive and the requirement to implement the better regulation directive. The Minister said that she had no discretion on that, but there is quite a lot of discretion within the directive because it does not specify a figure of £2 million, as has already been mentioned by the noble Lord, Lord Clement-Jones. It is a ministerial decision that this is the way to be “appropriate”, “effective” and “dissuasive”—the terminology used. Is it appropriate? Will it be effective? Will the net effect be dissuasive? That point came through in earlier speeches and I shall be interested to hear the Minister’s response.
As far as we can tell, Ministers have judged that £50,000 in fines is not dissuasive. Whichever way we read the impact statement—it was rather a heavy read—the evidence may support that level of penalty as regards certain companies, and certainly for those where the returns are much greater than £50,000 for an alleged breach of not providing the information. However, is it really appropriate to increase fines by 40 per cent in order to remedy a lack of provision of information? It is not exactly on the same scale as the examples given by the Minister. The only real example that I could find was where companies were undertaking short-term scams, although it was not clear what those were—perhaps we could have a discussion about them in the response—or what sort of returns there were on them. If they were that profitable, I should like to know more about them.
To explain, we are not really against the order but there are some questions. Is £2 million the right figure? The argument that it is the same figure that they have used in other places is not sufficient. We need to know more about what the £2 million does in terms of dissuasion and whether it is indeed appropriate and effective. Has consideration been given to another penalty? We were given one option, which was discussed, but it would not be difficult to think of a more dissuasive penalty in a situation whereby, as a result of the lack of the provision of information, the company concerned gained significantly in its trading activities. It is quite hard to see what that would be, but let us assume that that is the case. If the company made a significant profit as a result, perhaps the appropriate and dissuasive penalty would be the removal of that gain.
The potential impact on a smaller company certainly came through in some of the responses but has not really been picked up on. Many companies in this field do not have profits greater than £50,000 per year. To be fined at the level of £2 million is an awesome thought.
We were told that there was a large consultation but I agree with noble Lords that the information about who was actually consulted is not available. We were told that the responses were broadly supportive but we were unable to identify—certainly by size or by range—what those companies were. On reading the impact statement, it seems that the evidence used was only the 11 cases that have been considered by Ofcom since 2005, of which three were multiple occurrences. So we are talking about only eight different cases, which seems to be quite a small sample on which to base such a draconian increase.
In making a judgment that this measure is appropriate and proportionate, the Government are acting as both judge and jury. I am not sure that that is the right way to approach this. I would have liked to have seen more quantitative evidence in the impact statement.
The comment made in some of the paperwork is that as a result of this change there may well be an increase in the number of appeals made against such fines. That will obviously cost and it may be that the overall effect is not significant. In her summation, the Minister said that this would be good for business and good for consumers. I am not sure. This is more likely to be another example of gold-plating what is required by the EU directive, which is aimed at providing only appropriate, effective and dissuasive powers. It is not a fixed amount. It is perhaps not so much gold-plating but platinum-plating. It is hardly a light touch; rather, it is a heavy plundering.
Baroness Rawlings
My Lords, this has been a constructive small debate, and I am very grateful to noble Lords who have contributed. The change that I have outlined today will raise the level of penalty that the independent regulator, Ofcom, is able to levy for a breach of its information-gathering requests from £50,000 to £2 million. It is a necessary and welcome part of the United Kingdom’s implementation of the European framework on electronic communications. As in any fast-moving and dynamic sector, it is vital that the regulator is able to make necessary and timely decisions in response to changes in the market. The increase in penalty will help to make certain that the regulator’s enforcement powers for such a breach are sufficiently dissuasive and that the United Kingdom is fully compliant with European law.
I turn to the questions from my noble friend Lord Clement-Jones. The other changes have been passed and were made law on 26 May. They were passed by negative resolution in a statutory instrument. The change has been decided with Ofcom, and £2 million will make certain the equivalence with other enforcement measures.
We have listened to many people concerned, who have said that the level of this penalty must be proportionate to the breach. My noble friend Lord Moynihan asked for more details of the consultation level. We conducted a full and proper consultation from autumn last year. The response from industry was clear; it is vital that Ofcom is able to make properly informed decisions about this fast-moving sector. This means gathering all the necessary information through the effective and proportionate use of its information-gathering powers. Although a small number of businesses raised limited concerns about the level of the penalty sanction, the majority of the people concerned supported the Government’s proposals. In fact, all respondents to the consultation recognised that it is important for Ofcom to be able to levy dissuasive penalties for the breach of such powers, particularly on those operating short-term scams, as I mentioned, when the potential gains to the operator can exceed the amount of fine.
Four hundred and twenty organisations were consulted, and from 70-plus came replies. There were also more than 80 separate meetings, events and round tables with the industry, the regulator and consumer groups.
The noble Lord, Lord Stevenson, asked whether the change was necessary and whether it was not gold-plated. Changes to Ofcom’s information-gathering powers are intended to enable Ofcom to fulfil its role as the regulator more effectively. This change should not place significant burdens on industry, and it will apply only to businesses in breach of the UK regulation.
The noble Lord, Lord Stevenson, asked as well about the choice, which was between keeping £50,000 as a maximum and finding a sum that was consistent. There were more than 70 responses to the consultation, and most responses on this change were in favour of the £2 million sum. Only some of the larger companies were against.
The short-term scams mostly concern premium rate numbers run for 30 days. Sums run into the hundreds of thousands. They have been a serious concern for the regulator and for the European Commission.
The noble Lord asked about the impact on smaller businesses. The penalty does not have to be £2 million; that is the maximum. As I said earlier, it needs to be appropriate and proportionate. It is for Ofcom to decide, subject to appeal to the Competition Appeal Tribunal.
Her Majesty’s Government believe that this is a necessary and important change to the powers of the regulator. As I said, it will benefit both businesses and consumers. I recommend the order.