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Ofcom has today announced a fundamental review of the regulation of Royal Mail.

The review will ensure regulation remains appropriate and sufficient to secure the universal postal service, given the recent withdrawal by Whistl from the ‘direct delivery’ letters market, which has resulted in Royal Mail no longer being subject to national competition.

Ofcom established a regulatory framework for Royal Mail in 2012 that ensured UK consumers and businesses continued to benefit from a universally-priced, affordable postal service, six days a week. This reflected Ofcom’s duty to secure the provision of a universal service.

The framework included greater commercial freedom for Royal Mail to operate in what is a challenging market, removing regulations that threatened to undermine the universal service, and adding safeguards to protect postal users.

Ofcom’s review will incorporate its existing work, announced in December, to assess Royal Mail’s efficiency; consider its performance in the parcels market; and assess the company’s potential ability to set wholesale prices in a way that might harm competition. In addition, the review will address the implications of Whistl’s withdrawal, which represents a significant change in the direct delivery market.

A changing market

Royal Mail’s competitor Whistl announced on 10 June that it was withdrawing from the market for direct delivery - where an operator collects, sorts and delivers bulk mail entirely using its own network.

This leaves Royal Mail without any national competition for direct delivery of letters. (Competition remains strong in other postal markets such as parcels and ‘access mail’ - where operators collect and sort mail before handing over to Royal Mail to complete delivery.)

Royal Mail itself is in a stronger position financially than when Ofcom last reviewed the postal framework. Royal Mail also now operates as a public company, following partial sale by the Government. The Government has also outlined its intention to release its remaining 15% stake in Royal Mail.

What Ofcom will consider

Given these developments, Ofcom’s review will examine:

• what changes to the overall postal regulatory framework might be appropriate to secure the universal postal service;
• how best to ensure Royal Mail continues to become more efficient in the absence of national competition for the direct delivery of letters (so helping the universal postal service to remain sustainable);
• whether Royal Mail’s wholesale and retail prices are both affordable and sufficient to cover the costs of the universal service; and
• whether Royal Mail’s commercial flexibility remains appropriate in the changing market; and, if not, whether wholesale or retail charge controls might be appropriate.

Next steps

Ofcom will outline its initial thoughts and begin seeking formal submissions from industry, consumer groups and other stakeholders in July.

The review is expected to be completed, and a revised regulatory framework put in place, during 2016.

How postal markets work in the UK

NOTES FOR EDITORS:

1. Separately to the review announced today, Ofcom is currently investigating whether Royal Mail has abused a dominant position in contravention of the Competition Act 1998, by virtue of the access prices that it announced in November 2013 and January 2014. This follows a complaint by TNT Post UK (now Whistl). Ofcom intends to provide a copy of a provisional decision to Royal Mail in the first half of July 2015.
    
2. The Postal Services Act 2011 gives Ofcom a duty to carry out its functions in relation to post in a way that it considers will secure the provision of a universal postal service.
   The Postal Services Act 2011 also requires Ofcom to have regard to the need for the provision of a universal postal service to be financially sustainable, including the need for a reasonable commercial rate of return for any universal service provider; and to become efficient within a reasonable time, and then to remain so. Ofcom’s principal duty under the Communications Act 2003 is to further the interests of citizens in relation to communications matters, and to further the interests of consumers in relevant markets, where appropriate by promoting competition.