The FCA is increasingly scrutinising whether the pricing practices used by individual firms, or present across particular financial markets, are fair to consumers. We have written previously about the FCA’s increasing scrutiny of cross-subsidisation and price discrimination, both pricing practices that the FCA has concluded can cause harm to consumers. The FCA has now published its Feedback Statement on Fair Pricing (FS19/04), following on from a Discussion Paper it published on the same topic last year.In this Feedback Statement, the FCA:
- reaffirms the importance of its “6 question framework” in determining the fairness of particular pricing practices;
- acknowledges that the framework should be considered in the round and also relies on a significant degree of judgement;
- commits to incorporating its work on fair pricing into the review of its Principles of Business, which will be the first strand of its Handbook Review; and
- confirms that it will apply the framework in its General Insurance Pricing Practices Market Study, the findings of which will be published later in the year.
Implications for Firms
The FCA’s focus on fair pricing is increasingly extensive, wide-ranging and cross-sectoral in scope. Markets and products so far covered or being reviewed include:
- general insurance, where a pricing practices market study is currently underway;
- high-cost credit, where the FCA’s Review led to changes to overdrafts, buy now pay later offers, and to a price cap on rent-to-own policies;
- the cash savings market, on which the FCA is planning further publications on price discrimination this year; and
- the mortgage market, in which FCA has highlighted policy changes to help so called “mortgage prisoners” as an example of its fair pricing-related work.
The FCA will prioritise intervening in markets where it finds high levels of harm to large numbers of consumers, with further priority given to those consumers who are most likely to be vulnerable; consequently, in our view, the FCA is most likely to concentrate on mass market financial products. We also expect any cases of differential pricing or cross-subsidisation that the FCA finds unacceptable to be targeted in current and future market studies.
In view of this intensifying FCA scrutiny, firms may wish to consider reviewing their pricing strategies and practices and associated governance and MI flows, particularly where there is a heightened risk of poor outcomes for certain groups of customers, for example “back-book” consumers who may pay higher prices than new consumers. In particular, firms will need to be able to demonstrate that they have in place strong oversight and pricing governance, supported by comprehensive MI, for their legacy products.
Background: the FCA’s fair pricing framework
The FCA applies a “6 question framework” (set out in the table below) in order to assess the fairness of a given pricing practice, and consequently whether it will be minded to intervene.
The FCA says that it will look to apply the framework on a case by case basis, and that certain questions may carry more weight than others depending upon the pricing practice in question. However, in most cases no single question will determine whether a pricing practice is viewed as fair, with the FCA stressing that the framework needs to be considered in the round, and that it hinges upon judgement in each case.
The FCA also makes clear that its concerns about consumers affected by these pricing practices goes beyond vulnerable consumers, and that it will look at pricing practices affecting any and all consumers.
Significantly, the FCA also commits to incorporate its work on fair pricing into its overall regulatory approach. It will publish a Discussion Paper reviewing its Principles for business in Q4 2019/20, and “will report on the next phase of [its] fair pricing work at that time”.