The Competition and Markets Authority (CMA) has announced a package of reforms to tackle the substantial loyalty penalty impacting millions of people.

The CMA has investigated concerns raised by Citizens Advice in a ‘super-complaint’, that companies penalise existing customers by charging them higher prices than new customers.

The CMA has looked at the 5 markets highlighted by the super-complaint – cash savings, mortgages, household insurance, mobile phone contracts and broadband – and found that there is a total loyalty penalty of around £4 billion a year in these markets. 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 investigation has uncovered damaging practices by firms, which exploit unsuspecting customers. These include continual year on year stealth price rises; costly exit fees; time-consuming and difficult processes to cancel contracts or switch to new providers; and requiring customers to auto-renew or not giving sufficient warning their contract will be rolled over.

Millions of people are affected – from around 1 million in the mortgage market to nearly 12 million in the insurance market. The loyalty penalty is also likely to arise in many other markets, where people’s contracts are rolled over to a higher price.

A number of recommendations are being made to regulators and government to help stop loyal consumers being ripped off. These include:

  • Cracking down on harmful business practices using enforcement and regulatory powers to clamp down on harmful practices that stop people getting better deals. The CMA has today opened a consumer law enforcement investigation in the anti-virus software sector. This is a first step and further action may be taken by the CMA and regulators against other companies.
  • Setting out clearly the principles businesses across all markets should follow, such as people being able to leave a contract as easily as they enter it. The CMA will also be looking at whether consumer law should also be reinforced.
  • Firms should be publicly held to account for charging existing customers much more; 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 by the loyalty penalty, such as the vulnerable, where needed.

The CMA has also made recommendations to the FCA and Ofcom in each of the 5 markets, where work is currently underway. These include:

  • Mobile: providers must stop charging pay-monthly customers the same rate once they’ve effectively paid off their handsets at the end of the minimum contract period. Ofcom should continue its work to challenge this practice and bring it to an end. More should also be done to make people aware of sim-only packages.
  • Insurance: there is evidence of firms continually raising prices in this market. The FCA must look closely at these pricing practices in its current market study and take action to prevent people being exploited by firms. This should include considering pricing interventions.

Other recommendations have also been made in the mortgages, cash savings and broadband markets on ways that regulators can tackle the loyalty penalty and protect those being hit the hardest.

The CMA considers urgent action is required. It will be taking forward these recommendations, along with government and regulators. If sufficient progress isn’t made, it may take further action.

Andrea Coscelli, Chief Executive of the Competition and Markets Authority said “Our work has uncovered a range of problems which leave people feeling ripped off, let down and frustrated. They shouldn’t have to be constantly ‘on guard’, spending hours searching for or negotiating a good deal, to avoid being trapped into bad value contracts or falling victim to stealth price rises.”

“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.”

“That’s why we have today recommended a robust package of reforms. There must be a step change to protect the people being hardest hit, including targeted price caps where necessary.”

“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.”

In response to the CMA, Gillian Guy, Chief Executive of Citizens Advice, said“This is a strong response from the CMA, recognising that loyal customers are getting ripped off. That is exactly why we’ve been fighting to stop the loyalty penalty, and why we made the super-complaint.”

“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.”

“While the CMA needs to hold regulators to account, the onus is now on Ofcom and the FCA to act. The CMA has set a 6-month deadline for progress and expectations are high. 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.”

Lindsey Fussell, Ofcom’s Consumer Group Director, said“We welcome the CMA’s report, which supports our existing work to protect customers, including our reviews of mobile handset charges and broadband prices, and our plans to require companies to tell people about the best tariffs available when their deal is ending.”

Ofcom’s existing work to ensure a better deal for telecoms customers includes:

  • Reviewing how mobile operators charge their customers for handsets when these are bundled with airtime.
  • Reviewing broadband companies’ pricing practices, examining why some customers pay more than others.
  • Plans for broadband, mobile, landline and pay-TV companies to tell customers about their best available deal when their contracts are coming to an end, and every year after that if they don’t change their deal.
  • A major new information campaign and website, Boost Your Broadband, to help people get faster broadband and save money.
  • These measures support Ofcom’s work to protect people from high prices. For example, we recently announced a cap on prices for 118 directory enquiry numbers, meaning that customers will pay £3.65 for a 90-second call, down from £20 for some providers. Also, BT customers who have only a landline telephone – without any broadband – saw their monthly phone bill cut by £7 earlier this year, following an intervention by Ofcom, saving customers £85 a year.

Eric Leenders, Managing Director, Personal Finance, UK Finance said “The industry has already implemented a number of remedies to improve competition in the mortgages and cash savings market to encourage customers to shop around to get the best possible deal and we are pleased that the CMA has recommended that the Financial Conduct Authority continues to work with the industry in response to the super-complaint made by Citizens Advice.”

“In July we launched a cross-industry voluntary initiative to help longstanding mortgage borrowers on reversion rates to switch to an alternative product. We are currently working with the regulator and government to consider what more could be done for customers when mortgage providers are no longer active in the market, which may include a change to the current rules to make it possible to switch a like-for-like mortgage to a different lender more easily.”

“To help savers, we have instigated a package of improvements, including communicating more clearly with customers about the rates they receive, faster Cash ISA transfers and enhanced customer prompts before a rate is reduced.”

“We will now work with our members and the regulators in the coming months to take forward these proposals.”