4 min read 24 Oct 22
The price and value outcome of the Consumer Duty poses something of a dilemma: price is simple to measure; value less so. Thankfully, that’s not a problem the FCA is asking anybody to solve.
Instead, determining fair value for clients is a healthy blend of critical thinking and common sense.
Price and value, in FCA parlance, is a consideration across the value chain that what clients will pay for a product or service is commensurate with what they will get.
As those closest to the client, advisers have a unique – perhaps more burdensome – responsibility than others in that chain. We’ll get to that shortly.
The FCA is blunt about this: retail customers experience harm when they do not receive value for their money. Get your value assessment wrong, and clients could be worse off than if they had done nothing at all.
There are few surprises in how the regulator posits price and value. The price of a product or service should be reasonable compared to its overall benefits. That’s fair enough, and nothing you don’t already know. These benefits, the FCA points out, may be quality of product or service, the potential payout or return, the level of customer service, and how well it meets consumers’ needs.
However, fair value – and, again, no surprises here – is about more than just price. Advisers must think about price when assessing fair value but not at the expense of other factors.
The regulator’s yardstick for establishing value is three-fold: the nature of a product or service including its benefits; any limitations contained within it (such as exclusions in an insurance policy); and the expected total price customers will pay over time. To clarify, by ‘over time’, the FCA means ‘the lifetime of the relationship’ between a client and a firm.
I’ve no idea who said it first, but it applies to the Duty’s price and value outcome: worry only about those things you can control.
You do not need to base a value assessment on things out of your control, such as an investment trust trading at a premium, to use the FCA’s example. Instead, firms should consider the impact of charges they can control. To conclude the example, firms should consider the value of their charges, including ongoing charges, within the context of the net asset value.
Firms have discretion to decide which factors to include in their value assessments, though the FCA indicates there are some they would expect to find, such as those listed above, as well as the rates for comparable products.
Finally, and this is consistent across the four outcomes of the Duty, firms should monitor the value of products and services over time, conducting regular reviews.
I believe the overall impact of the price and value outcome on advisers is middling – similar to the impact on product providers – and much of that is down to the ‘gatekeeper’ role you play in the value chain.
The FCA said all firms in a distribution sequence are responsible for the value of the prices they control and “are not required to re-do or challenge other firms’ value assessments”.
However, advisers shoulder plenty of the workload. While it may not be your responsibility to conduct value assessments on all links in the chain (except your own adviser charges), you must “consider the cumulative impact” of the charges added by each product or service within it and take into consideration the overall cost to clients.
Though nothing new, as the individual or firm making the personal recommendation, that is a considerable challenge.
It is up to you to obtain from manufacturers all the information you need to understand the value a product or service is intended to provide. But providers don’t get off lightly: they have been assessing value for money as part of the PROD rules and must now communicate these assessments externally to help you meet your requirements.
Where different firms are involved in the distribution chain for an investment product, they all have responsibility to consider fair value as part of avoiding foreseeable harm and helping support customers in pursuing their financial objectives.
Fund managers… must assess whether their charges are justified
Platform providers… must set fair value charges for using them (where a platform is the final link in the chain, it must “consider the overall impact” of charges on customers)
Financial advisers… must consider if their adviser charges provide fair value and consider the relationship between the overall cost to the customer (including all product and distribution charges in the distribution chain) and the expected benefits from the product
Considering the needs of customers with characteristics of vulnerability is consistent across all the outcomes, rules and guidance under the Consumer Duty.
Vulnerable customers may be more susceptible to receiving poor value – though the intermediation of a financial adviser makes this far less likely – and should take care when dealing with them.
As elsewhere, the regulator points firms towards its guidance on the fair treatment of vulnerable customers.
The primary impacts on advice firms from the Duty’s price and value outcome include a requirement to obtain providers’ fair value judgments, and to use them as part of an overall assessment of value for clients. This second element, at least, will present nothing new.
Plus, the FCA points out that, overall, if firms are complying with existing Handbook rules on ‘fair value’ and ‘value assessments’, they are also complying with the Duty’s price and value outcome.
Mike Barrett is consulting director at the lang cat
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