What does 'fair value' mean in financial services? It might sound like dry regulator speak, but it’s really asking a simple question – are customers paying a reasonable price for a product, compared to the benefits they get in return?
This is not us setting a particular price or level of profit which firms can make. But it's a challenge to firms – can they provide evidence that their customers are getting a fair deal? If they can’t, then they need to look again.
This applies across financial services. One of the first areas we looked at after the introduction of the Consumer Duty was the cash savings market – prompted by complaints that savers weren’t seeing the benefits of high base rates.
After working with the 9 largest banks, we saw improvements in both the rates available to savers and the volume and timing of firms’ communications to savings customers.
We also challenged investment platforms who were keeping interest on their customers’ cash balances. We looked particularly at ‘double dipping’, where firms charged customers fees for holding their cash while also keeping the interest earned.
The improvements we’ve seen following our action are saving people an estimated £10m a year.
A good deal for insurance customers paying monthly
Most recently, we’ve had a significant impact on premium finance – where customers pay for their insurance monthly rather than a whole year up front. 23 million customers paid this way in 2023. Some of them prefer to budget across the year. But for others, it’s the only way they can afford insurance.
We’ve heard the concerns about whether these consumers have been getting a fair deal – and we’ve scrutinised this market closely. In particular, we spoke directly to the firms most at risk of not providing fair value. By that, we mean the outliers in charges or profits. We challenged them to show their working. Some of them could demonstrate that they were providing fair value – that they were charging reasonable prices in relation to the costs they paid and the service they delivered.
Challenging firms to improve
But not all firms could show this. Some didn't have the right processes in place to make a high-quality assessment. Others had the processes, but weren’t implementing them in practice. Where this was the case, we challenged firms to improve – and it’s already paying off. Among the group of firms we looked at closely, APRs have reduced by 7 percentage points on average – saving £14 on a typical motor policy and £4 on a typical home policy.
Overall, the combination of regulatory attention, firms’ own fair value assessments and a falling base rate is estimated to be saving consumers £157m a year.
We know that some stakeholders wanted us to make more significant interventions – for example, forcing companies to offer 0% APR. But we think that this risks reducing the availability of premium finance, which would negatively affect vulnerable consumers who would otherwise struggle to pay for insurance. It also takes time to introduce new rules, because it needs significant consultation. By using our fair value rules, we’ve been able to have a real impact already.
Continuing the challenge
But we’re not taking our attention away from this market yet. All firms now need to consider whether they need to make changes to their premium finance offerings to meet fair value requirements.
We’ll act further if we need to – including challenging individual firms, requiring remedial actions on fair value assessments and, in the most significant cases, enforcement action.