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FCA Put Fair Value into Action
The Consumer Duty was advertised as a step-change in regulatory expectations, one where firms will have to examine the very foundations of their business to ensure they are aligned with the needs of customers, both culturally and practically. What we have seen from the FCA to date certainly backs this up, proving the duty is more than only words, or ‘TCF re-written’ as some have claimed.
One behaviour that really sets the Duty apart from TCF is the level of engagement we’ve seen from the FCA. Throughout the implementation period they have provided valuable feedback in the form of multi-firm reviews, including:
Review of Fair Value Frameworks: May 2023
Post-implementation Review: December 2023
Review of Implementation of the duty: February 2024
Insurance Multi-firm review of outcomes monitoring: June 2024
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The highlights from these reviews include:
Firms were not always focusing on the right areas to determine whether value is offered
Sweeping statements rather than measurable data were often used to declare value is provided without any evidence to support this
Need for oversight and accountability of the necessary remedial actions
It is important to ensure 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.
What is clear from this list is the focus the regulator has on value; this outcome has had considerably more attention than the others. The regulator has focused on value not only in their feedback but also in their regulatory activities taken to date.
On the same day the duty first came into effect (31 July 2023), the FCA released a 14 point action plan to ensure banks and building societies are passing on interest rate rises to savers appropriately, that they’re communicating with customers much more effectively, and offering them better savings rate deals (FCA sets out 14-point action plan on cash savings | FCA). This was quickly followed by a request for a copy of their value assessments and an update in December of the same year setting out requirements (FCA update on cash savings - December 2023 | FCA).
2024 has been no different, with the Motor industry taking quite a hit in relation to the selling of GAP insurance and discretionary commission arrangements. Technically the issue around commission arrangements was not the FCA’s action, but due to two upheld complaints by the Financial Ombudsman Service (FOS) which found such arrangements to be unfair. Championed by Martin Lewis, the findings have caused a deluge of complaints to be made to firms who profited from such arrangements – Barclays has taken the FOS to judicial review in order to challenge the validity of the decision, we will need to wait for the completion of the review before it will become clear where the industry stands. Nevertheless, it shows the intense scrutiny that fair value now receives.
The FCA required that most providers of GAP insurance paused sales whilst they dealt with what they saw as a lack of fair value; this pause has only recently been lifted. The issue arose as the regulator analysed data provided to it by the industry. This showed that only 6% of premiums received were paid out in claims; for general insurance that figure is usually closer to 60%. Additionally, it became apparent that commission to the seller of the insurance product often made up the majority of the fee. These two areas showed that consumers were not getting a product that was suitable for them (i.e. they were able to make a claim) or was not appropriate for them and were paying over the odds because the work completed by the seller could not justifiably represent more work than the insurer themselves. So what were customers paying for?
These examples demonstrate the level of thought we need to put in when deciphering whether our products provide fair value or not. We’re hosting a webinar on 16th September 2024 at 3:30 until 4:40 to cover this, the consumer duty board reports, and next steps. If you’re interested in joining email us at: robert.bell@rbcompliance.co.uk
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