Ofcom’s own guidelines for setting fines say that it will be transparent about how it weighs various factors to set the level of fines. However, recent decisions do not follow this practice. Should Ofcom change its practice and be be more transparent?
Ofcom’s own penalty guidelines provide that:
Ofcom will have regard to the need for transparency in applying these guidelines [for setting fines], particularly as regards the weighting of the factors considered.”
However, our review (below) of Ofcom’s recent decisions to fine various communications providers shows that Ofcom is not currently providing transparency to the industry at large. In particular, Ofcom is not publishing its rationale for setting the level of fines by reference to the weighting of the various factors it considers. Without this transparency, it seems that Ofcom is failing to meet its own policy aim, which it explains (again in the penalty guidelines) as:
The central objective of imposing a penalty is deterrence. The amount of any penalty must be sufficient to ensure that it will act as an effective incentive to compliance, having regard to the seriousness of the infringement.”
For any fine to act as an effective deterrent against future non-compliance, regulated companies should be clear about the circumstances that may give rise to fines, the approach the regulator will take and the opportunities for mitigation.
Ofcom’s Penalty Guidelines
Ofcom’s penalty guidelines say:
“Ofcom will consider all the circumstances of the case in the round in order to determine the appropriate and proportionate amount of any penalty. The central objective of imposing a penalty is deterrence. The amount of any penalty must be sufficient to ensure that it will act as an effective incentive to compliance, having regard to the seriousness of the infringement. Ofcom will have regard to the size and turnover of the regulated body when considering the deterrent effect of any penalty.
The factors taken into account in each case will vary, depending on what is relevant. Some examples of potentially relevant factors are:
- The seriousness and duration of the contravention;
- The degree of harm, whether actual or potential, caused by the contravention, including any increased cost incurred by consumers or other market participants;
- Any gain (financial or otherwise) made by the regulated body in breach (or any connected body) as a result of the contravention;
- Whether in all the circumstances appropriate steps had been taken by the regulated body to prevent the contravention;
- The extent to which the contravention occurred deliberately or recklessly, including the extent to which senior management knew, or ought to have known, that a contravention was occurring or would occur;
- Whether the contravention in question continued, or timely and effective steps were taken to end it, once the regulated body became aware of it;
- Any steps taken for remedying the consequences of the contravention;
- Whether the regulated body in breach has a history of contraventions (repeated contraventions may lead to significantly increased penalties); and
- The extent to which the regulated body in breach has cooperated with our investigation.
When considering the degree of harm caused by the contravention and/or any gain made by the regulated body as a result of the contravention Ofcom may seek to quantify those amounts in appropriate cases but will not necessarily do so in all cases.
Ofcom will have regard to any relevant precedents set by previous cases, but may depart from them depending on the facts and the context of each case. We will not, however, regard the amounts of previously imposed penalties as placing upper thresholds on the amount of any penalty.
Ofcom will have regard to any representations made to us by the regulated body in breach.
Ofcom will ensure that the overall amount of the penalty is appropriate and proportionate to the contravention in respect of which it is imposed, taking into account the size and turnover of the regulated body.
Ofcom will ensure that the overall amount does not exceed the maximum penalty for the particular type of contravention.
Ofcom will have regard to the need for transparency in applying these guidelines, particularly as regards the weighting of the factors considered.”
On 27 March 2017, Ofcom announced that it would fine BT:
- £42 million for non-compliance with a regulatory obligation to provide wholesale ethernet services in a timely manner; and
- £300,000 for failing to comply with its obligation to provide complete and accurate information to Ofcom.
The fines follow Ofcom’s 8 January 2016 resolution of a dispute submitted to Ofcom by Vodafone concerning the same facts. That dispute was resolved by Ofcom finding that BT had breached relevant regulatory obligations, and that relevant operators would be therefore entitled to compensation from BT. In BT’s 27 March 2017 press statement, BT say: “The precise amount of these compensation payments will result from discussions with the affected Communications Providers outside of BT, but is currently estimated at approximately £300 million.”
Commenting on the BT fines, Gaucho Rasmussen, Ofcom’s Investigations Director, said:
We found BT broke our rules by failing to pay other telecoms companies proper compensation when these services were not provided on time. The size of our fine reflects how important these rules are to protect competition and, ultimately, consumers and businesses. Our message is clear – we will not tolerate this sort of behaviour.”
The legal basis for the £42m fine for breach of is s96 of the Communications Act (Act) for notified breach of condition. The amount of the fine is determined in accordance with s97 of the Act, which provides that:
“s97: The amount of a penalty imposed under section 96 is to be such amount not exceeding ten per cent. of the turnover of the notified provider’s relevant business for the relevant period as OFCOM determine to be—
(a) appropriate; and
(b) proportionate to the contravention in respect of which it is imposed.”
Ofcom’s press release notes that the fine was reduced from a potential £60m to £42m (30%), due to BT’s agreement to settle Ofcom’s investigation by admitting full liability, and to set up a scheme to compensate the telecoms providers that have been affected. Ofcom does not explain what factors it considered in both originally setting the fine and then reducing it.
So far as the failure to provide complete and accurate information is concerned, the penalty provision in s139 of the Act provides for a maximum fine of £2m. Again there is no explanation by Ofcom of how it set the fine at £300k, or the way it assessed the various factors.
Other recent enforcement action by Ofcom has included:
- 22 March 2017: £880,000 fine for Plusnet (a BT subsidiary) for billing ex-customers an estimated amount exceeding £500,000 (which Plusnet repaid by way of compensation and/or made equivalent charitable donations where customers could not be located). This fine was reduced: “The penalty incorporates a 20% reduction to reflect Plusnet’s willingness to enter into a formal settlement, which will save public money and resources. As part of this settlement, Plusnet admits and takes full responsibility for the breach of Ofcom’s billing rule.” There was no explanation of how the various factors were considered by Ofcom.
- 26 October 2016: £4.6 million fine for Vodafone for breach of consumer protection rules. This fine was reduced: “The penalties incorporate a 7.5% reduction to reflect Vodafone’s agreement to enter into a formal settlement, which will save public money and resources. As part of this agreement, Vodafone admits the breaches. It has also reimbursed all customers who faced financial loss, but for 30 it could not identify, and made a donation of £100,000 to charity.” There was no explanation of how the various factors were considered by Ofcom.
- 3 July 2015: £1 million fine for EE for failing to comply with Ofcom’s rules on handling customer complaints. Amount of compensation not quantified, no mitigation of fine. There was no explanation of how the various factors were considered by Ofcom.
- 29 July 2015: £200,000 fine for Unicom for mis-selling. Amount of compensation not quantified, no mitigation of fine. There was no explanation of how the various factors were considered by Ofcom.