The competition watchdog has laid down a set of radical reforms to how the insurance, mobile phone and broadband markets operate after finding that loyal customers are being overcharged by £4bn.
Following a “super complaint” by Citizens Advice, the Competition and Markets Authority investigated concerns that firms penalise existing customers by charging them significantly higher prices than those paid by new customers.
It found that consumers in those markets, as well as in cash savings, are “exploited” and face a “loyalty penalty” of around £4bn a year. 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 CMA inquiry uncovered “damaging practices” by firms, including 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 them sufficient warning that their contract would be rolled over.
The CMA is recommending regulators crack down on harmful practices using enforcement powers, stating the principles businesses should follow and holding firms to account for their actions.
Most radically, it also suggests “targeted price caps” should be put in place to protect those worst hit.
The watchdog recommended Ofcom stops mobile phone providers charging pay-monthly customers the same rate once they’ve effectively paid off their handsets at the end of the minimum contract period.
The Financial Conduct Authority (FCA), meanwhile should “look closely” at evidence that insurance firms continually raise prices and take action to prevent people being exploited. This should include considering “pricing interventions”.
Andrea Coscelli, CMA chief executive, 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.”
The watchdog found that millions of people are affected, including around 1 million in the mortgage market but nearly 12 million in insurance.
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.
“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 six-month deadline for progress and expectations are high. Regulators must do whatever it takes to fix the loyalty penalty.”
MoneySavingExpert.com founder Martin Lewis said: “In a competitive market, some people will, by definition, pay more than others for the same thing. The problem comes for those who are unable to engage in competition, because they are vulnerable, information disenfranchised, not on the internet or simply bureaucratically unable to switch. They are the ones who need protection.”
Which sectors are the worst?
Home insurers are probably the worst for hitting customers with the loyalty penalty, but gas boiler cover and breakdown recovery sectors run them a close second. Existing telecoms/ broadband customers are also hugely overpaying when compared with a “new” customer who may have just switched supplier. Energy firms price-gouged loyal customers for years, but now face price caps. This has reduced the loyalty penalty a little, but not enough for campaigners. Mortgage and car insurance customers tend to be much better at switching provider at the end of their contract, so fare a little better.
How did this come about?
All these firms’s business models rely on signing up new customers on discounted or teaser rates, and then raising the premium in the second year to its truer cost. Home insurers do exactly the same thing. They know exactly how many customers will leave after 12 months, and calculate the second year’s premium accordingly, in the hope that most customers will either not notice or will decide the saving is not worth the hassle of moving. Broadband firms use the fear of losing service to keep customers paying inflated monthly bills.
Why is it being examined now?
Essentially the companies got too greedy. The price disparity in these areas has simply become too great. It means those who rarely switch supplier – the elderly/non internet users – are in effect subsidising consumers who continually switch supplier.
How much are we talking?
Guardian Money has regularly featured elderly home insurance customers whose premiums have been quietly increased to over £1,000 a year. When a relative realised what was happening and they shopped around, the same company would lower the premium to £250 a year for the same cover. The banks have been the worst offenders at this.
The AA offers those signing up to its breakdown cover a discounted rate and then ups it by up to 124% in the second year. British Gas has been upping its Homecare boiler cover for existing customers to the extent that it now costs more a year than a new boiler.
What will be the impact?
Regulators have in effect been put on notice that they must act. The energy regulator’s price cap has had some impact, as the cost of the tariffs that customers are dumped on at the end of a deal has been lowered. The Financial Conduct Authority now insists insurers tell customers the old and new premium at renewal time to encourage consumers to shop around. This has had some impact. On Friday, Ofcom warned of a crack-down on broadband providers who rip off loyal customers by offering better deals to new subscribers.
Ultimately, the discounted first-year prices will probably have to rise to offset the reduction in price hikes in subsequent years. Miles Brignall