Royal Mail could be forced to cap prices

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The regulator is concerned that there are not enough players in parts of its markets, after the letter delivery service arm of Whistl and parcel firm City Link both folded in recent months.

Ofcom said it will look at the firm's position in the parcels market "and assess the company's potential ability to set wholesale prices in a way that might harm competition".

The collapse of the letter service run by Whistl - formerly known as TNT - left the Royal Mail with no national competitor.

As a result Ofcom said it may roll back some of the commercial flexibility granted to Royal Mail in 2012, including the ability to put up its prices, amid a review of the company's operations.

The inquiry will look at whether the future of the country's universal postal service is secure, which is the Royal Mail's commitment to make deliveries to all parts of the UK at a flat rate, six days a week.

Ofcom said it gave the Royal Mail the licence to set prices because at the time the universal postal service was under threat.

In 2012 the volume of UK mail had fallen by over a quarter in the previous six years, whcih had hit Royal Mail's finances.

But since then the firm's financial position has improved, and while competition in the parcels business had grown, it has suffered in the letters service.

Shares in the firm plunged 3 per cent off the back of today's news from Ofcom.

The Royal Mail said it would continue to participate fully in Ofcom's review.

It added: "In particular we will be highlighting the need for a consistent approach to regulation. Ofcom's existing framework, put in place in 2012 was to have provided certainty for seven years.

"Royal Mail believes it has used the commercial freedoms granted by Ofcom in a responsible and appropriate manner to help secure the financial sustainability of the universal service in the face of significant ongoing change across the postal market."

Ofcom's review is expected to be completed and revised regulations put in place in 2016.

Last month the Government cut its remaining stake in Royal Mail by half by selling 15 per cent of the group had been sold to institutional shareholders.

The Government is expected to sell the rest of its remaining stake by the end of the year, which amounts to another 15 per cent of Royal Mail.