The Price and Value Outcome – the FCA publishes its year one insights

The Consumer Duty was introduced at the end of July 2023 and has applied to closed products from the end of July 2024. One of the cornerstones of the Consumer Duty is the price and value outcome. The FCA defines the price and value outcome as a requirement on firms to make sure the price customers pay is reasonable compared to the benefits they receive. The FCA has published its insights from the first year on the implementation of the outcome and its supervisory activity in relation to cash savings, guaranteed asset protection (or GAP insurance) and platform cash.

The publication highlights good and bad practices and is a follow up to its May 2023 published findings of a review of 14 firms' fair value assessment frameworks.

The FCA's findings highlight:

• Firms should take a holistic approach to the price and value outcome and the Consumer Duty overall – poor practices are identified as including interest rate tiering in bank accounts with lower interest rates as balances grew and complex / opaque charging structures with the FCA specifically citing double dipping (i.e. charging for holding cash whilst retaining interest on cash) in the SIPP and investment platform sectors;
• Approaches to assessing fair value should look critically at customer outcomes and not look to justify existing approaches to pricing or benefits of a product or service – poor practices identified include grouping products together despite material differences in their structure, the use of broad target market definitions (for example in GAP insurance the target market was defined as anyone who buys a car - this was seen as too generic), failing to consider fees and charges against how the product or service is used or how it is distributed, failing to substantiate purported benefits of services provided (for example "peace of mind" for GAP insurance without evidence to back up the claim).  The issues here broadly relate to (1) failing to account separately for products with distinct features, fee structures or which yield different benefits and (2) defining the target market at too high a level of generality.
• Assessing customer groups where there are differential outcomes – if a group of retail customers receives different outcomes from the same products compared to another group of retail customers, the firm should be able to explain why this is the case and assess whether each group is getting fair value.  Poor practice in this area included firms struggling to provide data and evidence where there are different customer outcomes and inadequate assessment of vulnerable customer groups including that firms did not have adequate processes in place to proactively identify vulnerable customers and instead relied on customers to self-report vulnerabilities.
• Costs of manufacture and distribution impacting the value assessment – cost and margin analyses can be used when assessing fair value – however, poor practice cited includes providing insufficient explanation of the impact of cost on fair value, for example saying that the retention of interest on cash is made to run a platform but providing no evidence for that conclusion.

The publication also provides that – (1) the FCA is reviewing fair value assessments from 10 investment platforms/SIPP operators earning interest on cash balances, (2) for GAP insurance the FCA took action against a number of firms imposing requirements to suspend the sale of GAP insurance and has recently lifted a number of requirements and (3) the FCA continues to monitor banks in terms of passing on increases in interest rates to savers.

Notably at the outset of the update the FCA highlights the pressures on small firms when it comes to implementing the Consumer Duty and that the FCA does not "expect a small firm to apply the same resources or processes to assessing fair value as a large firm.".  Instead, the FCA says that it expects firms to "take a reasonable and proportionate approach in light of their resources, size of client base, and the complexity of the factors being considered in the fair value assessment".  For each of the areas highlighted by the FCA there is a specific note for small firms and what is expected of them.

The FCA continues to publish updates on the implementation and its oversight of the Consumer Duty.  It has already been a busy 14 months when it comes to the Consumer Duty and given the rate of FCA publications on the subject can be expected to just get busier.  It is perhaps a warning for the industry when the FCA says "we will act where we see firms not making improvements in response to feedback, or if firms' products and services are clear poor value outliers when compared to the price and value of similar products and services" – the price and value outcome is of course just one of the four outcomes underpinning the Consumer Duty – and so the scope for FCA activity is wide as we continue to see the FCA flex its muscles in this area.