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New Ofcom regulations: tackling the “loyalty penalty”

Loyalty Penalty

Ofcom has introduced new rules to crack down on unfair mobile & broadband contract price schemes, and ensure customers know that they’re on the best deal; what effect will these changes have on consumers and CSPs?

Ofcom provided consumers with a Valentine’s treat this year, introducing new legislation in February forcing mobile and broadband providers to notify customers when the end of their contract is imminent.

Sent by text, email or letter, these Annual Best Tariff Notifications (ABTNs) must inform the customer of:

  • their contract’s end date;
  • how much they’ve been paying;
  • how much they will pay when the contract period ends;
  • the provider’s best tariffs, including those available only to new customers;
  • and any notice period for ending their contract.

These notifications must be sent between 10 and 40 days before the customer’s contract comes to an end; those on shorter 30-day contracts will only be sent a single annual notification.

According to Ofcom’s own research, approximately 20 million customers are out-of-contract on their phone, broadband or pay TV service, and could save £120 or more through negotiating with their provider. Out-of-contract fees for broadband are on average 20% higher, rising to 26% if a TV contract is bundled. Furthermore, 16% of broadband customers don’t even know if they are still in a contract, a figure that rises to 21% of over-55s.

Before the new rules came into force, 25,000 broadband contracts were expiring every day, resulting in an automatic price rise. The number of out-of-contract broadband customers in the UK is estimated to be some 8.8 million people.

How have the major CSPs responded to the legislation?

Having made their service change pledges to Ofcom last July, BT and TalkTalk extended their minimum contract periods, with EE, O2, Tesco Mobile, Virgin Mobile and Vodafone set to follow. All will now reduce customers’ bills when their minimum contract term ends.

Three have, however, been a notable holdout, despite signing the Fairness for Customers pledge. The network argues that the changes could disincentivise customers from shopping around for the best deal for themselves, instead calling for “easier switching, all handsets to be unlocked, end-of-contract notifications and best tariff advice” while branding tariff discounts as “arbitrary.”

Citizens Advice argues that Three are in contravention of the Fairness for Customers pledge, with their customers overpaying between £1.5 and £2.7 million in total a month.

Increasingly, Ofcom and other consumer rights groups have been seeking to clamp down on the “loyalty penalty” that is affecting many consumers who paradoxically, end up paying more the longer they remain with a single provider. This penalty is estimated to cost consumers – particularly elderly and those on a low-income – around £4 billion a year.

Last year, Ofcom launched the Fairness for Customers campaign, introducing a number of protections for broadband customers, specifically targeting stealth price rises, steep exit fees and Byzantine cancellation policies. The move came in response to a sweeping “super-complaint” lodged by Citizens Advice in 2018 to the Competition and Markets Authority, targeting a number of key markets, including mobile and broadband.

For customers, these changes could not have come at a more opportune time, given the massively increased demands for mobile and broadband connectivity due to the COVID-19 pandemic.

As work and play at home eats up increasing amounts of bandwidth, providers have lifted data caps and introduced new packages to support the most vulnerable. BT have begun turning a blind eye to customers who are unable to pay their bills at the Post Office or bank, Virgin Media are “looking at ways” to help customers struggling to pay bills, and O2 are implementing emergency payment plans for customers.

As the competition for customers rages on in a market facing greater scrutiny on how it treats its existing consumers, particularly in times of crisis, telcos must ensure that their deals are both fair and transparent, and that they put as much consideration into nurturing the customers they already have as they do into acquiring new ones.

About the author

Adam Hughes


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