By Daniel Hunter

UK businesses should brace themselves for significant increases in the cost of postal services after today’s (Tuesday) announcement by Ofcom, which paves the way for Royal Mail bosses to set stamp prices themselves.

The Forum of Private Business has warned that, under the new system, postal chiefs at Royal Mail will be free to increase the cost of a first class stamp without limit, but with caps in place for second class letters and parcels for at least the next seven years.

Ofcom say charges for second class post will be indexed linked to inflation with a ceiling for second class stamps of 55p until 2020.

The Forum believes this will almost inevitably lead to first class charges becoming unaffordable for many small firms, forcing reliance instead on the far slower second class system.

Under the new model 93% of first class would be expected to arrive next day, and 98.5% of second within three days.

“We think these changes are bad for business, and will ultimately cost small firms — the bread and butter users of the postal service — far more to send items via first and to a lesser extent second class in the years ahead,” said the Forum’s Chief Executive, Phil Orford.

“If Ofcom thinks it can give Royal Mail these new freedoms and prices won’t immediately go up, it is deluded. This will merely prove to be yet another increase in the cost of doing business for SMEs.

“It will also result in a postal system where the bulk of all post will eventually be sent second class. Simple economics suggests this will, ultimately, force the cost of first higher as increasingly fewer people use the ‘premium’ service. There are also implications for rural areas where delivery times are usually that bit longer.

“There will always be those customers desperate to get a mail from A to B in a hurry, and for those there will be few options but to pay out what will no doubt rapidly become exorbitant prices. By adopting a: ‘the sky’s the limit’ mentality for first class, there’s a danger it will become a cash cow.”

Ofcom say the central aim of its review was to ensure Royal Mail’s Universal Service Obligation — which demands a six day a week service for UK customers - is financially sustainable and can be provided efficiently. The regulator says this will monitored and it retains the ability to intervene if the new regime fails to safeguard the universal service and the affordability of mail services.

“There’s a danger that Ofcom as a regulator has allowed itself to become something of a toothless dog," Mr Orford added.

"Exactly how far down the path of prices rises would it go before weighing in and asking Royal Mail to think again? Surely it would have been better for Ofcom to have more of a direct say in any price increases rather than relinquishing this power?

“We will certainly be looking over the shoulder of Royal Mail to ensure they don’t punish the wealth creating businesses by above inflation increases. The quickest way for the Royal Mail to decline further is by pricing businesses out of their service. The costs of business are already high. There needs to be some respite not further crude hikes.”

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