Competitive Edge - The Loyalty Penalty: CMA response to super-complaint

The CMA has published its response to a supercomplaint made by Citizens Advice in September 2018 in relation to what it has termed the "loyalty penalty".

Citizens Advice has claimed loyalty penalties are prevalent in five markets for essential products and services, namely mobile, broadband, cash savings, home insurance and mortgages ("the essential markets").

The CMA's response, which was published on 19 December 2018, is significant. Its package of proposed reforms, which include direct intervention such as price controls and enforcement against harmful business practices, shows that it is "getting tough" and seeking to tackle these issues head on from a number of different angles, together with the FCA, Ofcom and government. The proposed reforms relate not only to the essential markets identified by Citizens Advice but also to wider markets, with significant consequences for businesses across a range of sectors. The CMA's approach demonstrates that consumer protection is central to competition policy and reinforces a shift away from a strict division between consumer law and competition law enforcement.

Although the CMA is not planning to initiate a market study at this stage, it will consider again whether a market study is needed in 12 months, depending on whether sufficient progress has been made in taking forward its recommendations. Additionally, it has launched an investigation in the antivirus software market and has indicated that this is a first step in a wider programme of enforcement to tackle the issue.

Why is the CMA concerned?

Many services are paid for by customers through contracts which automatically renew or roll over, at which point many customers will pay higher rates than new customers unless they actively intervene. This might be because there is a sharp increase after the introductory price (a 'price jump'), successive price rises ('price walking') or because customers are on older tariffs ('legacy pricing').

The CMA estimates that the loyalty penalty paid by consumers each year could be around £4 billion in total across the essential markets. However, the CMA considers it likely that the loyalty penalty would also arise in other autorenewal and roll over products or services such as roadside assistance, other insurance markets, pensions, credit checking services, as well as subscription services such as pay TV, online gaming, gym memberships, software and magazines.

The CMA acknowledges that these contract arrangements can be convenient for customers, particularly when there are harmful consequences from not renewing, and that introductory deals can encourage consumers to shop around and enable new businesses to enter markets. However, the CMA considers that they also increase the risk that existing customers will payconsiderably more than new customers, as suppliers consider they are unlikely to switch to obtain a better deal.

The CMA has identified particular concerns in relation to loyalty penalties where:

• suppliers make it more difficult than necessary for customers to exercise choice, then exploit those who do not switch, by:
  • making it more difficult for customers to leave a contract than to sign up;
  • rolling over customers onto new contracts without sufficient warning;
  • imposing stealth increases in price on renewal year after year; and
  • requiring customers to automatically renew or roll over when they take up a service or buy a product without giving a choice;
  • the price gap is large, with some paying very high prices, or it affects many people;
  • vulnerable people are concerned, including those who struggle to use online services; and
  • they occur in markets for essential products and services.

How is the CMA addressing the issue?

The CMA recognises that the action taken by regulators and the CMA to date has not been sufficient to tackle these problems, particularly given their prevalence across many markets. As such, the CMA is proposing a stepchange to tackle the issues across wider markets and in the essential markets by:

• providing support to consumers through the use of 'smart data', intermediaries (including price comparison websites, automatic switching services and local facetoface advisory service)
• enforcement against businesses engaging in harmful and unacceptable practices; and
• targeted direct pricing interventions to either limit prices differences (such as restricting price walking) or price caps were there is clear harm.

Across Markets

The CMA is proposing reforms to address the problems related to the loyalty penalty across markets with eight recommendations:

to government, to make legislative and/or regulatory change, including new powers for the CMA to impose substantial fines for breaches;

• to government, to empower intermediaries to support switching, particularly for vulnerable consumers, for example by giving a greater role to local consumerfacing advisory organisations such as Citizens Advice;
• to government and regulators, to proceed with the Smart Data Review, which will explore how data portability can be used to improve the consumer experience, and to roll this out to where it has the greatest potential to transform markets, such as telecoms;
• to regulators, to use existing enforcement and regulatory powers more boldly – the CMA has led by example in this respect, by launching an investigation in the antivirus software market;
• to regulators, to publish the size of the loyalty penalty in key markets and for each supplier;
• to regulators, to assess the feasibility of matching price data to a recurring, large scale UK survey to improve understanding of who pays the loyalty penalty across markets;
• to regulators and the UK Competition Network, to capture and share best practice on 'nudge' remedies to consumers that have been tested and shown whether or not they work; and
• to regulators and the CMA, to consider targeted pricing regulations, such as limiting price differentials or price caps.

The essential markets

to Ofcom, to require mobile providers to move customers on bundled handset and airtime contracts onto a fairer tariff when their minimum contract period ends;

• to Ofcom, to seek to increase the engagement and awareness of mobile consumers by implementing smart data, supporting the development of innovative intermediaries and tackling low levels of awareness of SIMonly deals;
• to Ofcom, to consider possible pricing interventions in the broadband market, alongside measures to increase engagement such as the use of smart data and exploring the feasibility of collective switching;
• to the FCA, to consider further pricing interventions in the cash savings market and to consider whether collective switching can be applied;
• to the FCA, to investigate home insurance pricing practices and consider pricing interventions that limit price walking, as well as exploring how intermediaries can continue to benefit the home insurance market; and

Next steps

The CMA will provide an update on its progress to the joint government-regulator Consumer Forum in six months and an update will also be published on its website. The FCA and Ofcom will also provide updates on their progress in the essential markets.

Although the CMA does not consider a market study is necessary at this stage, given the work it has already undertaken and the recommendations it is making to address the problems, it will continue to review its progress over the next 12 months and, at that stage, it will consider again whether a market study is needed.

We shall continue to update you on competition lawrelated developments on the loyalty penalty. If you would like to discuss any of the above or related issues please get in touch with one of our team.