Consumer Duty fair value assessment is an important responsibility for financial services firms. The FCA expects firms to demonstrate that the price customers pay is reasonable in relation to the benefits they receive, supported by meaningful evidence, effective monitoring and a clear understanding of customer outcomes.
In a recent blog, Alison Walters, Director of Consumer Finance at the FCA highlighted questions that firms can use to challenge their approach to assessing and monitoring ‘fair value’.
So what is ‘fair value?’ Fair value is a simple yet important principle at the heart of Consumer Duty and it is this; the price paid by the customer should be reasonable and relative to the benefits they get.
Sounds simple, but nothing in regulated life is simple. Applying that principle in practice requires judgement and will be based on how firms’ implement this approach. The FCA are seeing clear differences between firms that have embedded fair value into their approach and those that still need to strengthen their assessments, evidence and monitoring.
The FCA reviewed how firms across the consumer finance market assess, evidence and monitor fair value, and discussed good and bad practices in their Report.
MOVING BEYOND ASSUMPTIONS TO EVIDENCE
The message is clear: having a fair value assessment in place is not enough. Firms must be able to demonstrate that their conclusions are supported by meaningful evidence, reflect the experiences of different customer groups and remain relevant throughout the customer journey.
The FCA expects firms to review the Report and review the findings to challenge your approach to assessing and monitoring fair value. Ask:
- Does the evidence tell you something meaningful about customer outcomes, or does it simply describe your product?
- Does your target market behave as one group once you look closely, or are they disparate?
- Can customers understand the total price they might pay and the financial commitment they are entering into?
Firms should therefore consider whether their management information (MI), customer feedback, complaints data, product usage and other relevant indicators provide a sufficiently detailed picture of customer outcomes. The challenge is to move away from simply documenting why a product represents fair value and towards demonstrating why that conclusion is justified.
ONE SIZE DOES NOT FIT ALL
Another important theme emerging from the FCA’s findings is the need to assess fair value across different customer groups. What does this mean? A product may offer reasonable value overall, but this does not necessarily mean that every customer receives the same level of value.
The FCA found examples of firms treating their entire target market as one homogeneous group, rather than disparate groups of individuals, potentially overlooking customers who were paying more or receiving fewer benefits than others.
Stronger approaches involved segmenting customers according to relevant characteristics, including credit risk, product usage, distribution channel and vulnerability. Some firms also considered different pricing groups, such as customers paying different APRs or receiving risk-based pricing, to understand whether differences in price were justified by differences in the benefits received.
The FCA recommends that firms should consider whether their existing MI allows them to identify these differences and, importantly, whether any disparities indicate that certain groups are not receiving fair value. It may be that existing MI is sufficient, or that changes are needed to give firms the MI they need to make effective decisions.
UNDERSTANDING THE TOTAL COST TO THE CUSTOMER
Ultimately, fair value cannot be assessed by looking at the headline price alone. These are other considerations: fees and charges, additional costs and the cumulative impact of charges over time can significantly influence the overall value a customer receives.
The FCA’s recent work highlights the importance of considering the total price customers might pay. It also emphasises the importance of considering non-financial costs, such as the time and effort customers need to spend accessing a service or resolving problems.
Customer understanding is equally important. Even where a product is competitively priced, customers may not receive good outcomes if they do not understand the charges, financial commitments or risks involved.
FAIR VALUE IS AN ONGOING RESPONSIBILITY
Needless to say, fair value should not be treated as a one-off exercise undertaken when a product is launched. Customer needs, pricing structures, product features and market conditions can change. For example, a product that offered fair value at the point of sale may not necessarily continue to do so throughout its lifecycle.
The FCA encourages firms to establish effective monitoring arrangements that allow them to identify emerging concerns and take appropriate action. This includes monitoring complaints, customer feedback, arrears, cancellations, product usage and the frequency of fees and charges.
WHAT FIRMS SHOULD BE DOING NOW?
The FCA’s findings do not introduce new regulatory requirements or prescribe a single approach to fair value assessments. Instead, they provide practical examples of good and poor practice to help firms assess whether their existing arrangements are effective.
There are several important questions firms should be asking themselves:
- Is our evidence sufficiently robust?
Can we demonstrate how the price customers pay compares with the benefits they receive, or are our conclusions largely based on assumptions and narrative statements?
- Are we considering different customer groups?
Do our assessments identify differences in outcomes across pricing groups, distribution channels and customers with characteristics of vulnerability?
- Are we assessing the total cost?
Have we considered all relevant fees, charges and non-financial costs, including the potential impact of repeat or cumulative charges?
- Are customers able to understand what they are paying for?
Do our communications clearly explain fees, charges and financial commitments, and do we have evidence that customers understand them?
- Are we monitoring value over time?
Do we have appropriate MI, thresholds and escalation processes to identify when customers may no longer be receiving fair value?
- Do we act on what the evidence tells us?
Can we demonstrate that identified concerns lead to meaningful changes in pricing, product design, communications or customer support?
Importantly, the FCA recognises that a proportionate approach is appropriate as how a firm moves forward will depend on its size. Smaller firms may be able to draw on information they already hold, including complaints, arrears, customer feedback and product usage which can provide valuable insight when analysed effectively. The good news is that the questions and answers does not need to always require complex modelling or new data.
DEMONSTRATING FAIR VALUE, NOT JUST DECLARING IT
Three years into the Consumer Duty, the FCA’s message is that firms need to move beyond treating fair value as a regulatory exercise and embed it into their everyday business decisions.
The strongest approaches are those that bring together meaningful evidence, an understanding of different customer groups and ongoing monitoring of customer outcomes.
Ultimately, fair value is not about demonstrating that a product is competitively priced or that a firm has completed an assessment. It is about understanding whether customers receive benefits that are reasonable relative to the price they pay, identifying where this may not be happening and taking action to address it.
As the FCA makes clear, firms need to show their working: what the evidence tells them, how it supports their conclusions and what they will do if it does not.
