Its Fair Pricing in Financial Services paper has been published alongside the findings of its work on pricing practices in the retail general insurance sector.
In launching the public debate, the FCA admits fair pricing is a complex issue and notes that the judgement of when price discrimination is fair is not always straightforward.
It is focusing the debate on two pricing practices:
firms charging different prices to different consumers based solely on differences in consumers’ price sensitivity, also known as price discrimination;
firms charging existing customers higher prices than new customers, sometimes referred to as loyalty pricing or inertia pricing.
“We have concerns that these pricing practices can potentially disadvantage some consumers significantly, in particular the most vulnerable and least resilient consumers,” the regulator said.
Throughout its document the FCA makes several references to the mortgage market, noting how customers are treated after their product period ends when they move onto a Standard Variable Rate (SVR) or other reversion rate.
“We have previously found evidence of inertia pricing in the cash savings and mortgages markets,” it said.
“Our diagnostic work also shows that some consumers who stay with their provider for a long time may pay significantly more than newer consumers, due to multiple price increases at each renewal.”
One in four don’t switch
Highlighting the example of moving to a reversion rate, the FCA was surprised at the number of consumers who do not move to a new deal.
“Around one quarter of consumers do not switch within six months after moving on to a reversion rate, and some of them could have got a better deal,” it said.
“The difference between the reversion rate and the (lower) rate they would pay in a new contract gives an initial indication of the extra cost consumers incur by not switching.
“There are many factors involved, such as the way competition works in practice, that lead to these pricing outcomes.
“One possible explanation is that if the non-switching consumers are less price sensitive, then firms can increase these prices and thus price discriminate on grounds of inertia,” it added.