Overcharging loyal customers could be banned under new plans being unveiled this morning by the Government.
The so-called “loyalty penalty”, where existing customers see their insurance premiums or mobile contracts increase in price or are charged more than new customers, costs consumers £4.1bn a year.
The Government’s new regime will see the competition watchdog given the power to issue fines to firms which overcharge or mislead their customers.
The proposals would include rules to prevent mobile phone providers from charging the same monthly rate after the cost of the handset has been paid off.
It comes in response to a "super-complaint" filed by charity Citizens Advice last year.
If the plans are adopted, the Competition and Markets Authority (CMA) will be able to determine whether a firm has breached consumer law, without going to court, and issue a fine.
The Government said the rules would act as a “powerful deterrent” to firms relying on unfair terms and conditions and hard-to-exit contracts.
Prime Minister Theresa May said: “For far too long, many big companies have been getting away with harmful trading practices which lead to poor services and confusion among customers who have parted with their hard-earned cash.
“The system as it stands not only lets consumers down but it also lets down the vast majority of businesses who play by the rules.”
Business Secretary Greg Clark said: “We are committed to ensuring consumers are not unfairly targeted and penalised for their loyalty and that they can access quality products and services for a price that is competitive and fair.”
But consumer rights experts have questioned whether the proposals go far enough.
Gillian Guy, the chief executive of Citizens Advice, said: “It’s right that the Government wants to abolish the mobile phone loyalty penalty, which has cost consumers £341m since we made our super-complaint.
“But this is just the tip of the iceberg. Across the four other essential markets we focused on, consumers have been left £2.6bn worse off since our super-complaint in September.”
She said that new powers for the CMA would help it deal with firms that exploit customer loyalty but pointed the finger at regulators for failing to make progress on the issue.
James Daley, of consumer watchdog Fairer Finance, said there was a risk this could be seen as a “box-ticking exercise”. “On the face of it, it sounds like it could be more spin than substance,” he added. “These are not issues that can be solved with a fine here or there. They are structural market failures.”
Andrea Coscelli, the chief executive of the CMA, said: “Our investigation revealed that loyal customers are being trapped in poor-value contracts or paying more than they should. This has to stop – that’s why we set out significant recommendations to tackle poor practice.”
He added the new powers would allow the regulator to deter wrongdoing and act swiftly to protect consumers. The rules will also help the CMA crack down on bad practice in other markets like secondary ticketing and care homes.
More details will be unveiled in an upcoming white paper.