The government is handing the competition watchdog new powers to fine companies that exploit the loyalty of existing customers by overcharging.
The so-called loyalty penalty occurs when customers of a business pay higher costs year-on-year for staying with the same product, while new customers of the same business pay significantly less.
The government says it will consult on giving the Competition and Markets Authority (CMA) the power to fine firms that overcharge or mislead their customers without the need to go through a court.
Ofcom and the Financial Conduct Authority will also be given the ability to stop loyal customers being taken advantage of if their existing powers are found to be insufficient.
The government believes the measures will act as a “powerful deterrent to firms that are harming consumers with misleading claims, unfair terms and conditions and hard-to-exit contracts”.
The news comes after a super-complaint filed by Citizens Advice last year which said loyal broadband, mobile and insurance customers who stay with the same supplier for household services are overpaying by £4.1 billion a year.
Prime Minister Theresa May says: “For far too long, many big companies have been getting away with harmful trading practices which lead to poor services and confusion among customers who have parted with their hard-earned cash.
“The system as it stands not only lets consumers down but it also lets down the vast majority of businesses who play by the rules.
“It is high time this came to an end and today we are confirming our intention to give much stronger powers to the CMA, to strengthen the sanctions available and to give customers the protection they deserve against firms who want to rip them off.”
Business Secretary Greg Clark says: “We are committed to ensuring consumers are not unfairly targeted and penalised for their loyalty and that they can access quality products and services for a price that is competitive and fair.”
However, consumer groups do not think the changes go far enough.
Gillian Guy, chief executive of Citizens Advice, says the problem is “just the tip of the iceberg."
She says: “Tough new powers for the CMA to fine businesses who have broken the law will help it crack down on firms that exploit customers’ loyalty.
“But, while the government’s announcement is welcome, we’re disappointed by the lack of action from regulators. The FCA and Ofcom have had six months since the CMA issued its findings on our super-complaint and there has been little progress.
They need to set out their plans urgently on how they will tackle this systematic scam.”