What? Ofcom has announced that it will prohibit automatically renewable contracts for residential and small business customers in the fixed voice and broadband sectors.

So what? Automatically renewable contracts ("ARCs") add a new minimum contract period ("MCP") to the term of the contract at the end of each MCP if the customer does not inform the provider that he or she wants the contract to expire at the end of the MCP. The customer is usually expected to pay an early termination charge to end the contract before the current MCP has expired.

Ofcom estimates that about 15 per cent of all fixed voice contracts in the residential sector are ARCs. Econometric analysis commissioned by Ofcom suggests that ARCs have a harmful effect on competition as the early termination charges disincentivise consumers from switching providers.

Ofcom will therefore amend its General Condition 9 to prohibit the ARC renewal mechanism, which requires customers to opt out of the renewal. The prohibition applies to fixed voice and broadband contracts with residential customers and small businesses with no more than ten employees.

The research undertaken by Ofcom only relates to the residential market but Ofcom believes that the results are equally relevant for small businesses.

The prohibition will be phased in with new ARCs being prohibited from 31 December 2011. Providers will then have until 31 December 2012 to migrate all their customers who are in ARCs to other contracts. Ofcom expects providers to be proactive in facilitating this migration and encourages providers to be flexible on the early termination charges for customers who have already completed their first MCP.

Ofcom is aware that providers will often have no information on the precise number of employees of their small business customers and is therefore proposing a flexible approach to enforcement to ensure that the compliance burden is reasonable.

Industry response

In March 2011, Ofcom published a consultation paper proposing the prohibition of ARCs. Responses were largely in agreement with Ofcom's findings, with Sky and BT being the chief exceptions.

Sky's main criticisms are that since 2008, when ARCs became prevalent in the residential fixed voice sector, no major provider who was not already offering ARCs has introduced them and therefore Ofcom's concern that their use is going to spread is unwarranted.

The use of behavioural economics by Ofcom also finds criticism with Sky as the effects observed by Ofcom might also be caused by lack of clarity in the terms and conditions of ARCs.

Sky's final point is that Ofcom has not published the number of customer complaints relating to ARCs.

BT maintains that ARCs are beneficial for consumers as the opt-out renewal process allows them to continue to receive the benefit of the service without having to take action at the end of the contract. BT also feels that its efforts to inform customers about the nature of ARCs are sufficient and that there is no need to intervene from a consumer protection perspective.

The final criticism is that there is no clear link between switching costs and competition and that the points made by Ofcom also apply to MCPs in general, which will not be prohibited.

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