Martin Lewis: Is it unfair to charge loyal customers more?

Should loyal customers be charged more than new ones? On the surface the answer is a simple no – but nothing is that simple. Many consumer marketplaces function because only some people embrace competition, and we need to work out what happens if we change that.

We've wrestled with this topic recently as Citizens Advice made a super-complaint to the Competitions and Markets Authority over what it calls the £4bn loyalty penalty. MoneySavingExpert's views on this have been sought too – our brilliant MSE campaigns team were tasked with writing a formal paper.

When the first draft came to me, it piqued my thinking. The draft rightfully championed loyal customers' rights. Yet while MSE's motto is "cutting your bills and fighting your corner", arguably in this the two clauses of the motto vie against each other.

How do you balance the rights of the savvy consumer who plays the market, and rides the best deals, against those who don't and need help. So I asked them to give me a bit of time to do some thinking and come back to them.

What sprung to mind was the problem of the energy price cap. If you want a competitive market, you have to accept that some people will pay more than others, as price differentiation is what drives switching.

That doesn't mean I think competition is necessarily the right solution: within energy, I can also see a strong argument for price-regulation. My point is more you have to pick one model, and if we plunge for competition, then big price differentials help rather than hinder. Which brings me to my core thought on this…

The real key is defining who are the acceptable and unacceptable victims of competition

If I, as an affluent, web-savvy person, didn't prioritise switching and therefore paid more, that's my problem. Yet if a struggling 90-year-old, with early onset dementia, who struggles to engage in the system pays more, that's everyone's problem – they're an unacceptable victim.

With that in mind, I decided to split the Citizens Advice loyalty penalty into two. I've given each element an arbitrary name to help...

  1. The loyalty penalty: This is the unacceptable bit. It happens either when people are sticking with a company who is overcharging either because a) they believe this is the right thing to do, or b) the barriers to switching either financially or hassle-wise are too big (see below for more on that).

    2. The apathy penalty: This is an acceptable penalty. It happens when people stick with a company when they know they could do better and are capable of engaging in the marketplace, but don't prioritise doing it.

Then, thankfully Thiri and the others on the campaigns team took my muttered thought ramblings, ran with them, and turned out the interesting paper below (which is far better at explaining it than my rushed-out blog above…):


The market context of the super-complaint

A core priority for MSE is to ensure that consumers are protected.

While companies spend billions on advertising and sales techniques, and can have significant political influence, consumers do not receive any formal education on the best way to shop around and have limited say on policy. MSE strives to rectify this imbalance through both informing consumers of how to save money and campaigning on their behalf.

There are many ways to intervene in the market to protect consumers from undue harm. For example, one possible method is through price regulation, where firms are simply told what to charge their customers. Yet the preference of successive UK Governments for several decades has been for a free competitive market, and while not making a judgement on that preference, it's within this context that MSE has prepared this response.

However, MSE does acknowledge that sometimes the Government and/or regulators may decide that the closer a product or service is to a public good, the more questionable it is to rely solely on competition to deliver it equitably. 

Of course, the remit of the CMA itself is to promote competition for the benefit of consumers. In a competitive market with switching, the incentives to switch have to be related to price. To encourage switching, and therefore competition, you need big price differentials. Some consumers will inevitably have to pay more than others – they will have to pay a 'loyalty penalty'.

In light of this, MSE's key philosophy, and thus this response, is built on the premise that encouraging churn is the best way for consumers to access the best deals in the market. The message is clear: to make the most savings consumers need to switch – loyalty doesn't pay.

While the existence of a 'loyalty penalty' is obviously bad for the consumers affected by it, its existence may not always be problematic.

The challenge is identifying who's an acceptable victim and who's an unacceptable victim of competition, and thus the 'loyalty penalty'. It is this latter group – unacceptable victims – that need to be protected.

If someone who is web-savvy and affluent is provided with all the information they need to know they are on a bad deal, and yet chooses not to switch, that's their decision. They fall into the 'apathetic' category and are a necessary by-product of competition. Their experiencing a 'loyalty penalty' is not necessarily evidence of market failure.

However, if a struggling 90-year-old grandad who's not online is too scared to switch, and pays a 'loyalty penalty' as a result, then this needs to be fixed. This is especially pertinent given that vulnerable consumers are often disproportionately impacted by 'loyalty penalties'. In these circumstances, it cannot be the sole responsibility of the consumer to be savvy and switch. Yet this is the expectation and it is an unreasonable one.

When it is unacceptable for someone to pay the 'loyalty penalty' is an extremely complex question which needs to be carefully considered and widely consulted on. There isn't a one-size-fits-all assessment. It depends on factors including the particular market and the circumstances of the consumer. At this stage, this means attempting to create an absolute definition of an unacceptable victim of the 'loyalty penalty' would be simplistic.

The CMA must avoid indiscriminate solutions to the 'loyalty penalty' and focus its attention on solutions which protect the unacceptable victims, which of course needs to be defined first.

Unacceptable barriers to switching

The 'loyalty penalty' is also problematic when it is caused by unacceptable barriers which unduly prevent or deter a consumer from switching.

To repeat, in a competitive market MSE does not consider consumer apathy alone to be an unacceptable barrier to switching and one which requires CMA intervention. 

Yet there are conditions which should apply in all markets to ensure that all customers are being treated fairly and are empowered to vote with their feet. Switching is a way of consumers protecting themselves in the event of price changes or changes to product terms and conditions. They must not face barriers to switching, with it being the best way to protect their interests in the current competitive market.

If there are bureaucratic barriers in existence which prevent switching, and thus create a 'loyalty penalty', these are unacceptable and should be addressed by the CMA.

The following are examples, but not an exhaustive list of specific instances of unacceptable barriers to switching.

1. Firms withholding the best tariffs and products from existing customers

In a fair market, existing customers who are out of contract should not be restricted from getting tariffs and products available to new customers. Full stop. If you offer it to one, you offer it to all. This already occurs in the energy market, and is increasingly seen in the mortgage market, but it is disappointingly rare in other essential markets.

Telecommunications providers generally won't let consumers switch to a cheaper tariff without haggling. Ideally, consumers engage with the whole of the market and find the best deal for themselves. But if they do wish to stay with their current provider, they shouldn't be barred from its best rates, or forced to haggle for a discount. Haggling is not something all consumers are happy to do and shouldn't be the only way for existing customers to get a better price.

Increasing, the accessibility of internal switching is especially important when consumers perceive external switching as too costly and/or difficult. Restrictions placed on internal switching can leave many consumers seeing the path of least resistance as staying on their expensive out-of-contract tariffs with their existing provider, thus paying a 'loyalty penalty'.

2. Inefficient switching processes

For a competitive market to best promote consumer benefit, switching must be simple.

The consumer should not be burdened with acting as messenger, back and forth between the existing and new provider throughout the switching process. Firms should be mandated to take up the majority of responsibility for facilitating the switch. Moreover, the completion of the switch should take place in the shortest possible amount of time.

The Current Account Switch Service is an example of good practice and should be emulated by other essential markets. After initiating the switch, a consumer needs to do nothing more while their new provider organises the transfer of all their personal information, all outgoing and all incoming payment arrangements from their old account within seven days. The ease of switching now experienced by a current account consumer should be a universal consumer experience.

3. Bureaucratic conditions put in place by firms to deliberately to prevent switching

While seamless switching ensures efficiency in a competitive market, some markets include bureaucratic features which aim to retain customers through dissuading switching.

A good illustration of this is the use of no-claims discounts to tie people into car insurance. If a consumer has accrued a no-claims bonus, it is common practice that they must be able to prove the length of this bonus to switch to another provider. This can be difficult to do and discourages customers from switching. Like many barriers caused by bureaucratic conditions, this could be fixed easily – for example by requiring firms to provide no claims information in renewal communications, which can then easily be passed to the new provider by the consumer.

Although car insurance isn't included in the super-complaint, it has arguably more of a problematic 'loyalty penalty' than household insurance, which is included. It's a 'grudge' purchase – you have to have it – making victims of this 'loyalty penalty' even more unacceptable.

Many of the biggest insurers and telecommunications providers don't allow customers to cancel their policy online, even though they allow customers to sign up online. Considering that in these markets you have a limited window to switch penalty-free, complicating the process of cancelling an account can act as a significant barrier to switching.

The CMA should ensure that bureaucratic penalties over and above explicit contractual ones are kept to a minimum.

4. Lack of communication about auto-renewal

In itself, auto-renewing isn't a bad thing – continual cover is a convenience for many, especially for products such as insurance and mobile.

But the problem is the way the auto-renewal is structured: providers usually increase prices each year, presumably to take advantage of inertia. This price increase is rarely sufficiently communicated to consumers.

Many customers simply aren't aware that they will have to pay more when out-of-contract, or when their premium ends, and so don't realise they might want to take action.

Consumers should have the choice of opting in or opting out of auto-renewal when a product is bought. In other words, if at renewal time they've chosen to opt in, they would be automatically renewed by default. If they've chosen to opt out, they would only be renewed if they explicitly agree, after being contacted by their provider when their contract is coming to an end.

At the very least, if consumers are auto-renewed without having opted in, they should be able to leave penalty-free.

Customers should also be warned at the point of sale that when their contract ends this may result in a bill increase if they chose to auto-renew. 

5. Barriers to accessing product information

Contract information is often not prominently displayed in a customer's online portal or in communications from the provider. Therefore, even when a consumer wants to switch they may struggle to find all the information they need to make the right choice.

Poor communication about customer contracts can only be rooted in firms hoping a consumer might forget when their contract will be ending, in an effort to keep them as a customer. It is an unfair barrier to switching and is incompatible with a fair, competitive market.

In contrast, the mortgage market is an example of better practice. Mortgage providers are mandated by the Financial Conduct Authority to give borrowers notice of changes to their payments as a result of interest rate changes, and therefore consumers are contacted when their fixed-rate mortgages come to an end. While firms are not mandated to offer customers another rate to switch to, increasingly lenders are making product transfer offers more proactively and have also opened up these options to advisers. As the mortgage market sees significantly higher rates of switching than in other essential markets, its measures to encourage switching could be mimicked in other sectors suffering from a 'loyalty penalty'.

6. Consumers' poor understanding of how products and markets work

Many essential goods markets are complex to understand. For example, mortgages and pensions: it is impossible for consumers to fully understand the vast range of products, rates and fees in these markets. Yet making the right decision is of utmost importance – it could mean the difference of thousands of pounds to an individual.

The complexity and weight of trying to understand these types of markets can lead many consumers to simply feel overwhelmed. They can become paralysed.

The solution isn't straightforward. While information provision has to be thorough, it also has to begin early – long before consumers are even active in these markets.

7. Exit fees and insufficient penalty-free switching windows

Consumers also face barriers to switching in terms of exit fees. The prospect of having to pay an upfront lump sum – even if this leads to cheaper monthly bills and greater savings overall – can act as a significant mental barrier to switching.

For example, in the telecommunications market a customer usually needs to give their provider up to 30 days' advance notice before switching without having to pay another month on the higher out-of-contract tariff. One leading broadband provider's out-of-contract price for standard speed broadband is £45.49 per month. With the lack of end-of-contract notifications in broadband, a customer could easily not realise their minimum contract is over until the first payment is taken at this higher price. Therefore, with that first payment and the additional 30 days payment, a customer may accidentally end up paying more than £90 for two months of service. This is shocking considering it is possible to get similar service from a different provider for around £10 per month, factoring in promotional cashback and vouchers.

Similarly, in the household insurance market, customers have a 'cooling off period' of 14 days after their contract has been auto-renewed. This is meant to make it easier for a customer to switch in this allotted time. Outrageously though, customers most often still have to pay a fee when switching – even in this short 'cooling off period'.

In the mortgage market, consumers can face significant fees when trying to remortgage from both their old lenders in the form of early repayment charges, and new lenders in the form of mortgage fees. Remortgaging also requires administration fees to be paid to other firms, such as valuation fees, conveyancing fees and broker fees. Some customers face substantial administration fees even when switching products with the same provider. These fees often amount to hundreds of pounds – which at best is discouraging and at worst unaffordable, leaving some mortgage consumers with no choice but to remain on expensive standard variable rates.

The timeframes given for 'penalty-free' switching are not long enough to allow a consumer to assess the marketplace properly and compare deals, and go on to switch if they decide that to be the best recourse. Indeed the windows are especially insufficient in the insurance and telecommunications markets, due to the complexity of the products in these markets which complicate the process of shopping around. 

In markets where consumers face an exit fee, we believe firms must be mandated to notify customers twice before their initial deals end: one month before the 'penalty-free' window begins, to encourage the customer to start comparing providers, and two weeks before the original contract ends, to encourage the customer to go ahead and switch if that is the course of action they have decided on.

Such communications would mitigate the psychological deterrent exit fees pose to switching.


The 90-day period in which the CMA has to respond means that this submission has had to be prepared in a timeframe which is inadequate to fully engage with every area of the wide-ranging Citizens Advice super-complaint.

Considerably more time, research and analysis would be required in order to fully delve into some of the crucial issues briefly outlined here – for example, what constitutes an unacceptable victim of the 'loyalty penalty'.

Given the scope and depth of the super-complaint, and how important these markets are to consumers' financial wellbeing, the CMA should strongly consider the merits of a full market study as its response. In addition, the CMA should not shy away from identifying any other essential markets which possess a problematic 'loyalty penalty', such as car insurance.

Ultimately, a 'loyalty penalty' only warrants intervention in a competitive market if there are unacceptable victims and/or unacceptable barriers to switching. This response has briefly illustrated the existence of both of these factors in essential markets. On that basis, further investigation by the regulator in the form of a market study could well be justified.