FCA shares findings of fair value supervisory work

What does this mean?

The regulator sets out findings in line with the following themes. 

Holistic consideration across the Duty 

The FCA reminds firms to consider fair value alongside the other outcomes and cross-cutting considerations of the Duty.  For example, some of the FCA’s concerns about the pricing structures of investment platforms and self-invested personal pension operators include a lack of transparency in the disclosures given to customers. 

Assessing value

FCA rules allow firms to group similar products or services together for the purposes of fair value assessments. This is where the customer base, complexity and risk of customer harm are sufficiently similar. The FCA provides examples of poor practice from its cash savings work, where it found that some firms were grouping products together even though there were material differences in interest rate structures and terms and conditions. 

Firms should ensure they identify a sufficiently granular target market. Good practice examples include segmenting groups based on customers’ objectives and needs (for example, for a cash savings product, those starting to save and those looking to maximise returns). 

The FCA expects fair value assessments to include the total price, as well as the benefits and limitations of the product. An example of good practice is where an investment platform looked at fair value across the full customer chain. In particular, the firm considered and provided risk ratings on how the distribution chain affects value in customer experience, service reliability and specific customer needs.

Firms should consider benchmarking and outlier analysis as part of their fair value assessments. An example of good practice being where a GAP insurer benchmarked its product against similar products using the FCA’s insurance value measures. 

Differential outcomes

The FCA expects firms to consider the likelihood of differential outcomes for different groups of customers (including vulnerable customers) when assessing fair value. The FCA is clear that its rules do not prevent cross-subsidies and that all customers do not need to be charged the same amount, however, customers in each pricing group should receive fair value. An example of good practice is where a firm takes steps to improve the value proposition for vulnerable customers, such as providing help from the customer support team to fill out forms.

Costs to the firm

While there isn’t a requirement to include costs in fair value assessments, the FCA states that including cost and margin analysis with supporting evidence in fair value assessments helps provide context to pricing decisions. An example of good practice is fund managers using activity-based methods to allocate fixed costs between funds. 

Mitigating actions and effective governance 

Where customers are not receiving fair value, the FCA expects firms to take prompt and specific actions, and to monitor the impact of these interventions. The FCA has seen some firms improving value by capping fees for long-term clients and waiving fees entirely where they could not be justified. 

The FCA reminds firms that their governance arrangements should enable senior managers to have rich discussions on Duty compliance. The FCA states it has seen some firms using robust product approval processes which are then overseen by the board, allowing senior managers to provide real challenge. 

Throughout its findings, the FCA emphasises that it does not expect a small firm to apply the same resources or process to assessing fair value as a large firm. Instead, small firms should take a reasonable and proportionate approach, based on their resources, number of clients, and the complexity of the factors being considered in their fair value assessments. 

What do firms need to do?

The FCA’s findings apply to all financial services sectors providing products and services to retail customers. Firms should consider the FCA’s findings, and assess how they are abiding by the Duty’s price and value outcome against the good and poor practice examples shared. 

Firms should ensure they are applying the Duty holistically. When carrying out fair value assessments, firms should consider how to integrate consideration of the other outcomes and cross-cutting obligations into their assessments. 

Firms should ensure that the target market they identify for their products includes consideration of the types of customers that are likely to sit inside their target market, as well as those that are likely to sit outside of their target market. Firms should ensure that this detail is captured within their fair value assessments. 

Where firms set different prices for different groups of customers, and / or cross-subsidise between different products and services, they should ensure they can show that all groups of customers receive fair value from their products. The FCA particularly highlights the risk that cross-subsidies could present to vulnerable customers, and so firms should consider how they have addressed this risk within their fair value assessments and wider business model arrangements. 

When developing new products and reviewing existing products, firms should ensure that any assertions in fair value assessments are backed up by reasonable evidence. Where this is not the case assertions should be removed and consideration should be given to what testing or evidence gathering can be done to support the assertion(s).

Next steps

The FCA plans to continue to work with firms on fair value, and to provide insights into its supervisory work on the Duty. It expects firms to improve fair value assessments over time, and will take appropriate action where this is not the case. 

The regulator adds that while it will continue to monitor how well the savings market is operating, it does not anticipate providing further savings updates unless it identifies further market-wide concerns.