The FCA has reviewed the Consumer Duty fair value assessment frameworks (FVFs) of 14 mainly large firms and shared its findings on good practice and areas for improvement. Firms to which the price and value outcome of the Consumer Duty applies should take note of the FCA's approach to assessing FVFs and to the considerations it is expecting firms to include in their frameworks.
Under the Consumer Duty firms have to deliver and assess the price and value outcome. To do this – and to show that the price a consumer pays for a product or service is reasonable compared to the overall benefits they can expect to receive - firms need to carry out fair value assessments.
Areas for improvement
In its review of the FVFs the FCA identified 4 areas where firms may need to develop their frameworks further:
- Use of evidence – firms need to give consideration to the collection and monitoring of evidence that demonstrates that products represent fair value.
- Remedial action plans – firms need to have clear oversight and accountability of remedial action if products do not provide fair value.
- Analysis of outcomes data – firms which have different consumer groups in their target market for a product need to have sufficient analysis of the distribution of outcomes across the target market, beyond broad averages, to demonstrate how each group receives fair value.
- Enabling robust discussions around fair value by decision makers – firms should consider how fair value assessments can be presented in a way that facilitates thorough discussions around fair value by decision-makers, for example through use of summaries and with clear explanations of any limitations in the analysis or evidence.
The FCA's approach to fair value frameworks
In reaching these headline findings the FCA's reviewed the FVFs against five criteria and highlighted examples of good practice and areas where more work is required. This approach gives a strong indication of how the regulator will assess FVFs once the Consumer Duty is in force this summer, so firms should test their own FVFs against these principles:
1. Understanding of fair value rules – the FCA expects firms to have a clear understanding of fair value and how it applies to their products.
Firms should tie their FVF to the new rules and guidance around the price and value outcome. There should be direct read-across to the principles and fair value considerations set out in PRIN2A.4 and the FCA's Consumer Duty non-Handbook guidance.
High level or unsubstantiated arguments that a firm's business model or ethos is inherently fair will not cut the mustard – firms need to be able to evidence fairness. Competitive pricing of a product is of itself not enough to demonstrate that fair value is being delivered.
Manufacturer, co-manufacturer and distributor roles need to be clearly identified and the relevant Consumer Duty requirements applied to each.
2. Assessment of value – the FCA expects FVFs to demonstrate how costs and benefits to consumers, including non-financial costs and benefits, have been considered.
Non-financial costs cover, for example, time and effort to amend or cancel a product, and non-financial benefits include product quality or level of customer service. As for financial costs and benefits, profit margins of different products and services will likely be relevant to the fair value assessment. Where products are bundled or packaged the bundling itself needs also to be assessed for value.
If a firm provides a range of different products across different market sectors firms need to assess fair value across the different market sectors. A single, generalised universal template for all market sectors is unlikely to be sufficient.
3. Consideration of contextual factors – the FCA expects FVFs to show that broader contextual factors relevant to value have been considered.
Fair value extends beyond financial value received by the customer. A narrow, price-focused approach to fair value risks overlooking pockets of harm.
Contextual factors include market prices for similar products and services, or consumer characteristics in the target market. Firms should consider how behavioural biases can impact the way consumers purchase and use products and result in poor value. An understanding of the impact of behavioural biases better helps firm to demonstrate that they are not seeking to exploit those, in compliance with Consumer Duty requirements.
4. Assessing differential outcomes – the FCA expects FVFs to show approaches to assessing the range of consumer outcomes, such as differential pricing, and outcomes for vulnerable consumers.
Customers can be segmented in a range of ways for the purposes of assessing differential outcomes. Firms may, for example, assess the value received by back-book customers, consumers using different channels, subsets of consumers paying disproportionately high margins given the benefits they receive or subsets of consumers at risk of paying higher fees and charges.
The need for a tailored fair value analysis for customers with characteristics of vulnerability should be considered. This might include an analysis of the differing needs and objectives of vulnerable customer groups, and thus how costs and benefits would vary.
While the price and value outcome rules do not require all customers to be charged the same amount, or for the same level of profit to be generated from all customers, firms should consider whether it is appropriate to look at product cross-subsidies – where certain consumers pay higher prices or generate higher profit margins –when assessing fair value for different groups.
To be able to demonstrate fair value to different groups of customers firms' assessment frameworks need to include information which enables an understanding of a full distribution of outcomes; average outcomes will not be sufficient for this purpose. Even using group averages within segmented customer groups could mask pockets of poor value.
5. Data and governance – the FCA expects FVFs to show firms' approach to measuring and monitoring fair value using data, and how governance arrangements operate.
Firms have to monitor and review customer outcomes using appropriate data and must take remedial action where fair value is not being provided. FVFs should include plans, including clear timelines, to monitor and review outcomes using data, and should allow for challenge and discussion in decision-making around fair value. Review frequency should be addressed and may correspond to the expected lifetime of a product or expected renewal pattern.
FVFs should cover the rectification process, including named owners, where a product is identified as no longer providing fair value. It may be appropriate to include triggers- for example, movement in a particular data indicator - which prompt a fresh value assessment.
If using points ratings or traffic light type assessments firms need to make sure they are giving enough weight to the critical analysis around the ratings, how thresholds between the ratings are set, and whether decision-makers have sufficient information to be able to review and challenge the fair value assessment.
Firms should be wary of over reliance on market-level benchmarking and comparators information. These produce only a relative indicator of delivery of fair value and can mask fair value issues that exist in the wider market.
The review findings should be considered alongside the FCA's Finalised Guidance on the Consumer Duty and expectations set out in the regulator's portfolio letters on the implementation of the Consumer Duty.
With just over two months until the Consumer Duty rules kick in firms should consider the FCA's review findings and assess whether their own FVFs require further development or fine-tuning in order to meet the FCA's expectations.