Blog

Background

In our second webinar of this 4-part series, we looked at the Price and Value outcome under the Consumer Duty. A key component of the second Consumer Duty outcome will be defining and demonstrating the associated value of a good or service. The FCA has said that it may review firms to make sure they are consistently providing evidence of compliance with this requirement.

The FCA has published new product governance standards that are relevant to all sectors. The criteria, however, won't be applicable to products and services covered by the present product governance rules found in PROD 3 (for MiFID financial instruments), PROD 4 (IDD and pathway investments), or PROD 7 (funeral plans).

Have a read below of the questions which were asked during the webinar which our in-house experts have answered. 

 1. How will the FCA test firm's approach to price and value?  All the assessments look the same and confirm VFM

We don’t know in practice what the detailed FCA approach will be after the 31st July deadline has passed. However, we can get a good understanding of the probable approach to be taken from the FCA’s initial May 2023 review of firms’ approaches to fair value assessments under the Consumer Duty. Key points raised by the FCA following this review were;

We have reviewed 14 firms’ fair value assessment frameworks, which set out the approach firms are taking in this area. We are sharing our observations from this review as other firms will find them helpful when implementing our price and value requirements.

We assessed fair value frameworks against the following 5 criteria: 

1. Understanding of fair value rules – how clearly the fair value assessment defines fair value and how it applies to their products.
2. Assessing value – how costs and benefits to consumers, including non-financial costs and benefits, have been considered. 
3. Considering contextual factors – how the firm has considered broader contextual factors relevant to value.
4. Assessing differential outcomes – approaches to assessing the range of consumer outcomes such as differential pricing, and outcomes for vulnerable consumers. 
5. Data and governance – the approach to measuring and monitoring fair value using data, and how a firm’s governance arrangements operate. 

We have identified 4 key areas for further consideration by firms:

1. Collecting and monitoring evidence that demonstrates that products and services represent fair value
   
   
2. Clear oversight and accountability of the necessary remedial actions if they do not provide fair value
   
   
3. 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
   
   
4. 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 

2. Small firm - we would appreciate templates or examples of best practices for Price & Value Assessments, will this be provided?

As discussed towards the end of the Webinar, we are offering a discounted price for Consumer Duty documentation.

In terms of best practice, many of the client firms that we speak to are looking for a really practical way to help evidence price and value, as part of the Consumer Duty requirements. What the FCA is expecting is that firms can evidence how they’ve assessed client fees: what do clients actually pay for the product or service, and this needs to be considered throughout the lifetime of a product, and you also need to consider the non-financial costs too e.g., how long does it take a customer to make changes to their product or service?

You also need to consider client benefits – how do you know how a customer feels about your service or product? And also think about profit, do you use this to feed back into your business and further develop your products, as an example?

3. How do firms find the balance between recording vulnerabilities for customers on health and meeting data protection requirements ?

Vulnerable customers are something the Consumer Duty policy statement discusses quite a bit. The Duty requires firms to pay attention to the needs of customers with characteristics of vulnerability and there is an expectation that your firm therefore proactively identifies any particular vulnerabilities relevant to your target customer base and then ensure that your products and services are designed to meet different needs and characteristics. So as part of your implementation plan, you should re-assess your current Vulnerable Customers framework to identify relevant data already available to inform policy, and also think about how you will enable staff to provide reassurance and support to vulnerable customers and demonstrate compliance to the regulator. But the expectation here is that you identify overarching vulnerabilities in the target market rather than looking at each customer individually.

However, the chances are that you will interact with vulnerable customers as part of your day-to-day operations of your business, and it is important to fully understand the expectations in regard to the data protection requirements.

There is never an expectation that you breach one regulation to allow you to comply with another. Under the UK-GDPR and DPA 2018, information relating to certain vulnerabilities, for example information related to physical or mental health, is considered ‘special category data’. Such information has to be managed carefully and in line with the data protection regulations. That means that your firm will need to obtain explicit consent from customers before recording any health-related vulnerabilities. In addition, clear and concise explanations should be provided to customers regarding the purpose, extent, and potential risks associated with such data recording. The issue that some firms have of course, is that the person doesn’t give you that authority – and then you need to think about how you overcome that.  The process for capturing special category data will differ for each firm, and it would be best to have a full review of your firm’s data protection framework and systems and controls to adequately answer this question. 
 
4. How would we be expected to handle Price & Value if we have evidence that an insurer applies a dual pricing policy to their product meaning that we know a customer could get a better price for the same product by using a different broker?  

• That we could become liable for recommending a product that we expect the client could buy cheaper elsewhere
• That the insurer shouldn’t be acting in this way as it is aware that any broker with access to its product at anything other than their most competitive pricing structure is likely to be failing to offer fair value. Therefore, how would it be able to arrive at the conclusion that its product offers fair value to every customer who buys it?

• Are there elements of the pricing structure that could lead to foreseeable harm? 
• Are there fees or charges or rates which appear unjustifiably or unreasonably high compared to the benefits of the product and other comparable products (either in the firm’s product portfolio or comparable products supplied by other firms)? 
• Should/have any changes in the benefits of the product been reflected in the price? 
• Should/have any material changes to assumptions that underpinned pricing (for example on costs of servicing) been reflected in changes to the price?

• 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 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, 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 looks at the 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). 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 which are priced significantly lower for a similar or better level of benefit. 

• Any accrued costs and/or benefits for existing or closed product

6.  Are value assessments expected to be published on websites in a similar way to UCITS products?

There is no evidence of this currently. The emphasis is expected to be on firms being able to demonstrate this outcome to the FCA where required. Firms may be able to publish assessments  -  we know of no reason why they cannot but this is subject to change.

7. What is the FCA's metric for measuring value in relation to price?

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 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, 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 looks at the 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). 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 which are priced significantly lower for a similar or better level of benefit.

• Any accrued costs and/or benefits for existing or closed products.

8. I understand what the Consumer Duty is but what does a 'framework' look like for firms i.e. is it a policy? 

You will need a policy, but there is much more to Implementing a robust Consumer Duty framework, although the specific elements of implementation may vary depending on the firm's size, nature of business, and target market, but let me give you an idea of some key elements that you could consider when developing a framework:

Policy:  A related Policy and Procedure document should outline your firm's commitment to the Consumer Duty principles and objectives. These documents should provide clear guidance on how your firm will ensure consumer protection, deliver good outcomes, and communicate effectively with consumers for example.

Governance & Oversight: You will also need to consider the Governance and Oversight arrangements within your business, ensuring your governance structure delivers accountability and oversight of the Consumer Duty implementation and ongoing compliance. This may involve designating responsible individuals or teams within the organization, establishing reporting lines, and integrating Consumer Duty considerations into existing governance frameworks.

Pricing & Value: And given the topic of today’s webinar, you would also need to conduct a Pricing and Value Assessment: looking at the pricing structure and value proposition.

Complaint handling:  You should also consider your complaint Handling framework to address consumer grievances and to ensure that complaints related to pricing, and value for example are given due attention.

Training & Awareness: You will also need to consider your Training and Awareness requirements: by providing regular training and awareness for employees at all levels of the organisation you are better placed to ensure that everyone in your business understands the Consumer Duty principles relevant to their roles.

Communication Strategy: Your business will need to Implement effective communication strategies to ensure clear and prominent disclosure of information to consumers. For example, information about product features, costs, risks, and terms and conditions.

Monitoring:  You will also need a process of continuous monitoring and review to assess the effectiveness of the Consumer Duty implementation with key performance indicators and metrics to measure success and track progress over time.

Establish mechanisms to monitor and enforce compliance with pricing and value standards. Regularly review pricing practices, value assessments, and consumer feedback to ensure ongoing adherence to fair pricing and value outcomes.

9. Should responsibility for Consumer Duty be a Senior Manager responsibility. What if you don't have retail clients?

Firms are expected to have a “Consumer Duty Champion”, who should ideally be an independent non-executive director, on the board or equivalent governing body. That person should work with the Chair and CEO to make sure the Consumer Duty is raised in all relevant discussions.

These rules will be applicable to all regulated firms which provide services to retail clients, including authorised firms with part 4A permissions, as well as electronic money institutions, payment institutions and registered account information service providers.

You can watch the recording of this webinar here. 

Read our answers to the questions submitted in the third part of the webinar series on the Consumer Understanding Outcome. 

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 a 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.

For more information about this webinar series and how we can help you with your Consumer Duty arrangements, implementation support, framework review, or ongoing support speak to the team by calling 0207 436 0630 or send an email to info@thistleinitiatives.co.uk.