This sort of thing doesn't surprise me any more. AFAIK DNS on every major ISP in the UK is broken, there is no NXDOMAIN. Unresolvable domains are simply redirected to a specific IP address which happens to host a page of ads and a search bar on port 80. This might not matter to most people, but it's a huge PITA when I'm testing some things.
That said, barring an explicit definition of 'Internet service' in your service contract, it's commonly understood that requesting a page from example.com, all the data your ISP returns implicitly is sourced from example.com. Introducing your own content in between is therefore fraud, as you've mis-represented the origin of the content.
I believe the owner of an involved web server would have standing as well, not just the users.
>nslookup notarealdomainthatshouldresolve.co.uk Server: cache1.service.virginmedia.net Address: 194.168.4.100
* cache1.service.virginmedia.net can't find notarealdomainthatshouldresolve.co.uk: Non-existent domain
Injecting or replacing ads in other people's content on the wire: 'knowingly and with intent to defraud', 'exceeds authorized access', 'furthers the intended fraud'
Ad revenue from doing so: 'obtains anything of value'
Forget copyright infringement: a case could be made that CFAA applies here.