OFCOM Case Study 2: Renewable Contracts

Renewable Contracts – OFCOM Statement 13 September 2011

Ofcom’s 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

Background

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, Ofcom has 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 has 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.

Economic Evidence

Econometric analysis on the switching behaviour of BT customers, indicated a clear causal link between ARCs and reduced levels of consumer switching. 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.

 

 

 

 

 

 

 

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