The competitions watchdog has made a number of recommendations following an investigation after a "super complaint" submitted by Citizens Advice found that customers are being penalised by up to £4billion a year for sticking with their provider.
The Competition and Markets Authority has given regulators such as Ofcom and the Financial Conduct Authority six months to address the issues.
The investigation also found that vulnerable people, such as the elderly and those on a low income, may be more at risk of paying the loyalty penalty.
The CMA's probe uncovered "damaging practices" by firms, including yearly price rises, expensive exit fees and difficult processes to leave or switch providers.
Other tactics by firms found were requiring customers to auto-renew and not giving enough warning to customers about when their contracts will be rolled over.
I was charged £600 a year for my phone, even though my contract had ended
The marketing guru from Buckinghamshire took out a 24-month contract for an iPhone 6 back in September 2015 and paid £49.95 a month.
But it wasn't until earlier this month that he realised his contract had ended even though he was still paying the full-whack.
Juan, 50, has been a customer with the network provider for more than seven years and claims he was never alerted by the company to the fact that his contract was up.
"It made me feel sick when I realised," Juan told The Sun. "They've absolutley fleeced me.
"When I called to complain they agreed to move me on to a SIM-only deal which costs £6.99 a month – so why have I been paying nearly £50 a month when my contract was up?
"Why didn't Vodafone tell me? They knew it was coming to an end so they must have ignored it.
"Technically I own the handset now so I've been paying hundreds more for no reason.
"What's worse is that they don't proactively get in touch to discuss your options.
"I want the £600 back. It's the least they can do."
A spokesperson for Vodafone said: "From April 2018 we have been proactively contacting all customers when they are approaching the end of their minimum term to let them know their options.
"These include upgrading their device or moving to a SIM-only contract so they are not paying anything for a handset.
"We also offer extra data to those customers who don’t opt for either of these alternatives but instead choose to stay on their contract after the end of their minimum term."
The CMA is recommending the government and regulators crackdown on harmful business practices and suggests that "targeted price caps" should be put in place to protect the most vulnerable Brits from being overcharged.
Firms that overcharge loyal customers could also be made to publish the size of the loyalty penalty on a yearly basis.
The watchdog also advises Ofcom – the communications watchdog – to put regulations in place to stop mobile phone providers charging pay-monthly customers the same rate once they've paid off their handsets.
How to make sure you're not being penalised for being loyal
These are some of the best websites to use to find a better deal on your provider. Remember though, if you are thinking about switching before your term is up then you could face an early exit fee.
- Broadband -Broadbandchoices.co.uk
- Home insurance – MoneySuperMarket.com
- Mobiles – BillMonitor
- Mortgages – MoneySavingExpert.com or use a free broker such as London & Country to help you find the best deal
- Savings accounts – Savings Champion
Meanwhile, it suggests that the FCA should consider imposing "pricing interventions" to prevent loyal customers from being exploited by insurance companies.
Andrea Coscelli, chief executive of the Competition and Markets Authority said: "Our work has uncovered a range of problems which leave people feeling ripped off, let down and frustrated.
"They shouldn't have to be constantly "on guard", spending hours searching for or negotiating a good deal, to avoid being trapped into bad value contracts or falling victim to stealth price rises."
The CMA found that millions of people are affected, including around 1 million in the mortgage market to nearly 12 million in insurance.
Gillian Guy, chief executive of Citizens Advice, said: "This is a strong response from the CMA, recognising that loyal customers are getting ripped off. That is exactly why we've been fighting to stop the loyalty penalty, and why we made the super complaint.
"While the CMA needs to hold regulators to account, the onus is now on Ofcom and the FCA to act.
"The CMA has set a six-month deadline for progress and expectations are high. Regulators must do whatever it takes to fix the loyalty penalty."
Lindsey Fussell, Ofcom’s Consumer Group Director, said: "We welcome the CMA’s report, which supports our existing work to protect customers, including our reviews of mobile handset charges and broadband prices, and our plans to require companies to tell people about the best tariffs available when their deal is ending."
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