Financial services: the rise of the price regulators
In the UK, the price of financial products has historically been set by market forces rather than by regulation. Since 2014 the current regulator, the Financial Conduct Authority (FCA), has intervened on pricing in a limited number of areas, but that has been the exception rather than the rule.
However the jurisdiction of the Financial Ombudsman Service (FOS), to resolve complaints against firms according to what is - in their opinion - “fair and reasonable in all the circumstances of the case,” is increasingly leading to price regulation by the back door.
Financial lines insurers are therefore increasingly at risk of exposure to mis-selling claims for “excessive” or “unfair” prices of financial products.
Most prices in the UK’s economy are of course determined by market forces. There are a limited number of exceptions, where regulators intervene to address lack of competition or to protect vulnerable consumers.
The FCA’s stance
The FCA’s Chief Economist has discussed this issue:
“So, is the FCA a price regulator? Well, not in the sense of our colleagues at other regulators who regularly review many of the prices in their remit. We see no reason to intervene directly in most of the thousands of prices that are set every day in financial services markets … But, clearly there are times when we intervene directly to protect consumers, including by controlling prices.”
Currently, the FCA actively regulates prices only in two narrow areas:
- Charges payable by members of personal pension schemes
- The cost of short-term credit (e.g. pay day loans).
Price regulation in those areas was specifically mandated by parliament or by the government.
More price regulation by the FCA is on the horizon. The Financial Guidance and Claims Act 2018 requires the FCA to protect consumers against “excessive charges” by claims management companies. The FCA is also carrying out a further review of “high-cost credit”, including overdrafts, and on 31 May 2018 it published a consultation on price intervention. In its 2018/19 Business Plan, the FCA said that it was carrying out a review of pricing practices in retail general insurance as well.
The FOS - price regulation by the back door?
The April 2018 edition of the FOS’s Ombudsman News asked “when does the price of an insurance policy become a matter of fairness?”
While the FOS says that “our role isn’t to tell insurers what to charge, or whether they’re generally offering their customers value for money,” it will uphold a complaint if it considers that the price charged for a financial product was “unfair”.
One example is insurance companies offering lower premiums to new customers without drawing that to the attention of existing customers. The FOS has upheld customers’ complaints on the basis that they would have moved to cheaper policies if they had been informed about them. The FOS takes the same approach to the pricing of other financial products.
Insurance industry response
On 8 May 2018, the ABI and BIBA published “Guiding Principles and Action Points for General Insurance Pricing”. Those guidelines state that “ABI and BIBA members do not support excessive differences between new customer premiums and subsequent renewal premiums that unfairly penalise long-standing customers,” and set out a number of action points.
There is an increasingly recognisable trend towards the price regulation of financial products. While the FCA’s interventions to date have been narrow and only as mandated by the government or legislation, we are concerned that the FOS’s “fair and reasonable” jurisdiction over consumers’ mis-selling complaints may effectively have introduced the price regulation of financial products by the back door.
The FCA has itself warned of the “very serious unintended consequences” that price regulation can cause, but the economic consequences of the FOS’s position have not been adequately explored.
The courts have expressed unease about the “uncertain space” created by the FOS’s jurisdiction (R. (on the application of Aviva Life and Pensions (UK) Ltd) v Financial Ombudsman Service ), but only unreasonable FOS determinations can be overturned on Judicial Review.
While insurers generally should pay heed to the industry guidelines on pricing, financial lines insurers - especially those who cover sellers of insurance products and the liabilities arising from FOS awards - face real concern over mis-selling claims for “excessive” or “unfair” prices falling within the scope of cover.
Some financial lines policies provide express cover for FOS awards. The effect can be that there is no need for an insured to demonstrate that it has a legal liability arising from a wrongful act such as negligent advice, and loss arising from any FOS award falls within the scope of cover. We recommend financial lines insurers to actively review the terms of cover, and especially policy exclusions, to avoid underwriting the price fairness of financial products sold by their insureds.