Ofcom Moves In To Protect UK Mobile Users From Loyalty Punishments
Amancio Mccrae
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Many services are paid for through automatically renewed or rolled over contracts. While this can be convenient for customers, it also increases the risk that customers who get rolled over year after year will pay a loyalty penalty. This super-complaint has given us the opportunity to look at this practice across markets, what has been tried in different markets over the years and consider what more can be done to prevent the loyalty penalty.
Ofcom moves in to protect UK mobile users from loyalty punishments
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Not enough has been done in the past by the CMA and regulators; there needs to be a step-change to tackle these problems more effectively. The focus should not only be on giving better support to consumers; but getting tough on harmful business practices and using targeted pricing interventions where needed to protect those who suffer most, particularly those who are vulnerable.
Our response sets out a significant package of reforms, both across markets and in the 5 markets, to address this issue and ensure that consumers can get better and fairer outcomes. The FCA and Ofcom are actively looking at this issue in the 5 markets. We welcome that work and make a number of recommendations in those markets.
There is a substantial loyalty penalty paid by consumers each year. Existing estimates suggest this penalty could be around 4 billion in total across the 5 markets we have looked at. The number of people who pay a penalty varies by market, with estimates ranging from under 1 million in mortgages to over 12 million in home insurance. This does not mean that prices are too high overall because some people are paying much lower prices, but some people are clearly paying too much.
These are the best estimates based on available data, but there are still gaps in the evidence base. Collecting and publishing information regularly on the size of the loyalty penalty and who pays it in key markets is important. This will improve understanding by regulators, raise public awareness and hold businesses accountable.
Offering introductory deals is not necessarily harmful. It can encourage people to shop around and try out new services, as well as allowing new businesses a foot in the door by attracting new customers.
The loyalty penalty affects many consumers across different markets and at different points in time. The exploitative practices used by some suppliers can cause serious problems for all consumers, who do not have the time or are not able to take the steps necessary to avoid paying a penalty.
The most vulnerable in our society can have even greater challenges engaging in markets, such as those on low incomes, people who struggle to use online services, or people with poor mental health who may avoid or fear change. This means they may be more at risk of paying the loyalty penalty, and may be least able to afford it. It is therefore important that the needs and capabilities of vulnerable consumers be taken into account when looking at tackling the loyalty penalty.
Protecting the interests of vulnerable consumers is a priority area for the CMA. We have an ongoing programme of work underway to better understand the challenges vulnerable consumers can face in markets, and how we can help to address them.
We recognise that auto-renewal can benefit consumers, particularly when there are harmful consequences from not renewing. However, suppliers must stop taking advantage of their existing customers by charging much higher prices, misleading people about their offers and making it much more difficult for customers to get good deals than it needs to be. These practices are likely to impose a significant cost on the economy, both in terms of the time consumers spend trying to get better deals and because they can end up paying much more. This makes people feel that markets are working against their interests and undermines trust.
Action has been taken by regulators and the CMA to try to tackle these problems. However, the prevalence of these issues across many markets shows that there is much more for us to do to stop these types of practices by businesses.
We are taking enforcement action in the anti-virus software market, and this is a first step in a wider programme of enforcement. We will also be considering whether existing law should be changed to ensure these practices are stopped.
The CMA, regulators and government must together tackle these problems head on. While there have been efforts to do so, these have not had sufficient impact. In the past too much has been asked and expected from consumers, and not enough from businesses. Although wehave become better at designing more effective interventions, more can be done, particularly to protect vulnerable consumers.
Suppliers should do all they reasonably can to support their customers in getting the best deal, rather than exploiting any perceived weaknesses or biases. We encourage businesses to work together with regulators to achieve this, rather than frustrating or delaying attempts to fix these issues.
There is also a strong case for considering more direct intervention such as price controls, targeted to protect those who are worse off. These have been used before by the CMA and regulators in some cases, particularly to protect vulnerable consumers and they should be considered in other markets. We make a number of recommendations where such interventions should be considered by regulators, alongside other measures, in the 5 markets highlighted by Citizens Advice.
It is also important that customers are given greater support and the tools they need to make active and informed choices. This ensures that businesses are put under continued and greater competitive pressure. There are newer and bolder ways to do this which could transform some markets and make it much easier for consumers to get better deals.
The CMA and regulators should continue to take action against suppliers whose business models are harmful to consumers. This means using our existing consumer enforcement powers and the powers regulators have to intervene directly, and strengthening these powers where needed.
Legislative and/or regulatory change may also be needed to effectively tackle these practices and we will be exploring this further, alongside new powers for the CMA to seek substantial fines where law is breached.
Reputational measures designed to put pressure on businesses can have a real impact in markets. In this case, data on the scale and size of the loyalty penalty, and which suppliers have the highest price differences, can put pressure on them to reduce this gap.
Empower intermediaries to support switching; for example giving a greater role to local consumer-facing advisory organisations, such as Citizens Advice, who could more actively support switching for vulnerable consumers.
Regulators have in the past been reticent to introduce price caps because these can distort markets. But where people who are unable or find it very difficult to switch are paying significantly higher prices, the case for targeted intervention is stronger.
Consider targeted pricing regulations such as limiting price differentials or price caps, alongside other measures where there is clear harm, particularly to protect vulnerable consumers. We also make recommendations about potential pricing interventions to be considered as part of ongoing work in the 5 markets.
It is also important to have more robust data on the extent of the loyalty penalty across a number of key markets and who is paying it. This is currently assessed on an ad hoc basis through specific market studies. But this approach does not enable comparisons across markets, nor, crucially, does it allow regulators to identify whether the same individuals are worse off across markets and over time.
Assess the feasibility of matching price data to a recurring, large scale UK survey to improve our understanding of who pays the loyalty penalty across markets, and whether vulnerable consumers are particularly adversely affected.
Alongside these cross-cutting recommendations, we have also looked at each of the 5 markets highlighted by Citizens Advice. We have considered what actions have previously been taken, what can be learnt from our review and what more can be done to tackle the loyalty penalty in these markets. We have worked with the regulators to understand these markets.
Based on our review, we also make recommendations to the FCA and Ofcom on measures to tackle the loyalty penalty in the 5 markets, which should be considered as part of their current work in these markets, alongside any other potential remedies.
We support a requirement on mobile providers to move customers on bundled handset and airtime contracts onto a fairer tariff when their minimum contract period ends. This is a recommendation for Ofcom.
In addition, Ofcom should seek to increase the engagement and awareness of consumers by pushing forward with implementing smart data, supporting the development of innovative intermediaries, and tackling low levels of awareness of SIM-only deals. This is a recommendation for Ofcom.
We believe a step-change in approach is needed to effectively tackle these issues. We have set out a package of reforms, both across markets and specifically in relation to the 5 markets identified by Citizens Advice. We believe these will achieve real changes and help existing customers get a fair deal.
A number of the market-specific recommendations can now be taken forward by regulators through their existing studies or ongoing work in each of these markets. Some of the recommendations require further consideration and oversight by the CMA and others such as government and regulators.
The CMA will be undertaking further work on the loyalty penalty, working closely alongside regulators, government, business and organisations such as Citizens Advice. This project will take forward in particular:
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