Ofcom Proposes Ban On UK Telcos Making 'inflation-linked' Price Hikes Mid-contract

Brit telecoms regulator Ofcom is proposing fresh rules that take a swipe at companies who impose inflation-linked price rises in the middle of a contract, saying pricing should be more transparent for customers.

The Office of Communications oversees local TV, radio and teleco services, and after its latest consultation wants to force telecoms and pay TV companies to set out changes in pounds and pence at the point of sale, stating exactly when any price rises will occur.

When the rises are baked in... and you have to pay to leave

It hasn't escaped Ofcom’s attention that a growing number of service providers have been writing built-in price rises into their contract terms to allow for an annual price hike linked to future inflation. But not satisfied with hitting their customers with an inflationary increase, almost all make it inflation plus an additional percentage on top, typically 3.9 percent.

What this means is that if inflation is running at 6 percent when the anniversary of you signing the contract rolls around, you end up being stung with a 9.9 percent price increase for the next year.

If a customer wants to exit the contract early, in order to avoid the price rise, they are likely to incur an early termination charge, Ofcom notes. It also notes that without an embedded price rise clause in the contract, companies are required to give customers at least one month’s notice of any price rise and the right to leave without any penalty.

Small wonder that telcos want to lock in customers with a guaranteed step-up in revenue for providing exactly the same service. Ofcom notes that during 2023, all of the providers increased their charges by at least 12.5 percent, with some going as far as 17.3 percent.

Ofcom notes that inflation rates have been volatile and rose dramatically during 2021 and 2022, and this has made it harder for consumers to work out what they might end up paying in future.

The regulator is perhaps responding to earlier complaints about this practice from consumer group Which? and comparison site Uswitch, which called on Ofcom to do something about mid-contract price hikes or ban them altogether. Customers had told Which? that if their provider hikes the prices mid-contract, they should be able to walk away.

Ofcoms' review was to “assess the effects of inflation-linked price variation terms on consumers,” including their ability to understand and choose the right deals for them, as well as on how this may be affecting the functioning of markets.

It found that awareness of inflation-linked price variation terms among consumers is low, and many consumers were unaware of the details of the price increase they would be facing this year. Provider explanations of inflation-linked price variation terms do not give consumers sufficient price clarity and certainty, it added.

“At a time when household finances are under serious strain, customers need prices to be crystal clear. But most people are left confused by the sheer complexity and unpredictability of inflation-linked price rise terms written into their contract,” said Ofcom CEO Dame Melanie Dawes.

Inflation-linked in-contract price rises have already seen mid-teen price rises this year...

In light of this evidence, the watchdog said it is proposing amendments to its general conditions to introduce new requirements for providers. These would require them to make the subscription price clear at the point of sale, as well as listing any planned increases in price in pounds and pence, and the date which these would take effect.

These would apply to all consumer broadband, landline, mobile and pay TV services, including where these are taken out in combination as a bundle.

As ever, Ofcom is consulting on these proposals, and is asking for views and comments on the issue to reach it by 1700 on February 13, 2024. It will then publish its final decision in spring 2024.

Uswitch cautiously welcomed the proposals, with director of regulation Richard Neudegg saying they have been a long time coming, and that its own research showed that the vast majority of consumers believe inflation-linked mid-contract price hikes to be unfair.

“It is important to note that these are just proposals at this stage, and even if these new rules come in, they will only apply to new contracts. So broadband and mobile customers are still in for another challenging round of price increases coming in April,” he added.

Telecoms analyst Paolo Pescatore at PP Foresight sounded a note of caution, warning that the proposed move would be a blow for telcos grappling with margins being squeezed and finding other ways of growing their revenue.

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“All telcos are struggling to generate new forms of revenue. This is despite rolling out next generation connectivity to satisfy users’ insatiable appetite for data,” he said.

Market researcher Megabuyte was critical of Ofcom's move, saying “there is a sense here of Ofcom shutting the stable door after the horse has bolted” because inflation-linked in-contract price rises have already seen mid-teen price rises this year, while inflation has now dropped to about 4.6 percent.

Ofcom’s proposals won’t stop service providers raising prices mid contract, Megabuyte said, but by having to explicitly set it out in the contract, buyers will hopefully be able to factor it into their decision making. ®