FCA clarifies approach to assessing fair pricing in retail financial services

In a document summarising feedback to its October 2018 discussion paper on fair pricing (28 page / 787KB PDF) the FCA said that, as an issue fair pricing was relevant for all consumers and not just the vulnerable, although it expected "all firms to exercise extra care where consumers may be vulnerable."

This Feedback Statement is the latest in a number of recent publications from the FCA concerning pricing practices and sits alongside the FCA's work on pricing practices in the general insurance sector. 

The earlier Discussion Paper contained the FCA's proposed framework for its assessment of the fairness of a given pricing practice and asked for feedback on this and on fair pricing generally. In the Feedback Statement the FCA clarifies its intended use of some of the framework questions for assessing concerns about fairness in price discrimination. This included the question whether a particular product or service is essential, with the regulator saying the question was not about "defining the markets" in which the FCA would be likely to apply the framework but was about "how we [FCA] will assess harm when we have concerns about the fairness of a pricing practice" – in combination with the other questions in the framework.  The regulator warned firms that they should not conclude that if a service is not essential then pricing practices cannot be unfair.

The FCA said it wanted to develop "a transparent and objective framework", and society’s view in assessing the fairness of pricing practices was “important not only because we [FCA] regulate in the public interest, but also because if consumers believe particular pricing practices are unfair, then there could be damaging effects on trust in markets and institutions”.

The regulator said it would develop further the question in the framework on "how firms are price discriminating." It said it considered this question to be “of fundamental importance to the assessment of the fairness of a pricing practice” and it would keep looking at what factors in the 'how' category would make it more concerned about the fairness of a given pricing practice.

Insurance law expert Matt Saward at Pinsent Masons, the law firm behind Out-Law, said: "Whilst on the face of it this framework may provide insurers with some welcome certainty on the FCA’s approach to regulating certain forms of pricing discrimination, the FCA has stated that in order to be effective and proportionate, the framework ‘needs to be considered in the round and retain a significant element of judgement when it is applied in practice’. While this is in accordance with the FCA’s principles-based approach to regulation it may not provide much comfort for insurers seeking clarity around how to best to respond to the FCA’s work in this area".

The FCA's Feedback Statement has confirmed that the regulator is likely to incorporate its fair-pricing work into the review of its principles, which it described as "the first strand" of its Handbook review, saying it is currently of the view that a "principles-based approach may be more effective in driving appropriate outcomes" for fair pricing in the future, rather than imposing prescriptive rules.The FCA plans to publish a discussion paper on reviewing its principles in the fourth quarter of 2019/20 and said that it would report then on the next phase of the fair pricing work.

Saward said that for insurers "the Feedback Statement offers little guidance on how the FCA expects firms to adopt pricing policies designed to address discrimination, although the FCA has said it will apply the framework in its General Insurance Pricing Practices Market Study, the findings of which it is due to publish later this year".

"This may provide firms with a better indication of how the FCA is likely to tackle pricing discrimination in practice," Saward said.

The FCA emphasised in the Feedback Statement that there "is no simple formula that determines whether a [pricing] practice is unfair" and so it will use its "judgment to balance the considerations in specific context." 

Saward said: "Insurers could still be left with a degree of uncertainty when determining how best to incorporate the framework into their pricing practices, but we will have to await the publication of the market study to see if any greater clarity is provided by the FCA."