BT fined £42m for Openreach contracts breach
March 27, 2017
By Colin Mann
Dominant UK telco BT is to be fined £42 million (€48.5m) for what regulator Ofcom describes as a “serious” breach of its rules, after the company reduced compensation payments to other telecoms providers for late installations. The penalty is a result of an investigation by Ofcom into BT’s infrastructure arm, Openreach. BT has apologised “wholeheartedly” for the mistakes.
The investigation found that, between January 2013 and December 2014, BT misused the terms of its contracts to reduce compensation payments owed to other telecoms providers for failing to deliver ‘Ethernet’ services – dedicated, high-speed cables used by large businesses, and mobile and broadband providers, to transmit data – on time.
Ofcom has taken enforcement action because BT breached rules that address the company’s ‘significant market power’. This market power comes from the fact that most telecoms companies rely on access to BT’s network to provide services such as broadband to their customers. Ofcom’s rules are therefore fundamental in ensuring BT does not act in a way that could harm competition and, ultimately, consumers and businesses.
Gaucho Rasmussen, Ofcom’s Investigations Director, said: “These high-speed lines are a vital part of this country’s digital backbone. Millions of people rely on BT’s network for the phone and broadband services they use every day.
“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.”
BT is obliged, under Ofcom’s rules, to install Ethernet services to its wholesale customers (providers such as Vodafone and TalkTalk), in accordance with its contracts, and to make compensation payments for late delivery. BT’s contracts require it to deliver Ethernet services within 30 working days, or pay compensation to the company affected.
If BT encounters problems that require more time to resolve, in certain circumstances it can assume that a customer has agreed to an extension. But Ofcom found that BT did this retrospectively over a sustained period, to reduce the level of compensation it owed to telecoms providers. Not only did this harm other telecoms companies, but it was also likely to have harmed the UK businesses and consumers who rely on high quality, high-speed, broadband services every day.
Ofcom opened the investigation in November 2015. This happened shortly after Vodafone brought allegations to Ofcom that BT had misused its contractual terms through the late delivery of Ethernet services without Vodafone’s consent, and by failing to compensate the company for these delays.
As a result of these findings, Ofcom will impose a penalty of £42,000,000 on BT.
The penalty incorporates a 30 per cent reduction to reflect 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.
BT must compensate, within twelve months, all the telecoms providers who faced financial loss because of its conduct. Ofcom anticipates that BT’s customers will engage constructively in the compensation process.
BT will also be fined £300,000 for failing to provide information to Ofcom. Through this Ethernet investigation, Ofcom became aware that BT failed to provide accurate and complete information for the original dispute, the Business Connectivity Market Review 2016 and this investigation.
Ofcom said that it takes any breach of its information gathering powers very seriously as such failures undermine the integrity of the regulatory regime, and that any company that breaks these rules should expect similar consequences.
BT acknowledged the findings of the investigation into the historical use of the so-called ‘Deemed Consent’ by its Openreach business.
Deemed Consent is an agreed process between Openreach and its Communications Provider customers. It allows Openreach to halt the installation and reschedule the delivery date for providing dedicated Ethernet services in a number of specific circumstances beyond its control.
The precise amount of BT’s compensation payments will result from discussions with the affected Communications Providers outside of BT, but is currently estimated at approximately £300 million.
The regulatory fine and associated compensation payments will be treated as a specific item charge. BT’s trading outlook for both 2016/17 and 2017/18 is unchanged.
In a Statement, BT said it did not agree with all elements of the decision to fine it £300,000 for its alleged failure to provide accurate and complete information under the Communications Act 2003, but has decided to accept it in the interests of reaching a swift and final resolution. BT agrees with the importance of providing accurate and complete information in response to Ofcom’s information requests, and that this is central to the integrity of the UK’s regulatory regime.
Clive Selley, Openreach CEO, said: “We apologise wholeheartedly for the mistakes Openreach made in the past when processing orders for a number of high-speed business connections. This shouldn’t have happened and we fully accept Ofcom’s findings.”
“Since I became CEO of Openreach in February 2016, we have monitored this area very closely, we have made improvements to how we process and deliver such connections, and we will make sure the same mistakes aren’t repeated in future. This issue is unrepresentative of the vast majority of work conducted by Openreach and we are committed to delivering outstanding service for our customers.”
Gavin Patterson, BT Group Chief Executive said: “The investigation into historical Deemed Consent practices at Openreach revealed we fell short of the high standards we expect in serving our Communications Provider customers. We take this issue very seriously and we have put in place measures, controls and people to prevent it happening again. My management team and I are determined that BT applies the highest standards when serving our customers.”
In response, Openreach has invested in significant changes to training, systems and practices for handling Ethernet orders and the Deemed Consent process. It has also made improvements to the way it processes payments awarded on successful appeals against Deemed Consent applications.
Openreach will be contacting all the affected Communications Providers in the coming weeks and offering them a full and fair settlement. This will be based on an approach that has been discussed with Ofcom and this will cover the period from January 2013 to September 2016 (i.e., beyond the period of Ofcom’s investigation and to the point at which Openreach introduced major reforms to the Deemed Consent process).
Openreach and Ofcom are discussing further improvements to the Deemed Consent process which would benefit all parties.
Openreach has changed fundamentally and has implemented a number of major governance enhancements in recent months to make it a more transparent and autonomous business. This includes appointing an independent Chairman and establishing a Board with a majority of independent members in January 2017.