Why companies punish you for loyalty

On a quiet Wednesday morning at a bank branch in Hertfordshire, an elderly woman with hearing difficulties is speaking loudly to the teller. “Can you tell me why my travel insurance has gone up to £149 a year? Last year it was much less. Why has it changed?”

As the staff member explains this was an introductory offer that did not continue past the first renewal date, a couple in their 40s on the other side of the branch are navigating their own introductory deal with ease. They are showing ID to secure a current account switch they organised online, which will net them several hundred pounds in the next year in interest and new-joiners’ rewards.

Welcome to Britain’s twin-track services economy. While many retailers reward us for loyalty, a swath of consumer industries, from banking to energy to insurance, penalise us for not regularly switching to new accounts, tariffs or policies.

Regulators have seized on switching as the answer to improving competition, but there is a growing political backlash against a system which rewards a few, motivated customers. The cheaper deals they are able to obtain are, in effect, paid for by the rump of loyal customers who are penalised for not being willing or able to switch.

In her speech last week at the Conservative party conference, Theresa May, the prime minister, said the government would not hold back from intervening in “dysfunctional” markets that were failing to offer proper consumer choice.

“Where companies are exploiting the failures of the market in which they operate, where consumer choice is inhibited by deliberately complex pricing structures, we must set the market right,” she said, adding: “It’s just not right that two-thirds of energy customers are stuck on the most expensive tariffs.”

There is plenty of evidence that consumers are reluctant to switch. We are more likely to get divorced than change bank account, so is it any surprise that companies are working idle loyalty into their pricing models?

“There is price discrimination,” says Dominic Lindley, director of policy at think-tank New City Agenda. “Companies do what is commonly referred to in banking as ‘gouging’ the back book of people who don’t use the information that is out there, or find it difficult to understand, to pay for those who can.”

A family could potentially save nearly £3,000 a year by grabbing all the best deals around, price comparison site Gocompare estimates, assuming they have a £160,000 mortgage on their lender’s standard variable rate, are paying a default utility tariff and using the least generous credit cards and bank accounts.

But achieving these savings will require digital prowess, using online comparison tools and haranguing rival suppliers — not to mention hours of research.

“Being a consumer is not a job,” says Caroline Barr, a member of the Financial Services Consumer Panel, which advises the Financial Conduct Authority on consumer issues. “I know when I have finished work and put the kids to bed, I don’t want to spend hours researching current accounts.”

Unfortunately, even consumers who manage to switch deals once may forget to do so again — and find they revert to a much more expensive “variable rate”. This model is used across the industry on products including mortgages, energy bills and broadband contracts, meaning consumers who want the best rates must engage in an endless cycle of switching to keep up.

Some regulators think that raising awareness of poor rates will encourage more people to switch — for example, energy regulator Ofgem wants suppliers to put prompts on customers’ bills and the Competition and Markets Authority wants consumers to share their data digitally so the best deals can find them.

While the political mood is changing, for now savvy FT Money readers should switch. We set out what your key priorities should be below, but also urge readers to investigate what contracts and tariffs elderly relatives are signed up to — our research shows that they are the most vulnerable to egregious charges.

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Mortgages

Your mortgage should come top of your “switch and save” priority list, as low interest rates mean you could potentially save thousands. An estimated 3m UK borrowers have rolled off a fixed-rate deal on to their lender’s standard variable rate (SVR) paying an average interest rate of 4.6 per cent, according to Moneyfacts, although rates on some new loans are now below 1 per cent.

The more equity you have, the better the rate you will probably get — though you should watch out for high arrangement fees.

However, older customers are more likely to find themselves “mortgage prisoners” stuck on expensive SVR loans, as tougher lending rules make it harder for them to switch.

Last month, the FCA said it was looking at whether there are “barriers to innovation in mortgage products that stop them genuinely meeting the changing needs of older people at every stage of life”.

A big problem affecting older borrowers is interest-only loans that are nearing the end of their term and have no realistic chance of being repaid. Since 2012, lenders have managed to halve the number of these loans on their books to 1.7m, with a further 0.5m altered to include some repayment element.

Problems can occur when an interest-only borrower who needs to extend the length of a mortgage has a lower income than when they originally took out the loan. In one case, a charity chief executive was refused her request to transfer from a SVR interest-only mortgage to a cheap fixed-rate loan because the length of the mortgage term would extend beyond her retirement.

The Council of Mortgage Lenders said that stories of older people being denied cheaper loans were rarely simple. “An awful lot of cases come down to ‘it depends’, as lenders try to balance the needs and desires of more borrowers to continue to borrow well into retirement against the conduct requirements of the regulator to ensure that [repayments are] affordable both now and into the future.”

Historically, lenders had a hard cut-off for mortgages to be repaid by the age of 70 or 75, but upper age limits can be overlooked if borrowers have a reliable source of income. And a new “lifetime mortgage” has been devised to help older borrowers, who can pay interest at first, but later switch into a roll-up loan.

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Banking on zero

Since August, UK banks and building societies have slashed the rates on more than 420 savings products to below the Bank of England base rate of 0.25 per cent, according to Moneyfacts.

For now, current accounts offer the best rates for active switchers who can split their deposits across a range of products that offer high in-credit interest for a limited time, and on limited amounts of money.

Marks and Spencer pays the equivalent of 11 per cent interest on a £2,000 balance currently, although this is mostly in gift cards to spend in its stores. Nationwide and TSB also pay 5 per cent annual interest on limited balances.

More than 100 rate cuts have been made over the course of 2016 to children’s savings accounts, Moneyfacts data shows, with many paying as little as 0.1 per cent a year.

At the time of writing, a selection of providers were paying 3 per cent or more to holders of Junior Isas, tax-efficient accounts for under-18s. Coventry Building Society tops the best-buy tables at 3.25 per cent.

Getting children and teenagers into the switching habit is a good life lesson.

“Our research tells us that 60 per cent of teenagers have their main bank account chosen for them, or choose to bank with their parents’ provider of choice,” says Eoghan Hughes of the London Institute of Banking and Finance “Their parents’ loyalty could cost them in the future.”

Regulators hope that digital advances could make it much easier for consumers to compare the cost of overdraft fees. The Competition and Markets Authority is developing the concept of open banking, which would enable consumers to upload their financial data via an app to analyse which products are best. However, the big test will be if consumers are willing to share their data.

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The energy price gap

Loyalty to your energy supplier can cost you dear — nearly £300 per year for the average user. This is the current difference between the cheapest deal on the market and the average “default tariff” that customers revert on to, according to price comparison service the Energy Helpline.

And existing customers are less likely to be offered their provider’s cheapest tariff. Of the 31 cheapest deals identified by price comparison group Uswitch, only seven were open to existing account holders.

Regulators removed requirements for power companies to make all tariffs available to all customers last year, although some companies — including Scottish Power — stress they offer their cheapest deals to new and existing customers.

“Some of the suppliers blocking existing customers from the best prices have up to 80 per cent of their customer book on standard prices, many of whom haven’t switched for years if not decades,” says Keith Anderson, chief corporate officer of Scottish Power, adding this practice “does not seem fair to me”.

Campaigners and consumer groups say the elderly struggle to move to cheaper fuel deals. “Around 70 per cent of energy consumers have never switched, and this is going to include a large number of older people who either have a sense of loyalty or are completely mystified as to how to go around looking for a fresh tariff,” says Mervyn Kohler, a special adviser at the charity Age UK.

“You need to be online to find deals, and when you have found one, it is often worth buying very quickly. This is not what most elderly customers would be expected to do. They are often cautious about new financial relationships.”

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Dialling up a better deal

Worries about losing their phone number or not being able to make calls during a changeover stop some customers from ever changing their mobile or broadband provider. Yet three-quarters of people with monthly mobile phone deals pay too much for minutes and data they don’t use, according to a Uswitch report in August.

Billmonitor and MobilePhoneChecker are both Ofcom accredited mobile comparison tools that can help you find out if you are one of these people. You need several bills to work out your monthly usage, and find cheaper deals.

Getting the latest phone often traps customers into expensive contracts. The offers give a “bargain” new mobile as part of a two-year deal and are often more expensive over the two years than buying a mobile and using a Sim-only deal.

Phone companies want to keep us tethered to them. Just as the phone is about to become all yours, they will often offer an upgrade to the latest model. If you don’t want to do this, Sim-only deals from companies such as GiffGaff start from £5 a month. These can be rolling 30-day deals or annual ones.

Some older customers have mobile phones to use in an emergency, but beware — your pay-as-you-go balance can be wiped if the phone is not used for six months.

Broadband deals offering landline and TV always seem to cost more than the initial quote in the direct mailings and advertisements, but sticking with the same company can also prove expensive.

Moneysavingexpert, a consumer website, reckons switchers can save up to £186 over 12 months and get £80 cashback as well. Some companies are removing landline charges — few customers need a home phone in our mobile age — but you still need to check the full costs when comparing contracts.

Insurance rollovers

The automatic renewal of insurance policies is, in theory, a sensible idea. Motor policies are automatically renewed to ensure that drivers do not forget to buy insurance and end up breaking the law. Home insurance is automatically renewed so that policyholders are not left without cover. But it can work against the policyholder’s best interests.

Renewal notices are sent out about 30 days before a policy expires, providing a window to switch. But in most cases, the notices do not tell customers what their previous premiums were. Without this knowledge, customers are not in a position to make a true comparison and premiums can be raised without the customer’s knowledge.

The Trustpilot review website shows that older customers often feel they are taken advantage of. Of the 19 reviews in the past three months for Saga, which offers services to 2.7m customers aged over 50, all but two gave the company a “one star” rating.

One customer, Roy, wrote: “Saga increased my car insurance premium this year by 83 per cent, from £316.49 to £580.70, despite no change in my circumstances (except I’m one year older — my age is 76). When I phoned up to query this, no explanation was given.”

Another customer, Stephen, wrote: “I was quoted a reasonable premium for my home and building insurance in 2013, and just let it roll on since, trusting the integrity of the Saga brand. Until, that is, when I saw the premium for this year’s renewal, which was way higher than I recalled. I checked back over the years, and found increases of 18 per cent, 22 per cent and 20 per cent each year. I hadn’t made a claim during this time.”

Saga said: “Along with all other insurers and many other businesses, we offer new business discounts to encourage people to try our services. Insurance is an incredibly competitive sector, pricing is dynamic and depends on a whole range of factors. About 27 per cent of home insurance customers pay less at renewal even without new business discounts.”

Following an FCA consultation, insurers will be required to include the cost of the current policy in renewal notices from next April. Customers who have renewed four times in a row will receive an additional message encouraging them to shop around.

But the digital divide is still a huge barrier. FT Money reader Evelyn says that when her father, who had dementia, died a year ago, she was shocked to discover her parents were paying £718 a year for home insurance. She was able to obtain a quote for just £200 a year by researching deals the same provider was marketing online.

Her parents had never used the internet, she says. “The policy had been in my father’s name, but even speaking to me on the phone was hard for him.”

Even if you do not want to bother with price comparison websites, it is always worth phoning your existing provider says Val Hamilton, a university worker in her 50s. She received a letter this year saying her home insurance policy was rising from £74 to £112. She got “straight on the phone to customer services” and haggled down the renewal to just £78.

“With insurers in particular I have found there is often a telephone menu option along the lines of ‘are you thinking of leaving us’, and this is what I use,” she says.

The Association of British Insurers also suggests older drivers should ask if a telematics or “black box” device could help them to save money on car insurance. The boxes were originally sold to young people to demonstrate that they were safe drivers and thus qualify them for lower premiums, but they can do the same for older drivers too.

A switcher’s charter

1. Switch only one loan or one service at a time to avoid confusion

2. Work out what you are currently paying so that you can compare this with competitor offers

3. Know what you are likely to save — at least £50 on insurance premiums (even if you have made a claim) and more than £200 a year if you have never changed your energy supplier

4. With mortgages, make sure you have all the documents relating to your income and spending before you ask for new quotes. Expect to save hundreds of pounds a month if you switch. But beware — if you only have a small mortgage the arrangement fees might exceed the savings

5. Check several price comparison sites. Not all companies are on all the sites; some sites are paid commission by companies that feature

6. Be aware that some insurers, notably Direct Line, are not on comparison websites

7. Check the details of services being offered. Are they really what you need?

8. Check how much you will pay for an early exit from a policy or loan

9. Call your existing provider to see if they can match the best offer you have found. They will in a surprising number of cases

10. Make a calendar note of when your new policy, fixed-rate or special offer expires so you do not lose out by reverting on to expensive default rates

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