As pointed out by the Financial Conduct Authority (FCA) in a Research Note in July 2018, we regularly find different consumers paying different prices for the same product. However, the way in which firms price discriminate so that some consumers pay more (and some pay less) can lead to different public reactions. Some forms of price discrimination are widely accepted (for example student discounts). However, in recent years other forms of price discrimination have provoked strong views on how firms treat their customers. Across a range of consumer markets (retail banking, energy and telecoms) regulators have scrutinised whether those markets are sufficiently competitive to work well for their customers.
The underlying assumption of regulators has been that if markets are competitive, consumers will benefit through switching to better priced products and/or being able to choose products that are most suited to their needs. Consumers will no longer be 'stuck' on unsuitable or discriminatory pricing if there is an alternative and switching is easy. Regulators have pushed firms to be more transparent on pricing, and have extolled the virtues of price comparison websites as tools to increase switching.
A shift in regulatory focus
Interestingly, however, the regulatory emphasis has been shifting, so that what we are now seeing is a greater focus on consumer outcomes. For the FCA, this is, perhaps, a natural progression, given that, its very first Occasional Paper, published in 2013, shaped the view that consumers do not make logical decisions, being heavily influenced by biases, beliefs and decision-making short-cuts; for example present bias, overconfidence and limited attention spans. It follows that regulatory change which drives increased price transparency and ease of switching is not necessarily going to be followed by consumers acting logically and in their own best interests.
This shift in focus is explained in the UKCN Review published jointly by the Competition and Markets Authority (CMA) and the FCA in October 2018. This paper looks at the main achievements and lessons learned from the CMA's collaboration with all the UK regulators that have a specific role to support and enable competition within their sectors on remedies in consumer markets. It says:
"Effective demand-side interventions rely on predicting and influencing consumer behaviour under a range of complex circumstances, against a background of many other factors competing for people’s attention. ....The evaluation of past interventions demonstrates that it is often not enough simply to provide consumers with a surplus of information and expect them to solve everything alone. Where people are making complex, or difficult long-term decisions, we also need to ensure that consumers are properly supported and/or protected."
The goverment made the same point in its Green paper on modernising consumer markets, published in April 2018, when it said:
"These challenges raise fundamental questions about how the government ensures modern markets work for all consumers. Simply relying on ‘engaging’ consumers by providing them with more and more information has been shown not to be a wholly effective approach. We want to harness the power of new technologies and new ways of doing business for the benefit of consumers. But we also want people to feel confident that they are not being exploited for their loyalty to what they may think of as a trustworthy supplier. Competition should drive the best deals, but no one should be exploited if they lack the time or capacity to engage and the vulnerable should be protected."
More recently, the government confirmed that, working with the CMA, it is to undertake pioneering new research into the practice of retailers targeting online shoppers and charging people different prices for the same items through personalised pricing, such as holidays, cars and household goods.
How these challenges are resolved goes to fundamental economic and political questions around the UK's free market economy, and the extent to which government and/or regulatory intervention in certain markets can be justified.
FCA leading the way
Of all the UK regulators, it is the FCA which has the most developed and extensive remit to require firms within its sphere of influence to change course, given its combination of principles-based regulation and strong enforcement powers. Where a firm’s pricing practices are resulting in poor outcomes for consumers, the FCA can take enforcement action on the basis that the firm is not treating its customers fairly or not meeting its customer’s information needs in a way which is clear, fair and not misleading Other markets would be well-advised, therefore, to take note of where the FCA goes with this debate as a proxy for how things are likely to develop in their own markets.
In Discussion Paper 18/6 on price discrimination in the cash savings market, published in July 2018, the FCA acknowledged that the disclosure and switching remedies trialled in that market did not stimulate sufficient changes in consumer behaviour to address harm to longstanding customers, and so it asked for views on the introduction of a basic savings rate (effectively a form of price control). In its recently published Thematic Review TR 18/4, the FCA found that general insurance pricing practices have the potential to cause harm to consumers, particularly those who are vulnerable. Meanwhile, Citizens Advice has expressed concerns in its super-complaint to the CMA (published in September 2018), that it is usually the vulnerable and least resilient consumers who are most affected by firms charging existing customers higher prices than new customers – also known as the 'loyalty penalty' or 'inertia pricing' (see our Insight: Bundled Handsets – How did we get here? ).
On 31 October 2018, the FCA published Discussion Paper 18/9 on the fairness of certain pricing practices in financial services. The FCA's focus is not only on 'loyalty penalties' but also on 'price discrimination' – the practice of firms charging different prices to different consumers based solely on differences in consumers’ price sensitivity. Like Citizens Advice, the FCA acknowledges that whilst there are complex issues involved in this debate, the concern that both loyalty penaties and price discrimination can potentially disadvantage some consumers significantly, in particular the most vulnerable and least resilient, merits a large-scale review. The FCA is likely to come to conclusions and make recommendations before the CMA takes any action as a result of the Citizens Advice super-complaint. It is extremely likely that all regulators of consumer-facing markets will be consulting one another behind the scenes on this issue so, again, other markets would be well-advised to keep a watching brief on how the debate develops in the financial services space.
On 22 November 2018, the FCA published a consultation paper (CP18/35) setting out proposals to introduce a price cap on the rent-to-own (RTO) market to address harm caused to vulnerable consumers from high prices. The proposed price cap on RTO products is designed to protect the most financially vulnerable in our society by limiting both the cost of the product and the charge for credit. Under the proposed cap, credit charges cannot be more than the cost of the product. In addition, RTO firms would need to benchmark the cost of products against the prices charged by three other retailers. Subject to consultation, the cap will come into force on 1 April 2019.
The UKCN Review identifies two key lessons learned from past regulatory interventions across the full range of consumer markets in the UK:
- consumer diversity and vulnerability. When price discrimination is possible, suppliers may seek to benefit from characteristics of particular consumers or groups of consumers. This is always a concern to regulators but is particularly acute where it is the most vulnerable who are bearing the greatest costs. These factors should be important considerations when designing interventions; and
- the opportunities and challenges presented by the digital economy. The increasing importance of the digital economy raises its own challenges regarding speed of change in market and risks for the digitally excluded, while simultaneously providing opportunities for new types of data-based or personalised interventions which warrant additional consideration.
In its Discussion Paper, the FCA recognises that any assessment of fairness will often be complicated. For example, is it fair to improve the market outcomes for some people if it will probably lead to worse market outcomes for others? It also recognises that some of these issues may also be issues of social policy that fall to Government. To assist navigating these complexities, it has developed a framework (see this infographic) in which it poses 6 evidential questions, the idea being that consideration of these questions will lead the FCA to an appropriate remedy:
- Who is harmed?
- How much are they harmed?
- How significant is the pool of people harmed?
- How are firms price discriminating?
- Is the product or service essential?
- Would society view the price discrimination as egregarious/socially unfair?
The FCA considers both demand-side and supply-side remedies. It suggests that demand-side remedies such as increasing transparency, promoting comparison tools and requiring firms to 'prompt' customers to take action, work best where customer inertia and lack of engagement is down to a lack of knowledge or understanding. While these might help to a certain extent, more drastic, supply-side, remedies are likely to be needed to protect vulnerable customers. Examples of supply-side remedies are banning auto-renewals, breaking up product packaging, simplifying tariffs and, ultimately, price capping. This might take the form of a price collar, where the difference between highest and lowest pricing is restricted, or a price discrimination ban, which is what has been proposed for the cash savings market.
Osborne Clarke comment
The FCA acknowledges that a factor in not switching products is the level of consumer engagment: the consumer's willingness or intention to engage with the relevant market. It says that it is important to work out whether inertia is a conscious choice or whether it is the result of behavioural biases, personal circumstances related to potential vulnerability or other obstacles. The implication is that where it is down to conscious consumer choice, no remedy is required, but where it is down to vulnerability, action should be taken. Whilst demonstrating just how complex the issues are here, the FCA does at least strike a balanced tone. This is in stark contrast to Citizens Advice's calls for individual companies to be held to account for 'ripping off' vulnerable customers.
The FCA ‘expects consumers to take reasonable responsibility for their choices and decisions’. However, it also expects firms to frame decisions for customers based on real world consumer behaviours and not to exploit biases, whilst exercising extra care where consumers may be vulnerable. This is consistent with its long-held view that financial services firms should take a paternalistic approach to their customers, as firms are usually in a better position to see where harm may be caused. There is no doubt that selecting remedies to deal with the lack of engagement in consumer markets caused by consumer vulnerabilities is perhaps one of the most complex and untested areas of consumer protection to be tackled. The issue is that it may be fair to require a firm to cater for customers who don't have the 'head space' to deal with their insurance policy renewal because of illness, disability, age or bereavement, but should firms also be responsible for customer decision-making where a customer does not have the 'head space' to think about policy renewal because he or she is very busy at work? If not, how do you introduce a remedy that protects one group but doesn't also interfere with the other?
Ultimately, it becomes impossible to draw the line between the two and/or to treat vulnerable customers any differently from customers who make conscious choices. There is therefore a risk that drastic price-capping measures, operating as safety nets, become more likely. The precedent set in the high-cost short-term credit sphere has been viewed as a success, in that consumer outcomes have been improved, which may embolden the FCA to take action more widely. However, price capping, whilst introduced with the best of intentions, can fundamentally alter markets. When the FCA reviewed the high-cost short-term credit cap, it didn't consider the wider impacts of the cap in the context of reduced competition in the market. There are always going to be wider unintended consequences to this kind of regulatory action, and, if utilised widely across the consumer spectrum, this could impact the UK's economic model as a whole. At the same time, there would be impacts on the ancient legal principal of 'caveat emptor' and there may also be social policy considerations for government to consider.
The FCA has asked for feedback, comments and evidence to be provided to it by 31 January 2019. It is open to having discussions in November and December 2018 and will be hosting roundtable events with key stakeholders, including consumer bodies and parliamentarians, in January. A feedback statement will be published in due course.
The CMA has until 27 December 2018 to respond to the Citizens Advice super-complaint. It can make recommendations to government to change legislation, act via sectoral regulators, take competition or consumer enforcement action, launch a market investigation or market study, or decide no action is required. Citizens Advice's preference is for the CMA to undertake a large-scale cross-sectoral market study.