Consumer Duty: do your products and services represent fair value?

Consumer Duty: do your products and services represent fair value?

Many firms are on course to meeting it [the Consumer Duty implementation deadline], according to our own research

Sheldon Mills, Executive Director, Consumers and Competition, Financial Conduct Authority (“FCA”), 10th May 2023

On 10th May 2023 the FCA published the latest in a raft of communications concerning the impending implementation of the Consumer Duty. The FCA warned that the 31st July implementation deadline was nearing. Furthermore, the regulator announced the findings from a review of 14 firms’ fair value assessment frameworks it conducted between January and February 2023. Although the review focused on large firms, it straddled a variety of sectors and, as such, the FCA was keen to stress that many of its “..observations will be relevant to the wider population of regulated firms”. To summarise, the FCA found that the firms reviewed were generally well prepared for implementation. Nevertheless, it was critical of attempts by some firms to rely on “unevidenced arguments” or “high level” assertions that their business models inherently offered fair value. Accordingly, the FCA offered some examples of good and bad practice in its feedback to the market. 

Links to the FCA’s most recent communications can be found at the end of this article. However, to save you time, we have: (a) extracted the key points and questions from these publications; and (b) ordered these into a self-assessment questionnaire that you can use to gauge your firm’s readiness. 

To recap, in the context of the fair value outcome, a firm subject to the Consumer Duty must be able to demonstrate that the price a customer pays for a product or service is reasonable compared to overall benefits that product or service offers (nature, quality, benefits, limitations, any additional factors a firm can demonstrate are relevant, i.e. should not be merely based on perception). 

Self-assessment questionnaire 

General

  • Does your purpose and culture align with your obligations under the Consumer Duty and support the delivery of good outcomes for customers?
  • Is the Duty being considered in all relevant discussions such as strategy, remuneration and risk?
  • Have you made sure your remuneration and incentive structures drive good outcomes for customers?
  • Are your prioritising delivering good outcomes for customers in a changing external environment?

Customised assessment – assessing fair value for groups of customers, products and services

  • Does your approach to assessing fair value consider outcomes for different groups of consumers (for example: consumers using different channels, consumers paying disproportionately higher margins given the benefits they receive?) that use your firm’s services? Does this approach avoid relying on broad averages?
  • Does your approach include a customised analysis of fair value for consumers exhibiting characteristics of vulnerability?
  • If you use margin from one product to cross subsidise different groups of customers, have you assessed the impact this could have on value for different groups?
  • Are high profit margins on a specific product an indicator that customers are not receiving fair value?
  • Does your assessment of fair value consider the quality and benefits of a product or service rather than just price?
  • Have you explored the types of non-financial costs and benefits (for example, the time and effort to make a decision) that retail customers might reasonably be expected to pay or receive?

Evidence and transparency

  • Have you maintained sufficient evidence to support that your products and services represent fair value?
  • Are you confident that the firm’s fees are fair and transparent, particularly where charging structures are complex or your firm is paying broker commissions?
  • Can you demonstrate that contextual factors such as how “sludge practices” and customers’ behavioural biases could have a negative impact on the value of a product or service?

Relationships with third parties

  • Have you identified your role as a manufacturer, co-manufacturer or distributor? Do you understand the responsibilities that attach to your role?
  • Have you considered whether you will need information from other firms in a distribution chain and/or other third parties to help you assess fair value?
  • If you have identified that you will need input from other firms, or pass information on to other firms, have you made it clear how and when this would be done? Have you made it clear how you will consider any information you receive?

Ongoing monitoring, oversight and remediation

  • Do your monitoring processes include triggers to prompt a fresh fair value assessment, for example because of trends in the data?
  • Where you identify gaps in the data to monitor the fair value of a product are the steps your firm intends to take to remedy this clear?
  • Where your firm identifies that a product no longer represents fair value, are clear processes in place to ensure rectification?
  • Are your fair value assessments presented in a way that enables decision-makers to robustly discuss whether the product or service represents fair value? Are any limitations in your analysis or evidence clear?
  • Can you demonstrate oversight and accountability of any necessary remedial actions if a product or service is identified as not providing fair value?

Looking for an independent assessment of your firm’s preparations for the implementation of the Consumer Duty?

C&G’s consultants have real world experience of implementing regulatory requirements in retail environments. Please contact us today if your firm is seeking an independent review of its arrangements for complying with the Consumer Duty.  

References

  1. Mills, S., Countdown to the Consumer Duty. Financial Conduct Authority, available at: https://www.fca.org.uk/news/speeches/countdown-consumer-duty#:~:text=For%20new%20and%20existing%20products,apply%20from%2031%20July%202024. (last accessed 15th May 2023). 
  2. FCA warns of impending Consumer Duty deadline. Financial Conduct Authority, available at: https://www.fca.org.uk/news/press-releases/fca-warns-impending-consumer-duty-deadline (last accessed 15th May 2023). 
  3. Consumer Duty: Findings from our review of fair value frameworks. Financial Conduct Authority, available at: https://www.fca.org.uk/publications/good-and-poor-practice/consumer-duty-findings-our-review-fair-value-frameworks (last accessed 15th May 2023). 

 

Alexander Culley

Alexander Culley

Alexander Culley

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