Consumer Duty: The Concept of Fair Value

The new Consumer Duty (“The Duty”) has been introduced by the FCA to ensure appropriate standards of care are provided to retail customers. The FCA published its final rules on the Duty in PS22/9 with additional guidance in FG22/5.

The Duty will create a 12th Principle, found within PRIN 2.1, the Consumer Principle. It requires firms to “act to deliver good outcomes for retail customers.” There are 4 outcomes the FCA wants to see improvement in. Products and Services, Consumer Understanding, Consumer Support, and the focus of this article – Price and Value.

It is no understatement that the new Consumer Duty will certainly rock the boat of many financial services firms, large and small. With the implementation plan deadline now passed, firms may be left scratching their heads on how to understand what the concept of Fair Value means for them and in turn how to demonstrate that. This article will unpack rules and guidance found in PRIN 2A.4 Consumer Duty: retail customer outcome on Price and Value.

Consumer Duty – The Concept of Fair Value

The FCA define value as the relationship between the amount paid by a retail customer for the product and the benefits they can reasonably expect to get from the product. A product or service is deemed to provide fair value where the amount paid for the product is reasonable, relative to the benefits of the product. This does not directly translate to lower prices meaning fair value and the same is true of the inverse statement – firms must find a balance.

It should be noted that in a recent Consumer Duty webinar held by the FCA, a particular emphasis on reasonability was made. The FCA also stressed that it is not in the business of setting prices for firms (at least not for the foreseeable future) although, it may be argued that this is the direction the FCA is headed. Firms must take a criteria-based reasonability approach when reviewing existing products and services and determining whether new products and services will also satisfy the outcome of Price and Value. As you will be aware, the Duty’s scope is far reaching and applies to all aspects of the distribution chain, meaning manufacturers, distributors, and firms will all need to be on the same page regarding the fair value of their products.

The FCA has made it clear that they will be working closely with the Financial Ombudsman Service during the implementation period and beyond, through the Wider Implications Framework. This is both to ensure that there is a consistent interpretation of the Duty, and to monitor the decisions they make from customer complaints about fees, charges, and inappropriate sales. Firms should therefore be aware that if the FCA do not pick up on poor value products and services directly, they will certainly be made aware of them through the Financial Ombudsman Service.

The Duty will clamp down on firms putting unreasonable exit charges on their products. By their very nature, they are designed to trap customers in products and services that they deem no longer suitable. These charges may cause foreseeable harm, do not support customers in fulfilling their financial objectives, and are therefore unlikely to comply with the Price and Value outcome. The onus will be on firms to demonstrate to the FCA that exit charges are reasonable in relation to the costs of terminating a contract.

Ascertaining whether the price of a product or service is detrimental to customers calls for a case-by-case assessment based on detailed data analysis. There are no specific pricing rules that can be applied at present. However, the FCA has equipped firms with guidance in the areas where there are no set instructions. Arguably, this less hands on approach could be seen as beneficial to firms as the overarching requirement is to prove why the products and services are worth the price paid. Struggling to do so in itself may be a strong indicator that products lack fair value.

The Value Assessment

Rules on the value assessment are outlined in PRIN 2A.4.8, making them essential for compliance with the Duty. To evidence compliance with the Price and Value outcome, firms must regularly undertake and clearly document their value assessment processes. Firms may wish to compile data derived from focus groups of customers or distributors. The aim of value assessments is for the firm to determine whether the product/service is providing fair value. If it is not, a firm may have to withdraw a product. In this case, firms will be expected to adequately manage the risks to existing customers and any foreseeable harm prevented for new customers.

A few aspects a firm must show consideration for in their assessments are:

  • The nature of the product, benefits, and quality
  • Limitations
  • Expected total price including:
  • Price paid at point of sale
  • Charges or fees incurred
  • Non-monetary costs such as time wasted
  • Market /internal rates for comparable products
  • Characteristics of vulnerability and the impact this may have on receiving fair value from the product

Where a product or service does not have any monetary or non-monetary cost to a consumer, the FCA would not expect firms to conduct value assessments. However, this does not disqualify free products or services from the scope of the Duty. Manufacturers will still be expected to show due consideration to fair value if customers are paying in non-financial terms e.g., associated fees and charges through the use of a consumer’s data. The Duty will not prevent firms from selling similar products with differing price points across various brands if there is still consideration for fair value.

What does Fair Value look like in Practice?

Example A: A firm charges servicing fees that differ based on the size of an investment. In this case, the fee charged will vary from consumer to consumer with some paying substantially more than others even though both types of consumers will receive similar benefits from the price paid.

In response to this, the firm conducts a value assessment in order to ascertain whether this price difference is reasonable relative to the benefit received between the consumer groups. Based on their data analysis of focus groups, the firm concludes that both groups are indeed receiving similar benefits and there are no discrepancies in the Price and Value.

Example B: A firm undertakes an existing products and services review and concludes that it must withdraw or make changes to a product that is has deemed no longer suitable for its target market based on lack of benefits received to the price paid by the consumer.

As a result, the firm anticipates the foreseeable harm this may pose to existing customers and communicates these changes to the consumer clearly and directly in a way that the consumer understands. In doing so, the firm also considers vulnerable customers who may require different forms of communication such as Braille. The firm also ensures that the changes made reflect fair value and mitigates risk for all groups of consumers in the target market.

In both examples, the firms have shown consideration for possible lack of fair value, and this is evidenced from the assessment carried out and shown to be reasonable. Notably, in the second example, compliance with the Price and Value outcome overlaps with the Products and Services and Consumer Understanding outcomes of the Duty.

To summarise, the focus of the Price and Value outcome is for firms to demonstrate to the FCA through assessments and data analysis of the target market, that there is a reasonable relationship between the price a consumer pays, and the benefits received. The satisfaction of the rest of the outcomes outlined in the Duty ensures that the product or service is likely to offer fair value. Therefore, firms should avoid approaching the outcomes individually and take a cohesive approach when considering fair value.

How can Complyport Help?

If this article has raised any questions about the new Consumer Duty rules, or you think your firm may require assistance, please contact Jan Hagen via jan.hagen@complyport.co.uk to book in a free consultation.

About Complyport

Complyport is a market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. Our vision is to be there for our clients every step of the way, helping them change, grow, and excel through expertise, insight, and innovation, and in so doing to become our clients’ most valued supplier and trusted advisor.

We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.

Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.

Day to day, we conduct audits and reviews of a firm’s products, processes, policies, and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Our clients tell us we live our values; we are driven, agile and collaborative.

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