The latest guidance from the regulator focuses on the price and value outcome.

By Nicola Higgs, Becky Critchley, and Charlotte Collins

On 18 September 2024, the FCA published further feedback on the Consumer Duty, setting out good and poor practices in relation to the price and value outcome. For many firms, this is the most challenging of the four outcomes, and so it is helpful that the FCA is sharing insights which firms can use to improve their implementation of the Duty. Analysing the value different customers are deriving from a particular product, and ensuring that certain groups of customers are not receiving poor value, is a tricky exercise for firms, particularly those with fewer resources. Helpfully, the FCA acknowledges in its feedback that it does not expect smaller firms to apply the same resources to assessing fair value as larger firms, providing clarifications as to what might be a proportionate approach for a smaller firm to take.

Key Messages

The FCA sets out five key messages for firms to consider in light of its feedback:

1. Firms should take care not to consider the price and value outcome in isolation, but should consider outcomes under the Duty holistically.
2. Firms that have effectively identified target markets at a sufficiently granular level will find it easier to assess impacts on different customers, as customers inside the target market will be more likely to derive value from the product.
3. Firms need to be conscious of the impact of cross-subsidies, particularly on vulnerable customers.
4. Evidence used to support assertions made in fair value assessments should be proportionate to the size of the firm and complexity of the assessment.
5. Prompt action should be taken if fair value assessments show customers are at risk of not receiving fair value, and firms must monitor the results of any such action.

Key FCA Findings

The FCA’s insights have been gleaned from its work reviewing fair value assessments across the cash savings, guaranteed asset protection insurance, and platform cash markets. However, the regulator stresses that the findings will be relevant across sectors. Firms must carefully review these findings and make any necessary adjustments within their business.

Considering Outcomes Holistically

Firms are reminded to take a holistic approach to the Duty. The FCA considers that a product or service that does not meet any of the needs of the customer it is sold to, causes foreseeable harm, or frustrates their objectives, is unlikely to offer fair value to that customer, whatever the price. Consequently, firms need to consider the cumulative effect of different outcomes on the value of what customers receive.

Assessing Value

The FCA recommends that, when assessing fair value, firms should think critically about the ultimate customer outcomes, instead of simply seeking to justify their current approach to pricing. The FCA is clear that it expects firms to conduct separate fair value assessments if two products or services have significantly different features, or separate and distinct target markets. The FCA accepts that grouping products can sometimes be appropriate, but stresses that this should be done with careful consideration, for example by taking care to avoid the risk of an oversimplified analysis concealing that some groups of consumers are not receiving fair value.

The FCA cites as good practice a firm segmenting target markets, and identifying expected and unexpected behaviours for each segment. The firm then mapped the unexpected behaviours to potential risks of poor value and identified actions to mitigate these risks. The FCA expects firms to monitor products on a regular basis, identify whether the target market remains appropriate, and take action if the product is not being used as intended.

If products have different overall fees and charges depending on how the product or service is used, or how it is distributed, firms are expected to consider how best to assess the overall price. The FCA highlights the importance of supporting evidence and analysis. It also emphasises that charges do not represent fair value simply because they have been disclosed and agreed with the customer.

According to the FCA, firms also need to be able to substantiate claims about the benefits of their products, for example by using customer surveys. Simply stating that something is a benefit is not enough; firms need to evidence how customers use and value a particular benefit.

Firms are encouraged to consider using benchmarking and outlier analysis, although they should not only rely on benchmarking when assessing fair value. However, firms using these tools should ensure that they compare their products against a representative set, not only choosing products that are likely to result in a positive comparison. Similarly, firms should ensure they are comparing against products with similar features so as not to skew the results. The FCA acknowledges that smaller firms may use their judgement to benchmark against a relevant sample of products, as a full cross-market benchmarking exercise may not be practical.

The FCA warns that many firms are not defining the product group or target market at a sufficiently granular level. It stresses that products that have distinct features, fee structures, or yield different benefits need a separate fair value assessment drawing out the combination of price and benefit for each product and assessing its fair value. The FCA also highlights the importance of ensuring the target market is defined accurately to effectively scope out any customer groups not intended to use the product, or who are at risk of not receiving fair value from the product.

Differential Outcomes

Under the Consumer Duty, firms must assess whether any group of customers is experiencing different outcomes to others, including outcomes in relation to price and value. The FCA underscores that, while differential pricing is permitted, firms must ensure that each pricing group is receiving fair value. Good practices include breaking down the target market into segments for further analysis, and evaluating the cost of providing products and services relative to revenue for various groups of customers. The FCA highlights that firms need to be able to provide data and concrete evidence for their assessments. This might include, for example, digging down into which additional product services and features customers are using when assessing value.

The FCA emphasises that firms must consider outcomes for vulnerable customers, and how outcomes for these customers may differ. Including a special “flag” on accounts of vulnerable customers that all staff can see constitutes good practice, contrasted with many firms not having adequate processes to proactively identify vulnerable customers or relying on customers to self-report. Firms are reminded that customers may find it difficult to self-report, and are encouraged to consider their processes from the potentially vulnerable consumer’s perspective.

The FCA accepts that cross-subsidies can benefit competition and consumers overall. However, it expects firms using cross-subsidisation to consider the impact of this pricing strategy in detail. The FCA cites as a good example a firm undertaking a broad multi-product analysis to demonstrate that the firm’s product offerings and pricing strategies were aligned with the distinct needs and characteristics of different customer groups, and provide supporting evidence that more vulnerable customers were not disproportionately contributing to overall profits.

For smaller firms, the FCA suggests that one option to help understand differential outcomes would be to benchmark the value of the product overall in the market by comparing it against similar products, and then assess the risks that any groups of customers might be getting poor value based on complaints and enquiries they receive.

Considering Costs to the Firm

The FCA explains that incorporating cost and margin analysis with supporting evidence in a fair value assessment can provide necessary context to understand pricing decisions, although it is not required. However, the FCA emphasises that, if firms do choose to include cost analysis, this must be sufficiently clear and granular to enable the assessment of fair value to be undertaken, for example by fully explaining the basis for the cost figure. Further, if firms wish to justify a higher product cost based upon increased costs to the firm, the fair value assessment needs to include a clear rationale for this. Therefore, if firms do wish to cite firm costs as justification for product costs, they need to go into enough detail to explain the link, not just use generic statements about the cost to the firm. The FCA also acknowledges that cost analysis may not be suitable for smaller firms with simple product offerings.

Mitigating Actions

The FCA emphasises that prompt action should be identified and taken by firms if their analysis shows that consumers are not receiving fair value. Actions should be specific and measurable. Further, firms need to ensure that they assess the root causes of any issues so they understand what mitigating action will be most effective.

The FCA suggests that good practices include reducing or removing charges, or capping or waiving fees, if price and value concerns are identified. It also provides an example of a firm using transactional data to identify customers who were not using a product in line with its intended use. The firm actively nudged those customers with targeted communications to encourage them to switch to a more suitable product. The FCA stresses that, if customer communications are used as a mitigating action, it is critical these are targeted and monitored for effectiveness. An important component is telling customers what action they can take to receive better value.

Effective Governance

The FCA stresses that governance arrangements, including the annual board report and the role of the board champion, should be used to ensure senior-level challenge on whether fair value is being provided. Fair value assessments should provide sufficient management information to boards to help them assess whether the price and value outcome is being met.

The FCA cites as good practice having mature governance structures with committees that meet every month or quarter, comprised of senior stakeholders. Such committees should review the fair value assessment’s quality and conclusions alongside fees, service quality, target market appropriateness, and other relevant factors. The FCA also highlights the importance of having a robust product approval process involving the board. Further, firms need to ensure that any material issues identified in relation to fair value assessments are escalated to the board.

What Should Firms Do Now?

The FCA warns that it will take action against firms if it finds they are not making improvements in light of feedback shared by the regulator, or if their products and services are clear outliers in terms of price and value. While the FCA is taking a pragmatic approach to supervision and enforcement of the Consumer Duty, this is on the understanding that firms will be making their best efforts to comply. Firms will find lots to digest in this feedback, with a strong emphasis on firms ensuring that any analysis they conduct is sufficiently granular and backed up by concrete evidence. Firms should review the FCA’s feedback in detail, work out where they need to make improvements, and formulate a credible and timely plan for implementing them.