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Should businesses give long-standing customers a discount for their loyalty?
Should you be able to get a better deal if you shop around?
If, like most people, you answer ‘yes’ to both, you’ll see the conundrum.
Of course, in practice, the better prices tend to go to those who scour the market; and loyal customers are often effectively penalised for their inertia.
Is that fair? It depends on your point of view. Discriminatory pricing, as economists call it, can be a legitimate practice. In the same way that an airline may charge one price to a canny frequent flyer who books early and a higher price to a naïve late booking tourist, is it wrong for service providers to win customers’ business by putting great deals into the market and recouping the discount by levying higher prices on those who don't shop around?
From a public policy perspective, it may depend on the ability of the customer to recognise that alternatives are available and to do something about it. From the point of view of Citizens Advice, which brought a ‘super-complaint’ to the Competition and Markets Authority (CMA) last year, there is definitely something wrong with the so-called ‘loyalty penalty’.
Citizens Advice argued that huge numbers of customers, of telecoms and finance companies in particular, were on uncompetitive deals, “paying far more for a service than a new customer would. We don’t think a customer’s loyalty should be penalised.” Responding to this just before Christmas, the CMA accepted the main point, commenting “Tackling [the loyalty penalty] problems head-on is overdue… There is a clear case for intervention to protect those who are hardest hit, particularly those who are vulnerable.”
So the pliable concept of fairness is one that is about to go through the wringer in 2019, with regulators from OFCOM to the Financial Conduct Authority (FCA) having to up their game and take a fresh look at pricing, terms and conditions, along with those they regulate.
In the telecoms market, which deals are OFCOM worried about?
In particular, Ofcom have thrown the spotlight on three types of contract that may in the future be 'unfair':
In terms of the first of these alone, OFCOM estimates that collectively UK mobile customers could be ‘overpaying’ by approximately £330m each year, so its concern should be no surprise.
The range of remedies open to the regulator is wide. Let’s look at some that OFCOM is considering.
1. Pricing transparency
Requiring providers to give better, clearer information about their tariffs. For example, in the bundled handset/airtime mobile market, they could be forced to tell customers about the costs of the different parts of their package.
2. End-of-contract notifications
A more powerful initiative would be to make communications providers send their customers notifications which would not only remind them, near to the end of their minimum contract period, of their option to switch, but also inform them about the best tariffs available.
3. Automatic switching or price reductions
The regulator could demand that communications providers switch customers automatically to a better deal when their fixed term contract comes to an end, such as a SIM-only contract in the mobile phone market, or reducing the price consumers pay to reflect the reduction in the provider's costs, for example where the cost of a handset has been repaid
4. Prohibiting bundled contracts
A more stringent measure would be to outlaw certain types of contract altogether – for example, in the mobile phone market, to require separate contracts for handsets and airtime, with handset payments stopping at the end of a fixed period.
Broadly, measures of this type fall into two groups. Some, like increased pricing transparency, are ‘demand-side’ measures which are designed to stimulate competition. Others, which impose controls on price or other terms and conditions, like prohibitions on bundled contracts, are ‘supply-side’ remedies.
While communications service providers may grimace at any new regulation, at least demand-side measures arguably help to make the market work better: in a more competitive environment, new opportunities may arise to compensate for other avenues closed off. But supply-side remedies bite harder, restricting providers’ flexibility. To that extent they can limit innovation and therefore reduce competition, which tends to lead to poorer outcomes for consumers, so why would regulators even consider them?
The answer is: to protect vulnerable consumers, such as people who are older, on lower incomes, or who have a physical or mental illness, where the provision of more or differently presented information may not be sufficient to protect them from 'unfairness'. But with remedies of this type, there is often the risk of unintended spill-over effects, creating harmful consequences for the wider market.
All involved, from consumer advocates to communications providers, have a lot at stake.
OFCOM is still considering how to tackle mobile phone contracts and its consultation on end-of-contract arrangements and fixed broadband services closes on 1 February 2019.
Beyond that, other players are in the wings to impose yet further measures. The CMA, for example, may yet still open a full ‘market study’ – the heavy armour in its battery of potential measures – if it feels there is insufficient progress to right market wrongs. The Department for Business, Energy and Industrial Strategy may progress with reforms it set in motion in a Green Paper on Modernising Consumer Markets. And the European Electronic Communications Code (the EECC), which was formally approved by the EU Parliament and EU Council at the end of 2018, may also affect consumer protection legislation, whatever direction Brexit takes.
Individual firms therefore need to assess their practices and consider what more they can do to enable effective consumer engagement while protecting the truly vulnerable. If they fail to engage, the risk is tougher, and possibly disproportionate, regulation that may stall competition and destroy value across the industry. The time for voluntary reform and judicious lobbying is now.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.
23 January 2019
by Stuart Murray