Consumer Duty: Tips on running your value for money assessment

Whilst the rest of Consumer Duty shouldn’t be underestimated, the price and value outcome is, in my view, the hardest for all firms to get right.

Come July, all firms (providers and advisers alike) will need to clearly demonstrate that their products and/or services offer fair value. The natural reaction to this is “of course they do”, but when you start to think about exactly how you will define value, monitor and document it all, things start to get complicated.

Under Consumer Duty, as now, cheapest isn’t always best: something that is unsuitable, but cheap, will still be unsuitable. Client suitability is still, as it has always been, the most important factor, but Consumer Duty raises the bar. As now, clients need to know what they have got, how much it costs, and why it is suitable for them.

When assessing value, FCA guidance (para 7.9) states that firms will need to consider the following points:

• 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.
• The expected total price clients will pay, including all applicable fees and charges over the lifetime of the relationship between client and firm.

Each of these three elements, the expected benefits, any limitations and the total price carry equal weight within the overall value assessment. Firms need to consider all three and will also need to ensure this is all clearly demonstrated to the end customer. How firms do this will be up to them (the FCA is not prescribing how) and therefore will vary firm to firm.

Total cost assessment

Advice firms are required to ensure their own advice services are good value for money, as well as assessing the total charge the client will pay for their investments. This will mean reviewing all provider charges such as platform, investment management, underlying investments – the list goes on.

For provider charges

It is reasonably straightforward. Clients will obtain value not only through low charges, but also functionality, better performance, relevant fund choices, flexibility, financial strength of provider, and tax benefits. This isn’t an exhaustive list, and all these aspects are almost certainly already being considered as part of your research and due diligence process.

For advice fees

It is perhaps more challenging. The good news is the fees, the services being provided for said fees and the overall customer experience are obviously directly in the control of the advice firm. And we’ll be publishing some research in April 2023 that shows most consumers paying for advice believe their fees represent good value for money. The not so good news is potentially just how easy it will be to demonstrate all of this to the standard the regulator is expecting.

I recently attended an FCA ‘Live and Local’ event for small/medium firms in the retail investment space. More FCA events are planned over the coming months, and it was certainly a couple of hours well spent. As part of this event the FCA highlighted four questions they urge firms to consider when completing their value for money assessments:

1. Is the firm able to clearly demonstrate how any product or service they provide offers fair value?
   
2. Can the firm demonstrate that the costs associated with the products and services that they offer are clear to the client?
3. How does the firm monitor the impact of different pricing on different clients?
4. In what ways does the firm review the price and value of the products and services that they provide?

Incorporating these questions into your research and due diligence on providers shouldn’t be too hard, but applying them to your own advice services might be a little trickier. This is because the nature of ongoing advice services will mean that in some years the clients will receive exceptional value for money, covering the cost of the fees for several years. Tax saved, a business sale, support through a family member death – just three examples where advisers will provide huge value to their clients.

However, there might also be years when none of these things happen. Then the value will be derived from the peace of mind knowing there is a financial plan and expert support needed if/when things happen.

The challenge is whilst the value in the three early examples can be quantified and measured, the benefits of no action are more subjective.

Either way, Consumer Duty requires firms to evidence their services represent good value for money, and with the July deadline getting closer by the day, all firms need to start working through these assessments now.