2018年-FCA英国金融行为监管局_occasional_paper_41_36页_1mb

Summary of "Price discrimination in the cash savings market: One rate, one solution?"

Core Content

This paper, published by the Financial Conduct Authority (FCA), examines the impact of a supply-side regulatory intervention called the Basic Savings Rate (BSR) on the cash savings market. The goal of the BSR is to promote more uniform pricing across cash savings accounts by requiring firms to revert all accounts to a single interest rate after a certain period (e.g., one year). This intervention aims to enhance competition and improve consumer outcomes by reducing price discrimination based on account age.

The paper applies a well-established economic model from the literature on switching costs to simulate the market impact of the BSR. It explores how firms currently use account age to differentiate interest rates, leading to lower rates for older accounts and higher rates for new accounts. This pricing strategy results in price-sensitive consumers (those in older accounts) receiving lower returns, while less price-sensitive consumers (those in newer accounts) are offered higher rates.

Key Findings

1. The introduction of the BSR is expected to increase the overall interest paid on easy access savings balances, as price-sensitive consumers are pooled with less sensitive ones, which helps "protect" the latter.

2. Waterbed effect: The BSR may reduce the incentive for firms to offer high introductory interest rates to new customers, as the profitability of older accounts (back-book) decreases. This has a partial offsetting effect on the increase in interest rates for older accounts, but the overall impact is small due to competitive pressures.

3. Smaller firms are less affected by the BSR, as they have smaller back-books and thus a lower proportion of older accounts.

4. The BSR is expected to lead to a net increase in interest paid to customers of around £150m to £480m per year (median estimate: £300m), with the benefit for back-book customers being larger than the net increase, but offset by losses to front- and mid-book customers.

5. Low switching rates among consumers are attributed to rational and behavioral factors, such as search and switching costs, low awareness of interest rates, inattention, and procrastination.

6. The FCA’s Market Study (2015) showed that older accounts earn lower interest rates than newer ones, even though they are more stable and cost less to serve.

7. Price discrimination by account age is not unique to the UK, as similar practices have been observed in other countries, such as Spain, and different time periods.

Main Viewpoints

• The BSR intervention aims to eliminate price discrimination based on account age, thereby increasing price transparency and improving consumer outcomes.

• The theoretical model used in the paper is based on Klemperer (1995) and Carbo-Valverde, Hannan & Rodriguez-Fernandez (2011), which study how switching costs influence pricing strategies.

• The model predicts that the BSR will lead to higher average interest rates for firms, but the overall impact is positive for consumers, particularly those in older accounts.

• The waterbed effect is a key limitation of the BSR, as it may reduce the ability of firms to offer high introductory rates to new customers, thereby reducing their profitability.

• The paper does not quantify all aspects of the policy, including compliance costs, funding model impacts, product design, increased confidence, and switching costs, but notes that these factors could improve or worsen market outcomes.

Key Information

• BSR Definition: A single interest rate that applies to all accounts after a specified period, typically one year. It is not based on account age.

• Model Assumptions:

  • Firms are assumed to face three types of consumers: front-book (new), mid-book (existing), and back-book (older).
  • Firms are assumed to know the price sensitivity of each group.
  • The model does not include all aspects of the policy, such as switching costs or compliance costs, which are considered separately.

• Data Used:

  • The data spans from January 2010 to June 2014.
  • It includes 13 providers (large and small) and covers on-sale and off-sale products.
  • The dataset tracks interest rates and balances over time, broken down by balance intervals, bonus rates, and PCA (Personal Current Account) status.

• Interest Rate Trends:

  • Interest rates for on-sale products decline sharply after the first year.
  • They gradually decrease over time as accounts age.
  • Off-sale products (older accounts) have lower and constant interest rates, around 0.40%.

• Balance Attrition:

  • Balances decrease rapidly in the first 18 months.
  • Attrition rate then gradually stabilizes at 10% to 15% per year.
  • Older balances are more sticky (less likely to be withdrawn or switched).

• Policy Context:

  • The BSR is part of a broader regulatory effort to improve information provision and switching processes.
  • The FCA published a Policy Statement in 2015 to enhance pre- and post-sale information and switching clarity.
  • The BSR is not the only intervention being considered, and the FCA has published a Discussion Paper (DP18/06) for further analysis.

Conclusion

The BSR is a potential regulatory tool to reduce price discrimination in the cash savings market. While it may reduce the incentive for high introductory rates, it is expected to increase overall interest paid to customers, particularly those in older accounts. The model suggests a net positive impact on consumer outcomes, although caution is advised when using the estimates to justify policy decisions. The paper highlights the complexity of the market and the need to consider other factors, such as product design, funding models, and consumer behavior, in policy evaluation.