General insurance market study launched
In the FCA’s 2018/19 Business Plan, the regulator announced plans for a thematic review into pricing practices within the general insurance industry, following concerns that consumers may be at risk of harm, particularly those in vulnerable circumstances. The results of this review have now been published and the FCA has announced that further measures, including a market study, are required to gain a deeper understanding of the scale of any harm and address instances of poor conduct.
Key findings of the regulators thematic work
TR18/4 examined pricing practices within the home insurance sector, which the regulator believes provides the best example of the customer outcomes stakeholders raise concerns over, including inertia, dual pricing and practices around renewals. The review involved 18 firms and examined:
- Pricing strategies, governance and controls
- The methodologies used to determine price
- The systems and data used
- Rating factors that affect pricing
- The extent to which the prices are above or below the risk premium and the cost to serve.
The review identified a number of issues, which give rise to the potential for significant consumer harm and poor outcomes:
- A lack of appropriate pricing strategies, governance and control, so firms are unable to assess and evidence whether they are treating customers fairly
- Differential pricing can lead to certain identifiable groups of consumers paying significantly more than others with similar risk and cost to serve characteristics
- The risk of discrimination through the use of price rating factors based on data relating to, or derived from, protected characteristics.
Firms are reminded of their obligation to comply with all FCA regulations when overseeing and conducting pricing activities, as well as paying due regard to the interests of customers and treating them fairly. For a firm’s systems and controls to be considered sufficient, the regulator expects robust MI to be collected and analysed by senior management to determine the impact of their pricing practices.
General insurance market study terms of reference
As a result of the above thematic work, the regulator believes it necessary to undertake an market study into the pricing practices of retail home and motor insurance, focussing on three key areas:
- Drivers of harm resulting from different pricing practices
- The impact of pricing practices on competition
- The fairness of such practices.
To determines the drivers of harm, the FCA will consider:
- The differences between the prices paid by different consumer groups, compared with the cost of providing insurance
- The volume of consumers paying higher prices
- The common characteristics of consumers paying higher prices, particularly vulnerable characteristics
- The drivers of higher prices.
To understand how differentiated pricing impacts competition, the FCA will examine whether:
- Firms’ pricing practices are increasing or restricting consumers’ access to appropriate, high quality insurance products
- Servicing certain groups of consumers, particularly vulnerable customers, are leading to high profit margins
- Current level of competition in the market is resulting in higher or lower costs for consumers
- Firms entering the market face barriers and whether new and alternative business models are delivering good outcomes.
On the issue of fairness, the FCA will seek to understand consumers’ understanding of how GI is priced and their perspectives on its fairness, alongside whether firms are treating customers fairly.
Fair pricing in the financial services industry
The FCA has published a discussion paper designed to gather industry feedback and start a debate on the fairness of certain pricing practices within the industry. The regulator acknowledges that the issue of whether price discrimination is fair is not always clear-cut and is seeking stakeholder feedback before deciding on the most appropriate approach to take. The paper considers two specific pricing practices:
- Price discrimination: pricing based on consumers’ price sensitivity
- Inertia pricing: higher charges for existing customers, compared to new ones.
Price discrimination can have both positive and negative effects on competition, product access and distribution, depending on the specific market conditions. The paper outlines a number of questions to consider when trying to determine whether price discrimination is fair or not, including:
- Who is harmed by price discrimination?
- How much harm do they suffer?
- How significant is the proportion of consumers experiencing harm?
- How are firms undertaking their price discrimination?
- Is the product/ service considered essential?
- Would society view this price discrimination positively or negatively?
Taking these questions together, the FCA can form an overall view on how fair or unfair a particular example of price discrimination is. Inertia Pricing The FCA provides a number of examples of inertia pricing within its discussion paper and discusses the fairness of this practice, using the questions outlined earlier in the paper. However, there are two important considerations when assessing the fairness of inertia pricing and its impact on competition:
- Some consumers are worse off as a result of inertia pricing, while others are better off and vulnerable customers can fall into either group
- When assessing fairness, the specific circumstances surrounding the pricing practice must be taken into account as generalised interventions can have a negative impact on product distribution and lead to higher average prices.
The regulator is also keen to understand how competitive landscape impacts the fairness of this pricing practice. This includes whether inertia pricing creates barriers to entry or expansion and whether intervening would lead to price increases or poorer service levels.
How might the FCA address potential harm?
The final chapter of the discussion paper considered both the demand-side and supply-side remedies the FCA may consider to help consumers make better decisions and address potentially damaging practices. The regulator is also seeking industry feedback on these potential approaches and what could be done to reduce the cost of shopping around.
[Speech] The FCA’s approach to authorisations and Brexit preparations
The FCA’s Director of Authorisations, Sarah Rapson, recently delivered a speech highlighting the work the authorisations department is conducting to prepare for Brexit and improve its approach. She opened her speech by outlining progress so far in the Delivering Effective Authorisations change program, which was launched in 2017.
The most significant change is in how the department reports on its KPIs, including average processing times at each stage and how many applications have been processed within the mandated service standards. As a result, the average time to authorisation has been reduced by 35% and overall customer satisfaction levels have increased from 21% to 66%.
While these changes are significant, the regulator is still working towards greater improvements. The service mindset that the Delivering Effective Authorisations programme was designed to instil in the department is also seen as key to the regulator’s overall approach to helping the industry prepare for Brexit. The FCA is currently undertaking a line-by-line review of around 50 pieces of EU legislation and 185 binding technical standards.
In the meantime, the regulator will limit any Handbook changes, other than essential changes and those already committed to in the 2018/19 Business Plan.
Another key part of Brexit preparations is the temporary permissions regime, designed to mitigate the risk of firms being unable to access the UK market after we leave the EU. In order for it to function effectively, it is crucial that firms notify the FCA that they require temporary permissions within the notification window, once this window closes, the legislation will not permit late applications.
For UK firms that are active in the EU or EEA, the FCA has published a list of questions for firms to consider, as a starting point, to determine whether Brexit would impact their operations.
There are also no current plans for a reciprocal temporary permissions regime for UK firms operating in the EU, so it is advised that affected firms continue to prepare for a range of scenarios.
FCA fines insurer for oversight and complaints handling failures
The FCA has fined an insurer £5,280,800 for failing to ensure robust and appropriate oversight of a third party contracted to process claims and manage its complaints handling function. These failings put customers at risk of having their claims and complaints handled unfairly, with some being unfairly declined or inadequately investigated. Some who complained about the treatment they received had the original decision overturned, creating a de facto two-stage claims process, while others had their concerns dismissed without appropriate investigation.
Prior to the FCA initialising its enforcement investigation, the third party undertook a voluntary redress and remediation exercise, with redress of nearly £4m offered to affected customers. This activity has been taken into account when calculating the fine to be paid. The insurer also agreed to settle at an early stage of the investigation, qualifying for a 30% discount.
The UK’s approach to cryptoassets As part of a MH Treasury-led Cryptoasset Taskforce, the FCA has published a report on the UK’s regulatory approach in this area. This follows the FCA’s work on distributed ledger technology (DLT). The report outlines a number of risks that the taskforce will seek to mitigate, including harm to both consumers and market integrity, the risk that cryptoassets are used for illicit activities and threats to financial stability. These will be addressed through a number of actions:
- Perimeter guidance will be published by the end of 2018, outlining which cryptoassets come under the existing regulatory perimeter and which do not
- Determining whether the regulatory perimeter should be extended to cover cryptoassets with comparable features to regulated assets, but which currently fall outside the regime
- A consultation, published during Q1 2019, on a potential prohibition of derivatives which reference certain types of cryptoassets, to retail customers
- The government will issue a consultation on how exchange tokens, such as Bitcoin, and related services can be effectively regulated
- Implementing regulatory requirements beyond the 5th EU Anti-Money Laundering Directive to tackle the use of cryptoassets for illicit activities.
FCA complaints data show increase in first half of 2018
Complaints about regulated firms have continued their upward trend for the fourth consecutive half year. In total 4.13 million complaints were made in H1 2018 to 3,161 firms, a 10% increase on the previous six-month period. As with previous reporting periods, PPI was the most complained about product, accounting for 42% of all complaints, followed by current accounts (15%), credit cards (8%) and motor and transport insurance (6%). Excluding PPI, total complaints increased by 9% (193,360) on the previous half. A number of high-profile service outages have contributed to the increase in complaints to certain firms. The proportion of non-PPI complaints being resolved within three working days has decreased, dropping from 59% to 58%.