On the 10th May 2023, The Financial Conduct Authority (FCA) issued a warning to firms regarding the upcoming Consumer Duty deadline, which is less than 90 days away. Firms are being urged to ensure they are prepared for the 31st July deadline.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, emphasised that firms who ignore the Consumer Duty or pose the most harm can expect swift action from the FCA.
The FCA’s supervisory and enforcement approach will be proportionate to the harm or risk of harm to consumers, with a strong focus on outcomes, prioritising the most serious breaches and taking assertive action where evidence of harm or risk of harm is found. This may include interventions, investigations, and possible disciplinary sanctions.
Mills acknowledged the efforts made by financial services firms to implement the Duty and highlighted how it could enhance the competitiveness of the sector. The Consumer Duty, as intended by Parliament, aims to provide better protection for the 52 million financial services consumers in the UK, especially during challenging economic times. It will also encourage firms to innovate and compete to better serve customers.
When applied correctly, the Consumer Duty is expected to improve customer experiences by ensuring they receive understandable communications, products and services that meet their needs and offer fair value and timely customer support.
To assist firms in meeting their obligations, the FCA is sharing the findings from its review of fair value assessment frameworks. The review identified good practices and areas requiring further consideration. Firms should focus on collecting evidence that demonstrates products represent fair value and maintaining clear oversight of actions to be taken if products do not provide fair value.
Mills concluded that given the current cost of living squeeze, it is crucial for consumers to receive fair value, and this emphasis on fair value is expected to enhance the competitiveness of the industry as firms strive to attract and retain customers by offering the best possible value.
Consumer Duty: Findings from the FCA’s Review of Fair Value Frameworks
On the 10th of May 2023, the FCA published its observations after reviewing fourteen firms’ fair value assessment frameworks. As stated in FG22/5, to assess if a product or service provides value, firms must consider at least 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 the 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 the customer and the firm.
Firms may also consider a range of additional factors in demonstrating that the price paid is reasonable compared to the benefits. Firms have discretion to decide any additional factors they use in their value assessments.
When assessing fair value frameworks, the FCA considers the following five criteria:
Understanding of Fair Value Rules
Good practice
- Establishment of principles for how the firm would apply the concept of fair value both generally and across product line,; and
- Good understanding of the different in-scope roles (i.e. manufacturer, co-manufacturer or distributor), and acknowledgement of their respective responsibilities.
Areas for improvement
- Reliance on high-level or unevidenced arguments that their business models or ethos are inherently fair value, and
- Failure to consider the distinction between manufacturers and distributors, and the relevant requirements that apply.
Assessing Value
Good practice
- Assessment of the benefits consumers can expect to receive,
- Provision of a broad view of the overall costs to the customer, including both monetary and non-monetary costs,
- Undertaking product-level value assessments,
- Clear discussion of how to price products sold as a package or bundle and assessment of whether bundling provides value to consumers, and
- Consideration of how the firm would treat and regard any information received.
Areas for improvement
- Lack of a multidisciplinary template when firms are active across several markets. Firms that provide a wide range of products and services across different market sectors may need to consider further how they adapt their approach to assessing fair value across these different market sectors, and
- Failure to consider the types of non-financial costs and benefits that consumers may reasonably expect to pay or receive.
Considered Contextual Factors
Good practice
- Consideration of the interaction between fair value and other elements of the Duty such as the products and services, consumer support and consumer understanding outcomes,
- Analysis around changes in the market and customer choice – how these affect value, and
- Consideration of consumers’ behavioural biases, such as instant gratification or overweighting potential losses, and how poor value may result.
Areas for improvement
- Failure to consider broader contextual factors or their impact on fair value (e.g. critical assessment of the fairness of their pricing structure). This consideration is particularly expected from large firms or those with complex business models and offerings, and
- Failure to understand whether information is needed from other firms in the distribution chain and/or third parties to properly assess fair value.
Assessing Differential Outcomes
Good practice
- Review of differential outcomes for customers and demonstration of a range of mechanisms to segment customers,
- Tailored analysis of fair value for consumers with characteristics of vulnerability, and
- Consideration of product or service-level cross-subsidies, where some consumers pay higher prices or generate higher profit margins and the factors to analyse when reviewing whether these products or services offer fair value.
Areas for improvement
- Reliance on average outcomes rather than analysis to understand the full distribution of outcomes. Group averages could disguise outliers or pockets of poor value, and
- Failure to demonstrate how differentiated groups of customers receive fair value.
Data and Governance
Good practice
- Implementation of appropriate data-led plans to monitor and review customer outcomes and allow sufficient challenge and discussion in the firm’s decision-making process, and
- Establishment of clear rectification processes that must be followed if a product is identified not to provide fair value.
Areas for improvement
- Failure to address data gaps or appropriate selection of data. This way, firms are not able to demonstrate that their products and services are of value to different groups of consumers,
- Failure to give sufficient weight to critical analysis around the ratings and assessment of fair value, and
- Failure to consider how fair value is delivered for customers in absolute rather than just relative terms.
How can Complyport help?
With less than three months until the Duty comes into force, it is imperative that firms to which the Duty applies are prepared in order to mitigate fines and reputational damage.
Discover the comprehensive range of services provided by Complyport, designed to guide and support firms throughout their Consumer Duty Implementation journey.
Our offerings include:
- Online Implementation Readiness Assessment:
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- Utilise our user-friendly online questionnaires to demonstrate consideration for Consumer Duty and identify gaps and areas for improvement. This assessment serves as a foundation for developing an effective implementation plan.
2. Consumer Duty Service package:
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- Benefit from a holistic package that encompasses various elements, such as:
- Diagnostic assessment to determine the applicability of Consumer Duty.
- Report Templates to streamline your documentation process.
- Working Papers and relevant rules to ensure compliance.
- Choose from our suite of meticulously designed policy templates*, including:
- Product Assessment Policy
- Consumer Duty Working Papers (client version)
- Consumer Duty Monitoring (client version)
- Fair Value Assessment Policy
- Consumer Duty Diagnostic Assessment
- Consumer Duty Annual Report
- Benefit from a holistic package that encompasses various elements, such as:
*Please note that policy templates can be customised for an additional fee.
3. Consultancy Services:
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- Access contracted and ad hoc consultancy support, both pre and post-implementation deadline. Our experts will assist you with regulation interpretation and address any personal queries, providing you with peace of mind throughout the process.
Partner with Complyport to navigate the complexities of Consumer Duty Implementation seamlessly. Our tailored solutions and expert guidance will empower your firm to meet regulatory requirements effectively. Contact Jan Hagen via email at jan.hagen@complyport.co.uk to book a free consultation.
