Consumer Duty: a deep dive into the FCA’s update on price and fair value
Heather Alleyne
Partner EY, specialising in Regulatory and strategic change, governance and controls and operational management.
The recent Financial Conduct Authority (FCA)?update on price and fair value underscores the regulator’s expectation for Consumer Duty to deliver meaningful positive change for customers of financial service products. While the implementation period has now passed, work continues across financial services firms to build on the uplifts introduced for each outcome. It’s crucial to ensure the delivery of not only the individual rules, but to also foster a deeper understanding, and drive tangible benefits for UK retail customers throughout the product lifecycle.
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It is an insightful and informative update, including examples of both good and poor practices identified by the FCA in their work to date. This blog delves into some of the key items that resonated with me:
1)????? The update confirms the FCA expects a holistic focus on value, not just price:
It’s evident from the review that some firms have separated the price and value outcome from the other outcomes and allowed their assessment to focus on the monetary price rather than the value to the customer. Differential pricing is acceptable, but the FCA expects firms to demonstrate how different pricing structures correlate with the value provided to customers, taking into account the target market and the full scope of the Duty across both the four outcomes and the three Consumer Duty cross-cutting rules. For example, if a product is designed to offer enhanced access and support with an associated higher price point, firms must ensure that customers understand this at the time of purchase and that the additional support is both utilised and appreciated.
Actions firms should take:
Firms should ensure their Consumer Duty product assessments include an overall assessment, not just evaluating separately against the individual outcomes.
2)????? Assessment needs to be customer-centric rather than internally orientated:
The FCA have been clear that too often, firms began their assessments with the presumption that their products offer good value, focusing on justifying existing prices. The FCA advocates for a more critical analysis that genuinely considers the customer's viewpoint.
The absence of suitable market benchmarking further complicates this issue, with instances of firms either not evaluating against the market or considering only a subset of participants, which leads to potentially skewed assessments that don't accurately reflect the competitive landscape.
Quantitative analysis of fair value is beneficial but it must reflect the true cost of delivering value to customers, not uncritically taking existing figures that may be due to internal inefficiencies. It's essential for firms to examine their cost structures to ensure they align with the value provided.
In designing and using our EY price and fair value assessment tool with clients, we found it was important to agree not only base assessment criteria, but also use the additional features. Rather than just assessing internal factors, this reviews different aspects of foreseeable harm from the perspective of the customer.
Actions firms should take:
By applying an external lens to internal information, firms can act now to ensure their assessments are not just internally consistent but also genuinely reflective of the customer's experience and value perception.
3)????? Price and fair value assessments must drive insight and action:
The intention of the Duty is to propel firms to act, taking steps to better deliver good outcomes for their customers. When an assessment uncovers potential harm, such as low savings interest rates or underutilised features, the Duty compels firms to respond proactively. Firms should offer alternative products, adjust pricing, or eliminate fees that do not equate to fair value. It's about taking initiative — moving customers to better-suited products or adjusting terms to ensure fairness.
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Aligned to this is that these assessments should inform ongoing management and delivery within the firm. While a product or service may have been fair value at the time of the assessment, management information (MI) systems should be in place to signal any shifts from fair value benchmarks. For example, If a product's interest rate drops outside a defined percentile, or if fees become less competitive, these indicators should prompt immediate reassessment or corrective action.
Actions firms should take:
With the Duty implemented last year for open products, firms should be identifying where good outcomes are not being delivered and taking action, rather than waiting to be challenged by the FCA, Financial Ombudsman Service (FOS) or directly by customers.
4)????? Be sure you are delivering good outcomes for all groups within your target market, particularly vulnerable customers:
The Duty requires firms to understand who is using their products and how they are using them. While a product may be good value for the average customer, if there are groups of retail customers using the same product but getting different outcomes, this requires evaluation.
If a subset of users is disproportionately bearing the costs, firms need to conduct a thorough analysis to understand why this is happening and how to rectify it. The good outcomes for each customer group need to be evidenced, or improvements made.
This is important for all groups of customers, but none more so than vulnerable customers. The update reminds firms that vulnerability can take many forms, and it's not always self-evident. Firms must use data to proactively identify customers who may be at increased risk of harm. For instance, those with poor credit scores may be more susceptible to financial stress so there is an obligation on the firm to recognise this in how they provide support and deliver good outcomes for these customers. Firms can and should be using outcome testing to understand outcomes for their customers, as well as different customer groups using their product or service.
Actions firms should take:
In conclusion, firms should now take proactive action if they believe there is more scope to better achieve all aspects of the four areas mentioned above. To secure long-term success and deliver superior value to customers, firms must embrace a culture of constructive self-evaluation and continuous improvement.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.