Citizens Advice has launched a super-complaint over the ‘loyalty penalty’

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Citizens Advice says that companies, from insurers and mortgage providers to broadband companies are overcharging long-standing customers. It says these customers are paying a loyalty penalty. Citizens Advice wants the competition watchdog, the CMA, to act.

What’s a loyalty penalty?

The problem is that a range of companies routinely charge a higher premium or tariff to customers who stay with them and don’t actively choose a new deal. This is the loyalty penalty. Citizens Advice says that affects a number of different suppliers, including:

  • Insurance (such as home and car insurance). It says 47% of customers pay a loyalty penalty. The loyalty penalty doesn’t sound much at £13, but that’s the difference between the premium a new customer is offered and what someone is charged after one year This penalty increases over time. A home insurance customer who’s been with the same insurer for five years could pay 70% more than a new customer.
  • Mortgage: 10% of people who have a fixed rate mortgage pay a loyalty penalty when the deal runs out. The loyalty penalty is £439, which is the difference between the average standard variable rate and the average fixed rate mortgage a new customer would take.
  • Broadband: 43% of customers pay this. The difference between the cheapest basic broadband contract and the amount people pay once their deal runs out is £113 over a year.
  • Mobile phone: 34% of customers pay a loyalty penalty. People overpay by an average of £264 when they stay on the same deal after they’ve paid for the handset. They carry on paying the same monthly premium, but the handset is already paid for.
  • Savings: 37% of customers pay a loyalty penalty. The loyalty penalty is £48 – this is the difference between a one-year fixed rate cash ISA and an average variable rate cash ISA.

SAVVY TIP: Citizens Advice says that eight out of ten people who pay for something like broadband or home insurance, are being overcharged by at least one provider. It says that across all five areas, this adds up to almost £900 a year.

I’m not sure I agree with some of their calculations of the loyalty penalty, but I do agree that companies do two things:

  • Increase prices for loyal customers or give them a low rate of interest, if it’s a savings account.
  • Make it hard for customers to shop around. Shopping around is easy in some markets (such as for savings accounts). But it can be harder for things like home, car or travel insurance, where you really have to read the details in the policy in order to know what you’re getting.

A ‘systematic scam’

Citizens Advice says that the loyalty penalty is a systematic scam – and that no-one would choose to pay more for basic services and products, such as insurance and mobile phone. Citizens Advice also says that it’s often the most vulnerable who pay the most, such as some older people who may not be confident about shopping around or may not trust brands they are not familiar with, or those on a lower income who may not have access to technology.

Why companies charge loyal customers more

In my view, companies charge loyal customers more because they can. They know that inertia means that many customers won’t shop around or switch to a better deal. It’s one reason why over two thirds of people pay the standard tariff for their gas and electricity, despite the fact it’s the most expensive tariff their energy provider has.

What Citizens Advice thinks should change

Citizens Advice has made a super-complaint to the Competition and Markets Authority. The way this works, the CMA can say that it doesn’t think there’s an issue or, if it does, explain how it will deal with it.

It’s up to the CMA (Competition and Markets Authority) to work out how to address the problem. Citizens Advice has suggested that some sort of price cap could be applied. This would mean that insurers, broadband, mobile and mortgage providers wouldn’t be able to charge more than a certain amount.

But Citizens Advice says that rather than an absolute cap, which sets an upper price limit, it thinks a better option might be that companies are told they can’t charge more than a certain amount over and above the deals that are offered to new customers. This wouldn’t get rid of the loyalty penalty, but should reduce it.

What you can do

Don’t be loyal! Sadly – insurers, banks, broadband suppliers and mobile phone providers, don’t reward loyalty. I would encourage you to shop around, but do spend some time on it. It’s especially important for something like home or car insurance. These policies are quite complicated and they do vary quite widely. I’ve included some links to articles that explain more about shopping around, at the bottom of this page.

If shopping around for home or car insurance, I would recommend:

  • Looking at a couple of different price comparison sites to get an idea of what’s available. It will mean giving your details if you are looking for home or car insurance and it will take some time – up to 15 minutes.
  • Making sure that you are comparing like with like. If there are certain things that your existing insurer provides, for example, make sure you are will be offered them by your new insurer.
  • Saving the quotes so you don’t have to make a decision there and then. This gives you more time to do your research. Quotes are often valid for up to 30 days, although some insurers quote more if you renew your policy a day or two before it runs out. They know you’re in a rush!
  • If there are a couple of deals that you are interested in, look up the insurer on review sites such as Trustpilot or the Review Centre. Put the insurer’s name and the word ‘complaint’ or ‘problem’ into Google and see what comes up.
  • Download the policy summary and policy wording of insurance policies you’re thinking of getting. The policy summary will explain the cover and point out any exclusions or limitations that aren’t covered. The policy wording should explain the policy in detail.
  • Talk to an insurance broker to see if they can get you a better deal. Insurance brokers charge for their time by taking a commission on any policies they sell. But they have to advise you about the best policy, rather than you choosing the best one. They’re particularly useful if your situation is a bit complicated or your home is unusual. You can find an insurance broker on the BIBA (British Insurance Brokers’ Association) website.
  • Haggle with your existing provider. If you decide not to switch to another insurer, use the information you’ve got to haggle for a better deal from your existing insurer.

Useful links:

You can read more about the Citizens Advice super-complaint on its website. You can also read and download its full report

Related articles: 

Banks may be forced to pay a minimum interest rate on savings

Your guide to switching energy supplier; save money on gas and electricity

Using price comparison sites for home insurance

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