What is a Favoured Customer Clause?
Technically known as “Most Favoured Nation Clauses” (“MFNs”), favoured customer clauses are essentially an arrangement or agreement whereby a supplier agrees not to treat a customer less favourably than other customers. So for example, a supplier may agree with customer X that the price at which he sells the goods to X will be no higher than the price at which he sells to any other customer. Such a clause is obviously attractive to customers as it ensures they are on a level playing field with their competitors.
Whilst such clauses are often benign, in certain situations they can be considered to amount to a form of price-fixing, resulting in a breach of the competition regime.
Breaching of the competition regime
In November 2020, the Competition and Markets Authority imposed a fine of £17.9m in relation to the use of MFNs by the price comparison website Compare the Market in its agreements with a number of home insurance providers. The MFNs in question prevented the home insurance providers from quoting a lower price for their products on rival comparison websites.
Following a three-year long investigation, the CMA found that the use of MFNs by Compare the Market resulted in reduced price competition between both price comparison websites and between home insurance providers. Of particular relevance in this case was the fact that Compare the Market had a market share in excess of 50%.
As a result of the MFN, if an insurer was to offer a price reduction on one price comparison site, they would have to fund an equivalent reduction on Compare the Market; as a result, the insurers had little incentive to lower their prices. Further, rival price comparison sites were unable to compete on price with Compare the Market for quotes from the insurance providers and therefore had reduced incentives to lower their commission or to induce the insurers to offer them lower prices.
