The UK’s Financial Conduct Authority (FCA) recently published a discussion paper on fairness in pricing in financial services. The paper is focused mainly on pricing practices that charge more to some customers and less to others based on their sensitivity to price (“price discrimination”).

One of the key practices of interest is what the FCA has termed “inertia pricing” – charging higher prices to existing customers and lower prices to new customers. This is the type of pricing that was also the subject of a recent super-complaint from Citizen’s Advice covering energy, mobile and financial services.

The paper reiterates a framework for assessing how the FCA will go about assessing whether pricing practices are fair, focusing on 6 evidential questions:

• Who is harmed?
• How much are they harmed?
• How significant is the pool of people harmed?
• How are firms pricing?
• Is the product or service essential?
• Would society view the practice as egregious or socially unfair?

These questions are not new, with the FCA outlining them back in July. What is new is that the FCA is now also looking to assess whether customers understand the consequences of their inertia and whether is it a conscious choice or the consequence of behavioural biases or vulnerability. “Good” loyalty or inertia might be a customer who sticks with their provider because they value the service or because the price differential is too small to be worth their while to switch.

More fundamentally, this discussion paper might signal a shift in focus for the FCA. Market studies have traditionally focused on whether competition is working well in a particular market. Questions of fairness side-step this approach. A market might be competitive, but still have pricing practices that are seen as unfair.

The evidential questions look reasonable at first glance, but any evaluation of fairness is ultimately going to be subjective. We might therefore be entering uncharted territory where the regulator needs to draw a line on what is “fair” and “unfair”. The test case for such a new approach might well be the market study into general insurance, launched simultaneously with the fairness paper, focused specifically on pricing practices in that market.

Frontier regularly advises on issues relating to financial services in the UK and Europe.

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