[First Published by the CCTA magazine in March 2023]
Overview
The price and value of regulated financial services products have long been in the FCA’s spotlight. The Consumer Duty is strengthening the FCA’s focus in this area.
The FCA already has the power to regulate certain aspects of pricing for financial products and services. However, its primary focus has been on consumer protection and market integrity. With its concurrent competition objective and an expanding interpretation of consumer protection under the Duty, the upcoming Price and Value outcome is raising the stakes.
Many within the financial services sector are struggling to gain traction evidencing both the rationale and justification of their pricing and value strategies. Our most recent webinar in February 2023 highlighted that 60% of respondents found that the price and value outcome was the single most difficult outcome to effectively evidence.
This isn’t particularly surprising, considering how challenging it is to first define fair value and then connect all the elements to understand what fair value means. It will involve both financial and non-financial measures and metrics.
So what do firms need to do to evaluate price and value in a Consumer Duty world?
Looking back to look forwards
According to the FCA, price is the amount that consumers pay for a financial product or service, while value is what consumers get in return for that price. The FCA believes that many firms already consider price throughout their day-to-day business decisions, but firms have not always considered the customer as being at the heart of this ‘value’ equation.
The FCA ultimately believes that financial products and services should be priced in a way that reflects their value to consumers, and that consumers should be able to understand the costs and charges associated with these products and services.
The regulator, has, already on several occasions stepped in to regulate prices. This has occurred, for example, when the FCA felt that market dynamics and competition were not working for particular groups of customers. For instance, within the General Insurance market, existing customers often paid a higher renewal premium compared to new customers. Furthermore, within the High-Cost Short Term credit marketplace, the FCA viewed that historic pricing was ‘excessive’, not in the best interests of customers (many of whom were potentially vulnerable), and on occasion, argued that competition was not working for customers.
Looking further back, many are often quick to point to the inherent issues with PPI as a product (for example, the limited ability to claim), but the excessive commission levels (often above the 50% tipping point outlined within Plevin) and the excessive erosion of value through an elongated distribution chain all combined to force the regulator’s hand to action and intervention.
By looking at previous precedents set, we can quickly gain a feel and understanding as to what the regulator wishes to avoid.
So, what should firms be looking to evidence to demonstrate ‘good value’?
Price & Value: The most difficult outcome to evidence?
The FCA’s recent podcast with Ed Smith made it clear that the FCA expects value assessments to include three key components:
First, is the product assessment which should assess the price that a customer pays over the lifecycle of the product and compare it to the benefits that a typical customer might get from using that product.
The second element is around the different groups of customers getting different types of benefits and potentially paying different charges, and ensuring that each of those different groups is getting fair value.
The final element outlined by the regulator for a good value assessment is ensuring that firms have a look at what is driving price, both at a firm and at the market level.
Although the FCA has helpfully summarised the three key components, translating these views into practical data points and meaningful MI is clearly proving difficult for many organisations.
So how can firms evidence and assess price and value?
Joining the dots
To assess ‘value,’ we begin with the understanding that value is the relationship between the amount a customer pays for a product and the benefits they expect to receive from it. This provides a foundation for evaluating value. Furthermore, if a product provides fair value where the amount paid for the product is reasonable relative to the benefits of the product. An assessment needs to be made to justify both the price paid and benefits received, for individual cohorts of customers.
Many firms are now starting to design their value assessment methodologies. On our recent webinar, 37% of our audience stated that ‘internal discussions have commenced around measuring value’ and that 46% of firms had ‘started to design their value assessment framework’. What was particularly impressive is that 16% of firms have ‘started to implement their value assessment framework’ already.
While metrics vary across businesses and sectors, typical metrics and indicators that firms are incorporating into their assessments include
Costs incurred in design, distribution and the upfront cost of capital/borrowing within the assessment framework
Costs associated with the servicing of the product (initial and ongoing)
Financial and non-financial benefits of the product (above and beyond its headline cost)
The cost of manufacture, compliance and other administrative outlay
Any fees, including contingent fees, charges and commissions which exist
Market rates and benchmarking for comparable products (including similar products)
Any erosion of value through the distribution chain
In addition to the upfront indicators (of which a small selection is detailed above). Many firms are also placing some reliance on proxy indicators of value, for example:
How many customers complain about price?
How many customers terminate early or pay additional fees and charges?
How many customers fall into arrears?
How many customers use some or all of the additional product benefits?
We would urge firms not to place an overreliance on these proxy indicators. However, they can be helpful to justify price and value holistically.
What other questions should firms be considering?
After your firm has designed its value assessment framework, other questions and considerations we believe firms should ask include:
How is our control environment helping to ensure effective implementation and embedding of the price and value outcome?
How will we monitor the price and value outcome continuously, and who will be responsible for this monitoring?
When does a product cease to provide fair value?
What MI are we using to monitor the fair value of its products and services on an ongoing basis?
What should our price and value governance look like and how can our leadership team attest on an annual basis?
Data holds the key to take you to where the Duty wants you to be…
The Price and Value equation is by no means a simple one.
The FCA is asking firms to consider going back to the very fundamentals of their business models. This is to justify the approach taken to the pricing and value assessments for individual products and services. Data will be the lynchpin for being able to evidence this outcome. However, qualitative judgement-based decisions by accountable stakeholders need to also be made and appropriately rationalised.
Another striking statistic on our recent webinar was that 1 in 4 firms have already been approached by the FCA to update on the status of their Consumer Duty implementation programmes.
There is no time like the present to pull together the relevant metrics and data to evidence your firm’s individual approach to pricing and value. Tough questions will have to be asked. Holding evidence and data to inform and support senior management decisions in this area is key. It is the foundation for complying with the FCA’s newfound ‘show me, tell me’ approach to deliver good outcomes.
