The effectiveness of fines in regulating phone-paid services

Last year I wrote a blog that set out the fines we have issued in recent years and the amount of bad debt we continue to chase.  In doing so, I explained why the PSA’s funding (as set out in the Business Plan and Budget) is entirely separate from the issuing and subsequent collection of fines – namely that we are funded instead by an industry levy.  While collected fines have been used historically to offset the total amount of levy funding required, the amount collected only affects (and benefits) the levy that industry funders have to pay.

This year, in addition to providing an update to the fines/bad debt figures, I thought it might also be useful to explain why fines remain an essential and effective part of the overall sanctions regime we have available to use against phone-paid service providers who breach our Code of Practice. 

Firstly, though, a quick reminder about how and why fines are issued:

• fines can only be issued by a Code Adjudication Tribunal (CAT) if it determines that the Code has been breached on a Track 2 enforcement case brought to them by the PSA Executive and a fine sanction is appropriate and proportionate

• the purpose of the CAT issuing a fine could be to:
  - remove part or all of the financial benefit from a service provider
  - act as a deterrent to the provider and others who might be considering similar non-compliant action;

• the role of the CAT is to determine whether or not breaches of the Code have occurred and, where appropriate, impose sanctions that fit the nature of the offence. If they choose to issue a fine, the CAT does not generally take into consideration any likelihood of the actual collection of that fine.  If affordability of fines was a routine consideration for the CAT, it could encourage providers to see fines as no more than a cost of doing business
  
• the PSA Executive looks to ensure compliance with all sanctions imposed by the CAT. In the instance where fines are unpaid, we work closely with our debt recovery solicitors to try to secure the full or at least partial recovery of the debt to ensure the sanction applied is as effective as can be.

The current analysis (to November 2019) of fines issued and resulting bad debt is set out below:

                      *this table excludes the impact of any financial year-end accounting adjustments

As you can see, there is still historic bad debt outstanding, with due legal process and the time needed to exhaust all possibilities meaning it can take a number of years in certain cases. Since 2012/13, around one third (£4.2m) of total debts recovered have been in years subsequent to the year in which the case was adjudicated.

It also still remains the case that the amount of bad debt arising varies across years and reflects a combination of different factors - including the Code in place at the time and the varying nature of the organisations in breach of the Code. However, our experience of the past two years shows that serious non-compliance has almost exclusively been carried out by providers with no long-term legitimate commitment to the market (and who attempt to liquidate rather than face up to their responsibilities and seek to continue as a viable business).

The importance of fines as one of the options available to the CAT was confirmed as part of the review of sanctions we did in mid-2017, and we continue to check that they remain an effective part of delivering the regulatory outcomes we seek to achieve.

With regards to removing the financial benefit from those in breach of the Code, we do recognise the current problem of organisations that have liquidated either as a result of our enforcement action or as an attempt to avoid it. 

To address this problem, in the first instance we make it as difficult as we can for providers to get away with the money. Our work with our debt recovery solicitors can identify monies or tangible assets that may be pursued to pay a fine, and we will and have reverted to the courts where necessary to secure those funds.

Fines are rarely the only sanction imposed by the CAT and their use needs to be seen in context as part of a toolkit to address non-compliance.  , We use the full range of our sanctions to remove the individuals behind these types of organisations from the market. Where an issued fine is not paid in full by a provider, services are suspended until such time as full payment is made. If full payment is not made, the PSA Executive will usually raise a case against the provider for breach of sanctions – and, where merited and proportionate, may include a recommendation for prohibiting the company or individuals behind it from the market.  In order to protect consumers as widely as possible, we will also share information (where lawful and appropriate) with other relevant regulators to allow them to apply additional enforcement measures beyond our remit.

In terms of a deterrent effect, we recognise it is always going to be difficult to measure how many providers may have been influenced to act compliantly because of the fear of financial sanctions.   Our most recent enforcement case experience suggests that we are tackling companies that have no commitment to the market as a whole, as opposed to non-compliant companies who might see a fine as a cost of doing business or indeed companies who genuinely want to remedy breaches and move back into compliant operation of their services

On a broader level, what this recent experience has done is to lead us to consider in more detail where fines, alongside other sanctions, can have the biggest impact as a deterrent effect. We believe this lies with those providers in the value chain who, while they may be largely compliant, run the risk of not taking their due diligence, risk assessment and control (DDRAC) responsibilities seriously enough. It is imperative that those with whom networks or platform providers are contracting are properly assessed and controlled on an ongoing basis thus reducing the risk of bad actors operating in the market. Our enforcement strategy already includes a strong focus on this area, and, as we head into 2020, we will continue to work with industry to develop renewed DDRAC guidance.

Finally, as we set out in the Business Plan and Budget 2020/21, we expect the phone-paid services market will continue its transition into a new landscape for consumers, and we need to ensure that our regulatory approach keeps pace with this transition. In developing a new Code of Practice, we will ensure that we have the most effective sanctions available to address the risk and occurrence of non-compliance within this new landscape – and we expect fines will continue to be a major part of this.