Earlier this month, the Financial Conduct Authority (“FCA”) released their findings based on reviews of approaches by firms to fair value assessments under the new Consumer Duty which will be enforced on 31 July 2023. The Consumer Duty will set higher and clearer standards of consumer protection across financial services and require firms to act to deliver good outcomes for customers. It also requires firms to understand the fair value rules, how these apply to their products and services and assessing the benefits to the consumer to ensure that the price paid is representative of the overall benefits to the consumer.

Consumer Duty consists of a new high-level Principle, Principle 12, three cross-cutting rules, and four customer outcomes.  Principle 12 requires that a firm should “act to deliver good outcomes for retail customers”.

Whilst the results of the assessment do not introduce new requirements on firms, it provides suggested areas of focus.  The FCA referenced good practice,provided ‘positive examples’ and included the ’areas for improvement’ that firms should focus on to improve its approach to meet the expectations under the Consumer Duty once it is enforced.  Overall, the FCA identified four key outcomes which firms need to assess and deliver including price and value.

The FCA stated that the reason for their review was to understand how firms, in different sectors, are implementing the price and value requirements, and to ensure that the FCA’s internal supervisory and regulatory approaches to fair value reflect industry thinking.

The review itself

The FCA review consisted of a small sample of 14 fair value assessment frameworks during January and February 2023. They added that the sample was not representative and had asked a range of mainly large firms within four portfolios (retail banking, consumer investments, payments and digital assets, and consumer finance) to provide their frameworks.

According to the FCA, larger firms’ fair value frameworks and assessments may understandably be more detailed than those for smaller firms, but many of their observations will be relevant to the wider population of regulated firms. The review did not cover more detailed documents, such as assessments of individual products and services.

The FCA assessed fair value frameworks against the following five criteria:

·       Understanding of fair value rules – how clearly the fair value assessment defines fair value and how it applies to their products. 

·       Assessing value – how costs and benefits to consumers, including non-financial costs and benefits, have been considered. 

·       Considering contextual factors – how the firm has considered broader contextual factors relevant to value. 

·       Assessing differential outcomes – approaches to assessing the range of consumer outcomes such as differential pricing, and outcomes for vulnerable consumers. 

·       Data and governance – the approach to measuring and monitoring fair value using data, and how a firm’s governance arrangements operate. 

Summarised findings of the review

According to the FCA, “Many firms are making substantial efforts in implementing the Duty.  Overall, the frameworks suggested that firms had carefully considered both our [FCA’s] price and value requirements and the shift in focus to consumer outcomes. Given our [FCA’s] price and value rules are outcome-focused rather than prescriptive, there were understandably considerable differences in firms’ approaches”. The FCA did point out that, in some cases, they had questions about the effectiveness of how certain firms’frameworks would work in practice. This suggested that some firms would have more work to do to meet the required price and value outcome rules. 

The FCA have identified four key areas for further consideration by firms:

·       Collecting and monitoring evidence which demonstrates that products and services represent fair value.

·       Clear oversight and accountability of the necessary remedial actions if they do not provide fair value. 

·       Where relevant, ensuring sufficient analysis of the distribution of outcomes across groups of consumers in the target market, beyond broad averages, to demonstrate how each group receives fair value.

·       Summarising and presenting fair value assessments in a way that enables decision-makers to robustly discuss whether the product or service represents fair value, such as by being clear on any limitations in the analysis or evidence.  

Additional expectations from firms

According to the FCA, firms must undertake fair value assessments as a way of demonstrating if the price a consumer pays for a product or service is reasonable compared to the overall benefits they can expect to receive, by delivering and assessing specific outcomes under the Consumer Duty, including price and value.

Therefore, to assess if a product or service provides value, firms must at least consider the following:

·       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).  

·       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 added that firms should also consider a range of additional factors in demonstrating that the price paid is reasonable compared to the benefits,including the costs firms incur to manufacture and/or distribute the product or service, the market rates and charges for comparable products or services, the price and benefit of other products in their portfolio, and any accrued costs and/or benefits for existing or closed products. Firms also have discretion to decide the additional factors which are used in their value assessments.

Although the Consumer Duty does not currently apply to crypto asset firms, it would incumbent on crypto firms to prepare in readiness for when the Consumer Duty will apply.

The published review from the FCA can be viewed via the following link:

https://www.fca.org.uk/publications/good-and-poor-practice/consumer-duty-findings-our-review-fair-value-frameworks

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