Ofcom bans phone companies' automatic rollover contracts

Ofcom said that telecoms firms will be banned from selling new automatically renewable contracts (ARCs) for broadband and landline phone services to consumers and small businesses with no more than ten employees from 31 December this year. Consumers on existing rollover contract deals will have to be "migrated" to new terms by 31 December 2012, the regulator said.

ARCs, or rollover contracts, sign users up to subsequent contract periods once a first contract period ends unless the telecoms operator is asked by the users not to. These subsequent contracts have fixed terms and penalties for leaving early, Ofcom has previously said.

Under the Communications Act Ofcom has the power to set conditions that network providers must abide by in order to operate. Ofcom said it had changed its general conditions to prohibit providers from renewing consumer and small business contracts following an "initial commitment period" without first obtaining their consent.

Ofcom said it has had concerns that ARCs harm consumers and competition.

"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," Ofcom said in a statement.

"We recognise that ARCs may have benefits for some consumers for example, those who wish to remain with their CP [carrier provider] 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," the statement said.

Ofcom said that it has monitored the use of ARCs and "carried out targeted research on their effects". The researched revealed that approximately 15% of consumers of landline phone services are contracted via ARCs, and that BT is the largest provider of these contracts, the regulator said. BT also offers ARCs to consumers who buy broadband packages from it, Ofcom said.

"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," Ofcom said in its report (69-page / 411 KB PDF) on ARCs.

"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," the report said.

BT said it was "disappointed" that Ofcom had decided to ban ARCs.

"Our customers tell us they are happy with the discounts offered by these contracts and we don’t believe there is any evidence that they damage competition, given that the UK telecommunications market is amongst the most competitive in the world," BT said in a statement.

"We have worked hard to make sure that customers understand what they are signing up to, including how the renewal works and the charges that apply if they choose to leave early.  In exchange for these terms, customers receive a significantly lower price, and as the renewal date approaches we contact them to give them 30 days notice to end the contract without charge," the statement said.

"Although the ban does not come into force until December 31, we will not be selling any new renewable contracts to residential customers from now on," BT said. "We will be letting existing customers know over the next few months what BT can offer as an alternative and we’ll aim to maintain the low prices we offer wherever possible, if customers want to stay with BT.  In the meantime, contracts which come up for renewal between now and December 31, when the change takes effect, will renew in the normal way unless customers tell us they want to end the contract when they receive their reminder letter," BT said.

"Customers and consumer groups will welcome Ofcom's decision", said Claire McCracken a technology law specialist at Pinsent Masons, the law firm behind Out-Law.com.

"Customers are often not aware that their contracts have renewed and they are subsequently hit by cancellation charges, which are seen as being unfair. Many don't understand the terms and conditions that they have signed up to at the time of contracting. Ofcom's decision will hopefully lead to greater transparency and more information being made available to customers at the point of sale", said McCracken.

Ofcom's decision to prohibit some ARC-selling followed initial proposals it made in March as part of a consultation on the issue. The regulator said that the "substance" of the changes it had proposed would be made and that all but BT and Sky had backed its plans.