Price and Value in a Consumer Duty World

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.

Under the rules, all firms (providers and adviser alike) need to clearly demonstrate that their products and/or services offer fair value. That may feel like an obvious objective but things get more complicated when you start to think about exactly how you will define value, monitor and document it all.

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.

What price value?

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.

Discretion and control

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.

The impact on advisers

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.

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. The not so good news is potentially just how hard it will be to demonstrate all of this to the standard the regulator is expecting.

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 that comes from knowing there is a financial plan and expert support available 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.

Value for money for vulnerable customers

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 – extra care should be taken when dealing with them.

As elsewhere, the regulator points firms towards its guidance on the fair treatment of vulnerable customers.

In conclusion