Fair value in the FCA's Consumer Duty crosshairs

In his 'Investing in outcomes' speech, Nikhil Rathi, FCA Chief Executive, delivered two clear messages about the regulator's areas of focus when it comes to the Consumer Duty: the FCA isn't targeting technical breaches where firms have made reasonable efforts to address concerns, and the regulator is keeping a close eye on fair value in the cash savings markets and certain insurance products. While there isn't anything particularly new in these key messages, they reinforce the FCA's signposted approach to the supervision and enforcement of the Consumer Duty. In this piece we look at the messages from the regulator and what firms should do to best ensure they are out of the FCA's crosshairs.

Pragmatic enforcement

The FCA is not looking to go after technical breaches. Firms that show continuing commitment to complying with the Duty rules and guidance and to embedding the Duty in their culture and at board level but aren't quite there yet on all aspects, or that have exposed poor customer outcomes and are working hard to address those and mitigate customer harm, can take some comfort from this. The regulator will look favourably on firms that have made mistakes but have taken reasonable steps to identify and proactively address concerns.

Instead, and mirroring the prioritisation approach recommended to firms in their Consumer Duty implementation, the FCA is prioritising and targeting the areas with the greatest harms to consumers. Two of those areas, in the FCA's view, are in the cash savings markets and insurance products such as GAP insurance and premium finance. These are areas that impact large numbers of customers and so the potential scope for customer harm is great.

There were no real surprises in these two areas being called out last week. The FCA has been signposting these areas of concern (against the Consumer Duty backdrop) over the last couple of years through its cash savings market review conducted amid concerns that savers were not getting good deals on their savings accounts rates despite UK base rate increases, and FCA Director of Insurance, Matt Brewis' statement last September that the FCA's call for action on GAP insurance was "an early signal" of the work the regulator would be doing under the Consumer Duty. And at a time of higher cost of living pressures the regulator's focus on failings around fair value is also not surprising.

Focus on fair value

The FCA's price and value outcome requires firms to be able 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. Price is, therefore, a key element of fair value. The FCA, however, is not a price regulator, and reiterated in last week's speech that the fair value outcome under the Consumer Duty is not a trojan horse for price regulation. The FCA can, however, manoeuvre pricing which cannot be justified under Consumer Duty standards. It did so on the day the Consumer Duty came into force last year, when it set an action plan to ensure banks and building societies were passing on interest rates to savers appropriately and offering better savings rate deals. Firms had to be able to show how their low savings rates offered fair value under the Consumer Duty or face FCA action. The market moved in response.

The FCA can also flex its Consumer Duty muscles to have products suspended where the regulator has concerns around fair value. GAP insurance, typically sold alongside car finance, is a case in point. Concerned that GAP insurance products (which are also subject to PROD 4 rules) were failing to provide fair value to some consumers (on average only 6% of premiums were paid out in claims and up to 70% of premiums were paid in commission to distributors), in September last year the FCA asked GAP insurance product manufacturers to prove fair value. Dissatisfied with responses a pause in GAP insurance sales has been agreed with the affected firms, which have also committed to make changes to their GAP products to provide better value for customers, in line with FCA rules.

What firms should take from the FCA's latest Consumer Duty messaging

There are two broad takeaways from Nikhil Rathi's speech – first, the FCA's expectations of firms, and, second, what firms can expect of the FCA in its approach to the Consumer Duty.

The FCA's expectations of firms: the FCA recognises that embedding the Consumer Duty is an evolutionary process. It is not seeking to trip up firms that are working hard to improve outcomes for customers. What the FCA does expect is for firms to be proactive around Consumer Duty issues and concerns. Firms that haven't got it right first time should proactively remediate and not wait for FCA intervention. Where firms' fair value assessments are showing poor customer outcomes, for example, firms should consider withdrawing or suspending the product while remediation takes place. Self-correction should be an output of embedded Consumer Duty culture within firms.

What firms can expect from the FCA: the FCA has used, and can be expected to continue to use, Dear CEO letters to guide firms' Consumer Duty compliance focus and to signal areas of potential concern to the regulator. Firms should review their products and processes carefully in the light of the areas of concern highlighted in those letters. As seen in the context of GAP insurance, firms can expect the FCA to intervene more firmly where firms' responsiveness to the regulator's concerns is lacking.

More widely, firms can expect the FCA to continue to target areas which fail to deliver good outcomes to large numbers of customers. Against a higher cost of living backdrop, firms can expect fair value to be a particular area of the regulator's focus. The FCA has previously telegraphed various areas of concern, including the fairness of (as well as delays in) insurance claims and fair value in the second charge mortgage market (focusing on brokers' and lenders' fees). Firms should expect further challenges from the regulator around the fair value of their retail products and services as the FCA continues to demand the higher standards and good customer outcomes required by the Consumer Duty.