FCA urged to take action on loyalty penalties

FCA urged to take action on loyalty penalties

The Financial Conduct Authority has been urged to take "strong action" on firms levying the 'loyalty penalty' — the practice of overcharging loyal customers in comparison to new clients.

In an update published today (June 19) the Competitions and Market Authority stated the loyalty penalty continued to be an "issue of great concern" and stressed it remained committed to tackling the problem.

The competition watchdog reported that the FCA had taken various measures to address the problems raised surrounding loyalty penalties so far.

For instance, the CMA welcomed the FCA’s mortgage market study, which was published in March and set out a number of changes that would help customers who cannot switch — so-called mortgage prisoners.

The FCA is also undertaking research to understand why some customers who could switch to a better rate end up staying with their policy.

Once more is understood about such consumers, the CMA urged the FCA to look at what else may be needed to help or protect them.

This issue of loyalty penalties came to light last September when Citizens Advice launched a super-complaint with the CMA calling for the issue to be remedied.

The charity claimed the practice of overcharging loyal customers was "widespread" and reported that such consumers lost £4.1bn a year in Britain across mortgages, savings, home insurance, broadband and mobile.

In the mortgage industry, the super-complaint was prompted by the treatment of vulnerable consumers who end up on standard variable rates as findings showed 1.2m borrowers paid a mortgage loyalty penalty of £439 a year.

Today, the CMA also said it welcomed the continued impetus behind ‘smart data initiatives’ — such as Open Banking — that can empower consumers to give intermediaries access to their information.

This could add further value in the mortgage market, for example by speeding up affordability assessments.

The review stated: "In particular we welcome the draft government steer for this to be prioritised in telecommunications, where we believe it will have a significant impact and could transform these markets. We will continue to offer support in taking this forward."

The CMA also released its new business framework which "if followed, should help prevent customers from being hit by the loyalty penalty."

It recommends that auto-renewal must always be explicitly agreed to by the consumer and not applied on a default basis, consumers should be properly notified before any renewal, and changes to price, product or important terms must have consumer’s express agreement.

On top of this, the CMA said the consumer should be able to exit a contract as easily as they were able to sign up.

Minimum terms should be restrained while auto-renewals to fixed firms should only occur if clearly in the consumer’s interest. 

The CMA concluded that it would continue to look at whether sufficient progress was being made in taking forward recommendations and will consider what next steps, including further action by it or the regulators, is needed.