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Electronic Communications (Networks and Services) (Penalties) (Rules for Calculation of Turnover) Order 2003

2.52 p.m.

Lord Sainsbury of Turville rose to move, That the draft order laid before the House on 8th September be approved [27th Report from the Joint Committee].

The noble Lord said: My Lords, the enactment of the Communications Act 2003 on 17th July heralded the creation of a new regulatory framework covering media ownership, broadcasting and electronic communications networks and services under the regulation of the Office of Communications.

On 29th December Ofcom, whose board was established under the Office of Communications Act 2002 to prepare for the creation of a new regulatory framework, is expected to assume its full powers under the Communications Act 2003. On that day the second commencement order will effect the transfer to Ofcom of the responsibilities of the Independent Television Commission, the Broadcasting Standards Commission, the Radio Authority, Oftel and the Radiocommunications Agency. Staff will also formally transfer on that day to coincide with the transfer of functions.

The purpose of the order which we are debating today is to provide a key definition related to the regulator's power to impose fines on communications providers who contravene the conditions of entitlement; that is, it will define the meaning of "turnover" as the basis for specifying the maximum fine which can be imposed. Once the order is approved, Ofcom will be able to exercise its powers to impose penalties under the networks and services provisions of the Communications Act 2003, and in the transitional period up to 28th December, these powers will be exercisable by Oftel. An explanatory memorandum setting out the policy background to the order was laid before Parliament with the order on 8th September.

The power to impose penalties supports and strengthens the enforcement procedures set out in Sections 94 and 95 of the Act. Section 94 provides for

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a notification to be given to a provider who is contravening any condition of entitlement. If the contravention is not rectified within the period specified in the notice—usually not less than a period of one month—Section 95 allows for the issue of a notice, which can be enforced through the courts, specifying corrective action. Section 96 allows Ofcom to impose a penalty on a provider either where a notified contravention has not been put right within the specified period, or where a subsequent enforcement notice has not been complied with.

The Act therefore provides Ofcom with the flexibility to impose a penalty as an alternative to an enforcement notice, or in addition to it, where that is appropriate and proportionate to the circumstances of the case. Ofcom must notify the decision to impose a penalty, the reasons for it, and the period within which the penalty is to be paid to the person on whom it is being imposed within one week of its decision. Where Ofcom is satisfied that a person is in serious and repeated breach of any conditions, and that the imposition of penalties, an enforcement notice or both under Section 95 has failed to secure compliance, Ofcom can suspend or restrict the person's entitlement to provide networks and services and/or associated facilities.

Section 97 of the Act sets out the penalty that can be imposed under Section 96, and it is in that context that the definition of turnover provided by the order is necessary. In deciding on the amount of penalty, Ofcom is required to take account of any representations made by the notified provider, as well as any steps taken by him to comply with the notified condition and to remedy the consequences of the contraventions.

The penalty has to be appropriate and proportionate to the contravention for which it is imposed and is not, in any event, to exceed 10 per cent of the turnover of that person's relevant business for the relevant period. Relevant business is defined in Sections 97(5) to (7) and broadly consists of any one or more of the provisions of an electronic communications network or service, the making available of associated facilities, the supply of directories, the making available of directory inquiry facilities or the supply of electronic communications apparatus. The relevant period is defined in Section 97(5) as one year ending on the 31st March preceding the notification, subject to exceptions for providers who have not been carrying on business for a full year, or who have gone out of business.

Section 97(3)(a) provides that the turnover of a person's relevant business for a relevant period shall be calculated in accordance with such rules as may be set out by order made by the Secretary of State. It is simply that order that we are debating today.

Before I explain the rules, it might be helpful if I were to point out that placing the definition in secondary legislation rather than the Act itself is consistent with the practice of the Competition Act and of various utility statutes, as indeed is the maximum value that the order adopts of 10 per cent.

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A definition in secondary legislation will provide the flexibility to amend the rather technical definition as future circumstances may require, without the need to amend the parent Act.

The rules are contained in the schedule to the order, and provide that turnover is limited to amounts derived from the relevant business, net of sales rebates, VAT and other taxes directly related to turnover. Where the relevant business consists of two or more undertakings, the turnover is to be calculated by adding together the turnover of each undertaking, excluding turnover resulting from the supply of goods or the provision of services between them.

The rules also provide that any aid granted by a public body to a notified provider which relates to one of the provider's ordinary activities should be included in the calculation if the notified provider is himself the recipient of that aid and it is directly linked to the carrying out of the relevant business. The intention is that the turnover taken into account is suitably related to the business on which a penalty is being considered by Ofcom. In addition, the turnover of a notified provider has to be calculated in conformity with accounting practices and principles that are generally accepted in the UK.

Public consultation was undertaken on the order and produced only one minor comment, to the effect that the order should clarify that the basis for accounting should be practices and principles which are generally accepted in the United Kingdom. We were happy to make that small change.

Noble Lords will be aware that although Section 19 of the Human Rights Act 1998 does not apply to secondary legislation, the Government have confirmed, as is customary, to the Joint Committee on Statutory Instruments that the order is compatible with convention rights.

The overall effect of the new regulatory regime established under the Communications Act 2003 is assessed in the regulatory impact assessment carried out for the then Communications Bill. This order, which sets the rules for determining the turnover to be taken into account for setting the cap on financial penalties, introduces no additional regulatory burden and is key to Ofcom's effective regulation of electronic communication networking services. I therefore commend the order to the House.

Moved, That the draft order laid before the House on 8th September be approved [27th Report from the Joint Committee].—(Lord Sainsbury of Turville.)

3 p.m.

Lord Hodgson of Astley Abbotts: My Lords, I am grateful to the Minister for his explanation of this complex and technical order. The primary legislation out of which it arises is the Communications Act, Sections 96 and 97. That part of the Act arises, in turn, from no fewer than five EC directives, which, in shorthand, are called the Access Directive, the Authorisation Directive, the Framework Directive,

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the Universal Service Directive and the Privacy Directive. Some of us feel that that is typical of the red tape which comes from Brussels.

The penalty regime comes from the Authorisation Directive in respect of which Ofgem issued what it called "an explanation". However, it was littered with an alphabet-soup of acronyms, such as NRA, ECN, ECS, AF and so on.

As is common with such legislation, offences are deemed to have been committed by corporations and not by individuals. As a judge once remarked, the problem with corporations is that they have no soul to damn or body to kick. Therefore, any penalties for infraction of the law, short of cancelling their licences, have to be financial. Given the size and worth of some of the corporations, the penalties have to be substantial if they are to amount to more than what they spend on paperclips.

Throughout EC legislation, the penalties are based on turnover. But, as the Minister has pointed out, that gives rise to another problem; that there is not always unanimity among accountants on the definition of "turnover".

The Minister has confirmed that prior to the laying of the order, and prior to the passage of the primary legislation, the Government carried out consultation. The only response they received was from the Mobile Broadband Group and it was incorporated in the requirements to strike out taxes and sales rebates and inter-company trading. I am pleased to see the Minister nodding and confirming what is in the directive.

Will the Minister confirm that in an attempt to achieve consistency in future legislation, whether under the Communications Act or other measures, and where a penalty regime is linked to turnover, the Government will automatically introduce the same qualification about the use of GAP—generally accepted UK accounting principles—without having to be asked to do so? So often in statutory instruments, definitions are slightly different. That is unhelpful to the regulator, to the Government and to British industry in making use of it. Consistency is most helpful to all parties concerned.

Apart from that request, we do not oppose the making of the order.

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