May 11, 2023

FCA Consumer Duty Update: Assessing Fair Value

David Berman, Charlotte Collins, Becky Critchley, Nicola Higgs, Rob Moulton

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Latham & Watkins LLP

The FCA has published the findings from its review of firms’ fair value assessment frameworks and set out implementation priorities for firms.

On 10 May 2023, the FCA published a speech by Sheldon Mills, FCA Executive Director, Consumers and Competition, on the countdown to the Consumer Duty implementation deadline of 31 July 2023. Alongside the speech, the FCA published the findings from its review of 14 firms’ fair value assessment frameworks under the Consumer Duty.

While the FCA’s review found that firms had considered the requirements carefully, it is concerned that some firms’ frameworks may not be effective in practice. Firms in the final stages of their implementation projects will want to ensure they take the FCA’s messaging, and findings from its review, on board.

Questions Firms Should Ask Internally

In terms of general implementation work, Mr Mills reminds firms of four questions they should already be asking themselves, which are:

Does your purpose and culture align with your obligations under the Duty and support the delivery of good outcomes for customers?
Is the Duty being considered in all relevant discussions such as strategy, remuneration, and risk?
Have you made sure your remuneration and incentive structures drive good outcomes for customers?
Are you prioritising delivering good outcomes for customers in a changing external environment?

He suggests that firms’ Consumer Duty champions and Chairs should be asking these sorts of questions internally. Accordingly, firms should take note of this and ensure that sufficiently senior individuals are asking the right questions at this stage.

Focus on Fair Value

Firms must undertake fair value assessments as a way of demonstrating that the price a consumer pays for a product or service is reasonable compared to the overall benefits they can expect to receive. Mr Mills mentions in his speech that the FCA understands that firms have found this the hardest of the four consumer outcomes to address. This feedback is hardly surprising, as quantifying what benefit different customers will receive from a particular product or service over its lifetime is not straightforward, and many varying factors feed into this analysis.

As part of its review, the FCA analysed the fair value assessment frameworks of 14 firms against five key criteria. Its main findings are summarised below:

Criteria	Good practice	Areas for improvement
Understanding fair value	Clearly setting out principles for how the firm would apply the concept of fair value, both generally and across product lines.	Not placing undue reliance on assertions that the firm’s business model or ethos is inherently based around fair value, without sufficient evidence or critical analysis. Giving sufficient thought to the distinction between manufacturers and distributors, and the relevant requirements that apply.
Assessing value	Providing a sufficiently broad view of the overall costs to the consumer, including fees and charges, any non-monetary costs, as well as any potential distribution costs to consumers. Orienting the framework toward the person undertaking the assessment, for instance by guiding the reviewer or providing practical statements, questions, or challenges to consider at different stages. Including clear discussion about how to price products sold as a package or bundle and assess them for value.	Considering how to adapt the firm’s approach across different market sectors, rather than relying on a single generalised template. Making sure profit margins are included as a relevant factor when considering fair value. Considering the non-financial costs and benefits that consumers may expect to pay or receive.
Considering contextual factors	Considering the interaction between fair value and the other consumer outcomes. Taking the impact of consumer choice and behavioural biases into account, as well as factors like which products and services consumers already hold with the firm.	Considering broader contextual factors, and not relying on an overly simplistic approach to fair value. Ensuring the firm considers whether it needs information from other firms in the distribution chain to properly assess fair value.
Assessing differential outcomes	Setting out a range of ways to segment customers, and including tailored analysis of fair value for consumers with characteristics of vulnerability. Considering product or service-level cross-subsidies.	Understanding the full distribution of outcomes rather than relying on average outcomes. Being able to demonstrate how each group of customers receives fair value where differential pricing exists between groups of customers.
Data and governance	Setting out appropriate data-led plans to monitor and review customer outcomes, including clear timelines for value assessments and reviews. Setting out clear rectification processes, complete with named owners, that the firm must follow if it identifies that a product no longer provides fair value.	Ensuring the firm has a clear plan to monitor fair value, with clear steps for remediation where appropriate. Considering whether sufficient critical analysis is carried out around ratings where points-based or traffic light systems are used. Ensuring that the limitations of evidence are made clear so that decision-makers can make critical assessments. Ensuring that, where market-level benchmarks or comparators are used, firms are considering how they are delivering fair value in absolute rather than just relative terms.

The FCA highlights the following as areas of particular focus for firms:

Ensuring they can provide adequate evidence as to why their products or services provide fair value, including collecting and monitoring the right evidence for this purpose
Providing sufficient analysis of outcomes across groups of consumers in the target market, to demonstrate how each group receives fair value, rather than relying on broad averages
Establishing clear oversight and accountability of the necessary remedial actions that they should take if their products or services do not provide fair value
Summarising and presenting fair value assessments in a way that enables decision-makers to critically analyse whether the product or service represents fair value, such as by explaining any limitations in the analysis or evidence

Mr Mills also emphasises that firms may not be challenging themselves enough by asking uncomfortable questions such as whether high profit margins on a product could indicate that customers are not getting fair value. Further, he explains that payment of commissions can have a significant impact on the value a customer receives and that the FCA will take a close interest in this issue going forward. Mr Mills encourages firms to place renewed focus on these areas in the weeks ahead of the implementation deadline.

The FCA expects that firms will consider the findings of the review alongside other regulatory material on the Consumer Duty and assess whether they need to make any adjustments to the way in which they are implementing the Duty in relation to the price and value outcome. The FCA indicates that it will undertake future reviews of firms’ fair value assessments in relation to specific products and services.

Future Supervisory Approach

In his speech, Mr Mills also touches on the FCA’s overall approach to supervising firms once the Consumer Duty has been implemented. As the Duty is outcomes-based, he underscores the importance of firms being able to evidence customer outcomes, so that firms can monitor compliance and tackle breaches early. The FCA expects firms to harness the benefits of data and technology to enable themselves to do this.

Mr Mills highlights that the FCA “will prioritise the most serious breaches and act swiftly and assertively where we find evidence of harm or risk of harm to consumers”. The focus will be on taking action that is proportionate to the harm to consumers. Mr Mills explains that firms that have not implemented the Duty correctly could face regulatory interventions or investigations, as well as potential disciplinary sanctions. Firms have already been put on notice that the FCA will take non-compliance seriously, but this comment serves as another reminder.

Ultimately, the FCA envisages the Consumer Duty being used to streamline regulation. While currently firms are faced with navigating the complexities of the Duty, Mr Mills suggests that it will enable the FCA to simplify its rules in certain respects. He explains that in future the FCA will ensure that it does not duplicate regulation that is already implicit in the Duty, which may help to rationalise the rulebook.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.