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Why telecoms mid-contract price rises need clearer regulation

Why telecoms mid-contract price rises need clearer regulation

Credit: Alamy

Lyndsey Burton, Managing Director

Lyndsey Burton, Managing Director | Choose

7 min read Partner content

It should not become the norm for customers to be left in the dark about mid-contract price rises. With the cost-of-living crisis, it’s time that Ofcom intervenes so that people can have certainty when it comes to their bills.

Just over 19 million households in the UK saw their monthly broadband bill increase by as much as 9.3% last month. Some mobile customers saw rises as high as 11.7%.

While Ofcom ruled in 2016 customers facing price rises during a contract period should be free to leave their contract early and without penalty, they also included in their guidance the option for providers to raise prices anyway, just as long as it’s communicated at the point of sign up. As such, in-contract customers facing this year’s annual round of price rises will have no choice but to pay up.

This weak regulation from Ofcom has meant not only are providers still allowed to raise prices above inflation in the middle of a contract, but that the price rise itself is open to a level of ambiguity that relies on fortune telling for a customer to judge affordability.

Rising prices

Mid-contract price rises aren’t new, but the issue has hit a peak in 2022. This has primarily been due to the record rate of inflation these rises are now linked to, but also due to the growing pressure on household finances in the cost of living crisis. It’s this unfortunate mix which has highlighted the current loophole in Ofcom’s regulations that has left consumers exposed to unfair terms.

In fact, by inflation-linked annual rises pushing broadband and mobile prices up by so much, the media attention and general outcry over costs has undoubtedly played a part in the escalation of increased calls from Ofcom and the Department for Digital, Culture, Media and Sport over affordable broadband and the need for social tariffs.

In January 2022, Choose ran a survey via a major polling company which found 25% of respondents would struggle if their broadband bill increased by 10%, and 1 in 10 (11%) said they wouldn’t be able to afford a 10% increase at all, suggesting they would be at risk of disconnection. In addition, almost half (46%) were unaware prices would be increasing.

Research carried out by Hyperoptic, a full-fibre broadband provider with fixed prices, also in January 2022, found 63% of those affected by mid-contract price rises felt they were unfair, and almost half (48%) would not have signed up if they had been aware of the annual increase.

In 2021, Tesco Mobile, the only fixed price mobile provider, also ran a survey which showed as many as 50% of respondents did not know prices could rise in the middle of a contract, and worryingly 69% didn’t know what CPI meant.

Regulations

The lack of consumer knowledge demonstrated in Tesco Mobile’s survey is a clear issue here because Ofcom guidelines state price rises must be “transparent” and that the “subscriber can properly be said to have agreed on an informed basis”. It’s arguable then that if the majority of consumers don’t understand the method by which prices will be increased, how can that be considered an informed decision?

In 2016, when Ofcom reviewed the fairness of contract price terms, they ruled consumers could leave their contracts early if the monthly subscription price was increased above that agreed at the point of sale.

However, when the guidance was updated, it also included a number of examples setting out specific situations when the material detriment requirement to leave a contract early would be considered not to have been broken.

Ofcom explicitly spelt out that providers were allowed to increase prices by RPI + X in the middle of a contract as long as that increase was “sufficiently prominent and transparent that the subscriber can properly be said to have agreed on an informed basis, at the point of sale”.

There is a clear argument evidenced in the surveys above, that there remains a large proportion of consumers who are unaware what the inflation abbreviations of CPI and RPI mean. This calls into question whether technical terms such as these can fairly be considered “transparent”, when that is meant to mean ‘easy to perceive or detect’, in other words; obvious, straightforward and unambiguous.

And further, not only are abbreviated technical terms hard to understand for many people, but the very purpose of their use here is to represent a number that is not yet known. Without a crystal ball, how can we expect consumers to have made an informed decision on a contract that will increase in price by an amount no one knows until that consumer is already locked in to that contract?

Provider costs

Inflationary pressures also affect providers however, and they as businesses need to protect against rising costs, as well as invest in infrastructure as the UK continues upgrading to full-fibre and 5G. It’s arguable though whether they were aware how high inflation was going to reach when many of these inflation-linked annual price rises were added to contracts.

Back in early 2021, when several providers switched to annual price rises, CPI was around 0.4% and wasn’t expected to rise to the heights we’re now seeing. It’s possible that judgements around the types of rises expected assumed inflation wouldn’t exceed the previous peak of 3.1% in November 2017.

This is further supported by the fact that some contracts even make clear if inflation is negative, the extra increase amount would still apply. In addition, KCOM actually scrapped their planned price rise for 2022 specifically due to the cost of living crisis and the pressure high inflationary linked price rises were threatening to cause.

So, if providers implementing these price rises weren’t aware how high inflation was going to become, and how detrimental that would be for customers, it demonstrates a strong argument that inflation linked price rises, while logical, simply aren’t transparent or providing of a fair opportunity for informed choice over budgeting and affordability.

Are fixed prices realistic?

It’s debatable whether annual in-contract price rises on an 18 or 24-month contract are truly necessary. This seems especially true when we still have providers sticking to fixed price deals apparently without issue, providing clear and unambiguous pricing for the duration of the minimum term.

Speaking to James Fredrickson, Director of Policy & Regulatory Affairs at Hyperoptic about how they sustain fixed pricing, he said, “the cost of maintaining the infrastructure is lower [than building the network] and relatively stable”, which means, “that the fixed broadband industry is better placed to mitigate the impact of inflation than other industries, particularly those where their inputs, like energy, are susceptible to supply shock.”

It’s a solid point that if an industry reliant on outside supply such as energy can operate with fixed deals, it should also be possible for broadband to do this too.

However, James also pointed out that as a business Hyperoptic, “believe[s] that the best way to make a predictable return on our network investment is by making sure that we are bringing our network to areas where our service is needed”, and therefore they, “prioritise delivering service to areas where demand is the highest”. This likely puts them in a stronger and more stable position financially than providers subject to the Universal Service Obligation, like BT, who need to invest in infrastructure and service provision where demand is much lower.

What needs to change

If there is no appetite from Ofcom to ban mid-contract price rises outright, there at least needs to be firmer regulation around clearer pricing and how that’s communicated. As well as the protection that when prices are increased above the headline price the product was sold at, that consumers should be allowed to leave penalty free.

At the very least, tying rises to ambiguous technical terms and unknown rates of inflation does not fairly allow consumers to make informed choices over affordability, and this needs to be recognised by Ofcom.

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