FCA pricing practices interim report: consumer protection or pricing interference?
Last month, the Financial Conduct Authority (FCA) published MS18/1.2, the interim report of its General Insurance Pricing Practices Market Study (the Market Study). The Market Study was announced as part of a package of measures launched in October 2018 to address concerns regarding pricing practices in the general insurance market. The interim report sets out the FCA’s preliminary conclusions and the potential remedies that may enable the FCA to ensure that the general insurance market remains competitive and fair to customers.
The FCA’s findings
The FCA’s initial view is that competition is not working well for all consumers in these markets. In particular, the FCA found:
- Insurers often sell policies at a discount to new customers and increase premiums when customers renew, targeting increases at those less likely to switch.
- Longstanding customers pay more on average but even some people who switch pay higher prices.
- From the FCA’s consumer research, 1 in 3 consumers who paid higher premiums showed at least one characteristic of vulnerability, such as having lower financial capability. For consumers who bought combined contents and buildings insurance, lower income consumers (i.e. those below £30,000) pay higher margins than those with higher incomes.
- People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium.
- Most firms, when setting a price, include their expectations of whether a customer will switch or pay an increased price. Importantly, this is not made clear to the customer.
- Firms engage in a range of practices to raise barriers to switching.
- Many customers who switch provider or negotiate their premium can get a good deal.
As foreseen in our previous article How concerned should insurers be with the regulator’s interest in pricing?’ the FCA’s proposed package of remedies suggests that firms may be required to take a more proactive approach to ensure the fairness of their pricing practices.
The FCA is considering remedies to require firms to be clear and transparent with their dealings with consumers. It states that one option is to require firms “to provide data on the average premium paid in home and motor markets across different groups of consumers. For example, firms could provide price differentials for new and renewing customers over the last 12 months”.
There is an emphasis consistent with in other regimes such as the Senior Managers and Certification regime (SM&CR) and the Insurance Distribution Directive (IDD) in the sense that in future not only will firms need to adhere to Treating Customers Fairly (TCF) principles but they may also be required to document and demonstrate the implementation of this in their pricing behaviours. The FCA confirms in the interim report that any remedies that may emerge from its Market Study will sit within the broader regulatory context including specifically the IDD.
The FCA has said that in the immediate future it will continue work to improve the governance, control and oversight of pricing practices. We envisage that the final report may put forwards various remedies for consultation, the common element in which will be a requirement that firms evidence their efforts to educate consumers as to what factors are taken into consideration when calculating prices for certain consumer groups.
Other suggested potential remedies raised in the interim report include banning or restricting practices like raising prices for consumers who renew year on year, or automatically moving consumers to cheaper equivalent deals, or restricting the way that firms use auto-renewal.
The regulator is clearly attempting to address a consumer protection issue by ensuring that vulnerable consumers (however defined) are not being unfairly taken advantage of. There will be difficult considerations to balance for those in the market who may view the proposed remedies as going beyond necessary consumer protection and starting to amount to unwarranted pricing interference.
The FCA invited responses to its interim report, including the package of remedies suggested therein, by 15 November 2019. The final report and a consultation on remedies is intended for publication in Q1 2020.