Ofcom’s final statement and guidance on extra charges paid by customers to phone, TV and internet companies

Plain English Summary of the Statement

Update 05|03|10: We are reviewing and, if necessary, updating the Guidance on Additional Charges in light of the Supreme Court's judgment in the Bank Charges case, The Office of Fair Trading v Abbey National and others (http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2009_0070_Judgment.pdf). This does not affect consumers' and service providers' continuing obligations under the Unfair Terms in Consumer Contracts Regulations 1999 (the "UTCCRs"). We will continue to enforce the UTCCRs, as necessary and appropriate, pending publication of any further guidance or other information in this area. Consumers who have concerns about the use of unfair terms in contracts for communications services should continue to raise them with Ofcom in the usual way.

Additional charges

No one likes surprises when it comes to bills and charges.

When you sign up for a service, you should have all the facts at your fingertips to know what it will cost you and what, if anything, might bump up those costs or change the rules. And any extra charges in the small print must be fair.

For the last 18 months or so, Ofcom has been looking into the whole issue of extra charges made by phone, internet and pay-TV providers. We've looked into the issues, and heard both from the companies that provide these services and the customers who pay for them.

Now, Ofcom is issuing final guidance on what we believe is the fair way to go. This plain-English summary gives you the main points of that guidance, but for the full Statement document please see Related Items.

Charges and the law

Ofcom's task has been to look at the law that's designed to protect consumers (the Unfair Terms in Consumer Contract Regulations 1999, or 'the Regulations') and say what we think it means.

The guidance we are now giving aims to make sure that the companies fully understand, and obey, the Regulations. If they don't, we can take action against them. This may include legal action, since the final decision on whether something is 'fair' is a question for the courts.

The small print, magnified.

We believe that healthy competition is the best way to make sure consumers enjoy the benefits of new services and lower prices. If, for example, you have a phone at home, a mobile, broadband or pay TV, you'll have seen their prices fall over recent years.

However, the main price you pay isn't always the only thing you pay. Sometimes, extra charges come into play, for a variety of reasons. Examples include:

if you choose to pay by cash or cheque, rather than using a Direct Debit from your bank ("non-Direct Debit charges");
if you want a fully itemised bill, not just a summary;
if you pay late, or if your payment doesn't go through (e.g. if your cheque bounces);
if you cancel a contract before the minimum period is up;
if you cancel a service even after the minimum period is up; or
if you stop taking a service, but still have to pay until the end of a notice period.

At Ofcom we've received many complaints about these small-print charges. For example, we've had many letters from MPs about extra charges for people who don't (or can't) use Direct Debit (DD), and there have been many articles in the papers as well. We've also received lots of complaints from people who have been charged for cancelling a contract early.

An extra charge isn't necessarily an unfair one. However, it's Ofcom's job to make sure that companies play fair, and that ordinary customers know what to look out for.

Areas that concerned us

For consumers generally

When most of us choose a service, we're looking at key features such as what it costs each month, broadband speeds or handset details. But we're far less likely to study the small print about terms and conditions. That's why there's a risk that the healthy competition that brings down the main advertised prices doesn't have the same effect on those extra charges. It can also open the way for some companies to set unfair charges. Ofcom believes that customers need appropriate protection alongside the benefits of competition to make sure:

companies make it clear what consumers might pay; and
companies don't set unfair charges.

For people on low incomes

Even if charges are clear, upfront and fair, they're not always affordable for people on low incomes. Ofcom needed to consider:

whether some people couldn't afford a phone at home because they could not, or would not, pay by Direct Debit; and
the whole issue of whether it's right that people on low incomes should face higher charges than people who earn more.

Ofcom's review

In June 2007 we began a review to look into extra charges. We wanted to know:

who is affected by them?
what do people think about them?
why do companies charge them in the first place?

Secondly, we wanted to know whether customers are being treated unfairly. If so:

would the charges be fair if people knew more about them?
can things only be fair if the charges come down?
are certain people being hit harder than others?

Thirdly, we wanted to know how the law can help solve any problems, by asking:

what legal rules apply to these types of charges?
how can Ofcom make sure companies play by the rules?

We looked at extra charges (and related contract terms) right across the board, focusing on the main areas that we believe worry customers the most. We show these in the table below.

The terms and charges featured in this review

Type of charge	What it means
"Non-Direct Debit charge"	An extra charge you may have to pay if you don't pay your bills by Direct Debit.
"Late payment charge"	An extra charge you may have to pay if you don't settle your bill on time.
"Payment failure charge"	A charge if your payment doesn't go through (e.g. if your cheque bounces, or your bank refuses to pay your Direct Debit).
"Charge to restore service"	A charge to bring back your normal service if, for example, your phone was cut off or barred because you hadn't paid a bill.
"Initial minimum contract period"	The minimum amount of time that you must stay with a particular service (often 12 to 18 months).
"Early termination charge"	A charge if you cancel a contract before it has run out.
"Subsequent minimum contract period"	A new minimum contract period, following an old one. This might happen if, for example, you choose a new broadband package with faster speeds; or switch to a phone plan with more free calls; or simply need to change the contract because you're moving house.
"Minimum notice period"	The amount of warning you may have to give before you can cancel an agreement.
"Itemised billing charge"	An extra charge if you want every call to be listed on your phone bill or you want a paper copy.
"Cease charge"	A charge you may have to pay for cancelling a service, even if it's after the minimum period of the contract

What we found

In general

Ofcom has found that phone, mobile phone and TV providers could be doing more to alert customers to possible extra charges before they sign on the dotted line and to make those charges fair. In particular:

companies need to make it easier for customers to understand the charges they pay; and
for charges which are not part of the price for the services being bought, companies must make sure they are fair.

For low income consumers

The Regulations we have looked at don't give low income consumers special protection.

But two fixed-line phone companies (BT and Kingston) have a duty to provide people on low incomes with a phone at home. However, in the past this has not always meant these customers escape extra charges.

Two significant developments have taken place.

In October 2008, BT launched a new phone service for people who receive certain state benefits. This service does not charge its customers any extra if they can't pay by Direct Debit, or if they choose not to.
The phone company in Hull, Kingston Communications, has also removed any DD-related charges from its own low-income scheme.

Of course, there are many other people on low incomes who do not qualify for these special schemes. However, we believe the choice on offer in the market place will give them the protection they need. In fact, while this consultation has been going on, we know of at least one major company which has scrapped extra charges for customers who don't pay by Direct Debit.

This still leaves the wider question of why people on low incomes often have to pay more than people who are better off. However, there are many examples of this happening to customers of other services and utilities, and Ofcom thinks that this is a matter for the Government rather than our guidance here.

Our final guidance on the different types of charges

1. Charges if you don't pay by Direct Debit

Customers told us:

it is wrong for companies to charge them extra if they choose to pay their bills by cash or cheque. They also feel this hits people on low incomes who, in particular, can't afford it; and
customers often don't know these extra charges even exist.

The companies told us:

Direct Debit is a cheap way to collect their money automatically. It costs them more if customers choose other ways to pay (even if they pay promptly);
many customers will pay late without an automatic system doing it for them. This in turn costs extra money when companies have to chase payments and send out reminders; and
customers who don't pay by Direct Debit are more likely to end up not paying at all, and that the debts they leave should be spread over the other customers who avoid Direct Debits.

Ofcom's final guidance is that:

If companies don't make these extra charges obvious - so customers don't see them as part of the price of the services they are buying - those charges must relate to direct costs only. They should only include the company's extra costs of collecting normal payments and not, for example, chasing bad debts.
However, if extra charges are obvious in the advertised prices, normal competition and not Ofcom - will decide how much they will be.

2. Charges for late payments, failed payments and switching normal services back on.

they're worried that they can be hit with extra charges when they pay late. Often, they feel this happens before they've had a fair chance to pay the bill;
they feel the charges are too high; and
often, they don't even know they risk these charges in the first place.

Companies told us that these charges encourage people to pay on time. They also say that these charges are only paid by the people likely to cost the company money, rather than spreading them across the 'good' customers who pay on time.

These costs include:

sending out reminder letters or making calls to customers to remind them to pay;
administrative costs when a cheque or a Direct Debit doesn't go through;
interest, because the company is getting its money later than it should; and
the industry costs that a company has to pay if it takes away part of a customer's service, and then returns it to normal later. (For example, only allowing incoming calls on a phone until a bill has been paid).

Some also say that customers who pay very late, or whose payments don't go through, are more likely to end up paying nothing at all. They say the extra costs of bad debt should be spread among everyone who pays late.

Ofcom's final guidance is that:

these charges will not be part of the price of the service the customer is buying;
any charge that is higher than the actual costs a company incurs for example in chasing a late payment - is likely to be ruled as unfair; and
customers who hold back an amount they are disputing should not be seen and charged as 'late payers'.

And Ofcom does not accept that bad debts should be lumped in with any of these charges.

3. Minimum contract periods and charges for cancelling a first contract

Customers have told us that:

they don't see why they should be locked in to a contract for a fixed-line phone at home, or pay extra charges if they want to cancel early. (However, they can see the reason for a minimum period when, for example, they receive a free mobile handset); and
they often don't know that fixed-line phones come with a contract, although more people expect one with a mobile.

Customers are more split about whether it's reasonable to be locked into a contract for broadband or pay TV.

The companies say that they ask you to agree to a minimum term so they can get back some of the money they've spent to sign you up. These costs may include:

the cost of free or cheaper equipment, such as a mobile handset, a broadband modem or a satellite dish;
the cost of free or cheaper installation, such as putting a satellite dish on your roof or connecting you up to cable; and
industry costs which the supplier has to pay when they take you on as a new customer.

By charging you for cancelling early, companies believe you'll want to stay with them for the minimum period. If not, they can at least get back any costs that your monthly payments haven't yet covered. They also say you should pay them what you agreed to pay for the whole period of the contract.

We accept the idea that minimum contract periods can help spread those upfront costs. We also accept that customers cannot sign up for contracts and expect to pay nothing if they cancel early (unless the company is at fault). But early cancellation charges should not be more than a fair amount.

Ofcom's final guidance is that:

We expect a minimum contract period to be clearly highlighted and easy to understand;
We think that a charge for ending a contract early will usually be fair provided:
- it is absolutely clear before you sign that you risk having to pay a charge if you end the deal early
- you know how much that charge will be
- the charge will never be more than the remaining amounts you would have normally paid
- it reflects any savings a company might make when you cancel the deal, or anything that they can re-sell
However, it would usually be unfair for the company to try to recover amounts that you wouldn't necessarily have had to pay - like charges for extra calls on top of those included 'free' in any deal.

4. Further minimum contract periods

Customers sometimes find that if they change their contract in any way, they can face an extra minimum contract period (and another set of cancellation charges). This can happen:

when you move house;
when you want to move to another package (e.g. a different mobile phone plan, a different broadband speed or a different pay TV package);
when you want to combine several services from one supplier; or
when you want a new mobile handset.

Extra minimum contract periods can also apply if you sign up to a contract that automatically renews at the end of each fixed period.

At Ofcom we think that an extra minimum contract period may be fair when companies have to lay out more money in advance and customers are clearly getting a benefit for it.

Our final guidance is that a further minimum contract may be fair, provided that:

when you first sign up, companies make clear the kind of events (such as a new upgrade) that would trigger a further minimum contract;
before you make that change (for example, by accepting that upgrade) you are again alerted that a new minimum period will come into play, and its length; and
the new minimum contract is reasonable, based on its clear benefits to you, and the costs to your provider.

The guidance also says we think fixed-term contracts that renew automatically may be unfair - if they do not give consumers something in return for the renewal and a fair chance to opt-out.

5. Minimum notice periods

Some companies insist you give them a period of notice before your contract ends.

Ofcom has found that:

only a few customers think that having to give notice to their network or provider is fair;
more than 40% of customers told us that even a one-month notice period is a barrier to switching to another company; and
most customers don't know that minimum notice periods may apply to them (particularly for fixed-line home phones).

However, Ofcom has not received many complaints directly from individual customers on this issue. And we accept that companies need some time to tie up all the loose ends when a contract finishes.

Ofcom's final guidance is that it's usually reasonable for your provider to expect a minimum period of notice from you, if:

they make it clear to you before you first sign on the line; and
the period reflects the administration time they need to close your contract, which
- for your landline and broadband, should take no longer than the time it takes for you to switch to another provider; and
- for mobile phones, should be 30 days maximum and likely much less.

6. Charges for itemised billing

Customers have told us they don't think it's fair they should pay an extra charge to receive a paper bill that lists all of their calls (an 'itemised' bill). They're also confused about which companies make this charge, and which don't. However, Ofcom has not received many complaints directly from individual customers.

On the other hand, the companies tell us it costs them more to produce a fully itemised paper bill, compared to a basic summary bill or a bill they can send online. These costs include extra paper and postage.

Ofcom's final guidance is that:

if companies make these charges obvious - so customers think of them as part of the price of the services they are buying - normal competition, and not Ofcom, will decide how much they will be;
we think they will be obvious enough where:
- companies are clear, in their contracts and marketing material, that customers can choose different billing options with different charges;
- they spell out what each option is (for example, a bill on paper or online), the level of information it contains (such as a simple summary or a breakdown of every call), and what it costs; and
- the information should be set out so that you would see itemised and paper billing as being part of the services you're buying under the contract;
if companies don't make these charges obvious enough, we think it's only fair for companies to pass on the reasonable extra costs they run up in providing you with a particular level of billing information.

7.'Cease' charges

If a customer decides to cancel a broadband service (and doesn't plan to switch to a new company which also uses BT's network) they may receive a 'cease' charge. This even applies if they have completed their contract. The company is passing on a charge which it has to pay, to BT Openreach.

Ofcom's final guidance is that a cease charge is probably fair, provided:

the charge is made clear to customers before they sign on the line; and
it's based only on the actual costs that come with ceasing a service.