Ofgem's focus on price comparison website commission raises questions for the insurance sector and others

Out-Law Analysis | 06 Feb 2015 | 10:18 am | 5 min. read

FOCUS: Price comparison websites for insurance, investments and other financial services could face stiffer regulation if the Financial Conduct Authority (FCA) follows the energy regulator's lead in introducing rules that connect higher commission payments with the possibility of bias creeping in to the ways financial products are displayed online.

Ofgem wants price comparison websites to stop promoting certain products because of their higher rates of commission. Though the FCA has not yet introduced a similar rule, trends in EU law could force the regulators' hands.

Ofgem is changing its voluntary code of practice for price comparison websites to prevent them from displaying products on which it earns commission more prominently than those on which it doesn't. Sites had been displaying products with commission arrangements in place as ones that consumers could switch to 'today', making consumers click through to suppliers' own sites for the no-commission products.

The code of practice is designed to ensure that consumers see available tariffs from across the whole of the market, and to keep comparison sites independent of suppliers.

These aims are very similar to the ones behind the rules introduced to protect investors against product bias and confusion over charges through the Retail Distribution Review (RDR). The RDR of 2012, which is still causing upheaval in the way that these products are sold, like Ofgem's new proposals, involved the regulator trying to stop the promotion of certain products just because the commission was higher.

The mechanism was different but the aim was the same – to make sure that providers and sellers of products and services could no longer structure information in a way that encouraged consumers to buy products for the wrong reasons.

In addition to impacting on the FCA's approach to price comparison websites, Ofgem's move may be the start of a trend for regulators in less-regulated industries to follow its approach.

In relation to websites that compare insurance, most, if not all of the major sites, will be regulated by the FCA, and be subject to many of the same rules that other insurance intermediaries must comply with. These rules include the requirement to treat customers fairly and display information in a way that is clear, fair and not misleading.

The FCA's Insurance Conduct of Business rules also require intermediaries to provide consumers with "appropriate information at the right time to make informed decisions", with information not just limited to price but also including "cover, benefits, exclusions and other relevant outcomes".

These rules are likely to be supplemented by further requirements about transparency of commission arrangements. In July 2012, the European Commission published a provisional draft of a revised Insurance Mediation Directive (IMD2) which is expected to be renamed the Insurance Distribution Directive (IDD), which would change the rules so that it would eventually become compulsory for all intermediaries to be more open about what they earn from the sale of products.  Although these provisions have since been watered down in negotiations between the Commission and European Council, they would mean significant change for the industry – intermediaries may generally be required to both the 'nature' and 'basis' for all types of remuneration they receive.

Not every regulator is taking that approach to every industry in which price comparison websites operate, at least not yet. Though the FCA recently concluded a programme of work on the role played by comparison websites in the sale of general insurance products, it told Out-Law.com that it is not currently planning to examine the relationship between commission payments and product bias.

Then-regulator the FSA published guidance to help sites comply with their regulatory responsibilities in 2011. In July 2014, the FCA set out its concerns that they had not fully implemented this guidance following a thematic review of the market. There is no doubt that comparison sites are a major part of the market now - the FCA says that they were responsible for a third of the 27 million motor insurance policies sold in 2013.

The report's criticisms did not centre on commissions, but on the fact that sites were too focused on headline price and brand, rather than providing consumers with appropriate information on things like policy coverage and terms to help them make informed decisions. The regulator was also concerned that sites were not making it clear enough that they merely displayed different policies and were not providing advice on the suitability of those products for individual consumers' needs.

But it did touch on the issue of 'transparency and fairness', which is the same underlying concern of those regulators dealing with commission.

With the FCA's regulatory approach to investments being used for energy comparison sites, and EU lawmakers considering mandating increased transparency on commission for intermediaries, we may well be witnessing the start of tighter regulation for all price comparison website operators.

Overview of regulations for intermediaries

Ofgem and energy price comparison websites: Operators who want their sites to be 'accredited' by Ofgem must prominently list the energy companies from which they receive commission on sales, as well as to make it clear that they earn commission on certain tariffs. In addition, they will no longer be allowed to limit the tariffs that a consumer sees when making a search by default. Sites that comply with the code are listed as 'accredited' by Ofgem and are allowed to display related logos on their sites. The code requires price comparison websites to display all tariffs available to a consumer regardless of supplier,

Ofgem has said that its changes to the code will enable the estimated 40% of retail energy customers that use price comparison websites to be "confident that deals aren't hidden from view". It has also said that it will take a more active role in ensuring compliance with the spirit, as well as the letter, of the code by preventing those comparison websites that it accredits from coming up with innovative ways of marketing certain energy deals to their customers. It is also continuing work that will potentially extend the code to allow sites that do not manage their own database and calculator to become accredited, and to cover collective switching service providers.

Once the new code is in force, accredited sites will only be able to limit the tariffs that they display if the consumer opts in, and sites will only be allowed to do this if the wording of the choice is "clear and simple". Wording must be tested with consumers and approved by Ofgem. Broader disclosure requirements will mean that price comparison websites will have to list those energy companies that they receive commission from "prominently", as well as making it clear that they earn commission on those tariffs that consumers can switch to directly through the site.

Platforms, commission payments and product bias:  The RDR of 2012 means that financial advisers selling retail investment products must be paid by their clients, and not product providers, for personal recommendations about investments. Advisers cannot earn commission from the provider. These rules addressed concerns that commission created the risk that advisers' recommendations were not best suited to their clients' needs.

The RDR rules also apply to wealth and investment platforms, whether used by financial advisers on behalf of their clients or used by consumers directly. Financial advisers can use platforms to view and manage their clients' investments, arrange transactions and provide investment planning tools and other services. From April 2014, advisers can only charge consumers for the use of platform services on their behalf via an explicit charge agreed with the consumer, subject to some exceptions. Cash rebates from product providers to customers are also banned.

John Salmon is a financial services expert at Pinsent Masons, the law firm behind Out-Law.com