In May 2016, the Financial Conduct Authority (“FCA”) published Access to Financial Services in the UK, an “Occasional Paper” describing the findings of research commissioned by the FCA. Although it has no legal force, it analyses the issue of access to financial products in comprehensive detail and provides a balanced account of how barriers to access have arisen and how they might be solved. Broadly speaking, the Occasional Paper suggests that many people in the UK find it difficult to engage with financial services, that there are a range of potential solutions, but that it is hard to determine the exact scale of regulatory or other government intervention which could remedy the issues identified.
This note summarises three things: the access problems identified by the FCA; the measures it puts forward as potential solutions to those problems; and the implications of those solutions for suppliers of FS products. The Occasional Paper is early-stage research and the FCA is at pains to stress that a lack of hard evidence is part of the access problems which may need a solution.
The Occasional Paper contains a large measure of crystal-ball gazing. So, it is important to remember that the FCA’s analysis is tentative. Whilst the Occasional Paper reaches no conclusion on how access issues will be addressed, it does highlight potential “solutions” include tailoring products, both to the wider market and specific defined population groups, increasing information available to consumers and more industry collaboration (which could give rise to legal issues of itself).
That said, it is clear that access issues are a significant regulatory concern and the way they are regulated in the future will inevitably have an impact on the FS sector and could even open up strategic options for FS businesses, whether banks, insurers or the providers of other financial products.
How is access to financial service products restricted?
In summary, the general features of FS markets which, in the FCA’s provisional opinion, make access to financial services problematic are a limited range of available products, a lack of fair procedure and a lack of transparency.
- For some consumers, there are no products or services available on the market which can meet their needs. This applies particularly to “non-standard” customers, which include ageing, rural or various categories of disadvantaged consumers. Even where available, products may not be affordable.
- In terms of fair procedures, many consumers are rejected by banks or other FS providers for reasons which are often unclear and unexplained. Sometimes they are turned away for reasons which are arguably unjustified.
- FS products are difficult to find at an affordable price and consumers are rarely aware, when they are refused a product, that there are alternatives available (if they are available at all).
These last two issues are about transparency and relate to a potential lack of access to information or a lack of “signposting”. These are classic market issues that the authorities have found in market-wide reviews to date (e.g. the FCA in credit cards, cash savings etc and other competition regulators more generally). Although challenging, it is often the solution the regulators seek to impose.
The Occasional Paper analyses the background to these problematic features (i.e. the reasons they are becoming more pronounced) by reference to five “big areas of social and technological development”:
- The shift to online delivery (which may disfavour poorer or rural populations)
- The impact on consumers of Know Your Customer and Anti-Money Laundering processes (which may seem bureaucratic and confusing)
- The impact of automated processes (which may seem impersonal to the individual consumer)
- The segmentation of markets, above all in insurance risk assessment, where targeted risk profiles can exacerbate the treatment of disadvantaged populations
- Access to credit in later life - by 2039, almost a third of the UK population is expected to be over 60, yet the availability of some FS products (especially mortgages) are subject to upper age limits
The structure of the Occasional Paper is built around these five “big areas”, with a central chapter devoted to each. Its Concluding Remarks reiterate their importance for any remedial action the FCA might take.
Many possible solutions, but collaboration is important
The Occasional Paper reaches no conclusion on how access issues will be remedied. Although it sets out a number of questions to explore or issues to debate, it has no formal set of recommendations or consultation points. However, at various points it sets out potential solutions, including the following:
- Tailored products could be created for the large number of consumers whose needs are not met by current market offerings.
- A measure referred to at several points is social policy intervention to ensure products are available for defined population groups, which could mean government cross-subsidies to ensure a range of niche products for unmet needs. The Occasional Paper refers also to the unintended (and commercially detrimental) consequences which may attend excessive market intervention.
- Suppliers could be obliged to provide more extensive information about their own existing products and, possibly, alternative products where they decide consumers are not eligible for their own products.
- There are various channels through which information remedies may be introduced, whether soft regulation (e.g. industry working with trade bodies to introduce informal protocols) or hard-law regulation (e.g. legislation implementing formal rules or codes).
- The FCA’s own work is highlighted, e.g. in setting up collaborative initiatives to encourage both innovation and communication between industry and consumers.
From the first page, the FCA’s watchword is the need for collaboration between industry stakeholders (business, Government, regulators and consumer organisations) in remedying an entrenched and complex market problem. The overview of possible solutions finishes with a call for a “joined up…and…strategic approach to addressing access issues”.
What are the implications for industry?
For the FCA, access is a major issue in the FS industry and it is a safe bet that, in the near future, some form of regulatory action is likely to address this issue.
There are various factors for firms to consider in assessing their perspective on this issue and, even if this Occasional Paper itself involves no consultation process, these factors will influence future approaches to the regulator:
- Never lose sight of the potential virtue of doing nothing. The Occasional Paper is open on the lack of clarity around the scope and cause of access failures. There may be an argument that any solution to an indeterminate problem could be the wrong solution.
- On the negative side, an increase in mandatory data provision or an obligation imposed on businesses to refer to competitive alternatives (e.g. when rejecting consumers applying for products) could be arguably disproportionate and involve a costly administrative burden.
- Any social intervention, such as cross-subsidy measures to facilitate the introduction of affordable products for defined demographic groupings, could easily lead to market distortion and detriment to existing businesses.
- Firms could, for instance, identify innovative products which satisfy unmet needs, which may fit their existing business profiles and which may give them an edge in what may prove a fast-moving market.
- It may be a lesser burden for firms to reinforce internal procedures, such as training of staff on how to sell existing products in a transparent and even-handed way, and to reinforce these procedures through collaboration with trade bodies (as recommended by the Occasional Paper). It may then be possible to argue to the FCA that such measures are easier and fairer to introduce than more burdensome regulation.
Following the publication of the FCA’s Occasional Paper, it is advisable for FS businesses to consider their standpoint on whether access can realistically be improved and, if it can be, how that can be achieved in a way which is beneficial for the industry, in readiness for potential regulatory action in due course.