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Rollover contracts with leaving penalties to be banned, says Ofcom

Telecoms firms will be banned from automatically signing customers up to renewed contracts with minimum contract periods, telecoms regulator has said. It said that 15% of home phone users are tied into such contracts.10 Mar 2011

BT and a number of smaller providers operate such contracts but this must stop, Ofcom has said in a consultation proposing a change to its rules on contract terms.

Automatically renewable contracts (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, according to Ofcom. It said that they should be banned because they are unfair to customers and damage competition in the home telecoms business.

"We are concerned that ARCs are damaging to consumers and competition in communications markets," said the Ofcom consultation (71-page / 443KB PDF).

"We have identified two types of harm to consumers: a direct effect coming from the potential for ARCs to increase individual consumers’ exposure to switching costs (in the form of an [early termination charge]) and an indirect effect coming from the potential for ARCs to lessen competition in the market, thereby reducing the pressure on firms to lower prices, and improve quality for all consumers," it said.

Ofcom said that it had conducted research linking ARCs with a reduction in levels of customers changing providers.

"Our research, in particular the expert econometric analysis that we have commissioned, indicates a clear causal link between ARCs and reduced levels of consumer switching," said the paper. "Furthermore, it shows that the effect is separate from the impact on switching levels of other factors such as price discounts. We believe this effect stems from the opt-out nature of the process for contract renewal, rather than a lack of transparency surrounding ARC terms or the complexity of the process for opting out."

"Because it stems from such a core aspect of ARCs this indicates that any example of such a contract is likely to be harmful to consumers and to effective competition," it said.

It said that it proposed to make a change to General Condition 9 to ban minimum contract periods that are automatically entered into unless a customer opts out of them.