What we learned about consumer switching from the CMA supercomplaint response

Today sees the publication of a response by the Competition and Markets Authority (CMA) to a super-complaint made by Citizens Advice on the so-called loyalty premium — where firms overcharge loyal customers.

A super-complaint is a complaint made by a government approved ‘super-complainant’/watchdog organisation on behalf of consumers. In response, the CMA has today said that after finding people overpaying by £4 billion a year in total it recommends firms in key markets publishing the size of the loyalty penalty to protect the “worst hit” — including vulnerable consumers, older people, and those on low incomes.

The response also includes extremely interesting insights into “service switching”: something of particular relevance to Fair By Design and the remedies to tackle the poverty premium.

As the flagship research on the poverty premium found, by researchers at the University of Bristol, not switching to the best fuel deal is the biggest proportion of a low income household’s exposure to the poverty premium: costing 73 per cent of those households an extra £233.

It would be so simple to offer as a solution more switching for people to beat the poverty premium. But as the CMA has shown today, along with fantastic insight by Britain Thinks, it is not quite so simple.

They show that low financial resilience (i.e. not having enough money), fear of the risk of something going wrong, and time pressures, can stop people from wanting to switch.

From today’s report:

“Financial resilience refers to an individual or household’s ability to withstand unforeseen life events which can have an impact on finances — for example, being made redundant or being diagnosed with a long term health condition. Therefore, having low financial resilience can also be a barrier to vulnerable consumers being able to shop around or switch suppliers. It can mean that the impact of something going wrong, or of paying a loyalty penalty, causes greater financial harm to vulnerable consumers than to consumers generally.”
“Fear of the risk of something going wrong as a result of changing suppliers was a recurring theme in our qualitative research. Participants on low incomes often chose to stay with their existing provider because they wanted reliability and continuity of service and feared being disconnected. For some participants, aversion to the risks arising from constrained finances sometimes meant that they were unwilling to switch for fear that something would go wrong or that contractual arrangements would result in them being penalised. In cases where participants had had previous debts written off by suppliers, there was a fear that they may be charged more or lose out on certain tariffs with new suppliers.”
“Switching suppliers or negotiating a better deal with an existing supplier can involve significant ‘hassle’ and time costs. In the case of vulnerable consumers, these barriers to accessing better deals can be exacerbated to the point where it is no longer an option. One research participant said that as the carer for her six year old son, she was concerned about being on the phone for longer than 15 minutes at a time, in case her son’s school contacted her to administer emergency medication. She could not afford another phone and the school was not insured to store the medication onsite. ‘I have to be available within 15 minutes so I’m always on a time limit and I can never go very far while he’s at school.’”

In their summary, they show the following:

“the available evidence indicates that older consumers and consumers on low incomes are more likely to stay longer with their providers in the five markets. In financial services, survey results also show that people with other vulnerabilities, such as a physical or mental health condition, are more likely to have long tenures. As a result of being longstanding customers, these groups of vulnerable consumers may be more likely to pay a loyalty penalty in these markets.”

The CMA also demonstrates a business case for reducing and eliminating the loyalty premium, as well as the assumption that switching is the only solution possible:

“While some very active consumers are getting cheap deals, many others are losing out. Some think that staying ‘loyal’ will pay off, do not realise they are paying much more or struggle when they try to shop around as it can be difficult, confusing or time consuming. These challenges can be even greater for those who may be vulnerable. This erodes people’s trust in markets and many consumers feel let down or frustrated.
Businesses can make this worse by making it even more difficult or confusing for their existing customers to either change or get better deals. Examples of these practices include imposing continual ‘stealth’ price increases, not giving customers enough warning before being rolled over or making it more difficult to leave than it is to sign up.”

The switching solution is never quite so simple, so Fair By Design welcomes the report today. We also agree with the CMA that relevant regulators (the FCA and Ofgem) should take a look at price caps as a means of helping people in vulnerable situations avoid paying more.

Finally, the CMA’s recommendation to empower intermediaries to support switching, such as considering giving a greater role to local consumer-facing advisory organisations, is something we support. One notable idea on this front is to give housing providers brokerage powers to help people access the best deal, particularly those without the time or ability to do frequent market comparisons (see for example how Monarch are acting as energy brokers for their housing tenants).

This response to Citizens Advice today gives great insight into why switching is not the only remedy in town — so the work on empowering intermediaries begins now.