FCA findings on fair value assessments under Consumer Duty

On 10 May 2023, the FCA published its findings from its review of fair value frameworks with respect to firms' implementation of the Consumer Duty. For those of you who attend our weekly Consumer Duty webinar, these findings will come as no surprise as the FCA trialled them in our session a couple of weeks ago. However, the lessons and areas for improvement that have been highlighted by the FCA are important for firms, in particular with less than 100 days to go until the deadline for Consumer Duty implementation. This newsflash summarises the key messages for firms following the FCA's review of fair value assessments and sets out what firms should be looking at in this area.

The FCA has reviewed 14 firms' fair value assessment frameworks, comprising mainly large firms within retail banking, consumer investments, payments and digital assets, and consumer finance. The FCA shares observations from this review and provides some good practice suggestions.

The FCA reminds firms that fair value assessments should consider both mandatory and additional factors. They have split these between:

• the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities;
• any limitations that are part of the product or service, for example limitations on scope of cover for insurance products; and
• the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between the customer and the firm.

The above being mandatory factors.

The FCA also notes that firms may consider additional factors including:

• the costs firms incur to manufacture and/or distribute the product or service;
• the market rates and charges for comparable products or services;
• the price and benefit of other products in their portfolio; and
• any accrued costs and/or benefits for existing or closed products.

The above being additional factors.

In assessing firms' fair value frameworks, the FCA looked at five criteria:

1. understanding of fair value rules and how clearly the fair value assessment defined fair value and how that applied to the firm's products;
2. assessing value – how costs and benefits to consumers, including non-financial costs and benefits, have been considered;
3. considering contextual factors, such as how the firm has considered broader contextual factors relevant to value;
4. assessing differential outcomes, for example approaches to assessing a range of consumer outcomes such as differential pricing and outcomes for vulnerable customers; and
5. data and governance, being the approach to measuring and monitoring fair value using date and how a firm's governance arrangements operate.

In general, the FCA found that firms' frameworks suggested that firms had considered both price and value requirements including the shift in focus to consumer outcomes. However, the FCA had some questions as to how effective certain firms' frameworks would prove to be in practice. The FCA set out areas where further consideration was needed and where there was room for improvement under each of the five criteria it had looked at. A summary of these is set out below.

1. Understanding of fair value rules – the FCA noted that some frameworks suggested that firms plan to rely on high level or unevidenced arguments that their business models or ethos are inherently fair value. However, firms will need to consider how they could provide evidence for review and how their own critical analysis of this position would ensure that they deliver fair value for their customers. In addition, a small number of firms had not given sufficient thought to the distinction between the manufacturers and distributors.
2. Assessing value – the FCA noted that a few firms who were active across several markets had a single generalised template for assessing fair value, but it was not always clear how the template would apply to products with different characteristics and which may serve different target markets. Importantly, the FCA noted that some firms' assessments did not make any reference to the firm's profit margins on different products and services. Finally, some firms did not consider the types of non-financial costs and benefits that retail consumers may reasonably expect to pay or receive.
3. Considering contextual factors – some firms did not give much consideration to broader contextual factors or their impact on fair value, for example some firms only considered whether the financial value customers received was positive and not contextual factors such as a critical assessment of the fairness of the pricing structure.
4. Assessing differential outcomes – the FCA noted that some of the information presented in frameworks tended to rely on average outcomes rather than analysis to understand the full distribution of outcomes. Even where firms are undertaking analysis of consumers using segmented groups, group averages could disguise outliers or pockets of poor value. The FCA went on to note that some firms' assessments appeared to identify differential pricing between groups of customers, but not require firms to demonstrate how each group of customer received fair value.
5. Data and governance – the FCA noted that some firms did not identify how they plan to monitor fair value, what data they might want to use or how they would address data gaps. Other firms had clearer data plans but their remediation steps were less clear. A number of firms proposed a points based "red", "amber" or "green" style approach within their fair value frameworks. The FCA noted that in such scenarios, firms may want to consider whether they are giving sufficient weight to critical analysis around the ratings. Where firms are using market level benchmarks or information on comparators within their assessments, they should also consider how they are delivering fair value for their customers in absolute rather than just relative terms. The FCA went on to note that relative comparisons can hide fair value issues that are prevalent within a wider market and are just one factor in the consideration of fair value.

Next steps for firms

Clearly fair value assessments are high on the FCA's agenda and will be subject to scrutiny by the regulator with respect to what firms are doing to achieve good consumer outcomes on price and value. This is a challenging area for industry and one which we are seeing different approaches being taken. The FCA is clear that divergent approaches are acceptable provided that the frameworks used achieve the correct level of scrutiny and assessment the FCA considers is required.

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