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How can we end the Loyalty Penalty?

19th Dec 2018

In our previous blog we set out the behavioural factors underpinning the ‘loyalty penalty’: the fact that consumers who do not shop around and switch deals can pay up to £877 a year more for their bills for basic services. The Competition and Markets Authority (CMA) has this week recommended 8 reforms to tackle the loyalty penalty across five essential markets – savings accounts, home insurance, broadband, mobile, and mortgages – in response to the ‘super-complaint’ Citizens Advice submitted on this issue.

Here are our recommendations.

1. Embed the ‘symmetry principle’

It is important that all five essential markets adhere to the “symmetry principle”: it should be as easy for a customer to exit and switch between contracts as it is to enter one. It’s a simple principle, and one that tips the balance firmly in favour of the consumer. If businesses can invest in making it as smooth as possible for us to sign up to a contract, they can also invest in removing the friction and ‘sludge’ on the other side.

How might this work in practice? Take savings, for example. The symmetry principle would mean being able to switch savings accounts in just a few minutes. As it stands, customers frequently need to move both their current and savings accounts to switch to another savings account. This should not be the case.

Although, on the whole, the cards are stacked against consumers when switching, there has also been progress in other sectors. Since the super-complaint was lodged, Ofcom has proposed new rules to ensure broadband and mobile providers alert customers about the best deal they can offer, and many communications service providers are engaging in a “gaining provider-led process”, which sees the new provider coordinate the switch on behalf of the consumer. In the insurance market, the FCA introduced a rule last year that insurance renewal notices must display their previous year’s insurance premium alongside the renewal premium. We should build on these successes by scaling and embedding them systematically across essential markets.

The CMA has included the symmetry principle in their core set of principles for businesses to follow and will now be looking into whether legislative and/or regulatory change is needed to effectively tackle it (recommendation 2).  

2. Scale switching trials and remedies

Simple and low cost interventions have been found to address some of our biases and encourage switching. For example, Ofgem found offering disengaged consumers an exclusive ‘collective switch offer’ meant they were 8 times more likely to switch. These examples of ‘what works’ should be replicated and scaled by regulators, suppliers and third parties across markets. This may include, for example, collective switching across mobile and broadband. The CMA should take a leading role in encouraging and coordinating these trials.

This suggestion is reflected in the CMA’s sixth recommendation: “capture and share best practice on ‘nudge’ remedies that have been tested and shown to work or not.”

3. Extend smart defaults to protect vulnerable and sticky consumers

Smart defaults provide protection to disengaged consumers, especially those who are most vulnerable. Regulators should work with suppliers and third parties to test ways to shift the customers most reluctant to move provider on to a better deal. Where effective it wouldn’t matter if a consumer is particularly sticky since their plan would automatically be switched to a better deal than their current one. We see this working in two ways:

  1. i) Following Ofcom’s lead in considering fairer default tariffs for mobile handsets, or defaulting vulnerable energy consumers into default ‘safeguard tariffs’. Other essential markets should build in smart default tariffs; and
  2. ii) Delegating decision-making to a third party such as automatic switching or notification services, such as the Cheap Energy Club. Third parties like Citizens Advice could play a more active role by running a tender for a bespoke automatic switching service which it could recommend to vulnerable consumers.

This was included in the CMA’s fourth recommendation – to empower intermediaries to support switching – and its seventh recommendation – to consider targeted pricing regulations (e.g. limiting price differentials or price caps) and other measures where there is clear harm, particularly to protect vulnerable consumers.

4. Establish a ‘Better Markets Fund’

In other markets, competitions and prize funds have been successful in promoting competition, innovation and improving consumer outcomes. For example, banking’s Open Up challenge and energy’s Energy Market Challenge have led to the development of new products, services and business models which benefit consumers.

This competition model could be applied to the five essential markets through a cross-sector ‘Better Markets Fund’, overseen by the CMA in partnership with third parties. Some examples of projects the fund could be used for include:

  • Selectively providing access to databases (using principles similar to Ofgem’s Secure Data Exchange) to top performing providers or intermediaries (e.g. auto-switching services);
  • Allowing digital comparison tools to alert consumer to better deals;
  • Permitting rival providers to contact consumers who have been on the same contract for 5 years with alternative offers;
  • Requiring that providers communicate the best deals they offer based on a consumer’s historical usage.

This would incentivise both existing suppliers and newer tech start-ups to pitch solutions to reduce the loyalty penalty. It would provide the markets with a standard of success and push industry to offer solutions to this important problem. This could subsequently feed into the best practice repository.

This was not included in the CMA’s recommendations. However, recommendation 8 (capturing experiences of the loyalty penalty through surveys) could provide an opportunity to create a database of consumers for the challenge prize.

5. Helping customers with consistent metrics across products, websites and services

While marginal gains have been achieved through efforts focusing on shifting consumer behaviour, there are further opportunities in factoring in supplier behaviour. If we take the example of the sugar tax, this was predominantly focused on shifting consumers to purchasing lower calorie drinks. However, the greatest impact emerged when beverage companies chose to reformulate their recipes with lower sugar content so they are either no longer subject to the tax, or fall within a lower tax bracket.

Customer reviews and feedback have become increasingly important part of consumer choice. They are integrated into many online platforms and, while shopping around, help us decide whether a product or service is right for us. However, metrics differ across products, websites and services, making it difficult to meaningfully interpret. One way of overcoming this is through cross-sector scorecards, which display certain quality and product metrics (e.g. ease of switching, number of complaints and quality of customer service). Companies and services could be given a star rating for each quality/product metric, which is displayed on company’s websites and price comparison sites. If this is standardised across markets, it would make it easier for us to understand which products provide the best value for money, and which are perhaps best avoided.

Equally, price comparison websites have becoming an increasingly important tool in switching, yet it is hard to know whether the one you are using is actually offering you the best deal. Regulators could utilise aggregated feedback data and mystery shopping information to run ‘meta price comparison websites’.

This suggestion is reflected in the CMA’s third recommendation: “Publish the size of the loyalty penalty in key markets and for each supplier, through for example an annual joint loyalty penalty report.”

Will the CMA recommendations address the loyalty penalty?

We’re pleased with today’s response and support it’s recommendations to tackle this important consumer issue. We are now keen to see how the FCA and Ofcom respond over the coming 12 months. For more on the loyalty penalty and all other things behavioural insights, sign up to the BIT newsletter here.

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