Often the cost of a communications service as advertised is not borne out by the first bill that arrives. Ofcom has recently published Guidance on how to avoid this happening and given providers until April 2009 to get their houses in order. Anna Montes tells us more.
When: 19 December 2008
Where: United Kingdom
Law stated as at: 22 January 2009
On 19th December 2008, Ofcom published its final guidance on how the Unfair Terms in Consumer Contract Regulations 1999 (the "Regulations") apply to communications providers' standard consumer agreements.
This guidance was created as a result of a review conducted by Ofcom in June 2007. This focused on the range of charges applicable to services such as home phone, mobile, broadband and pay-TV, which are imposed on customers in addition to their basic service charges. The charges Ofcom considered as part of this review included fees for late payment, early termination or restoration of service (following suspension of service or other restrictions) and charges imposed where consumers did not opt to pay their bills by direct debit.
At the time Ofcom published the results of this review, it made it clear that it was concerned about the transparency and fairness of such charges and a further consultation was launched to look at proposed guidance on how fees providers wanted to charge within their consumer contracts could comply with the Regulations.
What is it that communication providers need to comply with?
The Regulations require that standard terms in contracts between suppliers and consumers, which have not been individually negotiated, are transparent and fair. Such terms will not be considered fair if they cause a "significant imbalance" in the parties' rights and obligations and this is to the detriment of the consumer. In applying this fairness test to a contract, account must be taken of the nature of the goods or services concerned and of all the circumstances surrounding the conclusion of the contract. If a term is considered to be unfair, it will not bind the consumer. Suppliers also have guidance provided to them by the Regulations through the inclusion of Schedule 2 which contains an indicative list of the types of terms that may be considered "unfair" for the purposes of the Regulations.
In a nutshell, providers should be clear and up-front with their customers and do more to make it easy for consumers to understand the charges that may be triggered in the future. Furthermore they should make sure that such extra charges that are not part of the price for the services the consumer is buying, are actually fair. Ofcom feels providers have been failing in this regard and hence the need for this new guidance.
What is Ofcom's advice in respect of particular charges?
To summarise some of the areas of guidance provided by Ofcom, communications providers need to be mindful of the following when describing certain types of additional charges:
1. Non-direct debit charges – The Ofcom guidance makes it clear that a charge which is levied where consumers choose to pay their bills using a method other than direct debit, may be a core term of the contract for the purposes of the Regulations and which is exempt from the Regulations' fairness test. However, this will only be the case if the information relating to such a charge is presented to the consumer in plain, intelligible language. The prominence and transparency of the language used to explain this charge to consumers is also important and it must be portrayed in such a way that a typical consumer would regard the charge as part of the price to be paid for the services concerned, not a separate charge. Where the charge is a non-core term, then the fairness test will apply and this is likely to mean the charge should reflect only causally related costs, not other costs incurred by the provider such 'bad debt' costs.
2. Charges for late payment, payment failure or to restore services – Ofcom advises that these charges will not be considered core terms and are therefore subject to the Regulations' fairness test. Ofcom views these terms as likely to be unfair where they seek to recover costs above and beyond those that have been directly incurred by the provider as a result of a particular default. Ofcom has also advised that consumers who dispute an element of their bill and who therefore subtract the disputed amount before settling their bill, should not face late payment charges for having done so.
3. Initial minimum contract periods with early termination charges – Minimum contract periods in this sector are often between 12 to 18 months in length. Ofcom views that such minimum terms are likely to be core terms for the purposes of the Regulations and therefore they need to be presented to consumers in a very transparent and prominent way. Terms providing for early termination charges however will not be considered core terms. Ofcom's guidelines suggest that such a charge is likely to be considered fair only where the terms concerned:
(a) are transparent and prominent at the point of sale;
(b) are never greater than the amount of the contractual retail payments remaining due at termination;
(c) take account of any costs associated with the provision of the service which will no longer be incurred by the provider;
(d) reflect any ability of the provider to reduce its loss by reselling the service to a new consumer; and
(e) make allowance for the provider's accelerated receipt of any sums.
4. Subsequent minimum contract period (SMCP) – Ofcom has made it clear that SMCP terms are likely to be non-core terms, except in a few circumstances. They may be fair where the terms explaining the events that will trigger a requirement for an SMCP are transparent to consumers, at the point of sale, and where the supplier will make it clear to the consumer that the event(s) concerned will indeed trigger a new MCP when it arises. Other factors to be taken into account when considering the fairness of SMCPs will be the length of any new MCP, at the point in time when the consumer is considering the change and the costs incurred by the supplier. Communications providers are informed that terms providing for the automatic renewal of the MCP on its expiry should not mean that consumers are subject to unintentionally long and recurring contracts.
5. Minimum notice period terms – such terms are unlikely to be part of the main subject matter of the contract and are likely to be non-core terms for the purposes of the Regulations. Ofcom considers that a term providing for a minimum notice period is likely to be fair where it is transparent to consumers at the point of sale and reflects a reasonable period within which the provider is able to carry out the necessary administration of terminating the contract. Ofcom considers that for fixed-voice and broadband services, this period should be no longer than any formal migration process, and for mobile services or others that don’t have formal migration processes, the period concerned should be no longer than is reasonably necessary for the required administration to be undertaken. Whilst what is "reasonable" is a subjective matter on a case-by-case basis, Ofcom has made it clear that for mobile services this period should be no longer than 30 days or one calendar month at the very most.
6. Itemised / paper billing – Ofcom considers that billing charges may be considered core terms in cases where they are presented in such a way that the typical consumer would regard them as part of the price he is paying for the services concerned (rather than a separate, incidental additional charge). Providers therefore need to ensure that their contract terms and related marketing materials make it clear in a prominent manner whether there are any separate billing options for which there are different charges. It must be ensured that amongst other things such materials clearly set out what the various payment options are together with their charges (as applicable) and that the information is presented in such a way that a consumer who chooses itemised billing would regard that as part of the services he is buying under the general contract.
Why this matters:
Ofcom has indicated that it is going to give communications providers until April 2009 to review their terms and conditions and charges structures, and to ensure they comply with the Regulations and Ofcom's guidance. If after this time Ofcom still believes the charges of any individual provider are unfair, it will seek to take enforcement action against that provider.
Can Ofcom get so involved in how the communications providers enter into contracts with their customers? Well yes it can – the Enterprise Act 2002 gives Ofcom the right to engage in consumer protection law enforcement in communications matters. Providers cannot ignore the guidance that has been issued as Ofcom is able to seek enforcement orders against them if they continue to breach legislation intended to give effect to EC Directives, particularly where this results in harm to consumers.
However, it should be remembered that Ofcom has provided guidance only – it will always be for the courts, not Ofcom, to decide whether a term in a particular contract is unfair under the Regulations.
"Unfair commercial practices" risk
Ofcom wants to protect consumers and does not like charges being hidden in the small print of contracts and marketing materials. Both communication providers and others should also remember that if they do omit material information from marketing materials or sales processes, or their practices are misleading in any way, and this leads to consumers entering into contracts which they may not have otherwise entered, the business could also be considered liable for criminal offences under the Consumer Protection from Unfair Commercial Practices Regulations introduced last year. Consumer protection is high on the legal agenda at present and so it would not do any harm for all businesses, in addition to communication providers, to review their commercial practices for 2009.