Squeezed households paying loyalty penalty for key services, charity warns

Around one in seven people could be paying a “loyalty penalty” for products such as mortgages and mobile and broadband packages, according to Citizens Advice.

One in seven people could be paying a "loyalty penalty" for products such as mortgages and mobile and broadband packages, according to Citizens Advice.

The charity said tackling loyalty penalties – where longstanding customers may end up paying more than they need to – could be worth more to some households than the £400 discount on energy bills they will receive as part of cost-of-living support packages.

More than 3,000 people were surveyed about their contracts in June and around one in seven (13.5 per cent) were found to be potentially paying a loyalty penalty on at least one of their contracts for their mobile, broadband or mortgage.

People were deemed to be potentially paying the loyalty penalty if they had been with their provider for longer than two years for their mobile, three years for broadband, and five years on a fixed-rate mortgage.

Citizens Advice also said analysis of 165,000 budgets of people who came to it for debt help suggests those on lower incomes can end up spending nearly double the proportion of their income on telecoms as people earning more.

Among those who reported the costs of telecoms including mobile, broadband, landline and TV in a budget planner, people on an income of less than £400 per month spent £30 on average, equivalent to 8 per cent of total spending.

Those who have an income of more than £3,200 per month spent an average of £132, equating to 4.1 per cent of total expenditure.

The charity submitted a “super complaint” about the loyalty penalty in the mobile, broadband, home insurance, mortgages and savings markets in 2018.

Measures to protect home and car insurance customers from loyalty penalties were introduced by the Financial Conduct Authority (FCA) in January this year.

The changes mean insurers are required to offer renewing customers a price that is no higher than they would pay as a new customer.

Dame Clare Moriarty, chief executive of Citizens Advice, said: “The Government did the right thing by strengthening its cost-of-living help, but finally fixing the loyalty penalty could put more than twice as much money back in some people’s pockets as the £400 October energy grant.

“As we all pull together to weather the cost-of-living crisis, it’s incredibly frustrating to see there are still firms out there that prefer to help themselves than help the people who’re most in need.

“The time for piecemeal pledges has passed. Regulators must tackle the loyalty penalty across these three markets – no more excuses, no more delays.”

In 2020, Ofcom introduced end-of-contract notifications. These require phone, broadband and pay-TV providers to warn customers when their current contract is ending, and what they could save by signing up to a new deal.

People who choose to stay with their provider without signing up to a new contract are also given details of their firm’s best deals every year.

An Ofcom spokesperson said: “At a very challenging time financially for many households, our focus is on making sure people get the best deal for them.

“Switching to a new deal when an existing one ends can put a significant amount of money back in people’s pockets, and we’ve taken action to make the process simpler and quicker.”