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Clifford Chance

Clifford Chance


The 'loyalty penalty' conundrum remains a UK market problem

18 April 2019

In September 2018 Citizens Advice submitted a super-complaint to the Competition and Markets Authority (CMA) calling for action in five different markets, including the home insurance market, to tackle the “loyalty penalty” paid by some existing customers.

In December 2018, following its investigations, the CMA announced a package of reforms that included recommendations to regulators to:

  • Make “bolder use of existing enforcement and regulatory powers to tackle harmful business practices”;
  • Consider limiting price differentials or having price caps, particularly to protect vulnerable consumers; and
  • Encourage better behaviour by publishing an annual report on the size of the loyalty penalty in key markets and for each supplier.

The CMA also pointed out the loyalty penalty issue in the insurance market is not limited to just the home insurance market.

Also in response to the submission of the super-complaint to the CMA, the Financial Conduct Authority (FCA) announced the launch of a market study looking at how general insurers charge customers for home and motor insurance. The CMA welcomed the study and recommended the FCA consider pricing inter­ventions that restrict “price walking” (successive price rises) and look at how intermediaries could benefit the home insurance market by exploring “semi-smart” solutions that could improve the existing infrastructure of price-comparison websites.

The FCA is not expected to report on its market study until summer, so it remains to be seen what action it proposes. Previous market studies show the FCA has been willing to consider bans on price discrimination and require greater price transparency in other markets that have demonstrated price discrimination.

The government has supported the CMA in this area by providing extra funding to promote competition for the benefit of consumers and business. The Department for Business, Energy & Industrial Strategy addressed customer loyalty in its consumer green paper last April, asking for a new approach by government and regulators to safeguard customers who remain loyal to their supplier for whatever reason.

The paper highlighted, unsurprisingly, that vulnerable customers should be protected and noted that “all consumers should expect to get reasonable outcomes, even if they do not actively search for the best deal”. The paper was unrestrained in its language, referring to businesses in many markets exploiting disengaged customers, the need to break up cartels and tackle dominant positions and the issue of big data working against customers, rather than for them.

There are clearly demand- and supply-side factors affecting customer loyalty and financial markets regulators can only really require change to supply-side behaviour. The FCA will however want to avoid becoming a pricing regulator or reducing competition in the insurance market. Expectations of the FCA are high and the CMA will monitor whether sufficient progress has been made by the end of this year and will then consider if further steps, including its own market study, are needed.

This article first appeared in Insurance Day