The UK’s biggest mobile phone companies face a £3.3bn class action lawsuit alleging that long-standing customers are being ripped off by “loyalty penalties”, under which the same services are offered to new customers at a better price to lure them from rivals.
The legal action, which has been brought by the campaigner Justin Gutmann and the law firm Charles Lyndon, targets BT-owned EE, Vodafone, Three and O2, which is part of Virgin Media O2.
It alleges that the UK’s four largest mobile phone operators overcharge customers by continuing to take payments for their handsets as part of their bills after they have paid them off at the end of their initial contract.
Concern over telecoms pricing has been mounting during the cost of living crisis, with mobile and broadband operators under investigation by the regulator, Ofcom. Consumer campaigners meanwhile are concerned that a proposed merger between Vodafone and the smallest operator, Three, could reduce competition on pricing by bringing the number of mobile network operators down from four to three.
Loyalty penalties were the subject of a 2018 “super complaint” by the consumers’ body Citizens Advice to the competition watchdog, which was followed by voluntary commitments given by most mobile operators. The lawsuit claims the practice has affected around 5 million consumers across more than 28m current and historical contracts.
Documents filed by the complainants argue that each over-charged contract could be worth as much as £1,800 to a consumer if the claim is successful.
“I’m launching this class action because I believe these four mobile phone companies have systematically exploited millions of loyal customers across the UK through loyalty penalties,” said Gutmann, a former executive at Citizens Advice, who has previously undertaken class legal actions against Apple and UK train operators.
The Competition and Markets Authority published its last update on the “loyalty penalty” issue in 2020, saying providers “should not continue to charge consumers the same rate once they have effectively paid off their handsets”.
Ofcom announced new rules in the same year forcing mobile and broadband operators to notify customers when their contracts are ending, alerting them to better deals if they are available and telling them to reduce charges for customers when they roll off their initial contracts.
The media regulator estimated that these commitments would remedy “80% of the harm in this market”.
Citizens Advice, however, published research least year estimating that about one in seven consumers could still be paying a “loyalty penalty” for products such as mortgages, insurance and mobile and broadband packages.
The loyalty penalty claim is operating on an opt-out basis, meaning most of the customers who made payments after the expiry of their contractual minimum term are included without being personally identified. Only those that specifically want to opt out will be excluded.
The claim estimates that the amount consumers have been overcharged since 2007 is £3.28bn.
“We’ve long been calling for an end to the ‘smartphone swindle’ and for other mobile operators to stop the pernicious practice of charging their customers for phones they already own,” said a spokesman for O2.
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“We are proud to have been the first provider to have launched split contracts a decade ago which automatically and fully reduce customers’ bills once they’ve paid off their handset.
EE, Vodafone and Three were also contacted for comment.
The class action is the latest issue to hit the UK’s telecoms sector. BT is embroiled in a separate £600m class action over claims it overcharged customers for their landline services.
Telecoms companies also continue to face criticism for instituting annual mid-contract above-inflation price increases for broadband and mobile customers.
The practice, which is not allowed in other utility sectors such as electricity and gas, involves increasing bills by using either the consumer price index (CPI) or retail prices index (RPI) measures of inflation, and then adding almost four more percentage points on top of the official rate.
Research by the consumer group Which? estimates that telecoms firms will generate £488m from the 2024 mid-contract price rises, which will be set based on the inflation figures for December, released in January.
The UK advertising watchdog is also investigating whether telecoms companies are misleading consumers by neglecting to tell them about mid-contract increases when promoting deals in their marketing campaigns.
Robert Johnson is a UK-based business writer specializing in finance and entrepreneurship. With an eye for market trends and a keen interest in the corporate world, he offers readers valuable insights into business developments.
