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Executive Summary

Introduction

1.1 No one likes surprises when it comes to bills and charges. When consumers sign up for a service, they should have all the facts at their fingertips to know what it will cost – and what, if anything, might increase those costs or change the rules. And, any extra charges must be fair.

1.2 We believe that healthy competition is the best way to make sure consumers enjoy the benefits of new services and lower prices. However, sometimes, consumers are required to pay additional amounts of money (‘additional charges’), over and above the headline prices they expect. For example, they may pay more in order to pay bills by cash or cheque, rather than by direct debit (through a ‘non-direct debit’ charge). Other examples include: paying an early termination charge to terminate a contract early; or paying extra to receive a fully itemised bill.

1.3 Ofcom has received many complaints about these additional charges. For example, we have had letters from MPs about extra charges for people who don’t (or can’t) use Direct Debit (DD). We also have received complaints from consumers who have been charged for cancelling a contract early.

1.4 An extra charge is not necessarily an unfair one. However, it is Ofcom’s job to make sure that suppliers play fair, and that consumers know what to look out for.

1.5 Ofcom launched a review of additional charges in June 2007. We published a consultation document setting out our findings in February 2008 and requested responses by 8 May 2008.

Additional charges and the law

1.6 Ofcom’s task has been to look at the law that is designed to protect consumers (the Unfair Terms in Consumer Contract Regulations 1999, or ‘the Regulations’) and say how this applies to some terms and charges in contracts for communications services between suppliers and consumers.

1.7 This statement sets out our consideration of, and response to, consultation responses on draft guidance we proposed about the way the Regulations apply and is accompanied by our final guidance.

1.8 The guidance aims to make sure that suppliers are aware of, understand and comply with their obligations under the Regulations. It sets out what Ofcom considers those obligations to be and the approach we expect to take in performing our obligations and exercising our powers under the Regulations. We expect that this guidance (together with Ofcom’s enforcement activity) will help give consumers appropriate protection alongside the benefits of competition.

1.9 If suppliers do not comply, we can take action against them. We will monitor complaints and examine suppliers’ terms to see whether they are consistent with our view of the law as set out in the guidance. Where they are not, we will consider the best way to enforce the Regulations, including taking the necessary formal enforcement action using our powers under the Regulations and/or the Enterprise Act 2002. We expect to start doing so three months from the date of publication of this statement (plus 2 weeks, to allow for the Christmas period).

Low income consumers

1.10 The Regulations seek to ensure that the small print in contracts between suppliers and consumers is generally transparent and fair. That is what our guidance is about. The Regulations do not explicitly distinguish between types of consumer – so do not treat low income consumers any differently to other types of consumer.

1.11 However, even if charges are transparent and fair for consumers generally, we may still have concerns regarding access and inclusion for low income consumers – non-direct debit charges (or other additional charges) might exclude some consumers from access to essential services, for example.

1.12 Our primary concern for low income consumers is currently fixed telephony services. They are recognised as being important for social inclusion, as reflected in the Universal Service Obligations (USO) for BT and Kingston and their social telephony schemes. Following our consultation:

• BT launched BT Basic in October 2008, which does not have a non-DD charge; and
• Kingston removed the non-DD charge from its social telephony products.

1.13 For those low income consumers not eligible for social telephony schemes, we believe competition and consumer choice (shopping around) will provide the appropriate protection. We are aware that since we published our consultation document at least one major supplier has removed its non-DD charge for all consumers.

1.14 We also recognise that there is a growing concern regarding access to broadband services. Ofcom will engage with UK Government and European institutions on whether there may be a case to extend the application of the USO to broadband services.

1.15 More generally across the economy, we are aware there are numerous examples of how low income consumers end up paying more for essential products and services. These wider concerns around distributional effects are more an issue for government than Ofcom and our guidance about the Regulations.

Advice for consumers

1.16 Alongside this statement, Ofcom has published a guide for consumers, offering advice on the type of charges to look for before signing up to a new communications service or provider. It includes information on what consumers can do if they think they have entered into a contract with an unfair term or charge.

Ofcom’s decision

1.17 Ofcom has found that suppliers could be doing more to alert consumers to possible additional charges and to make those charges fair. In particular:

• consumers need to understand the charges they pay; and
• for charges which are not part of the price for the services being bought, suppliers must make sure they are fair.

1.18 The following table is a summary of the decisions we have made, and the final guidance we are issuing, in light of our consideration and analysis of stakeholders’ views. Where we state a view, it reflects what we consider the position under the Regulations is likely to be. We recognise that only the courts can decide whether a term is unfair under the Regulations.

1.19 We are, of course, aware that certain issues under the Regulations are the subject of ongoing court proceedings between the OFT and a number of banks and a building society, and that the courts may give judgments that are relevant to our guidance. We will consider whether our guidance – which we envisage will in any case be reviewed from time to time – needs to be amended in light of any judgment(s) if and when they are issued.

Charge / contractual term	Ofcom's final decision
Non-direct debit (non-DD) charge A charge for consumers choosing not to pay by direct debit	Non-DD charges may be core terms exempt from the Regulations fairness test. In order to be likely to be considered a core term, the non-DD charge must be presented in plain intelligible language, with due clarity, prominence and transparency, so the typical consumer would regard it as part of the price he is paying for the services he is buying and not a separate, incidental additional charge. Where they are non-core terms, the fairness test applies and is likely to mean the charge should reflect only causally related costs, not others like bad debt costs. The final guidance makes clear how we consider it may be fair to calculate and apportion the costs recoverable in what we consider a likely fair non-DD charge.
Late payment charge A charge for consumers who pay late (i.e. beyond the invoice due date) Payment failure charge A charge where the payment method fails (e.g. a direct debit payment fails or a cheque bounces) Charge to restore service A charge for consumers who have had service restricted due to non payment (for example, having outgoing calls barred), who now wish to resume full service	These charges will not be core terms and are subject to the Regulations fairness test. Such terms are likely to be unfair where they seek to recover costs other than those directly incurred by the supplier as a result of the relevant default event/matter (e.g. late payment charges should seek to recover the limited administrative costs of chasing and collecting late payments). Consumers who are disputing an element of their bill with their supplier and who subtract the disputed amount before settling their bill, should not face late payment charges for doing so.
Initial minimum contract periods (MCPs) A minimum (fixed term) contractual period set at the start of a contract (often for 12 to 18 months) Early termination charges (ETCs) A charge for consumers who terminate their contract before the end of the minimum contract period	MCPs are likely to be core terms and we would expect them to be transparent and prominent (failing which they may be assessed for fairness under the Regulations). Terms providing for ETCs will not be core terms. We consider that an ETC is likely to be fair where: the terms providing for it are transparent at the point of sale with sufficient prominence that the consumer is fully aware of the consequences of terminating early, and what the level of the ETC would be; it is never greater than the amount of the (usually monthly) contractual retail payments remaining due at the date of termination; it also takes account of any costs associated with the provision of the service which will no longer be incurred by the supplier, including any: variable costs which can be avoided; and costs of shared network elements which the consumer is no longer using, and which can be used to provide services to another consumer (whether a new customer or increased demand from an existing customer); and it reflects any ability of the supplier to reduce its loss by reselling the service to a new consumer; and it makes allowance for the suppliers accelerated receipt of any sums. We also set out in the final guidance that there is an alternative basis on which, in our view, a likely fair ETC may be recovered: the recovery of a suppliers unrecouped expenditure on the early terminated contract. But this may not be greater than the amount calculated as set out above.
Subsequent minimum contract period (SMCP) A clause providing for a new minimum contract period (or extension to an existing minimum contract period) for existing consumers wishing to change their service in some way (e.g. changing their service package, or moving house)	There may be some circumstances where a consumer agrees to new terms and services and a new contract arises between the supplier and the consumer - on new terms - in which the MCP may be a core term. However, SMCP terms are likely to be non-core terms. SMCP terms may be fair where: the terms explaining the events (such as a decision to upgrade), that will trigger a requirement for a SMCP are transparent to consumers within the contract at the point of sale; the terms set out that the supplier will make it very clear to the consumer that the event (such as a decision to upgrade) will trigger a new MCP, and the length of that new MCP, at the point that the consumer is considering the change (for example, the term says the supplier will write to the consumer stating when changes to the services will result in a subsequent MCP); and the costs incurred by the supplier and the benefits to the consumer in relation to the subsequent contract are commensurate with the subsequent MCP. Terms providing for the automatic renewal of the MCP on its expiry raise some concerns and should not have the effect of consumers being subject to unintentionally long and recurring contracts. However, they will not always be legally unfair.
Minimum notice period (MiNP) The notice period which a consumer must give their supplier before they can bring their contract to an end	MiNP terms are unlikely to be part of the main subject matter of the contract and are likely to be non core terms. A term providing for an MiNP is likely to be fair where the MiNP is: transparent to consumers within the contract at the point of sale; and reflects a reasonable period in which to carry out the necessary administration of terminating the contract. We consider likely fair MiNPs should be no longer than the period reasonably necessary for the administration connected with the termination of the contract: for fixed voice and broadband services that reasonably necessary period should be no longer than the formal migration process; for mobile, and in any sector where no formal migration process applies, the period should be no longer than reasonably necessary for the required administration (and this should be no longer than 30 days or one calendar month and likely much less).
Itemised / paper billing A charge for consumers wishing to receive a full call by call itemisation of the calls made, rather than a summary, or who want to receive a paper rather than an on-line bill	Billing charges may be considered core terms in cases where they are presented in such a way that the typical consumer would regard them as part of the price he is paying for the services he is buying, not a separate, incidental additional charge, and be aware of the level of information or billing which is provided. This is likely to be so where: the contract term and any marketing material makes clear in a prominent manner whether there are any separate billing options for which there are different charges; any such information clearly sets out what these options are, together with the price for each option (including whether the options are related to charges or discounts for receiving printed or Internet bills, and/or for different levels of billing information); where there are different levels of billing information which incur different charges, the contract terms clearly set out what level of billing information is provided under each option; and the contract terms and the marketing material set out the required information in such a way that the consumer who chooses itemised billing would regard that as part of the services he is buying under the contract. We consider it may be fair for a supplier to include in these charges the reasonable additional costs it incurs which are directly attributable to the level of billing provided. We confirm our administrative threshold (of 1.50 per bill) relating to these charges. However, the threshold is subject to review and may - for example - be changed if there is increasing evidence of consumer harm in relation to these charges.
Cease charges A charge for consumers ceasing their service (even where they are outside their minimum contract period)	Terms providing for cease charges are unlikely to be core terms. Such terms are likely to be fair where they are transparent to consumers at the point of sale and reflect only direct costs associated with ceasing service.

• Statement: Ofcom's Review of Additional Charges [pdf]
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