A blaze of publicity has followed the announcement of a class action lawsuit that wants damages from Britain’s four mobile operators on behalf of 4.8 million customers. The basis of the complaint is that the operators collectively overcharged customers by GBP3bn (USD3.75bn) because they did not automatically switch customers to a lower tariff at the end of contracts that also covered the cost of the customer’s handset. In effect, customers would continue paying a higher rate despite having repaid the implicit subsidy for the handset they received at the beginning of their contract. Activists describe this as a ‘loyalty penalty’ because it affects customers that do not routinely change their provider. Whether it is right or wrong, keeping customers on combined handset and airtime contracts beyond their minimum duration has been normal business practice for decades. Consumer rights activist Justin Gutmann (pictured outside of the Royal Courts of Justice) alleges there have been over 28 million mobile phone contracts which led to overcharges for British customers since 2007. As the BBC reports:
[Gutmann] alleged that the UK’s four biggest network operators and their parent companies did not reduce the amount they charged customers once their minimum contract term ended — despite the fact that consumers had already paid for their mobile handsets.
This meant existing customers were charged for something they had already paid for, and that they were charged more than a new customer on, for example, a Sim-only deal, he added.
“If our claim is successful, it will finally stop these firms from taking advantage of their loyal customers and stop the immoral practice of loyalty penalties,” Mr Gutmann said.
The mobile subscriber loyalty penalty has already been subjected to scrutiny. In 2018, Citizens Advice, a leading consumer affairs charity, submitted a super-complaint to the UK’s Competition and Markets Authority (CMA) that included mobile operator contracts alongside other examples of ISPs, insurers and mortgage providers charging higher rates to existing customers than new ones. The CMA concluded it was a serious problem which had a profound impact on those least able to afford it. Ofcom, the UK comms regulator, subsequently imposed new rules which require mobile and broadband providers to advise customers of other tariffs when they near the end of a contract. Gutmann now wants to go further by obtaining retrospective compensation for customers who were not aware that their provider offered cheaper equivalent plans. He told BBC Radio’s Today program that:
The work that Ofcom and the CMA have done does not address the issue of the harm done to consumers in the past and that is what my claim is about.
Per Gutmann’s figures, the most loyal mobile operator customers would each be entitled to receive a GBP1,800 (USD2,250) refund. It will take years for his class action to be pursued through the courts, but he has a realistic chance of success. Gutmann already knows all about loyalty penalties from his time as the former Head of Research and Insight at Citizen Advice. He is also establishing a reputation for bringing class actions in the UK, including a GBP1.6bn (USD2bn) lawsuit on behalf of 24 million owners of iPhones. Apple tried to have the latter case thrown out of court but a tribunal recently ruled that it should proceed.
EE said they ‘strongly disagree’ with the lawsuit, and also described it as ‘speculative’. Vodafone UK said their legal team lacked sufficient information to form an opinion. However, the four operators are not unified on the wider issue of how to handle the end of a customer’s contract. O2 pointed out that they already go beyond the requirements of Ofcom’s end-of-contract rules by “automatically and fully reduc[ing] customers’ bills once they’ve paid off their handset.” Earlier this year O2 launched a marketing campaign that accused competitors of ‘swindling’ customers by not switching them to more appropriate service plans when they reach the end of their contract. O2’s campaign states that customers of other British mobile operators are being collectively overcharged more than GBP500mn (USD625mn) a year.
It is understandable why some mobile operators will oppose the introduction of automatic switching of customers to new tariff plans after handset subsidies have been recovered. Even O2 is likely to fight the reimbursement of past overcharges. However, a regulatory trend is emerging in the UK and in some other countries. It is not challenging to develop systems and execute processes that automatically steer customers towards a more appropriate tariff plan when a contract ends. Governments and regulators are increasingly conscious that complicated tariffs are used to extract more money from unwary consumers. Politicians who want to present themselves as reducing the burdens on voters will be supportive of increased intervention that forces telcos to put customers on tariffs that are most appropriate for their needs. If telcos resist then governments and regulators may resort to the blunter tool of setting price caps.
Some mobile operators will charge customers for handsets for as long as they possibly can. But I suspect they are only delaying an inevitable change in the relationship between retail customers and the suppliers of essential services like telecommunications. Telcos have consciously chosen to adopt complicated methods of pricing services when this will increase profits. It is easy to portray this kind of behavior as exploitative. Politicians that want to buy voters without spending taxpayer’s money will be tempted to order businesses to make life simpler for customers, even if they choose not to dictate the specifics of how services will be priced. The telecoms industry is already on the verge of using complicated algorithms just to decide which calls and messages will be allowed and which will be blocked. It is much more straightforward to implement algorithms that compare a customer’s current needs and historic usage to the price for each service plan. Algorithmic decision-making is becoming the new norm, and this will also influence the way prices are regulated. If we can use data to increase the profitability of businesses then we will also be expected to use data to serve the interests of customers.
A dedicated website explaining Gutmann’s loyalty penalty lawsuit is found here.
