Last September, the UK's Citizens Advice Bureau (CAB) filed a super-complaint with the Competition and Markets Authority (CMA) calling for more to be done to tackle the ‘loyalty penalty’ being paid by longstanding customers in five markets: mobile phone contracts, broadband, cash savings, home insurance and mortgages. The ‘loyalty penalty’ refers to suppliers penalising existing customers by charging them higher prices than new customers when their contracts renew.
In December 2018, the CMA published its response to the super-complaint and outlined a step-change plan to loyal customers being penalised, having calculated that customers who stay loyal to their providers are losing out on over £4bn a year.
The CMA admitted that not enough has been done to date and estimated that the cost to British consumers could actually be more than initially estimated if loyalty penalties also arise in other auto-renewal markets, such as subscription services.
The CMA’s response identified a range of supplier practices that they deemed unacceptable in that they exploit the loyalty of their customers that keeps them from switching to other providers. As such, it detailed three key steps to fix the issue:
- providing support to consumers through the use of 'smart data', such as price comparison websites, automatic switching services and local face-to-face advisory services
- enforcement against businesses engaging in harmful and unacceptable practices
- targeted direct pricing interventions to either limit price differences or introduce price caps where there is a clear need
In addition, the CMA has put forward recommendations to the FCA and Ofcom for consideration across their specific markets. This demonstrates that the CMA is taking a comprehensive, joined up approach in conjunction with the appropriate regulators.
What will the impact be?
In essence, the CMA reforms are designed to protect consumers. They will help put a stop to the practice of making it overly difficult for people to exercise choice, and then exploiting those who do not switch.
However, potential unintended consequences might change the dynamics of the currently competitive marketplace. Price differentiation drives switching, so there could be less incentive for customers to shop around if pricing interventions are put in place.
Alternatively, the move could be identified as a window of opportunity for providers, offering the chance to attract new customers from those who feel they have been ‘ripped’ off by their current provider.
Ensuring a robust approach
In order to retain and attract new customers, suppliers must ensure that they critically evaluate their pricing schemes to ensure that the price differences between customers can be reasonably justified. They must differentiate themselves from competitors via a customer-centric approach. For example, they could ensure that long-standing customers are not penalised for remaining with a supplier, instead rewarding loyalty.
This self-scrutiny must also focus on those most vulnerable in our society. This group remains a huge focus for regulators, as they are most at risk of paying more and may be least able to afford it. As such, suppliers and regulators must identify and monitor vulnerable customers to ensure they are not disproportionately impacted by the penalty.
CMA ‘Core Principles’ for change
The CMA outlines a number of best practice principles that firms can be basing future changes on.
Firstly, customers should be able to exit a contract as easily as they entered it. Customers can sign up to services with the click of a button these days, so there needs to be an equivalent ability that allows them to leave.
When customers do choose to leave, they should not face exit fees or penalties if they have reached a minimum term. Switching should also generally be managed by the gaining supplier. This would function much like the Current Account Switch Service does now between banks and building societies.
Auto-renewal should also be an ‘opt in’ feature. In general, customers need to be sufficiently informed about their contract’s renewal format and of any price increase they may face well ahead of time.
The CMA will publish a progress update in six months, alongside updates from the FCA and Ofcom on the development of their own activities. There will be specific regulatory requirements that come from this focus, no doubt, but in the meantime, suppliers will need to drastically change their internal policies and procedures to ensure they are meeting best practice guidelines on treating customers fairly.
Huntswood is a leading resourcing and advisory provider, supporting companies and authorities manage changes to policies and procedures and ensuring they are focused on treating customers fairly. Huntswood implements expert learning and development programmes to ensure staff are equipped to deal with customer complaints. Huntswood can also provide expert case handlers with specialist regulatory knowledge to supplement existing staff, either based on providers’ local sites or by using their own managed outsourced sites across the UK.