Price and Value under the Consumer Duty - FCA insights a year on

Firms should take an holistic approach across the outcomes and cross-cutting obligations under the Duty. Products which are poorly designed, or do not meet the needs of the target market, are less likely to provide fair value for customers. A firm may consider adjusting the core features of a product, effectively communicating with and supporting consumers so they are in the right products, and monitoring how these actions are cumulatively working together to ensure consumers are receiving fair value.

Examples of poor practice include:

• having a regressive tiered interest rate (with lower interest rates as cash balances grew) that customers may not understand and/or not initially offering products better suited to customers’ needs; and

• complex pricing models that customers may not understand such as ‘double dipping’ (e.g. charging a platform fee as well as retaining interest).

In a FVA, a firm should think critically about the ultimate customer outcomes, instead of seeking to justify the current approach to pricing or benefits of a product or service. The FCA has drawn out examples of good and poor practice across four areas as outlined in detail below.

Overall, the FCA found that many firms’ FVAs were not defining the product group or the target market for a product at an appropriate level of granularity. A FVA should be done for each product that has distinct features, fee structures or benefits. If there is an expectation that a product might not generate fair value for a particular customer group, firms should consider how their target market is being defined so this customer group is not in the target market.

Grouping of products or services

Examples of good practice

• Wide, multi-product analysis i.e. comparing each individual product’s fair value and assessing how it aligned to distinct customer needs

• Providing evidence that vulnerable customers or those with lower savings ability were not disproportionately contributing to overall profits

Examples of poor practice

• Grouping products into one FVA that have different interest rate structures or Ts&Cs e.g. all instant access savings accounts

Identification of the target market

Examples of good practice

• Segmenting target market based on customers’ needs and objectives, and expected and unexpected behaviours (e.g. those starting to save, regular maintenance savers)

• Monitoring products on a regular basis and developing the target market over time

Examples of poor practice

• Very broad target market definition – e.g. for GAP insurance, ‘anyone who buys a car’ – which misses that the product may not be suitable for drivers of older or lower value vehicles for which claims are rarely made

• Failing to identify needs, objectives, interests and characteristics of target market in a FVA
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Consideration of costs, benefits and limitations

Examples of good practice

• An investment platform analysing pricing models, detailing third-party fees and use of a governance committee to oversee third-party services

• Using the average investment charge of the top 20 most popular funds customers invested in to estimate charges earlier in the distribution chain. Considering this holistically with the service fee, interest retained on cash balances, and brokerage-related fees to reach a single figure of total fees for each kind of investor (segmented by balance and top-ups).

• Using examples of different groups of customers (with different holdings and types of accounts) to determine the effective cost for each customer group

• Consideration of intangible benefits (e.g. flexibility, access to in-person facilities) and using reputable third party survey results to show that customers valued these features

• Consideration how the distribution chain affects customer value across features such as service reliability and customer experience

Examples of poor practice

• Lack of supporting analysis or evidence for overall charge being fair value

• Lack of analysis that all charges across the value chain are fair value (disclosure of fees to the customer is not sufficient)

• Unsubstantiated benefits, e.g. in relation to GAP insurance, ‘peace of mind’, e.g. in relation to cash savings, holding both a savings account and another current account with the same provider

Evidence of appropriate benchmarking

Examples of good practice

• Benchmarking against similar products e.g. using FCA-published insurance value measures such as average claim payout

• Comparisons of non-price benefits e.g. customer satisfaction, service levels

• Evidencing how a product can provide fair value even if it is an outlier

Examples of poor practice

• Only comparing against a favourable subset of the relevant market and/or portfolio

• Not taking into account significant features of the product when benchmarking

Firms should identify and analyse varying outcomes across different consumer groups, considering how they use products, the benefits they receive and common customer segmentation characteristics. (Differential prices are permitted where the customers in each group are receiving fair value.)

Assessing customer groups

Examples of good practice

• Breaking down a target market into segments looking at average revenue contribution, expected behaviour and costs (e.g. customers just starting to save) – analysing likelihood of harm for each segment

• Introducing fee caps e.g. where a few is over 1% of a customer’s total ‘pot’

• Evaluating the costs of providing services relative to the revenue for various groups of customers.

Examples of poor practice

• Lack of data and evidence e.g. no analysis of the impact of introductory rates or whether customers who did not opt in for bonuses still received fair value

• No consideration of whether a product may have customers using it for different purposes and therefore the risk of customer harm

Assessing vulnerable customer groups

Examples of good practice

• Flagging accounts of vulnerable customers, visible to all customer support staff

• Additional provisions for vulnerable customers e.g. more help from customer support to complete forms

Examples of poor practice

• Inadequate process to identify vulnerable customers e.g. self-reporting only

• Inadequate process to monitor outcomes for vulnerable customers due to gaps in MI

Cross-subsidisation

Examples of good practice

• Additional analysis of cross-subsidisation across products, mapping out the different target markets and evidencing that vulnerable customers were not disproportionately contributing to overall profits

Examples of poor practice

• Assertion that increasing rates on savings accounts might impact mortgage customers without any supporting analysis

There is no requirement that firms must include costs in assessments of value, but understanding margins on products can be useful context for Boards to make decisions on value. However, if a firm is trying to justify higher prices due to higher costs, there must be a clear rationale in the FVA. Not all FVAs include costs at the moment, but those that do it well include an analysis of the interest rate offered versus the costs to the firm for providing the product.

Examples of good practice:

• Allocating fixed costs between products (e.g. funds) to enable a better analysis of value

• Linking the interest retained to the costs to the firm of managing customers’ cash

Examples of poor practice:

• Citing costs as important without a sufficient explanation of what they are and how they relate to fair value

• Little to no explanation of general business costs

FVAs must get to the root causes of customers not getting fair value so that they can be addressed.

Examples of good practice:

• Using transactional data to identify customers not using the product in line with its intended use and nudging them with targeted communications

• Reducing or removing charges for some products or services where they were deemed too high relative to the benefits provided

Firms should use the Board Report and the Board champion role to ensure rich discussion and consideration of how they are abiding by the Consumer Duty. Firms should also conduct regular reviews of FVAs in a reasonable and proportionate manner.

Examples of good practice:

• Having mature governance and committee structures to challenge FVAs with key business stakeholders

• Robust product approval process overseen by the Board with real challenge by senior managers

Examples of poor practice:

• Little escalation when issues are identified with the FVAs e.g. risk of consumers not receiving fair value

• FVAs placing responsibility on customers to act where they may be getting poor value