I remember, way back in my early days in the tech sector, my mentor at the time saying “always stay a version behind“. Basically, his view was to let some other poor sods suffer the blood loss on the bleeding edge, and migrate in increments to stable versions.
The same often applies to regulatory matters. It pays to wait and see what others do – either because you might find a competitive advantage away from the pack, or because there’s safety in numbers in a collective position.
Here, I am about to suggest you adopt a relatively invasive measure – the Contract Summary requirement in the European Electronic Communications Code (EECC) – well in advance.
No – I haven’t lost my grip on reality. There are two key areas where early adoption of this measure (or a form of it at least) will act to protect business to business telecommunications providers from issues later on in the contracts they are signing now with a minimum commitment period extending past when the measures come into effect.
While the requirement to have a Contract Summary in your sales process is a way off, there are good reasons to adopt it early. Namely, protecting your business to business contracts against issues with ragged ends as customers add users on different terms to their estate, and to allow flexibility in changing prices (not just the bundle) during an initial commitment period.
A brief interlude on enforcement….
The headline grabbing cases of enforcement are those published by the UK’s regulator, the Office of Communications (Ofcom), with eye-watering fines. However, it is worth remembering that for spats a communications provider is having with a small business customer or residential user, an Alternative Dispute Resolution (ADR) scheme will be the binding arbiter (on the provider at least) of who is right and wrong.
In a formal enforcement action by Ofcom, the accused will have the opportunity to argue their case with highly qualified and experienced regulatory professionals – often those that drafted the regulations and formed the policy in question. A detailed and academic argument can be had about the compliance or otherwise with certain conditions.
This is not the case when an Ombudsman reviews an emotionally charged complaint from a member of the public. In the alternative, you may find yourself arguing the construction of a contract in front of a County Court in an attempt to ensure you get paid; while we have the utmost respect for the judiciary, the nuances of telecommunications regulation is not likely to be a subject matter for which the judge has seen many cases.
It would, therefore, seem to be worthwhile to pre-empt future areas of contention, such as whether ragged-end contracts or international calling price rises in contracts entered into now, and disputed in the future, are compliant with the rules.
…Enter the Contract Summary
The Contract Summary is exactly what it says on the tin – think of the KFI documents you get with credit cards, insurance etc. It is meant to be one side of A4 (whoever specified that didn’t actually try to create one – we have for a client and there’s just no way that is likely to happen, save for the simplest of telecoms services) and the end user is to be given sufficient time to read and understand it prior to entering into the agreement, for sales in June 2022 onwards.
Assuming that the overall requirements for this document are met (time to review, durable medium, font size (yep!)), it cannot be said that the end-user entering into the agreement was unaware of the stipulations it contained…. which is where a provider’s early adoption creates a shield on the two issues which are the focus of this blog.
The official term, in the language of Ofcom, is “non-coterminous linked contracts”. There is an in-depth analysis in the statement transposing the EECC which you can read at your leisure, but broadly – contracts for a product or service, which are financially or technically linked, which have commitment periods which end at different times.
By way of a worked example, consider having a new 12-month subscription to your provider’s sports channel giving a “bundle discount” but only 6 months left on your broadband contract with them. Or, more importantly for those providing business services, having a subscription for a Cloud PBX, inclusive of the handset, ending at different times because the customer added more users, each on a 3 year term.
Ofcom have made it clear that such arrangements are likely to be a disincentive to switch, which they consider bad. However, in some cases, they may have benefits for consumers – one of the reasons (we assume) being the handset-amortising subscription to a cloud PBX I cited. Here’s an extract from Ofcom’s guidance on the subject.
In addition, we would take into account any other factors which might reduce the potential for harm from non-coterminous linked contracts, for example: whether the contractual arrangements provided efficiencies or other benefits for customers. We would, however, expect providers to be able to evidence that there were such efficiencies or other benefits to customers.
The guidance comes into force in December 2021 and is meant to apply to contracts entered into from that point with small business customers.
In terms of benefit, the amortisation of the handset (or, in other contexts, routers and other equipment) over the default term, often 3 years in business telecoms, is likely to be preferential for the working capital position of the customer when compared to amortising it to align to other parts of the subscription. Additionally, even if the end user has to pay early termination charges if they move their whole system, the harm is limited to the element that isn’t the equipment – because they would have had to buy that regardless.
In this scenario, the end-user has just one price per seat, not a different price for every user added after the initial installation, which is an administrative benefit for all involved. For us, these both meet the threshold, but the final judge of that matter is the regulator who may have a different view, even if the harm to a small business is modest.
That said,, the second and third points in the Guidance add a hurdle – it must be made clear to the end-user they are entering into such an arrangement and be offered the alternative, along with an explanation of the implications. That means everyone may need to have an a raft of pricing for the same product to align new users with the bulk of the estate just in case.
The Contract Summary does not come into force for 6 months after this Guidance…. however, if that is adopted early and contains a paragraph compliant with the Guidance quoted above, it materially reduces the ability for anyone at Ofcom to say that there is harm arising from a disincentive to switch and the consequence of enforcement action thereafter.
Mid-Term Price Rises
A few years ago, Ofcom prohibited telcos from increasing the “Core Subscription Price” in customer contracts without the same provider offering the customer a penalty-free exit from their commitment period. This was in response to operators increasing them during the initial commitment period and a consumer backlash that followed.
At the time, Ofcom suggested all price rises would be included – that would include non-geographic termination rates set by the called party, or ancilliary services, or calls to international destinations which can fluctuate wildly. Ofcom, following the consultation, said that was not proportionate given the facts, so limited the measure to just the bundle.
However, now, because the European Union says it is OK, it is de facto proportionate, so Ofcom have largely implemented the doomsday position it rejected in the past – with a few saving graces.
Firstly, third party services are excluded, which includes non-geographic calling services (of course, the Access Charge levied by the originating provider is in scope). That clearly brings the UK’s 08, 09 and 118 ranges into scope of the exemption. As to whether this exemption includes all non-geographic numbers world wide, the subtlety comes in how the pricing is presented in our opinion.
The UK non-geographic calling services market, being an Access Charge (the gross profit for the originating CP) plus the Service Charge (termination rate) allows Ofcom to offer such an exemption, because the originating provider (residential and small business customers – although most replicate the structure for larger enterprises too) is still constrained on one element and cannot interfere with the Service Charge which it is obliged to pass through. In an A-Z listing of international destinations, the termination rate and margin are all bundled together into one price offered to the customer. It is this distinction that makes us consider international destinations aren’t included, even if they are non-geographic in that country’s numbering plan.
But it does give rise to an idea – one option would be a radical change of how international calls are marketed – to replicate the Access Charge and have a “spot-rate” each day on your website, derived from the cost of provision. In other words, set a customer specific margin, charged separately, for the life of their contract and load your Least Cost Routeing table to a portal.
What has become known in some circles as the ‘Virgin Clause’ from the EECC Statement (A11.103 of the new GC1 Guidance) provides an alternative too.
Where a provider’s contract contains a price variation clause, which has the effect of binding a customer to pay different prices at different times during their commitment period, the requirements in Conditions C1.14 and C1.15 will not apply, provided that, at the time the customer signed the contract:
a) those terms were sufficiently prominent and transparent; and
b) the provider ensured the customer was fully informed about the different amounts they would have to pay at different times, such that the customer can be said to have agreed to those terms.
Price variation clauses should only be used where there is reasonable justification on practical grounds, and where the two criteria set out in the paragraph above are met.
The Contract Summary requirement brings a document that it is difficult to say, assuming the concept is complied with, is not “prominent and transparent”. The second part is ensuring that the customer is fully informed, again, something the Contract Summary can help do.
Of course, if international destinations are included in the bundle, then there continues to be a lot less wiggle room. However, the risk is often to destinations rarely in bundles, so we are hoping a course can be plotted with the ‘Virgin Clause’.
The new mid-term provisions come into effect in two tranches – December 2021 and June 2022. Unlike the “ragged-end contracts” issue, it is unclear as to whether or not there is a difference in application for contracts entered into before or after the point the Guidance (and General Condition of Entitlement) comes into effect. To that end, certainly for small business customers, it would seem prudent to adopt a new pricing mechanism or implement the ‘Virgin Clause’ through contract summary as early as possible. This will ensure as many contracts are protected come the implementation of the rules – and importantly, remain able to pass through fluctuations in costs to your customers, where you want to.
For larger customers, some thought is required as the Contract Summary may not be appropriate. The mid-term price rises rule applies to all Subscribers – i.e. all customers, not just small businesses and consumers. However, in the Guidance (June 2022 version, §11.89) it says;
The specific arrangements that Ofcom refer to, for us, include the usual price modification clause in contracts which, at the smaller end of the market, are considered inappropriate. It would therefore seem that some compromise between treating a Fortune-300 company like a consumer and business as usual is required, with a greater emphasis in the sales process on when price changes might arise.
It isn’t often that you will see telecommunications types chomping at the bit to adopt regulation early – however, with these two issues at least, we think there is a clear case to do just that with the Contract Summary.
As ever, please feel free to reach out to us for a no-obligation chat about how this might affect you and how we can help!