Cross-subsidies in the cross-hairs

Ensuring compliance amid FCA scrutiny

The Financial Conduct Authority (FCA) is subjecting firms’ use of cross-subsidies to great scrutiny amid concerns that they can lead to the unfair treatment of consumers or harm effective competition.

In this report, we highlight the FCA’s increasing focus-on rooting out cross-subsidies that it sees as harmful to its competition and consumer protection objectives. The continued importance the FCA places on firms’ business models has led it to scrutinise firms’ use of cross-subsidies across a number of papers and market studies.

While there are no specific rules or requirements around cross-subsidies in the FCA’s handbook, the FCA has linked the issue of cross-subsidisation to a number of conduct concerns, particularly in the areas of product suitability and the fair treatment of customers. These conduct concerns, alongside worries about cross-subsidies harming effective competition, have led to concerted regulatory interventions across a wide variety markets and sectors.

The report also discusses the FCA’s approach to price discrimination, a topic which it has often discussed alongside the issue of cross-subsidisation. While these are distinct practices, price discrimination and cross-subsidisation share common features and can result in similar regulatory concerns.

We expect the FCA to continue to focus on cross-subsidies in markets where there is evidence of weak or ineffective competition, and where there are high margins, few competitors, and barriers to consumers switching or changing provider.

A comprehensive understanding of the FCA’s perspective on cross-subsidies and price-discrimination will enable boards and senior managers to understand how these business model practices may lead to regulatory concerns about the fair treatment of customers or the effectiveness of competition in the markets in which they operate. We have therefore analysed the FCA’s stance and approach to date in order to identify what types of cross-subsidy and price-discrimination it is likely to be concerned about and where its future review work may fall. We go on to set out some practical steps that firms can take to minimise the regulatory risks in this area.

About the EMEA Centre for Regulatory Strategy

The Deloitte Centre for Regulatory Strategy is a powerful resource of information and insight, designed to assist financial institutions manage the complexity and convergence of rapidly increasing new regulation.

With regional hubs in the Americas, Asia Pacific and EMEA, the Centre combines the strength of Deloitte’s regional and international network of experienced risk, regulatory, and industry professionals – including a deep roster of former regulators, industry specialists, and business advisers – with a rich understanding of the impact of regulations on business models and strategy.

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