Royal Mail was the biggest riser on the FTSE 100 shortly after the opening bell on Wednesday, its shares jumping 2.5 per cent to 533p, after the UK’s communications regulator delivered its verdict on Britain’s postal market.

Here FT’s Michael Pooler explains the main findings.

Royal Mail has avoided new wholesale and retail price controls by the regulator Ofcom, following a fundamental review into UK’s dominant postal operator.

Instead, the communications watchdog said it would tighten rules on Royal Mail in the so called “access” market – where rival operators collect and sort mail such as bank statements and utility bills before handing it over to Royal Mail to complete delivery.

A price cap on second-class stamps will remain.

Ofcom launched the root-and-branch probe into Royal Mail nearly a year ago, after the withdrawal of rival Whistl from door-to-door letters delivery left the postal operator with no effective competition in this key part of the market.

Consequently, Ofcom was concerned that Royal Mail had no competitors to put pressure on it to improve services and become more efficient. Officials see this as vital to safeguarding the universal service obligation – the legal requirement for Royal Mail to deliver mail six days a week throughout the UK at a uniform price.

Investors in Royal Mail may feel a degree of relief from today’s outcome.
In summary, Ofcom’s findings were:

  • The universal postal service is financially sustainable, while current rules and safeguards for postal users are generally working well.
  • Royal Mail’s current return on sales is at the lower end of the 5-10% range which Ofcom considers to be compatible with a sustainable universal service. In recent years, the company had fallen below this range.
  • Royal Mail has made notable modernisation improvements, but it could still do more to improve efficiency, in the interests of postal users.
  • Consumer satisfaction with postal services, and value for money, are high.
  • There has been increased competition and innovation in the parcels sector. Royal Mail has retained its strong position in the delivery of small, individual parcels.

On the strengthening of rules in the access market, Ofcom said:

  • First, to stop shorter notice periods around contractual terms being imposed by Royal Mail on access operators.
  • Second, to respond within six weeks when a wholesale customer requests a product similar to one already sold by Royal Mail.
  • Ofcom is also concerned that Royal Mail has the potential to cross-subsidise its parcels business through its letters business – where it has a much larger market share and an established delivery network – in a way that might disadvantage other parcel operators. So Ofcom will closely monitor whether Royal Mail is appropriately allocating its costs between parcels and letters.

In addition, Ofcom also also plans to further protect “untracked’” letters that are valuable to the recipient – such as credit card bills, hospital appointments or exam results. It will require all postal operators that deliver this mail to minimise the risk of loss, theft or damage, with the threat of fines.

Royal Mail is still subject to two further separate investigations by Ofcom. One is into allegations of anti-competitive behaviour, which Whistl said prompted its withdrawal; and another after it failed to hit performance targets for first-class mail last year.

There is relentless competition in Royal Mail’s other key area of parcels, on which it is counting to prop up future earnings as Britons send fewer letters. The FTSE 100 company posted a one-third drop in pre-tax profit to £267m in the year to March 27.

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