Introduction
Also referred to as rollover contracts, automatically renewable contracts (ARCs) are contracts that roll forwards at the end of a minimum contract period to a new one by default unless the customer actively informs the communications provider of cancelling it (Crawford et al., 2011). Typically, the contracts state that a service can automatically be renewed on a particular date for a specific price unless the customer provides advance notice to the seller of intending to terminate the agreement (Becker, Spann and Schulze, 2015). As such, businesses are allowed to renew their subscription services by charging the consumer through the details kept in the file. Such a strategy is effective for businesses to enhance customer loyalty and retain their customer case as the sales teams aim for greater customer experience while gauging customer satisfaction (Milan et al., 2015). This relates to the UN guidelines on consumer protection (2015) for protecting and promoting consumer economic interests.
Business Behaviour, Economic rationale, Main issues
In this market study, it is indicated that ARCs were established as the available call packages for businesses, getting into the residential markets through BT as domestic call packages offering the option of a 12-month ARC feature with weekend calls and unlimited evening calls at discounted prices, representing a discount of 21%. Unless customers informed BT they wanted to opt out, the contracts automatically rolled forward to a new 12-month MCP. This market study highlights the concerns of ARCs as damaging to consumers noting the direct effects that occur from the potential of ARCs increasing individual exposure of consumers to switching costs and indirect effects occurring from the ARCs lessening market competition which reduced the pressure on firms to lower process and improve quality. Thus, the research focuses on the ARC offerings of BT, the largest provider of ARCs in the UK by a greater margin and the only significant supplier of residential voice services offering ARCs.
In this case, Ofcom monitored ARCs in the UK’s business and residential fixed voice markets, targeting the effects of ARCs with the econometric analysis indicating a connection between ARCs and decreasing levels of consumer switching. This effect is not affected by factors like price discounts but is mainly noted as occurring from the provision of opting out of the contract renewal process. This study looks to review if the ARCs could be enforced under the Unfair Terms in Consumer Contracts Regulations (UTCCR) for the judgement of fairness and transparency to the customer, focusing on how the ARC propositions of BT provide customer awareness (19).
Following this market study, there have been proposed reforms to auto-subscription rules for consumer contracts with regards to UK consumer policy, with businesses required to provide consumer awareness on the agreements made for the subscription contracts, including the minimum terms of the contract and the price per billing, minimum notice period for cancellation, and costs for auto-renewal or exiting. The businesses also need to offer consumers choices before the contracts are entered into without auto-renewal, send reminders of autorenewal at reasonable times, and present auto-renewal as a choice of opting in. Moreover, based on proposed reforms, businesses need to give notice of service suspension and stop charges when there is evidence of inactivity for a reasonably long time. Through the market study by Ofcom, there is evidence that the industry and market need reforms that would sustain the use of ARCs to benefit the vendors and consumers and ensure that the harms are identified and mitigated.
Analysis of the Market Study
Intense scrutiny of business-to-consumer contracts indicates that consumers are not equal to large businesses, and the autorenewal provisions may be unconscionable when improperly handled (Alshurideh, 2016). This requires that governments provide laws that protect consumers with specific methods that cater to autorenewals and cancelling of subscriptions, providing notice of renewals, and providing reminders for longer periods of autorenewals. Ofcom uses this market study to present an impact assessment of ARCs as defined in section 7 of the Communications Act 2003, noting the impacts of such contracts on stakeholders such as the suppliers and the consumers. The study identified that there are two problems for consumers. First is the direct effect that comes from the potential of ARCs increasing the individual exposure of consumers to switching costs when there is an early termination charge. The main assumption of consumer behaviour is that consumers act to maximise their utility subject to time, information, and income constraints. Thus, although some individual consumers may not be affected by the financial penalties of the contract for the exit, such contracts tend to discourage most consumers from switching, especially since a significant proportion of them have no full awareness of the renewal mechanism, hindering them from making balanced judgements (Bisping and Dodsworth, 2019). The issue, in this case, is that the ARC terms caused by the opt-out process are likely to cause significant harm to consumers as they reduce the ability to switch. Therefore, the ARCs use these costs to deter consumers from switching to new offers in the market, harming competition.
The second problem is the indirect effect that occurs when the ARCs lessen the market competition, reducing the need for businesses to improve quality and lower prices. The firms tend to create incentives to make the opt-in process convenient for the consumer, but the opt-out process is cumbersome, time-consuming, and not customer-friendly (Dodsworth et al., 2014). According to the study by Ofcom, some ARCs give consumers the option of opting out of the next rollover at any time during the current MCP, making it transparent and increasing flexibility for the consumer. However, the decision to roll forward must be linked to the value assessment of switching suppliers, only conducted close to the date with up-to-date information provided to the consumer about the available offers in the market.
It is notable that ARCs are beneficial for some consumers, especially those expected to retain their suppliers and value the convenience of not proactively renewing their contracts. It is also beneficial because the services can continue without interruption, there is no need for bureaucracy or paperwork, fewer negotiations saving on time and expenses, and no burdensome chargebacks. With the assumption that the consumers in a competitive market are well-informed, the businesses offer new contracts providing increased consumer value. This includes offering contracts with minimum contract periods that include price discounts, with the difference only occurring at the end of each MCP if the consumer takes no action during that time. The renewals also allow extending any commercial relationships, addressing updates for the circumstances of each party, and renegotiating delivery terms and payment, enabling the smoother business to continue. The vendors also benefit further as they can easily and better predict consumer behaviour in their utilisation of products or services, and they can better guarantee revenue without using sales teams or employees for income retention. Nonetheless, such a market strategy can be a disadvantage when high-volume contracts make it harder to track if using unsophisticated software.
Within the current regulatory framework of ARCs in the UK, businesses are required to act within the provisions of the UTCCR (1999), the Consumer Protection Act 1987, the Consumer Contracts Regulations 2013, the Consumer Rights Act 2015, and the Unfair Contract Terms Act 1977 as required by the Competition and Markets Authority (CMA – UK) with the responsibility of enforcing consumer protection legislation and thus prohibiting businesses from engaging in unfair commercial practices that harm the economic interests of consumers. As per the CMA, even though the contract may provide some benefits to consumers, they are still negatively affected by the contracts that lock them in for longer periods than they may want or need or have unexpected renewal or exit costs (Kovač and Vandenberghe, 2015). Therefore, through consumer law, CMA offers protection against unfair contract notices and terms with recommendations offered for professional diligence through Guidance. The Compliance Principles in the Guidance indicate that for compliance, the contract terms need to ensure that the customers are fully informed about the auto-renewal choice, including the charges, the length of the contract period, and the working process of auto-renewal. Businesses must also remind customers about auto-renewal in good time before the process happens through appropriate communication methods (Murooka and Schwarz, 2018). Thus, from a legal standpoint, ARCs need to have notice provided prior to the renewal date as specified in the exact contract terms of the agreement. Also, unless there is renegotiation of the terms of the agreement between the involved parties, the terms remain inflexible and cannot be changed with the automatic renewal. Once the deadline passes in the ARCs, both parties become locked into the contract, and thus, no changes can be made once the deadline passes (Twigg-Flesner et al., 2018). Businesses today can learn that the autorenewal contracts have to contain the specific dates of autorenewal with notice given prior to the next renewal so that the consumer can choose to renew or opt-out. The binding terms of the contract for the specific period given should be realised through mutual agreement. With the modern platforms of contract automation, some features help in managing the process, avoiding any cumbersome and time-consuming aspects and thus tracking the renewal dates effectively.
References
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Crawford, G. S., Tosini, N., and Waehrer, K. 2011. The impact of ‘rollover’ contracts on switching costs in the UK voice market: Evidence from disaggregate customer billing data.
Dodsworth, T. J., Baltrusch, V. S., Dallemagne, U., and de Medeiros, D. T. A. 2014. A comparative study of automatically renewable contracts in Europe. Business Law Review, 35(3).
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Milan, G. S., Eberle, L., and Bebber, S. 2015. Perceived value, reputation, trust, and switching costs as determinants of customer retention. Journal of Relationship Marketing, 14(2), 109-123.
Murooka, T., and Schwarz, M. A. 2018. The timing of choice-enhancing policies. Journal of Public Economics, 157, 27-40.
Ofcom. 2011. Automatically Renewable Contracts: Research into their effects and proposals for a General Condition. https://www.ofcom.org.uk/__data/assets/pdf_file/0024/27870/Automatically-renewable-contracts.pdf
Twigg-Flesner, C., Schulze, R., and Watson, J. 2018. Protecting rational choice: information and the right of withdrawal. In Handbook of Research on International Consumer Law, Second Edition (pp. 111-138). Edward Elgar Publishing.
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