’Most favoured nation’ clauses have existed longer than there have been PCWs, but ComparetheMarket’s recent fine shows how they can undermine the market 

Aleksandr the meerkat, has been a staple of British life now for more than a decade since becoming the public face of ComparetheMarket in 2009.

However a ruling in November by the CMA showed that the price comparison website’s business practices are a lot less cuddly than its mascot.

The regulator fined ComparetheMarket £17.9m after finding it had breached competition law by imposing clauses in its agreements with home insurance companies, which prohibited the latter from offering lower prices either on their own platforms or to other comparison sites.

By restricting rivals from competing on price, the CMA said that ComparetheMarket made it harder for other comparison websites to expand and challenge the company’s ‘already strong’ market position.

The CMA found that the website had a ‘network’ of what are known as Most Favoured Nation (MFN) clauses in its contracts with home insurers.

MFN, otherwise known as ‘price parity’ clauses are nothing new in the world of PCWs, said Marc Israel, a partner at solicitors White and Case.

“MFN have been in existence for a long time, long before there were PCWs,” he told Insurance Times.

MFN clauses can either be ‘wide’ or ‘narrow’. The latter, under which insurers agree not to undercut a PCW on their own platforms, are generally uncontroversial.

Wide most favoured nation clauses

The CMA’s beef was with ComparetheMarket’s use of ‘wide’ MFN clauses, which prevented the company from being undercut by prices quoted on competitors’ sites.

These stipulated that if a home insurer offered a price reduction to a rival comparison site, it was contractually bound to offer the equivalent deal to ComparetheMarket.

“With a wide MFN, not only can you not offer the same product cheaper on your own website but also not on other platforms,” said Israel.

The use of MFN clauses has been in the sights of regulators across Europe since the early part of this decade.

The CMA’s investigation into ComparetheMarket kicked off in September 2017 when the watchdog published its wide-ranging market study into digital markets, which raised concerns about MFN arrangements.

MFN clauses can help to protect comparison websites from the impact of so called ‘free riding’, said Nicola Holmes, legal director of competition, EU and trade at law firm Eversheds Sutherland.

“The risk for any platform is the so called “free rider” problem, where consumers can look on the platform, spot a deal and get it direct from them (the insurer)”, she told Insurance Times.

”That can deprive the platform of the commission on that sale and reduces their ability to get back their investment into the platform.

“If everyone does that, there will soon be no point in a PCW continuing to make its site useful because people are jumping ship and getting deals elsewhere.”

The problem with the wide MFNs is that they undermine the point of using comparison websites, Israel said.

Vicious circle

“It defeats the whole purpose because they won’t be able to find anything cheaper on any other PCW. It keeps commissions high and prices high as customers are not going to find a better deal and therefore switch.”

The upshot is a “vicious circle” that perpetuated the company’s already dominant position in the home insurance market, he said.

“There’s no point in a provider offering better terms to another PCW because it would have to offer them to ComparetheMarket. It also meant that ComparetheMarket didn’t have to compete on commission against others so it could keep its commission high.

“It prevents competition amongst PCWs which and therefore reduces competition between insurers because they can get a foothold anywhere else because if they have to offer GoCompare a better deal, they will have to offer it contractually to ComparetheMarket.”

Where an insurer tried to agree a promotional deal with a rival platform by temporarily offering lower prices, ComparetheMarket prevented them by enforcing the wide clauses, Holmes said.

“There was evidence of insurers withdrawing lower prices from the competitor’s website so it was a very clear restriction of competition.

ComparetheMarket hasn’t enforced the controversial clauses since the CMA launched its investigation in 2017.

However the company should have reacted faster, said Matthew Hunt, associate at solicitors Bristows.

“I would have thought that a company of that size would have taken action before being investigated,” he told Insurance Times.

“Given the number of investigations into these types of clauses across Europe, they should have assessed their arrangements with insurers and probably started moving to a narrow MFN model.”

’Ton of bricks’

However even if ComparetheMarket had abandoned the problematic clauses, its “egregious” systematic enforcement of would have counted against it, said Israel.

“When it saw that insurers were offered better deals on other PCWs, it came down like a ton of bricks.

“Internal documents show that without these wider MFNs, there would have been greater competition and their profits wouldn’t have been as high.”

Holmes agreed: “They captured a really large proportion of the market with this network of clauses and have enforced these clauses very vigorously.”

While the impact of the CMA’s ruling is muffled by ComparetheMarket’s decision not to enforce the clauses, the watchdog’s decision to press ahead with its investigation sends a message to the wider market about such practices, said Hunt: “They are cracking down on this kind of thing.”

The price comparison site will have to overcome a high hurdle to reverse what he describes as a “pretty solid case” in the CMA’s ruling, Israel said: “It’s not impossible. It’s a big fine and relatively new area but they might think that chances are slim so move on.”

The CMA’s decision to rule on the ‘effects’ of the clauses rather than their ‘objective’ will make it harder to overturn legally, said Holmes.

A potential challenge is “more complicated” because it can’t just be challenge on the principle of the ruling, she said.

“If ComparetheMarket were to appeal, they may go down the route of trying to show that the CMA not properly considering evidence that the clauses produced pro-competitive efficiencies or that they were objectively necessary.”

Wide MFN clauses can be automatically rewritten without undermining the rest of the contracts, said Israel.

By unpicking these clauses and negotiating more favourable terms, like lower commission rates, the industry will be better to play PCWs off against one another or grow their offerings by trading from own platforms, said Holmes.

ComparetheMarket has a two-month window from last month’s judgement to mount a challenge.

The company is “disappointed” with the CMA’s decision and does not recognise its analysis of the home insurance market, a spokesperson said.

“We fundamentally disagree with the conclusions the CMA has drawn and will be carefully examining the detailed rationale behind the decision and considering all of our options.”

But while ComparetheMarket mulls its options, the ruling has been an early Christmas present for insurers and brokers, says Israel :“It’s extraordinarily good news because they have a lot more freedom.

If they want to do a deal with somebody else and offer them lower prices because they don’t have a deal with that PCW or not getting much penetration through that channel, I’m sure it will be welcomed.”