fca says competition not working

Christopher Woolard, director of policy, risk and research at the FCA, speaking at the Regulatory Policy Institute's Annual Competition and Regulation Conference, said poorly engaged consumers meant competition is not working as it should in the financial services sector.

fca says competition not working


Woolard said historically financial services companies have not been able to win market share by focusing on customer service and good value products because consumers do not tend to switch from providers who treat them badly.  

He added: "For many financial products it is hard for consumers to gain experience. Buy a brand of beans you don’t like at the supermarket and you’ll know not to purchase them again. Buy the wrong pension and you may not know for 35 years. There are significant informational asymmetries between providers and consumers.

"Advice can help bridge that gap in some cases, but it needs to be trusted and good value. The reality is many firms add layers of complexity – impenetrable jargon, pages of terms and conditions, bizarre exclusions in the reams of small print, products launched and withdrawn with often bewildering frequency."

In the face of complexity, Woolard says, customers simply rely on gut instinct or defer to the judgment of friends or family. In order for competition to work effectively in financial services, switching between providers must be simpler and exit penalties justified. 

Woolard said the FCA plans to look at whether there are barriers to entry created by regulation. It also plans to promote competition. Unlike the FCA, the FSA did not have a competition objective so some rules need to be rewritten and the FCA has committed to make changes where necessary. 

The FCA also plans to promote greater financial literacy. Woolard says: "Firms have known for years that financial literacy in this country is low. They know that people aren’t very interested in reading small print on their contracts. They know that busy people won’t always shop around for the best ISA rates. This wasn’t labelled ‘behavioural economics’ until recently, and regulators have been behind the pace of firms in thinking about how to apply these insights, but we are spending considerable time on this now."

It will also look at parts of the market where competition does not appear to be working effectively. For example it plans to launch a market study into the cash savings market, where it believes consumer inertia leads to low switching rates, which in turn reduces competitive pressure on banks to offer existing customers the best deals. It will also focus on retirement products and in particular, the lack of consumers using the open market option for annuities at retirement. 

Finally, the regulator plans to look at how competition is working between firms operating in wholesale markets, in the recognition that this can lead to better quality and cheaper products down the line for retail consumers. 




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