Telecoms regulator Ofcom has announced a set of proposals that could lead to a ban on inflation-linked mid-contract price rises.
Under the existing system, lots of mobile phone, broadband and pay TV providers hike bills every April. The increase is normally determined by the inflation rate for the preceding January, with an extra 3.9% added on top.
Your contract will set out the formula for these annual hikes, with any above-inflation increases allowing you to exit your contract early without a fee. But Ofcom says this system means consumers have no certainty about what their prices will be over the duration of their deal. Instead, it wants suppliers to set out future mid-contract price rises whenever they market packages..
Deputy Editor of Look After My Bills, Catherine Hiley, said: “We’re happy to hear that Ofcom plans to protect consumers from unexpected mid-contract price rises. Many households were hit by large price hikes to their broadband and mobile phone bills in April 2023 without being given the option to leave their contract penalty-free.
“By forcing providers to disclose the exact amount their bills will go up during their contract, consumers will be able to make an informed decision before signing up. And they won’t get stung by a price increase that they weren’t expecting.
“If you’re out of contract with your broadband or mobile phone provider, you could almost certainly save money by switching to a new deal. Shop around to find a plan that fits your needs and your budget.”
What are mid-contract price rises and why are they controversial?
Many mobile, broadband and pay TV contracts come with clauses that allow suppliers to raise their prices once a year. Usually, they say they’ll do this by taking an inflation figure for January and adding a percentage (normally around 3.9%). The increase then comes into effect in April.
The inflation figures they take come from either the Consumer Price Index (CPI) or Retail Prices Index (RPI). These both measure the rate of price rises throughout the economy in subtly different ways. But what you need to know is that RPI tracks slightly higher (6.1% compared to CPI’s 4.6% as of October 2023).
Providers argue that this system, which started to be used in 2020, allows them to keep up with the costs of maintaining infrastructure and providing their services. But Ofcom says the way price hikes are conducted can cause “substantial amounts of consumer harm” because they complicate the process of shopping around for a deal. It says this results in “less effective” market competition.
Research undertaken by the regulator has found that just 16% of broadband customers and 12% of mobile customers are aware of mid-contract price rises and the way they are calculated. Ofcom also found that even if people are aware of the hikes, they find it hard to estimate what the real-terms impact of the mid-contract price rises will be on their bills, making it hard to budget.
It said it received more than 800 complaints about unexpected price hikes between January and October this year. This was roughly double the volume of complaints it received over the same period in 2021.
What has Ofcom proposed?
Ofcom has proposed the scrapping of inflation-linked mid-contract price hikes. The regulator is seeking to provide households with cost certainty for the duration of their contract, while passing the risks associated with inflation onto suppliers.
In practice, this could mean we see the exact amounts – in pounds and pence – monthly mobile, broadband and pay TV contracts will rise by in each year of the contract we’re signing up to. Ofcom says it wants these figures to be shown “prominently and transparently, at the point of sale”, so people can be completely informed when making a deals comparison.
Melanie Dawes, Ofcom’s Chief Executive, says: “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, which undermines customers’ ability to shop around. Our tougher protections would ban this practice once and for all, giving customers the clarity and certainty they need to secure the best deal for their needs and budget.”
However, it should be noted that the proposals – if adopted – would mean there will continue to be mid-contract price rises. Some campaigners are petitioning Ofcom in a bid to get the regulator to scrap these hikes completely.
Will the news affect my bills in April 2024?
Given Ofcom needs to consult on its plans before implementing them, its proposals are unlikely to affect your bills until after the next set of hikes.
The regulator says it will consult the telecoms industry, campaigners and other interested parties until 13 February 2024. It will then publish its final decision at some point next spring, with any new rules going into force four months later.
This timeframe means we will face another round of inflation-linked mid-contract price rises in April 2024. We will find out the sort of increases we can expect to see in our bills in mid-February, when the Office for National Statistics (ONS) publishes January 2024’s inflation statistics.