Out-Law Analysis 5 min. read
03 Jul 2023, 8:26 am
At the end of May, the Financial Conduct Authority (FCA) published a review of UK financial firms’ approaches to fair value assessments.
The review reminded firms that, under the price and value outcome in the upcoming Consumer Duty, manufacturers must have completed a fair value assessment and share the outcome of that assessment with their distributors. Failure to do so before 31 July 2023 will mean that a firm’s products can no longer be distributed.
Price and value is a hot topic for the FCA in relation to the Consumer Duty, as it is one of the four key Duty outcomes for firms – along with products and services, consumer understanding and consumer support. The Duty requires that firms ensure the price a customer pays for a product or service is reasonable compared to the overall benefits. The rules allow firms some discretion in selecting factors to consider, but the nature and limitations of the product and all fees and charges paid by customers must be taken into account.
What is fair value in any particular case is likely to be a range rather than an absolute amount, as there are many variable factors to weigh. The concern of the FCA is that the factors are assessed by firms and properly evidenced and reasoned conclusions are reached. An inability to demonstrate the nature and outcomes of the assessment is likely to lead to questions from a firm’s supervisors.
The FCA’s latest review provides a useful illustration of how the regulator is likely to approach this area once the Duty is implemented, and contains some pointers on what all firms need to be considering in the remaining time. The review was limited in scope, covering just 14 large firms from sectors including retail banking, consumer investments, payments and digital assets, and consumer finance.
Despite this, the findings illustrate the depth to which the FCA is considering the requirements and the standards they are expecting of firms. Building on their statements at the time they introduced the Duty – that this was not a question of ‘tick box compliance’ – the regulator’s examined not just the output of the actual assessment, but also the understanding and data that went into the assessments.
Firms should use the time left before 31 July to ensure that their fees are fair and transparent, and that particular groups of consumers are not disproportionately disadvantaged
The review makes clear that monitoring and data are key to demonstrating compliance with Duty implementation. A concern highlighted by the FCA was that, in some of their reviews, there was a lack of clarity about what monitoring would be carried out, what data would be collected, or what the limitations of the collected data are. The FCA has clear expectations that data should be targeted to the particular product, cautioning against reliance on relative comparisons to benchmarks.
In addition, the FCA expects firms to examine the impacts of value on groups of customers with appropriate analysis, and not just rely on average outcomes. While the Duty applies proportionately and reasonably, taking into account the size of firm, there is a clear step up for all firms in meeting the FCA’s expectations on data and monitoring.
The review also sounds a note of caution for attempts to simplify the value assessment process. While templates and processes can and – given the rules require a process – should be adopted, firms need to be conscious of the boundary beyond which they will no longer be sufficiently assessing the value of the particular product.
There is a difficult line for firms to walk in ensuring they have cost-efficient processes that can be clearly and consistently applied across the firm, versus ensuring the processes obtain and record the necessary detail for the assessment. It is notable that the FCA has called out as potentially poor practice the reliance on general templates where firms have products across a range of markets and sectors. It is important that any template includes clarity on how it applies to different product characteristics and markets.
Interestingly, the FCA has also cautioned against assumptions that business models or a firm’s ethos is inherently fair value. While it does not go so far as to say this type of approach can never be justified, it is clear that justification is expected by the FCA. Firms relying on this approach would be well advised to ensure they have the data to support the position and a robust internal challenge process aimed at ensuring their conclusions about their inherent fair value remain justified.
The holistic nature of the value assessment is also seen in the FCA’s focus on how firms have considered contextual factors in their assessments. This includes the links with the other Duty outcomes, broader customer characteristics and consumer biases. A key concern of the FCA in introducing the Duty was to tackle what it terms ‘sludge practices’. In its comments on what should be taken into account in the value assessment, the relationship between the outcomes, and the need to take account of broader contextual factors, the FCA is indicating how its concerns may find expression as it looks to supervise the Duty.
While consumer biases and other areas such as customer support may obviously sound in applicable Duty rules under the cross-cutting rules and the customer support outcome, firms should also be prepared for the FCA to consider their other processes such as the value assessment with a view to ensuring that foreseeable harm does not arise at this stage either.
The review also highlights the importance of culture, governance and systems and processes, in particular in the comments the regulator makes around clear accountability and rectification processes. The review highlights as good practice clear escalation procedures with named owners and appropriate levels of challenge where it is identified that fair value is no longer provided.
It is worth looking forward to the annual board report, where firms will be required to report on the fair value outcome and report on action they have taken in circumstances where this has not been met. In addition, the outcome itself requires regular reviews and appropriate action should it be identified that fair value is no longer being provided. Establishing robust processes now with clear lines of escalation to senior decision makers will both contribute to establishing the adequacy of governance arrangements and the meeting of the price and value outcome.
It is clear from the FCA’s useful review that there is a lot of good practice to draw on, but also that firms should use the time left before 31 July to ensure that their fees are fair and transparent, and that particular groups of consumers are not disproportionately disadvantaged. When it comes to the price and value outcome, the regulator is likely to take a dim view of high commissions and complex charging structures, particular for firms with high numbers of vulnerable customers.
Firms can usefully draw on the FCA’s ‘key questions’ published earlier this week as a checklist against their readiness for the implementation deadline in this area. In price and value the FCA’s questions are:
If a firm is in a position to provide a detailed answer to these questions, then it will be well-placed for demonstrating compliance with the price and value outcome.