CIRCUMVENTION OF THE RULES
We recently considered a notice to industry issued by the premium rate services regulator, PhonepayPlus, concerning a call to cease services, and were surprised at the level of response. Not only were our clients – and the industry at large – extremely concerned about the subject matter of the update, we received numerous accounts of quite worrying trends emerging from the investigation process. In this article we explore what we consider to be the most alarming of these trends: the secret requests (outside of the rules) of the PhonepayPlus Executive to Level 1 providers to switch off service and/or withhold revenues from their Level 2 customers.
The 12th Code of Practice, implemented following extensive public consultation and approval from Ofcom (the backstop regulator), provides a very specific procedure for ‘emergency’ cases where it is considered necessary to suspend a service and/or withhold revenues from an L2 provider, for example, where a service is harmful to consumers and the payment of refunds may be necessary. The ability to suspend service and ensure funds can be accessed in order to rectify harm are key powers of a regulator overseeing a fast-paced digital market. However, the implications of the regulator’s exercise of such powers are grave: a provider’s sole or key income can automatically cease and its business grind to a halt with the knock-on consequences to cash-flow, overheads, payroll and ultimately insolvency. Employees are vulnerable to redundancy and creditors at risk of non-payment. For these reasons, any decision to implement such serious measures must be taken with care, must not be open to misuse and must satisfy certain basic safeguards.
Those safeguards were introduced into the PhonepayPlus procedures by virtue of the Emergency Procedure, the latest version of which can be found at paragraph 4.5 of the 12th Code of Practice. Following public consultation and the input of Ofcom, in line with procedures common to other regulated sectors, measures were adopted to achieve independence in decision-making and to guarantee, as far as possible in such cases, fairness and non-bias and to guard against manipulation or misuse.
The Emergency Procedure provides a mandatory procedure to be followed in apparently serious and urgent cases, which can be summarised as follows:
1. PhonepayPlus must conduct an immediate preliminary investigation into the service.
2. Upon completion of the preliminary investigation, PhonepayPly must notify its findings to three members of the Code Compliance Panel – a panel of nine members “independent of PhonepayPlus” formed on 28 April 2008 (following Ofcom’s approval of amendments to the Code of Practice). The CCP’s function is entirely “adjudicatory”, as opposed to the PhonepayPlus Executive’s investigatory function. The CCP’s members are a mix of lay (3 non-industry Board members) and qualified members (6 individuals appointed for “their specialist legal and adjudicatory experience”), with a legally qualified Chair.
3. The three individuals notified must then decide, on the basis of the submission of the PhonepayPlus Executive, whether the situation is sufficiently serious and urgent to warrant the use of the Emergency Procedure. Only if all three people agree on the use of the Emergency Procedure can any emergency action be taken.
4. Before taking any such action, PhonepayPlus is obliged to use its best endeavours to inform the relevant L2 provider that its service appears to be in breach of the Code and that the Emergency Procedure is being used.
5. Only if the L2 cannot be contacted or does not immediately suspend the service can the Executive direct any relevant Network operator or Level 1 provider to bar access to the relevant service or numbers.
Once the service has been suspended, PhonepayPlus must provide all necessary information about the alleged breaches which led to the instigation of this process, including details of the service and/or promotional material and relevant sections of the Code, to the party under investigation. The service provider will then have five working days in which to respond and provide any information requested. Only in exceptional circumstances may PhonepayPlus set a shorter time limit. All relevant information, including any response from the service provider, will then be placed before a Tribunal ‘as soon as is reasonably practicable’ and the matter listed for hearing, at which the service provider is entitled to make ‘informal representations’.
A rather different practice is occurring behind the scenes which it seems reasonable to assume has evolved as an alternative to the Emergency Procedure in cases where one or more of the above requirements cannot be met, for example: where the Executive is unable to establish the requisite seriousness or urgency (possibly due to the Executive’s own delays); is unwilling to put the service provider on notice of intended action, and/or is unable to secure the independent and unanimous sign-off of the CCP.
Instead, direct requests are being made of Level 1 providers to suspend service and/or withhold revenues from their Level 2 customers in private correspondence (i.e. correspondence from which the Level 2 provider is excluded) on the basis of the opinions of the investigatory team – individuals responsible for investigating complaints, compiling evidence, and pursuing the case for breach, who have no adjudicatory function, are not independent and do not hold the qualifications considered of key importance in respect of the CCP.
The requests are couched in careful terms, with references to a ‘recommendation’ (rather than a direction) and ‘voluntary’ (rather than obligatory) actions required of the L1 but the effect is exactly the same as a formal direction under 5 above: the recipient L1 provider feels compelled, under threat of direct action from the regulator, to take the steps requested. Inevitably, the contracts between the L1s and the L2s permit this. Service providers are kept outside of the correspondence loop and all the safeguards listed at 1-4 are displaced.
We do not criticise the L1s for reacting precisely as suggested by the Executive. Under the following Code provisions, the L1 provider is responsible both for due diligence and code breaches relating to its function.
• Paragraph 4.2.8 – PhonepayPlus can raise breaches against any party (i.e. the network, the L1 or the L2);
• Paragraphs 3.8.1 and 3.8.2 – PhonepayPlus can raise breaches and proceed directly against the L1 provider in respect of the L1’s performance of its functions;
• Paragraph 3.3.4 – any breach of the L1’s due diligence obligation will be regarded as a very serious code breach.
The practical implications of these provisions can be seen in Case Reference 11196, Upright Line SA, in which proceedings were brought directly against the L1 aggregator, Velti. D.R. Ltd. PhonepayPlus pursued the L1 for the L2’s breaches on the basis of its concerns regarding the L1’s assessment of risk / steps taken to control risk in relation to the L2’s service. A fine of £17,500 was imposed upon the L1 provider.
IS THIS SERIOUS?
Quite simply: yes. The Code requires a formal Adjudication before such serious measures can be taken – quite rightly, a decision to suspend a provider’s service with all the potential consequences of such action must be based on a process which implements accepted principles of natural justice. The Emergency Procedure allows for an exceptional deviation from this process, in specified circumstances, according to strict requirements. The need for independence from the investigatory function, supporting evidence and unanimous agreement, as well as disclosure and notice requirements are pivotal to the deviation from the norm: a formal decision by a Tribunal.
VOLUNTARY OR OBLIGATORY
Any suggestion that the L1 providers, in suspending service and/or withholding revenues in response to correspondence from the Executive, are acting on a ‘voluntary’ basis does not stand up to scrutiny. First, there is no reason why a truly voluntary measure would not be openly and directly requested of the L2 provider – the party responsible for the service. Yet, the Executive chooses to correspond privately with the L1 telephony / technology provider – the party with the ability to switch-off the service. By writing to the L1 provider, the Executive is, in effect, manipulating a conflict situation in which the L1 provider is likely to protect its own interests over that of the target L2 provider. Put simply, the Executive is more likely to achieve its aims by dealing with the L1 rather than the L2 provider whose own interests lie in the opposite direction: in the survival, not the cessation, of its business.
Second, the alleged informal nature of the communications with the L1 is not made out in the Executive’s actions. We have seen written demands from the Executive to an L1 provider asking to know why services remain live in spite of their ‘recommendation’ to suspend. In other words, L1s are expected to explain why they have not complied with an ‘informal’ request. Even in its breach letter, the Executive has treated a ‘recommendation’ as a formal request to suspend service and any failure to comply, or to comply fully and/or within an arbitrary timeframe, as a relevant factor in formal proceedings, and relevant to the mitigating or aggravating circumstances of the case. In essence, the Executive wants the Tribunal to consider whether or not the L2 provider complied with the Executive’s ‘recommendation’ in determining the level of any sanction imposed in formal proceedings.
The situation is quite perverse: any failure to take ‘voluntary’ action in response to a ‘recommendation’ can be held against the L2 provider in formal proceedings as if it had failed to comply with an ‘obligation’. The Executive cannot have it both ways.
Of course, whether or not the request is formal or informal and any action taken voluntary or involuntary, the effect is the same: L2 services are being suspended at the instigation of the Executive without due process. The absolute requirement for a Tribunal Adjudication, and the single permitted deviation from this, the Emergency Procedure, are being totally disregarded.
To suspend service and withhold revenues from any provider of a service is a potentially catastrophic measure: the immediate cessation of a businesses’ ability to operate and to receive an income has serious consequences. For this reason, the Code has included a specific procedure to ensure that, only in serious and urgent cases, and in line with strict safeguards, should a service be suspended without a formal Adjudication. Unfortunately, and rather alarmingly, a practice has arisen which undermines these safeguards, most importantly, the requirement for evidence of breach and an independent review of such evidence by a suitably qualified panel of no less three individuals who must unanimously agree on the outcome. Instead, the Executive is exploiting a conflict of interest between L1 and L2 providers in seeking to secure the same end by virtue of ‘voluntary’ measures. By approaching L1 providers for a ‘voluntary’ suspension / revenue withhold, the Executive is banking on the fact that the L1 will act to preserve its own position vis a vis its exposure to direct regulatory action.
Through issuing ‘recommendations’ to L1s the PhonepayPlus Executive has effectively allowed itself to circumvent its own Code rules and created a situation whereby any subsequent fines can be met from withheld revenues, leaving the provider with limited (if any) funds to defend the case for breach and to seek recourse for its losses.