Handset subsidy mystery solved

Consumers will finally have clarity on how much they are paying for “free” cellphones, but not because the Independent Communications Authority of SA (ICASA) has at long last regulated the emotive issue.

Instead, the Consumer Protection Act (CPA), which came into effect on Friday, will put an end to an almost six-year debate over how much of what consumers pay is for the handset, as it could force cellular companies to redraft contracts to split phones from airtime costs.

Handset subsidies have been a bone of contention for subscribers, who ended up paying hefty penalties to get out of fixed-term contracts as cellular companies recouped the cost of handsets that were marketed as “free”.

Bundling cellphones with airtime deals previously locked consumers into two-year contracts because consumers were actually paying for the phone, and not only airtime. Now, however, final regulations that give effect to the new consumer law could finally sort out an issue that ICASA has been battling with for years.

The regulations, published on the same day the CPA came into effect, allow suppliers to charge a reasonable cancellation fee if consumers cancel a contract early. This fee can take into account the value of goods that the subscriber will keep. Consumers can cancel a fixed-term contract by giving 20 days' notice.

As a result, cellular companies are going to have to work out how to charge for handsets, and contracts will end up being transparent. Currently, the cost of the airtime and phone are bundled together and it's not clear what each costs.

ICASA first tried to sort out this issue in 2006, when it embarked on a consultation process to see if it should regulate handset subsidies. In 2008, the handset subsidy regulations, requiring operators to define how much consumers paid for phones, were published.

However, Vodacom threatened the regulator with legal action if the regulations went into force, and ICASA bowed to pressure. At the end of 2009, a new code of conduct was released, but was much softer and more of a recommendation than a prescription.

Now ICASA has put the entire issue on hold indefinitely. An 18 March Government Gazette indicates the “regulation-making process under review is hereby put on hold till further notice from the authority”.

ICASA spokesman Paseka Maleka explains the regulations have been paused, because the Electronic Communications Act (ECA) must be amended to give it enough power to sort out handset subsidies.

Maleka says the process of regulating handset subsidies started under the Telecommunications Act, which has since been replaced by the ECA. The ECA, however, isn't clear on how to implement handset subsidy regulations, he notes.

The authority intends proposing amendments to the act to clarify the situation. Maleka says this may happen this financial year, although a date has not yet been set. In addition, says Maleka, there is duplication within the CPA, which also deals with cellphone contracts through several of its provisions.

Maleka says there is a possibility that ICASA may not have to regulate handset subsidies if the CPA clears up the issue in practice.

Nicholas Hall, an attorney with Michalsons Attorneys, explains the regulations allow cellular operators to take various factors into account when contracts are ended early. This includes how much is outstanding, the value of goods being kept or returned, and industry practice.

Hall says this will allow consumers to keep their handsets when they cancel contracts early as long as they pay a fee for the cellphone.

Previously, cellphone companies would have only been able to charge 10% of the outstanding value of the contract, which could have resulted in them having to reclaim bundled devices, which would have been potentially worthless.

Although the final regulations work more in favour of the cellular operators than the consumer, the cancellation fee must be reasonable, and cellular companies can't charge a ridiculous amount, explains Hall.

Hall adds the CPA opens up the “real possibility” of cellphone contracts being split into two sections - one defining the cost of the handset and the other covering airtime. He says this would make implementing the law easier, although the practicalities will still have to be worked out.

Arthur Goldstuck, MD of World Wide Worx, says the CPA negates the need for ICASA to regulate handset subsidies as the consumer law will solve the drawn-out debate when it is put into practice.

Cellphone contracts are now likely to break down the handset costs, notes Goldstuck. The price consumers pay for handsets will no longer be “opaque”.

Dominic Cull, a director at Ellipsis Regulatory Solutions, says ICASA should not be dealing with handset subsidies at all, as this issue will be far better tackled by the National Consumer Council (NCC). The NCC came into being as a function of the law to deal with consumer complaints.

Cull doesn't believe ICASA has any business discharging a consumer protection mandate, as the body has been a “spectacular” failure in this area, because it doesn't have the capacity to deal with consumer complaints.

The CPA gives ICASA a “wonderful out” and removes the burden of dealing with handset subsidies from the body, Cull says. He says ICASA will watch how the issue is played out in practice, and then realise it can't add anything.

Cull says bundled cellphone contracts only pander to the needs of consumers who want the latest and greatest handsets. He argues the phones are not 'free', and cellphone companies should stop making this claim.

Vodacom chief officer of corporate affairs Portia Maurice says suppliers don't have to take goods back if a contract is ended early. Vodacom hasn't yet sorted out its “final business rules” to deal with handsets, as it is finalising its options. “We certainly will comply with the regulations.”

Graham Mackinnon, Cell C's group general counsel, says as the regulations were only published late last week, the company is still assessing the impact on its business. However, says Mackinnon, the removal of the 10% penalty is an important change for cellular companies.

“Cell C has changed various consumer-facing documents and policies to bring them in line with the requirements of the CPA,” says Mackinnon. The cellular operator will revisit the documents to make sure they are in line with the final regulations.