Do the FCA's price and value expectations make sense?

The FCA's Consumer Duty industry engagement continues with the first of a series of FCA podcasts on the Consumer Duty in which the FCA's Head of Competition Ed Smith deals with the price and value outcome.

Price and value is one of the most difficult aspects of the Consumer Duty, one which many firms are wrestling with as part of their implementation programmes. In many ways the episode creates more questions than it answers.  

Too much information

The FCA stresses the importance of manufacturers and distributors co-operating.  One reason is so that manufacturers are given the information they need to make a value assessment - for each individual group of customers - in light of the likely overall charges to the end consumer (including those from distributors and advisors). 

There are real problems with this.

Manufacturers may find it difficult to get this information from distributors in practice (not to mention at times problematic from an antitrust perspective).  Each manufacturer may have numerous distributors.  Each distributor may have different fee structures.  And each fee structure may play out differently for different customer groups.

Not to mention that manufacturers cannot directly control the fees that distributors charge.

Does this mean in practice that manufacturers' value assessments sometimes will need to be done on a hypothetical basis, potentially based on broader industry data on distributors' fees?  This itself seems a challenging data aggregation exercise (Sisyphean, even - particularly if this aggregation is attempted on a customer group-by-group basis).

Do not compare yourself to others

The FCA's basic expectation is that each customer group should receive fair value.

This of course allows for differential pricing: the FCA says that it's fine, subject to meeting the above expectation.

Seems clear enough: for each product, do a value assessment for each customer group.

But we have detected the FCA starting to stray from this simplicity into murky waters:

• It's taking a 'relative' rather than 'absolute' approach to fair value.  What does this mean?
  • The FCA suggests that as part of your consideration of price drivers at the firm and market level, cross-subsidisation of products "might create unfairness between different groups of customers". 
  • If that's true, then every value assessment is affected by every other value assessment for each customer group across all of your firm's products and services. An unworkable plethora of permutations, not to mention being logically impossible (circular references anyone?)
  • One way to cut through this quagmire is just to assess whether you make substantially the same profit margins for all customer groups. Nope, that's unworkable: profit margins always change over time and indeed differing profit margins are important to a competitive market, including because loss-leading is an essential phase of launching any new product or service.
  • We think people would welcome clarification from the FCA that fair value should be assessed independently for each customer group.
• It is not allowing room for firms to set fee structures that reflect firms' own commercial constraints and/or achieve better product-market fit.
  • The FCA expects value assessments to address not just differential pricing (e.g. insurance premia, unsecured lending rates, or simply being prepared to pay more for certain product features) but also whether any customer groups may receive "substantially worse outcomes due to, say, differential pricing or due to outlier behaviours or different ways of using the product that might really incur substantial extra fees." In retail banking, for example, this might include fees for certain transaction types, or overdraft fees.
  • Is the FCA suggesting that, for example, my primary UK bank discontinue foreign transactions on my current account simply because accountholders would pay uncompetitive fees to my primary UK bank for those transactions compared to other UK providers?  But that product feature is important to me, just in case - it's up to me to use it responsibly.  (Not to mention that many of those other providers (a) aren't banks with deposit protection and (b) may not accept certain customers at risk of financial exclusion.)
  • We’d argue that the FCA shouldn't be focusing on "outlier behaviours" and "different ways of using the product".  After all, it's unavoidable: every product (including in financial services) can be misused.  Instead, the FCA should be focused on protecting vulnerable customers.  Viewed this way, everything gets clearer: the better your product design (the first outcome) and customer communications and support (the third and fourth outcomes) address vulnerability, the less of an issue it will be for your value assessments (the second outcome).

Just reason backwards

Finally, how are you supposed to divide your customers into groups?  

You see, the FCA isn't just asking firms to use customers' own financial characteristics (including of vulnerability) to draw dividing lines between them.  It's also asking firms to use the way that customers use the firm's product - those "outlier behaviours" again.

This opens the door to arguments that those that have suffered a certain loss should have been hived off into their own group from the very beginning of a firm's value assessment process.

Here, the hindsight bias one might argue is embedded in the FCA's outcomes-based approach come sharply into focus.  At least one thing can be said for this approach: it's nimble and adaptive, but that may come at the expense of regulatory clarity.