Friday, 4 January 2013

Ofcom sets out proposals to tackle mid-contract price rises

‘Exit without penalty’ rule proposed to better protect consumers

 Ofcom has today launched a consultation on how to protect consumers from price rises during fixed contracts for landline, broadband and mobile services.

Of the options put forward, Ofcom’s proposed approach is to intervene to allow consumers to exit their contract without penalty if their provider introduces any price increase during the term of the contract.

Alongside this, Ofcom would expect providers to be clear and upfront about the potential for price increases and of the consumer’s right to cancel the contract in the event of any price increase.

The consultation follows an Ofcom review into the fairness of certain contract terms.

This review and Ofcom’s analysis of consumer complaints has identified issues concerning the clarity and effectiveness of current rules* which has led to consumer harm.

  • *Under current Ofcom rules (General Condition 9.6), communications providers are required to give customers a minimum of one month’s notice of any change to their contractual terms that is likely to be of ‘material detriment’ and customers must be able to withdraw from their contract without penalty following such notice.

Ofcom’s proposed approach

All communications providers must follow a set of Ofcom rules called General Conditions. Ofcom proposes to modify one of these rules (General Condition 9.6) to allow consumers to withdraw from a contract without penalty, if providers increase prices during the contract term.

While it would allow communications providers to increase prices during a fixed-term contract, consumers would be free to leave the contract if they did not wish to accept the rise.

This proposed change would address consumer concerns that it is unfair that providers are currently able to raise prices, while they themselves have little choice but to accept the increase or pay a penalty to exit the contract. Under the current rules, the exception is where a provider agrees that the price increase would be likely to cause ‘material detriment’.

Ofcom would also expect providers to be transparent about the potential for price increases so consumers can make an informed choice when entering the contract.

Other options for consultation

The consultation also considers three other possible approaches to address price rises in fixed term contracts.

One option considers whether consumer harm could be addressed solely by tackling the current lack of transparency around the potential for price increases. This is considered alongside the possible need for guidance on how providers should interpret and apply both Ofcom rules and general consumer protection laws when making price increases.**

A further option considers whether consumers should have to actively ‘opt-in’ to any variable price contract. Ofcom also considers the implications of maintaining the status quo.

At this time, Ofcom’s view is that these three options are unlikely to be sufficient to address the consumer harm identified. Ofcom’s reasoning for this provisional view is set out in its consultation.

A complete ban on price rises in fixed contracts has also been considered. However, Ofcom does not think this would be consistent with the European legal framework, so it is not presented as an option for consultation.
  • **To date, Ofcom has not issued any guidance on what is likely to constitute ‘material detriment’, leaving it for Communications Providers to consider the matter on a case by case basis. This has resulted in different interpretations of what constitutes ‘material detriment’ by providers and when the obligations under General Condition 9.6 are triggered.

Consumer Complaints

During the course of its review, Ofcom examined 1,644 consumer complaints made to the regulator about changes to terms and conditions during the period September 2011 to May 2012. The analysis shows many consumers complained that they were not made aware of the potential for price rises in what they believed to be fixed contracts.

Some consumers felt that communications providers should not be able to impose price increases during the life of a contract, and, if they do, the consumer should be able to exit the contract without penalty. Others complained specifically about the amount of the price increase and how it would affect them.

Claudio Pollack, Ofcom’s Consumer Group Director, said: “Many consumers have complained to us that they are not made aware of the potential for price rises in what they believe to be fixed contracts.

“Ofcom is consulting on rules that we propose would give consumers a fair deal in relation to mid-contract price rises.”

Next Steps

Ofcom is inviting stakeholders’ views on all the options put forward for consultation to address this issue.

The consultation closes on 14 March 2013 and Ofcom expects to publish a decision in June 2013.

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