New guidance on fair pricing in financial services

The UK’s Financial Conduct Authority (FCA) has published a response to feedback it has received on a new framework for fair pricing.

The issue of fair pricing is a topical area of debate across a number of regulated markets including energy, telecoms and financial services.

Last year the FCA set out an important contribution to the debate, outlining a framework of six questions to assess whether a pricing practice is of greater or lesser concern. The FCA’s particular focus has been on ‘price discrimination’ (customers being charged a different price based solely on their sensitivity to price) and ‘loyalty pricing’ (new customers receiving lower prices compared to existing customers).

The framework seeks to establish where such practices might be of greater concern asking:

  • Who is harmed?
  • How much are they 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?

The FCA has made no significant changes in response to feedback. It has however clarified a few important things. In particular, a recognition that addressing fairness concerns must account for the wider effects on the market, such as the possible impact on competition. This is an important clarification, because if intervention to make outcomes ‘fairer’ also dampens competitive pressures the net result might be higher prices for all customers. Where such equity and efficiency trade-offs exist it is right that they should be made explicit and carefully weighed.

Overall, the framework helps to provide a structure to assess fairness concerns. But it cannot solve the fundamental challenge at the heart of this debate: at what point is pricing unfair? This remains uncharted territory for the regulator who may need to draw a new (and inevitably subjective) line on what is fair and unfair. 

The FCA has signalled that the current market study into general insurance pricing will be a first test case of this new framework. In doing so the FCA may be setting new precedents on the acceptability of different pricing models that financial service providers will need to carefully note.

Frontier regularly advises on issues relating to financial services in the UK and Europe.

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