What is the loyalty penalty and how can you avoid feeling ripped off?

Consumers are collectively wasting £4 billion a year by paying a loyalty penalty for certain services – with a range of problems leaving people feeling “ripped off, let down and frustrated”, the competition watchdog has found.

Here is a look at how this is happening:

– What is the loyalty penalty?

Longstanding customers who stick with their existing provider year in, year out are being charged higher prices than new customers being wooed by firms.

Many services are paid for through automatically renewed or rolled over contracts.

This can be convenient, but it can also increase the risk of a loyalty penalty.

Some people paying the loyalty penalty may not realise they could be better off elsewhere and they may wrongly believe staying put will pay off in the long term.

– Who is paying it?

Millions are affected by the loyalty penalty and they are often the people who can least afford it.

The Competition and Markets Authority (CMA), which has investigated concerns raised by Citizens Advice in a “super complaint”, said vulnerable people, including the elderly and those on a low income, may be particularly at risk of paying the loyalty penalty.

– Which markets has the CMA looked at?

The watchdog looked at five markets highlighted by the super-complaint – cash savings, mortgages, household insurance, mobile phone contracts and broadband.

It also said the loyalty penalty is likely to be a “much wider issue” than just these five markets.

– What happens now?

The CMA thinks urgent action is needed and has made a raft of recommendations to regulators and Government “to help stop loyal consumers being ripped off”.

It suggesting targeted price caps to protect the people worst hit by the loyalty penalty, such as the vulnerable, where needed.

To make the loyalty penalty more visible, regulators should publish its size in key markets and for each supplier on a yearly basis, the watchdog has said.

– What can consumers do?

Consumer campaigners said people wondering if they could be better off with another firm should not wait for the problems found by the watchdog to be fixed.

Jenni Allen, managing director of Which? Money, said: “While we await the necessary action we would urge consumers unhappy with their current provider to consider switching to a better deal – a few minutes of your time could potentially save you hundreds of pounds a year.”

Consumers who want to stick with their provider could try haggling with them to see if they can get the price down.

Doing some research before trying to haggle could help, as consumers may be able to give their provider examples of cheaper deals they have seen elsewhere – and ask them to match or beat the price.

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