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Executive summary

Background

1.1 Consumers of communications services (fixed voice, mobile, broadband and pay TV) have benefited from competitive markets which have helped reduce the headline prices of the services they purchase. However, Ofcom believes consumers need appropriate protection alongside the benefits of competition.

1.2 Consumers are sometimes 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 Many consumers are concerned about these types of charges. Ofcom has received a high level of complaints both directly from consumers and via their MPs. While non-direct debit charges have prompted the most public debate, we note that over the last six months Ofcom has had almost as many complaints about early termination charges. We have received complaints about a number of suppliers.

1.4 Some stakeholders are particularly concerned that some of these additional charges end up being paid to a disproportionate extent by those on low incomes who can least afford them. This is particularly true of non-direct debit charges. Some people on low incomes cannot pay by direct debit because they do not have a bank account, or do not want to pay by direct debit because that makes it harder for them to manage their finances.

General concerns

1.5 Ofcom’s concerns focus particularly around transparency and fairness of these additional charges. Many of these types of charges will not be at the forefront of a consumer’s mind when they are choosing their supplier. Consumers are naturally far less likely to take account of additional charges contained in detailed terms and conditions (the ‘small print’). There is a risk, therefore, that some of these additional charges are not constrained by competition, leaving it open to suppliers to set these charges in a way that does not reflect underlying costs and causes consumer harm.

Concerns about low income consumers

1.6 Even if charges are transparent and fair for consumers generally, Ofcom 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.

1.7 Stakeholders have also raised concerns about distributional effects – the fact that low income consumers pay more than higher income consumers. While we have considered these concerns, we note that more general issues around distributional effect are more an issue for government than Ofcom.

Ofcom’s guidance

1.8 This consultation includes Ofcom’s draft guidance on the fairness of terms providing for additional charges under the Unfair Terms in Consumer Contract Regulations (‘the Regulations’). The Regulations apply to terms in consumer contracts which have not been individually negotiated and are designed to protect consumers from terms which cause a significant imbalance in the rights and obligations of the parties to the detriment of the consumer.

1.9 In looking at the issues raised, Ofcom has considered the policy issues that arise, and whether these can be addressed using the Regulations. Our approach has been:

to consider whether there is a policy concern and consumer harm arising from each additional charge or contractual term;
to consider whether that harm is caused by unfair terms, within the meaning of the Regulations;
to assess whether clarity over the application of the Regulations may be expected to address the concerns identified; and
to consider other appropriate legal instruments to address any remaining concerns not addressed by the Regulations.

Overview of findings

1.10 In this consultation document Ofcom reports on its findings for each of the additional charges and contract terms which we have looked at. The full detail of the evidence we have considered and the reasons for our proposals are given in the detailed sections of this document. Our key findings are summarised below.

1.11 Ofcom believes suppliers of communications services need to do more to make sure consumers are properly informed and that additional charges and other contractual terms are set fairly and clearly explained at the outset. In particular:

they need to be clear and upfront with their customers 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 main service provided, suppliers must be able to demonstrate the charges are fair.
(Our views on the individual charges are set out in Figure 1.1 below.)

1.12 In order to ensure this happens, we will have an active programme of enforcement. We will also continue to monitor these issues – if there is evidence that our guidance is not having an impact we will look at these issues again.

Findings relating to low income consumers

1.13 Ofcom has identified two reasons why we might be concerned about low income consumers, even where charges are transparent and fair: first, access and inclusion; and second, more general concerns that low income consumers pay more for a wide range of goods and services.

1.14 Ofcom’s policy concerns regarding access and inclusion are, we believe, best addressed through targeted action to identify, and help, those at most risk of being excluded from essential services. Under the Universal Service Obligation (the ‘USO’), BT and Kingston Communications (‘Kingston’) in the Hull area, are required to provide social telephony products. Following discussions with Ofcom, BT will offer a new service – BT Basic – from mid 2008, which offers a low cost fixed voice service to those who are in receipt of certain Government benefits. BT Basic will not have a non-direct debit charge and, in contrast to previous social telephony products, will be available to consumers who have prepay mobile phones and / or broadband services.

1.15 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.

1.16 For low income consumers who use the phone a lot and do not qualify for BT Basic or the Kingston Social Access package the added cost is not so high that it is likely to exclude them from phone services.

1.17 Similarly, we do not consider that the level of non-direct debit charges is a significant factor in preventing low income consumers taking up broadband services. Ofcom recognises that broadband is increasingly becoming integral to participation and is rapidly evolving towards becoming an essential service. There may be a broader long term issue about the affordability of, and access terms for, broadband services for low income households. The current scope of the USO does not allow Ofcom to take action on this issue. The scope of the USO is ultimately determined at the EU level, where the USO issue is due to be discussed during 2008.

1.18 We also recognise that there are broader concerns about the fact that low income consumers often pay more than higher income groups. Ofcom considers that the extra amount paid by low income groups in non-direct debit charges in the communications sector is relatively small compared to the extra amounts low income groups may pay in other sectors. There are many examples across the economy of low income consumers paying more, for example:

charging different amounts according to payment method is widespread in the energy sector;
lack of access to cheap credit means low income consumers often pay more for many goods and services; and
insurance premiums will often be higher for those living in less affluent areas.

1.19 Ofcom would be happy to engage with government in looking at these issues in a wider context as we recognise that this is a factor in economy wide distributional questions.

Summary of Ofcom’s guidance on transparency and fairness

1.20 In relation to individual charges and contract terms we have looked at, the following table provides a high level summary of what we expect in terms of transparency and fairness.

Figure 1.1: Summary of Ofcom’s Guidance

Charge / contractual term	Transparency	Fairness
Non-direct debit charge A charge for consumers choosing not to pay by direct debit	Suppliers to do more to ensure consumers properly understand the charges they are paying. Headline prices (including any non-direct debit charge) should be very obvious to consumers within marketing material.	Where non-direct debit charges are not obvious (and so not part of the headline price) charges can be assessed for fairness. This would mean that only direct costs can be included. We do not consider this can include additional costs relating to bad debt. Where non-direct debit charges are obvious (and so are part of the headline price) it is competition, not regulation, which should determine the level of the charges and ensure that they are fair.
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	Information on late payment charges, payment failure charges and charges to restore service to be easily available and clear to the consumer at the point of sale.	These charges can be assessed for fairness. They should be directly related to costs incurred. We do not consider this can include additional costs relating to bad debt.
Initial minimum contract periods A minimum contractual period set at the start of a contract (often for 12 to 18 months) Early termination charges A charge for consumers who terminate their contract before the end of the minimum contract period	Suppliers to do more to ensure consumers fully understand their contractual commitment and that consumers understand what they will be charged if they terminate a contract early.	Early termination charges should never be more than the remaining payments under the contract. Early termination charges should be reduced below remaining payments where the supplier can save or mitigate their costs (for example, this includes wholesale charges and the costs of shared network assets).
Subsequent minimum contract period 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)	Information on the circumstances under which a new minimum contract period can be imposed should be easily available and clear to the consumer at the point of sale.	Subsequent minimum contract periods will only be fair where there is a clear benefit to the consumer and cost to the supplier. Examples where a subsequent minimum contract period would be unfair include: an upgrade to a package (which involves little or no cost to the supplier) at any time; a downgrade to a package (which involves little or no cost to the supplier) once the consumer is no longer in a minimum contract period.
Minimum notice period The notice period which a consumer must give their supplier before they can cease service or switch to an alternative supplier	Information on minimum notice periods to be easily available and clear to the consumer at the point of sale.	Minimum notice periods should not be longer than is necessary. For example, where there is an Ofcom determined or industry agreed migration process (designed to ensure that consumers taking services based on BT’s wholesale services can switch suppliers easily) minimum notice periods should match the migrations process.
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	Suppliers to do more to ensure consumers properly understand the charges they are paying. Headline prices (including any itemised / paper billing charge) should be very obvious to consumers within marketing material. It should also be made clear to consumers what they are getting for the charge (e.g. the difference between basic and fully itemised billing).	Where the transparency requirements are not met, itemised / paper billing charges can be assessed for fairness. This would require that only direct costs can be included. Where the transparency requirements are met, it is competition, not regulation, which should determine the level of the charges and ensure that they are fair.
Cease charges A charge for consumers ceasing their service (even where they are outside their minimum contract period)	Information on cease charges to be easily available and clear to the consumer at the point of sale.	Cease charges can be assessed for fairness. They should be directly related to costs incurred, such as wholesale charges.

Charge / contractual term

Transparency

Fairness

Non-direct debit charge

A charge for consumers choosing not to pay by direct debit

Suppliers to do more to ensure consumers properly understand the charges they are paying. Headline prices (including any non-direct debit charge) should be very obvious to consumers within marketing material.

Where non-direct debit charges are not obvious (and so not part of the headline price) charges can be assessed for fairness. This would mean that only direct costs can be included. We do not consider this can include additional costs relating to bad debt.

Where non-direct debit charges are obvious (and so are part of the headline price) it is competition, not regulation, which should determine the level of the charges and ensure that they are fair.

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

Information on late payment charges, payment failure charges and charges to restore service to be easily available and clear to the consumer at the point of sale.

These charges can be assessed for fairness. They should be directly related to costs incurred. We do not consider this can include additional costs relating to bad debt.

Initial minimum contract periods

A minimum contractual period set at the start of a contract (often for 12 to 18 months)

Early termination charges

A charge for consumers who terminate their contract before the end of the minimum contract period

Suppliers to do more to ensure consumers fully understand their contractual commitment and that consumers understand what they will be charged if they terminate a contract early.

Early termination charges should never be more than the remaining payments under the contract.

Early termination charges should be reduced below remaining payments where the supplier can save or mitigate their costs (for example, this includes wholesale charges and the costs of shared network assets).

Subsequent minimum contract period

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)

Information on the circumstances under which a new minimum contract period can be imposed should be easily available and clear to the consumer at the point of sale.

Subsequent minimum contract periods will only be fair where there is a clear benefit to the consumer and cost to the supplier.

Examples where a subsequent minimum contract period would be unfair include:

an upgrade to a package (which involves little or no cost to the supplier) at any time;
a downgrade to a package (which involves little or no cost to the supplier) once the consumer is no longer in a minimum contract period.

Minimum notice period

The notice period which a consumer must give their supplier before they can cease service or switch to an alternative supplier

Information on minimum notice periods to be easily available and clear to the consumer at the point of sale.

Minimum notice periods should not be longer than is necessary.

For example, where there is an Ofcom determined or industry agreed migration process (designed to ensure that consumers taking services based on BT’s wholesale services can switch suppliers easily) minimum notice periods should match the migrations process.

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

Suppliers to do more to ensure consumers properly understand the charges they are paying. Headline prices (including any itemised / paper billing charge) should be very obvious to consumers within marketing material. It should also be made clear to consumers what they are getting for the charge (e.g. the difference between basic and fully itemised billing).

Where the transparency requirements are not met, itemised / paper billing charges can be assessed for fairness. This would require that only direct costs can be included.

Where the transparency requirements are met, it is competition, not regulation, which should determine the level of the charges and ensure that they are fair.

Cease charges

A charge for consumers ceasing their service (even where they are outside their minimum contract period)

Information on cease charges to be easily available and clear to the consumer at the point of sale.

Cease charges can be assessed for fairness. They should be directly related to costs incurred, such as wholesale charges.

Consultation and next steps

1.21 Given the widespread concerns expressed about additional charges, Ofcom is consulting on the matter, including the draft Guidance, for ten weeks. Responses to the consultation are requested by 8 May 2008. See Annex 1 for details.

An Ofcom consultation on extra charges paid by customers to phone, TV and internet companies [pdf]
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