What are the FCA looking for?

The FCA expects firms to provide products and services that are designed to meet customers' needs, provide fair value, help customers achieve their financial objectives, and do not cause them harm. In its recent review of the Consumer Duty, titled "Findings from our review of the fair value framework" (May 10th, 2023), the FCA stated, "Firms must undertake fair value assessments as a way of demonstrating if the price a consumer pays for a product or service is reasonable compared to the overall benefits they can expect to receive."

The review of Fair Value Assessment Frameworks looked at 14 mainly large organisations with the objective of understanding how firms in different sectors of the financial services industry were implementing the price and value requirements so far.

It's encouraging that the FCA recognised areas of good development and demonstrated a good understanding, while also acknowledging that these were mainly larger organisations with different products and customers, resulting in some level of variance between the firms. However, the FCA also raised some clear warnings labeled as "areas for improvement." These warnings are meant to guide the industry because if even the larger organisations have areas for improvement, the rest of the sector should pay attention.

Key Role of Evidence

The areas for improvement emphasised the need for sound evidence to support assessments and assertions. This is one of the biggest differences between the old and new rules that many firms could easily overlook. No firm should assume that the notion of "well, it's obvious, isn't it?" will suffice. Without evidence, the firm has no defence at all. Such an approach would only elicit skepticism and potentially harsh consequences from supervisory teams. Every assessment of every product, service, scenario, and observation must be supported by ample evidence. Without evidence, any assertion is meaningless.

Avoiding Easy Averages

In addition to the need for evidence, there is a stark warning against relying on broad averages. If firms have data that segments their customers, they must ensure that they use those segments independently in their assessments. The FCA expects firms to explore outliers rather than accept averages. For example, if a firm has a group of 500 customers who, on average, have achieved a certain acceptable outcome, but there are 10 outliers receiving less than the average outcome, the firm needs to focus on those outliers, segment by segment. Unless products are intended to meet similar customer needs or reach a similar customer base, they should not be grouped together assuming that they collectively demonstrate fair value. Each product should be assessed separately, it’s important to consider product unique costs and benefits to the customer. The rate or price applied to a product may vary significantly for each type of customer it is offered to, so each "type" of customer must receive fair value.

Relying on Sound Evidence, Not Assumptions

The FCA also discovered that some frameworks were partially relying on high-level or unevidenced arguments that their business models or ethos inherently provided fair value. However, firms must remember that evidence is required to support this view. They cannot solely rely on their own critical analysis to validate the delivery of fair value to customers.

Value Beyond Price

Fair value encompasses more than just price; it includes the consideration of the quality and benefits of the product or service. Firms should thoroughly examine and challenge themselves regarding whether the cost of a product or service is genuinely reasonable relative to the overall benefits. The assessment is crucial, not only in terms of upfront price and value but also critically throughout the product's lifecycle.

Importance of Monitoring

An area that should not be overlooked is the requirement for ongoing monitoring of fair value. If any firm is rushing to complete Consumer Duty implementation and move on to business as usual, they must establish a continued program to monitor customer outcomes…this should be the new normal. This program goes beyond internal audits and measuring systems and controls; it involves continuously measuring and exploring customer outcomes while also having mechanisms in place to recognise, report, and rectify any unacceptable and unfair customer outcomes. Remember, the monitoring should focus on outliers—the cases where customers did not achieve the average and acceptable outcome.

Shifting Perspectives

It is easy for firms to become inward-looking, but the Consumer Duty requires them to consider things from the customer's perspective. It is important thats firm ask themselves “am I treating my customers as I would expect to be treated in their circumstances?” Even if the customer isn’t directly their customer. The Consumer Duty represents a major shift from Treating Customers Fairly and is about embedding the right culture within the firm, reflecting the positive and proactive expectations the FCA have of firms. With only a couple of months remaining, there is still much to achieve, even for the larger organisations.

Caroline Walton

Non Executive Director, Interim Manager & Leader in Financial Services