The Financial Services Consumer Panel has today published new research which looks at the potential detriment for consumers of being trapped in poorly performing financial services products. The research shows that the costs of remaining in such products can represent a notable proportion of a consumers’ annual income.
As a result, in a position paper also published today, the Panel has asked the FCA to consider the merits of introducing a new automatic-upgrade rule. This would either require a firm to automatically upgrade its customers into its best available product or offer them a choice of better quality and better value products within the firm’s portfolio which suit their needs.
The recent super-complaint from Citizens Advice raised concerns about long term customers paying more for goods and services, which it referred to as ‘the loyalty penalty’. The Panel’s research investigated this further.
Conducted by Europe Economics, the research used the FCA’s ‘Financial Lives’ data to identify the products which were held by the ‘average’ consumer in several different groups. The 8 products examined were current accounts; cash ISAs; credit cards; mortgages; investment products; pensions; home insurance and income protection. The research found that some consumers could be incurring loyalty penalties over 5% of their annual income, and it is not impossible to imagine that there are some consumers for whom these costs are as high as 10% of their income.
Panel Chair, Wanda Goldwag said:
“The research demonstrates the detriment for consumers of remaining in poorly performing products and the need to ensure that all consumers are treated fairly. Loyal customers are often those who are too busy to search for and switch to better products, those who do not switch due to behavioural biases, those trapped with their existing provider or those who are not aware that better alternatives exist. Consumers should not be penalised for this loyalty. An automatic-upgrade rule would level the playing field.”
Hugh Savill, Director of Regulation at the Association of British Insurers, said:
“Pricing practices which can unintentionally penalise loyal customers deserve a well-considered solution. The proposal put forward by the FSCP to automatically move customers onto other products overlooks the practicalities of underwriting and product choice. It carries risks, that customers could be moved onto policies that don’t take their specific circumstances into account or provide them with the levels of cover they need.
“The ABI and its members are committed to working with the FCA and others on finding the right way forwards on the so-called loyalty penalty. Of all the sectors examined, insurers have already done the most to recognise the problem and take steps to address it.”