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Cash-strapped telcos face regulatory backlash

The Citizens Advice Bureau and Ofcom have found that some mobile phone providers have been charging their customers for handsets which have already been paid off
October 11, 2018

Last time I switched phones, I created a comprehensive spreadsheet to assess whether it would be cheaper to buy my handset directly from the shop or enter a contract with a telecoms company and pay for it over 24 months. I picked the latter option and it’s a decision I regret. Unknowingly, I have been paying that contract for several months longer than necessary – my telecoms provider continued to charge me after I had paid off the phone.

I am not alone. According to the Citizens Advice Bureau (CAB), consumers who stick with their mobile, broadband, home insurance, mortgages and savings providers are losing out on over £4bn a year, or £877 per person by continuing to pay for a contract which has ended. Research by media and telecoms regulator Ofcom found that mobile communications providers alone could be overcharging by approximately £330m a year – a problem inflated by the fact that 12 per cent of consumers don’t know when their contract ends.

Vodafone (VOD) – which at the time of writing is facing a backlash for an advert that appears to suggest customers can terminate their contract at any time – has responded to Ofcom’s claims by confirming that: “We contact our customers when they are approaching the end of their minimum term to let them know their options”. BT (BT.A), whose EE network has been named as an offender, has not responded to a request for a statement.  

It seems completely absurd that an industry that provides communication services cannot inform its customers when their contract is complete, let alone cancel it automatically – surely a simple text would help. That’s why Ofcom has set out plans to force companies to tell their customers when their contract has ended and has engaged with the major mobile providers to seek a “simple, voluntary solution”. The regulator told the IC that the telcos' plans to resolve the problems “were not sufficient to bring about change for consumers”.

The CAB has gone a step further. In late September, the charity issued a ‘super complaint’ to the Competition and Markets Authority (CMA) calling for the regulator to outline how the problem can be fixed. An Ofcom spokesperson welcomed the complaint and told the IC: “It complements our existing work to ensure customers get a fair deal. We’ll continue to work with Citizens Advice and the CMA on this issue.” Offenders should be nervous – the CAB’s last super complaint culminated in the payment protection insurance (PPI) scandal which, to date, has seen the UK’s major banks pay back more than £32bn to customers.

That’s the kind of money telecoms companies can’t afford to part with. Over-exuberant consolidation, infrastructure investment and growing competition have stretched the leverage ratios of the sector to worrying levels in recent years. According to broker JP Morgan, European telcos will have an average net debt to adjusted cash profit (Ebitda) ratio of 2.7 times by 2019 (compared with 2.0 times in 2006) – second only to the utilities sector.

True, the sector’s low operating costs and superior cash generation have historically justified the high leverage and helped ensure the companies keep paying their dividends, but JP Morgan claims that the industry’s free cash flow conversion is actually much poorer than people realise. Ebitda margins are expected to fall to 32 per cent by 2019, from 38 per cent in 2005, while capital expenditure (including spectrum costs) has risen to 19 per cent of sales. That means the average cash conversion of Ebitda is “only” 38 per cent in the European telecoms industry, compared with 76 per cent in the wider market.