A number of publications in the past week have highlighted the increased focus on the FCA’s competition objective and the role that ‘behavioural economics’ will play in shaping future regulatory policy.
An ABI paper entitled FCA and competition: a new direction for financial regulation? discusses the importance and potential implications of the FCA’s new remit to promote competition. The ABI details the work already undertaken by the regulator and projects in developments, particularly the recent findings from the market study into add-ons in the general insurance sector. The FCA is building a specialist division with competition expertise, with greater emphasis on understanding and influencing the dynamics of markets as a whole. The ABI remains concerned, however, about the potential overlap between various regulatory initiatives and warns against ‘generic conclusions’ that do not take account of individual market specificities such as product features, distribution channels and market size. Remedies should be bespoke to prevent consumer detriment and market distortions in other parts of the market. The ABI offers some challenges and recommendations for the FCA and the industry. For the FCA, the ABI recommends:
- a joined-up approach within the FCA to market analysis and interventions;
- close coordination with the new Competition and Market Authority and Government departments;
- providing more insight on how behavioural economics will influence competition policy;
- exercising caution when conducting profitability analysis and pricing interventions; and
- operating on the basis that neither different markets nor consumer interests are homogenous.
For the industry, the ABI recommends that:
- insurers should be prepared for a different type of regulation focused on markets and overall consumer outcomes, not simply compliance with conduct rules;
- firms involved with market studies should take time to explain to regulators how each insurance market product works in practice which should improve the effectiveness of data requests;
- firms engage the whole business in responding to the FCA, not just compliance;
- insurers recognise the advantages of evidence-based regulatory intervention but be aware of the risk of increasing political interest in the industry; and
- firms recognise the potential for strategic opportunities for growth despite the challenges that regulatory change poses to business models.
Also this week, Martin Wheatley, FCA Chief Executive, addressed the Australian Securities and Investments Commission on the rise of behavioural economics at the regulator. The FCA’s use of behavourial economics aims to break the ‘link between poor products and high financial reward’. A combination of consumer inertia and product complexity has led to what Mr Wheatley calls an erosion of competitive pressures.
The general insurance add-ons study is the most recent and high profile use of behavioural economics and the FCA has now published background analysis showing how this work was carried out. In summary, the study found that: 25 per cent of consumers who bought add-on insurance were not aware they could purchase it separately; 58 per cent did not make comparisons with other policies in the market; around one in five could not remember buying the product three months later and claims ratios for some products were as low at 9 per cent. Proposed remedies such as a ban on pre-ticked boxes, publication of claims ratios and improving how add-ons are sold on comparison websites are based on the FCA’s observations of consumer behaviour. Mr Wheatley warns that ‘competition will be king’ as the industry moves forward and behavioural economics will become an increasingly important part of the regulatory toolkit.
Firms wishing to comment on the FCA’s proposals for the add-ons market should respond by to the consultation by April 8.
View FCA and competition: a new direction for financial regulation?, 20 March 2014
View Making competition king: the rise of behavioural economics at the FCA, 25 March 2014
View Occasional Paper No. 3: How does selling insurance as an add-on affect consumer decisions?, 25 March 2014