Existing customer penalty charges targeted in new reforms

Savings, broadband, mortgages, home insurance and mobile contracts were all highlighted in the super-complaint made by Citizens Advice in September.

Recommendations are being made to regulators to ensure that loyal customers aren't unfairly penalised for staying with companies.

The CMA are also examining whether further consumer protections need to be put in place to protect vulnerable customers.

While this super-complaint related to five sectors, the CMA have acknowledged that other sectors suffer from similar issues.

Damaging practices revealed

The wide-ranging complaint response found that vulnerable people such as the elderly and those on lower incomes are at high risk of paying loyalty penalties.

Key examples of the penalty include auto-renewal and rolled-over contracts which, while convenient for some customers, lead to rising bills year-on-year in sectors such as insurance.

Other issues include sharp increases following introductory prices and 'legacy pricing' for customers on older tariffs receiving the same services as new customers on better tariffs.

The CMA notes that suppliers in all sectors make switching more difficult than it should be and then proceed to exploit customers who don't switch by raising prices on their products.

All consumers can be affected by these penalties, but the problem is most serious when vulnerable customers who have challenges engaging with the market are affected.

The report estimates that £3.9bn is lost by customers split across the five sectors in the following way: £1.1bn on savings, £1bn on broadband, £0.8bn on mortgages, £0.7bn on home insurance and £0.3bn on mobile contracts.

Up to 12 million customers are estimated to be affected by loyalty penalties in the insurance market alone.

Recommendations issued by CMA

The CMA recommends that existing enforcement and regulatory powers are used to clamp down on these harmful business practices.

This includes clearly setting out the principles that firms must follow, including the requirement that customers should be able to leave a contract as easily as they enter it.

They also suggest that companies should be publicly held to account, with the recommendation that regulators publish yearly loyalty penalty figures with a breakdown per sector and supplier.

Targeted price caps may also be introduced where the need to protect vulnerable customers from loyalty penalties is most acute.

Specific recommendations to the FCA and Ofcom have been made to each of the 5 sectors.

For instance, they state that mobile phone providers must end the practice of charging monthly customers the same rate once their minimum contract ends as the handset is no longer being paid for.

Equally, they recommend that the FCA addresses the insurance industry's habit of continually raising prices, with the possibility of pricing interventions.

The CMA has highlighted that urgent action is required to protect consumers and warned they may take further action if sufficient progress is not made to address their concerns.

Loyalty beginning to wane

There are signs that many customers are beginning to move away from the loyalty model that financially penalises them.

In 2017, over 5.5 million people were reported to have switched energy supplier, with the 'big six' companies projected to lose 2.3m customers by the end of 2018.

Fresh guidelines coming into force in 2019 will introduce Guaranteed Standards of Performance for switching from one supplier to another.

However, seven smaller energy suppliers have collapsed in 2018 alone, shrinking the marketplace and adding uncertainty for consumers who may consider switching.

The CMA also suggest in their recommendations that intermediaries should be empowered to facilitate switching across various sectors.

This would see consumer-facing advisory organisations including Citizens Advice able to actively assist vulnerable customers in switching, and this has been recommended to the Government.