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Additional charges

Background

At Ofcom, we believe that healthy competition is the best way to make sure consumers enjoy the benefit of new services and lower prices. If, for example, you have a phone at home, a mobile, broadband or pay TV, you’ll have seen their prices fall over recent years.

However, the main price you pay isn’t always the only price you pay. Sometimes, extra charges come into play, for a variety of reasons. Examples include:

if you choose to pay by cash or cheque, rather than using a Direct Debit from your bank (“non-direct debit charges”);
if you want a fully itemised bill, not just a summary;
if you pay late, or if your payment doesn’t go through (e.g. if your cheque bounces);
if you cancel a contract before the minimum period is up;
if you cancel a service even after the minimum period is up; or
if you stop taking a service, but still have to pay until the end of a notice period.

At Ofcom we’ve received many complaints about these small-print charges. A lot of these complaints have been about non-direct debit charges. We’ve had a lot of letters from MPs about this, and there have been a number of newspaper articles. However, we’ve also had complaints about other extra charges. In the last six months we’ve had almost as many complaints about charges when you cancel your contract early. We’ve had complaints about a number of different companies.

This doesn’t necessarily mean that firms are doing anything wrong, but it’s our job to make sure that companies play fair, and that ordinary customers know what to look out for.

We’ve also heard worries that these extra charges hit people with the lowest incomes. For example, they may not have a bank account and then have to pay more because they can’t set up a Direct Debit.

Why Ofcom might be worried

For consumers generally

When most of us choose a service, we’re looking at its key features such as what it costs each month, broadband speeds or handset details. But we’re far less likely to study the small print about terms and conditions. That’s why there’s a risk that the healthy competition that brings down the main advertised prices doesn’t have the same effect on those extra charges. It can also open the way for some companies to set unfair charges. Ofcom believes that consumers need appropriate protection alongside the benefits of competition to make sure:

companies make it clear what consumers might pay;
companies don’t set unfair charges.

For consumers on low incomes

Even if charges are transparent and fair, Ofcom may still be worried about low income consumers:

we’d be worried, for example, if consumers couldn’t afford a phone at home, just because of non-direct debit charges; and
we might be worried just because it seems wrong for consumers on low incomes to pay more than consumers on higher incomes.

Ofcom’s review

In June 2007 we began a review to look into extra charges. We wanted to know:

who is affected by them?
what do people think about them?
why do companies charge them in the first place?

Secondly, we wanted to know whether customers are being treated unfairly. If so:

would the charges be fair if people knew more about them?
can things only be fair if the charges come down?
are certain people being hit harder than others?

Thirdly, we wanted to know how the law can help solve any problems.

what legal rules apply to these types of charges?
how can Ofcom make sure companies play by the rules?

We have been looking at extra charges right across the board, rather than focusing on a particular type of service. We have also focused on the main charges that we believe worry customers the most, and we show these in the table below.

The charges featured in this review

Type of charge	What it means
“Non-Direct Debit charge”	An extra charge you may have to pay if you don’t pay your bills by Direct Debit.
“Late payment charge”	An extra charge you may have to pay if you don’t settle your bill on time.
“Payment failure charge”	A charge if your payment doesn’t go through (e.g. if your cheque bounces, or your bank refuses to pay your Direct Debit).
“Charge to restore service”	A charge to bring back your normal service if, for example, your phone was cut off or barred because you hadn’t paid a bill.
“Initial minimum contract period”	The minimum amount of time that you must stay with a particular service (often 12 to 18 months).
“Early termination charge”	A charge if you cancel a contract before it has run out.
“Subsequent minimum contract period”	A new minimum contract period, following an old one. This might happen if, for example, you choose a new broadband package with faster speeds; or switch to a phone plan with more free calls; or simply need to change the contract because you’re moving house.
“Minimum notice period”	The amount of warning you may have to give before you can cancel an agreement or switch to a new company.
“Itemised billing charge”	An extra charge if you want every call to be listed on your phone bill.
“Cease charge”	A charge you may have to pay for cancelling a service, even if it’s after the minimum period of the contract

What we’ve found

Here’s a summary of what Ofcom is proposing regarding these different kinds of extra charge.

In general

Ofcom thinks suppliers of communications services need to do more to make sure consumers are properly informed and that extra charges are set fairly and clearly explained at the outset. In particular:

companies need to be clear with their consumers and do more to make it easy for the consumer to understand the charges they pay and to compare between providers; and
for charges which are not part of the price for the main service, suppliers must be able to show the charges are fair.

For low income consumers

Ofcom has said there are two reasons why we might be worried about low income consumers, even if charges are transparent and fair: first, do they stop people having a service at all; and second, is it right if low income consumers end up paying more for things.

Ofcom ensures low income consumers have access to essential phone services via social schemes provided by BT (and, in Hull, Kingston Communications) which help make sure that having a phone is affordable for everyone. From mid 2008, BT will offer a new service – BT Basic – which offers a low cost service for home phone services to those who are in receipt of certain Government benefits. BT Basic will not have a non-direct debit charge and will be available to consumers who have a pre pay mobile phone and broadband services. Ofcom is currently discussing with Kingston the possibility of Kingston changing its pricing for its Social Access package so there is a single price irrespective of the payment method. For low income consumers who use the phone a lot and do not qualify for the social schemes the added cost is not usually so high that it is excluding people from phone services.

Those kinds of social schemes don’t currently extend to broadband services and Ofcom recognises that access to broadband for low income consumers is something we will need to think about further in future.

We also recognise that there are wider concerns around the fact that low income consumers often pay more for essential products and services than higher income groups. There are many examples of this, for example:

charging different amounts according to payment method is very common for gas and electricity;
low income consumers pay high interest charges if they want to borrow money; and
insurance is often higher for people living in less well off areas.
The fact that people on low incomes often end up paying more for a wide range of things is not something that Ofcom can solve on our own. We believe that this is also an issue for Government and Parliament.

Charges if you don’t pay by Direct Debit

Customers have told us:

it is wrong for companies to charge them extra if they choose to pay their bills by cash or cheque. They also feel this hits people on low incomes who, in particular, can’t afford it.
customers often don’t know these extra charges even exist.

The companies have told us:

Direct Debit is a cheap way to collect their money automatically. It costs them more if customers choose other ways to pay (even if they pay promptly);
many customers will pay late without an automatic system doing it for them. This in turn costs extra money when companies have to chase payments and send out reminders; and
customers who don’t pay by Direct Debit are more likely to end up not paying at all, and that the debts they leave should be spread over the other customers who avoid Direct Debits. However, Ofcom does not accept that bad debts should be lumped in with the cost of handling payments.

Ofcom has found that both sides have strong feelings on the subject. In turn, we believe that:

companies must be clearer on what customers will actually pay. When they advertise prices, it must be obvious what any extra charges for paying by cash or cheque will be. Customers can then shop around and compare, with charges brought under the spotlight of healthy competition;
if a company doesn’t make it obvious in its advertisements what the different charges for different ways of paying are, any extra charges must relate to direct costs only. They should only include the company’s extra costs of collecting normal payments – and not, for example, chasing bad debts. Ofcom will make sure our rules for fair charging are followed.
However, where extra charges are made obvious in the advertised prices, normal competition – and not Ofcom - will decide how much they will be. We are expecting companies to make their advertising and brochures much clearer. Customers will then have the facts to know who to choose and exactly what they’ll pay. If companies fail to be clearer, we may need to investigate further and make sure their charges fairly reflect genuine extra costs.

We will be keeping a close eye on this situation as it develops. If we do not feel that companies are being sufficiently clear – or if there’s a large rise in these charges – we will review the subject again.

Charges for late payments, failed payments, and switching normal services back on.

Customers have told us that:

they’re worried that they can be hit with extra charges when they pay late. Often, they feel this happens before they’ve had a fair chance to pay the bill;
they feel the charges are too high; and
often, they don’t even know they risk these charges in the first place.

Companies have told us that these charges encourage people to pay on time. They also say that these charges are only paid by the people likely to cost the company money, rather than spreading them across the ‘good’ customers who pay on time.

These costs include:

sending out reminder letters or making calls to customers to remind them to pay;
administrative costs when a cheque or a Direct Debit doesn’t go through;
interest, because the company is getting its money later than it should; and
the industry costs that a company has to pay if it takes away part of a customer’s service, and then returns it to normal later. (For example, only allowing incoming calls on a phone until a bill has been paid).
Some also say that customers who pay very late, or whose payments don’t go through, are more likely to end up paying nothing at all. They say the extra costs of bad debt should be spread among these ‘riskier’ customers. However, Ofcom does not accept that bad debts should be lumped in with late or failed payments.

Ofcom believes that:

companies need to make their customers much more aware that they risk these extra charges;
a charge should only be made if the customer has had a fair chance to pay the bill;
these charges are not part of the advertised price, and should only reflect the true extra cost of collecting money;
fair charges are especially important to customers on low incomes; and
general costs of bad debt should not be included in setting late payment charges.

Looking at typical costs, many companies are playing fair, but our findings may lead to some companies cutting their charges. However, the principles we’ve set out would stop all companies making unfair charges in the future.

Minimum contract periods and charges for cancelling a first contract

Customers have told us that:

they don’t see why they should be locked in to a contract for a fixed-line phone at home, or pay extra charges if they want to cancel early. However, they can see the reasoning better for a minimum period when, for example, they receive a free mobile handset; and
they’re often not aware that fixed-line phones come with a contract, although more people expect one with a mobile.

Customers are more split about whether being locked into a contract for broadband and pay TV is reasonable.

The companies say that they ask you to agree to a minimum term so they can get back some of the money they’ve spent to sign you up. These costs may include:

the cost of free or cheaper equipment, such as a mobile handset, a broadband modem or a satellite dish;
the cost of free or cheaper installation, such as putting a satellite dish on your roof or connecting you up to cable; and
industry costs which the supplier has to pay when they take you on as a new customer.

By charging you for cancelling early, companies believe you’ll want to stay with them for the minimum period. If not, they can at least get back any costs that your monthly payments haven’t yet covered.

We accept the idea that minimum contract periods can help spread those upfront costs, although early cancellation charges should not be higher than they need to be. These charges can add to the cost of switching companies and, in the process, harm healthy competition. We believe that:

companies must be clearer. Their customers must know what they’re signing up to, and the costs they must pay if they choose to break the deal;
a customer should never have to pay more than the payments left on his or her contract;
companies should not make more money from a customer who cancels early than from one who stays to the end of the period. If a supplier saves money or can take action to save money when a customer stops taking the service, these savings should be used to cut the charges for cancelling early; and
companies can only work out charges based on the basic contract the customer has signed. They cannot include possible profits from other services the customer can purchase from the supplier.

These rules particularly affect the cancellation charges for phone, mobile and internet services. We believe the costs of cancelling early should come down significantly in many cases.

Separately to this, some consumers may feel that if they have had very bad service, they should be able to cancel without paying any sort of charge. These kinds of cases can only be considered case by case. If the customer and the company cannot agree, the customer can take the dispute to the Alternative Dispute Resolution (ADR) Scheme of which the company is a member (currently there are two ADR Schemes - Otelo and CISAS).¹

Minimum contract periods, and early cancellation charges for a contract you’ve extended

Customers sometimes find that if they change their contract in any way, they can face an extra minimum contract period (and another set of cancellation charges). This can happen:

when you move house;
when you want to move to another package (e.g. a different mobile phone plan, a different broadband speed or a different pay TV package);
when you want to combine several services from one supplier; and
when you want a new mobile handset.

At Ofcom we think that an extra minimum contract period may be fair when companies have to lay out more money in advance. However, this should only happen when customers are clearly getting a benefit for it. If not, the charges act as a barrier to switching companies.

We believe that:

companies must make it very clear in the information they provide to consumers when they sign up, why they may insist on a further minimum contract period at some point in the future;
an extra minimum contract period is only reasonable when there are clear benefits to the customer, and costs to the provider;
the length of an extra minimum contract period should be proportionate to the additional costs faced by the provider;
any new cancellation charges should be based on the same rules about fairness as the first contract;
extra minimum contract periods are not acceptable when a customer is upgrading to a new package (which costs the providers little or nothing); and
extra minimum contract periods are not acceptable when a customer is downgrading to a new package (which again costs the providers little or nothing). This assumes the customer has completed an initial minimum contract period.

This would mostly affect customers with fixed-line home phones and broadband services. They would have more freedom to change their package with their supplier without having to worry about another minimum contract period.

Minimum notice periods

Some companies insist you give them a period of notice before you switch to a new provider.

Ofcom has found that:

only a few customers think that having to give notice to their network or provider is fair;
in fact, more than 40% of customers told us that even a one-month notice period is a barrier to switching to another company;
most customers don’t know that minimum notice periods may apply to them. This is very often the case for fixed-line home phones;
however, we have not received many complaints directly from consumers.

Ofcom accepts that providers need time for administration if a customer chooses to leave. However, we believe that:

companies must make it very clear, in the information they provide to consumers when they sign up, what the minimum notice period is;
if there is an industry (or Ofcom led) process to move customers from one company to another, the notice period should not be any longer than that process needs; and
if there isn’t an industry process in place, we would not expect to investigate a notice period of one month or less.
We believe customers can expect notice periods to shorten, particularly for broadband services where one month’s notice may come down to around 7 days.
If notice periods are not closely linked to industry processes, customers may risk paying twice for a service (or being without a service at all). People on low incomes are the least able to pay extra costs, and it is vital that minimum notice periods are as short as possible.

Charges for itemised billing

Customers have told us they don’t think it’s fair they should pay an extra charge to receive a bill that lists all of their calls (an ‘itemised’ bill). They’re also confused about which companies make this charge, and which don’t. However, we have not received many complaints directly from consumers.

On the other hand, the companies tell us it costs them more to produce a fully itemised paper bill, compared to a basic summary bill or a bill they can send online. These costs include extra paper and postage.

Ofcom believes that:

companies need to be better at telling customers about any extra charges for itemised bills;
they should remind customers of the alternatives such as free online billing;
companies should explain why there’s a charge, showing the difference between a summary bill and an itemised one; and
if companies fail to be clear from the beginning, they can’t argue that itemised billing is part of the price they advertise for their service. We may then need to investigate that their charges are a fair reflection of the extra costs they run up.

Having looked at typical charges (in summer 2007), and the true costs to the companies, we do not believe customers are in general being hard done by – assuming, of course, that they’re fully aware of these charges. The principles we’ve set out will stop companies acting unfairly in the future.

These charges mostly crop up with contract mobile phones. Since most people on low incomes choose pay as you go services, this issue doesn’t particularly affect customers who are harder up.

‘Cease’ charges

If a customer decides to cancel a broadband service (and doesn’t plan to switch to a new company which also uses BT’s network) they may receive a ‘cease’ charge. This even applies if they have completed their contract. The company is passing on a charge which they have to pay, to BT Openreach.

We have not received many complaints directly from consumers. Nonetheless, Ofcom believes cease charges can be a barrier to switching companies and, therefore, can harm competition. We believe that:

companies must make it very clear in the information they provide to consumers when they sign up, what the minimum notice period; and
if a company makes a cease charge, it should closely reflect the charge they have to pay BT Openreach.

Ofcom’s guidance

All companies that use standard contracts for private customers must obey the Unfair Terms in Consumer Contracts Regulations 1999 (‘the Regulations’). This is a piece of general consumer protection law and is designed to make sure that terms and conditions are clear and fair.

The job of making sure the Regulations are followed is shared by the Office of Fair Trading (OFT) and a number of other bodies including Ofcom. The OFT has published guidelines based on its experience of enforcing the Regulations.

Ofcom is going to publish guidance, which will set out our views on issues we’ve covered in this booklet. This will explain what the Regulations mean in practice for companies who provide communications services, for the particular extra charges we have reviewed here. This will help those companies understand where we are likely to take action, and why. The guidance will work alongside the OFT’s own guidance, rather than replace it.

If we need to take action against unfair terms, we would do so under the Regulations, or the Enterprise Act, or both. If we find a business breaking the rules, we may accept an assurance that it will not be repeated. If this does not solve the problem, Ofcom can take legal action. We recognise that the final decision on whether a term is unfair or not is a matter for the courts.

We will continue to watch these issues closely. In particular, we expect to come back to the issue of extra charges for customers who do not pay by Direct Debit, and consider the impact our action has had.

Our consultation: how to take part

Because of the widespread concern about extra charges, we are holding a consultation on the issues raised in this booklet, and the Ofcom guidance, for a period of ten weeks.

We would welcome your views. Please e-mail them to us at: additional.charges@ofcom.org.uk

If possible, please attach your response as a Microsoft Word document. Please also attach the response cover sheet, which you can download separately from the ‘Consultations’ section of our website at: http://www.ofcom.org.uk/consult/244504/

You can also post or fax your response, marked ‘Additional Charges - Consultation’ to:

Sarah Evans
Consumer Policy Manager
Ofcom
Riverside House
2A Southwark Bridge Road
London
SE1 9HA.

Fax: 020 7981 3706

The closing date for responses is 8 May 2008, at 5pm.

To simplify the process, we do not usually acknowledge that we have received your response.

We think it is important that anyone interested in our consultation can see the views we receive. For this reason, we will put all responses on our website when the consultation period is over. We will treat your response as confidential only if you ask us to.

Any general comments?

We also welcome any comments you may have on the way we have organised this consultation process. Please contact:

Vicki Nash
Ofcom ( Scotland)
149 St Vincent Street
Glasgow
G2 5NW.

Phone: 0141 229 740
Fax: 0141 229 7433
E-mail: vicki.nash@ofcom.org.uk

After the consultation: next steps

Depending on the results of our consultation, Ofcom aims to:

publish final guidance by autumn 2008, together with a statement explaining our views and actions. We will then allow three months for companies to bring their contract terms and marketing material into line with the guidance. However, we expect changes to be made as soon as possible, and companies to stop using unfair terms straight away; and
publish a checklist for customers on what to look out for before they sign on the line.

Footnotes

The ADR Schemes make a fair and impartial decision about the dispute between the company and the customer. Depending on the circumstances of the matter, the ADR Scheme may order the company to fix the problem and, if needed, pay compensation. You should find details of the company’s ADR scheme on the back of your phone bill, in the company's Complaints Code of Practice or available from the company’s customer services staff.
Unfair contract terms guidance (OFT311, http://www.oft.gov.uk/advice_and_resources/resource_base/legal/unfair-terms/guidance)