Last week’s publication of the Financial Conduct Authority’s (FCA) market study into general insurance add-ons is a timely reminder of the importance of the FCA’s new remit to promote competition.
Reading through the findings, it soon becomes clear that the FCA has kept its word by placing the new remit at the heart of the review. However, since this is the FCA’s first market study it is apparent that the regulator is still feeling its way when fine-tuning its use. The ABI has also been doing some thinking about this new direction for financial regulation.
We were disappointed the FCA was slow to engage with the industry throughout the course of this market study. We hope there will now be more commitment to working together as the FCA’s thinking on interventions develops, as a partnership approach is conducive to achieving the best possible outcomes for consumers.
With a large number of overlapping FCA reviews currently underway, including the thematic review of price comparison sites and a market study of retirement products, a coordinated approach is vital, both internally within FCA, and externally with bodies such as the Competition Commission (which is still investigating the motor insurance market). The five ongoing reviews of different aspects of the motor market are a case in point for competition analysis that should be streamlined.
Meanwhile the add-ons market study – which in fact covers five very distinct markets - highlights the importance of being clear on the differences between insurance products, particularly the way they are distributed. For example, car dealers interface with consumers in the sale of GAP insurance, which is very different from how consumers increasingly purchase travel insurance online. A one-size-fits-all approach is not appropriate and the FCA needs to be careful when drawing general conclusions.
The add-ons study uses Behavioural Economics (BE) research to support its theories. The FCA has often highlighted the use of BE analysis as a core tool for promoting competition.
This is a welcome addition to its toolkit as it allows for an appraisal of how consumers behave in the real world rather than the economic textbooks. However, it is now time for FCA to explain how the analysis will be used in practice in devising new regulations.
We can also expect increased scrutiny of industry profitability by the FCA but we urge them against reaching hasty conclusions. Buried deep in the add-ons study is a profitability assessment which shows that insurers are not making high underwriting profits, but distributors are highly profitable in some markets.
So in conclusion, here are five recommendations to the FCA that we think are important to making the new competition remit successful:
- We recommend a joined-up approach within FCA to market analysis and interventions.
- We recommend close coordination with the new Competition and Markets Authority and Government departments.
- We recommend that FCA should provide more insight on how Behavioural Economics analysis will influence competition policy.
- We recommend caution when conducting profitability analysis and pricing interventions.
- We recommend that FCA should operate on the basis that neither different markets nor consumer interests are homogenous.
For more, read the ABI's newly published paper discussing the importance and potential implications of the FCA's new competition remit: FCA and competition: a new direction for financial regulation? (pdf 230kB)
James King is Head of Conduct Regulation, Association of British Insurers (ABI).