Earlier this month the FCA published their findings from a review of Fair Value frameworks. Fair Value is one of the 4 outcomes on which firms will be assessed under Consumer Duty when it comes into effect in July. To help establish the regulator’s expectations, the FCA is providing feedback based on organisations’ proposals. For this report, they looked at the Fair Value Assessment Frameworks of 14 firms, with the aim of both highlighting good practice and areas of improvement to provide clear examples.
What kind of evidence does the FCA want to see to prove that your business offers customers Fair Value? The Fair Value rules within Consumer Duty focus on ensuring that the price a customer pays for a product or service provides “reasonable value” relative to the overall benefits. The regulator will want to see clear proof that organisations have considered the nature of their products and services, any limitations of the product or service and the expected total price customers will pay across the lifetime of the product.
For this review, the FCA assessed the Fair Value Assessment Frameworks on their understanding of Fair Value rules, how costs and benefits to customers (including non-financial costs and benefits) are being assessed, how the firm has included wider contextual factors in their assessments of value, what approach has been used to assess the range of possible consumer outcomes (including outcomes for vulnerable customers) and how a firm is using data to monitor and measure fair value.
The good practice sections for each of these five assessment factors are encouraging reading, suggesting many firms have a good understanding of what they need to do and are on the way to achieving it. For example, the report says that the majority of frameworks have clear principles for how they will apply the concept of fair value, most frameworks have a reasonable view of how to assess consumer benefit, including non-monetary factors, and many firms are considering the interplay between Fair Value and the other elements of Consumer Duty.
I would recommend anyone working on Consumer Duty preparations read the full report, but I wanted to highlight some of the key Areas for Improvement that the FCA names.
First, looking at the “understanding fair value” assessment, they raised a concern that some firms “planned to rely on high-level or unevidenced arguments that their business models or ethos are inherently fair value”. This is something we’ve talked about in previous Consumer Duty articles – almost everyone working in Financial Services believes they’re putting out good products for their customers. It’s going to be crucial to get past that kind of belief in the “self-evident” and to provide substantial evidence that your products are providing fair value. The FCA is also concerned that some firms have “not given sufficient thought to the distinction between manufacturers and distributors in PRIN 2A.4”. Whether a firm is a manufacturer, a co-manufacturer or a distributor makes a substantial difference to how they should assess the costs and benefits of their services.
Next, within the “assessing value” findings, they flagged that some firms who operated across multiple markets were using a single generalised template for assessing Fair Value. Any business with a wide range of products across different market sectors is going to need to think about how they adapt their approach for each of those sectors. The FCA also mentioned that some firms had failed to make any reference to their profit margins on products and services and pointed out that this is “likely to be a relevant factor in assessing [a product’s] fair value.”. Finally, on assessing value, they were concerned that some firms were not considering non-financial costs and benefits – for example, quality of product and level of consumer service on the benefit side and the time taken to decide about a product and the effort needed to make an amendment or cancellation on the cost side. It’s going to be important to think about those factors that can’t be reduced to numbers on a page, providing a holistic view of how your organisation is providing Fair Value.
Under the “considering contextual factors” section, the FCA were alarmed that some firms were simply not giving substantial consideration to broader contextual factors and their impact on Fair Value. Again, it’s not going to be enough to say a product provides positive financial value, organisations are going to need to look beyond that – especially for larger firms and complex offerings. There was also concern that some firms were not considering what information they needed from other firms in their distribution chain, which will be vital to assessing fair value of any product that involves third parties.
In the fourth section, “assessing differential outcomes”, they noted that some of the information being presented in frameworks had a tendency to “rely on average outcomes rather than analysis to understand the full distribution of outcomes”. Remember that averages are likely to mask outliers and what the report calls “pockets of poor value” – just because you have an average positive outcome, your assessment needs to consider the value being provided to customers who do not have the normal positive experience with your product.
Finally, under the “data and governance” findings, the FCA raises concerns that some firms have not identified how they plan to monitor Fair Value, what data they want to use and how they will address data gaps. A lack of proper data will lead to vague, “high-level” cases being made which, again, will not be enough. A related issue is firms failing to consider the limitations of the data they were using to evidence Fair Value, making it unclear how decision-makers would be able to critically review this evidence. There was also a point raised about firms using market-level benchmarks and presenting their case for Fair Value in terms of relative comparisons – this can hide value issues which are prevalent across the wider market. Finally, where firms are using “traffic light” or points-based approaches in their Fair Value Frameworks, there needs to be substantial critical analysis around those scores and ratings – firms need to examine how thresholds between different ratings and points are drawn and whether sufficiently detailed information is being provided to review and challenge the assessment of Fair Value.
It’s a lot to consider, but there is still time to get your organisation ready before the July 31st deadline.
Kind Consultancy recently supported a client through an initial Review of Target Market Fair Value and processes to ensure they were in line with FCA and industry expectations. This included examining the way the firm had assessed their target markets, benchmarking against those in and outside the sector, looking at what was needed to maintain a cycle of continuous improvement, agreeing on what conditions would trigger an urgent out-of-cycle Fair Value review and how senior management were informed in order to provide assurance that their risk tolerance was being kept within the required parameters.
If you are looking for a ‘fresh pair of eyes’ to act as a critical friend, Kind Consultancy work with a number of consultants who are available to provide you who can independently assess the work you have carried out so far and highlight any changes needed in order to be Consumer Duty ready. framework and highlighting any changes needed to be Consumer Duty ready.
For more information, please get in touch on 0121 643 2100 or e-mail firstname.lastname@example.org for a confidential conversation about your needs.