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FCA Update on Price and Value Outcome: Good and Poor Practice
In late September the FCA issued an update on firms’ implementation of the Consumer Duty. Bringing together insights gained by the regulator over the first year they have issued this guidance to help firms improve the way they conduct value assessments.
The key messages included:
Outcomes for the consumer duty should be considered holistically, meaning price and value cannot be considered in isolation to the other outcomes.
Understanding your target market is key to then being able to ascertain whether distinct groups of customers receive worse outcomes (including value) to other groups of customers.
The general view is that cross-subsidies should indicate a potential lack of value. Whilst the FCA does not prevent one product subsidising another, the regulator highlighted the importance of reviewing whether this situation could mean some customers are unfairly paying more.
Back up assertions made in value assessments with evidence, such as data.
Prompt action should be taken where it has been identified that customers are at risk of receiving poor value.
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The latter two points are not new and have been discussed in our articles for some time, however if you do want to read more, see the FCA’s feedback here.
Considering all outcomes when reviewing price and value
PRIN 2A.4.12G requires firms to review price and value against the cross-cutting rules and other outcomes. Those who understand the duty appreciate this logic, where a lack of value is present it is likely the customer is experiencing foreseeable harm, or the lack of value is caused by the manufacturer’s poor faith. Certainly, those customers will be less likely to be able to achieve their financial objectives.
Equally, it is clear that the other outcomes can impact value. For example, poor communications can result in customers accessing a product which does not meet their needs and could, therefore, be of poor value to them. Equally the customer service provision can add to the value received by customers or reduce it.
In this review, the FCA provide some useful examples of poor practices they have identified, one of which expresses this point very well: “Poor practice: In our cash savings work, we found accounts regressive interest rate tiering, with lower interest rates paid as balances grew, which has the effect of disadvantaging customers that maintain high cash balances. We recognise that offering higher, more competitive rates at lower balances can be an effective way of attracting savers to start saving funds.
However, in these cases, we found that the large majority of funds received lower rates. Had these accounts been inspected holistically with other outcomes in mind alongside this pricing structure, this would have suggested customers did not sufficiently understand the implications of the tiered rate, and/or were not initially offered savings products that better suited their needs, and/or were not sufficiently monitored and prompted to move to more appropriate accounts. We did not see sufficient evidence to indicate that the product was working effectively for customers, nor did we see mitigating actions to ensure good outcomes for consumers.”
Assessing Value
One of the most difficult elements of the duty is how to ‘assess value’. PRIN 2A.4.1R describes it as the amount paid by a customer and the benefits they can reasonably expect to receive. The FCA are looking for firms to critically analyse the amount they charge (remembering price can be monies paid, time or data) from the point of view of the customer.
To achieve this, it is helpful to group customers where the customer base, complexity, and risk of customer harm are sufficiently similar. This grouping then allows an understanding of the amount paid and whether this differs per group.
Identifying the target market correctly is highlighted as imperative to then being able to assess value with the following example cited: “Poor practice: We saw poor practice through very broad target market definitions. When identifying the target market, general insurance manufacturers must identify if there are groups of customers for whom the product or package would not provide the intended level of value. But some providers of GAP insurance defined their target market as anyone who buys a car. This is too generic. For example, the product may not be appropriate for drivers of older or lower valued vehicles given the very small proportion of customers who make a claim on the product, which, combined with a relatively low depreciation of such vehicles, would likely result in a low expected payout. GAP insurance firms also often failed to identify the needs, objectives, interests, and characteristics of the specified target market in their fair value assessments, which made it difficult to assess outcomes through the lens of a target customer.”
Other golden rules include:
Ensure value over the lifetime of the product is considered, for example by considering charges levied throughout the entire life cycle.
Consider benefits and limitations
Benchmarking is useful
Whether distinct groups of customers receive worse outcomes
In considering the value assessment and how it applies when manufacturers have different groups of retail customers in their target market for a product, they should have regard in particular to the following:
whether any retail customers who have characteristics of vulnerability may be less likely to receive fair value; and
whether the product provides fair value for each of the different groups of retail customers in the target market, including in circumstances where the pricing structure of the product involves different prices being charged to different groups of retail customers.
The following example brings this section to life: Poor practice: Poor practice observed included many firms not having adequate processes to proactively identify vulnerable customers. Relying solely on customers to self-report vulnerabilities can mean some characteristics of vulnerability are invisible to assessment, and customers would need to keep reporting vulnerabilities. Firms should have processes to proactively identify vulnerable consumers, as consumers themselves will experience barriers to effective identification and reporting. Individual consumers will not be able to undertake the analysis that firms would be able to about how vulnerable circumstances have the potential to impact their financial decisions, and may experience apprehension in reporting such circumstances. Firms should consider their processes from the potentially vulnerable consumer’s perspective.
Cross-subsidisation
Firstly, ensure the scope of the value assessment covers not only the specific product but any which are used to subsidise the product or vice-versa. The FCA go on to say “Cross-subsidy occurs when higher margins on some products that a firm sells compensate for lower margins or negative margins on other products in its portfolio. Depending on the circumstances, cross-subsidies can benefit competition and consumers overall. However, this is very dependent on the particular context and cross-subsidies can also increase the risk that some groups of consumers do not receive fair value or that vulnerable customers are disadvantaged.
In their fair value assessments, a firm may refer to such pricing strategies as a contextual factor to explain why their overall proposition provides fair value.”
The review does give us an opportunity to step back and check we have not fallen into any of the pitfalls cited and, with the good practice examples, identify ideas to bolster our assessments. Our template value assessment is very much in line with the requirements of the FCA, covering the expectations set in this review. It can be downloaded here.
To leave you, we will share the FCA’s words on what to do where a lack of value is identified: “In situations where there is a significant risk of consumers not receiving fair value, a firm should identify this risk and consider the appropriate mitigating actions. Depending on the nature and severity of the fair value concern, a firm may consider adjusting the core features of a product, ensuring there are alternatives available, effectively communicating with and supporting consumers so they are in the right products, and monitoring how these actions are cumulatively working together to ensure consumers are receiving fair value.”
I’m pleased to announce that my book, ‘A Practical Guide to the FCA’s Consumer Duty’ is now available to buy. You can do so by visiting: A Practical Guide to the Financial Conduct Authority (FCA) Consumer Duty: Amazon.co.uk: Bell, Robert: 9781916698444: Books
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