What can we learn from the FCA review of fair value framework?

I have said it before, but I’ll say it again – the FCA has a laser-sharp focus on Consumer Duty. They have just published another review – this time on the fair value frameworks which firms are developing.?

They reviewed a sample of 14 firms, mainly large ones. Unsurprisingly, they did not cover the general insurance sector, a sector already subject to detailed fair value assessments under PROD4 - which puts the industry in a good place, but, as the FCA said at BIBA this week, also means that the industry is front of the queue to be reviewed.

So what did we learn – quite a lot in fact and the review warrants a full read. The FCA only reviewed frameworks, not specific product or service assessments, and while they recognised firms’ progress, they also questioned whether some frameworks would be effective in practice.

Here is my pick of four points, equally valid for the insurance sector:?

1. The FCA is serious about value, and will be challenging firms about their evidence and how critical they are in their analysis. They point to some shortcomings in the frameworks such as consideration of costs or profit margins.
2. The review identified that firms may not be doing enough to analyse differential outcomes within firms’ customer base and evidence fair value.
3. Firms should critically assess their fair value monitoring and check that it provides decision makers with sufficient data and critical analysis, alongside an honest assessment of their limitations, to challenge fair value assessments.
4. It’s good practice to consider the interaction between fair value and the other outcomes – including sludge practices and behavioural biases.

On the same day, Sheldon Mills made a speech on the countdown to implementation (apparently 82 days) and that warrants an extra point to my list:

1. The FCA will take a close interest in manufacturers' and distributors’ understanding of the impact that different commission models have on the value that consumers receive.

Finally, it’s worth saying that this is rather helpful from the regulator. Following the multi-firm review of implementation plans, this provides another early steer on good and poor practices. Firms should take advantage of this – but will no doubt also be told that they have no excuse not to have known.?

Nadege Genetay , Partner