Poorest households in the UK are paying 10p in every £1 more for essential goods and services according to research conducted by a Loughborough expert for Consumer Futures and the Joseph Rowntree Foundation (JRF).

In his report Addressing the poverty premium, Donald Hirsch, Director of the Centre for Research in Social Policy at Loughborough University, finds that markets for utilities and financial services are failing those on the lowest incomes. The report calls for regulators to put the needs of low-income consumers at the centre of their thinking about whether markets are working well and to develop and implement Consumer Vulnerability strategies to focus their efforts for consumers.

People on low incomes are in a weak position in any market.  This is not just because they have less money. They also lose out because of the way that firms construct products and tariffs, because of the extra costs of paying off line and not having direct debit banking.  Some consumers use payment methods, like pre-payment meters, that cost them more because they are wary of getting into debt given the cost of credit.

Although some consumers can be “costlier to serve” than others, e.g. those using pre-payment meters or paying by cash or cheque for energy, the report finds that extra charges applied cannot always be justified and that regulators should focus on making firms drive down costs for these consumers, reflect those efficiencies in fairer prices and help all consumers access the best value deals in their markets. Donald Hirsch said:

“People on low incomes can be doubly disadvantaged by having to pay above the odds for essential services and credit - making it even harder to make ends meet. Some regulators have started to recognise that disadvantaged households can be poorly placed to benefit from the market.

“Where this is the case, they may need additional protection, or regulators may need to take extra steps to create a level playing field.

“This report shows that the stakes are high for low income households: higher prices can substantially lower their living standards to well below an acceptable level. The challenge that this raises for all regulators is to look systematically at outcomes for low income groups, and where markets have failed them, to consider what additional protections are needed.”

Consumer Futures and the Joseph Rowntree Foundation want regulators to develop coherent strategies to tackle consumer vulnerability in their markets by spreading the benefits of competition to all consumers, taking a fresh look at fairer trading and pricing in these markets, and working with governments, to build a genuine cross market approach to consumer vulnerability.

Mike O’Connor, Chief Executive of Consumer Futures, said:

“Consumers who are poor or vulnerable may always be with us but we can do more to make sure that markets do not make their position worse.

“Consumers should be able to access essential services at affordable prices and with appropriate level of service. If essential markets do not deliver accessible and affordable services to consumers on low incomes, then regulators, working with governments, need to intervene to make markets fairer or target support packages to make sure everyone has the essentials of life.

“The cost of many essentials such as energy and water are likely to rise and whilst we hope for a tide of economic growth which will lift all, poverty and vulnerability is not going to go away and indeed many people who are not seen as “poor” will struggle to meet household bills.

“Low income households need to spend between a fifth and a third of all outgoings on utilities and on buying larger items that they are most likely to purchase on credit. This research shows that paying higher prices for utilities and credit can raise the cost of a minimum household budget by around 10 per cent.

“These can be complex issues and regulators and Government lack a common framework to understand how the poverty premium manifests itself and what they can do about it.

“This report can help establish bring a shared approach to a stubborn issue that quite simply will not go away by itself and needs determined and focused action by markets, regulators and governments.”

Katie Schmuecker, Policy and Research Manager at the Joseph Rowntree Foundation, said:

“The poor pay more may be a well-worn phrase, but this report drives home the very real impact of the poverty premium on the living standards of low income families. Households on low incomes already fall short of achieving what the public think is an acceptable standard of living - the poverty premium further compounds this, risking increased poverty and hardship.”

−ENDS−