Shepherd and Wedderburn LLP
  November 6, 2006 - Scotland

OFCOM's Latest Broadband Consultation: The Seven-year Switch?
  by John Schmidt and Anne Mizzi

Broadband providers will be required to ensure that their ten million UK customers can more easily take advantage of cheaper broadband deals in an increasingly competitive market, under new regulations proposed by the UK communications industry watchdog OFCOM on 17 August 2006. OFCOM's move is in direct response to high levels of complaints from consumers who have found it difficult to switch providers, and since it considers this issue particularly urgent, OFCOM has reduced the usual ten-week consultation period to seven weeks. This means that broadband providers will only have until 5 October 2006 to put forward their views (see box 1 below for an overview of the consultation timeline). Essentially, the consultation will cover OFCOM's proposed introduction of new regulations governing digital subscriber line (‘DSL’) broadband migrations (‘the DSL Consultation’). While the proposals are aimed at those broadband providers that make it difficult for customers to switch, once adopted they will apply to all service and wholesale broadband providers. This article will look at the background to the proposals and the existing regulation of broadband services. It will then examine in more detail the proposals that are currently the subject of consultation. Background The take-up of broadband in the United Kingdom has spiralled. Nearly 70 per cent of internet usage is now via a broadband connection, compared with less than 10 per cent in 2005. This is in part due to new regulatory and industry initiatives, but also because providers themselves see a potential market for the product and consumers' demand for that product. In recent months, many service providers have also been offering ‘free’ broadband packages, such as those offered by Orange, BSkyB and TalkTalk, to encourage wannabe broadband customers to sign up or switch to their service. However, OFCOM's recent Broadband Migrations Review (‘BMR’) reveals that customers who want to switch are put off by the burden and complication involved in signing up to a new deal. In some cases, customers are facing weeks without broadband because of obstacles within the transferral process. OFCOM's BMR focused on broadband provided over BT copper loops using DSL technology, and so only examined connections based on BT Wholesale and Openreach wholesale products. Cable and wireless broadband migrations and more complicated migrations involving packaged services are still being considered as part of a wider review based on a broader consultation, the Migrations, Switching and Mis-selling Consultation (‘the Migrations Consultation’) launched in February. The BMR concluded that broadband users need to be able to switch more easily. The DSL Consultation is therefore aimed at introducing a framework to facilitate the migration process. The consultation will not just deal with the situation where a customer switches between broadband service providers. It will also cover other moves, such as signing up to a broadband service for the first time, moving home and switching between different broadband products (see box 2 below). OFCOM's DSL Consultation will move the spotlight onto the adequacy, or not, of the current framework of broadband regulation. The present rules are not tailored to specific issues relating to the particular technology and market. OFCOM's current industry code of practice is designed to facilitate the migration of customers from one provider of broadband services to another and has been adopted by some industry players. However, the code of practice is voluntary, so there is no regulatory authority to enforce compliance. All of these issues will be examined during the DSL Consultation. Given the increasing pressure from customers and consumer groups, it seems almost inevitable that specific regulations will be introduced to replace the current largely self-regulatory regime. For consumers this is likely to mean easier switching and better access to competing deals, but there is also much to gain for broadband providers. Enhanced ability to switch will enable those that offer attractive deals to capture new customers, but this is clearly a double-edged sword as customers can just as easily move on to a different provider if they obtain a better deal elsewhere at a later time. If a provider achieves a net gain in customers they will clearly welcome more stringent requirements, while those that are net losers cannot be expected favour increased switching. The level of complaints to OFCOM suggest that the current regime is insufficient and that it is now time to take steps to make it easier for customers to switch. Consumers are clearly finding it difficult to migrate without problems or even a period of disconnection: ‘Over the last year, many thousands of customers have contacted OFCOM to complain about problems related to broadband migration. The distress caused to affected customers can be substantial, and deserves urgent investigation and action.’ Current law At present, broadband service providers in the United Kingdom are not subject to any specific industry regulation, beyond the general provisions of competition and communications legislation as well as unfair contract terms and consumer legislation. Most of this derives from European legislation, although European institutions have not directly legislated in regard to Broadband Migration Authorisation Codes. The Communications Act 2003 implements various EU communications directives in the United Kingdom and gives OFCOM the power to formulate various general conditions with which providers have to comply. These are set out in General Conditions, which are published on OFCOM's website. The General Conditions apply to all communications providers. In view of the international scope of the market, there may well be merit in introducing a set of harmonised European regulations on broadband migration in order to ensure an even level of consumer protection across Europe; in the meantime, OFCOM's initiative should ensure that the United Kingdom is ahead of the game. Issues to be investigated OFCOM has identified a number of problems that consumers face when wishing to switch. First, they find it difficult to obtain transfer codes. Second, there may be problems providing a broadband service on an existing line (so-called ‘tagging on line’). Third, there are a number of technical problems that can create obstacles to switching suppliers or for home movers. Each of these three categories is outlined in more detailed below. Obtaining transfer codes In order to allow for a simultaneous transfer from one provider to another, a customer needs to obtain a Migration Authorisation Code (‘MAC’) from his or her existing provider which is then used by the new service provider. Without a MAC, a customer can only switch suppliers by cancelling the first contract and then entering into a new service provision agreement with a new service provider. This not only involves additional time and effort but can also lead to the loss of broadband access for a number of weeks. All of this contributes to and reinforces customer inertia and hence prevents switching even where an alternative product may be more suitable, more reliable or cheaper. At present, the procedure for issuing MACs is contained in a voluntary code, the Broadband Service Provider Migration Code of Practice (‘the Code’), which applies to all broadband services provided over BT's copper loops. Although more than 80 per cent of broadband service providers in the United Kingdom are signed up to the Code, this does not guarantee that they will comply, as the Code is non-binding and lacks teeth because it is not enforceable. Broadband service providers are free to decide what approach to take to migrations. They might sign up to the Code and comply, or they might sign up and not comply. They may also choose not to sign up at all. Broadband service providers fail or refuse to issue MACs for various reasons. This might be because the customer in question is still under contract with another provider or because the customer owes the service provider money (even though his is not permitted under the Code). OFCOM has also received reports of customers being given invalid MACs or service providers only offering MACs by email (when the customer does not have email access). There are obviously enforcement provisions with non-binding codes. E7even's withdrawal from the consumer market is a good example that highlights the issue. E7even terminated its customers' broadband service supply contracts, but its customers were unable to obtain MACs held by E7even's wholesale providers Tiscali and Netservices. Although the wholesale providers offered E7even's former customers broadband packages, they were not particularly competitive. But turning down this offer meant disconnection. Losing Service Providers (‘LSPs’) may also embark on ‘save activity’, which is marketing to the departing customer during the switchover period in order to attempt to persuade the customer not to go. Save activity is already restricted in some situations in order to prevent communications providers from behaving in a way that would adversely affect competition. OFCOM does, however, recognise that some form of limited activity may have some benefits in terms of service improvement. Tag on line Home movers in particular often face difficulties where a new service provider is unable to provide a broadband service because a market is left on a line. This can happen if that line already has an existing broadband service or operates an incompatible product, such as an ISDN, on the line. While this so-called ‘tag on line’ problem is not strictly a migration problem, as it can also affect first-time subscribers, OFCOM is considering how this problem might be resolved within the remit of the DSL Consultation. Many of the calls received by OFCOM, more than 1,000 each week, relate to this problem. More than 70 per cent of all cases assessed by OFCOM between May and October 2005 related to tagging on line. Most recently, one Tiscali customer was reported to have been left without broadband for two months because of a 'marker' being left on his line. While Tiscali later admitted their mistake in this case, the customer’s problems were only resolved following numerous phone calls to the ISP and the intervention of OFCOM. Other problems OFCOM will work with broadband suppliers to resolve the technical and organisational issues which currently prevent some users from switching providers or signing up to broadband services. There are problems with local loop unbundling (‘LLU’) migrations. Although the voluntary code extends to connections using LLU, the MAC process, as it applies to LLU connections, is not currently widely used. Processes are not currently available for all migration paths to and from LLU-based connections. There has been a poor take-up of the tactical process for migrations from shared LLU. The industry has recently introduced a new process designed to address this problem and so there is now no reason for providers not to offer and accept MACs for migrations from shared LLU to IPStream and DataStream. That said, there are still gaps in the processes for shared or full LLU broadband migrations. OFCOM notes that although work to develop and implement processes across the board continues, consumers may experience problems with tactical processes or might have to cease and reorder, which could leave them without a broadband service for sometimes several weeks. OFCOM's proposed solution OFCOM has proposed that the new regulations will be introduced as a new General Condition 22 on Service Migrations. This will require broadband service providers and wholesale broadband providers to comply with a set of high level principles governing all broadband migrations and to follow the procedure set out in the Code. The proposed new General Condition will require broadband services providers to: * facilitate consumer requests for migrations in a fair and reasonable manner, * ensure migrations are carried out within a reasonable period, * ensure migrations are carried out with minimal service loss, and * provide a MAC to customers on request and comply with specific related processes (for example, the Code). These general requirements lack detail because they are high-level obligations. This means that there is no guidance on how service providers should act in order to ensure customer requests are dealt with in a fair and reasonable manner. It is also uncertain what will be regarded as a ‘reasonable period’ and what amount of service loss will be regarded as ‘minimal’. All these are issues which broadband providers should aim to flesh out during consultation. If these obligations remain vague and general, this will provide OFCOM with a large amount of discretion when applying General Condition 22. In essence, it will give OFCOM a wide power to intervene as it considers necessary. OFCOM has also proposed making the Code mandatory by incorporating many of its provisions into an annex to General Condition 22. Making compliance with the MAC process a general obligation will enable OFCOM to investigation allegations of non-compliance with the Code and take enforcement action where necessary in future. OFCOM is also considering extending the application of the Code to wholesale broadband providers which are currently not covered. This would deal with issues faced by E7even's customers, but an enforceable MAC process on its own is unlikely to be the panacea, as it requires a high level of customer input which, in turn, may give rise to delays or discourage switching. OFCOM is also asking the industry to design a new process to allow customers to obtain their MAC from a third party. General Condition 22 will impose an obligation on wholesale broadband providers to provide a MAC if this is not available from the service provider, but there are currently no guidelines on this procedure. Therefore, OFCOM has called on industry to design a procedure and formulate proposals for other key areas for further development and report back to OFCOM in February 2007. The clear challenge for industry will be whether it can improve the current MAC process. If industry does not come up with a proposal, OFCOM will step in with a further consultation. OFCOM will decide at the end of the DSL Consultation period whether to introduce the new General Condition on the basis of the submissions received. Given the seriousness of the issue, OFCOM is likely to go ahead with the proposals, although they may be modified as a result of the submissions. The resulting proposal will be published as a final statement which will hopefully flesh out the proposals so that service providers have clear guidance on steps they need to take to ensure they do not fall foul of their new obligations. Conclusion: is OFCOM going far enough? As mentioned above, the proposed regulations are very high-level obligations and it remains to be seen how strict OFCOM plans to be on service providers. Pushing for clearer guidance from OFCOM on its approach would assist service providers in achieving compliance. Such guidance should also ensure that consistent standards are set and maintained. BT Wholesale is attempting to address the problems outlined above through various initiatives, and work by Openreach to develop automated processes should help to address some of those problems. However, the introduction of specific targeted regulation will be crucial if OFCOM is to be given any muscle to take action to improve the migrations process. For the industry, the DSL Consultation is an opportunity to put across its views on the issues that are raised. OFCOM will have the difficult task of balancing the interests of service providers, industry and consumers. Ultimately, all interested parties should benefit from a more certain procedure and an improvement in standards, as long as that balance of interests is found. The current proposals are a step in the right direction for establishing such a system. What is already clear is that broadband providers and wholesalers alike have much to gain from engaging in a positive and constructive dialogue with OFCOM. Consultation timeline: * February 2006: OFCOM publishes Migrations, Switching and Mis-selling Consultation (Migrations Consultation); * April 2006: Migrations Consultation period ends; * April 2006: Broadband Migrations Review starts; * August 2006: DSL Consultation launched; * August 2006: OFCOM calls on industry to devise procedure for third-party delivery of MACs; * October 2006: DSL Consultation ends; * (December 2006/January 2007: General Condition 22 to come into effect); * February 2007: industry to publish procedure for third-party MAC delivery. Different migration scenarios considered as part of the consultation: * Customer orders broadband for the first time from a new provider; * Broadband service provider changes the underlying wholesale product; * Customer changes from one broadband service to a different service from the same supplier; * Customer switches from one broadband service provider to another; * Customer moves house and wants to take broadband with him.


Footnotes:
John Schmidt is a partner specialising in competition and regulation with law firm Shepherd and Wedderburn. +44(0)131 473 5423.