The Financial Services Consumer Panel has made the call to regulatory chiefs as it branded the idea that consumers can and will drive competition as ‘fiction’.
Research by the panel found that firms are developing complicated products with misleading prices and terms and conditions, preventing consumers from shopping around.
In a report, the panel said that competition firms still rely too heavily on consumer engagement to drive competition, which ‘won’t work’ as the number of engaged customers is not high enough, with this not altering company behaviour either.
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Financial Services Consumer Panel board member, 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.”
The report said: “Competition authorities place high expectations on consumers to make markets work competitively. But the evidence shows that, for most consumers, buying financial services is a chore.
“It is clear from the panel’s research that firms are using consumers’ behavioural biases against them. A small group of consumers is engaged in the market, and will follow information prompts as well as shop around. However, this group is not large enough to drive competition, or to make firms change their behaviour.
“The focus on driving active consumer engagement to help make markets work competitively also neglects the possibility that consumers may be acting rationally in not switching, once all factors are considered.
“This highlights the scale of the challenge to competition authorities: firms will continue to exploit loyalty if information remedies and a reliance on switching are the only proposed solutions.”
Mike Barrett, consulting director at the Lang Cat, said: “The main theme of both the platform and asset management market studies is competition, yet it’s clear the Consumer Panel have concerns about whether this alone can deliver positive outcomes.
“Both papers feel like positive steps, but when the Consumer Panel is saying ‘The fiction that consumers can and will drive competition has persisted too long. We need tough action now’ questions must be raised as to whether the current burst of regulatory action is actually going to be effective.”