Cashback Contracts

Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Michael Foster.]
9.30 am

Mr. Roger Godsiff (Birmingham, Sparkbrook and Small Heath) (Lab): It is always a pleasure to initiate a debate under your wise and experienced chairmanship, Mr. Benton. I am particularly pleased to have the opportunity to raise the issue of the way in which the mobile phone industry operates, its acquiescence to mobile phone retailers who offer unrealistic cashback offers, and the consequences for customers when retailers go into liquidation.

I should first like to talk specifically about Dial a Mobile, which was an independent retailer of mobile phones in the Bordesley Green area of my constituency. It ceased business on 30 August 2007 with, it was subsequently revealed, debts of £12 million and more than 90,000 customers who were connected through the company to the networks of the big five providers, Orange, T-Mobile, O2, Vodafone, and 3.

Prior to being contacted by constituents who were affected by the collapse of Dial a Mobile, I confess that I did not know much about the mobile phone industry or how it operated. Like an ever-increasing number of people, I use a mobile phone, and I had a contract with an airtime provider, but I did not know how the cashback system operated, the relationship between the airtime provider and the retailers, or the powers of the regulator, Ofcom. Having spent several months dealing with issues arising from the collapse of Dial a Mobile, I now have a good knowledge of how the industry operates, and I find what I have learned extremely disconcerting.

My concerns are not mine alone; they are shared by the European Union’s communications commissioner, Viviane Reding, who has serious concerns about how the mobile phone industry operates, particularly in this country and, as she calls it, its cosy relationship with Ofcom. She is also—rightly—extremely concerned about the vulnerable position in which many customers find themselves when mobile phone retailers go into liquidation.

I should explain that cashback is one of a range of incentives offered by mobile phone retailers to attract new customers or to poach customers from the network airtime providers—the big five to which I referred. In a highly competitive industry, the retailer is paid lucrative commission by the airtime provider for each new customer signed up for the provider’s network. To entice customers to sign up, the retailer will offer part of its commission to the customer, which is payable, usually in stages, when the customer has been with the network for a certain period, in most cases 12 or 18 months. That sounds quite innocent;

indeed, the customer could, in theory, have a sizeable amount of their contract payment reimbursed by the retailer.

However, there is a catch, and it is a very big catch. The retailer in the mobile phone industry is under huge competitive pressure to offer bigger incentives to get customers to sign up to the network that pays the biggest commission. To retain business, therefore, the retailer will offer bigger cashback offers to the customer. Slowly, as happened with Dial a Mobile, a business model evolves whereby if more than four out of 10 new customers claim their cashback, the retailer loses money and goes bust.

If a mobile phone retailer simply went into liquidation and could not honour its customers, and the contract—this is important—with the customer became null and void, it might not matter too much. It could be put down to the normal cut and thrust of business—some you win, some you lose. However, there is a clear difference in the mobile phone industry because of the way in which the system operates. To all intents and purposes, two contracts are involved. The contract that includes incentives such as cashback is between the retailer and the customer, but a network supplier insists on a contract with the customer when a customer hooks up to it. Also, as with Dial a Mobile, the network supplier disclaims responsibility for incentives such as cashback that are offered by the retailer. It insists that the customer pays the full amount to the network provider; otherwise, it will take legal action against the customer. That could, as is the case with many customers of Dial a Mobile in my constituency in east Birmingham, result in bailiffs being sent in and the customer getting an adverse credit rating.

Fiona Mactaggart (Slough) (Lab): My hon. Friend is talking about a similar problem to one that occurred in my constituency with Cell Fones UK; indeed, local trading standards officers have been liaising closely with those in Birmingham. Is he aware that his constituents, like mine, have often not signed, or even seen the terms of, the contract to which they are tied with the mobile phone companies?

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