Consumer rights and protections, and older consumers: the value of loyalty

Gerard Brody, speech to COTA Forum June 28, 2018


Thank you to Ian and COTA Australia for the opportunity to speak today.

Today I’d like to talk about values and consumer protection, and particularly values that are relevant to older people.

Often, we speak about fairness being central to consumer protection – indeed, the objective of the Competition & Consumer Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.

While fairness is an important value, we should also consider other values that are integral to fair and just markets, particularly for essential services and other markets servicing older Australians.

The value I want to talk about today is loyalty.

It may or may not be a surprise that older people are generally more brand loyal than other people. A study from the field of consumer behaviour science, published in the open access journal Heliyon in March this year, had some interesting findings. A group of 344 older people participated in the study which showed that consumer satisfaction increases brand loyalty in older consumers. No surprise there.

But it also found that disconfirmation – that is, where the subjects have been provided with evidence that conclusively establishes that their beliefs about the brand are untrue – this did not reduce brand loyalty. The conclusion of the study was that the loyalty of older adult consumers towards a brand was more likely to be influenced by their affection, an emotional connection, rather than their cognition, which is more logical decision-making.

I suspect that many other people, not just older people, are brand loyal due to similar reasons. As behavioural economics has taught us, emotions often tend to win out over logic, especially for purchasing decisions which are made quickly or under pressure.

If we look at key markets and how providers treat loyal customers, then perhaps they know already that there is money to be made out of older Australians. I want to look at energy, insurance, and banking as key examples.

First: energy. The Australian Energy Market Commission last week published its annual report into energy retail competition. The AEMC stated that it was ‘notable’ that there are no loyalty discounts for staying with a retailer for a relatively long period of time. The AEMC also talked about “win-back offers” being increasingly prevalent and acting as what they called a ‘disloyalty discount’.

Win back offers are where your existing retailer takes advantage of the 10-day cooling off period. Your existing retailer is notified when you seek to move away, and then contact you and offer you a better offer to keep you, before the cooling off period expires and the transfer occurs.

A more troubling aspect of penalising loyalty in the energy market involves the operation of ‘benefit periods’. These periods commonly last for a year, and they are the period in which contractual benefits apply, for example, percentage discounts. At the end of the period, the contract continues but unless the consumer seeks to change or amend their contract, they will lose the discount.

Some effort has gone into changing the rules here by requiring retailers to inform you before a benefit period ends. This was the result of an intervention from no less than the Prime Minister last year when he met with energy retailer CEOs. However, there has not been any evaluations as to whether this works, and I have my doubts.

What we do know from other research is that most people are disengaged, uninterested and reluctant to switch to a better deal. This leads to a dominant ‘set and forget’ culture of energy purchasing. Perhaps surprisingly, higher bills have not led to higher engagement, but actually higher levels of dissatisfaction.

The practice of using benefit periods clearly discourages loyalty. The message is – you have to switch providers every year to benefit. And switching is not a simple process. Due to complexity of offers and tariff arrangements, switching increasingly requires you to be a savvy internet user and be able to use the energy comparison or switching websites. I think it’s fair to say that despite efforts to improve the digital literacy of older Australians, there are still many people who are going to find it challenging using these sorts of technological tools.

Second, let’s now look at insurance. Insurance is a product that claims to reward loyalty. A quick internet search finds that a number of companies use loyalty in their marketing. For example, both SGIO and NRMA heavily advertise loyalty programs. These programs can involve offering discounts for renewing with the insurer or providing better coverage at the same price.

Another common marketing technique in insurance involves ‘no claims discounts’ or ‘ratings schemes’. These schemes are a prominent feature of many comprehensive motor vehicle insurance policies and are generally presented by insurers as a means of rewarding careful driving. Some schemes also allow consumers to keep the highest no claim discount percentage even when at-fault claims are made. Again, these schemes play on feelings of loyalty.

However closer scrutiny suggests that loyalty to insurers can pay.

Insurance, like home insurance or car insurance, generally provides 12 months cover at a time. At the end of the year, your insurer will send you a renewal notice quoting a price for the next year. Unfortunately, most of us don’t shop around. Research from Roy Morgan has shown that 83 percent of consumers do not take the opportunity of renewal time to shop around on car insurance.

This is despite insurance marketing promoting hefty discounts if you switch. You’ll all have seen the TV ads and billboards that say that they’ll beat your existing premium or offer a sign-up discount. Most of these advertisements include fine print to say that existing customers are excluded from the deals.

The ABC consumer affairs TV show The Checkout has also produced a great segment on what they call the lazy tax – an invisible surcharge on consumer apathy. They point to many consumers who have received their renewal notice, but then have gone online to generate a quote which turns out to be much lower than the premium on the renewal letter.

Consumer advocates have pushed for changes that might mean people are less likely to be subject to a lazy tax. These include new requirements for insurers to include information about premiums for not only the forthcoming year but also the existing year on renewal notices. When this change was trialled in the UK, up to 18% more consumers took action to switch or negotiate their insurance policy.

Perhaps in response to regulatory concern, the Association of British Insurers have last month released a set of guiding principles and actions on practices that penalise loyal customers. Insurers in the UK now say they do no support excessive differences between new customer and renewal premiums.

Unfortunately, we don’t yet have such commitments in Australia. In a 2015 report published by the Insurance Council of Australia on enhancing general insurance disclosure, insurers agreed to trial better disclosure of renewal notices. To my knowledge this has not happened, and now there is a proposal for Government intervention following a Senate Inquiry last year.

The problems with encouraging switching in the insurance market, however, is that it can be very difficult making like-for-like comparisons in relation to insurance. This was a problem recognised by the Senate Inquiry into general insurance that I just mentioned. That report recognised that it was a problem if consumers are selecting a product on the basis of its price alone, rather than considering a product’s value or whether it provides a level of cover appropriate to their needs.

A particular challenge is that even if you read the product disclosure statements of various insurers, each may use terms with different definitions. An example relates to the definition of ‘actions by the sea’, which is a common exclusion in insurance policies. In CHOICE’s submission to that inquiry, it noted that ANZ insurance excludes loss or damage caused by ‘actions of the sea’, however it does not define a tsunami as an action by the sea and will in fact cover loss or damage by a tsunami – that is good. However, by contrast, Coles insurance considers a tsunami to be an act of the sea and excludes damage or loss ‘caused by high tide, tidal wave, tsunami or other actions of the sea’.

The Senate committee recommended that the government work closely with industry and consumer groups to develop standardised definitions of key terms for general insurance. It also recommended an independent review of the existing standard cover regime, which is supposed to help consumers by ensuring products meet a minimum level of cover. The Federal Government has supported these ideas, and has tasked Treasury to assess the proposals.

The final market I want to discuss is banking and I want to start by talking about mortgage pricing. While choosing a mortgage might be seen as a job for younger people, more and more older people have mortgages and some may be retiring without yet paying off their mortgage.

The ACCC is currently examining this market, and has earlier this year released a report that demonstrates how banks are penalising loyalty. Again, this involves the use of discounting. The report found that banks offer varying levels of discounts, both advertised and discretionary. However, discretionary discounts are not always transparent – they are only available if you push your lender or threaten to switch providers.

The ACCC backed up their findings with data. They found that existing residential mortgage borrowers paid significantly higher interest rates than new borrowers at the same bank. Between June 2015 and June 2017, existing borrowers on standard variable interest rate mortgages at the big four banks were paying up to 32 basis points more, on average, than new borrowers. Over time, this can add up to many thousands of dollars in a loyalty penalty.

The ACCC said that these findings suggest that many bank customers would likely benefit from either switching mortgage providers, or approaching their bank for a better rate and indicating they are prepared to switch to get one. This sort of advice, however, leaves older people in a bind – particularly if older people have reduced hours or are no longer working. For these people, it might be easier said than done to switch providers. In a way, they may be captured paying a loyalty penalty.

The second area of banking that I’d like to mention relates to bank guarantees. Many older Australians are asked to provide guarantees, often in favour of their children. This was an issue considered in the most recent round of hearings at the Royal Commission into Misconduct in the Banking & Finance Sector. In one case study presented at the Royal Commission, pensioner Carolyn Flanagan gave evidence about a guarantee she had provided to secure a loan taken out by her daughter and her partner to purchase a Poolwerx franchise business. When the business did not succeed, Ms Flanagan as the guarantor lost ownership of her home.

The Productivity Commission recently examined issues associated with small business lending in its draft inquiry report into competition in the Australian financial system. It found that over 80 percent of small business lending is secured through real estate, with over 40 percent being secured by a residential mortgage. While I haven’t been able to find exact statistics, I’d estimate a significant proportion of these to be secured through guarantees provided by older parents over their own home.

In its report, the Productivity Commission found that the APRA capital requirements create an incentive for lenders to seek a residence as collateral for small business finance. This is because the way the risk ratings work – the risk ratings for these arrangements are similar to residential home lending, while lending secured by a commercial property attracts a higher risk rating and is treated the same way as unsecured lending, costing the bank more.

Some academics have said that this contributes to a ‘lazy bank effect’, where banks fail to consider the sustainability of the underlying business if there is collateral it can rely upon.

What, you might ask, has this to do with loyalty?

Well, along with loyalty comes another value important to the effectiveness of markets and the responsibility of service providers, and that is trust. Older people who provide guarantees often do so following a long loyal relationship with their banking. They rightly consider that if the bank is suggesting this arrangement to a loyal customer, then the bank must be confident that it is very unlikely that the guarantee will be called upon.

These are difficult issues, and I don’t pretend to have all the answers. I hope the Royal Commission does help us come up with a better system to protect older Australians.

However, one question for policy makers is what we do about loyalty and consumer protection. I haven’t focused today on any policy prescriptions for dealing with the issue, other than to note that loyal customers can be penalised and harmed, sometimes substantially so.

It might be that we need greater social responsibility by our key service providers to treat loyal customers well.

It might mean that we need changes to incentives in markets, particularly the incentive to make the most money out of a customer as quickly as possible. What about incentives that reward longer-term, loyal, mutually beneficial service relationships? After all, it is incentives that drive behaviour and behaviours establish norms of conduct, including in business.

Or we might need actual regulation to solve these problems.

I suspect that there may be different solutions in different markets. What is most important, though, is that we continue to discuss values like loyalty and consumer protection. My concern is that if business continues to penalise loyalty, then the long-term benefits associated with markets that operate both competitively and fairly will fail to materialise. Thank you.

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