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Price discrimination and cross-subsidy in financial services

December 7, 2016

At the end of September the FCA published Occasional Paper 22 on price discrimination and cross-subsidy in financial services.

It is a good analysis of the subject and worth a read, particularly in the context of Brexit where some EU-driven restrictions may be abolished or replaced with UK-specific ones.

Price discrimination happens when a firm charges different prices to different consumers for the same product, or where all consumers are charged the same price but costs differ between consumers – so different consumers face different mark-ups.

Currently, there are four key ways of implementing price discrimination. First consumers with higher income or wealth may have a lower sensitivity to price.

They may see the value of switching suppliers to achieve small savings as less important. Second, consumers may prefer to stick with a particular supplier despite price differences with other suppliers. Third, consumers may have fewer options, for example those with a poor health record. Fourth, some consumers may be less ‘savvy’ about the way the market operates.

With the increasing availability of Big Data, firms may be able to refine their prices to more accurately reflect the value a given consumer places on the product. But if the data are very expensive to acquire or analyse, consumers may be able to buy at a lower price from less sophisticated rivals. The jury is out on how this will turn out in practice.

There are two types of cross-subsidy. One is where some consumers are charged below the cost of providing the product, which is paid for by the firm charging other consumers above the cost price.

The second is between products, where a firm’s profits from one product are used to provide another product at a loss. The pricing of PPI was an example of cross-subsidy between the loan market and insurance, as some consumers with low credit scores might have been unprofitable were it not for PPI income.

Price discrimination and cross-subsidy may be a concern if the high-price segments contain a high proportion of consumers in need of protection (‘vulnerable’ consumers), or a significant share of such consumers are excluded from important products, such as IP insurance.

Charging higher mark-ups to less price-sensitive consumers may be an alternative to uniform pricing. But concerns may be raised that those groups are paying more than a proportional share of those costs.

However, price discrimination is often a part of normal competitive practice and so does not necessarily warrant any intervention. And badly designed or inappropriate regulatory interventions can lead to undesired or unintended consequences for consumers and competition.

So what’s this got to do with Brexit? The EU Gender Directive prohibits using actuarial factors based on gender in the calculation of premiums. The effect of the prohibition has been to introduce uniform pricing.

Due to the different accident risks, health risks and life expectancy of men and women, which affect costs of supplying insurance, the effect is to require different mark-ups for the two groups – a form of price discrimination. Next year we expect to see ‘The Great Repeal Bill’.

One in the frame could be the Gender Directive.

What is particularly interesting about the economic analysis is that it shows the intention to reduce one form of discrimination has actually produced another version of it.

What the report does not cover is the ethics of this deliberate decision. Next year it is likely that we will see a repeat debate on such seemingly settled issues.

Written by Richard Walsh, SAMI Fellow and first published in Cover magazine, November 2016

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Hard Brexit – Evolving Scenarios for Brexit

November 30, 2016

In developing scenarios, it pays to plan for the unexpected. Back in the run-up to the Brexit referendum, SAMI published a set of foresight articles on different ways in which Brexit might pan out. In order to make clear that we were not trying to “predict” the future of Brexit, we did this by way of drawing analogies with three of the USA’s neighbours, each of whom have a different relationship with their giant neighbour. We took as our models Cuba, Mexico and Canada.

Calling the Shots

Since then, there has been much discussion about whether Brexit will be “hard” or “soft”. Journalists have spent a great deal of time trying to read the auguries within the Conservative Party, as the Brexiteers in the Government contend with the “remainers”. This has created the impression that the hardness or softness of Brexit will be largely determined by the way that the UK Government decides to approach the negotiations with its EU neighbours, once it has invoked Article 50 of the Lisbon Treaty.

That has always been an insular fallacy. Open Europe, in their analysis of the lead-up to the referendum, “wargamed” Brexit, using a panel of ex-Ministers from the UK and other major EU countries, and senior Commission officials. The wargame showed how the EU members would be likely to drive a hard bargain, not least because of concern about the impact of Brexit on their own domestic politics. To give too generous a deal to the UK would be potentially to encourage Eurosceptic and nationalist movements elsewhere in the EU, and potentially to empower opposition parties within member states.

This tends to support the view that a hard Brexit is more likely than a soft one.

The results of November’s Presidential and Congressional elections in the USA is a useful reminder that any Brexit scenarios need to build in multiple risks and uncertainties. And the elections may be a game-changer. The election of Donald Trump seems likely to lead to a significant recalibration of US foreign policy, with a degree of rapprochement with Russia, and a reduced commitment to NATO appearing possible.

More immediately, a Trump presidency could lead to a significant change in the assumptions underlying global trade. Whereas previously there has been a clear, if slow, progression towards global free trade, the rhetoric of President-elect Trump’s campaign indicated a return to protectionism. This could make it a hard world for the UK to seek to make bilateral trade deals – although, to be fair, President-elect Trump has made friendly noises towards Brexit.

This serves to illustrate two key points. Firstly, events beyond Europe could influence the climate in which Brexit needs to be considered. If the US is indeed losing enthusiasm for free trade, and/or playing such a leading role in NATO, then Europe will need to recalibrate its own trade and defence strategies. If that is the case, will it still make sense for a fractious UK exit from the EU, or will the case become stronger for a more amicable settlement, and some sort of continuing security and defence relationship at least?

The election of President Trump may convince a critical mass of European opinion formers that the UK and the EU need to work together, not fall out.

Secondly, future events within the EU will significantly affect the outcome. If the Italian referendum sees the Government defeated; if the forthcoming elections in Germany and France see changes of Government, then the attitude of the key European players to Brexit can be expected to change. And such events – event the prospect of a US-style entry fee for UK citizens holidaying on Europe post-Brexit, may influence opinion in the UK itself.

If there is a renewed fiscal or financial crisis in Europe, or the UK economy falters, again, the attitudes to Brexit will change. This could play either way – ie bolster the hard or soft Brexit options, depending on the particular events themselves.

Building Brexit Scenarios

So, in looking at possible Brexit scenarios, we need to model at least three distinct key drivers of uncertainty:

  1. The way events play out in the UK – the debates between “hard” and “soft” Brexiteers, and the outcome of litigation over the role of Parliament in invoking Article 50, and the state of the UK economy and economic confidence
  2. Events in Europe – debates between those in favour of compromise and those unwilling to make concessions, influenced by political and economic developments within the EU
  3. External events – in the USA, Russia and elsewhere, and in the global economy and global trade

Beyond Brexit

Looking beyond Brexit is difficult – as trade talks might continue for many years beyond the formal negotiations around Article 50. But it is also important. As events unfold, SAMI Consulting will continue to revisit its own scenarios and continue to blog on the unfolding future.

Written by David Lye, SAMI Fellow

The views expressed are those of the author and not necessarily of SAMI Consulting.

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Shell scenarios – a net-zero CO2 emission world

November 23, 2016

Why net zero CO2 is important

In a report which supplements the Shell New Lens Scenarios (NLS) published in 2013, Shell have concluded that a net-zero CO2 emissions world is attainable by 2100:. A rising level of CO2 not only puts pressure on the climate, but also warms and acidifies the oceans, raises sea levels, threatens land-based ecosystems and affects patterns of food production. There is broad scientific consensus that the quality of life for hundreds of millions of people stands to suffer from this.

The Paris agreement

An important and constructive milestone on the journey was the recent Paris climate conference (COP21) in December 2015. At this, 196 countries adopted the Paris Agreement, which will enter into force after 55 countries that account for at least 55% of global greenhouse emissions have deposited their instruments of ratification. The agreement sets out a global action plan intending to put the world on track to avoid dangerous climate change by limiting global warming to well below 2°C.

The architecture of this agreement has been described as a “motorway” to address climate challenges in which there are different lanes, with different economies going along these lanes at different speeds and using different vehicles. But they will all be moving in the same general direction on the same motorway – and this movement, over the course of the century, will bring us towards increasing decarbonisation of our economies and transitions in the way energy is used.

It is valuable to recognise, however, that a net-zero emissions world is not necessarily a world without any emissions anywhere. It is a world where remaining emissions are offset elsewhere in the system, an outcome that is more rapidly achievable and hence more consistent with limiting the accumulation of greenhouse gases. This means that the world will need “negative” emissions in some sectors to offset remaining emissions in others such that zero additional emissions enter the atmosphere – the so-called “net zero.”

Demand for energy will double to 2100

Shell point out that the energy system responds to the demands of a growing number of people in the world with aspirations to make life materially better for themselves and their children. Meeting this demand will probably require approximately doubling the size of the global energy system over the course of this century. And that means the potential growth of atmospheric CO2 and other greenhouse gases – unless something is done at the same time to reduce these emissions so that there are no net additions. The challenge is how to supply this demand while at the same time halting the accumulation of CO2 in the atmosphere – ensuring a healthy planet.

The New Lens Scenarios

Scenarios offer plausible alternative stories of the long-term future. They do not describe what will happen (a forecast) or what should happen (a policy prescription), but what could happen. The NLS scenarios – Mountains and Oceans – considered alternative ways influence in society could evolve and described different routes for the future evolution of the global energy system. The write up can be found at

The Mountains scenario represents much of the current status quo, and Oceans is a more fragmented and diverse set of actors. Both the Mountains and Oceans scenarios led to CO2 levels which led – in the MIT model widely used for this modeling – to temperature rises in excess of 2 degrees.

Can the world do it?

In the report building on the New Lens scenarios, Shell construct a “Goldilocks” scenario combining the “best of both”. By analyzing the hurdles and opportunities in each of the four pillars of the energy system – transport, power, buildings and industrial use – they conclude that three areas are critical.

The first area is the use of fossil fuels. Shell assess that this will still be significant right through the century, so imaginative approaches to carbon capture are needed. They discuss the use of oceans, the impact of agriculture and forestry policy. And they also suggest that solar power costs are reducing at such a rate that it would be economically viable in the medium term to retire coal burning plant.

The second area is renewable, where solar energy in particular is obeying – and will continue to obey – learning curve pricing, and also can be generated in bite sized components, giving individuals the capability of making their own choice.

The third area is energy efficiency, in all four pillars of the system.


Shell conclude by suggesting that, even taking into account the greatly increased demand for energy over the next decades, this goal can be met. However they emphasise that many of the hurdles are political and societal rather than technological.

Written by Gill Ringland, SAMI Fellow and CEO.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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“Engineering the Future” – the IET’s “Future Festival 50”

November 16, 2016

As part of their first “Engineering the Future” event, the IET arranged a series of talks at Savoy Place as the “Future Festival 50”, so I went along to hear what new developments they thought were important.

savoy-place-hw       faraday-hw

The event was hosted by Professor Danielle George from the University of Manchester. Unfortunately I missed the opening session featuring Jerry Chow of IBM on Quantum Computing, so the first talk I heard was by Noel Sharkey, Professor of AI and Robotics at Sheffield, and perhaps better known as a judge on BBC2’s “Robot Wars”. He recounted how the media picked up on stories about sex robots and weaponry, and described some advances in autonomous vehicles: cars, planes, ships, submarines, military and police drones. But his key emphasis was on the ethics of these systems. Sex robots can damage young people’s experience of intimacy; military robots killing people autonomously breaks the first Asimov robot law; police robots breaking up demonstrations raise other human rights issues. And even autonomous cars have the ethical problems of who to kill or injure in the event of an accident (and as he pointed out, no-one would buy a car where the answer was “the driver”!). His company “Responsible Robotics” campaigned on these issues. Questions from the audience addressed insurance of AVs and the impact on jobs: Prof Sharkey was not optimistic on the latter, saying we maybe needed a Universal Income.

Next was Maneesh Januja, a health futurist. His focus was on the use of VR and AR in health. He talked about the Google Pixel and 360 Photos on Facebook, and demonstrated how 360 cameras are an accessible and affordable way of people creating their own VR. But I didn’t think his health industry examples were that exciting. Education, notably of surgery, obviously; as a way of informing patients what they would be experiencing; and as a way of developing empathy – showing the doctor what it feels like to have my condition. More bizarre was showing stroke patients what was going on in their own heads – not sure how this helps. One nice example was of a young woman with tunnel vision being able to replay what was going on around her. There was also the use of VR as a social community to address depression and social isolation. I felt there ought to be more powerful applications somewhere. Questions examined the impact on one’s vision and the dangers of increased social isolation.

The last talk of the morning was a shift of gear. Eleanor Stride, Professor of Engineering Science at Oxford explained how sophisticated use of bubble technology could deliver cancer killing immunology treatment to the exact heart of the tumour. Micro-bubbles of gas, surrounded by a surfactant that attached to the proteins given off by tumours, and magnetised, so that they could be controlled and directed, can be used to deliver the cancer-killing drug directly to where it is needed, rather than being dispersed around the body and causing side-effects. One of the benefits of this approach was that it evaded the body’s own immune system.

After lunch we were treated to the dynamic and entertaining Ed Gillespie, a futurist with an interest in sustainable development, beginning with a quote: “We are not blindly opposed to progress; we are simply opposed to blind progress”. He rattled through a range of statistics – e.g. there are five times as much fossil fuels discovered than we can afford to burn if we want to hit carbon emission targets – and examples of absurd inconsistencies: if you bought Tesco low-energy light bulbs to reduce power consumption, they would give you airmiles!! He advocated local community solar systems, underground hydroponic agriculture and radical recycling – there is enough energy in waste coffee grounds in London to power 15,000 homes. He ended with a joke illustrating that we may not be successful in managing the threat.

Two planets were walking along, when one started scratching and looking very uncomfortable. “What’s the matter?” asked the other. “I’ve got a bad case of Homo Sapiens” was the reply. “Oh well, don’t worry, it doesn’t last long”.

The last talk I went to was by Mark-Olivier Coppens, Professor and Head of Chemical Engineering at UCL. He was studying how to draw lessons from nature to engineer innovative solutions. His first example was the femur-like structure of the legs of the Eiffel Tower, designed that way because of the balance of forces it provides. His important point that the approach was not simply bio-mimicry, but based on an understanding of why the natural system was the way it was and adopting a similar structure. His example was comparing fuel cells to the structure of the lung – at one level there are fractal, branching systems, but deeper down the flow of oxygen through cell walls; his design for fuel cells is structurally similar.

The presentations, including ones I missed, are available on

Written by Huw Williams, SAMI Principal.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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What are the benefits of energy?

November 9, 2016

Energy is an essential pillar of economic development. This appears so obvious, that it seems almost banal to say it. Indeed, few would question the need for increasing access to energy, and UN initiatives such as Sustainable Energy for All have successfully embedded the idea into the Sustainable Development Goals for 2030.

But as soon as we ask ‘how much energy is needed for a country to develop’, we hit a problem. The empirical evidence is surprisingly thin. We know the historical record of 19th Century’s reliance on coal, and the global political struggles of the 20th Century over the oil and gas needed to sustain our energy-intensive economies. But beyond these historical narratives, the analysis proving a causal link between energy access and economic development is largely missing, especially at a micro-economics level. We need to better understand this if we are to develop a forward-looking narrative for the energy story in the 21st Century, and understand what type of support will be needed from policy-makers.

This question is particularly pertinent for countries not already committed to heavy industrialisation pathways. Sub-Saharan Africa together with India and Bangladesh are the new frontier of this debate. New energy business models are emerging to provide energy to households based on micro-credit or pay-as-you-go, enabled by new communication technologies and a precipitous decline in solar energy costs. The financial sector serving this market is still small and niche, but is getting positively frothy at the prospect of serving this huge untapped market.

However, the questions remain; what are the benefits of energy access, and therefore, how much support should be given? Evidence from case-studies and data reported by practitioners and industry bodies show a range of positive socio-economic benefits including health, education, welfare and gender impacts (e.g. IEG 2008, GOGLA 2016, ODI 2016). But academic literature reviews find more mixed results. Whilst the IEG 2014 review supports the case for educational benefits, they find evidence is thin regarding economic, health and gender impacts. A World Bank review also concludes that in the literature there is “a complete lack of agreement concerning the nature of the causal link (if any) between energy and GDP”. Systematic literature reviews by Attigah 2013 and Torero 2014 also show mixed evidence on economic impacts, noting examples of both positive and negative impacts depending on country context and the kind of investment being made. One recent example is in Kenya where the social benefits of grid electrification were found to be smaller than the costs, leading to overall negative social welfare impacts (Lee, 2016). Peters 2015 finds that in the short run at least, energy access in low consumption environments such as rural Sub-Saharan Africa can be as effectively served by low-cost solar alternatives.

This evidence suggests that simply providing higher levels of energy access will not necessarily drive more development if other growth factors are not in place. In some circumstances, basic access will deliver a high proportion of the achievable benefits, whereas in other circumstances, development benefits will only accrue if high-level access is available. This variation in the impact of energy access depends on what binding constraints apply in different circumstances, factors such as income levels, human capital, physical capital, natural resource endowments, technological status etc. Energy access is only one of these constraints, so providing more energy does not necessarily lead to a proportionate increase in development. Getting energy access decisions wrong may lead to huge opportunity costs in terms of inappropriate spending, or delayed benefits.

Research funded by DFID is currently underway to understand the relationship between energy and development for both centralised and decentralised systems. Intuitively it seems likely that causality works in both directions between energy and growth, the classic chicken-and-egg problem. Planning energy systems in this context will require a deeper understanding of the linkages between energy and other growth factors. Energy policy needs to come out of its silo and work towards building coordinated strategies that tackle the SDGs in a holistic way.

Written by William Blyth, SAMI Associate.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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The Airport of the Future

November 2, 2016

This blog is based on the write-up on the Airport of the Future, which can be found on

Helios is a consultancy specialising in air travel – air traffic management (ATM) and airports. Their offices have a grandstand view of the Farnborough Airshow, and they kicked-off their 2016 Farnborough Airshow Seminar Week with a highly interactive seminar, challenging an invited group of senior professionals to consider the case of ‘airports in the 2050s’.

The seminar used scenario planning techniques, which encouraged the guests to challenge themselves, and their usual way of thinking. So, although the air show outside suffered disruption from torrential rain, inside we were using the example set by mother nature to consider how airports of the future might respond to unpredicted and challenging natural, man-made and geo-political circumstances.

The day was led and facilitated by two very different, yet complementary, experts in the field: Mike Pearson, Helios Sales and Marketing Director, has spent much of his career advising on major airport developments around the world and Gill Ringland, CEO and Fellow of SAMI Consulting, is a renowned expert, trainer and best-selling author on scenario planning and strategy.

Scenario planning is a powerful methodology that does not focus on a single ‘right’ answer, which is almost certain never to emerge. Rather, it explores several alternative futures. It is all too easy to fall into the mind-set of expecting more of the same and then doing nothing about it. This exercise demonstrated how scenarios can help us to better develop and future-proof strategies, identify early indicators of change and provide focus for long-term planning.

In this case, we set three broad scenarios with differing political models, global responses to new technology and even the hypothetical re-emergence of powerful city-states, all to explore how airports might evolve in the future.

As you might imagine, we enjoyed thoughtful, robust and wide-ranging interaction and interventions from all of our guests, who contributed fascinating observations to enrich each scenario. Here are just a few of the interesting threads from the day which resulted from consideration of how airports might evolve in different global scenarios:

  • The key to unlocking additional capacity in Europe is as much about a strong transport strategy with clear political backing, as it is about technology advances and physical infrastructure.
  • Continued developments in aircraft and ATM technology help to unlock new traffic patterns and flows, affecting airline models, passenger experience and opening up new opportunities for secondary airports.
  • Regional airports may face the threat of less government funding as political priorities shift and private investment in airports increases…’uberisation’ of transport, reductions in staff, increased virtualisation, charters and co-location with technological and industrial partners are all potential ways they can respond to make their business more viable.

A successful business model today will not necessarily be as effective in the future, as the competitive landscape and business environment changes. Bringing in an external perspective can prove particularly useful when applying scenario planning techniques and allow the group to expand its thinking and understand the drivers of change.

Written by Gill Ringland, SAMI Fellow and CEO.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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What Does Brexit Mean For Law Firms?

October 26, 2016

Gill Ringland was invited by a forum of Financial Directors from the top 100 law firms to lead a discussion on Brexit at their recent meeting held in Birmingham. The four tables of attendees first chose different areas of law to focus on: Corporate, Private Clients, Real Estate and Data Protection. Gill then explained the Three Horizons methodology and the concept of scenarios.

3-horizonsThe groups were then invited to consider the three different scenarios of the UK’s relationship with the future EU that we’ve discussed in this blog previously – being similar to the relationships to the USA that Canada, Mexico and Cuba in 2000 had. In effect these are on a continuum of friendly, through wary to distant.

All four groups identified short term uncertainty as affecting decision-making in all three scenarios – a potential opportunity for law firms.

CanadaThe Canada scenario was thought to affect location of HQ’s in the Corporate sector and the rate of investment and M&A, and over time impact supply chains. Cross-border tax issues also affected private clients, with real estate being affected by exchange rates and the movement of labour. There were concerns over different layers of data protection regulation and the impact on the “safe harbour” rule, but in this scenario a convergence of regulation over the long-term was expected.

In the Mexico scenario, however, law firms needed to demonstrate expertise in Mexicoboth EU and UK data protection regulation, and were likely to have to open offices in the EU. High-flier private clients might themselves move – say to Dublin – as residency issues arise and so law firms might need to follow. Concerns about the break-up of the UK become stronger in this scenario. The Corporate sector would face currency and supply chain issues and may start to substitute markets, looking to do new things with new partners.

The Cuban scCubaenario is a more extreme version of Mexico, with higher property prices, returning Britons, and changes in business culture leading to a more buccaneering approach, but with dangers of a brain drain. Private clients may be concerned about finding opportunities to avoid red tape and compare tax regimes, but non-doms may be looking for an exit strategy. Data protection regulation could be less onerous and more flexible, though may need to converge with those of new trading partners like Australia, India and China – law firms would need to build expertise in those regimes.

There was a general discussion about the effect of uncertainty. The idea of planning for the worst case, regarding others as upsides, was rejected because of the danger of it becoming a self-fulfilling prophesy by inhibiting investment. The need was for flexible, adaptable, multi-layered approaches.   Law firms should stay closer to their clients to track their attitudes as change emerged. This in itself would provide an opportunity to engage with them and offer a wider range of services. Gill gave the example of Allen & Overy who had used a scenario planning exercise as a way of engaging at more senior levels with their clients.

In all the scenarios it would be advantageous to strengthen global contacts, look at ways of cross-selling and actively seek out new opportunities, rather than waiting to see what happened. New technology should be leveraged and, with the onset of AI replacing even non-routine tasks (as described by Susskind), firms should look to make a wider use of their talents of empathy and understanding.

Written by Huw Williams, SAMI Principal.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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