UK regulator urged to address broadband loyalty penalty issue

Evidence is mounting that in the UK’s cost-of-living crisis, consumers are retreating on connectivity as they prioritise financial and mental wellbeing, with a potential knock-on effect of efforts to break the digital divide facing challenges and making this worse. And, according to a study from Citizens Advice, the UK’s broadband providers are among the worst businesses in the country for adopting the practice of loyalty penalties.

The organisation for independent advice defines a loyalty penalty as the difference between what existing – loyal – and new consumers pay for the same service. Following its survey looking at the broadband, mobile and mortgages markets, Citizens Advice is calling on the respective regulators, including broadcast and telecoms regulator Ofcom, to finally tackle the loyalty penalty. It says no one should be punished for being loyal in the midst of a cost-of-living crisis which is set to get worse for millions of UK consumers.

The analysis of 165,000 budgets of people who came to Citizens Advice for debt help found that those with the lowest incomes spend almost double the proportion of their income on telecoms than the highest earners. Specifically, one in seven customers are still paying the levy in the midst of a cost-of-living crisis.

The charity also found that two-fifths of people (41%) who are paying the loyalty penalty have struggled to sleep because of their finances. Nearly three in 10 (28%) have already cut back on everyday essentials, such as food and energy, and almost two-thirds (65%) are worried about keeping up with their bills.

In September 2018, Citizens Advice submitted a super complaint on the loyalty penalty in the mobile, broadband, home insurance, mortgages and savings markets. By 2020, the sectors’ regulators had discovered a combined loyalty penalty of £3.4bn every year. In January 2022, the UK’s Financial Conduct Authority (FCA) essentially abolished the loyalty penalty for car and home insurance by banning price walking – gradual year-on-year price increases – and making companies automatically switch their customers to better deals. It has paused investigating the cash savings market.

But Citizens Advice is concerned that little meaningful action has been taken in the three other markets it previously identified as having a problem. Regulators found annual loyalty penalties of £451m for broadband customers, and £83m for mobile customers paying a bundled contract including a handset. It also calculates that for mobile, the loyalty penalty cost per person per year was £83, with 1.5 million UK adults paying the loyalty penalty during the cost-of-living crisis. For, broadband the loyalty penalty cost was £61 per person per year from 7 million paying adults.

“The government did the right thing by strengthening its cost-of-living help, but finally fixing the loyalty penalty could put more than twice as much money back into some people’s pockets as the £400 October energy grant,” said Clare Moriarty, chief executive of Citizens Advice. “As we all pull together to weather the cost-of-living crisis, it’s incredibly frustrating to see there are still firms out there that prefer to help themselves than help the people who are most in need. The time for piecemeal pledges has passed. Regulators must tackle the loyalty penalty across these three markets – no more excuses, no more delays.”

Jarlath Finnegan, CEO at UK broadband provider Giganet, noted that as consumers battle with spiralling living costs at a time when reliable internet access is as necessary as running water and electricity, mid-contract price hikes were the last thing households need.

“We have set out to challenge this industry norm by honouring both new and long-standing customers with full fibre as standard, set tariffs regardless of postcode or customer loyalty, and free set up – with no contracts, no exit fees and no mid-term price rises,” he said. “By freezing our prices until 2023, and committing to set tariffs permanently, it’s the least we can do to support customers – at this time and in the future.”

Fellow UK broadband supplier Zen Internet CEO Paul Stobart added: “Today’s news that Ofcom should be doing more to protect broadband customers should come as no surprise to anyone in the broadband industry. Unfortunately, the broadband industry has become known for its price hikes – punishing those that are loyal. It’s a game that has been played for years by all the big broadband providers – luring customers in with great deals and then hiking their prices mid-contract.

“As a broadband business, it is clear to us that providers should not punish loyal customers by raising prices mid-contract. It is important that we take action against these practices, especially inflation price hikes hidden in the small print, leading to consumers paying more for their services than they anticipated when they signed up.”