Britain's telecoms regulator proposed banning inflation-linked price rises in the middle of customers' broadband and mobile contracts, saying the practice was unfair on consumers and hampering competition.

Shares in London-listed telecoms companies BT and Vodafone fell 4% and 2% respectively on the proposed ban, as they would no longer be able to impose such extra charges, putting them on the hook to absorb inflationary risks.

Regulator Ofcom, which launched a review in February, said it wanted any future price rises to be written into a contract in pounds and pence, giving consumers more certainty over what they will pay.

Telecoms companies have included inflation-plus price rises in their contracts to cover increased costs, such as a trebling in energy bills, and investment in networks.

The contract terms received scant attention when inflation was low, but a sharp rise in 2022 to a peak above 11% resulted in consumers facing hikes in bills of around 14% earlier this year from providers including market leader BT.

Both broadband and mobile providers have tagged the extra charges onto contracts, with Ofcom saying half of mobile contracts were now subject to inflation-linked price rises, while for broadband customers it was four in ten.

"We have provisionally concluded that inflation-linked mid-contract price rise terms can cause substantial amounts of consumer harm by complicating the process of shopping for a deal, limiting consumer engagement, and making competition less effective as a result," Ofcom said.

BT said it had always followed the regulator's guidance on pricing. It said it was assessing its options.

A Virgin Media O2 spokesperson said: "We have always been clear and transparent with our customers regarding any price changes and provide excellent value for connectivity that is used almost constantly."

It said it would make clear its view on how Ofcom could maintain the competitive environment that already existed for consumers, while also supporting the billions of pounds of investment operators like Virgin Media O2 make in telecoms infrastructure each year.

TalkTalk, a value provider that uses BT's Openreach network, said it had delivered value for customers in the "vibrantly competitive UK broadband market" for 20 years.

"If Ofcom is to push ahead with tying industry's hands on CPI indexed price inflation, we urge them to urgently review similar CPI inflation for BT Openreach at a wholesale level," Chief Executive Tristia Harrison said.

"The link between the two is obvious, is essential for protecting both consumers and competition, and needs addressing."

Ofcom said it would consult before publishing its final decision in spring 2024.

(Reporting by Paul Sandle and Sarah Young; Editing by James Davey and Mark Potter)