Tackling the loyalty penalty

Many people are punished for their loyalty to a firm. By sticking with a provider of services like home insurance, broadband or energy for the long haul, existing customers can face a higher bill compared to new ones. And this so-called loyalty penalty often affects vulnerable people the most.

As well as representing my constituents, I sit on the cross-party Treasury Committee in Parliament. Our role is to scrutinise the work of the Treasury, HM Revenue and Customs, and associated public bodies such as the Bank of England. As part of our inquiry into consumers’ access to financial services, the Treasury Committee has been examining the issue of loyal customers being penalised in this way.

Earlier this year, Citizens Advice submitted a super-complaint to the Competition and Markets Authority (CMA) about the loyalty penalty, which it defines as the cost of being a long-standing customer, compared to a new customer receiving the same product of service. Citizens Advice described this as ‘deep, structural price discrimination against disengaged and loyal consumers’.

In the home insurance market, 47 per cent of people are likely to be paying a loyalty penalty, totalling over £700 million per year, to fund discounts for newcomers. The average difference between the initial price a customer pays, and the price offered on a renewal after one year, based on the average cheapest combined premium, is £13.24.

If a new home insurance customer is offered an annual policy for £100, another customer who has been with the same firm for five years will be paying – on average – £169 for the same policy.

Of particular concern to the Treasury Committee is how the loyalty penalty impacts on vulnerable and low-income consumers, including older people and people with mental health problems.

Vulnerable consumers are less likely to benefit from new digital tools, such as price comparison websites, and are likely to experience the financial impact of loyalty.

And we aren’t talking small benefits here. Citizens Advice estimated that if a person is paying the loyalty penalty in six essential markets – energy, mobile phones, broadband, home insurance, mortgages and savings – they could be overpaying by nearly £1,000. That’s more than four months’ worth of food for the average household, and it is often vulnerable consumers who pay the most.

What’s worrying is that firms are doing this knowingly, and in the home insurance industry, such pricing practices have damaged trust in insurers. They are taking advantage of consumer bias towards the status quo by exploiting unsuspecting customers by, for example, making it difficult to leave a contract, insufficient auto-renewal notice, and hidden annual price hikes.

Just before Christmas, the CMA responded to the Citizens Advice super-complaint, saying that the loyalty penalty costs consumers around £4 billion a year, and that vulnerable people may be more at risk of paying it.

They announced a number of recommendations to regulators and Government to help stop loyal consumers being ripped off, including new powers for the CMA to fine companies, publicising the size of the loyalty penalty in each market, helping customers to switch, and potentially imposing price caps.

The Financial Conduct Authority, which regulates the financial services sector, welcomed the CMA’s recommendations, and called the loyalty penalty a longstanding issue for the regulator.

Firms are expected to treat all of their customers fairly, whether they are new or longstanding. But clearly these expectations aren’t always met, and it is often vulnerable people who are the hardest hit.

So, in November last year, the Treasury Committee launched an inquiry into consumers’ access to financial services. As part of this inquiry, we’ll scrutinise whether certain groups of people are excluded from obtaining a basic level of services from financial services providers, and whether vulnerable consumers pay more for financial services products.

This week, I’ll be representing the Treasury Committee at a meeting here in Newcastle to hear from vulnerable consumers who have interacted with financial services providers, specifically any experience people may have had of the loyalty penalty.

There are measures that the Government and regulators can take to promote choice, increase competition, and protect vulnerable consumers across essential markets. I’ll use these local discussions to feed back into the Committee’s inquiry, which will conclude with a series of recommendations to Government.

People, especially vulnerable people, should no longer be punished for their loyalty.