Consumer Duty: Demonstrating Value

In the modern age of dining, customers often rely on online value assessment views to discover little-known restaurants or to avoid being lured into a tourist trap and having to put up with an underwhelming, expensive Caesar salad. In a similar fashion, the FCA wants firms to demonstrate that their products and services offer value so customers can buy with confidence and know they are paying a reasonable price.

Value has been a focus of the FCA since the Asset Management Market Study (AMMS) was published in 2016. We have seen from recent FCA letters, speeches and now its multi-firm review across sectors that it remains one of its key priorities under Consumer Duty. From our experience of working with firms they have focused due attention on this outcome, but it has proved a challenge to design and implement an effective and proportionate framework that delivers ‘value’ to the business.

The principle is simple on the face of it; firms must ensure that the price paid by a customer is reasonable compared to the benefits they receive. Many firms already include this principle with their business ethos and embed it as part of their day-to-day operations. But the FCA is clear that this alone is not enough. Firms must critically assess and evidence how they have satisfied themselves that their products and services offer value.

The recent FCA review builds upon the initial Consumer Duty Rules and Guidance to offer some concrete examples of good practice and areas for improvement. Many of these examples will not be a surprise. Overall, the FCA found that firms have carefully considered the rules and guidance in their approaches, but their review and findings pose the next key question ahead of July: does the implemented value framework truly assess if consumers are achieving good outcomes, or is it just a tick box exercise to meet the regulations?

The graphic below highlights some key questions firms and Boards can be asking themselves when challenging their implemented framework and approach to validate if they are meeting regulatory expectations.

Below we have provided suggestions for translating a fair value approach into clearly articulated outputs that are useful throughout the business.

For products and services not previously in scope of Assessment of Value Rules requirements under the COLL sourcebook, firms have typically adopted standardised templates as an efficient way of completing large volumes of fair value assessments. This approach can be effective if implemented correctly as it enables firms to create a consistent and repeatable process that ensures that all key factors are appropriately considered. The FCA has been clear that this approach will only work if templates and approaches allow flexibility to tailor reviews to reflect the characteristics of the specific product and target market under review.

In our view, a useful way to do this is to include key guidance and questions framed at the individual completing the assessment to tailor the assessment and output to different types of products and services. This will ensure customer needs are always the primary consideration of the assessment. Clear procedural and methodology documentation can also effectively support those conducting the assessment to consider a range of factors to identify and apply tailored evidence.

The FCA’s review emphasised that fair value assessments are inherently linked to a firm’s ongoing monitoring strategy. The FCA expects firms to take a data-led approach to monitor outcomes and be able to support value conclusions with appropriate evidence.

To reach an objective conclusion firms should seek to integrate data, such as metrics in the form of KPIs/KRIs into their value assessment approach to support qualitative and quantitative assessments and statements.  This data should be consistent with existing risk and performance metrics, triggers and limits used elsewhere across the firm to create a consistent view of outcomes and risks. It can also help provide the building blocks for future automation and efficiencies – a longer term objective for many.

Firms should also challenge themselves on whether conclusions regarding, for example, their competitiveness within the market, are supported with truly comparable data and analysis. It is worth noting that the FCA drew particular attention to the inclusion of profit margin analysis in the review. Analysis of margins should include a review of the drivers of profits and costs and their changes over time at an individual product level, as well as comparisons across the product range to validate if the price charged is fair to all.

As with all reviews from the regulator, there is a focus on governance and MI arrangements to ensure that senior management are fully identifying, challenging and continually reviewing whether good outcomes are being met.

Firms are aware of the benefits of building out KRIs and MI packs – effective MI is critical in getting an accurate view of where action is needed. In our view, often overlooked areas are the key processes and controls to ensure there is timely identification and escalation of issues as they emerge. We have seen emerging good practice with use of digital channels and dashboards to escalate matters in near real-time to senior management. This is enhancing abilities to identify and rectify risks before harm materialises and, ultimately, ahead of the FCA knocking to ask questions.