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.

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%) 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% of total spending.

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

Citizens Advice said it heard from Tracy, who is originally from the United States, who signed up to a £30-a-month package which included TV, landline, broadband and international calls in 2006. She relies on disability benefits.

In January this year she started working through her bills to look for potential savings and was shocked to see her bill had increased to £80 over the years, the charity said. She has now switched providers.

She told the charity: “Everything is going up; gas, electric, food and I have a mortgage to pay. I shop late in the evenings to get yellow-sticker discounted food, I turned off my gas as I can’t afford to repair the boiler or use the heating and I don’t go anywhere other than my hospital appointments.

“When I asked my broadband provider why I wasn’t told about the increases, they said I should have checked my payments and contacted them to see if there was a cheaper deal.”

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.

Mike Emmett, who runs training for advisers at Citizens Advice Cardiff and Vale, said: “Many people see their mobile and broadband as a lifeline. They need them to speak to people and do things like manage their Universal Credit account, and help their kids with their homework.

“But they’re usually reluctant to switch for fear of rocking the boat, particularly because of the prospect of credit checks. We also find people who are digitally excluded or who have mental health problems often prefer to speak to someone about switching, but they can wait for hours on the phone and end up giving up.

“It’s so frustrating when we see people who are on the lowest incomes paying the loyalty penalty, as they’re forced to jump through so many hoops to try and sort it.”

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.

“Since we introduced new rules requiring providers to send prompts to shop around, the number of out of contract broadband customers has fallen by more than one million.

“There is also a moral imperative on providers to support out of contract customers suffering financial hardship, and it is vital they do all they can to help them secure a deal that is more affordable.”

A spokesperson for UK Finance, which represents the banking and finance industry, said: “Lenders will contact customers ahead of the end of a fixed-rate period, giving customers the chance to consider the range of mortgages their current lender has available or browse for a deal they prefer elsewhere.

“We would always encourage people to shop around to find the best deals. If anyone is struggling with their mortgage payments, please get in touch with your lender as soon as possible to discuss the options available.”

A statement from the Financial Conduct Authority said: “Our data shows that competition is working in the mortgage market – the number of people not switching when they could save money has declined significantly since 2016, from 800,000 to an estimated 370,000.

“We know that around 37% of borrowers are on fixed rates coming to an end in the next two years.

“With interest rates rising, we told firms in June to ensure they’re supporting consumers, including considering what more they can do to encourage mortgage borrowers to switch to a less costly option where that is available. It’s important that borrowers are aware of their options and switch if they can where it is appropriate for them and saves them money.

“We welcome Citizens Advice’s work – we will continue to monitor levels of switching in the market and will consider if further steps are needed to ensure that markets provide fair outcomes for borrowers, including longstanding and vulnerable consumers.”