As we start the year, it’s a good time to reflect on how the regulatory landscape has changed in retail financial services over the last 12 months, and what we may expect this year. Last January, we made some predictions, highlighting fair pricing, vulnerable customers, access to physical banking and Open Banking as the things to look out for in 2019. So what happened?
The dividing line between fair and unfair pricing
‘Fair pricing’ was the big talking point at the start of last year, with discussion papers and interventions from several regulators. Over the summer, the FCA confirmed its fair pricing framework which it says will be relevant for all of its functions, including how markets work, supervision, and enforcement. This framework has helped to articulate where price differentials are more or less of a concern. But firms have been grappling with where to draw the dividing line between fair and unfair. This does, and should, require judgement from firms, but there remains uncertainty as to what the FCA (and other regulators) see as acceptable price differentials.
Fair treatment of vulnerable consumers
A question we were asked a lot last year is ‘what is a vulnerable customer’, particularly when thinking about fair pricing. It is clearly a difficult question to answer for any individual customer. Even if a firm had data on everything about a customer, it still could not determine whether they were vulnerable or not, given the personal and temporary nature of many drivers of vulnerability. Another way of thinking about this question may be to turn it on its head and ask ‘if a customer is vulnerable, then what is the worst that could happen’. This allows firms to think more about the processes and pricing they have than about identifying any individual. The FCA published a consultation on its guidance for firms on the fair treatment of vulnerable customers last summer, and this will conclude early in 2020.
The digitisation of the banking sector
The steady decline in access to physical banking continued in 2019. ATM transactions fell by another 11% in 2019, and Which? reported that around 600 branches were closed last year. The Treasury Select Committee put the ball firmly in the industry’s court: “If the financial services market is unwilling to innovate to halt the closure of bank branches, market intervention by Government or the FCA may be necessary to force banks to provide a physical network for consumers”.
The UK leads the way in open banking
Open Banking was one of the remedies mandated by the Competition and Markets Authority in its 2014-16 market study. The industry has made a huge investment to deliver Open Banking, and the UK is now a world leader in this technology. There are many services enabled by Open Banking including account aggregation, automatic overdraft borrowing and SME lending. However, adoption of these services is still at an early stage and it is perhaps too early to tell how this will evolve.
And what about the year ahead? As well as those trends above continuing, here are some highlights that we are expecting to see:
- It was way back in April 2007 that the Office of Fair Trading launched its market study into PCAs, which followed a significant number of complaints about unarranged overdraft charges. There followed voluntary initiatives in 2009 to increase the transparency of charges, a full market investigation by the CMA in 2014, and finally the FCA’s own review into the cost of overdrafts in 2016. As a result of the FCA’s review, unarranged overdrafts charges will be banned from April this year, thirteen years after that first market study. This is a significant intervention which removes one of the main revenue streams for PCAs. This year will reveal how firms choose to rebalance pricing, and how customers will respond.
- It is not just overdrafts where intervention on retail pricing is expected. The FCA will publish an update on pricing in cash savings, and its final report in its market study on general insurance pricing practices. For insurance, the FCA is concerned about the fairness of price increases at renewal, which can leave longstanding customers paying higher prices. There are some significant interventions on the table, including restrictions on price levels and margins. Whilst there is broad agreement on the problem, there are no easy answers and no consensus for how to change pricing models. This year will say much about the FCA’s appetite to intervene in competitive markets to achieve greater pricing fairness between customers.
- The FCA will conduct a ‘Principles Review’ this year, which is likely to ask some fundamental questions. For example, the FCA recognises that the requirement for “fair, clear and not misleading” communication may be too low a bar and doesn’t guarantee customers actually understand the information. And so the FCA will be considering whether to require firms to ensure customer understanding. This would mean firms have much greater flexibility to determine how they meet such a target, rather than simply following rules set out by the FCA. But it also raises the question about how much understanding customers need. This may be a debate that gets to the heart of how firms are regulated.
- Hot on the heels of Open Banking, there will be a greater focus on Open Finance in 2020. Open Finance will allow customers to share their data across a wider range of products from pensions to credit cards. The FCA has already launched a call for input to help it understand the potential for Open Finance. It will also consider whether it needs to intervene in markets to deliver Open Finance. Most would now agree that customers have a right to share their data as they choose. However, there are significant costs required to deliver this functionality and the question of who pays for this investment will be a critical debate this year.
Of course, there are other things happening in 2020 beyond FS regulation. The first Government with a working majority in nearly ten years will be keen to make progress on several fronts, with new consumer protection powers for the Competition and Markets Authority one of the priorities. With that thought, Happy New Year!