Royal Mail shares fall on Ofcom review

Royal Mail shares fell on fears that Ofcom could impose price caps

Shares in Royal Mail fell on Friday after Ofcom confirmed the scope of a review into the company's operations.

The review could result in a price cap being imposed on the postal operator.

The regulator said the inquiry will examine the "efficient and financially sustainable provision" of the UK's universal postal service.

The universal service is the Royal Mail's commitment to deliver to all of the UK for the same price.

Shares fell closed down 3.5%, or 18.5p, to 508.5p.

The company is worth about £5bn and the shares are up 14% since its float in October 2013.

Ofcom, which first announced the review last month, is concerned at the reduction in competition in parts of the letters and parcels markets.

The letter delivery service arm of Whistl and parcel firm City Link both folded in recent months.

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

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

Royal Mail has no competition in the letter market following the collapse of Whistl

The regulator said it could roll back some of the commercial flexibility given to Royal Mail in 2012, which included the ability to raise prices.

In May Royal Mail reported pre-tax profits of £400m for the year to 29 March, down from £1.66bn for the previous 12 months.

'Consistent approach'

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

"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," the company said.

"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 next year.