On the 10 May 2023, the FCA published its findings from its review into firms’ approaches to fair value assessments under the new Consumer Duty.
In conducting its review, the FCA’s objective was to understand how firms in different sectors are implementing the price and value requirements, in a bid to ensure that the internal supervisory and regulatory approaches within the FCA reflect industry thinking.
Throughout the course of January – February 2023, the FCA looked at a sample of 14 fair value assessment frameworks. The sample was a range of mainly large firms and therefore was not representative of the financial services industry as a whole. The FCA acknowledged that these firms’ assessments were likely more detailed than those of smaller firms. The FCA intends to conduct a similar analysis of smaller firms in the near future.
The FCA’S findings::
The fair value frameworks were assessed against 5 criteria (set out below).
Overall, the FCA found that the frameworks they reviewed suggest that firms have carefully considered price and value requirements and the shift in focus to consumer outcomes. Understandably, there are differences in the approaches taken by each firm and in some cases, the FCA had questions as to how effective some of the frameworks would be in practice. Some firms therefore have more work to do to meet the FCA’s price and value outcomes.
Here is a summary of the FCA’s findings, which includes examples of good and bad practice identified against the criteria:
|| GOOD PRACTICE
|| BAD PRACTICE
|Understanding Fair Value
||Clearly setting out principles for how the firm will apply the concept of fair value generally and across product lines.
||Not giving enough consideration to the distinction between manufacturer and distributor.
|Identifying the role of manufacturer, co-manufacturer or distributor and demonstrating a clear understanding of their responsibilities.
||Providing a sufficiently broad view of the overall costs to the customer, including fees, charges, non-monetary costs, and potential distribution costs.
||Failing to create a template assessment applicable to products with different features and different target markets.
|Including guidance for the review or providing practical statements, questions, and challenges to make at different stages.
||Not referring to profit margins on different products and services.
|Clearly considering where bundling does, or does not, provide value to customers.
||Not considering non-financial costs and benefits.
|Considering Contextual Factors
||Considering the interaction between fair value and other elements of the Duty, such as products and services, consumer support and understanding outcomes.
||Not conducting critical assessments of the fairness of pricing structure.
|Good analysis of choice and the impact it has on value.
|Considering other products the consumer has with the firm, even when they are not sold as a bundle and how this impacts value.
||Not considering the need for information from other firms in the distribution chain and/or third parties in the assessment of fair value.
|Considering consumer behavioural biases, such as instant gratification or overweighting potential losses.
|Assessing Differential Outcomes
||Identifying a range of ways to segment customers to look for differential outcomes.
||Relying on the average outcome rather than the full range of outcomes.
|Tailoring the analysis of fair value for consumers with characteristics of vulnerability e.g. analysing how the needs and objectives of vulnerable customers affects cost benefits.
||Failing to demonstrate how each group of customers receives fair value.
|Data and Governance
||Data-led plans to monitor and review outcomes.
||Failing to identify the types of data needed to measure fair value.
|Clear timelines and rectifications processes, with named owners.
||Including remediation steps with little detail.
|Identifying triggers which may require a new assessment.
||Using red/amber/green ratings but not carrying out a critical analysis of the ratings, how thresholds are drawn and whether decision makers have sufficiently detailed information to review and challenge the assessment of fair value.
General Observations from the FCA
In summarising their findings, the FCA made the following general observations:
- The price and value outcome rules do not require firms to charge all customers the same amount or make the same amount of profit from all customers.
- The rules and guidance require firms to be able to demonstrate how each group of customers received fair value.
- Firms should consider how they are delivering fair value for their customer in absolute rather than relative terms where they are using market-level benchmarks or information on comparators within their assessments.
- Firms should consider where the simple approaches to fair value will overlook pockets of harm, particularly or firms with complex business models and offerings.
- Firms must give careful consideration to the roles of manufacturer and distributor.
Firms must ensure that they are ready for the July 2023 implementation deadline for new and existing products and services.
Some of the comments from the FCA suggest that the FCA expects firms to conduct a critical analysis and stress-testing of their implementation plans and frameworks, to ensure they are fit for the purpose of implementation of the new Consumer Duty.
The FCA will continue to monitor firms’ approach to ensuring consumers receive fair value and this will include future review of firms’ fair value assessments of specific products and services.