Exit Fees on Headline Grabbing Tariffs - A worrying trend?

MarkyMarkD

Regarding posts saying "simply stop offering cashback", this shows a naive lack of understanding of how things work.

In the main, the energy suppliers DO NOT offer cashback. They make payments to organisations which introduce customers to them - mainly price comparison sites. Some of these sites pass on some of the payment to the consumer. Many do not.

If a supplier chooses not to make a payment to comparison sites, it may well not be listed by them at all. That is scarcely a realistic scenario given the proportion of customers who buy on the basis of comparison sites' recommendations.

And it is irrelevant (sort of) to the energy supplier whether the customer switches because they have had a cashback, or the comparison site has kept it all. Either way, it has cost them a lot of money to recruit a customer and they are entitled (IMHO) to retain them for a period of time in order to recoup that. That is what the penalties are for.

Regarding letting existing customers (who are tied in) switch to the latest, cheapest deals, I also don't agree with anyone else on here as is probably obvious. They simply don't need to allow you to switch - without penalty - as you are tied into them. Why should they throw profit away?

Longer-term arguments are fine - but everyone who is moaning about it is a rate tart anyway, who isn't loyal unless they are getting a best buy rate. So cut all the (not so) righteous indignation!

Cardew

jb5 wrote: »

Even just clear calculations of the TRUE cost of energy supplies - by a publicly owned 'comparison site' {to ensure impartiality} would help.

This is something I have been 'banging on about' for the last few years on MSE.

Ofgem seem to be a pretty useless organisation, but they could do much to enhance their reputation if they ran a comparison website for gas and electricity.

They would have no axe to grind and would not include highly subjective 'service ratings' that the current websites include to 'point' customers toward the companies that pay the highest commission.

They could even make it mandatory that all licenced energy companies supply them with details of all their tariffs. By charging a small fee the site would be self-financing.

jb5

MarkeyMarkD - I'm not sure if you are being deliberately provocative, but to address some of your points.

MarkyMarkD wrote: »

Regarding posts saying "simply stop offering cashback", this shows a naive lack of understanding of how things work

I think that the cash-back discussion is a side issue that seems to have gained prominence at the expense of the main point of my OP.
However, to address this point - I'm not against the closing of a loop-hole that allows 'super tarts' to 'make money' by switching repeatedly every few months in order to gain cash-back.
As cardew posted earlier, this isn't 'free money'; some people (a few) are profiting by it, at the expense of, I expect, the majority. There are many ways to eliminate this practice. Charging an exit-fee is one of them. I personally think there are better ways to achieve the same end.

MarkyMarkD wrote: »

They make payments to organisations which introduce customers to them - mainly price comparison sites. Some of these sites pass on some of the payment to the consumer.

OK, so this is essentially part of a 'normal' advertising budget.

MarkyMarkD wrote: »

If a supplier chooses not to make a payment to comparison sites, it may well not be listed by them at all.

Perfect reason for a Public company to offer this service.

MarkyMarkD wrote: »

They simply don't need to allow you to switch - without penalty - as you are tied into them.

This is the new trend (for variable rates), which I think is harsh, and as such prompted my OP.
The consumer is locked into a deal, one in which a company can change tariff rates 'by some margin' without breaking their T&Cs.
{OK - Energy companies are unlikely to completely alienate their customer base, though one or two companies appear more cavalier in this respect than others, so who knows!}
Another aspect of this new type of tariff, is that once the end-date arrives, the account reverts to a 'standard' tariff, one that is such poor value for money that the consumer is practically "OBLIGED" to switch. {At least for the EDF tariff I have looked at.}
If an energy company wants to retain consumers for the long term, offer good rates over the long term - eliminating the need to switch company OR tariff.

MarkyMarkD wrote: »

but everyone who is moaning about it is a rate tart anyway

I can only speak for myself, but I have forgone switching, even when there would have been a genuine saving on fuel - let alone any potential cash-back, rather than switch to a company that I have found to have provided a poor service to me in the past.

MarkyMarkD wrote: »

who isn't loyal unless they are getting a best buy rate.

If the service provided is good, and the tariff is reasonably competitive, without the prospect of cash-back, who in their right mind would go through the hassle of switching? I suspect the problem is with the energy companies and their MO rather than consumers. The energy companies can control their own destiny to a large extent. They can engender loyalty to their company by offering competitive terms and good quality of service - no tie-in necessary.

MarkyMarkD wrote: »

So cut all the (not so) righteous indignation!

My contention is - once it becomes 'STANDARD PRACTICE' to offer contracts for fixed periods (on variable rate tariffs) there are several potential pitfalls for the consumer:-

They can ramp up the tariff rate once the deal is closed - if the exit fee is small, it doesn't necessarily prevent someone from switching, but it does introduce a 'mental barrier' to switching in the mind of the average consumer;
With a small number of service providers, it does not take long before ALL suppliers start offering similar 'restrictive' deals - going somewhere else is less of an option;
Also, it is easy to co-ordinate/synchronise end dates, and thus potentially control the market.

This would shift the balance of control firmly in favour of the energy-company and away from the consumer. That is the problem I have with where we seem to be headed.

Cardew

jb5 wrote: »

My contention is - once it becomes 'STANDARD PRACTICE' to offer contracts for fixed periods (on variable rate tariffs) there are several potential pitfalls for the consumer:-

They can ramp up the tariff rate once the deal is closed - if the exit fee is small, it doesn't necessarily prevent someone from switching, but it does introduce a 'mental barrier' to switching in the mind of the average consumer;
With a small number of service providers, it does not take long before ALL suppliers start offering similar 'restrictive' deals - going somewhere else is less of an option;
Also, it is easy to co-ordinate/synchronise end dates, and thus potentially control the market.

This would shift the balance of control firmly in favour of the energy-company and away from the consumer. That is the problem I have with where we seem to be headed.

jb5,
I think many of us share your concerns.

However you are outlining a(potential) problem, and with respect you are not giving any workable solutions.

The turbulance caused by people regularly switching is a very real problem for the utility companies - not only for the cashback/champagne etc, but the huge clerical effort involved in a customer switching. The costs for all this is footed by us customers.

The drivers for this turbulance are the comparison websites trying to maximise their commission, doorstop salesmen, and cashback incentives.

In evidence given to the Parliamentary Committee on energy it was stated that a huge percentage of customers actually switch to a more expensive tariff. You can gather from countless posts on MSE that many believe a DD reduced(initially!!) from, say, £100 to £80 means a 20% reduction in their energy costs. You also cannot underestimate the lure of 'free' champagne!!

So IMO utility companies are entitled to try and prevent this turbulance, and modest exit fees seem a reasonable way to achieve this aim.

MarkyMarkD

I am not (normally) deliberately provocative. I normally post what I believe.

I know I keep banging on about the similarity to discounted mortgages, but that similarity is very strong indeed.

With a discounted mortgage, you don't know what the actual cost will be - it is a discount off a rate the company can set wherever it pleases. Ditto for energy contracts like WS3.

OK, WS3 and similar have the added wrinkle that the guaranteed discount is less than the initial discount. There are similar deals in the savings market too - guaranteed to be BBR+something, but actually BBR+a lot more. So financial services has a mirror for that too.

Continuing the mortgage allegory, it can be claimed - with strong factual basis - that the short-term incentivised deal regime has decimated profit for mortgage lenders, precisely because people churn from one deal to the next. What is happening now in energy, was already happening in mortgages.

For quite some period of time, it was better for mortgage borrowers that this churn occurred - and so, at this stage, I'd argue that it is probably benefiting customers and stuffing the energy companies with or without exit penalties. They are simply running 10-15 years behind the mortgage lenders in their understanding of things ... which is quite silly when it doesn't take much thought to join the dots.

The exit fees for energy contracts are very small, compared to those for mortgages - and, as jb says, they won't be enough to make it worthwhile for all customers to stay rather than to go. But those who go are ultra-rate tarts anyway - so what loss? By imposing an exit penalty, they are keeping most rational customers and losing the worst ones.

As I have said before, there's nothing to stop them offering a good deal to retain those customers at the end of the initial tie-in, if they wish to do so.

I could go on more about mortgage similarities - but reverting to a relatively high rate is scarcely unique to energy suppliers.

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The reason I go on about the mortgage comparison is that it's so relevant. Nobody in their right mind claims that mortgage early repayment charges are unfair - whether for fixed rates, discounted rates, or any other form of up-front incentive rate.

Similarly, nobody in their right mind should claim that energy contract early repayment charges are unfair - whether for fixed rates, discounted rates, or any other form of up-front incentive rate. Given that almost everyone on this thread seems to switch partially because of up-front cash back, that means almost every energy contract qualifies under my definition for a perfectly fair early repayment charge.


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Also to continue the mortgage simile, and completely agreeing with what Cardew posted, the amount of cost attributable to the churn is enormous and at the end of the day, that is money which either comes out of shareholders' pockets or comes out of consumers' pockets, in the form of less attractive rates on offer.

Nationwide were not wrong when they sought to get out of the rat race of incentivised short-term mortgage deals. But nobody followed them, and they had to retire injured from that strategy. The same is likely to happen in the energy markets if anyone tried to stop the merry-go-round.