By Kristy Dorsey

The UK’s financial watchdog has put forward proposals to end practices that result in returning customers paying more on their car and home insurance premiums than those purchasing a policy for the first time.

In its latest move to crack down on the industry, the Financial Conduct Authority (FCA) has proposed what it described as “radical” reforms to boost competition and deliver value. It estimates that if its proposals are accepted, customers could save £3.7 billion over 10 years.

Insurers offer lower prices to attract new customers, with premiums rising for those who stick with the company at renewal. This practice, known as “price-walking”, leads to existing customers paying what is commonly referred to as a “loyalty tax”.

READ MORE: Watchdog warns lenders about treatment of customers in debt

The FCA is proposing that renewing customers should pay no more than if they were new to their provider through the same sales channels. For example, if a customer bought the policy online, they will be charged the same price as a new customer with the same risk profile who purchases online.

The proposals are being put out to public consultation until January 25, with final rules published later next year.

“We’re consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers,” FCA interim chief executive Christopher Woolard said.

The FCA said it identified six million policyholders who were paying high or very high margins in 2018. If they had paid the average for their risk profile, they would have saved £1.2bn.

READ MORE: Late night venues welcome ruling on coronavirus-related insurance claims

The Association of British Insurers (ABI), which represents the industry in the UK, said it agrees the household and motor insurance markets “do not work as well as they should for all customers”. Huw Evans, director general of the ABI, added that it’s “vital” the FCA give price comparison websites and insurance brokers the same level of monitoring “to ensure a balanced approach”.

“There are winners and losers in the way the market works currently, with those who switch insurance provider every year often ending up lower prices,” he said, adding that the FCA has “confirmed that insurers have not made excessive profits”.

The proposals from the FCA come a week after the financial watchdog successfully brought a test case against eight insurers over their denial of business interruption claims brought about by the pandemic. That lawsuit is estimated to affect up to 370,000 small businesses across the UK.