Commission 

Financial service firms ‘exploit consumer loyalty’

Financial service firms ‘exploit consumer loyalty’

Financial services firms are exploiting consumers by developing complex products with obscure or misleading prices and small print, a Financial Conduct Authority advisory panel has claimed.

The Financial Services Consumer Panel, a statutory panel which advises the FCA on consumer interests, has today (17 July) published a paper that claims the industry is capitalising on customers’ behavioural biases and preventing them from shopping around.

The paper highlighted complex and opaque services, lengthy terms and conditions, business models based on commission or murky pricing strategies as examples of practices which do not lead to better outcomes for consumers.

Pointing to other areas such as cash savings, current accounts and the energy market, the panel says evidence shows that relying on consumers to take action does not work. Although it supports making comparison and switching easier, it says the onus should be on firms and not consumers to improve competition.

The panel argued firms will continue to exploit loyal customers if information remedies and a reliance on switching are the only proposed solutions.

“Firms appear to compete vigorously, but they strive to inhibit consumers’ ability to shop around, by developing complicated products, with obscure or misleading prices and terms and conditions," the paper stated.

While competition authorities have begun to realise this, the report argued they still rely too much on active consumer engagement to drive competition.

The report stated this won’t work because the number of engaged consumers is not large enough to drive competition or to make firms change their behaviour and even those who are engaged can’t usually assess whether switching would get them a better deal.

The report noted automated shopping around will eventually become the norm, but questions whether regulators and consumers are prepared for this.

In its position paper, the consumer panel called for:

* Competition authorities to take robust and effective action to tackle firms’ exploitation of consumers’ behavioural biases and over-complicated products and pricing.

* The FCA to be tough on firms that penalise their loyal and trusting customers.

* The FCA to develop robust measures of consumer outcomes, and require firms to make these widely available, and incorporate them in digital comparison tools.

* Competition authorities and regulators to act now to make sure the new generation of automated shopping around and switching services do not simply repeat the problems of the past and further weaken rather than strengthen consumers’ position in the financial services market.

Panel chair Sue Lewis said: “Financial services firms exploit their customers’ inertia and misplaced loyalty. Simply telling people this and encouraging them to go elsewhere is not going to work for most consumers. Firms will only change their behaviour when they have an incentive to do so.

"Competition authorities need to analyse what works: what needs to happen for people to know they can switch to a better product or service? What remedies should be put in place to protect those who, perfectly rationally, do not want to switch? The fiction that consumers can and will drive competition has persisted too long. We need tough action now.”

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