The Consumer Duty rules include four outcomes. This note considers the key issues arising in relation to the “price and value” outcome which will be set out in the new chapter PRIN 2A.4 in Principles for Business (“PRIN”) of the FCA Handbook.
The price and value outcome relates to whether retail customers are receiving ‘fair value’ for a product or service. Fair value is represented if the amount paid for the product or service is reasonable relative to the overall benefits of a product (for example, the nature, quality, and benefits the customer will experience). The FCA confirms that a product or service that meets all other elements of the Consumer Duty (for example, it is designed to meet the needs of its target market, is transparently sold and customers are properly supported) is more likely to offer fair value.
Regulated firms who are already subject to existing rules requiring manufacturers and distributors to assess whether the price of a product and service provides fair value and to review this regularly are likely to already meet the price and value outcome although they will have to ensure they meet all other requirements and outcomes to fully comply with the Consumer Duty. These are firms meeting the value rules in PROD 4 for non-investment insurance, PROD 7 for funeral plans, and COLL for wealth management firms).
The Consumer Duty rules introduce a common standard that applies to all firms. For some firms, this may represent a significant step up from their current approach. Although the FCA has taken action in different sectors where it has been concerned about the price of products – for example, the impact of the so-called loyalty bonus in relation to some general insurance products – it has always emphasised that it is not a price regulator.
There are a number of questions that firms will need to consider in order to comply with the price and value outcome. These include:
- Are there elements of the pricing structure that could lead to foreseeable harm?
- Are there fees or charges or rates which are 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 products 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?
Value assessment process
Firms are required to have a value assessment process in place and must be able to demonstrate that the relationship between the total price of the product or service and the benefits the customer receives remains reasonable. Firms have the discretion to decide on the factors that they use in their value assessments but PRIN 2A.4.8 provides that the assessment must include at least the following:
- The nature of the product and the benefits provided to the customer (e.g. the investment return or the suitability for a customer’s needs or a non-financial benefit such as an enhanced level of customer service for example providing extra assistance to retail customers using the product).
- Any limitations that are part of the product.
- The expected total price paid by the retail customer or that may be due from the retail customer over the lifetime of the relationship between the customer and the firm.
- Any characteristics of a vulnerability that retail customers in the target market display and the impact these characteristics have on the likelihood that retail customers may not receive fair value from the products/services they receive.
PRIN 2A.4.9 provides guidance on the value assessment and factors that may be considered by manufacturers in assessing whether or not a product is providing fair value including the following:
- The cost firms incur to manufacture and/or distribute the product or service including the cost of funding (e.g. for loans) or non-financial costs incurred by the customer such as the provision of personal data and the granting of permission to use that data or the time and effort it takes to access, assess and act to buy, amend, switch or cancel a product.
- The market rate and charges for a comparable product.
- Any accrued costs and/or benefits for existing or closed products.
- Whether there are any products that are priced significantly lower for a similar or better benefit.
The FCA acknowledges that the nature of the value assessment and the data and insight firms use to inform that assessment will vary depending on the type of product or service, and the size and complexity of the firm.
Demonstrating fair value through data and monitoring
Firms will need to be able to show that they have collected and analysed appropriate data in order to demonstrate fair value. Firms could conduct customer research, and testing or use internal data to assess whether a product or service provides fair value but customer feedback on its own is likely to be insufficient in providing the full picture due to customers (particularly unsophisticated retail customers) not having sufficient knowledge to fully assess whether they are receiving fair value. Firms are required to regularly review the data and record actions taken should it be found that a product or service is not delivering fair value.
The manufacturer of a product is required to specify the target market for the product at a sufficiently granular level, taking into account the characteristics, risk profile, complexity, and nature of the product. Having done this, the manufacturer must ensure that the design of the product meets the needs, characteristics, and objectives of the target market and that the distribution strategy is appropriate for the target market. Primarily this requirement relates to the ‘product and services outcome’ but where a product/service is not appropriately designed, there is an increased chance that the product or service does not offer fair value which also demonstrates how the Consumer Duty outcomes are linked.
Price charged to customers
The price and value outcome does not prevent charging different groups more/or less for the same/similar products but firms need to demonstrate fair value based on the target market for their products and sufficient rationale for charging different amounts. Risk-based pricing is permitted (for example, customers using lending products may carry different levels of credit risk and therefore justify a difference in price). Where a product has default charges, firms will need to consider how these are factored into the calculation of fair value. Firms will be expected to demonstrate that the overall costs consumers are likely to pay, including potential default fees, are reasonable relative to the benefits. Consumers who are not in a position to give sufficient consideration to the risks and consequences of default when being offered products with default fees will increase the risk of them receiving unfair value.
Distribution chain considerations
All firms in a 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. Distributors however must obtain relevant information from manufacturers to understand the value a product or service is intended to provide and to enable them to understand whether their distribution arrangements would result in the product or service ceasing to provide fair value to retail customers. The guidance is not prescriptive on the level of detail required but distributors will need to obtain sufficient, adequate, and reliable information from the manufacturer on the outcome of the value assessment in order for it to be satisfied that the product is providing fair value. The distributor will need to consider the cumulative impact of the remuneration added by each person in the chain on the overall value of the product to the customer. This is important as fees charged by different firms along the distribution chain might together result in a higher overall fee that does not represent fair value for customers. There is no cap on the margins but there is likely to be an issue if firms stand to benefit too much in comparison to their costs.
Firms should consider the issues raised above as they carry out their implementation plans.
If you require any assistance in relation to any of these issues, please contact our team.
Authored by Roger Tym, Julie Patient and Melanie Johnson