Behavioral economics to the fore as Ofcom bans automatic contract renewals


Following consultation on its earlier proposals, last week Ofcom confirmed that it would update General Condition 9 so as to prohibit contracts that automatically renew at the end of their initial term for additional periods from being offered to residential and small business providers by fixed and broadband communications providers. The ban will come into effect from 31 December 2011.

As I mentioned when Ofcom published its original proposals, I have mixed feeling about the change. It is always difficult to argue against ‘pro-consumer’ measures, but regulators need to be mindful of the costs imposed through sector specific regulation and need to be very clear about why their intervention is needed. Telecoms regulators exist because a number of market features (such as: network effects; high sunk costs; economies of scope, scale and density; scarcity of certain resources such as spectrum; etc) mean that telecoms markets tend towards sub-optimal outcomes without regulatory intervention. However, it is less clear that telecoms market have peculiar features that warrant sector specific regulation in the consumer protection area, and given that automatically renewing contracts can be found in multiple sectors I wonder whether Ofcom has decided to regulate this issue as much because Ofcom exists as a sector specific regulator, as because the issue needed regulating per se.

That said, despite my initial scepticism, in this case Ofcom does appear to have produced a justification for intervention although I can’t help wondering whether if the reasons stack up so clearly this should more properly have been passed across to the OFT to deal with on a wider basis?

The final area of interest in the statement is the growing influence of behavioral economics on regulatory decision-making apparent from Ofcom’s statement. This approach was criticized in negative responses from Sky and BT and it remains to be seen whether either party feels strongly enough about the issue to appeal. My instinct is that as the decision’s impact is less easily quantifiable than, for example, interconnection or access rate disputes, it may not be appealed and so we are perhaps unlikely to hear submissions on the merits of behavioral economics as a basis for regulatory decision-making. A little part of me thinks that is a shame – it would certainly provide some contrast from the more normal fare of cost allocation methodologies.

About Rob Bratby

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

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