Further feedback: The FCA turns its attention to Consumer Duty value assessment frameworks

The FCA has published feedback on a sample of firms’ fair value assessment frameworks. FCA Executive Director, Consumers and Competition, Sheldon Mills has also given a speech in which he reflects on some of its findings.

The FCA looked at frameworks from just 14 (mainly large) firms within four portfolios (retail banking, consumer investments, payments and digital assets, and consumer finance). This only scratches the surface of the range of approaches being taken across the industry - the FCA itself admits that frameworks for larger firms will necessarily be more detailed than those for smaller firms.

The FCA stresses that firms must tailor their frameworks to their business, products and customer base, however, the feedback does contain valuable insight into the criteria and approach firms should consider adopting.

The feedback sets out five key targets for an effective assessment of value framework. These are:

1. A clear understanding of what fair value looks like generally and across product lines.
   1. This includes incorporating a direct read across to FCA Guidance and a clear understanding by firms of their role in the distribution chain (manufacturer, distributor etc)
2. An effective approach to assessing value.
   1. Frameworks should give a reasonable view of how to assess the benefits customers receive, including practical statements, questions, or challenges to guide the reviewer throughout the process. Bundling is called out as an area where firms need to develop their understanding of when this does (and does not) result in products offering fair value.
   2. There should also be a clear procedure for requesting, considering and reviewing information received from other firms (eg manufacturers) and a mechanism for explicit consideration of profit margin and non-financial costs.
3. Consideration of contextual factors
   1. Frameworks should deliver a critical assessment of the fairness of a firm’s pricing structure, including a clear understanding of how (and what) changes in the market and other external factors (such as holding other products and services with the firm) might impact the value of a product.
   2. There should also be a recognition of how behavioural bias might impact on the way in which a customer accesses or uses a product, and therefore ultimate value they receive (eg a desire for instant gratification or a tendence towards overweighting potential losses).
4. An assessment of differential outcomes
   1. The FCA is clear that assessing value simply at target market / average customer level will not be sufficient. Frameworks should consider value from the perspectives of those who access a product through particular channels, or subsets of customer paying higher margins or higher fees and charges. Firms' assessment should be detailed enough to demonstrate whether different groups within a target market are receiving value and be specific enough to highlight any instances of unfair value.
   2. In assessing value for customers with a vulnerability, firms need to understand both the characteristics of vulnerability likely to be present within the particular target market, how their needs/objectives might differ and the impact this might have on value.
   3. Frameworks should have space for considering the impact of cross-subsidies and differential pricing on value, leading to an explanation of how affected customers are receiving fair value in this context.
5. Data, monitoring, oversight and accountability
   1. Frameworks should have clear plans for collecting data to monitor / review outcomes and well thought out governance around assessments, to include:
      • Timeframes for initial assessments and sensible triggers for reviews.  
      • Escalation procedures where a product is judged to no longer provide fair value.
      • Provision for discussion and challenge at an appropriate level of seniority and presenting assessments in a way that facilitates a critical and robust review.

Potential pitfalls 

In his accompanying speech, Sheldon Mills indicated that “some firms may not be able to provide adequate evidence for why their products or services provide fair value”.

The FCA observes in its feedback that some firms were planning to rely on ‘unevidenced’ arguments that their business model ensured products were inherently good value. This echoes a response we have seen where firms have asserted that their business model is inherently focused on delivering ‘good outcomes’ – firms need to be able to demonstrate this with data.

Mr Mills also observed that some firms were not “challenging themselves enough on uncomfortable questions” such as, are high profit margins on a specific product a sign that its customers are not getting fair value? There are potentially some equally uncomfortable questions for the FCA here, such as at what point its approach to what constitutes ‘good value’ strays into price regulation. Nonetheless, firms should consider using these assessments as a prompt for reviewing the value proposition of their most profitable products. If the FCA does review a firms’ assessments, these are the products on which it will likely focus first. Building a robust and evidence-based case on value here now is likely to pay dividends once the Duty comes into force.