Rollover contracts, which tie landline and broadband customers into repeated minimum contract periods unless they opt out, will be banned from December this year.
The contracts, also known as Automatically Renewable Contracts (ARCs), roll forward to a new minimum contract period - with penalties for leaving - unless the customer actively opts out of the renewal.
However, Ofcom has now decided to outlaw the practice, with the ban applying to ARCs for landline and broadband services sold to residential and small business customers.
The regulator estimates that approximately 15% of UK residential consumers are on such contracts, with BT the largest communications provider currently offering them.
Other residential providers include Adept Telecom, Axis Telecom, Eze Talk and iTalk, while TalkTalk Business, Titan Telecoms, and Optimum Calls offer ARCs to business users.
"Ofcom's evidence shows that ARCs raise barriers to effective competition by locking customers into long term deals with little additional benefit," said Ofcom chief executive, Ed Richards.
"Our concern about the effect of ARCs and other 'lock in' mechanisms led to our decision to ban them in the communications sector."
The sale of new automatically renewable contracts to residential and small business customers will be prohibited from 31 December 2011.
All residential and small business customers currently on rollover contracts will have to be moved to alternative deals, so that the contracts are completely removed from the market by 31 December 2012.
Adam Scorer, director of external affairs at Consumer Focus, said the ban is extremely welcome.
"Rollover contracts can be confusing and penalise customers," he added.
"Many people have been unknowingly rolled over into another contract. This has left them unfairly tied into a contract which they had to pay a penalty fee to escape.
'This move by the regulator will help make it easier for customers to switch and get a better deal, and should help to make the market more competitive."
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