Update on Tailor Made Incentives and Condition 21(5)

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5 May 2009

Postcomm has today served a notice under Section 27(8) of the Postal Services Act (the Act) stating that it will not make a final order in relation to securing Royal Mail’s compliance with Condition 21(5) of its licence when offering Tailor Made Incentives (TMIs) on Mailsort 2 products.

On 13 March 2009, Postcomm issued a notice of a proposed final order setting out what was required to ensure compliance with Condition 21(5) of Royal Mail’s licence when offering TMIs on Mailsort 2 products. Royal Mail responded on 27 March 2009 stating that it had taken the decision not to reintroduce TMIs on Mailsort 2 products. Following consideration of Royal Mail’s representations, Postcomm is satisfied that it has agreed to take and is taking all the steps that Postcomm considers appropriate to ensure compliance with Condition 21(5) of its licence, insofar as TMIs on Mailsort 2 products gave rise to a contravention of the licence condition.

Royal Mail’s representations also argued that Postcomm had failed to satisfy the procedural steps necessary in reaching its conclusion that a financial penalty is justified and reasonable, through not issuing a formal notice under Section 32 of the Act and considering representations made in accordance with that notice. Whilst Postcomm regards a formal notice under Section 32 of the Act as not necessary in relation to a zero penalty, Postcomm is content to issue such a notice in order to remove any possibility of procedural shortcoming in the way in which Postcomm’s decision has been implemented. In accordance with the Act, Royal Mail has until 28 May 2009 to make representations in relation to the notice issued today under Section 32 of the Act.

Further information on the investigation.

Notes to editors:

TMIs are a scheme offered by Royal Mail which it regards as encouraging customers to make further use of postal services for marketing and promotion purposes. If Royal Mail considers that customers are using its services in an “innovative way” (against certain criteria), it offers a rebate relating to the innovative mailing activity (a percentage of the value of the mailing), in the form of a postage credit.

Under Condition 21(5) of Royal Mail’s licence, the minimum percentage level of headroom between the access price and the analogous retail price which the licence requires to be “reduced by the maximum amount of all discounts available” is set, for each weight step for the duration of the 2006-2010 price control. The intention of this restriction is to prevent a margin squeeze between Royal Mail’s retail and access services. Without the headroom control, there would be potential for Royal Mail to reduce the margin between its retail and access prices to prevent access operators from competing in the upstream activities of its business. Royal Mail is required to take “all reasonable steps” to ensure compliance with the Condition.


Tailor Made Incentives

Tailor Made Incentives (TMIs) are a scheme offered by Royal Mail which it regards as encouraging customers to make further use of postal services for marketing and promotion purposes. If Royal Mail considers that customers are using its services in an “innovative way”, (against certain criteria) it offers a rebate relating to the innovative mailing activity in the form of a postage credit.

On 28 February 2008 Postcomm published a letter consulting on Royal Mail's application to be exempt from publishing on its website certain details relating to TMIs, under Condition 7 of its licence. One consultee expressed concern that TMIs may represent a means whereby the headroom protection within Royal Mail's licence can be breached, by reducing the margins between retail and access services.

In August 2008 Postcomm began a preliminary assessment to consider Royal Mail’s compliance with Condition 21(5) when offering TMIs. Following the preliminary assessment, Postcomm considered that there were reasonable grounds for suspecting that there had been a contravention of Condition 21(5) of Royal Mail’s licence and opened a full investigation into this matter.

In December 2008 Postcomm issued its “minded to” decision in which Postcomm was minded to find that Royal Mail had contravened and was likely to continue contravening (unless appropriate action was taken) Condition 21(5) of its licence through the offering of TMIs on Mailsort 2 products.

In response to Postcomm’s “minded to” decision, Royal Mail submitted written and oral representations to Postcomm in January 2009. Third party representations from the Mail Competition Forum and TNT Post UK Limited were also received.

Following consideration of these representations and all the relevant information gathered throughout the investigation, Postcomm has decided that Royal Mail has contravened Condition 21(5) of its licence through the offering of TMIs on Mailsort 2 products, and that it is therefore necessary to propose a final order requiring Royal Mail to take the necessary steps to comply with Condition 21(5) in accordance with Section 22 of the Postal Services Act 2000 (the Act).

Royal Mail submitted representations to Postcomm on the proposed final order at the end of March 2009, stating that it had taken the decision not to reintroduce TMIs on Mailsort 2 products. Postcomm decided that Royal Mail had agreed to take and is taking all the steps that Postcomm considers appropriate to ensure compliance with Condition 21(5) of its licence, insofar as TMIs on Mailsort 2 products gave rise to a contravention of the licence condition. In early May 2009 Postcomm served a notice under Section 27(8) of the Act stating that it will not make a final order in relation to securing Royal Mail’s compliance with Condition 21(5) of its licence when offering Tailor Made Incentives (TMIs) on Mailsort 2 products.

Royal Mail’s representations also argued that Postcomm had failed to satisfy the procedural steps necessary in reaching its conclusion that a financial penalty is justified and reasonable, through not issuing a formal notice under Section 32 of the Act and considering representations made in accordance with that notice. Whilst Postcomm regards a formal notice under Section 32 of the Act as not necessary in relation to a zero penalty, Postcomm is content to issue such a notice in order to remove any possibility of procedural shortcoming in the way in which Postcomm’s decision has been implemented. In accordance with the Act, Royal Mail has until 28 May 2009 to make representations in relation to the notice issued under Section 32 of the Act.