The National Audit Office (NAO) has highlighted issues with the way the Office of Fair Trading (OFT) regulates the debt management industry, and the resources available to it.

In a report published in December 2012, the NAO acknowledged that the regulator does a good job of monitoring the consumer credit industry considering the resources available to it, and that for every £1 spent on enforcement in the financial year 2010/11, consumers saved £8.60. However, they also estimated that consumers could have benefitted by at least a further £450 million during the period 2010/11 had the OFT addressed other instances of malpractice by firms, with the most vulnerable customers suffering disproportionately as a result of this shortcoming. This figure was based on an analysis of complaints made against firms over the 12 month period.

The OFT regulates 47,500 active consumer credit firms, but only has an annual budget of £11.5 million and has only 120 staff to oversee the sector. Fees from applications for Consumer Credit Licences are the only source of funding for consumer credit regulation. As a result it cannot conduct day-to-day monitoring of firms it regulates, and only has the resources to act when it receives indications of non-compliant behaviour.

Examples of enforcement action the OFT can take include issuing warnings, issuing fines of up to £50,000, imposing requirements on a firm, varying the terms of a licence or withdrawing a licence altogether. If common issues are identified in different firms carrying out the same credit activities, the OFT may also decide to conduct a thematic review of that business sector, as it did with payday lenders in 2012.

Having reviewed the OFT’s management information, the NAO has questioned whether sufficient resources are being devoted to high risk areas, and whether the OFT fully understands the costs of enforcement. In particular, the NAO highlighted that the OFT does not collect data on amounts lent by each regulated firm, and thus does not understand the level of supply in the market, cannot charge different levels of application fees according to the size of the firm and cannot identify the areas posing the greatest risk.

Comptroller and Auditor General of the NAO, Amyas Morse, said: “The OFT has achieved a good return for a small outlay, but has not been able to tackle the full extent of harm to consumers in credit markets. This is because it has not had enough resource to regulate effectively or the right kinds of powers. The government’s proposed new regulatory system will need to address these problems.”

Mr Morse’s last comment refers to the new Financial Conduct Authority, one of the successor bodies to the existing Financial Services Authority, which will take over regulatory responsibility for consumer credit in April 2014.



Frontier Ltd Tribunal

On 20 December 2012, the Tribunal considered a case brought against Frontier Ltd – the operator of a service known as ‘Porn Locker’ – by PhonepayPlus, which regulates premium rate phone services in the UK.

Porn Locker provides access to adult video material.

Between 13 September 2011 and 6 November 2012, 60 complaints were made to PhonePayPlus by members of the public about the Porn Locker service, with most alleging that they had received unsolicited marketing texts.

The Executive of PhonepayPlus wrote to Frontier on 13 November 2012, alleging potential breaches of its Code of Practice in the following areas:

• Rule 2.3.3 – Consent to charge
• Rule 2.4.2 – Consent to market

Frontier responded to the breach letter on 4 December 2012.

Rule 2.3.3 reads, “Consumers must not be charged for premium rate services without their consent. Level 2 providers must be able to provide evidence which establishes that consent.”

Rule 2.4.2 reads, “Consumers must not be contacted without their consent and whenever a consumer is contacted the consumer must be provided with an opportunity to withdraw consent. If consent is withdrawn the consumer must not be contacted thereafter. Where contact with consumers is made as a result of information collected from a premium rate service, the Level 2 provider of that service must be able to provide evidence which establishes that consent.”

The Evidence:

Regarding rule 2.3.3, the Executive alleged that Frontier had sent reverse billed marketing texts, charged at £3 each, to an unspecified number of people, and noted that it had not seen any evidence from Frontier that demonstrated that the recipients had consented to receiving these texts and paying the associated charge.

Frontier argued that it had not sent any unsolicited texts, and included in their argument that the fact that recipients had clicked on the WAP link in the texts constituted ‘active consent’. It also argued that it suspected the recipients had complained because of their dissatisfaction with the content provided, rather than with the fact they had received the text.

Regarding rule 2.4.2, the Executive said there was insufficient evidence to demonstrate that the recipients had purchased similar services from Frontier previously, or that Frontier had given these clients the chance to opt out of receiving marketing texts.

Frontier said that all recipients of these texts were existing customers. It claimed to have provided evidence of when these customers opted in to receiving marketing communications, and pointed out the ways in which the customers were informed how they could stop receiving such material.

The Tribunal’s rulings:

On the first point regarding consent to charge, the Tribunal concluded that there was not ‘robust evidence’ of the recipients giving their consent to pay a charge for Frontier’s services.

On the second point regarding consent to market, the Tribunal concluded that Frontier had failed to provide sufficient evidence to demonstrate consent. The volume of complainants alleging they had received unsolicited messages meant it was likely that at least some had not given their consent.


The Tribunal issued a formal reprimand to Frontier, imposed a fine of £30,000 and ordered them to pay refunds to all affected customers who requested compensation.


Core Telecom Ltd Tribunal

On 20 December 2012, the Tribunal considered a case brought against network operator Core Telecom Ltd by PhonepayPlus, which regulates premium rate phone services in the UK.

On 19 July 2012, the Tribunal upheld nine breaches of the PhonepayPlus Code of Practice (12th Edition) (“the Code”) against Daniel Marshall.

Between April and June 2012, PhonepayPlus received complaints regarding four betting tipster service providers. None of these providers were registered with PhonepayPlus. Three of these four had never been registered with Companies House, and the fourth was listed with Companies House as a dormant company.

PhonepayPlus argued that these providers were providing premium rate services, and that Core Telecom had failed to conduct adequate due diligence and risk assessment and control on them. PhonepayPlus cited Core Telecom’s admission of failings of due diligence and risk control in the case against Mr Marshall.

The PhonepayPlus Executive sent a ‘breach letter’ to Core Telecom on 30 November 2012, alleging breaches of three areas of the Code:

• Rule 3.3.1 – Due diligence
• Rule 3.1.3(a) – Risk assessment and control (provision of premium rate service)
• Rule 3.1.3(b) – Risk assessment and control (promotion, marketing and content)

Core Telecom countered by saying that PhonepayPlus had previously advised them that the providers’ phone services did not meet the definition of premium rate services. It acknowledged that it had a revenue share agreement with the four providers, but argued that its end user was the employees and agents of the four providers, and not the providers themselves. The employees and agents would not receive a revenue share. It acknowledged failings in the case of Mr Marshall, but argued that these were due to the actions of a rogue employee, and that it had conducted all necessary risk assessment regarding the tipster services.

Core Telecom replied to the breach letter on 14 December 2012.

Rule 3.3.1 ruling:

The Tribunal ruled that the providers did operate premium rate services, based on the 50 pence per minute cost; and the definition used in section 120 of the Communications Act 2003

Core Telecom was unable to provide any evidence that PhonepayPlus had previously advised them to the contrary.

The Tribunal also ruled that the providers were the end users, as the employees and operators only used the numbers in the course of their regular employment.

The Tribunal then ruled that the limited documentation provided by Core Telecom was insufficient to prove that adequate due diligence had taken place. The Executive’s decision was upheld regarding a breach of this rule

Rule 3.1.3 (a) ruling:

Core Telecom had previously acknowledged failings under Rule 3.1.3 (a) concerning Mr Marshall, and so the Tribunal found against Core Telecom on this point. The Tribunal did not find that there was a breach of Rule 3.1.3 (a) regarding the tipster services, as Core Telecom had reasonably inferred that the services were not premium rate services.

Rule 3.1.3 (b) ruling:

The Tribunal did not uphold a separate breach of Rule 3.1.3 (b) as it ruled that the wording of Rule 3.1.3 (a) was sufficient to cover all the alleged risk assessment and control breaches.


The Tribunal issued a formal reprimand to Core Telecom and imposed a fine of £12,000.