Segmentation, vulnerability and blurred lines: the FCA's latest Consumer Duty value messaging

The FCA is forming some pretty pointed concerns about firms' value assessments.  It has observed that many firms have found them "challenging" and encouraged firms to engage in sufficient challenge rather than "seek to validate previous pricing decisions".

This is from its just-published update on good and poor practice on value and the accompanying update on cash savings, complementing its prior sector specific work including on GAP insurance, platform cash and general insurance and pure protection.

This FCA update is important reading.  It is also complex and it buries genuinely new messaging and direction-setting within restatements of existing guidance.

Let's cut through and tell you what's new.

A holistic approach

The FCA says its primary Consumer Duty focus is on price and value.  But the closer you look, the more the lines are blurred.

You see, the FCA is now calling out the connections between price and value and each of the other outcomes.

This isn't just about looking beyond price when assessing fair value.

For example, poorer value may result when customers don't understand (that's outcome 3) complex pricing structures.  Or when customers don't sufficiently engage with a product feature and associated communications, such as an annual "bonus" rate renewal or tranched - especially regressive - savings rates (that's outcomes 1 and 3).

Yet communications are no panacea.  The FCA takes a dim view of firms assessing fair value solely on the basis that the customer understood the relevant fees.  If a product represents poor value, communications generally won't cure it.  And as a remedial measure, communications need to be targeted and to the point with a clear call to action.

The key message: take a holistic approach.  Look at value in context.  Spot opportunities to improve your value proposition by making product design, communications or support adjustments.

Get granular: segment everything

This theme frequently crops up in the FCA's guidance, and in a few broad buckets:

• Products.  Do separate value assessments for products that have significantly different features or distinct target markets.  If you don't, you risk over-generalising and therefore missing pockets of poorer value.
• Target market.  Define this precisely.  The FCA says, for example, that it's too generic for a GAP insurance provider to define its target market as "anyone who buys a car": the product may not be appropriate e.g. for drivers of older or lower-value vehicles.  (I can't resist observing here that, taken too far, such an approach threatens the very activity of providing insurance.  But that's a topic for another day…)
• Customer segmentation.  Segment your customers for the purpose of your value assessment.  The FCA says it's good to do so e.g. based on customers' objectives and needs.  Then, examine each segment's actual customer behaviour and contribution to the firm's revenue.  This will help you to identify outliers, spot potential harm and take remedial steps (one example: capping ad-hoc charges for customers with lower balances).  Here, data on actual customer behaviour and engagement can be useful.
• Costs to the firm.  It is of course optional to consider these during a value assessment.  But if you do, your aim ideally is to obtain MI to support an apportionment of costs relative to revenue for different products and customer groups.  This will help you to demonstrate the relationship between your costs and what you charge the customer.  Here the FCA is a fan of activity-based costing.

Consider non-financial benefits and limitations

This is another instance of blurred lines.  Understandably so.  

Some highly-valued features are non-financial - indeed, are more in the nature of communications and customer support.  For example, a challenger bank's well-designed app.  Or a large retail bank's in-person branch service.  

Here, the FCA wants firms to substantiate assertions that their customers value these features.  For example, reputable third-party surveys, or web/app impressions data on insights and tools that the firm offers.

And remember that different customer groups and target markets may value different features differently.  Consider revisiting your segmentation and target markets with your non-financial benefits in mind.

All this is doubly important if your market survey work reveals that your customers are paying materially more than market average.  The more you are an outlier, the "greater the onus" on you to assess value "more rigorously".

Vulnerability

The FCA says quite starkly that it "did not see evidence that many firms had fully assessed the [Consumer Duty] outcomes for customers with characteristics of vulnerability".  

On value in particular, the FCA:

• Called out the risk that cross-subsidies may disadvantage vulnerable customers.
• Criticised the practice of relying on customers self-reporting their vulnerability.
• Observed that MI gaps and limitations were stymying efforts to address vulnerability in value assessments.  

We've been saying for a little while now that vulnerability is an area of heightened risk of Consumer Duty interventions and enforcement once it arrives in force.  The FCA's latest messaging reinforces our view.  Take heed!