What has happened?
The new FCA rules relating to the Consumer Duty Regulation will come into force, for firms that are currently offered products and services on 31st July 2023 (31st July 2024 for closed products and services). From that date, all firms dealing directly or indirectly with retail clients must be in full compliance with all of the requirements.
What are the key points?
The FCA’s Policy Statement, issued in July 2022, introduced rules comprising:
- A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers,
- Cross-cutting rules provide greater clarity on expectations under the new Principle and help firms interpret the four outcomes, and
- Rules relating to the four outcomes the FCA wants to see under the Consumer Duty Regulation. These represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers.
These outcomes relate to:
- products and services,
- price and value,
- consumer understanding, and
- consumer support
In this article, we consider ten things that firms need to consider in relation to the fair price and value outcome.
- The focus of the price and value outcome rules is on ensuring the price the customer pays for a product or service is reasonable compared to the overall benefits (the nature, quality, and benefits the customer will experience considering all these factors). Value needs to be considered in the round and low prices do not always mean fair value. The FCA expects firms to think about price when assessing fair value, but not at the expense of other factors.
- A product or service that meets all of the other elements of the Consumer Duty Regulation (for example, if it is designed to meet the needs of its target market and is transparently sold and customers are able to exercise choices to switch or exit and are properly supported) is more likely to offer fair value. This is because of the benefits customers receive and because they have the information they need about the benefits and limitations of the product or service they are buying, and the ability to pick something else should they prefer.
- In order to assess if a product or service provides value, firms must consider at least the following:
- the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities,
- any limitations that are part of the product or service (e.g. limitations on the scope of cover for insurance products), and
- the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between customers and firms.
- When firms perform value assessments, in addition to the above aspects, they may consider a range of factors in demonstrating that the price paid is reasonable compared to the benefits. These are also factors that the FCA may consider when it reviews firms’ value assessments. They include the following points.
- The costs firms incur to manufacture and/or distribute the product or service, including the cost of funding (e.g. for loans). The difference in costs may for example explain why otherwise similar products are priced differently, and/or explain changes in the price charged over time.
- The market rates and charges for comparable products or services and whether the product is a significant outlier compared to these. Where a product or service is a significant outlier, it might prompt the firm to check that other elements of the design of, and support for a product or service are functioning properly, and/or to confirm they are still confident the price is reasonable compared to the benefits received.
- Whether there are any products in the firm’s portfolio that are priced significantly lower for a similar or better level of benefit.
- Any accrued costs and/or benefits for existing or closed products
- Depending on the nature of the product or service, firms could conduct customer research or testing or use internal data to assess whether a product or service provides fair value. They should not rely solely on individual consumers to consider whether the price provides fair value in relation to the benefits.
Firms could use the following types of data to monitor that they are meeting expectations under this outcome:
- the expected price paid by customers, including associated fees and charges and those incurred further down the distribution chain,
- profitability data, including revenue and profit margins,
- customer complaints and root cause analyses,
- surveys, net promoter scores, social media rating analysis, focus groups, mystery shopping or other customer research,
- data about customer usage and behavior, such as transactional data, retention rates, or relevant A/B testing of variation in product or service design,
- operational data which might affect value such as app or website outages or service call abandonment rates,
- feedback from other firms in the distribution chain including manufacturers, intermediaries, appointed representatives, or other third parties regarding the value of the product,
- the cost of providing the product or service, including credit risk, or
- market conditions, such as the interest rate environment or rates for comparable products
- If a product or service does not provide or ceases to provide fair value to customers, firms must take appropriate action to mitigate and prevent harm, for example, by amending it to improve its value or by withdrawing it from sale.
- Firms must assess value at the design stage and before offering products or services to consumers. They must ensure that the prices represent fair value for a foreseeable period. The foreseeable period will depend on the nature of the product or service and, where a product or service renews, including the period following renewal. They must also monitor and assess the value of their products and services throughout their life, conducting regular reviews of their value assessment.
- Where products and/or services are sold together as part of a package, firms must ensure that each component product or service, and the overall package, provides fair value. The FCA expects firms to be able to show that they have made an assessment and can demonstrate why they consider that the relationship between the price and the benefits is reasonable.
- Manufacturer firms must assess the benefits consumers can reasonably expect from a product or service when designing products and services to meet the needs, characteristics, and objectives of the target market.
- Distributors must ensure their own charges for distributing the product or service represent fair value. All firms in the distribution chain are responsible for the value of the prices that they control and are not required to redo or challenge other firms’ value assessments.
How can we help you?
Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as and when, our team of specialists can serve as your right hand in meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.
Are you looking for help with your Consumer Duty Regulation arrangements, or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.