In May 2021 the FCA published a consultation seeking to raise the bar for consumer outcomes.
With its title of a ‘new consumer duty’, one can imagine many Boards asking their head of compliance if extra checks are needed in the customer journey.
But such a call would be wrong.
For this consultation is a ‘Trojan Horse’. Buried inside its belly is a key change in the FCA’s approach that will fundamentally alter regulated firms’ business models; irrespective of which products or services they offer.
The FCA’s proposals includes a complicated and tiered system of new rules but one of the new ‘Four outcomes’ talks about product ‘price and value'. Among other things, this new proposal seeks to eliminate the ‘loyalty tax’.
“Outcome 4 – The price of products and services represents fair value for consumers.”
As we know from many sectors (e.g. energy, broadband, car insurance) new customers are sometimes charged a lower price to attract them in, a so called ‘teaser rate’, but then eventually if they stay with the same product provider, the price they pay will rise.
This means customers are effectively being punished for being loyal. As counterintuitive as that sounds, such pricing is common in financial services and many other industries.
But the FCA says ‘no more’ - this is unfair to those loyal and existing customers. They are particularly wary of such pricing falling most harshly on vulnerable customers, like the elderly.
The FCA are taking a stand against sludge practices and business models that rely on customer behavioural biases, including loyalty. Earlier this year the FCA set out several such measures for the general insurance industry.
The FCA’s actions on general insurance pricing are expected to cost billions of pounds (£1.2bn for 6 million customers).
If other financial services sectors are affected by the FCA’s new consumer duty proposals, they could face similar losses of billions of pounds.
For better or worse several business models are highly dependent on back book pricing.
As an example, several banks depend on paying lower rates on back-back deposits and earning income on SVR mortgages – and that supports the margin they can achieve. If margins and business models are about to change what can you do?
Next Steps
- Review the FCA’s May 2021 consultation, ‘A new Consumer Duty Consultation Paper CP21/13***’ and keep your eyes peeled for the second consultation in December 2021. Do feedback to the second consultation as the new rules will not be finalised until 31 July 2022.
- Review your business model and which lines are dependent on back-book pricing.
- Analyse which lines are no longer viable and which may need to close.
- Review your product design to look at other ways, beyond price, to make them competitive.
- Review the FCA’s measures for general insurance and what lessons can be learnt e.g. approach to auto-renewal.