Ofcom proposes prohibition of evergreen customer contracts


Earlier this week I discussed the changes Ofcom are proposing to the General Conditions of Entitlement to implement the revised European Regulatory Framework. It now seems that Ofcom are also taking the opportunity to look at other changes to the General Conditions, yesterday publishing proposals to amend General Condition 9 to prohibit providers of fixed voice and broadband services to the consumer and SME (for these purposes, businesses with less than ten employees) markets having contracts which automatically renew at the end of their initial contract term for subsequent fixed contract term(s). Early termination charges would be payable if contracts are terminated before the end of any particular contract term.

Readers will recall that Ofcom’s earlier consultation already included proposals restricting Communications Providers’ freedom to contract with their customers including a maximum contract period of two years and the requirement to offer a twelve month contract option where a longer contract period is offered, as a well as a general requirement to ensure that conditions or procedures for contract termination do not act as disincentives for end-users against switching.

The additional proposed restriction would prohibit relevant Communications Providers from having opt-out processes for minimum contract term renewals.

Ofcom is clearly anticipating significant industry resistance, as they have commissioned an array of research to justify their proposals, including:

  • Empirical Analysis of BT’s Automatically Renewable Contracts, August 2010 – an econometric study analysing the impact of BT’s automatically renewing contract on its customers decisions to switch to another CP.
  • Mystery shopping survey summary by E-Digital, September 2009 – to see whether BT promotes ARCs ahead of other options, and whether consumers are given all facts about ARCs in order to facilitate effective purchasing decisions.
  • BT Renewable Contracts – a Report by Spring Research, August 2009 – to assess the knowledge and understanding of ARCs terms and conditions among BT customers.
  • Analysis of Call Recordings by Mott MacDonald, October 2009 – to understand the accuracy of information that BT call centre advisors provide to consumers in relation to ARCs at point of sale, and whether advisors verify that customers understand the ARC prior to agreement.

Ofcom identify two types of potential harm:

  1. direct effects  from the exposure to switching costs in the form of early termination charges; and
  2. indirect effects  from the lessening of competitive intensity in the market.

Responses are due by 12 May with implementation proposed to be at the same time as the other changes to general conditions.

The watcher has mixed views on the proposals. Whilst on their face they appear positive for consumers and competition, from a policy perspective it is not clear that Ofcom have identified a market failure that requires regulatory intervention and interference with the freedom to contract.  Some communications providers already compete in the market by making a virtue of their lack of contract term (e.g. see Post Office Home Phone) and there is not a convincing cost-benefit analysis of the proposals. I await responses with interest.

About Rob Bratby

Telecommunications, media and technology lawyer advising companies across Europe and Asia
This entry was posted in Broadband, Commercial activity, Fixed, Regulatory action, Telecoms, UK and tagged , , , , , . Bookmark the permalink.

3 Responses to Ofcom proposes prohibition of evergreen customer contracts

  1. Pingback: Behavioral economics to the fore as Ofcom bans automatic contract renewals | Watching the Connectives

  2. Pingback: Commission maintains its softly, softly approach on net neutrality (whilst carrying big stick) | Watching the Connectives

  3. Pingback: Spectrum, broadband, customer switching and online piracy Ofcom’s telecoms priorities for 2011/12 | Watching the Connectives

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