The Financial Conduct Authority (FCA) has disclosed its findings from a review of 14 fair value frameworks ahead of the Consumer Duty implementation in less than three months. RegTech platform Novatus Advisory has reviewed this and outlined the key takeaways for firms.
Consumer duty requires that customers always receive fair value from financial services. The FCA’s review scrutinised the approach to fair value, providing valuable insights into one of the most difficult elements of the Consumer Duty.
Five core criteria formed the basis of this review: understanding of fair value, assessing value, considering contextual factors, assessing differential outcomes, and data and governance.
The FCA defines ‘fair value’ as ensuring the price paid by a customer for a product or service aligns with the overall benefits received. The majority of the frameworks under review had incorporated principles and factors from the Final Guidance for the Duty, which the FCA deemed good practice. However, firms are also encouraged to apply this concept both generally and on a product-specific basis. The FCA identified the need for improvement in clearly defining firms’ roles in the product chain and ensuring that concrete actions have been taken.
When assessing value, the FCA promotes a broad approach, encompassing both monetary and non-monetary costs. The best frameworks prompted those responsible to critically analyse the value received by consumers. Despite recognising the challenges in determining profit margins on a product-by-product basis, the FCA stated that this should be a crucial component of firms’ value assessment, in line with a 2017 Asset Management Market Study.
The FCA criticises the use of general templates that overlook the unique characteristics of products that can influence fair value. Additionally, the failure to carry out qualitative assessments of value, which consider the quality of the product or service, contradicts FG22/5.
Furthermore, the FCA advises firms to consider behavioural biases such as instant gratification and loss aversion that can impact consumer decision-making.
Assessing differential outcomes, segmentation analysis is an effective way of ensuring that different consumer groups do not receive unequal outcomes. However, reliance on averages that may hide outliers is a practice requiring improvement.
In terms of data and governance, the FCA highlights the need for a well-structured approach to conducting value assessments. Frameworks that scheduled reviews according to expected renewal patterns or the product’s expected holding period, and identified trigger points that would require a value reassessment, were considered superior.
As the Consumer Duty implementation date approaches, firms are encouraged to be well-prepared. Novatus offers a range of services from rapid health-checks, validation and review of implementation plans, and full implementation.
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