I think we all wish last year a good riddance, and can now look ahead to 2021 with some optimism. Whilst Covid dominated everything else in 2020, the new year is 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 highlighted overdrafts, introductory pricing, the FCA’s ‘Principles Review’, and Open Finance as the things to look out for in 2020. So what happened?
Standardisation of overdraft prices
After years of investigation, the FCA finally banned unarranged overdraft charges from April 2020. The uncertainty last January was how firms would choose to rebalance their prices to replace the revenue from unarranged overdraft charges. Providers didn’t have many options. They could raise their arranged overdraft rate, lower their deposit rate (which was already zero for many customers), or introduce new charges, such as monthly fees. Nevertheless, the FCA was forced to launch a review after a media backlash over arranged overdraft rates increasing (for many banks) to around 40%. And even in December, bank bosses were still being asked by the Treasury Select Committee whether there was a cartel to fix overdraft rates. The FCA’s review concluded that “while many of the banks’ new rates were similar, we have seen a range of pricing structures and price points…most banks estimate that these pricing changes would reduce their total overdraft revenue by between a quarter and a third”.
Healthy introductory discounts
By the end of 2019, the FCA had put on the table some significant interventions to restrict introductory discounts in general insurance and cash savings and make pricing “fairer”. This year we found out how far the FCA was prepared to go. In cash savings, the intervention was pulled in the summer due to the very low interest rate environment. But in general insurance, the FCA surprised many with its proposals to require renewal prices to be set the same as new business prices. This should end the practice of “price walking”, where customers see an increase in their premium every year.
The debate was not confined to these markets though. Towards the end of 2020, we saw further interventions proposed in the energy sector to scale up ‘opt-in’ switching and reform auto-renewal. The CMA also published an update on its ‘loyalty penalty’ work. This revealed two themes in its thinking. First, that regulators have little guidance from the literature to distinguish between the fairness of healthy introductory discounts that encourage competition and unhealthy loyalty penalties. Second, that “transparency-based remedies and…improving consumer engagement can be powerful, but they also can fail to reach the most vulnerable consumers…and pricing interventions can serve an important purpose…”.
A shift to outcome-based regulation?
The FCA had planned a ‘Principles Review’ this year, which was to ask some fundamental questions. In particular, the FCA recognised that the principle for “fair, clear and not misleading” communication may be too low a bar and didn’t guarantee customers actually understand the information. The FCA was to consider requirements for firms to ensure customer understanding instead. 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. However, the FCA didn’t progress this review. In Chris Woolard’s final speech before leaving his role as interim CEO, he again talked about whether the FCA needed to think about more outcomes-based regulation. However, following Covid and Brexit, this debate may be superseded by other priorities this year.
No time to Open Finance
Open Finance would allow customers to share their data across a wide range of products from pensions to credit cards – building on Open Banking. Most people would 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 is critical. The FCA launched a call for input to help it understand the potential for Open Finance at the end of 2019. But this was delayed due to Covid. The outcome of this review will now be published this year, which may move this debate forward, but perhaps as a lower priority for the FCA in 2021.
And what about the year ahead? As well as those trends above continuing, here are some highlights that we are expecting to see:
- Nikhil Rathi started his role as the FCA’s new CEO towards the end of last year, and big reforms have already been announced. The FCA’s two existing supervision divisions will be brought together and merged with the policy and competition functions. These will form a new, single mega division containing over half of the FCA’s staff. It will be led by two Executive Directors: one focused on the FCA’s consumer protection and competition objectives; the other on the objective to protect financial markets. The purpose of the merger is to build a strong coordinated regulatory framework. This will be particularly important for those issues (e.g. overdraft charges) that emerge from competition across the market, but which the FCA has attempted to tackle on a firm-by-firm basis through its supervisory work. The upcoming consultation on a duty of care for firms will also need to reflect on what they are trying to achieve structurally.
- It was way back in April 2007 that the Office of Fair Trading launched its market study into PCAs. This year may see PCAs rise to the top of the agenda again as its core economics come under pressure from overdraft regulation, Covid-related indebtedness, the growth of buy-now-pay-later, ultra-low interest rates, and the fall in cash usage accelerated by Covid (which raises costs of cash access per customer). These will be challenges for all PCA providers, but will also make life difficult for those entrants that have been trying to expand in the market in recent years.
- The fairness of introductory pricing has concerned regulators for years, but may gain even greater momentum this year. The first real attempt to prevent introductory pricing will go live in general insurance in mid-2021. All eyes will first be on whether the rules can actually make pricing fairer, and then on how competition evolves under the new rules, which may make it more difficult to attract new customers. Other products may also come under the spotlight with the FCA due to consider potential remedies for mortgage customers who do not switch. The FCA will need to decide whether to continue with transparency-based remedies, or go further with more direct intervention as it has for insurance.
- Finally, the financial services industry has an important role to play in enabling the economic recovery from Covid. The focus for the sector will be to restore the financial health of those consumers that have taken on debt during the crisis as they have lost jobs or incomes. The sector will also need to facilitate growth to support the recovery by lending to viable businesses, including those that may have suffered the most during 2020 but which still have a bright future. Further government support may be needed to boost lending and relieve some of the costs of the crisis for those businesses to thrive again.
Of course, there are other things happening in 2021 beyond retail regulation. Hopefully, we will see the end of the health emergency, whilst the “economic emergency” will become even more urgent. We may also see in 2021 the start of the inquiry into the crisis, and the role that all parties (including the financial services sector) have played. The implications of Brexit for the sector will become more apparent. And the fintech sector continues to grow and innovate challenging existing business models and firms. With that thought, Happy New Year!