Good Practice and Areas to Improve – Consumer Duty Price and Value

Introduction

On 18^th September 2024, the Financial Conduct Authority (“FCA”) set out an update to its initial observations of the Price and Value framework introduced by the Consumer Duty (the “Duty”) regulations. The update provided an overview of the key messages for firms following review of fair value assessment frameworks as well as setting out good and poor practice observations.

Within this article we will provide an overview of the good and poor practices observed by the FCA and we encourage firms to use this information to further enhance their own frameworks. For a high level summary of the key messages from the FCA’s initial review of Fair Value Assessment frameworks, please refer to our recent article here.

The Review

The results of the update provide a valuable insight into the FCA’s expectations of firms. The review focused primarily on three areas that the FCA has prioritised since the Duty came into force; these are areas with longstanding regulatory concerns and are as follows:

Cash Savings;
Guaranteed Asset Protection Insurance; and
Platform Cash.

However, it must be made clear that the findings of the review are relevant to all firms engaged in retail market business who must ensure that products offer fair value. The fair value assessment process is a key component in ensuring that the price for the customer is reasonable compared to the benefit received from the product. These assessments are valuable evidential information demonstrating compliance with obligations.

The FCA’s Guidance

The FCA has highlighted some good and poor practice examples for firms to consider when reviewing and improving their own frameworks to further align with the FCA’s expectations. These are spread across the above areas and include the following:

Good Practice

The selected examples provide an insight into the FCA’s expectations and areas for firms to consider. The good practice examples provided throughout the report should be used by firms to cross reference with their own price and value frameworks to ensure that they have appropriate systems in place to identify and provide clients with fair value. If a firm feels that its framework does not align with the presented good practice examples, consideration should be given regarding ways to adapt its framework to fall in line with the FCA’s expectations.

Areas for Improvement

Coupled with the good practice element of the report, the FCA has provided firms with areas to focus on regarding their own frameworks. The examples provided allow a targeted approach for firms to begin reviewing their developed frameworks and allow adjustments to be made with the feedback provided by the FCA. Such information being available leaves no firm with an excuse to not develop robust price and value assessment frameworks or maintain frameworks that may share characteristics with those poor practices identified.

Good Practice	Poor Practice
*Holistic Consideration across the Consumer Duty Outcomes*
Consideration of the Consumer Duty framework as a whole and not individual silos, establishing transparency, detailing pricing structures in simple language	Pricing structures being complex or opaque, diminishing consumer understanding and therefore providing poor outcomes Use of tiered pricing structures that see returns diminish as investment grows e.g. lower interest rates for higher savings deposit amount
*Assessing Value*
Mapping fair value against the individual product being offered and the requirement of the target market identified Breaking down individual identified target markets into sub-groups based on customer objectives and needs e.g., savings account being divided into children, parents, maintenance savers, etc. Understanding the target market of a product may change over time. Firms could monitor products on a regular basis to ensure that established target market is appropriate Incorporating features of products into analysis to demonstrate fair value e.g., easy or flexible access bank accounts Utilising benchmarks of similar products against those offered by the Firm, allowing for objective comparison	Grouping product offerings together in the same fair value assessment, despite material differences Broadly defining target markets e.g., for insurance stating a target market is for “anyone who buys a car” Not being able to substantiate evidence of claimed benefits meaningfully within fair value analysis, e.g., ‘peace of mind’ brought through insurance Not recording or providing evidence of how holding multiple product types on offer provides value to the customer Comparing products against selective markets/products thereby showing their product in a better light
*Differential Outcomes*
Breaking down target market segments into groups and then applying analysis against the smaller segments to establish the likelihood of harm Analysing reasoning for customer charges, with action taken if identified value is not achieved without amendment Evaluating the cost of providing a product or service against the revenue groups of customers provide. This provides evidential information to support value being provided despite price differences Firms utilising systems to flag customer accounts showing signs of vulnerability allowing for additional provisions to be applied as required Utilising multi-product analysis to provide clearer explanation of how consumers receive fair value, showing the pricing aligns with the needs and characteristics of different customer groups	Not gathering data or evidential information relating to different customer outcomes and how these produce fair value Not having adequate processes to identify vulnerable customers in a proactive manner. These firms relied on self-reporting from customers Limiting the analysis phase and not considering how one of their products is priced may affect the costing of another offering
*Considering Costs to the Firm*
Utilisation of activity-based methods when assessing fixed costs, specifically observed within fund management, allowing an informed assessment of profitability variation between differing fund sizes Links between the amount charged to a customer against the cost of managing the customer’s financial activity e.g., higher amount of interest retained for higher activity accounts	Minimal analysis of key costs against the service provided to the client. Lack of documented analysis does not allow effective challenge from governing bodies Lack of explanation or evidential information regarding retention of fees or interest, e.g. retaining interest earned on cash-holding facilities to assist in platform costs, without providing explanation on what costs these will service
*Mitigating Actions*
Utilisation of transaction data to identify customers using products in a way that they are not intended, targeting said customers with communications to trigger a transfer to a more suitable product or realign their product usage Improvement of value propositions through reduction or removal of charges for products deemed to be too high relative to benefit offered or capping fees for long-term clients/waiving fees initially for unjustifiable total prices in relation to the product	Identifying customers receiving poor value but, when in communication with those clients, not offering actions the customer could take to receive better value, e.g., transfer to a different product type
*Effective Governance*
Utilising governance or committee structures to oversee and challenge fair value assessments Implementing robust product approval processes overseen by the governing body	Identifying material issues in price and value assessment but inability to demonstrate how this is escalated to the governing body Assigning responsibility to identify poor value on the customer instead of reviewing internally

Next Steps

Firms that are required to apply the Duty should analyse their frameworks against the good and poor practice information provided by the FCA. Firms should review their own frameworks regularly to strengthen them and to align with regulatory expectations. Firms should use this information akin to a lessons learned activity and make adjustments as required in a proportional manner.

How Complyport can help

As experienced regulatory Consultants, we can provide assistance to firm in understanding the Consumer Duty requirements and frameworks, establishing relevant polices and procedures. We offer tailored support to ensure compliance with the regulatory environment.

We provide support with:

Consumer Duty policy and procedure documentation;
Consumer Duty framework review;
Consumer Duty reports;
Compliance monitoring; and
Compliance Health Checks.

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Good Practice and Areas to Improve – Consumer Duty Price and Value

Introduction

The Review

The FCA’s Guidance

Good Practice

Areas for Improvement

Next Steps

How Complyport can help

COntact us for assistance

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