Select Committee on European Union Minutes of Evidence


Examination of Witnesses (Questions 140 - 159)

WEDNESDAY 16 FEBRUARY 2000

MR GEORGE HALL AND MR SIMON HAMPTON

Lord Chadlington

  140. Yes, I am sorry about that but when I walk out in 20 minutes it is not because you have said something to offend me. I should declare an interest. I am Chairman of International Public Relations, Chairman of TOL, which is an Internet company, and director of Oxford Resources, also an Internet company. My question for you is really about the conflict in your paper between regulation on the one hand and commercial encouragement on the other. I would like to concentrate on the notion of regulation and hear what your views are on that. The bottom of the second page of AOL's memorandum you seem to be saying that you are encouraging a situation of self-regulation and I wonder if I could ask you, first of all, to expand on that notion of self-regulation and then perhaps, with the Chairman's approval, I will ask a supplementary question.
  (Mr Hampton) I think a lot of areas of the Internet have grown up managing themselves. Although it started off as a defence network it very quickly took off in its own right and has managed itself. For instance, the whole arrangement of the names of websites and the underlying numbers, this has all been done on a self-regulatory approach. I think the internet industry as a whole feels that progressively, and certainly led by companies like AOL which has always wanted to promote the Internet as an e-commerce environment has always offered to do as much as possible to fulfil its social responsibilities in advance of being asked. We have done that partially because there is a fear that if we are forced to do something, we will be forced to do something which we cannot do compared with what the technology does allow us to do. We have always attempted to be proactive on that side. That is the past. In the future with e-commerce we are dealing with an inherently global technology and it is actually very, very difficult for an individual government, and to a large extent for the Commission as well, and the Brussels institutions to get a grasp on this. There is also a call amongst the industry to regulate ourselves, regulate e-commerce because we believe that is going to be the best way, the most effective way of providing protection for the consumers in particular. As a medium, we are competing with the high street, with the out of town stores, with mail order so we have every interest in making our medium responsible and responsive to consumers. We believe the most effective way that is going to be delivered is through a self-regulated approach. The only danger at the moment is there are so many initiatives starting up rather than there being insufficient.

Chairman

  141. Mr Hall?
  (Mr Hall) Very much what Paul is saying. The convergence of IT telecoms and broadcasting creates a particular complexity and as a company ICL have used the network of networks as just the network. Provided it is digital we do not really see the difference between the telecoms network, a TV network or an IT network. Historically we have come from an unregulated industry unlike obviously telecoms or broadcasting. Our culture and our experience reinforces the virtues of industry self-regulation. We also believe absolutely that it is so difficult in an environment which is changing so rapidly to have regulation which will anticipate changes in the market place and thus benefit both the consumer and the supply side. We believe that industry self-regulation, which has a self-interest in meeting the needs of the customer, because the customer will walk away if you do not do that, is probably more effective than having fixed regulation. I mentioned in my paper the distance selling regulation which was drafted at least five years ago—maybe six—before all of this was happening and yet will be applied to this new digital environment. We can see all sorts of difficulties that might arise on that. Clearly, there are differences across the Union in the business cultures. There is much more reliance on certain forms of regulation in some Member States than in others. The United Kingdom tends to be pretty liberal. The United Kingdom also has a very long tradition of industry self-regulation. We are very comfortable with the concept but we still have to win that argument, it appears to me. When I say "in Brussels", it is not the Brits versus the rest of the Union; it is just that there has to be a discussion of the pros and cons so that the strengths of our case get understood.

Lord Chadlington

  142. I can see the benefit to your organisations of self-regulation in a sense, but self-regulation leads to the possibility of exploitation. Let me take a specific example: the provision of medicines which are not available across the chemist's counter in the United Kingdom, which are purchasable over the Net. They might be perfectly legal medicines in other countries. I am not taking a pornography example or a drug example but one which has a certain amount of social validity to it. Do you think that there is any way at all that a part of the world can legislate in some way so as to prevent those kinds of things happening? If you were in charge, what would you do? Could you do anything?
  (Mr Hall) I think you can legislate. Enforcement might be rather more difficult, which comes down to how we operate in open, liberal, democratic markets. I can only restate what I think the industry has said many times: that we do not encourage anybody to break the law. If there was a law that said "Thou shalt not have access to certain pharmaceuticals" we would not encourage people so to do. How to prevent them gaining access to a global, unpoliced network, which might damage themselves, I am afraid I do not have the answer to.
  (Mr Hampton) There is not a way of stopping people doing things. The Internet is the great enabler. For children, there are things that we can do. AOL includes technology that prevents children going to websites. The parents can set it up, but adults have the freedom to explore the Internet. It is pretty much unrestricted.

Chairman

  143. What happens if somebody purchases something, say, in France and pays by credit card and whatever they are seeking to purchase never materialises? What would self-regulation do there to protect the consumer?
  (Mr Hall) This is why we promote alternative dispute resolutions. In fact, there is a dialogue going on in Brussels, as it happens, between the European Consumers' Association, in which the Consumers' Association of the United Kingdom plays a significant role, and UNICE, which is the equivalent of the CBI at European level, to look at issues like that. It depends on the size of the credit card bill. Clearly if you have paid for a Renoir with your Amex and it does not turn up, you will very quickly go to the courts and get your money back.

  144. Which court would you go to?
  (Mr Hall) If it was a Renoir, you would very quickly get on a train and go to a court in France. If it was a crate of wine that you did not like or did not deliver, would you do the same thing for something that cost £50? The danger there is that the consumer could get ripped off 100,000 times at £50 a time. There needs to be some form of redress.

  145. You are talking about regulation?
  (Mr Hall) We are promoting self-regulation, using alternative dispute resolutions to give the consumers the confidence that, for instance, they enjoy in the United Kingdom at present by working within industry codes of conduct and turning to people like the Consumers' Association and indeed looking at the Fair Trading Acts.

Lord Faulkner of Worcester

  146. I want to take up a point Mr Hampton makes right at the end of his evidence where he says, "It would, in particular, be a catastrophe if consumer protection concerns would lead to a fragmentation of the single market at just the time that the Internet enables citizens to shop all around the EU from the comfort of their own home." Is that not rather at variance with what Mr Hall has just said? It is giving the impression that caveat emptor is not a sufficient safeguard and there should be in some way in which consumers can get redress.
  (Mr Hampton) Exactly. What we support would be European-wide codes of conduct so that although I might read the version on an English website in English I would know that the people I was dealing with, because I could see the relevant logo on their website, were respecting the same conditions, albeit in French. There is the issue of would I have gone to a French website in the first place if I did not speak French. What we want is European codes of conduct so that when you do get into a problem you can be sure that the French supplier will act responsibly. The alternative is to go to a court. Say you wanted to go to a British court. You would get a British ruling but you would then have to enforce it abroad. The court's proceeding at the moment was not designed for a world where everybody was shopping cross-border. It was designed several years ago when only a very small number of people were shopping cross-border. This is one of those areas where the Internet really does change everything because we all have the capacity to buy from anywhere in the world now instead of the very different situation as it was before.

  147. If I want to buy a carpet from Pakistan over the Internet, are you suggesting there could be some sort of worldwide consumer protection arrangement which would cover that as well as the crate of wine bought in France?
  (Mr Hampton) No. I do not think you can rely on industry to produce you those kinds of guarantees. At the end of the day, most people shop from brand names that they recognise, from shops that they recognise. It is not likely to be terribly different. The reason why Amazon has succeeded is because it has a brand name that people trust. Other companies are seeking to emulate the brand name as much as they are seeking to emulate just the sales of books and so on. This is why you see at the moment that so many of the advertisements on the underground at the moment are just for websites. They are building a brand because they hope that the brand you will trust and then you will trust the medium.

Chairman

  148. Do we not have literally hundreds and thousands of websites being added every day from people who are new entrepreneurs endeavouring to make as much money as quickly as possible, who are not necessarily going to sign up to any consumer association charger of rights?
  (Mr Hall) That is correct. That is something we are encouraging because it is certainly one of our ambitions as a company to encourage more British entrepreneurs to become Web entrepreneurs and create jobs here, create sources of supply here that can then be exported to markets elsewhere. There will be an element of risk. As Simon said, most people when they are surfing the Web will be looking for brands that they recognise. As more and more of the established retailers become Internet retailers, there will be much greater consumer confidence because they will recognise the brand names from the high street and from elsewhere. Those retailers will carry their brand values with them, which consumers have learned to trust over the years.
  (Mr Hampton) Our brand name is trusted by our members. Some of these small entrepreneurs set themselves up and they become part of what we call our shopping channel, which is AOL's high street. Because people know that they are getting to it via AOL, they then have trust in these people who otherwise they have not ever heard of and they would not shop with. It is one of the areas where we add value. Our brand name adds trust to some of these new people.

  149. Not so far as underwriting though. That could be a solution, could it not?
  (Mr Hampton) This is regrettably one of those things where the US is ahead. In the US, we do underwrite the people that you buy from and it is something that we are contemplating for the United Kingdom market but it is not there yet unfortunately. I would love to be able to announce that.

  150. And for elsewhere in Europe?
  (Mr Hampton) Once we bring it to the United Kingdom we will do it in the other countries where we are active as well.

Lord Cavendish of Furness

  151. Am I right to believe that the last mile is a physical as well as a monopolistic question? There is the question of the actual technology of the last mile as well as who owns and controls it and puts the tariffs on? Secondly, while I understand and accept the metering proposal and how good it would be to do away with it, given the differences of culture and doing things, one continent with another and one country with another, is it self-evident that the more minutes you spend on the Internet the better you are or the better you are doing something? The American practice of having breakfast meetings has almost been proved not to be particularly efficient. Thirdly, my question is on self-regulation, which I think rings a little hollow in this context. As somebody who is chairman of a business which is potentially very dangerous and where the government undoubtedly, through its regulation and its inspectors make it more dangerous than it need be, but were they to say to me, "Cavendish, your industry will be safe", I would be much safer than I am being regulated. On the other hand, I have always felt it reasonable—very well described in the Piper Alpha Report by Lord Cullen—to make a safety case which an authority then could comment on and say, "This is what I propose to do to be safe." Might there be mileage in the Internet world actually working on the regulation case, "We will do this", which then governments, authorities and institutions could look at and comment on, rather than deliver regulation from on high?
  (Mr Hall) The last mile is physical. There are issues about the state of the network and whether it should be twisted copper or whether it should be high band width as well as, if you like, commercial questions about access. The fact is that the current network in the main to domestic homes is twisted copper. There is an issue about how quickly that will be uprated. The question of safety and other public policy objectives and how that then gets interpreted into actions that achieve the objective is one that we are trying to get our heads around as well. Certainly we think there is a role for coregulation, where, as is happening in the United Kingdom, HMG goes through the process, states the policy, but then leaves it up to the industrial players and other stakeholders to deliver that. With regard to the Electronic Communications Bill, for instance, which is currently going through Parliament, the government has stated how it wants the use of encryption to be handled but is looking to industry self-regulation to deliver that. In our business, encryption is probably the area which causes the greatest furore in terms of safety of public policy issues. As the big picture evolves, we will see examples of coregulation. I do not think we are claiming that we should be above the law and the law does not apply to us. What we are saying is that when laws are being drafted and considered please involve us early on so we can explain and maybe help identify where there might be difficulties in implementing that law. One of the big issues for us working across the Union is compliance. What is acceptable and proper in the United Kingdom may be quite difference in France and Belgium. If you are trying to operate across the Union, that becomes a huge compliance cost. We are looking for simplifications, rules and codes of conduct which are very similar across the Union so we can build systems that will react properly within that framework.

  152. Must that not start from the bottom? If you have goods or services to sell, is it not for those sellers to get together and say, "This is the way we would like to operate in order to protect our customers"?
  (Mr Hall) I think that is precisely what we are proposing.

Lord Paul

  153. I want to come back to self-regulation. There are a lot of countries where self-regulation has not worked in Europe and this business is very global. Even in Britain where it used to work it is difficult. How do you expect that self-regulation can work in this industry which is absolutely global?
  (Mr Hall) I do not think that in the short term there will be global self-regulation. It may happen in particular industries where there is a long tradition of operating globally. In financial services, there is a degree of interworking between self-regulatory schemes. The oil industry which is global perhaps has schemes that could lend themselves to that. Rather, we are looking at the European level to see a greater emphasis on self-regulation. That is from my company's perspective in our domestic market. When we operate in north America, we would expect to work within their industries' self-regulation rules which will tend to be similar because the industries themselves have similar attitudes, even though they may not have similar histories. We are quite clear in our own thinking that this provides for the flexibility as the markets change.

  154. Even in a country like Britain, self-regulation in other industries is not functioning any more, or it is functioning less and less. In an industry like this, what is the hope?
  (Mr Hall) I cannot speak for other industries. I have no competence outside my own industry and some might even question my competence in that because it is changing so quickly. The self-regulatory practices with which we are involved have evolved as the IT industry has evolved in this country and in Europe. I do not perceive problems with self-regulation. However, we do not operate in a vacuum. If self-regulation fails, I am sure that the governments would step in to either bring in new laws or to require governmental bodies or NGOs to take action.
  (Mr Hampton) Maybe one of the issues that you are concerned with is enforcement. That is clearly an important issue. I think it is absolutely vital for this new medium to establish confidence in competition against other mediums. We have every incentive to ensure that. I can understand that you might still have concerns. The other side of it is that what we need if we are going to work in a global market is a degree of harmonisation. Frankly, the European Union is too slow and by the time it has harmonised it has probably harmonised the wrong thing. As Mr Hall said, industry does tend around the world to think about things in much the same way. You will get a kind of de facto harmonisation through these industry self-regulatory approaches on both sides of the Atlantic. That is going to be a very valuable element in it.

Lord Woolmer of Leeds

  155. I assume that in the business to business area there are more well established procedures by which one checks on supplies and suppliers check on the likelihood of their customers paying up. There are various checks, transparencies and so on. The issues we are discussing principally relate to business to retail customers. Is that correct?
  (Mr Hampton) I cannot imagine that it would be necessary to intervene on the freedom to contract that exists between businesses.

  156. This discussion is principally about business to consumer?
  (Mr Hall) My understanding has been that we are talking here about business to consumer rather than business to business.

  157. Is there any evidence that large corporations seek to apply e-commerce through the supply chain globally and that itself is creating a need to have a global process of checking up on suppliers and so on? One can do it in an established chain in one's own country in Europe, but the notion of e-commerce is that it widens enormously the access and availability of suppliers often in the business case.
  (Mr Hall) I do not have any anecdotal evidence that there is a problem because before a company enters into a contract they will go through their normal contracting processes. They will do it much quicker by e-mail or web linked systems. That will cover the standard contracting terms. That is one reason, I suspect, that the business to business sector is growing rather faster than the business to consumer—particularly the case where you have industries which already source globally and they are already searching for new sources of supply.

  158. Could I touch on a point in your own paper on the first page, where you make two points? You talk about whether Europe will become a serious competitor in the global markets. What do you mean by that? "The big question is whether EU sources of supply—primarily of electronic commerce engineers and venture capital—can increase sufficiently quickly not only to satisfy domestic demand but also to allow Europe to become a serious competitor in the global markets." What is it that we are all getting bothered about?
  (Mr Hall) Anybody who is in business should start getting bothered about it if their market can be attacked by competitors that they do not know simply because those competitors make more effective use of the global networks. A major concern that we have as a company is not that the Europeans do not understand the technology—the technology is global; everybody gets involved in it—but that we do not have the skills in our companies to implement the technology both swiftly and efficiently, thus not just maintaining existing competitiveness but perhaps becoming more aggressive in trying to take business from other people. That is an issue. That is essentially business to business, although business to consumer comes into it as well. On the business to consumer as well as business to business, we would like to see the United Kingdom and the EU become sources of supply rather than being places where the demand is being satisfied from outside the EU. We would like to see more companies growing faster here and generating the value added in Europe. We are not downhearted about this. We see it as an issue but certainly as far as digital goods are concerned, bit based goods, we believe there are huge opportunities not least as far as education is concerned and other content that could be delivered over the network. There is a particular opportunity for the United Kingdom because of the English language and the creative industries in this country, but we have to move fast because the markets themselves are changing fast.
  (Mr Hampton) We are an intermediary in this business so we are also looking very much at the demand side. You need both of them to rise at the same time. You need more potential customers coming online before the suppliers see an entrepreneurial advantage in becoming a supplier. The two are going to go hand in hand. We should never lose sight of both of those.

  159. In your paper, Mr Hampton, you said that the EU draft Action Plan is something of a shopping list, a document which we have all read and I am sure we would all concur with. Are there any items in that shopping list that are rather more important than others in your view?
  (Mr Hampton) We think cost of access is crucial. The proposals they come up with for broad band are great for a broad band future some time in the latter half of this decade. What they fail to recognise is that the Americans are doing e-commerce using their telephone lines at the moment. You do not need a broad band connection for that. All the estimates are that only 25 per cent of connections to the Internet even in 2004 will be broad band. Narrow band ought to be today's focus. That is not mentioned at all in here which is highly regrettable. The school side is very important but it is difficult now to find a government that is not aware of that, although there are some that are more ahead than others. Risk capital was one that Mr Hall raised in his paper, which I think is important. Some of the others are important but they are a bit peripheral. What is really lacking here is you do not get the impression that they have done a serious analysis of the situation and where we are going. If you compare it to [email protected], that is rather a good document. The other very creditable thing in that is that it sets the United Kingdom government deadlines of three or four months. These are credible to Internet companies. Deadlines at the end of this year, the end of next year or the year after are way beyond our radar screens. Just with our staff, we have six month objective periods and six month bonus periods. Most companies do this on a yearly basis. It does not make sense on the Internet to do that.


 
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