This statement presents our decision to amend General Condition 9 (-1-) (GC 9) in order to prohibit Automatically Renewable Contracts (ARCs also referred to as rollover contracts or rollovers) to residential customers and small businesses with no more than ten employees in the fixed voice and broadband sectors.
In communications retail markets, ARCs are those that, at the end of each minimum contract period (MCP), roll forward to a new MCP by default unless the customer proactively informs their Communications Provider (CP) that they do not wish this to happen. An MCP is a fixed period of time for which a customer commits to taking services from a CP. While under an MCP, a customer is usually subject to an Early Termination Charge (ETC) should they wish to end the contract.
Since they first became a prevalent feature of the residential fixed voice sector in 2008, we have been concerned that ARCs are damaging to consumers and competition in communications markets. We recognise that ARCs may have benefits for some consumers for example, those who wish to remain with their CP and who value the ability to move into a new minimum contract period unless they opt out. However, we believe these benefits are relatively limited and are outweighed by the costs.
Ofcom has been monitoring ARCs in UK residential and business fixed voice markets since they emerged, and we have carried out targeted research on their effects. While we have not carried out such specific research with respect to small businesses, we are confident that the results we have identified for residential ARCs customers can be extrapolated to small business customers. BT is the largest CP currently offering ARCs in these markets. Residential ARCs are also available from several smaller fixed voice CPs such as Adept Telecom, Eze Talk, italk and Axis Telecom, while TalkTalk Business, Titan Telecoms, and Optimum Calls offer ARCs to business users. We calculate that currently around 15% of UK residential fixed voice consumers are contracted to ARC packages. BT also offers ARCs in its residential broadband propositions.
Our research, in particular the econometric analysis that we commissioned on the switching behaviour of BT customers, indicates a clear causal link between ARCs and reduced levels of consumer switching. We believe this effect stems from the opt-out nature of the process for contract renewal and that any example of such a contract is likely to be harmful to consumers and to effective competition.
Our ARCs consultation document, published on 3 March 2011, set out our analysis in detail and presented proposals to prohibit ARCs for residential customers and small businesses with no more than ten employees in the fixed voice and broadband sectors. In this statement, we present and discuss the responses to the consultation that we received. The majority of respondents were supportive of our proposals, including both consumer groups and CPs. Two CPs opposed our proposals, and a number of others opposed elements of our proposals or analysis, but were generally supportive of our main proposals.
Having carefully considered all the consultation responses, we have decided to proceed with our proposed modifications to General Condition 9 to prohibit the opt-out mechanism in ARCs. This statement contains (at Annex 2) the formal notification of modifications to General Condition 9 to give effect to the prohibition of ARCs in the fixed voice and fixed broadband small business and residential sectors. The modifications incorporate some changes to the drafting which we have made in response to the comments of respondents, but the substance of the changes is as we proposed in the consultation document.
We recognise that the removal of ARCs from the markets in these sectors cannot happen overnight, particularly for the significant base of customers currently contracted to ARCs. We have noted the views of respondents who urged us to mandate an accelerated withdrawal, and also taken account of the practical considerations of withdrawal which requires changes to CPs systems. We want to ensure that the implementation is smooth and does not itself result in distortions to the market or disruption and inconvenience for consumers and business customers. Taking account of all these considerations, we have concluded that the following framework is appropriate for the withdrawal of ARCs:
For fixed voice and fixed broadband residential and small business ARCs the prohibition on the sale of new ARCs (-2-) will take effect on 31 December 2011. This means that the sale of new ARCs will be prohibited from that date.
To enable the orderly migration of the existing customer base, we are requiring that ARCs are completely removed from the market (i.e. all existing ARCs customers migrated) by 31 December 2012. We also expect CPs to be proactive in facilitating migration for existing ARCs customers during this period, and to take a flexible approach to ETCs for ARCs customers who wish to exit after the first MCP of their contract.
We recognise that, with respect to the prohibition of ARCs in relation to small businesses, it may, at times, be difficult for a CP to identify whether or not a customer has 10 employees or less. This is because CPs may not routinely collect or hold information about the number of employees of their business customers, and because employee numbers can fluctuate. Therefore we believe a flexible approach to compliance and enforcement is needed to ensure that the small business prohibition is not inappropriately targeted, and that the compliance burden is reasonable. We have included guidance on our approach to compliance and enforcement at Annex 3 of this statement.
1.- A General Condition is a regulatory condition that has been set by Ofcom and applies to all Communications Providers who have been defined in that GC.
2.- By new ARCs we mean the sale of ARCs to residential and small business customers who are not, as at 13 September 2011, in a contract with a Communications Provider where, at the end of that MCP the contract will automatically renew for a further MCP.
The full document is available below