Around one million mortgage customers are being ripped off by expensive loyalty penalties – paying a high price for sticking with one provider and not switching deals.
That’s according to an investigation into a range of financial services providers accused of penalising existing customers by charging them higher prices than new customers.
Mortgages were one of five markets named in the Citizen’s Advice ‘super-complaint’ which sparked the inquiry. Cash savings, household insurance, mobile phone contracts and broadband industries were also highlighted as exploiting loyal customers.
The resulting investigation, carried out by the Competition and Markets Authority (CMA), uncovered a catalogue of ‘damaging’ practices by firms, including year-on-year price rises, costly exit fees as well as time-consuming and costly exit fees which made it difficult to switch providers.
Mortgage prisoners
Currently the Financial Services Authority (FCA) is taking action to tackle the problems faced by so-called mortgage prisoners who cannot switch onto new deals.
The CMA’s investigation supported this work, but identified 10% of longstanding mortgage customers who could switch but did not. Indeed, research out this week by mortgage switching platform, Dashly, found nearly four in 10 people have paid their lender’s more expensive standard variable rate (SVR) in the past after the end of their fixed rate period.
“This is their reward for being loyal to the average lender,” said the firm’s founder Ross Boyd.
Protecting customers
The CMA has now urged the FCA to do more to protect these customers.
It is one of a raft of recommendations it has issued to the regulators and Government to prevent loyal customers being ripped off. It includes proposals to make it as easy for borrowers to get out of deals as it is for them to get into them and plans to publish the size of each company’s loyalty penalties each year.
It has also called for price caps to prevent those people worst hit by loyalty penalties such as the vulnerable.
Andrea Coscelli, chief executive of the CMA said: “Our work has uncovered a range of problems which leave people feeling ripped off, let down and frustrated.
“They shouldn’t have to be constantly ‘on guard’, spending hours searching for or negotiating a good deal, to avoid being trapped into bad value contracts or falling victim to stealth price rises.
“Millions of loyal or vulnerable customers are being taken advantage of each year by firms – and end up paying much more than they should do. This must come to an end.”
Is this the end for SVRs?
Meanwhile, Ross Boyd of Dashly said the super-complaint by Citizens Advice would go down as the ‘starting gun’ of a radical pro-consumer change, and he suggested SVRs could now be on borrowed time.
He added: “The loyalty penalty people pay in countless areas of their financial lives is one of the biggest consumer travesties of our time.
“A small minority of consumers know to avoid the loyalty penalty by actively switching, but the vast majority still fall foul of it.”
