On 18th September 2024, the FCA published an update on good and poor practices related to the Price and Value Outcome under the Consumer Duty.
This update comes as the FCA marks the first year since the Duty’s introduction. It aims to provide guidance to help firms ensure that their products and services offer fair value to retail customers.
In this blog, we’re diving into the key findings from the FCA and summarising important points for firms.
Context to the FCA’s Price and Value Outcome Update
The Consumer Duty, a groundbreaking piece of legislation for its influence and scope, came into force in July 2023 and sets high standards for consumer protection. Among other things, the Duty requires firms to ensure that the price of a product is reasonable compared to its benefits—the Price and Value Outcome.
A year on from its introduction, the FCA has engaged with firms to assess how they apply fair value principles across various products and services, with the aim of providing practical insights and identifying both good practices and areas for improvement.
While no individual firm has been singled out, the FCA’s observations in publications like these serve as guidance for firms to improve their approaches and ensure transparency, while meeting their obligations under the Duty.
Key Findings
Let’s dive into the key findings from the FCA’s update.
Good Practices
Comprehensive Fair Value Assessments
Some firms are carrying out regular, thorough assessments to confirm that the price consumers pay is proportionate to the benefits they receive.
Good assessments consider the needs of diverse customer segments, including vulnerable groups, and ensure fair value across a range of consumer experiences.
Clear Communication of Fees and Charges
Good practice includes providing consumers with transparent and accessible information about costs, charges, and key product features. Simplifying pricing structures and clearly explaining cross-subsidies within products helps customers better understand the value they are receiving.
Proactive Product Adjustments
Leading firms are proactively adjusting their products and services based on fair value assessments, addressing any potential gaps to enhance customer outcomes. Examples of this include revising pricing, refining product features, or implementing targeted changes to ensure value for specific customer segments.
Areas for Improvement
Inconsistent Fair Value Assessments
Although recognising that many firms were creating good assessments, the FCA also identified inconsistency in fair value assessments across some firms.
Assessments were sometimes unsupported by sufficient evidence or conducted irregularly, particularly for products with diverse consumer bases. This inconsistency can prevent firms from consistently delivering fair value.
Firms must ensure that they have in-place methodologies to support regular assessments, and that firms demonstrate strong governance frameworks where management regularly involve themselves in value outcomes.
Transparency Issues in Consumer Communications
Firms still struggle to communicate product costs, fees, and benefits to their customers transparently.
Complex pricing structures and hidden costs limit consumers’ ability to make informed choices and compare similar products. This reduces competition and makes selecting the best product for a customer’s needs challenging.
Another area the FCA identified for improvement was instances of overly broad target market definitions, which could lead to poor value for specific consumer groups, such as GAP insurance policies marketed to all car buyers without regard to the varied needs within that group. Firms must be careful to segment their customer base appropriately, while communicating price and value precisely to different groups.
Reactive Rather than Proactive Changes
One key theme of the Duty is that firms must not wait for instructions from regulators, but instead take a holistic approach to the Duty, anticipating improvements for their customers without a regulatory push while also evaluating price and value in the context of the Consumer Duty’s cross-cutting obligations and customer outcomes.
Several firms make product adjustments only after identifying consumer issues or receiving regulatory feedback. However, such a reactive approach can undermine consumer trust and delay necessary enhancements to product value.
Considerations for Small Firms
A running theme in all of this communication, especially in light of the latest Call for Input, is the impact that the Duty’s rules have on small firms, which may face unique challenges in conducting in-depth analyses or maintaining formal governance structures.
However, as Sheldon Mills explained in July, ‘The Duty allows for smaller firms […] to take an approach that fits their size, the activities they undertake, the market they operate in and, of course, to the needs and circumstances of their customers’.
With regard to the price and value outcome, the FCA recommends a proportionate approach, such as using consumer feedback and industry benchmarks when firm-specific data is unavailable.
Next Steps for Firms
The FCA’s update emphasises the importance of robust fair value assessments, clear communications, and timely adjustments to maintain fair value under the Consumer Duty.
Firms are encouraged to regularly review their fair value processes and implement ongoing improvements to align with the Duty’s principles and ensure good outcomes for all consumers.
If your firm requires assistance in strengthening fair value assessments, enhancing consumer communications, or applying the FCA’s guidance effectively, API Compliance can provide tailored support. Contact us using the form below to discuss how we can help your firm meet its Consumer Duty obligations.
