CMA Seek Urgent Action to Tackle Mobile and Broadband Loyalty Penalties

The Competition and Markets Authority has concluded its “super-complaint” probe into how UK consumers who remain loyal to a broadband ISP or mobile operator often end up paying “significantly more” than new customers. In response they’ve called for “urgent action” to tackle related issues and protect vulnerable users.

The investigation began in September 2018 after Citizens Advice, which tabled the complaint, claimed customers who stay loyal to their providers were losing out on over £4 billion a year. “It beggars belief that companies in regulated markets can get away with routinely punishing their customers simply for being loyal. The CMA should come up with concrete measures to end this systematic scam,” said the organisation’s CEO, Gillian Guy.

Many of these issues occur because providers often offer big discounts to new customers, which can last as long as the first contract term (up to 24 months) before coming to an end. Once the discount is over then the price returns to its “normal” post-contract level and this tends to be significantly more expensive. This is a fairly normal practice for any aggressively competitive market.

The problems often begin when customers discover that they often cannot simply re-contract with their provider in order benefit from the same discounts as new subscribers, instead you’re stuck paying a much higher price. A savvy consumer may contact their provider in an attempt to haggle for a lower price (Retentions Tips) or switch to a different ISP, but only around 10%+ of broadband users actually do this each year.

Andrea Coscelli, CEO of the CMA, 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.

Millions of loyal or vulnerable customers are being taken advantage of each year by firms – and end up paying much more than they should do. This must come to an end.

That’s why we have today recommended a robust package of reforms. There must be a step change to protect the people being hardest hit, including targeted price caps where necessary.

Together the CMA, regulators and government must act more promptly and powerfully to hold firms to account, stop them exploiting their customers and restore people’s trust in markets.”

The CMA found that vulnerable people, including the elderly and those on a low income, may be more at risk of paying the “loyalty penalty“. It also highlights a number of “damaging practices” that they found are used to “exploit unsuspecting customers.”

Examples of Damaging Practices

* Stealth price rises. Imposing “stealth” increases in price on renewal year after year, which can lead to very significant price increases without customers being aware of it.

* Costly exit fees.

* Time-consuming and difficult processes to cancel contracts or switch to new providers (i.e. making it more difficult to leave a contract than it is to sign up).

* Requiring customers to auto-renew or not giving sufficient warning their contract will be rolled over. The CMA said in most markets there should be a choice.

In response the CMA has made a number of general recommendations to tackle these problem areas, as well as several specific ones for the different markets (i.e. cash savings, mortgages, household insurance, mobile phone contracts and broadband). The recommendations aim to “help stop loyal consumers being ripped off” and are being made both to the UK government and regulators (e.g. Ofcom).

CMA General Recommendations

* Using enforcement and regulatory powers to clamp down on harmful practices that stop people getting better deals. The CMA has today opened a consumer law enforcement investigation in the anti-virus software sector. This is a first step and further action may be taken by the CMA and regulators against other companies.

* Setting out clearly the principles businesses across all markets should follow, such as people being able to leave a contract as easily as they enter it. The CMA will also be looking at whether consumer law should also be reinforced.

* Firms should be publicly held to account for charging existing customers much more; regulators should publish the size of the loyalty penalty in key markets and for each supplier on a yearly basis.

* Targeted price caps to protect the people worst hit by the loyalty penalty, such as the vulnerable, where needed.

Recommendations for the Mobile Sector

* We do not consider that providers should continue to charge customers the same rate once they have effectively paid off their handsets at the end of the minimum contract period. This is unfair and must be stopped. 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. [Recommendation: 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. [Recommendation: Ofcom].

Recommendations for the Broadband Sector

* Loyalty penalty problems in this market must be thoroughly investigated. Ofcom should consider a number of possible pricing interventions including tackling broadband legacy pricing and targeted safeguard caps to protect vulnerable consumers, alongside measures to increase engagement such as the use of smart data and exploring the feasibility of collective switching. [Recommendation: Ofcom].

Ofcom has of course already moved to propose several solutions to the above problem with certain Mobile contracts (here) and on the broadband side they’re preparing to require that ISPs should give customers End of Contract Notifications, which among other things will now also include information on the best deals available to them from their provider. Both measures will be introduced later in 2019.

On top of that the telecoms regulator has just launched a new review of broadband pricing to examine whether loyal (existing) and vulnerable ISP customers are being ripped-off (here), which it said would “examine why some customers pay more than others, and whether vulnerable customers need extra protections to ensure they get a good deal.” Broadly speaking, Ofcom is already doing what the CMA wants.

Lindsey Fussell, Ofcom’s Consumer Group Director, said:

“We welcome the CMA’s report, which supports our existing work to protect customers, including our reviews of mobile handset charges and broadband prices, and our plans to require companies to tell people about the best tariffs available when their deal is ending.”

At this point we should highlight that most of the problems come from some of the biggest mobile and broadband providers, but that not all ISPs adopt the same model and many smaller providers, which may also offer advanced features (static IP etc.) and better service quality, simply charge a set monthly fee that rarely ever changes. A few providers, such as TalkTalk, also enable existing customers to re-contract on to a lower price point.

Meanwhile one of the simplest changes, which Ofcom will hopefully recommend, is to require that ISPs also place their post-contract prices alongside any discounts. At present there are still a few providers that try to conceal this in the small print. If consumers are made aware of the post-contract pricing then they will be in a better position to compare the longer term costs (we already do this for you in our own ISP Listings).

However the CMA’s work doesn’t stop at today’s conclusion. The competition regulator plans to undertake further work on the loyalty penalty, such as by launching enforcement cases, exploring the feasibility of matching price and survey data and launching a review of the case for changing consumer law in addressing the loyalty penalty.

The CMA said they will provide an update on their progress to the newly established joint government-regulator Consumer Forum, led by the UK Minister for Consumer Affairs, in 6 months’ time (late spring 2019).

Full List of General CMA Recommendations

Recommendation 1

Bolder use of existing enforcement and regulatory powers to tackle harmful business practices. We are launching investigations in the anti-virus software market.

This is a recommendation to regulators and action by the CMA.

Recommendation 2

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.

This is a recommendation to government.

Recommendation 3

Publish the size of the loyalty penalty in key markets and for each supplier, through for example an annual joint loyalty penalty report.

This is a recommendation to regulators.

Recommendation 4

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.

This is a recommendation to government.

Recommendation 5

Press ahead with the Smart Data Review and rolling this out in those markets such as telecoms, where it has the greatest potential to transform markets.

This is a recommendation to government and regulators.

Recommendation 6

Capture and share best practice on ‘nudge’ remedies that have been tested and shown to work or not. Some remedies (such as requiring suppliers to give last year’s price on renewal) could be rolled out across markets and potentially strengthened.

This is a recommendation to regulators and the UK Competition Network.

Recommendation 7

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.

This is a recommendation to regulators and the CMA.

Recommendation 8

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.

This is a recommendation to regulators.