Citizens Advice launches super-complaint over the ‘loyalty premium’

Citizens Advice says that financial companies, ranging from insurers and mortgage providers to broadband companies, are routinely overcharging loyal customers.

The charity wants the competition watchdog, the Competition and Markets Authority (CMA), to act and prevent companies from charging customers who either stay with them or who don’t actively choose a new deal,higher costs.

Who’s affected?

Citizens Advice says that customers of a number of different suppliers are affected, including:

  • Insurance (such as home and car insurance). Citizens Advice says 47% of customers pay a loyalty premium. The loyalty premium 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 premium increases over time. For example, a home insurance customer who’s been with the same insurer for five years could pay 70% more than a new customer.
  • Mortgages: Around 10% of people who have a fixed rate mortgage pay a loyalty premium when their deals end, according to Citizens Advice. The loyalty premium is £439, which is the difference between the average standard variable rate and the average fixed rate mortgage a new customer would take.
  • Broadband: Nearly half of broadband customers (43%) pay a loyalty premium, Citizens Advice says. The difference between the cheapest basic broadband contract and the amount people pay once their deal runs out is about £113 a year.
  • Mobile phone: A third of people (34%) 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 savings account customers pay a loyalty premium, according to Citizens Advice. The loyalty premium is £48 – this is the difference between a one-year fixed rate cash ISA and an average variable rate cash ISA.

Citizens Advice claims 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, loyalty premiums could add up to as much as £900 a year.

“A systematic scam”

Citizens Advice says this is a “systematic scam” and that no-one would choose to pay more for something once their existing deal ends. They also say that it’s often the most vulnerable, 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, who are worst affected.

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.

Now that Citizens Advice has made a super-complaint to the CMA, it’s up to them 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.

The charity thinks that rather than an absolute cap, which sets an upper price limit, 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.

What you can do

Don’t be loyal! It’s easy to say, but – sadly – insurers, banks, broadband suppliers and mobile phone providers, don’t reward loyalty. It’s therefore important to shop around for the best deals when your current deal ends.

Our car insurance and home insurance comparison tools enable you to compare the renewal quotes you’re offered by your existing providers with those provided by alternative insurers. Before selecting a deal:

  • Make sure that you are comparing like with like. If there are certain things that your existing insurer provides, for example, check these will be offered them by your new insurer.
  • 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.
  • If your situation is complicated or your home is unusual, 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. The British Insurance Brokers Association (BIBA) can help you find a broker here or you can call them on 0370 950 1790.
  • Even 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.
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