“Reasonable” Cancellation Penalty – Cell-phone Contracts (Part 1)

Staff Writer @ Lucid Living

Despite the introduction of the Consumer Protection Act (CPA), most consumers are still none the wiser as to how much they are paying for the so-called “free” handsets, often used to lure subscribers into signing fixed-term contracts.
“Free” handsets have long been a bone of contention with cellular subscribers, who end up locked into two-year deals they can’t get out of, unless they pay hefty penalties.

Under the CPA, subscribers can get out of fixed-term contracts by giving 20 days’ written notice. In addition, companies can’t enforce hefty penalties, because only a “reasonable” cancellation fee can be charged.

The CPA doesn’t specify what a “reasonable” amount is – instead the regulations provide guidelines on how to determine the cancellation fee.

At present, neither Vodacom nor MTN seperate out the cost of handsets on invoices, which will leave consumers at the mercy of cellular providers to work out a “reasonable” cancellation fee if contracts are cancelled early.

Richard Boorman, Vodacom’s executive head of media relations, says the company isn’t splitting handsets and airtime as separate contracts. “The regulations allow for a reasonable cancellation fee – we’re still in the process of finalising that number.”

MTN SA corporate services executive Robert Madzonga says the operator amended its contracts from 1 April 2011 to comply with the CPA by changing terms and conditions.
However, MTN did not respond to a request to clarify how the operator will deal with the cost of the handset if a deal is cancelled early.

Cell C is changing the layout of its bills to reflect the amount owed on handsets, says group general counsel Graham Mackinnon. “Customers that cancel their contracts prior to the expiry of the contract period will be liable to pay the outstanding amount owed on the handset.”
Mackinnon says the cellular company has changed its subscriber agreement to make sure terms and conditions are in clear and understandable language, to comply with the CPA.

Virgin Mobile SA chief strategy and marketing officer Jonathan Newman says the company has always split out the cost of handsets on its contracts. Contract customers that cancel in full will only be liable for the balance owing on the handset, he explains.

Cellular companies must indicate what the “reasonable” cancellation fee is upfront, so consumers know what they are getting into, argues the National Consumer Commission (NCC).

If a consumer feels the cancellation fee is unfair, they can challenge it by taking it to the NCC. The onus will then be on the cellular service provider to prove that it is reasonable, which will entail showing what the cost of the handset is.

See Part 2 of this segment, for some interesting information we obtained directly from each cellular company, in respect of this issue.