How fixing the loyalty penalty will help low-income consumers
Essential service markets aren’t working for people on low incomes. That’s a key reason why Citizens Advice made a super-complaint to the Competition and Markets Authority (CMA) in September: we want to make sure providers aren’t making huge profits by ripping off consumers who can least afford to pay.
We only use our statutory power to make a super-complaint (which requires regulators to investigate a market or market practice) in important cases – this was our first one in 7 years. We used it last year because we found that large numbers of customers who stay loyal to their provider are on uncompetitive deals, paying far more for their service than a new customer would, and it’s costing them more than £4 billion a year.
Why did Citizens Advice focus on the loyalty penalty?
Our interest in the loyalty penalty grew out of the issues people come to local Citizens Advice for help with. The people our advisers see are almost 5 times more likely to be in poverty than an average member of the UK population, and are often in severe financial crisis. People most often come to us for help with benefits or debt issues.
The first thing our advisers do is try and support clients with their immediate problem. But often one of the best ways they can help – the thing that can increase people’s disposable income the most – is getting clients on better deals for their essential bills, such as energy and mobile. This often adds up to hundreds of pounds a year: a lifeline for people struggling with debt and low incomes.
The University of Bristol’s study on the poverty premium found that not switching (moving from one service provider to another for a better deal) is the biggest part of why poorer people end up paying more for essential goods and services. In their survey, 73% of low-income households hadn’t switched fuel supplier in the last 2 years.
In our research on the loyalty penalty, we also found vulnerable people are often the worst affected. Our polling found that 15% of those who have experienced a mental health problem in the last 12 months think it’s too difficult to switch contracts in essential service markets, compared to just 5% of those who haven’t.
Achieving fundamental changes to how markets are designed
While we don’t think anyone should have to devote a lot of time and energy to changing to a new essential service deal every year or so to avoid being ripped off, many vulnerable and low-income consumers will find switching particularly difficult. There are cognitive and behavioural biases associated with living on a low income that make it harder to actively engage in consumer markets. For example, those on low incomes may not be switching due to the effects of the ‘scarcity mindset’ – the tendency of those who are worried about their financial situation to have less cognitive capacity to devote to other areas of their life, such as managing their essential services.
Rather than depend on switching alone, which we know will only happen for a limited section of the population, we wanted to try to achieve some fundamental changes to how these markets are designed that could protect consumers from paying a loyalty penalty in the first place.
What happens next?
We were pleased that the CMA’s initial response to our super-complaint recognised that loyal consumers are being ripped off, and that bold action, such as targeted price caps, could be necessary to stop the loyalty penalty. The CMA has set a 6-month deadline for progress, and we want to see the regulators working particularly hard on protections for vulnerable people and those on low incomes. We’ll be holding regulators to account to make sure that concrete action is taken to stop essential service providers charging poorer people more for the same service they provide at a lower price to their wealthier customers.
This is a guest blog. The views of the author do not necessarily represent those of the APPG on Poverty.
Rebekka Rumpel is a Policy Researcher in the Consumer and Public Services team at Citizens Advice.