Mary Starks’ recent lecture at the Social Market Foundation – well worth a read – is a wide-ranging attempt to place the FCA’s approach to price regulation in a broad historical and regulatory context. In doing so, it indirectly sheds light on several inherent prejudices and long term trends . Understanding these underlying contours of regulation can help firms position themselves better and anticipate likely future developments.
Here are the five main ones:
1. Price regulation is political: It is clear that the FCA is highly unlikely to embark on formal price regulation without being directed to by Government. Each of the examples in the speech meets this test and, to take the obvious example, the FCA was publicly opposed to the price cap on payday loans until Stella Creasy and others persuaded the Government of the policy’s benefits.
2. Financial services products are unusual: Not only are they typically complex, but their value is often capable of dramatic change, depending on both outside factors and the customer's situation. If their complexity continues to increase and/or the economy becomes more volatile, political demands for more intrusive regulation are likely to grow again.3. All regulation has unintended consequences: From Diocletian to New York rent control, the speech contains several examples of the unintended consequences of price controls. But the truth is that all regulation suffers from these. One possible future example, mentioned in the speech is the additional governance requirements being introduced in the respect of workplace pensions and the asset management sector. Time will tell…
4. Regulations should be reviewed regularly (but usually aren’t): Historically, the consensus around such reviews has been matched only by their rarity. The review of the payday price cap quoted in the speech is important but the ultimate worth depends on its being repeated. Neither the FSA nor the FCA have been good at this, one of the main reasons being the high cost of doing them credibly. This is an area where a mature discussion with the industry could help greatly.
5. “Duty of care” consultation could be a tipping point: This aspect of the FCA’s Mission consultation has been pushed down the road until after Brexit. By the time it happens, interest rates are likely to have risen significantly and, if so, will almost inevitably have exposed some new price-related conduct issues. In an industry where price is meant to reflect risk, and where so many customers can be described as “vulnerable”, this will increase public focus on the quality and purpose of the product.
If the FCA isn’t a price regulator in the conventional sense, neither is it really a product regulator (an issue for another time), and the industry has tended to support both these positions. The result is that the FCA tends to focus on the sales process, on transparency and governance, on charging structures, encouraging competition and so on.
Taking a step back, however, given the complexity of many financial products and services, and the challenges of managing the many inherent conflicts of interest, it may be that both the industry and consumers would be better served by a broader and more balanced regulatory focus and use of regulatory tools.
there have been some instances where the FCA has intervened to set a cap on certain prices charged to consumers. So clearly we can regulate price in some situations. The important question is: when should we?