FCA opens up on process it will use to determine what is unfair pricing

The FCA has said it will take a “principle-based” approach to determining what is unfair pricing.

Detailed in the FCA’s feedback statement on its study into fair pricing in financial services released today, the regulator said there will be an element of judgement and discretion in how it decides when a firm is guilty of unfair pricing.

It said that “prescriptive rules are unlikely to be appropriate in this case”.

It will come to a judgement based primarily off a framework of six questions.

It said the answers to these questions would be “considered in the round” and would “retain a significant element of judgement in its application to particular cases”.

The FCA said: “It is important that we give firms clarity about how we intend to regulate, but at the same time we need to give this clarity in a way that does not unduly constrain the application of the Framework on a case-by-case basis. Fair pricing is a complex issue with broad application.”

The FCA has stated that the first application of this framework will be in its general insurance pricing practices market study – the findings of which it said would be published later this year.

The questions the FCA will ask to determine unfair pricing

  • Who is harmed by price discrimination?
  • How much are these individuals harmed?
  • How significant is the pool of people harmed?
  • How are firms price discriminating?
  • Is the product/service essential?
  • Would society view the price discrimination as egregious/socially unfair?

But on the subject of dual pricing, an issue of particular relevance to general insurers and brokers, the FCA gave some guidance on what it will consider unfair.

And it said that where dual pricing was resulting in harm to vulnerable customers, it would be more likely to intervene.

The regulator added: “We recognise that some consumers may value convenience more than others and, depending on the context, we might be less concerned about pricing practices that are based on this variation in willingness to pay.

“However, if the reason some consumers are willing to pay more than others is because they do not understand the product, then firms should not exploit this by charging them a higher price.

“Similarly, there are some firm behaviours that we would be more concerned about. For example, if firms actively sought to identify customers who do not understand the product in order to charge them more, we would be particularly concerned.”

The feedback statement also alluded to what remedies the FCA might use to kick out unfair pricing, and how it might intervene.

Some insurance firms responding to this fair pricing study were concerned that if auto-renewals were removed it would leave vulnerable customers exposed to being uninsured.

Other concerns around FCA intervention focused on reducing competition and the ability of smaller firms to earn market share through discounted prices; causing customers to focus solely on price; and causing customers to disengage from the market.

The FCA said: “When we consider what remedy to use, we will take into account the nature of competition in the market and recognise the potential for any unintended consequences.”