The penultimate part in our FCA Priorities series focuses on the cross-sector priority of fair treatment of existing customers.
Over the last few years the FCA have increasingly focused on this issue, unhappy that firms were attracting new customers with preferential rates/incentives whilst not offering those rates and incentives to their existing customers. The Citizen's Advice super-complaint to the Competition and Markets Authority (CMA) in 2018 on the 'loyalty penalty' in essential markets has added impetus to the FCA's work in this area.
The FCA has confirmed its agenda focuses on identifying situations where existing customers are penalised for their loyalty in markets they regulate and addressing any resulting harms. Whilst there are more entrants to the market offering to assist customers less able or financially aware to switch service providers, there still a large number of elderly or vulnerable customers who do not switch and who may be adversely impacted by any bias towards new customers.
Which markets are under scrutiny?
The mortgage market, following the Mortgage Market Review (MMR), swung strongly in favour of increased affordability testing. One of the unintended consequences of this meant that many mortgage holders were trapped, unable to re-mortgage at the end of their fixed term, due to new affordability assessments. The FCA, in its Mortgages Market Study Final Report published in March 2019, identified over 10,000 mortgage holders who were 'mortgage prisoners' unable to switch deals once the fixed term had ended, many of whom were meeting their repayments without issue. Following widespread consultation in the industry a voluntary agreement among over 65 active lenders now allows these lenders’ customers, who are up-to-date with payments, to switch internally without any affordability assessment, subject to meeting certain criteria.
The FCA is still focusing on helping those 800,000 customers identified in its March 2019 report who have not switched deals and are paying a high reversion rate on their mortgage when they could switch.
The general insurance market (made up primarily of motor and home insurance) is a key aspect of the UK economy with 82% of adults holding at least one general insurance product, according to the FCA. The General Insurance Pricing Practices Market Study is expected to be published imminently and will look at issues such as fairness in pricing and whether competition is working effectively for all consumers in the market. The FCA intends to evaluate the effectiveness of its 2017 intervention to increase transparency and engagement at renewal in the general insurance market.
Cash savings market
The FCA published their discussion paper (DP18/6: Price discrimination in the cash savings market) last summer which set out concerns that competition was not working in the cash savings market, particularly for longstanding customers. They mooted the introduction of a Basic Savings Rate (BSR), a minimum rate that banks and building societies would have to pay to personal savings customers with easy access cash savings accounts and easy access cash ISA accounts after a set period of time. Firms would be required to apply a single interest rate to all easy access cash savings accounts and to all easy access cash ISAs which have been open for a set period of time (for example, 12 months). It is envisaged that firms would decide the level of their own BSR and would be able to vary it, they’d be incentivised to offer higher rates than they have to their long term customers, in an effort to retain more recent customers. The CMA's super complaint supported the introduction of a BSR although firms will likely struggle with the concept of one rate, irrespective of the size of the account and how it is managed (online, by post, in person). Firms will also likely be wary of the introduction of a BSR given the lack of flexibility this will give them in their pricing models.
What next for 2020?
The FCA and CMA both confirm they will work together to push forward this agenda to ensure customers are not disadvantaged. This is closely connected to the debate around imposing a general duty of care on firms (to be discussed in more detail in our final article in this series). Pervasive to this issue and a constant monitoring point for the FCA is the information provided to customers from firms and the ease with which customers can compare products and services. The FCA is due to publish further work before the end of 2019 and we may see some further recommendations in this area.