On 31 October 2018, the FCA published Discussion Paper 18/9: fair pricing in financial services (DP18/9). DP18/9 follows on from a recently published framework on how the FCA may tackle unfair price discrimination in the financial services sector. DP18/9 is focused on the following practices:
- firms charging different prices to different consumers based solely on differences in consumers’ price sensitivity (also known as ‘price discrimination’); and
- firms charging existing customers higher prices than new customers (sometimes referred to as ‘loyalty pricing’ or ‘inertia pricing’).
Chapter 3 of DP18/9 provides an overview of how price discrimination generally operates in financial services. The FCA outlines that factors including intrinsic preferences and behavioural biases generally influence why some consumers can have a lower price sensitivity for products than others. Figure 1 on page 16 provides an FCA assessment to determine fairness within price discrimination practices.
Chapter 4 of DP18/9 sets out in more detail a specific form of price discrimination where firms charge their existing customers higher prices than new customers – inertia pricing. By using the fairness guidance discussed in chapter 3, the FCA sets out two important issues involved in assessing fairness in inertia pricing and the implications for competition:
- some consumers are made worse off because of inertia pricing, but others are better off. Consumers who show traits of potential vulnerability may belong to either group; and
- an assessment of fairness should take into account the specific circumstances of the pricing practice. Interventions could lead to worse distributive effects of inertia pricing, as well as higher average prices.
The FCA explores the remedies that can be used to reduce or prevent the negative effects of inertia pricing in Chapter 5. The FCA does not make any specific recommendation of market action, but instead provides a general discussion on:
- demand side remedies: these focus on helping consumers make better decisions. In the case of inertia pricing, that includes: lowering the costs of shopping around and switching, and reducing other causes of consumer inertia; and
- supply-side remedies: these focus on firms, and can involve restricting the way firms design, market and price products. They may include price regulation and product structure restrictions.
The deadline for responses to DP18/9 is 31 January 2019.