The so-called loyalty penalty, where companies charge existing customers more for new contracts and premiums, cost consumers more than £4bn a year, according to Citizens Advice.

The government has announced it will consult on giving the Competition and Markets Authority (CMA) powers to fine firms without having to go through the courts as is currently the case.

Ministers hope this will deter firms that are harming consumers with misleading claims, unfair terms and conditions, and hard-to-exit contracts.

Prime Minister Theresa May said: “For far too long, many big companies have been getting away with harmful trading practices which lead to poor services and confusion among customers who have parted with their hard-earned cash.

“The system as it stands not only lets consumers down but it also lets down the vast majority of businesses who play by the rules.

“It is high time this came to an end.”

The proposals follow a super complaint lodged by Citizens Advice in September last year.

A study of the mobile, broadband, home insurance, mortgages and savings markets by the national charity concluded that eight out of 10 people end up paying more than they need for products by remaining loyal to their existing provider – or receiving less interest in the case of savings.

Citizens Advice calculated that the average cost of the loyalty penalty to the UK consumer was £877 a year, or £4.1bn overall.

Responding to the super complaint, the CMA said it agreed that firms were using damaging practices and exploiting unsuspecting customers and called for urgent action.

Citizens Advice welcomed today’s proposals but said more needed to be done to protect consumers.

Gillian Guy, chief executive of Citizens Advice, said:“Tough new powers for the CMA to fine businesses who have broken the law will help it crack down on firms that exploit customers’ loyalty.

“But, while the government’s announcement is welcome, we’re disappointed by the lack of action from regulators. The FCA and Ofcom have had six months since the CMA issued its findings on our super-complaint and there has been little progress. They need to set out their plans urgently on how they will tackle this systematic scam.”