FCA review of fair value assessments: is yours up to scratch?
As the countdown to the July 2023 Consumer Duty implementation date continues, the FCA have published its observations from a review of firms’ fair value assessments. Below, we briefly cover what the price and value outcome is and what the FCA found when reviewing several firms’ preparation to comply.
The price and value outcome
Price and value is one of four outcomes firms are expected to deliver as part of their obligation to “deliver good outcomes to retail customers” under the Consumer Duty. In a speech by Sheldon Mills, which was published alongside the findings of the FCA’s review, Mr Mills commented that they had found the price and value outcome the hardest of the four for firms to address. So what are firms expected to do under this outcome?
The price and value outcome requires firms to ensure that the price a customer pays for a product is reasonable compared to the overall benefits that the customer gets from the product. In practice, firms are broadly required to:
Complete an initial value assessment of each product/service in accordance with the rules in PRIN 2A.4
Have a procedure in place to be followed in the event a product the firm manufacturers or distributes does not provide fair value i.e. an outline of potential steps to mitigate, remediate and prevent harm occurring
Regularly review the value assessment throughout the life of the product/service, ensuring the initial assessments remains accurate and up to date
Collaborate with other firms in the distribution chain to ensure each parties responsibilities are clearly understood and documented and that each have the information necessary to comply with their obligations i.e. ensure information on price and value is shared between manufacturers and distributors
What did the FCA find?
The fair value frameworks of 14 larger firms were assessed against the following 5 criteria:
1. Understanding of fair value rules
2. Assessing value
3. Considering contextual factors
4. Assessing differential outcomes
5. Data and governance
While the review focussed on larger firms, the findings (particularly where the FCA found there was room for improvement) will be useful for all firms looking for guidance on whether their value assessment frameworks are likely to meet FCA expectations. In summary, the key areas the FCA found firms could improve on were:
Understanding fair value: Firms should not place undue assertions that the firm’s business or ethos is inherently good value without sufficient evidence of critical analysis. Firms should give sufficient thought to the differences between the rules which apply to manufacturers and distributors.
Assessing value: Firms who may have adopted a single, generalised template when assessing fair value should consider how to adapt these for products with different characteristics and which may serve different target markets. Profits margins should be included as a relevant factor when considering fair value, as should non-financial costs and benefits.
Considering contextual factors: Firms should consider broader contextual factors and not rely on an overly simplistic approach to fair value. Firms will need to consider whether it needs information from other firms in the distribution chain to properly assess fair value.
Assessing differential outcomes: Firms should not focus on the average outcome but make sure to look at the full distribution of outcomes. Only by doing this can they identify drivers which may lead to customers not receiving fair value and understand why there may be differences between groups of customers.
Data and governance: Firms should be able to identify how they plan to monitor fair value and what data they might want to use or how they would address data gaps. Where a scoring or ratings system is applied, ensure there is appropriate critical analysis of this approach, i.e. consider whether decision-makers have sufficiently detailed information (including on any limitations) to review and challenge the assessment of fair value.
What should you do?
By now, firms should have already made good progress on their price and value assessment framework and the underlying assessments of each product/service. We recommend firms review the FCA’s findings and consider if their approach needs uplifting in order to meet FCA expectations.
This is especially important as the FCA have indicated that they will continue to monitor firms’ approach to ensuring customers receive fair value and confirmed this will include future reviews of firms’ fair value assessments of specific products and services. FCA’s first review focussed on larger firms, so it’s certainly possible they would look to widen the net and focus on smaller firms next.
If you don’t already have a price and value framework in place, we can help you develop one and answer any questions you may have when conducting the assessments in practice.
Get in touch here.