More than a year on from implementation we can expect firms that don't meet the Duty’s standards to face a high level of regulatory scrutiny, including through skilled person reviews. We also think it's likely that the FCA will keep the pressure on all firms to maintain momentum and have stressed that both the Duty and fair value assessments (FVA) are “not a once and done” exercise.
Firms need to continue monitoring and updating their FVA approaches and outputs, based on what they have learned and done following previous assessments to ensure that the interpretation and application of the Duty and fair value evolves with the product offering and individual product lifecycles. Agility and proactivity in this area will enable a smoother transition to compliance with any future regulatory guidance.
Based on the FCA’s commentary and our work in supporting firms on their FVAs, there are several areas where its clear that they need to increase their focus.
Firms should take a customer-centric approach to FVA
This includes assessing the role of bundled products, introductory offers and non-financial incentives to open a product (eg, vouchers) in the overall FVA.
A ‘one size fits all’ approach to FVAs across product ranges should be avoided
The approach should be tailored to the individual product, and firms should show what outcomes specific groups of customers are getting for specific products. This is particularly applicable for firms that have a diverse product offering and those that have both open and closed-book products.
Firms should consider deepening the range of metrics they use to assess fair value in their products to generate the best insights for their FVAs
Going beyond price benchmarks and complaints data is key to undertaking a rich and robust FVA. For example, firms could evaluate how they assess their brand and service offerings, and the quality of product features and communications in FVAs. Other non-price metrics firms could assess include service reliability, eg:
Firms could take advantage of digital tools and AI to undertake sentiment analysis of customer reviews to further bolster their assessments
Firms should consider what happens if customers don't use their products as intended, and how this then changes the benefits that the customer receives within their FVAs.
Unintended consequences need to be accounted for and firms should justify how they prevent them, describing the mitigations and safeguards they have in place.
The FCA describes the four Duty outcomes as mutually reinforcing
Firms should therefore look for opportunities to incorporate the demonstration of the other three outcomes, including management information and the outputs from outcome testing, as components of their approach to the price and value outcome. Assessing value in the round means considering all aspects of the product, such as ensuring that it demonstrably reaches only an appropriate target market, that customers fully understand the product, and that they receive appropriate support throughout the product lifecycle.
Focusing on differential outcomes, especially for vulnerable customers
Effectively describing the product target market and successfully segmenting customers groups within it's an essential part of robust FVAs. Firms should think about whether the level of granularity of their target market and customer segmentation is sufficiently detailed. Further, they should revisit this assessment at regular point throughout the lifecycle of the product to make sure that the product design continues to meet the target market's needs.
Firms should go further in understanding the differing needs of different groups of customers. They should think about what different groups use their products for, their various experiences and financial capabilities, and what their priorities are. Firms should then map the identified customer group needs and characteristics to elements of the product that fulfil it or make the product appropriate.
Firms need to be more proactive in their identification of vulnerable customers and ensure that they have a framework in place for recognising and supporting them. They should also look past ‘traditional’ measures of vulnerability and consider other factors. This includes considerations about the purpose and target market of the product that means certain types of vulnerability are inherently more likely, and the ability of the customer to understand the product they're being sold.
Firms should also consider customer vulnerability in how products are sold. For example, for certain products, customer characteristics mean that they're unlikely to be able to effectively engage with the product online and so are more likely to not use the product as intended. This can impact on the customer’s outcome.
It should also be considered that vulnerability definitions may change by product. Firms should be abreast of cross-subsidisation between customer groups and how this impacts FVAs. ‘Winners’ and ‘losers’ of cross-subsidisation need to be carefully considered and justified by firms. These justifications should include clear communication on rationale behind any price differences between customer groups and show that vulnerable customers aren't unfairly affected. Comparing outcomes between groups should allow some insight into this for firms.
The increased usage of AI, machine learning and other digital transformations mean that a focus of the FCA in the future will be how firms are using these innovations to enhance value and good outcomes for customers. Firms should anticipate that the FCA may publish regulatory guidance on the use of these tools in their product design, customer service, and outcome monitoring.
Undoubtedly other regulators will have been watching the progression of the Duty to see how effective the guidance is in creating good outcomes for customers. Firms in sectors other than financial services should be sitting up and taking notice of the principles that underlie the Duty. They should be thinking about what fair value means in the context of their products and services. A proactive approach to applying the four outcomes of the Duty, especially fair value, might make firms leaders in their markets if other regulators decide to take inspiration from the FCA.
Our team is experienced in the design and production of effective and proportionate FVAs. Our economists and financial services regulatory specialists employ a range of appropriate metrics and techniques, tailored to each firm’s product and service offering to both design and undertake FVAs for firms, and assess FVAs for how they could be improved.
We've advised a range of firms across the financial services industry to ensure their products, services, and operations are in line with the Duty’s wider requirements. We can also provide planning and implementation remediation where poor value becomes apparent.
To discuss the Duty or FVAs further, get in touch with Emma Wilson and Schellion Horn.
