Watchdog calls for price caps a consumers pay £4m 'loyalty penalty'

Banks, insurers and mobile phone and broadband providers may be hit with price caps and other new regulatory enforcement after the UK competition watchdog found they were punishing longstanding customers with a “loyalty penalty”.

A "loyalty penalty" of roughly £4bn a year was being levied on the country from longstanding customers paying much more than new customers for the same services, the Competition and Markets Authority said on Wednesday. An average "loyal" household was therefore paying £1,439 per year more than it could if switched all mobile, broadband, savings, insurance and mortgage when contracts finished.

The CMA produced its report into the phenomenon after a 'super complaint from Citizens Advice over concerns that raised concerns about issues in mobile, broadband, cash savings, home insurance and mortgages markets.

A "step-change" was needed to tackle these problems more effectively, the CMA said, calling for better support for consumers and "getting tough on harmful business practices and using targeted pricing interventions", particularly for those who are vulnerable, such as the elderly and those on low incomes.

"Our work has uncovered a range of problems which leave people feeling ripped off, let down and frustrated," said Andrea Coscelli, the CMA’s chief executive.

"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."

The report recommended several reforms for regulators and the government to tackle the loyalty penalty, including:

• Taking action against providers whose business models that stop consumers getting better deals.
• Targeted price caps or price differential limits.
• Roll out the use of smart data in markets such as telecoms, where it has the greatest potential to transform markets.
• 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.
• Publicise the size of the loyalty penalty in key markets and for each supplier, through for example an annual joint loyalty penalty report.

It was also proposed to assess the feasibility of matching price data to a recurring, large scale UK survey to improve understanding of who pays the loyalty penalty across markets, and whether vulnerable consumers are particularly adversely affected.

In cash savings, where the Financial Conduct Authority is mulling implementing a basic savings rate, the CMA said if this does not have the intended impact the regulator should consider further pricing interventions such as a targeted absolute price floor in cash savings and perhaps also consider whether collective switching can be applied.

The FCA is also probing the insurance market, where many customers are being rolled onto more expensive deals when their contract finishes. The CMA called for pricing interventions to restrict this "price walking" practice, with an exploration of how intermediaries can continue to benefit the home insurance market.

In mobile, also, the CMA said the process whereby providers continue to charge customers the same rate once they have effectively paid off their handsets was "unfair and must be stopped". With regulator Ofcom already consulting on this, the recommendation was for customers to be automatically moved onto a fairer tariff when their minimum contract period ends.

Based on figures from regulators, including £330m from mobile contract, £990m on broadband packages, £1.14bn on saving accounts, £709m on home insurance and £800m on mortgages, the CMA judged that almost £4bn was the total "loyalty penalty".