FCA speech: Countdown to the Consumer Duty

Some key points from the speech delivered by Sheldon Mills, FCA Executive Director, Consumers and Competition, include:

Fair value as an area of focus

• Fair value is singled out as a particular area of focus because the FCA regularly hears that the price and value outcome is the one that firms find the hardest. Take a look at our Engage article ‘Consumer Duty – the price and value outcome’ for further analysis of this outcome. See also ‘Findings from fair value assessment frameworks review’ below for more on the results of the FCA’s review of firms’ frameworks.
• Areas that will need renewed focus in the weeks ahead are: ensuring proper consideration of outcomes for different groups of consumers, rather than relying on broad averages; and full challenge on uncomfortable questions such as whether high profit margins on a specific product is a sign that those customers aren’t getting fair value. The FCA expects to see all firms taking an honest and critical approach to their fair value assessments.
• While the cost of doing business is also rising for firms, this does not absolve them of their duty to make sure that their customers are paying a fair price for their product or service in relation to the benefit received.
• Ipsos Mori’s latest financial research survey found that half of consumers are finding repayment of bills and credit commitments hard. The FCA’s recent Consumer Duty ‘Dear CEO’ letters reference fees and charges across multiple sectors.
• However, fair value is also about more than price. It should include consideration of the quality and benefits of the product or service. Firms should be looking at their product and really examining and challenging themselves about whether the cost of a product or service really is reasonable relative to the overall benefits. The assessment is crucial, not only in terms of the upfront price and value but also throughout the product’s lifecycle.
• The Consumer Duty presents an opportunity for manufacturers and distributors to really understand the impact that different commission models have on the value that consumers receive. The FCA will be taking a ‘close interest’ in this aspect of the Duty across sectors.

FCA’s supervisory and enforcement approach post-31 July 2023

• From 31 July 2023, the FCA’s supervisory and enforcement approach will be proportionate to the harm - or risk of harm - to consumers. It will ‘prioritise the most serious breaches’ and ‘act swiftly and assertively’ where it finds evidence of harm or risk of harm to consumers. In some cases, firms can expect the FCA to take ‘robust action’, such as interventions or investigations, along with possible disciplinary sanctions.

Importance of data and technology

• The FCA wants firms to harness the benefits of data and technology to improve their services and understand the outcomes they achieve for their customers, including tackling any potential breaches early.

Ensuring a joined-up approach to interpretation and application

• The FCA has worked closely with the Financial Ombudsman Service (FOS) to ensure a joined-up approach to how the Duty applies. It will continue working on its interpretation under the Wider Implications Framework going forward. The Financial Services and Markets Bill will introduce a duty on the FCA, the FOS and the FSCS to cooperate on matters with significant implications for one another, and to consult others, such as The Pensions Regulator and the Money and Pensions Service, where appropriate.

Findings from fair value assessment frameworks review

The FCA has also published the findings from its review into firms’ approaches to fair value assessments under the Consumer Duty. This relates to the price and value outcome, under which firms must carry out 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 looked at 14 (mainly large) firms’ fair value assessment frameworks with the aim of understanding how firms in different sectors are implementing the price and value requirements, and to ensure that the FCA’s internal supervisory and regulatory approaches to fair value reflect industry thinking. The firms under review were selected from the retail banking, consumer investments, payments and digital assets, and consumer finance portfolios. The FCA acknowledges that larger firms’ fair value frameworks and assessments may be more detailed than those for smaller firms, but confirms that many of its observations will be relevant to the wider population of regulated firms. The review did not cover more detailed documents, eg assessments of individual products and services.

Four key areas for further consideration by firms

As a result of the review, the FCA has identified four key areas for further consideration by firms:

• Collecting and monitoring evidence that demonstrates that products and services represent fair value;
• Clear oversight and accountability of the necessary remedial actions if they do not provide fair value;
• Where relevant, ensuring sufficient analysis of the distribution of outcomes across groups of consumers in the target market, beyond broad averages, to demonstrate how each group receives fair value; and
• Summarising and presenting fair value assessments in a way that enables decision-makers to robustly discuss whether the product or service represents fair value, such as by being clear on any limitations in the analysis or evidence.

What about the more detailed findings from the review?

The FCA assessed the firms’ fair value frameworks against five criteria, and set out examples of good practice and areas for improvement for each. These include:

1. Understanding fair value: Frameworks should clearly set out principles for how a firm will apply the concept of fair value both generally and across product lines, and also identify their role as a manufacturer, co-manufacturer or distributor and show understanding of their respective responsibilities under PRIN 2A.4. This is described by the FCA as an ‘important element’ of its rules. Reliance on high-level or unevidenced arguments that business models or ethos are inherently fair value is not sufficient. Firms will need to consider how they could provide evidence for this view, and how they allow for their own critical analysis of this position to ensure they deliver fair value for their customers. 
2. Assessing value: A single, generalised template for assessing fair value is unlikely to be adequate. Firms who provide a wide range of products and services across different market sectors may need to consider further how they adapt their approach to assessing fair value across these different market sectors. Also, the FCA suggests that the profit margins of a product or service are likely to be a relevant factor in assessing its fair value. Likewise in relation to any non-financial costs and benefits. Where products are sold as a package or bundle, frameworks should contain a clear consideration of where bundling does, or does not, provide value to consumers. For example, one firm noted that a bundle should not be priced higher than its constituent parts unless there is value to the consumer in terms of the convenience of bundling. Where firms are required to gather input from other firms or to pass on information to other firms in the distribution chain, frameworks should set out clearly how and when this will be done and how the firm will treat and consider any information received. 
3. Considering contextual factors: Simple approaches to fair value which don’t consider broader contextual factors may overlook pockets of harm, especially in the case of large firms or those with complex business models and offerings. Examples of good practice here include consideration of:
   1. The interaction between fair value and other elements of the Duty such as the products and services, consumer support and consumer understanding outcomes;
   2. How wider changes in the market could affect firms’ own fair value assessments;
   3. Customer choice and how it affects value, especially how factors like ‘sludge practices’ could lead to poor value;
   4. Other factors that may affect the firm’s assessment of fair value, such as the products and services that consumers already hold with the firm (even if not sold as part of a bundle), and how this evidence could change firms’ conclusions around fair value for different customer groups; and
   5. Consumers’ behavioural biases, how these may affect the way consumers buy and use products and services and how poor value may result.

On this last point, the FCA reminds firms that FG22/5 sets out that it expects firms not to seek to exploit customers’ behavioural biases, lack of knowledge or characteristics of vulnerability.

4. Assessing differential outcomes: It is not sufficient for firms to only identify differential pricing between groups of customers. They must also be able to demonstrate how each group of customers receives fair value, as required by the FCA’s rules and guidance. Reliance on average outcomes rather than analysis to understand the full distribution of outcomes could disguise outliers or pockets of poor value. Firms should set out how they plan to look at differential outcomes for customers and demonstrate a range of ways to segment customers. Tailored analysis of fair value for consumers with characteristics of vulnerability and consideration of product or service-level cross-subsidies are other examples of good practice under this assessment criterion.
5. Data and governance: Frameworks should set out appropriate data-led plans to monitor and review customer outcomes and allow sufficient challenge and discussion in the firm’s decision-making. There should be clear timelines for when firms should conduct value assessments, including the frequency of reviews, eg to correspond to the expected length of time a consumer will keep a product or the expected renewal pattern. There should also be clear rectification processes to be followed if a firm identifies that a product no longer provides fair value. This could include triggers which may require a new assessment, eg movements in a certain data indicator, and could allow for discussion and challenge at an appropriate level of seniority. Where firms are using points-based or red/amber/green-style approaches within their fair value frameworks, they may want to consider whether they are giving sufficient weight to critical analysis around the ratings, how thresholds between points/ratings are drawn and whether decision-makers have sufficiently detailed information to review and challenge the assessment of fair value. More generally, any limitations in relation to evidence relevant to fair value should be clarified. This will enable decision makers to critically review the evidence when assessing fair value.

Next steps

The FCA states that firms should consider the findings from its review of fair value assessment frameworks and whether they need to develop their approach to implementing the FCA’s price and value outcome rules in line with good practice. They should consider these findings in conjunction with the FCA’s Finalised Guidance on the Duty and expectations highlighted in its recent sectoral letters on the Duty. 

The FCA will continue to support firms’ embedding activities in the run-up to, and beyond, the July 2023 implementation deadline for new and existing products and services. In particular:

• It has given all the firms involved in the review feedback on its findings where applicable. It will continue to engage with firms where it has questions about their plans or approach, and to monitor the progress they are making in embedding the Duty. 
• It is reviewing the findings of its survey of 1100 firms, to better understand the progress smaller firms are making in different sectors and on different aspects of the Duty. It will use the findings to carry out targeted engagement with smaller firms.
• It will continue to update its dedicated webpages and host further regional in-person events for specific groups of small and medium-sized firms.
• It will continue to monitor firms’ approach to ensuring customers receive fair value and this will include future reviews of firms’ fair value assessments of specific products and services. It will continue to feedback to the market on what it sees on fair value and the other areas of the Duty.

With the 31 July 2023 deadline for new and existing products or services open to sale or renewal looming ahead, our Consumer Duty hub provides a number of useful resources to help firms as they enter the final stage of implementation of the Duty.

If you would like to discuss any aspect of the Consumer Duty or the FCA’s findings from its review of firms’ fair value assessment frameworks, please get in touch with one of the listed lawyers or your usual Hogan Lovells contact.

Authored by Virginia Montgomery.