Loyal customers of financial firms are punished for staying with providers to the tune of £4 billion a year according to findings from the competition watchdog the Competitions and Markets Authority (CMA).
The findings have come as the CMA sets out proposals to take providers to task over the practice, which sees customers who stay with single financial providers charged higher prices year after year.
The CMA was prompted into action by charity Citizens Advice, which used unusual powers to issue a ‘super complaint’ in September.
The super complaint obliged the CMA to investigate as a matter of urgency the alleged customer loyalty penalty in five different financial services markets – broadband, cash savings, household insurance, mobile phone contracts and mortgages.
Its investigation has found millions of people affected by loyalty penalties.
In mortgages it found more than one million customers overcharged for their loyalty.
The insurance market is even worse, where it says 12 million people are affected.
The loyalty penalty occurs where customer deals and contracts roll over from initial periods and firms hike prices. But despite this many do not switch away and firms are able to charge them much higher rates than new customers.
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Andrea Coscelli, chief executive of the CMA says: “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.”
Tackling the loyalty penalty
The CMA has made several recommendations for action to the government and regulators of respective markets as a result. These include:
- Using enforcement and regulatory powers to clamp down on harmful practices that prevent customers from obtaining better deals
- Outlining key business principles across markets that protect consumers such as giving customers the right to leave contracts as easily as they enter
- Holding firms publicly accountable for charging old customers more than new
- Publishing the size of the typical loyalty penalty in markets to ensure customers are aware they are being overcharged
- Price caps to protect vulnerable people worst affected by loyalty penalties
The CMA have also recommended to the Financial Conduct Authority (FCA) and Ofcom that mobile providers must stop charging customers the same rate on a pay-monthly contract once the cost of a phone included in the bill is paid off.
Lindsey Fussell, Ofcom’s consumer group director, comments: “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.”
Of the insurance market it says there is evidence of firms “continually” raising prices for customers, and recommends immediate review and action to prevent customers being exploited. It says the FCA should even consider “pricing interventions”.
In all instances the CMA says urgent action is required and that "if sufficient progress isn’t made, it may take further action."
Beat the loyalty penalty yourself
It is clear the CMA is prepared to take action in the event that regulators and the government fail to take initiative. However, you don't need to wait for the watchdog to make sure you're not being punished by the "loyalty penalty".
Households end up paying over the odds when they don't regularly shop around to get the best deal. Companies start to notice that you are not the type of customer who is likely to leave and so gradually push up bills. It is often - but not always - the case that the best deals are saved for new customers while existing, loyal customers are charged more.
Setting aside an afternoon to check that you are still getting the best broadband, energy, mortgage, insurance and savings deals can save you thousands of pounds if you have not done it for a while. Using price comparison sites is a good starting point but checking directly on provider sites can also bring up good deals on offer.
If you do not want to change supplier, call them up and see if you can negotiate a better deal if you have been with them for a while. Check prices of its rivals online - and the price it is currently offering new customers - and use this to help negotiate a better deal.