The European Commission has launched legal action against the the UK Government for failing to ensure the privacy of UK internet users.

The move to start infringement proceedings for non-compliance of privacy laws was sparked by a series of complaints to the Commission by UK internet users about major internet service providers (ISPs) using Phorm's Webwise technology. Concern centred on how the software, that constantly analyses customers' web surfing habits in order to deliver better targeted advertising, would be a danger to web users' privacy.

It then emerged that BT had already run covert trials of the Webwise software, in 2006 and 2007. But despite complaints to the police, Government and Information Commissioner's Office, no action was taken against BT.

The European Commission investigated and concluded that if UK authorities allowed ISPs to do this, it would be a breach of the EU Privacy and Electronic Communications and the Data Protection Directives. It has now said the UK Government must make changes.

Viviane Reding, EU telecommunications commissioner said: “The rules are quite clear. A person's information can only be used with their prior consent. We cannot give up this basic principle and have all our exchanges monitored, surveyed and stored in exchange for a promise of 'more relevant' advertising."

Following the complaints about the use of Webwise, it was feared that, by default, customers of ISPs would be opted in to this profiling without first giving express consent. The EC has now ruled this illegal and has taken the first steps to force the UK to comply with e-privacy and data protection laws.

The Privacy and Electronic Communications Directive outlaws interception and surveillance of communication without either the user's permission or a legalising process, such as a warrant. The Data Protection Directive governs users' consent to the collection of data and sanctions for those who break the rules.

Richard Clayton, a privacy expert for the Foundation for Information Policy Research (FIPR), an independent body that studies the interaction between information technology and society, said the EU could force UK authorities to comply.

“The EU has concluded that the Phorm system's snooping is unlawful interception because permission has not been obtained from both the user and the website owner.

"FIPR agrees, and first drew attention to this illegality almost a year ago. However, the UK Government has denied that the Phorm system breaks the law. They now have a choice.

"They can either agree with FIPR and admit that they didn't properly understand existing UK legislation; or they can stick to their guns, and then be forced by the EU to bring forward a new statute.”

The UK has two months in which to respond to the Commission.

Ms Reding said: "I will not shy away from taking action where an EU country falls short of this duty. The Commission has asked the UK authorities several times since July 2008 about how consumers will be protected.

"It has now concluded that the UK’s implementation of these laws fail to give consumers adequate protection and has called for changes."

The Department for Business, Enterprise & Regulatory Reform (BERR) and the Home Office said they had received the letter. A Home Office representative said it was “not appropriate” to comment at this time but it and BERR would “respond” in due course.

Phorm released a statement saying that: “Phorm’s technology is fully compliant with UK legislation and relevant EU directives. This has been confirmed by BERR and by the UK regulatory authorities and we note that there is no suggestion to the contrary in the Commission's statement today.

"We do not envisage the Commission’s proceedings will have any impact on the company’s plans going forward.”

BT said it had no comment to make and the matter was an issue between the Government and the EU. It said it was still evaluating the results of its latest Webwise trial, which was this time run with users' consent.

But Alex Hanff, who had led a public campaign against the use of Phorm and made official complaints to the police about BT’s use of Webwise without consent, told us this could be the end of ISPs using Webwise.

“I would question whether Phorm has any future at all, let alone that future being unaffected by EU act.”