UK: FCA reports on the Consumer Duty price and value outcome

Why should I read this?

The Consumer Duty price and value outcome has been in force since 31 July 2023 for new products and 31 July 2024 for existing products.  The FCA has recently collated its insights from the way in which firms have approached the outcome during its first year in force on its webpage “Price and Value Outcome: Good and Poor Practice update”. The idea is that this will help firms improve the way they think about fair value assessments.

The FCA notes that firms are continuing to adjust and improve implementation of the Consumer Duty to deliver good consumer outcomes, but warns that it will act against firms that do not make improvements in response to feedback or if the products and services they offer are of notably poor value compared to similar products and services.

This review builds on the FCA’s previous review of 14 firms’ fair value assessments, “Consumer Duty: Findings from our review of fair value frameworks” , which was published in May 2023.

What are the key messages?

• Consumer Duty outcomes should be considered holistically

The price and value outcome should be considered together with the other outcomes and cross-cutting obligations under the Consumer Duty.

• The importance of effectively identifying target markets

Firms need to identify the customers who, because of their circumstances and behaviours, are more and less likely to get value from each product and service they offer.

• Cross-subsidies should be analysed

Differential pricing and cross-subsidy is permitted, but firms must be able to demonstrate that all customers get fair value from their products.  The FCA is particularly concerned that cross-subsidies should not disadvantage vulnerable customers.

• Assertions about price and value should be supported by evidence

Assertions made in fair value assessments should be supported by reasonable supporting evidence, the extent and detail of which should be proportionate to the size of the firm and complexity of the factors being considered. 

• Prompt action

Action needs to be taken promptly if customers are shown to be at risk of not receiving fair value.  The actions to be taken should be specific, and their success and impact should be monitored.

Findings

The FCA stresses that meeting the price and value outcome is not solely about making products and services cheap.  It appears that the FCA is open to the idea that higher charges can be charged for better service and better products, although it will be for firms to demonstrate this and cost is often an easy differentiating factor for similar products, particularly where those are relatively commoditised.

Consumer Duty outcomes should be considered holistically

The FCA notes that the price and value outcome should be considered along with the other outcomes and cross-cutting obligations.  The examples that it gives highlight the interaction between the price and value outcome and each of the other three outcomes: products and services; consumer understanding; and consumer support.

Firms that identify significant risks of consumers not receiving fair value should take mitigating actions, which may include:

• adjusting the core features of a product
• ensuring there are alternatives available
• effectively communicating with and supporting consumers so they are in the right products

Firms should monitor how their actions work cumulatively to ensure consumers are receiving fair value.

Assessing value

The FCA expects firms to conduct a thorough fair value assessment of each product and service they offer, which should involve a critical assessment of the relevant product or service from the point of view of a retail customer.  Firms should consider value in the context of the ultimate outcomes for customers, rather than seeking to justify the current approach to pricing or benefits of a product or service. 

The FCA sets out examples of good and poor practice relating to:

• Grouping products and services when assessing them
• Target market identification
• Fees, charges, benefits and limitations
• Evidence of appropriate benchmarking

Differential outcomes

The FCA expects firms to identify and analyse varying outcomes across different consumer groups.  Firms should consider how consumers use products, the benefits they receive, and common customer segmentation characteristics. Particular attention should be paid to vulnerable customers.  The FCA reminds firms they should be familiar with FCA Final Guidance FG21/1 “Guidance for firms on the fair treatment of vulnerable customers”.

The FCA sets out examples of good and poor practice relating to:

• Assessing customer groups
• Assessing vulnerable customer groups
• Cross-subsidisation

Manufacturing and distribution costs

The FCA notes that incorporating cost and margin analysis with supporting evidence into a fair value assessment can provide necessary context to understand pricing decisions.

Examples of good practice included platforms allocating costs between funds on the basis of activity levels and only retaining interest on customers’ cash balances to the extent necessary to cover the costs of managing the customer’s cash.

Mitigation

The FCA reminds firms that the Consumer Duty requires them to take appropriate action if they identify that customers are not receiving fair value, or that any particular group of customers is getting worse outcomes than another group in respect of same product.  One way a firm might achieve this is by using transactional data to identify customers not using a product in line with its intended use and then sending those customers targeted communications to either change their use or switch to a more appropriate product.  The success and impact of steps to mitigate harms should be monitored.

Effective governance

The FCA expects firms to have a board level champion for the Consumer Duty and for governance arrangements to provide opportunities to get senior-level challenge on whether fair value is being delivered.  It expects boards to use fair value assessments as an opportunity to provide thorough management information and to assure themselves that their products and services provide good outcomes for price and value.

The FCA’s examples of poor behaviour include a firm failing to escalate Consumer Duty concerns to its board.

What else do I need to know about the price and value outcome review?

Small firm guidance

The FCA does not expect a small firm to apply the same resources or processes to assessing fair value as a large firm.  It expects that  to take a reasonable and proportionate approach in light of their resources, size of client base, and the complexity of the factors being considered in the fair value assessment.

The FCA gives specific guidance on what small firms can and should do.  That guidance is also a useful indicator of the standards which larger firms should aim to significantly exceed.

Products reviewed

The FCA reviewed three types of product.

• Cash savings

Within this market, achieving good customer outcomes through a holistic approach to the price and value assessment means ensuring that customer’s needs are properly assessed, they are offered a product that best suits there needs and they understand how to obtain the best value from the account.  For example, if interest rates are tiered, do customers understand what rate of interest they will achieve and how changes to the amount they have saved will impact the rate they receive? 

We have seen the FCA, through its Cash Savings Market Review, push banks and building societies to pass interest rate rises on to savers in a more timely way, to ensure that they communicate effectively with customers and offer better savings rate deals, particularly in the instant/easy access account market.  The aim being that savers will earn more interest and switch accounts to achieve higher rates.

• Guaranteed Asset Protection (GAP) insurance

Regulatory intervention into GAP has now been going on for over a decade.  Following the 2014 Market Study on general add-ons, the FCA introduced a mandatory two day delay between a customer being provided with information about GAP and entering into the contract.  Following a review of value measures data in 2022 and 2023, FCA intervention led to the suspension of sales of GAP, with firms that resumed sales materially lowering the levels of commission, improving value for customers.  The FCA is currently assessing the remaining firms’ fair value assessments.  It remains to be seen whether following the FCA’s intervention all GAP providers will remain in the market.

• Platform cash

Many investment platforms and self-invested personal pension operators continue to or did retain a large portion of the interest earned on their customers’ cash balances, including in some cases by both charging a management fee on the cash as well as withholding interest, known as “double-dipping”.  The FCA are currently in correspondence with operators who retain interest to establish how their practices can be reformed to better meet the price and value outcome.

The nature of the products reviewed means that some of the examples of good and poor behaviour are necessarily specific, however, the key messages and findings are intended to be of broader application.

Further reading on Consumer Duty

See our previous client briefings:

• Implementing the Consumer Duty: are retail financial markets ready?
• Implications of the new Consumer Duty for Asset Managers
• The Consumer Duty: a significant shift in retail financial services

How Eversheds Sutherland can help

Whether it’s helping you to get authorised, developing new products, implementing large regulatory change or supporting you on ensuring that your processes and policies are fit for purpose, our team is well placed to help you. Our team has extensive experience of what the regulators expect and what the market requires and our technical and industry insight can ensure that your projects are managed efficiently to achieve a first class result.