FCA publishes fair pricing paper

The Financial Conduct Authority has launched a public debate on the fairness of certain pricing practices in financial services, including the mortgage market.

The regulator is asking for comments on its published discussion paper, Fair Pricing In Financial Services, to be submitted by 31 January 2019.

The FCA is focusing the debate two key pricing practices. Price discrimination and loyalty (or “inertia”) pricing.

Price discrimination is when a firm charges different prices to different consumers based solely on differences in consumers’ price sensitivity. Loyalty or inertia pricing is when firms charge existing customers higher prices than new customers.

The FCA is concerned these pricing practices can potentially significantly disadvantage some consumers, in particular the most vulnerable and least resilient consumers.

The FCA says it has previously found evidence of inertia pricing in the mortgage market. “For instance, in the mortgage market, over three quarters of consumers switch to a new mortgage deal within six months of moving onto a reversion rate but around 23% do not,” said the report.

The FCA’s Mortgages Market Study interim report, published in May 2018, noted that: “The mortgage market has evolved into one where customers take out a series of short term deals. Most consumers in the mortgage market appear well engaged, with switching rates higher than in many financial services markets. But a significant minority of consumers stay on reversion rates for an extended period. Our analysis focuses on those customers that are on a reversion rate, up-to-date with their mortgage payments, and would benefit from switching.”

However, the FCA noted that consumers are often told the non-promotional price (for example, the reversion rate for mortgages) at the outset of the contract and that there are usually regulatory safeguards against unjustified rate changes.

Intrinsic mortgage network (part of Quilter) managing director Gemma Harle says: “The FCA’s discussion paper on fair pricing in the financial services sector shines a light on why getting mortgage advice can be critical to getting the best deal as the paper states that around a fifth of consumers don’t switch to a new mortgage deal within six months of moving onto a reversion rate.

“The good news is that a large majority of consumers are benefiting from intermediated new deals illustrating the value of advice when it comes to getting a better deal. Similarly, a mortgage adviser might be able to help avoid a consumer becoming a mortgage prisoner, which is where a homeowner cannot move to a cheaper mortgage deal because they can’t pass the affordability tests applied by lender.”

The discussion paper can be found on the FCA website.

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