FCA Consumer Duty – a closer look at Outcome 2: Price and Value

In case you've missed it - a recap

Hopefully you’ve found your way to this article having already had a chance to look at the first in our series of deeper dives into each of the Consumer Duty outcomes, starting with Outcome 1: Products and Services. If you’ve done that already then feel free to skip on down to the next paragraph but, if not, it’s worth having a read of these before coming back to this latest piece which focuses specifically on the second outcome, Price and Value.

Now that we’ve got that bit of brief housekeeping out of the way, let’s get stuck into all things Price and Value. The FCA’s second Consumer Duty outcome is based on its assertion that consumers experience harm where they don’t get value for their money. And a lack of fair value is also unlikely to be consistent with customers realising their financial objectives. Firms cannot act in good faith if they are knowingly selling poor value products or services.

The impact of charges can be profound....

Especially with the power of compounding. The table below shows the difference between a 1%, 1.5% and 2% total charge. Over the long-term charges can have a devastating impact on the end result. 

Is price the only consideration?

Of course, fair value is about more than just price and the Consumer Duty aims to tackle other factors that can result in products or services which are unfair or poor value. These include unsuitable features that can lead to foreseeable harm or frustrate the customer’s use of the product or service, as well as poor communications and consumer support. Inevitably this will bring into focus the price the consumer is paying for their products or services but the FCA explicitly states that “low prices do not always mean fair value”. Essentially, something that is unsuitable but cheap is still unsuitable. The Consumer Duty’s Price and Value outcome will create regulation to this effect, requiring firms to continuously assess and monitor its products and, or, services to ensure it provides fair value.

What do we need to consider?

In order to assess if a product or service provides value, firms should consider at least the following:

• the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities
• any limitations that are part of the product or service (e.g. limitations on scope of cover for insurance products), and
• the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between customer and firm

Requirements for regular reviews

It is likely that firms will need to conduct regular value assessments, similar to the requirements that asset managers have had to follow as a result of the Asset Management Market Study. And when performing these value assessments, advisers should also consider a range of additional factors:

• the costs firms incur to manufacture and/or distribute the product or service
  
• the benefits received by consumers and the utility of the product or service
• the market rates and charges for comparable products or services
• possible savings from economies of scale which could be shared with customers
• possible returns from investment products or services

Putting it simply:

As the often repeated statement goes, ‘cost is what you pay, value is what you get’. Are the costs (charges) at a level where the value can still be derived? The FCA has previously talked about the potential for “self-defeating transactions”, especially for replacement business, whereby the charges are so high they make it almost impossible for any value to be derived. Most advice firms will already be making this assessment on a case by case basis, with a house view on what level of charges represent good, or not so good, value for money. This Consumer Duty outcome builds on the current guidance and good practice, by creating enforceable rules.

As with all four of the outcomes there is a degree of overlap here with other rules. And as well as assessing value for money, firms should think carefully about whether other factors such as complex pricing or unclear terms and conditions are making things unnecessarily complicated. These can prevent consumers from choosing effectively as they are not able to reasonably assess the information and act to pursue their financial interests. The third consumer understanding outcome covers this in more detail, and the good news is that we’ll be taking another deep dive into this as we head into next month.