Last month the Financial Conduct Authority (FCA) published its Business Plan for the coming year, up to 2020, with fairness at the very centre of what the regulator hopes to achieve in the coming months. Although coping with the consequences of Brexit made an appearance in the FCA plan, it also provided a forum in which to further look into how existing customers are treated in the insurance market. Although the plan didn’t go into much detail about how any new measures would be implemented, what is important to note is that this was highlighted as a key agenda item for the coming 12 – 24 months.
Insurance pricing for existing customers
Back in November last year, the FCA launched a study that was designed to look deeper into the home and motor insurance markets. The purpose was to identify whether firms in the insurance market had appropriate measures and strategies in place to avoid over pricing and whether it was possible for insurance businesses to demonstrate that customers were being treated fairly. An important part of this was looking at those firms who tend to charge existing customers more than new customers.
The Citizens Advice super complaint
The FCA study was triggered by a super-complaint lodged with the Competition and Markets Authority (CMA) by Citizen’s Advice, which named insurance as one of the industries where fairness to existing customers was somewhat lacking. The complaint outlined that – across the industries highlighted by the consumer body – those customers who stay loyal to an existing supplier of a product like insurance can end up losing out to the tune of £4 billion a year.
Fairness of pricing practices
The latest Business Plan from the FCA referenced the study into the treatment of existing customers by saying, “The study will consider the fairness of firms’ pricing practices, whether competition is working effectively for all consumers in this market and the nature and scale of any consumer harm.” The practice of charging existing customers more for effectively the same product or service is known as “inertia pricing” and is common across industries such as insurance and energy. The FCA is going to be approaching its review of the fairness of pricing practices from the perspective of six key evidential queries:
- Who is harmed by inertia pricing?
- To what extent are they harmed?
- How substantial is the size of the group affected?
- How are firms pricing?
- Is this an essential product?
- Would society view the practice as egregious or socially unfair?
The interim report into the study undertaken by the FCA is due to be published in “summer 2019,” so could be released at any time in the next couple of months. It should help to provide both insight and clarification into what constitutes the fair treatment of existing customers. It could also identify where businesses in various different sectors will have to make changes in order to ensure that fairness standards are being upheld.
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