James Daley

By James Daley

Yesterday's radical move by the FCA to ban dual pricing will heralded by many consumer groups and parts of the media as a victory.

There's no doubt that having to shop around every year - or face a hike in price - tops the list of just about every consumer's list of gripes about the insurance industry. And last year, Citizens Advice even used its statutory powers to issue a super-complaint about the problem.

But as every regulator knows, all regulatory intervention has unintended consequences. And this bold move from the FCA will unleash a whole raft of them.

What's the problem?

To my mind, this all stems from a misdiagnosis of the condition. The FCA believes that because customers come in on a discount, and see their insurance prices increase each year, people are paying too much for their cover if they haven't switched by year three or four.

This is undoubtedly true. Many people do pay more than they need. But in a market where switching is easier than it's ever been, is that really a problem? If a consumer decides that shopping around and switching is not worth the time and effort, then that's their prerogative. As long as they are not trapped, it's a perfectly acceptable decision for a customer to pay more than they need to.

There is of course a small minority of vulnerable customers who are paying too much, who are unaware, and don't have access to comparison sites even if they had a desire to get a better deal. And it's vital that special measures are taken to protect this group.

But why turn the industry's entire business model on its head for these few? It's heavy handed - and it will not be a silver bullet to the industry's broader problems around consumer confidence.

The FCA believes that it will save consumers £3.7bn over the next 10 years through its intervention. But if this is true (and I think you can make a credible case that it won't have anything like that impact) insurers will have to replace at least some of those profits elsewhere. Some may choose to withdraw from the market altogether.

The obvious way to increase margin when you can't exercise price control is to hollow out your product - a trend that has been prevalent in the market since comparison sites came onto the scene at the turn of the millennium. Cover levels will fall, excesses and admin fees will rise. New exclusions will be introduced. Claims processes will be tightened.

The FCA plans to head this off by forcing companies to produce reports which prove they are offering fair value to their customers. But such value will be determined by comparison to the peer group - who will all be doing the same. Firms will also have to publish more data to indicate what percentage of premiums they are paying out in claims. But the competitive nature of the motor and home insurance markets means that firms are unlikely to be able to get themselves into a position where they're making excessive profits.

Mind the expectation gap

So the real impact of these pricing interventions will be to widen the gap between consumers' expectations and what their policy actually delivers. This, to my mind, is the biggest problem in today's insurance market - not the fact that new and existing customers pay different prices.

Worse still, there's a risk that consumers will be even less engaged with their insurers than they are today. Once people understand that they are not being subjected to price-walking anymore, the incentive to shop around will fall away.

A market with high levels of switching keeps companies honest. But if customers no longer feel they even need to open their renewal packs, they're unlikely to catch the memo about how their cover is changing and doesn't do everything it did when they first bought it.

I was surprised how muted the insurance industry's response was yesterday. Direct Line was the only company that I saw a statement from - and it was carefully worded to say that it would be examining the policy to see whether it improved customer outcomes.

The ABI said something similar - adding that it agreed the home and motor markets were not working well for consumers (quite an admission from the industry's flag-bearer).

If the battle is lost, the war is not

Perhaps they feel the battle is lost.

From where I sit, I think it's worth fighting on. There's a clash of politics and ideology at the heart of all this. Is the FCA's job to wrap consumers up in cotton wool and create a system where no consumer can get a bad outcome? Personally, I don't think it is - why aim for the impossible?

To my mind, its job is to create a market where every consumer has the ability to get a fair outcome. But that still requires some responsibility on the consumer's part. It's not the FCA's job to protect us from ourselves. It's their job to force providers to give us every chance to make the best decisions.

Rather than banning dual pricing, it could have simply made companies work harder to show how much customers could save by shopping around - limiting any heavy handed measures to supporting vulnerable customers who would be unlikely to benefit from greater transparency.

Its work on the single easy access rate in the savings market seems to be driven by this same instinct to wrap consumers in cotton wool.

It's a laudable ambition -but in my view it's unreconcilable with maintaining a competitive market.

The FCA should save its heavy handed interventions for the markets where the consumer detriment is large on an individual scale - even if the numbers of people affected are smaller.

The bigger issues in insurance - such as how we get consumers to better understand the difference in product quality, and how we close the expectation gap, will remain after these changes. Let's hope that at the very least, the FCA does not feel that it's work is over in this market. There's much more to do.