FCA Consumer Duty Outcome: Price and value

The FCA’s latest reflection on fair value frameworks discussing firms’ progress to date is the latest development in a series of steps from the FCA to aid firms with the successful implementation of the Consumer Duty’s outcomes, especially by taking into account the fast approach deadline for the implementation of the consumer duty for open product/services in just over 10 weeks, on 31 July 2023.

Consumer Duty – findings from the FCA’s review of fair value frameworks

What is the discussion about?

The FCA’s latest reflection on fair value frameworks discussing firms’ progress to date is the latest development in a series of steps from the FCA to aid firms with the successful implementation of the Consumer Duty’s outcomes, especially by taking into account the fast approach deadline for the implementation of the consumer duty for open product/services in just over 10 weeks, on 31 July 2023. 

This publication follows on from the FCA’s Dear CEO letter setting out its priorities for Payment Firms (published in March 2023) and another FCA Dear CEO letter on the implementation of the Consumer Duty for payment firms (published in February 2023).

Against this backdrop, on 10 May 2023 the FCA shared its observations from its review of fair value assessment frameworks amongst a sample of 14 firms. Rather than using a representative sample, the FCA’s focus had been put on large firms operating within four portfolios (i.e. retail banking, consumer investments, payments and digital assets, and consumer finance). Even though larger firms’ fair value frameworks and assessments may be more detailed than those for smaller firms, the FCA had been hopeful that many of the FCA’s findings would also be relevant for smaller firms as well.

The FCA have provided general indicators of what demonstrates good practice whilst also highlighting certain areas of improvement for firms in their approach to ascertain how effective a firm’s framework would be in practice. Sheldon Mills, Executive Director of Consumers and Competition of the FCA identified that firms were not considering the outcomes for different groups of consumers and therefore there was a risk that certain categories of customers, such as those on low incomes or in vulnerable circumstances were receiving poor value. For example, such customers might not benefit from certain product features or might pay certain onerous charges such as late payment fees. This type of approach needs to be carefully considered by firms.

The aim of the fair value framework

The stated aim of the fair value framework is to enable firms to ensure the price the customer pays for a product or service is reasonable when compared to the overall benefits of the product or service.

What firms should consider in their assessment of the fair value of a product or service, specifically?

  • the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities
  • any limitations that are part of the product or service (e.g. limitations on scope of cover for insurance products), and
  • the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between customers and firms

 

The FCA assessment of firm’s fair value based on 5 criteria

The FCA have assessed fair value framework against the following five criteria:

1. Understanding of fair value rules and how this applies to the firm’s products
Firms who did well Firms who needed improvement
  • had a direct read across between the principles and practices in FG22/5 and identified their roles, including responsibilities under PRIN 2A.4.
  • should have provided evidence of fair value rather than relying on unevidenced conceptions of their business model or ethos as fair value.
  • should have considered how they could provide evidence for their views.

 

2. Assessing value – how costs and benefits to consumers, including non-financial costs and benefits, have been considered.
Firms who did well Firms who needed improvement
  • set out a broad view of the overall costs to the consumer and the benefits the consumer could expect to receive.
  • üone firm included an explanation of the value of the parts within a bundle and stated that the price should not be higher than the constitute parts unless there was greater value to the consumer from the bundle.
  • had a general assessment of fair value which would apply to a wide range of products and services and needed to consider further how the approach could be adapted to assess fair value across the different sectors.
  • in addition, some firms did not make reference to a firms’ profit margins.
  • other firms did not consider non-financial costs and benefits a customer would expect to pay or receive such as time and effort.

 

3. Considering broader contextual factors relevant to value.
Firms who did well Firms who needed improvement
  • showed a wider understanding of the fair value of the products and services with the other outcomes and how changes in the market may affect their fair value assessment of their products and services.
  • many firms also considered customers behavioural biases such as instant gratification which might result in poor value.
  • did not have a broad understanding of how contextual factors might impact their fair value.
  • some firms only considered whether the financial value the customer received was positive and not a critical assessment of the fairness of the pricing structure.
  • some firms considered they needed further information from firms in the distribution chain to properly assess their value
4. Assessing differential outcomes
(e.g. differential pricing and outcomes for vulnerable consumers)
Firms who did well Firms who needed improvement
  • demonstrated differential outcomes for customers in different situations such as some consumers being at risk of paying higher fees and charges.
  • some frameworks provided a tailored analysis for consumers with characteristics of vulnerability.
  • some firms considered service level cross-subsidies where some consumers pay higher prices or generate higher profits and considered whether these products provide fair value.
  • relied on average outcomes rather than analysis to understand the full distribution outcome
  • some firms’ assessment showed differential pricing between groups of consumers but did not demonstrate how each group of customers receive fair value

 

5. Data and governance
(approach to measuring and monitoring fair value using data, and how a firm’s governance arrangements operate)
Firms who did well Firms who needed improvement
  • set out data-led plans to monitor and review customer outcomes to allow sufficient challenge and discussion and most included clear timelines on when to conduct these assessments
  • some firms included names owners for any rectification process that may follow as a result, which could also trigger the appropriate level of seniority.
  • did not outline how they would monitor fair value or what data they would use or how they would address data gaps.other firms failed to provide clear remediation steps (albeit remediation steps were outside of this FCA review and so may have been set out in other documents).

 

Next steps

The FCA is expected to continue supporting firms’ embedding activities in the run-up to, and beyond, the July 2023 implementation deadline for new and existing products, in particular by:

  • giving to all the firms involved in the review feedback on its findings.
  • monitoring the progress firms are making in embedding the duty.
  • reviewing the findings of a survey of 1100 firms to better understand the progress small firms are making with different aspects of the duty.
  • making further publications and hosting further regional in-person events for specific groups of small and medium-sized firms.
  • continuing monitoring firms’ approach to ensure customers receive fair value.

Our Payment Services Regulatory team will be monitoring next steps and shall keep you up-to-speed with the latest developments re the implementation of the Consumer Duty for UK payment firms.

Co-authors: Gavin Punia, Finance & Financial Regulation Partner, London, [email protected], Nassos Kalliris, Finance & Financial Regulation Associate, London, [email protected], Melissa Daley, Finance & Financial Regulation Associate, Knowledge Lawyer, London, [email protected]

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