April 1999

Implications Of The New FCC Anti-Slamming Rules

BY JAMES VEILLEUX, VOICELOG LLC

In late December 1998, the Federal Communications Commission (FCC) adopted new rules to combat slamming -- the unauthorized switching of a consumer's telephone service. The rules eliminate the so-called "welcome package," require verification on inbound, as well as outbound, telemarketing orders and require verification on carrier freezes (in which the local company agrees not to change the customer's service without direct instructions from the customer). In addition, the FCC decided to absolve consumers from any payment to alleged slammers for the first 30 days of service.

Of all the changes, however, the most surprising was the FCC's decision to put the first round of slamming dispute resolution in the hands of carriers. This aspect of the rules -- which was not obvious when they were first announced -- could have the most profound impact on the telecommunications industry of any of the rule changes. If you or your client, if you are an outsourcer, is a telecommunications marketer, these changes will directly affect you.

Verification Requirements Changed
Verification requirements for telecommunications orders have been changed -- dramatically for some carriers and resellers, but not at all or not a great deal for others. The biggest change is the requirement that all orders, whether from telemarketing, direct sales or otherwise, be verified through one of the three methods now permitted by the FCC. So, if you take orders from inbound calls, you will need to have those verified in some fashion.

In addition, the verification requirements for telecommunications orders have been changed. The "welcome package," which was the only viable alternative to third-party verification for telemarketers, has been eliminated. Carriers and resellers are now restricted to three verification methods: letters of agency (LOA), third-party verification (TPV) and electronic verification. In addition, there is new language that defines what makes a third-party verifier truly independent, specifying that a TPV provider must not be owned, managed, controlled or directed by the carrier and that there can be no financial incentive for the TPV company to approve orders.

Finally, the FCC made it explicit that states could enforce the FCC rules themselves and create additional verification requirements for intrastate service as long as they do not conflict with the FCC's rules. Presumably, this means that state rules -- like California's -- which are more restrictive than the FCC rules, are permissible.

Resolving A Slamming Dispute
The rule change that received the most attention is the "30 day" absolution rule, which dictates that a consumer who is slammed is not required to pay for the first 30 days of service from the carrier that slammed him or her. The process for avoiding payment is relatively confusing.

First, the absolution only applies if the customer has noticed that the carrier change took place and refuses to pay. If the customer pays, he or she does not get back the money -- only the difference between what was paid and what would have been paid to the former carrier.

Second, if the carrier accused of slamming wants to dispute the slamming charge and try to collect payment for the first 30 days, it must go to the customer's former carrier with proof of the order and the verification. The former carrier, which at this point is presumed to have regained the customer, is required to investigate the slamming claim and decide if the customer was slammed or the order is good. If the former carrier decides the order is good, it then bills the customer for the first 30 days' service and sends the funds to the alleged slammer -- now cleared -- when the customer pays.

The implications for the call center selling services or taking orders are twofold: carriers will be much more cautious of sales programs that generate large numbers of weak orders and will be very focused on making sure the orders meet the regulatory requirements.

If the customer does pay the bill of the alleged slammer, the process changes. According to the new rules, the former carrier must investigate the slamming charge with the carrier that is accused of slamming. Once questioned, the alleged slammer can either send what it collected to the former carrier or send proof that the order was valid. If the former carrier collects, it must refund to the customer the difference between what it collects and what it would have charged at its own rates for that service. If the former carrier does not collect, it is not required to pay the customer -- it must simply inform him or her of the right to individually pursue a claim against the slammer.

If the accused slammer provides evidence of a good order, the customer can presumably still press a claim if he or she does not agree with the evidence. Remember, too, that the FCC explicitly allows states to enforce the FCC rules and to impose their own rules, as long as they do not conflict, so the consumer can still make a complaint directly to the state PUC.

Whether or not the customer pays, a carrier that slams is responsible for paying the cost of switching the consumer back to the former carrier. In addition, a slammer must pay for the former carrier's cost of collecting the money paid by the customer.

Carrier Freeze Rules
The last, but not least, section of the new rules deals with carrier freezes. A carrier freeze occurs when the customer instructs the local exchange carrier not to execute a carrier change without direct instructions from the customer. Carrier freezes can be implemented for any type of service -- interLATA, intraLATA, local, etc. -- for which there is competition.

The new rules are designed to keep incumbent local exchange companies from abusing the freeze process as a way to inhibit competition. For example, local exchange companies are required to offer freezes on a nondiscriminatory basis, regardless of the carrier the customer selects and to include clear and neutral explanations of freezes in their literature. Carriers must also verify a freeze -- using one of the three approved methods: LOA, TPV or electronic verification. Finally, carriers must provide at least the following two ways to lift a freeze: an LOA and a three-way call which the submitting carrier (the carrier trying to get the order placed) can access.

Implications Of The New Rules
For call centers, the new rules mean both trouble and opportunity. It is very possible that some carriers will choose to exit the telecommunications business or cut back on aggressive marketing techniques that generate relatively weak orders. On the other hand, the third-party verification business could boom, so call centers that offer that service may see a big increase in business.

Call centers should also expect their telecommunications clients to be a lot more concerned with meeting the rules and ensuring that the third-party verification suppliers they use provide solid, easily accessible proof of the sale. If you do not already have a voice logger and you sell telecommunications services, you may want to consider getting one, since it provides another way to produce a recording of the sale.

The 30-day absolution will probably change the economics of new customer acquisition, making it much more expensive to be overly aggressive or sloppy in acquiring customers. If some carriers were to lose the first month's billing for 5 percent, 10 percent or 20 percent of their orders, their financial picture would be very different. Most carriers, we suspect, will not see a dramatic increase in slamming complaints unless the biggest carriers become very aggressive in their win-back campaigns.

The change in verification requirements also has some impact. TPV will add from $0.50 to $3.00 or more to the cost of an inbound or Internet-based order. Carriers that relied on the welcome package will need to find a new verification method.

A very few carriers have used captive, company-owned or other less-than-independent verification services for their orders. Since these were of doubtful legality in the first place, it is unclear whether those carriers are likely to change their processes, although some of them might if they want to defend against slamming claims and have a better chance of getting paid.

Our Predictions
Here are our best guesses on what the industry will do as a result of the new rules:

• More win-back programs. Carriers will find win-back programs to be an important tactical and strategic tool. Tactically, re-selling ex-customers is generally more profitable than selling to new customers, and the new rules should help that, since unscrupulous carriers or their sales representatives can use the 30-day absolution as an incentive to switch back. Strategically, it will be important not to lose more customers and their revenue than competitors will. Call centers should consider suggesting win-back programs to their telecommunications clients.
  
  
• Carriers pursuing claims of lost revenue. We are unsure how many carriers will aggressively pursue claims against alleged slammers for revenue the alleged slammer has collected, but we believe that some of the larger carriers will. Whether or not carriers will be aggressive is an open question, but the new rule says carriers must pursue the slamming claim when brought to them by a customer, so we would expect some carriers to take advantage of an area they must develop anyway. Look especially for some ILECs to use this as a defensive weapon when local competition is really active.
  
  
• Getting paid for the first 30 days will become harder. This prediction states the obvious, but there are some subtleties worth noting. We would expect some carriers or their sales reps to encourage slamming claims during win-back campaigns. That is bad for the industry as a whole. When an accused carrier wants to dispute a slamming claim, there is very little incentive for the former carrier to conclude that the order was good, so carriers that want to defend against slamming claims should be sure they have strong and retrievable verifications. Even if the former carrier decides the customer was not slammed, it will be reluctant to bill the customer and will have little reason to be vigilant in paying the carrier that documents a good order. We expect many carriers to decide that defending the slamming claim is not worth the trouble.

Conclusion
The new FCC anti-slamming rules will make things difficult for telecommunications marketers who are selling aggressively by telemarketing. By extension, this will make life difficult for the call centers that service those clients. On the other hand, there may be increased opportunities in third-party verification win-back programs to offset some of the loss in business.

For a complete analysis of the FCC rules, see VoiceLog's Web site at www.voicelog.com.

James Veilleux is president and founder of VoiceLog LLC, a company he formed with two partners in early 1996. He has worked at MCI, Sprint and SkyTel and as a consultant to Bell Atlantic, Iridium and Telecommunications Premium Services. His positions have included telemarketing sales and support, market research, database marketing, direct mail and customer communication, channel development, product and market management, partner marketing and pricing and business analysis. VoiceLog LLC is a provider of third-party verification services. Introduced in 1996, the VoiceLog system offers an automated platform to dramatically lower costs, as well as special techniques to eliminate fraud in telephone services sales.