Ofcom could fine Royal Mail £1bn over its pricing

Royal Mail could be fined almost £1bn after the postal regulator found that it broke competition law and prevented rivals from expanding.

Royal Mail shares fell by 3.4 per cent to 486.7p following the statement from Ofcom.

If the postal watchdog’s provisional findings are confirmed in a final decision next year, a fine of 10 per cent of global turnover, or £940m, could be imposed on the privatised business.

Ofcom said that when Royal Mail set access prices for bulk mail delivery services, the cost of servicing rural areas was much greater than the cost of serving urban areas. This meant that in practice “higher access prices [were] charged to access customers that competed with Royal Mail in delivery than to those access customers that did not”.

Ofcom’s statement alleges that these higher access prices would be a “strong disincentive” to new entrants to come into the market, while also making it tougher for existing postal operators to compete with Royal Mail.

The regulator said this could lead to a potential “distortion of competition against the interests of consumers”.

The Ofcom findings follow a complaint by Whistl, a rival postal operator, after Royal Mail announced proposed charges in January 2014.

Although the proposed charges were never actually implemented, Ofcom argues that even publication of the proposals amounted to a breach of competition law.

Whistl, which began delivering letters to homes in London in 2012 and in Manchester and Liverpool in 2013, wanted to expand to cover 42 per cent of addresses in the UK. However, in May this year it pulled out of the end-to-end delivery market for mail.

Royal Mail said it would respond “robustly” to Ofcom’s statement in the next few months. The postal group said: “Royal Mail takes its compliance obligations very seriously and is disappointed by Ofcom’s announcement. The company considers that the pricing changes proposed in 2014 were fully compliant with competition law.”

In recent years, access to the postal market has been opened up to competition. Mail that is partially sorted by competitors or large customers can go directly into the Royal Mail system, for delivery by its workers.

Whistl, formerly TNT Post and owned by the Dutch postal group Post NL, wanted to sort bulk mail for large customers and also deliver to households. Its service began in more densely populated urban areas.

Royal Mail believes that Ofcom’s guidance on how it should set charges for the end-to-end delivery market gave the postal group the scope to set different prices for different geographic areas, to make sure that the cost of delivering to more remote areas was properly covered.

This was important to the postal operator, and to many stakeholders, because there were fears that rival post groups would “cherry pick” the easiest and most lucrative areas of business, such as inner-city deliveries.

If Ofcom decides to sanction Royal Mail when its final findings are published in 2016, the postal operator will be able to appeal to the Competition Appeal Tribunal.

In June Ofcom launched a fundamental review of how Royal Mail sets charges, as the postal group faces renewed competition – particularly in the parcels market from competitors such as Amazon. Ofcom may decide to tighten caps on what Royal Mail can charge for stamps, having relaxed the cap on first class stamps in 2012.