Gov to Give CMA Power to Fine UK Broadband ISPs for Loyalty Penalty UPDATE

The UK Government has proposed to beef up the Competition and Markets Authority (CMA) so that it can “decide for itself whether consumer protection law has been broken” and impose fines for “wrongdoing,” such when potentially unfair pricing is applied to vulnerable customers (“loyalty penalty“).

The proposals appear to form part of the Government’s response to last year’s “super-complaint” probe by the CMA into the loyalty penalty issue, which made several recommendations (here). Just to recap, the so-called loyalty penalty reflects situations where existing customers can end up paying significantly more for their service than new subscribers.

Big providers often offer sizeable discounts to new customers, which can last as long as the first contract term before coming to an end (up to 24 months). Once the discount is over the price returns to its post-contract level, which tends to be significantly more expensive.

Such discounting is all fairly normal for any highly competitive market and consumers who switch providers, or renegotiate (Retentions Tips), at the end of their term benefit the most by saving money. Unfortunately not everybody does this and some ISPs still aren’t clear about their post-contract pricing. The CMA noted that vulnerable groups (e.g. pensioners) could thus end up being stuck on expensive legacy contracts for years.

Ofcom and the Government have already proposed various changes to help tackle this, such as through end-of-contract notifications (here), as well as the plans for a new consumer Fairness Framework (here) and the introduction of a consumer advocate (here). Today they’re pledging to take an even firmer “stand against egregious practices that cause consumers harm or take advantage of vulnerabilities.”

The Government expects these to guide regulators in their approach to enforcement:

• Exit/entry equivalence: people must be able to exit a contract at least as easily as they can enter it;

• Auto-renewal should generally be on an ‘opt-in’ basis upfront, and include a clear and prominent option without auto-renewal in most markets;

• Exit fees should not be used after any initial minimum/fixed term;

• Auto-renewal onto a fresh fixed term should not generally be used;

• Customers must be sufficiently informed about the renewal and any price changes (through sufficient notifications) in good time;

• Switching should generally be managed by the gaining supplier so that customers do not have to contact their existing supplier if they want to move.

The Secretary of State for Business, Greg Clark MP, told the CMA in an Open Letter that they would seek to strengthen the legal framework in order to tackle “subscription traps” in their forthcoming Consumer White Paper. This includes “bolder” powers to fine naughty broadband ISPs and mobile operators etc.

Greg Clark MP said:

“But, as highlighted by Lord Tyrie, new powers are also needed to properly address this issue. Where action by the CMA and regulators using existing powers does not or cannot deliver an improved outcome for consumers, then I am willing to consider further legislative or regulatory change to ensure that they have the tools they need. Enforcement is an essential element of ensuring a level playing field for business, maintaining trust in markets and protecting consumers.

In the Consumer White Paper I will consider proposals to strengthen our system of public enforcement of consumer law while maintaining the benefits of the current landscape. The Government has already committed to legislate in order to give consumer enforcers the power to impose fines on companies for breaches of consumer law by applying to the courts. We will follow this through and also want to go further to ensure that enforcers have the powers they need to incentivise firms to comply with the law. This will include empowering the CMA to decide itself whether consumer protection law has been broken and then impose fines for wrongdoing directly. We will consult on how best to achieve this in our Consumer White Paper, including the route of appeal, and the implications for the wider consumer enforcement landscape.”

At present the CMA has to go through the courts in order to determine whether existing laws have been broken but under this change that would no longer be necessary. Equally Greg noted that such “pricing interventions” must still be considered a “matter of last resort” and would need to be “targeted, proportionate to the scale of the harm and minimally distortive to the wider market.” (i.e. code for focusing on vulnerable groups).

Curiously the letter also revealed that Ofcom will consult, during Q3 2019, on an approach to implementing a “new switching process so that it is always led by the gaining provider, including when a consumer is switching away from or onto the Openreach network.” This sounds very much like the existing switching process for broadband and phone providers.

Further details on this are expected in a future consultation, which will be launched sometime this summer.

UPDATE 19th June 2019

In keeping with this the CMA has posted a Progress Update (PDF) on its efforts to tackle the loyalty penalty, which doesn’t say anything that we haven’t already reported.