As part of its commitment to providing more transparency around its activities and decision-making processes, the FCA has released its final Approach to Competition (the Approach) document.
The Approach, which is part of a series of documents the FCA committed to producing when it published its Mission statement, sets out how it diagnoses and remedies harm in the market and measures the impact of its interventions. It also highlights a number of current regulatory themes and perspectives, such as value for money and consumer vulnerability, to which the FCA is likely to pay particular attention when identifying harm and deciding what action to take.
This blog summarises key points and themes from the Approach and sets out some considerations for firms. It should be read in conjunction with our blog on the FCA’s draft Approach to Competition.
The FCA’s competition objectives and role
The FCA is relatively unusual amongst conduct supervisors in having a statutory competition objective as well as conduct regulation role. However, the Approach makes clear that the FCA promotes competition “in the interests of consumers and not for its own sake”1. Accordingly, it seeks to address the root causes of consumer harm by improving how competition works in the market, thereby improving consumer outcomes. The Approach notes the importance to the FCA of striking the right balance between its statutory objectives. While it seeks, as a matter of policy, to choose the most pro-competition remedy, it will do so only provided that the remedy is compatible with its duties as a whole.
The FCA’s primary role as a competition regulator is not to regulate prices or profitability directly. However, there may be some occasions when it needs to intervene on a specific aspect of pricing (for example, an exit fee) or “more rarely still” on an overall price (for example, the default charge for auto-enrolled pensions). As our recent blog on price caps explores, pricing interventions are gaining increasing prominence amongst the options the FCA considers when it judges that a market failure is occurring.
The FCA considers that a market where competition is working in the interests of consumers will be one in which:
- Confident consumers are able to exercise choice with access to the information and support they need to make informed choices;
- Firms do not present information in a way that exploits behavioral biases;
- Firms win business by making the best offer to consumers, not through collusion or excluding rivals;
- Firms can enter and grow, without facing undue barriers;
- Firms have the freedom and flexibility to develop new products and services; and
- Firms treat customers fairly, knowing that unfair treatment will have commercial and regulatory consequences.
Notably, the Approach highlights the FCA’s desire to ensure that customers get access to “good value products and services that meet their needs”, underscoring its focus on value for money in the identification of competition issues. Where it identifies poor value, the FCA has demonstrated a willingness to deploy a range of robust remedies in response. These may include pricing interventions, such as those outlined above, or remedies that aim at improving the governance and oversight of value for money such as introducing a requirement for Authorised Fund Managers (AFMs) to appoint a senior individual with responsibility for ensuring that the AFM carries out an assessment of value and acts in the best interests of fund investors.
The FCA has identified a range of market characteristics that can indicate the potential for consumer harm as a result of poor competition. These include market barriers that prevent challengers from entering or growing; a lack of access to information, making it difficult for consumers to compare and understand products; and sustained excessive profitability.
These characteristics should enable firms to anticipate areas in which the FCA might challenge individual product lines or overall business models or undertake future investigation. In particular, as outlined in our earlier blog, it is worth noting the FCA’s comments on sustained excessive profitability – which it defines as a situation where an entire industry is making high returns for sustained periods of time – as an indication of where its scrutiny is likely to fall.
When deciding on an appropriate remedy, the FCA sees a need to be realistic about how consumers assess and compare products, and to ensure remedies are designed for “real world behaviour rather than textbook rationality”. Here Behavioral Economics will have strong influence over the FCA’s design and choice of remedies, with the FCA committing, in its previous Approach to Consumers, to “explore remedies that improve competition and protect consumers as they are, rather than as we might like them to be”2.
For firms, this will mean that the FCA will look to design remedies based on how consumers behave in practice, rather than just according to theory. For example, by considering remedies that go beyond disclosure (giving customers more information about products) and considering how to drive improvements in communications, sales or marketing to help consumers get the products and services that they need.
FCA will prioritise an activity (for example, a market study) where vulnerable consumers may be at particular risk or give specific consideration to how effectively a remedy works, in practice, for vulnerable consumers.
This may mean that the FCA will take targeted action to address the needs of vulnerable customers, even if a market is working well for others. For example, though the FCA assessed that competition in the credit card market was working well for most consumers, it took action – in the form of new rules - to assist customers who are in financial difficulties or at risk of developing them.
The impact of FCA interventions
A core aspect of the FCA’s decision-making process is understanding the impact that its interventions have had or may have on consumers, firms and markets. The Approach highlights that the FCA has begun recently to conduct detailed evaluations of its most significant interventions. It published the first of these, on its interventions in the Guaranteed Asset Protection (GAP) insurance market, in July. Two others, on lower barriers to entry in the banking sector and bringing additional benchmarks into the regulatory and supervisory regime, are currently underway.
Implications for firms
The Approach, alongside the other documents that flow from the FCA’s Mission, offer important insights for firms as to the FCA’s priorities, objectives, practical perspectives and decision-making processes.
We suggest that firms pay particular attention to the FCA’s articulation of “what good looks like” as it captures the conditions the FCA wants to see when consumers are adequately protected and markets are functioning well. This overarching perspective will drive the FCA’s assessment of how well competition is working in certain markets and the range of products and services available to consumers, what constitutes poor customer outcomes, and the existence of any barriers to entry or expansion.
Where it assesses that these conditions are not present in a particular market, the FCA has demonstrated increased willingness to intervene and it is currently undertaking work to investigate and address competition concerns across a wide spectrum of markets including high cost credit such as overdrafts, general insurance, wholesale insurance broking, investment platforms and asset management.
The Approach also sheds further light on the FCA’s thinking and practical approaches towards
- The assessment of value for money;
- The lessons that can be taken from behavioral economics in identifying consumer and competition issues and developing appropriate remedies; and
- How best to identify and protect vulnerable customers.
In short, the FCA can be expected, as part of its routine supervision, to challenge firms on:
- Activities that exploit behavioral biases in a way that may limit effective competition or harm consumers;
- The exclusion of vulnerable customers from certain markets; and
- Products and services which offer poor value for money to consumers.