On 18th September, the Financial Conduct Authority (FCA) published a Price and Value Outcome: Good and Poor Practice update.
The Price and Value is one of the four outcomes that the Consumer Duty is centred around. Consumer Duty is the FCA’s response to the four key consumer harms:
Consumers buy the wrong products or products that are too risky = Products & Service outcome
Consumers incur greater monetary and non-monetary costs (e.g. time, stress and missed opportunities) = Price & Value outcome
Consumers find it hard to make decisions or fail to make timely decisions = Consumer Understanding outcome
Consumers find it hard to switch/transfer to get better deals = Consumer Support outcome
The FCA’s update collates insights from the first year of the implementation of the price and value outcome and looks to help firms improve the way they think about fair value assessments.
The FCA’s key messages to firms
1. Be clear for whom products and services are designed for - it is key that firms identify groups of customers outside of target, or groups within target getting worse outcomes than other customers
2. Firms must do more to identify and adjust to vulnerable customers' needs and ensure they get the same outcomes as non-vulnerable customers
3. Firms must focus on outcomes (not processes) in the context of the product - what are the foreseeable harms that use or misuse of a product might bring?
4. Be data led - firms must find and use new sources of data to do all of the above and not rely on historic measures
What do firms need to consider in their approach to Consumer Duty compliance?
- Business Model risk: Are your profits sustainable or do they rely on inertia, legacy pricing, or lack of transparency?
- Customer risk: Do you serve niche groups of customers with complex needs or who are vulnerable?
- Product risk: Are your products inherently complex or do they have features that are outside of the market norm?
How do the FCA’s Consumer Duty rules define 'fair value' for e-money and payment institutions, and what are the implications for these firms?
The FCA has been clear that Consumer Duty rules are not about setting prices, requiring prices to be low or that firms charge the same as competitors. But, firms are required to consider price when assessing whether they are providing fair value, and take action if not
Firms should be evidencing data and metrics to ensure that the price a customer pays is reasonable compared to the benefits they receive, with the ability to justify any pricing outside of the market norm, e.g. premium pricing with evidence of access to (and usage of) additional features and benefits.
Additionally, the FCA stresses that each outcome should be looked at holistically, within the context of the other outcomes and the rest of Consumer Duty. If your product meets all elements of the Duty, it likely offers fair value.
What should payments and e-money firms follow to ensure their customer communications meet the requirements?
The FCA had laid out specific expectations it has on hope firms approach meeting Consumer Duty requirements, including:
Defining and documenting outcomes specific to each firm’s business model
Tracking customers who fall outside of the target market and implementing outreach or intervention measures
Improving the way firms capture and record information about customer vulnerabilities to better meet customer needs by adopting a ‘Tell Us Once’ approach
Be proactive with communications - reach out to customers to inform them of more suitable products may be available and measure the impact of those communications
Get good at benchmarking - be clear on and assess comparable firms and products
Take action when adverse outcomes are identified, and demonstrate how you evaluate the effectiveness of the action
Show an understanding of what customers think and how firms are seeing products bought and understood in the market through solid data and credible evidence
What’s next?
In the report, the FCA states that they will focus thematic price and value outcome work across sectors. It has already reported on General Insurance, has an ongoing review of Guaranteed Asset Protection insurance commissions and has announced a review of the pure protection market, again with a focus on commissions payable.
Justifying remuneration/charges is clearly a theme moving forward for the FCA, especially where those fees are invisible to the end consumer. The key to justification will be solid evidence built on data.