The government is to press ahead with plans to make internet service providers (ISPs) retain communication traffic data, despite opposition from MPs.
A report by the All Party Internet Group (APIG) said that government plans to force ISPs to retain traffic data in order to aid law enforcement agencies needed rethinking.
The APIG report insisted that it is not "practical to retain all communications data on the off-chance that it will be useful one day".
MPs in the group demanded the government scraps its plans to set up a voluntary scheme for data retention. APIG believes data preservation orders would be more appropriate.
Under current proposals, ISPs will be forced to save all traffic data. Under APIG's data preservation scheme, ISPs would only store information when requested to do so by the police.
But the Home Office is pressing ahead with a voluntary scheme and has produced proposals which it hopes will prove acceptable to industry. Home Office minister Bob Ainsworth said "data retention is necessary" to combat the continuing threat from terrorists.
At the public hearing, ISP AOL claimed that it would cost $40m (£26m) to set up a system to retain internet traffic data and $14m a year to run.
But Ainsworth said figures on the cost of retaining data had been greatly exaggerated.
"We've getting a clearer idea of the associated costs, and its nowhere near as considerable as those presented to APIG."
But Liberal Democrat MP Richard Allen, joint vice chairman of APIG, described the Home Office demands as a disproportionate response to the threat.
He said that the authorities had yet to establish that the benefits to tackling crime justified the costs.
"Take the analogy of closed-circuit camera footage," he told vnunet.com. "It would be useful to solve some crimes if every firm was forced to store their tapes. But the cost is so great that it's not worth doing."
Industry players also remain unconvinced. "It's not just about data retention. The costs of retrieval are the real overhead," said Nick Truman, security manager at BTopenworld.
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