Postcomm proposes penalties of £11.7m on Royal Mail for failures in customer service

10 February 2006

Postcomm, the independent regulator for postal services, today proposed financial penalties of £11.7m on Royal Mail for serious breaches of its licence obligations in 2004/05 to protect the mail and deliver it on time.

Of the total financial penalty:

  • £11.38m is for Royal Mail's failure to meet its obligations to protect the mail; and
  • £0.27m is for Royal Mail's poor mail delivery performance across three London postcode areas.

"A regulator's first duty is to protect the interests of customers. Customers are entitled to expect that when they post mail it will reach its destination. But during 2004/05, around 14.6 million letters, packets and parcels in Royal Mail's care were lost, stolen, damaged or interfered with," said Nigel Stapleton, chairman of Postcomm.

"A Postcomm review uncovered some serious shortcomings during 2004/05 in Royal Mail's application of its procedures for properly protecting the mail - what we call mail integrity.

"Royal Mail is a large and highly decentralised organised and it is essential that there are controls in place to ensure that procedures for protecting mail are being followed across the company."

Postcomm's review found that some important features of Royal Mail's procedures were not being applied across the business. The most significant weakness was the poor management of the recruitment and training process for non-contract (agency) staff.

In addition, the framework and information systems that Royal Mail had put in place to prevent the loss, theft or damage of mail were not operating effectively. These weaknesses significantly reduced the company's ability to protect customers' mail.  

"Although Postcomm has observed significant efforts by Royal Mail to improve since our review was completed in May 2005, the fact remains that these shortcomings existed over a prolonged period. The level of this proposed finiancial penalty reflects the Commission's view of the extent and seriousness of the licence breaches. I should stress that these are mainly management failings and do not reflect on the deication and commitment of postmen and post-women," Mr Stapleton said.

Also announced today is a separate proposed financial penalty on Royal Mail of £271,000 for its poor delivery performance during 2004/05 across three London postcode areas - SE, WC and E - where, during the year, around two million letters were delivered late.

In these postcode areas, Postcomm found that Royal Mail failed to use all reasonable endeavours to meet one or both of the delivery performance targets set out in its licence. London SE failed on both targets, London E on intra mail and London WC on posted mail.

Postcomm is encouraged that more reacently - and partly as a result of Postcomm's review - Royal Mail appears to have improved substantially its performance in both these areas of licence breach. Although Postcomm cannot ignore Royal Mail's serious failures to observe important parts of its licence obligations, the company's recent initiatives are reflected in a 20% reduction in the proposed gross financial penalty in respect of the mail safety and security failures. postcomm will continue to monitor the company to ensure that these improvements are maintained.

Under the terms of the Postal Services Act 2000, Royal Mail has an opportunity to make representations to Postcomm on the proposed penalties.

Notes for Editors

Mail integrity investigation: timetable

  • In the summer of 2003, Postcomm raised concerns with Royal Mail over the application of the mail integrity procedures that the company had drawn up. This followed customer complaints about the loss of mail items and an instance of apparent failure in pre-employment vetting.
  • As a result, Royal Mail began a review of its procedures. Postcomm also started its own review of Royal Mail's mail integrity procedures.
  • In April 2004, a Channel 4 Dispatches programme showed footage that called into question Royal Mail's mail safety and security procedures. In December 2004, further investigations were carried out by the London Evening Standard and the Birmingham Evening Mail. Postcomm broadened the scope of its review to cover some of the allegations made by the Evening Standard.
  • Postcomm's review covered the period August 2004 to May 2005. A provisional report was prepared in November 2005. However, Royal Mail provided further evidence and requested an oral hearing, which took place in December 2005. This has delayed the conclusion of the review.

In reaching its conclusions, Postcomm has not relied on media reports as substantive evidence, but has used them to identify areas of review.

All licensed postal operators, including Royal Mail, must now comply with Postcomm's mail integrity code, which came into effect when the postal market opened to full competition on 1 January 2006.

Mail integrity: main findings

Postcomm's review of the application of Royal Mail's mail integrity procedures, detailed in a report published today, found that:

  • For a majority of its agency staff, Royal Mail's pre-employment vetting procedures did not comply with those it had itself developed. As a consequence, many agency staff were not properly vetted before being employed, and/or inadequately trained afterwards. 
  • The high-level co-ordination of procedures designed to prevent loss, theft and damage to mail was ineffective as was the collection and dissemination of data about the incidence of these problems.
  • There was a general failure by Royal Mail to monitor the application of its procedures.
  • Royal Mail broke its licence conditions by failing to provide information to the regulator about changes it made to its mail security procedures.

In the newly-competitive mail market, Postcomm also expects from other operators the same high standards for protecting the mail. Postcomm has already brought several successful prosecutions for interference with mail against employees of mail operators other than Royal Mail.

How the £11.38m financial penalty was calculated

Royal Mail handles almost 21 billion items of mail a year. Of these, around 14.6 million are lost, damaged or stolen, according to Royal Mail's own figures. The postage customers paid to Royal Mail for this mail was £4.2m.

Royal Mail's code of practice "Keeping our Promise" (April 2005) sets a compensation level for lost or damaged mail at the equivalent of a book of 12 first class staps - £3.60. This was the financial baseline used by Postcomm to calculate the penalty.

With such a large volume of mail, Postcomm was mindful that it is not possible to guarantee the delivery of every item. However, it felt that by using all reasonable endeavours, Royal Mail should be able to halve the numbers of losses to 7.299 million. Multiplying this by £3.60 (the price of a book of stamps) gives a figure of £26.276m. But from this must be deducted £13,632,026, which Royal Mail has already paid in compensation for loss and damage. This gives a baseline figure of £12.644m.

Postcomm then allowed for aggravating and mitigating circumstances (Royal Mail's conduct during the review, major changes within Royal Mail and improvements since the review) to arrive at the proposed financial penalty of £11.38m.

Worst-performing postcode areas

The delivery targets against which Royal Mail consistenly underperforms in the postcode areas that had been reviewd by Postcomm are for:

  • "Posted" mail - mail posted from one postcode area to another. In 2004/05, the performance target for this type of mail was for 91% of first class stamped and metered mail to reach its destination the next working day. (The target is now 91.5%.)
  • "Intra" mail - first class mail posted to an address within the same postcode area. The performance target here is 92.5%.

Several other postcode areas were also investigated: London SW, London W, Chelmsford CM, Southend SS. Although failings were reported, delivery performance targets were met, so no financial penalties are proposed for these areas. 

The regulatory regime

After a thorough review, Postcomm has concluded that Royal Mail is in breach of Condition 8 of its licence, which requires the company to "use all reasonable endeavours at all times to apply the procedures that it had established ... to minimise the exposure of postal packets to the risk of loss, theft, damage or interference." For postcode areas, Royal Mail has a similarly worded licence obligation under Condition 4 to meet its quality of service standards.