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Watchdog announces crackdown on firms overcharging loyal customers

Watchdog announces crackdown on firms overcharging loyal customers

Firms that overcharge loyal customers should be publicly named and shamed, and vulnerable customers should be protected by price caps, the competition watchdog has said after it found consumers overpay by £4 billion a year in total.

The Competition and Markets Authority (CMA) has released a series of recommendations to tackle the so-called loyalty penalty – the amount a customer loses by being loyal – after Citizens Advice called for it to take action to stop people being exploited.

One of the CMA's recommendations is that firms should be publicly held to account for charging existing customers much more, and regulators should publish the size of the loyalty penalty in key markets and for each supplier on a yearly basis.

It has also called for targeted price caps to protect those worst hit by the loyalty penalty. 

Citizens Advice launched a 'super complaint' in September, after its research found British consumers are losing £4.1 billion a year across the mobile, broadband, home insurance, mortgages and savings markets to the so-called 'loyalty penalty'. It said eight out of 10 consumers were paying a significantly higher price to at least one of their providers for remaining with them.

See Martin's blog Is it unfair to charge loyal customers blog? Plus our Compare Broadband DealsCheap SimsCheap Home Insurance, Savings and Mortgages guides for help.

Martin: 'Targeted price caps protect the vulnerable'

MoneySavingExpert.com founder Martin Lewis said: "The CMA has rightly recognised that if we are going to stick with a competitive market, we need to decide who is and who isn't an acceptable victim of it.

"In a competitive market, some people will, by definition, pay more than others for the same thing. The problem comes for those who are unable to engage in competition, because they are vulnerable, information disenfranchised, not on the internet or simply bureaucratically unable to switch. They are the ones who need protection. If I – as someone who is web-savvy, affluent and financially informed – choose not to switch, that's my problem. If a struggling 90-year-old who's not on the web can't, the market needs fixing.

"So we are pleased to see the CMA rightly talking about targeted price caps, not blanket price caps. A blanket cap leaves you stuck in a halfway house – a hodgepodge – between competitive prices and price regulation, where we simply tell companies what they can charge. Yet targeted price caps protect the most vulnerable in our society."

What did the CMA find?

The CMA uncovered damaging practices by firms, including continual year-on-year stealth price rises, costly exit fees, difficult cancellation processes, requiring customers to auto-renew or not giving sufficient warning their contract will be rolled over.

It also found that vulnerable people, including the elderly and those on a low income, may be more at risk of paying the loyalty penalty.

The CMA said millions of people are affected, with around one million in the mortgage market to nearly 12 million in the insurance market, and the loyalty penalty is also likely to arise in many other markets.

What is the CMA recommending?

The CMA is making a number of recommendations to regulators and the Government to stop consumers being ripped off. These include market-specific recommendations:

  • Mortgage providers should help the 10% of customers who could switch but don't, and must help the mortgage prisoners by putting them on a better deal to tackle the £0.8 billion loyalty penalty.

  • Mobile firms must not continue charging customers the same price once they have paid off their handset at the end of their minimum contract to tackle the £0.3 billion loyalty penalty.

  • Home insurers should be investigated by the Financial Conduct Authority to look at the practice of continually raising prices. The CMA said pricing interventions should be considered to help tackle the £0.7 billion loyalty penalty.

  • Savings providers could face collective switches, and the introduction of a basic savings rate to tackle the £1.1 billion loyalty penalty.

  • Broadband firms could face collective switches and targeted price caps to tackle the almost £1 billion loyalty penalty.

Other recommendations include:

  • Cracking down on harmful business practices. Enforcement and regulatory powers should be used to stop practices that prevent consumers getting a better deal.

  • Setting out principles which businesses across all markets should follow. These could include people being able to leave a contract as easily as they enter it.

  • Reinforcing consumer law. The CMA has said it will also be looking at whether consumer law should also be reinforced.

  • Firms should be publicly named and shamed. Regulators should publish the size of the loyalty penalty in key markets and for each supplier on a yearly basis.

  • Targeted price caps to protect the people worst hit. These could help vulnerable people where needed.

The CMA has said it will monitor its recommendations over the next 12 months to see what progress is made. It has also opened a consumer law enforcement investigation in the anti-virus software sector following its research.

What does Citizens Advice say?

Citizens Advice is one of a number of Government-designated consumer groups which can ask a regulator to investigate an issue or a market that it believes is working against the public interest.

Gillian Guy, chief executive of Citizens Advice, said: "The CMA is clear that nothing should be off the table when it comes to tackling the loyalty penalty, including targeted price caps, so we're expecting bold action.

"Regulators must do whatever it takes to fix the loyalty penalty in the mobile, broadband, insurance, savings and mortgage markets.

"As the CMA has recommended, where regulators lack the powers to address this problem, the Government should introduce legislation to fill the gaps – ideally in the next Queen's Speech.

"The loyalty penalty costs customers £11 million every day. The Government and regulators need to show they're on the side of consumers by taking urgent action to end this systematic scam."

What does the CMA say? 

Chief executive Andrea Coscelli said: "Millions of loyal or vulnerable customers are being taken advantage of each year by firms – and end up paying much more than they should do. This must come to an end.

"Together the CMA, regulators and Government must act more promptly and powerfully to hold firms to account, stop them exploiting their customers and restore people's trust in markets."