The “loyalty penalty” for home and motor insurance will be ended under regulator plans for existing customers to be guaranteed the same deal as new ones.
The Financial Conduct Authority (FCA) this morning announced plans to outlaw the practice it called “price walking” whereby loyal customers who renew their policies are charged slightly more each year.
The watchdog estimated that the “radical” reforms will save consumers £3.7bn over a decade and that roughly six million people could be overpaying on their premiums by £1.2bn.
The FCA uncovered examples where new customers had paid £285 for motor insurance while customers of more than five years were charged £370.
A new buildings insurance customer was being charged £130 for cover, while the provider’s existing customer was charged £238.
Christopher Woolard, the FCA’s interim chief executive, said the plans “would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers”.
The proposals follow voluntary commitments from firms secured by the regulator in the mobile phone and broadband markets, but experts warned there is still more to be done.
It is now nearly two years since charity Citizens Advice issued its “super-complaint” on behalf of consumers about the loyalty penalty.
Meanwhile, last year the Government announced its intention to end the practice by boosting the powers of the Competition and Markets Authority (CMA). The Telegraph understands that a white paper on the proposals is yet to be published.
Dame Gillian Guy, of Citizens Advice, said: “We’re pleased to see the FCA is proposing strong action to crack down on this systematic scam.
“We’re especially happy to see it tackling price-walking – gradual year-on-year price increases – and making companies automatically switch their customers to better deals.”
But she added: “It’s important to remember these are proposals and have an introduction date of 2022 which is a long way away. It is essential that the FCA confirm and implement these quickly.”
The new rules would work by ensuring that new and old customers purchasing on the same channel, for example online, would pay the same price for cover.
Firms would only be allowed to increase renewal prices if a customer’s risk profile changes.
The FCA said that 10 million home and motor policies are held by people who have been with their insurer for five years or more.
The watchdog said firms often use “complex and opaque pricing practices” and that while some customers “shop around for a deal, many others are losing out for being loyal”.
It added that firms do not always offer regular switchers the best deals.
The plans would also see firms required to report to the FCA to ensure the rules are being followed and make it simpler to stop automatic renewal across all general insurance products.
The new proposals will be consulted on until January and could be adopted next year.
James Daley, of consumer group Fairer Finance, warned there was a chance the rules could leave policy holders with diluted cover.
He said: “People could become complacent and not read the small print [on their policy renewal].” He added this meant customers may not spot changes like an increased excess.
The Association of British Insurers said it supports the FCA’s work and that firms have already taken steps to tackle the issue.
Director general Huw Evans said: “It is vital that price comparison websites and insurance brokers are subject to the same level of supervision and monitoring by the FCA to ensure a balanced approach.
“We will consider carefully this package of proposals, so that we can engage with the FCA on the most effective measures possible.
“There are winners and losers in the way the market works currently, with those who switch insurance provider every year often ending up with lower prices. The FCA has confirmed that insurers have not made excessive profits.”