Consumer Duty – Q2 2023

With the Consumer Duty implementation fast approaching, the Financial Conduct Authority (FCA) released its latest findings from Q2 2023. In this article, we provide a concise overview of these publications and highlight what firms should focus on.

Consumer Duty: Findings from the FCA’s review of fair value frameworks

The FCA has sought to understand how firms across the sectors are implementing the price and value requirements ahead of the introduction of the Consumer Duty.

Released in May 2023, the publication does not introduce new rules, rather it focuses on the existing requirement that the price a customer pays for a product or service is reasonable compared to the overall benefits. The FCA stated that firms can consider additional factors to use in their value assessments, but the following are the core considerations:

The nature of the product or service, including the benefits provided (or may reasonably be expected) and their qualities.
Any limitations that are part of the product or service (such as limitations on scope of cover for insurance products).
The expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between customers and firms.

In demonstrating that the product price is reasonable, the FCA suggested firms might consider:

costs incurred in manufacturing or distribution
market rates and charges for comparable products
price and benefits of other products in their portfolio
accrued costs or benefits for existing or closed products

What management should consider

Firms should ensure that their fair value assessments incorporate the core considerations stipulated by the FCA.

For example, have you identified the benefits of a product that could be reasonably expected by a retail customer? Do you and the customer have clarity over product limitations, for example on scope of insurance cover? Have you anticipated the total price a customer could pay for a product and service? Are you still assured that this final cost demonstrates good value for a consumer? Have you distinguished between costs to you of new products, and accrued costs of existing products?

The FCA acknowledged that firms are making substantial efforts in implementing the Duty. However, they also commented that, since the price and value rules are not prescriptive, firms have adopted a wide range of approaches in their value assessments, with some assessments prompting questions as to their effectiveness.

Key findings from the FCA’s review are captured below.

1. Understanding of the fair value rules

Good practices

Correct identification of a firm’s role, for example as manufacturer.
Appropriate understanding of the responsibilities of this role.
Frameworks that set out the principles for how a firm would apply the concept of fair value.
Direct read across between principles and factors that will be assessed.

Practices requiring improvement

Frameworks which assume business models or ethos provides fair value inherently, without evidence.
Firms which have not sufficiently distinguished between manufacturers and distributors.

What management should consider

Management should ensure there is clear understanding and definition of what fair value is and the requirements of the fair value outcome. Definitions should be informed by the regulator’s comments and communicated throughout a firm. Consensus over the ‘fair value’ definition will assist in performing fair value assessments and developing a consistent approach.

For example, where there is perception that a business model is inherently fair, or that products are by nature valuable, what evidence is available to support this? How do you perform your own analysis to ensure you are providing fair value for each product?

2. Assessing value

Good practices

Frameworks that:
set out how to assess the benefits consumers can expect to receive, including reference to the overall costs to the consumer.
provide guidance to individuals who would undertake product-level value assessments.
contain clear discussion about how to price products sold as a package or bundle and assess them for value.
Clarity over how and when to distribute information to other firms and how to treat information received.

Practices requiring improvement

Generic templates or frameworks, not tailored to a range of products with different characteristics and which may serve different target markets.
Frameworks that do not refer to the firm’s profit margins on different products and services.
Poor consideration of types of non-financial costs and benefits that retail consumers may reasonably expect to pay or receive.

What management should consider

Firms should consider all fees and charges within their fair value assessments. This should include non-monetary costs, such as the effort required to amend a product, and potential distribution costs to consumers. Prices of packaged products should match the sum of the individually priced components, and if not, is there a clear rationale for this? If products are purchased through different channels, can any price variation be justified?

3. Considering contextual factors

Good practices

Considering:

the interaction between fair value and the four Consumer Duty outcomes;
how market changes could affect value assessments;
products a customer already holds with the firm;
the impact of consumer bias, such as instant gratification on value;
how customer choices can affect value, including factors such as ‘sludge practices’.

Practices requiring improvement

Limited consideration of contextual factors (such as those listed under good practices).
Focussing only on the financial value received by customers.
Limited consideration of the need for information from other firms in the distribution chain and/or third parties to properly assess fair value.

What management should consider

Firms should ensure that the fair value assessments consider factors beyond the financial value of the product. This may include consideration of sludge and nudge practices, whether customers hold other products with the firm and customer behavioural biases.

4. Assessing differential outcomes

Good practices

Plans for how firms would look at differential outcomes for customers.
Identification of vulnerability indicators.
Tailored analysis of fair value for vulnerable consumers.
Consideration of product or service-level cross-subsidies, where some consumers pay higher prices or generate higher profit margins.

Practices requiring improvement

Frameworks relying on average outcomes rather than a deeper analysis.
Limited understanding of the distribution of differential outcomes.
Poor or lack of evidence for how each differential pricing outcome provides fair value.

What management should consider

The FCA does not require firms to charge all customers the same amount, nor to make the same level of profit from all customers. However, management should ensure that they have assessed the value of differential outcomes for consumers. This might include the value received by back-book customers, consumers using different channels and other subsets of consumers.

5. Data and governance

Good practices

Data led plans to monitor customer outcomes and facilitate challenge and review.
Frameworks which include timelines and frequency of value assessments.
Named individuals to action remediation where fair value is not being delivered.

Practices requiring improvement

Limited (or lack of) plans as to how firms will measure fair value and across different customer groups.
Lack of clarity over which data sets might be needed to measure value.
Lack of clarity regarding remediation plans.
Insufficient detail in RAG ratings to assist firms in rectifying issues.
Lack of clarity regarding limitations of fair value evidence.
Use of only relative comparisons against industry benchmarks, rather than absolute measures of value.

What management should consider

Management should specify timelines or triggers for conducting value assessments. This might correspond to an expected length of time a consumer would utilise a product.

Management should also have identified the data needed to monitor fair value as well as any data required to address gaps. It is important for firms to assess whether their measurement approaches, such as RAG ratings, provide sufficient detail or link to thresholds to be of value.

Consumer Duty: Findings from the FCA’s firm survey

To mark the approach of the deadline, the FCA recently published the results of a survey looking at the preparedness of firms to meet the deadline. This survey was undertaken between March and May 2023 and looked at a sample of c.1200 mainly SME firms.

The survey revealed that 23% of firms said they would still have some work to do after the deadline. A further 7% of firms said they would still have significant work to go or had not yet started work. Many firms are facing challenges with reaching full compliance with the Duty in time.

We set out the key areas of interest and findings from the survey below.

Knowledge gaps

Retail finance providers and debt advice firms scored the lowest in terms of their engagement, understanding of the Duty and implementation progress against other firms.

When asked whether the portfolios agreed or strongly agreed that the Consumer Duty was a high priority within their organisation, 59% of retail finance providers and 56% of debt advice firms responded that this was the case. This contrasted with 87% of all firms across portfolios who agreed the Consumer Duty was a high priority in their organisation.

What management should consider

Management should be mindful that from 31 July 2023, boards, senior management and all staff should have a thorough understanding of what is expected from them in their role under the Duty. Firm-wide campaigns, town hall presentations and targeted workshop training sessions will all facilitate a better understanding of the Duty.

Outcomes monitoring

The FCA asked survey respondents what further areas of the Duty they would like the FCA to provide more information about.

Outcomes monitoring, including data and metrics, was chosen by 51% of respondents as the leading topic they would like further information on. At the end of June 2023, the FCA published a podcast specifically on outcomes monitoring.

We highlight the key points from the podcast below, where Ed Smith, Head of FCA Competition Policy, was interviewed on outcomes monitoring.

What management should consider

Firms should include processes to identify the root cause of poor outcomes for customers. This means that firms must be able to monitor distinct groups of customers to see whether they might be receiving worse outcomes than others.

While the type and source of data collected as part of the outcomes monitoring strategy will vary across firms, many existing sources of data will still be relevant to the approach taken under the Duty. The FCA highlighted the value of data related to cancellation rates and reasons, complaints, and customer feedback as useful sources to provide insight into customer treatment and outcomes.

Management needs to be able to evidence that action is being taken to mitigate risks of harm and that the strategy to deliver good outcomes is working in practice. A starting point is to establish a log of interventions made to improve outcomes. This could include a wide range of actions such as changes to product design, amendments to communications, such as clarifying charges, or a change to the target market.

Firms are responsible for outcomes monitoring and compliance with the wider Duty expectations even where they outsource key activities to third parties. As a result, management will need to make sure that there are arrangements with outsourcers to capture the data they need to demonstrate good outcomes across the customer journey.

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FS regulatory affairs newsletter – Q2 2023

In continuation of our previous FS regulatory affairs newsletter, this edition highlights the key regulatory updates from the second quarter of 2023.

Consumer Duty – Q1 2023

The FCA published a wealth of material in Q1 2023 to support firms’ implementation of the Consumer Duty in the lead-up to the 31 July 2023 deadline. There is a range of different FCA publications to get to grips with from podcasts to Live & Local events across the UK, as well as multi-firm reviews and Dear CEO Letters.