Consumer Duty: Findings from our review of fair value frameworks

Summary

The Consumer Duty will set higher and clearer standards of consumer protection across financial services and require firms to act to deliver good outcomes for customers.

Firms need to deliver and assess 4 outcomes under the Consumer Duty, including price and value. Firms must undertake fair value assessments as a way of demonstrating if the price a consumer pays for a product or service is reasonable compared to the overall benefits they can expect to receive. To help firms better understand our expectations, we have committed to providing regular feedback to industry on the work we do to assess firms progress in embedding the Duty.

We have reviewed 14 firms’ fair value assessment frameworks, which set out the approach firms are taking in this area. We are sharing our observations from this review as other firms will find them helpful when implementing our price and value requirements. This publication does not introduce any new requirements on firms, but we have set out some suggested areas of focus in the ‘what we found’ section below. Where we reference good practice, these are positive examples we have found from our review work. Under the heading ‘areas for improvement’, we cite practices and examples we identified in our review where firms may need to improve their approach further to ensure they meet expectations under the Duty when it comes into force on 31 July 2023.

Who this applies to

These examples will be of interest to all firms to which the price and value outcome of the Consumer Duty applies.

Guidance these examples refer to

These examples refer to our rules and guidance on price and value in PRIN 2A.4 and Chapter 7 of our non-Handbook Guidance for firms on the Consumer Duty. 

This publication reiterates those rules and guidance on fair value.  The specific focus of these rules is on ensuring the price the customer pays for a product or service is reasonable compared to the overall benefits (the nature, quality and benefits the customer will experience considering all these factors).  As stated in FG22/5, to assess if a product or service provides value, firms must consider at least the following:  

• the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities  
• any limitations that are part of the product or service (eg limitations on scope of cover for insurance products), and  
• the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between customers and firms. 

Firms may also consider a range of additional factors in demonstrating that the price paid is reasonable compared to the benefits, including the costs firms incur to manufacture and/or distribute the product or service, the market rates and charges for comparable products or services, the price and benefit of other products in their portfolio, and any accrued costs and/or benefits for existing or closed products. 

Firms have discretion to decide the additional factors they use in their value assessments, therefore, within this publication the term ‘good practice’ is used only to present examples.

What we looked at

Our objective was to understand how firms in different sectors are implementing the price and value requirements, and to ensure our internal supervisory and regulatory approaches to fair value reflect industry thinking.

We reviewed a small sample of 14 fair value assessment frameworks in January and February 2023. The sample was not representative – we asked a range of mainly large firms within 4 portfolios (retail banking, consumer investments, payments and digital assets, and consumer finance) to provide their frameworks. Larger firms’ fair value frameworks and assessments may understandably be more detailed than those for smaller firms, but many of our observations will be relevant to the wider population of regulated firms. The review did not cover more detailed documents, such as assessments of individual products and services.

We assessed fair value frameworks against the following 5 criteria: 

1. Understanding of fair value rules – how clearly the fair value assessment defines fair value and how it applies to their products. 

2. Assessing value – how costs and benefits to consumers, including non-financial costs and benefits, have been considered. 

3. Considering contextual factors – how the firm has considered broader contextual factors relevant to value. 

4. Assessing differential outcomes – approaches to assessing the range of consumer outcomes such as differential pricing, and outcomes for vulnerable consumers. 

5. Data and governance – the approach to measuring and monitoring fair value using data, and how a firm’s governance arrangements operate. 

What we found

Many firms are making substantial efforts in implementing the Duty. Overall, the frameworks suggested firms had carefully considered both our price and value requirements and the shift in focus to consumer outcomes. Given our price and value rules are outcomes-focused rather than prescriptive, there were understandably considerable differences in firms’ approaches. However, in some cases we had questions as to how effective certain firms’ frameworks would prove to be in practice. This suggested those firms would have more work to do to meet our price and value outcome rules. 

We have identified 4 key areas for further consideration by firms:

• collecting and monitoring evidence that demonstrates that products and services represent fair value 
• clear oversight and accountability of the necessary remedial actions if they do not provide fair value 
• where relevant, ensuring sufficient analysis of the distribution of outcomes across groups of consumers in the target market, beyond broad averages, to demonstrate how each group receives fair value 
• summarising and presenting fair value assessments in a way that enables decision-makers to robustly discuss whether the product or service represents fair value, such as by being clear on any limitations in the analysis or evidence  

Our detailed findings on each of the 5 review criteria are set out below.

Finding 1: Understanding fair value 

To make sure they are delivering fair value for consumers, firms will need to have a strong understanding of what fair value is, and the requirements of our fair value outcome. 

Good practice

Many frameworks had clearly set out principles for how the firm would apply the concept of fair value both generally and across product lines. There was often direct read across between the principles and factors that will be assessed and our guidance in FG22/5. 

Most firms had also identified their role as a manufacturer, co-manufacturer or distributor and understood their respective responsibilities under PRIN 2A.4.  

Areas for improvement

Some frameworks suggested that firms planned to rely, at least partly, on high-level or unevidenced arguments that their business models or ethos are inherently fair value. This could be, for example, due to their perception of how competitive or valuable their product or service offering is. Firms will need to consider how they could provide evidence for this view, and how they allow for their own critical analysis of this position to ensure they deliver fair value for their customers. 

A small number of firms had not given sufficient thought to the distinction between manufacturers and distributors in PRIN 2A.4, and the relevant requirements that apply. This is an important element of our rules. It allows firms to capture and assess the relevant costs and benefits of their products/services or role in the distribution chain to ensure they provide fair value to customers. 

Finding 2: Assessing value

To assess if a product or service provides fair value, firms will need to assess the costs and benefits that consumers can expect to receive, taking into account the intended purpose of the product or service.  

Good practice 

Most frameworks set out a reasonable view of how to assess the benefits consumers can expect to receive. These also provided a sufficiently broad view of the overall costs to the consumer, including fees and charges, any non-monetary costs, as well as any potential distribution costs to consumers. 

Some fair value frameworks were oriented towards the individuals who would undertake product-level value assessments, for instance by guiding the reviewer or providing practical statements, questions or challenges to consider at different stages. 

A handful of frameworks contained clear discussion about how to price products sold as a package or bundle and assess them for value. There was a clear consideration of where bundling does, or does not, provide value to consumers. For example, one firm noted that a bundle should not be priced higher than its constituent parts unless there is value to the consumer from the convenience of products being bundled together.  

Where firms are required to gather input from other firms or to pass on information to other firms in the distribution chain, it was often clear how and when this would be done and how the firm would treat and consider any information received. 

Areas for improvement  

A few firms who were active across several markets had a single generalised template for assessing fair value. But it was not always clear how the template would apply to products with very different characteristics and which may serve different target markets. Firms who provide a wide range of products and services across different market sectors may need to consider further how they adapt their approach to assessing fair value across these different market sectors. 

Some firms’ assessments did not make any reference to the firm’s profit margins on different products and services. While it can be difficult to allocate costs on an individual product basis, the profit margins of a product or service are likely to be a relevant factor in assessing its fair value.  

Some firms did not consider the types of non-financial costs and benefits that retail consumers may reasonably expect to pay or receive. FG22/5 states that benefits may include the quality of the product or service and level of consumer service. Non-financial costs might include factors such as the time and effort to make a decision about a product, such as amending or cancelling it. 

Finding 3: Considering contextual factors 

Broader contextual factors may affect the costs and benefits that consumers get from a product or service, and so may affect fair value. These factors may include evidence such as market prices for similar products and services, or consumer characteristics in the target market. 

Good practice 

Many firms considered the interaction between fair value and other elements of the Duty such as the products and services, consumer support and consumer understanding outcomes. Some firms considered how wider changes in the market could affect their own fair value assessments. We also identified good analysis around customer choice and how it affects value, especially how factors like ‘sludge practices’ could lead to poor value.  

Many frameworks took into account other factors that may affect the firm’s assessment of fair value, such as the products and services that consumers already hold with the firm (even if not sold as part of a bundle). These frameworks also described how this evidence could change their conclusions around fair value for different customer groups.  

Many firms also considered consumers’ behavioural biases, such as instant gratification or overweighting potential losses, how these may affect the way consumers buy and use products and services and how poor value may result. FG22/5 sets out that we expect firms not to seek to exploit customers’ behavioural biases, lack of knowledge or characteristics of vulnerability. 

Areas for improvement  

However, some firms did not give much consideration to broader contextual factors or their impact on fair value.  Some firms only considered whether the financial value customers received was positive, and not contextual factors such as a critical assessment of the fairness of their pricing structure. We encourage firms to consider where these simple approaches to fair value may overlook pockets of harm. This is especially the case for large firms or those with complex business models and offerings.  

Some firms did not appear to give much consideration to whether they needed information from other firms in in the distribution chain and/or third parties to properly assess fair value.  

Finding 4: Assessing differential outcomes 

As set out in our guidance, differential pricing for different groups of consumers, is likely to create additional considerations for firms’ fair value assessments. 

Good practice 

A number of firms set out how they plan to look at differential outcomes for customers and demonstrated a range of ways to segment customers. For example, they considered the value received by back-book customers, consumers using different channels, subsets of consumers paying disproportionately high margins given the benefits they receive or subsets of consumers at risk of paying higher fees and charges.  

Some frameworks included tailored analysis of fair value for consumers with characteristics of vulnerability. For example, analysis of how the needs and objectives for vulnerable consumer groups were likely to differ and thus how costs and benefits would vary, and indicators to understand the characteristics of consumers in the target market. 

Some firms considered product or service-level cross-subsidies, where some consumers pay higher prices or generate higher profit margins, and the factors to consider when reviewing whether these products or services offer fair value. Our price and value outcome rules do not require firms to charge all customers the same amount, or to make the same level of profit from all customers. One firm considered whether it is using the margin from a product to cross subsidise different groups of customers and the impact this could have on value for different groups. Another firm considered how product-level cross-subsidies may affect fair value and discussed the circumstances under which this could result in harm for some customers. 

Areas for improvement  

Some of the information presented in frameworks tended to rely on average outcomes rather than analysis to understand the full distribution of outcomes. Providing fair value to different groups of retail customers is a central theme of our rules. 

Even where firms are undertaking analysis of consumers using segmented groups, group averages could disguise outliers or pockets of poor value. Where firms include segmentation analysis in their value assessments, they may consider whether that gives decision-makers enough understanding of the distribution of differential outcomes like prices and mark-ups to be able to identify and rectify any instances of unfair value. 

Some firms’ assessments appear to identify differential pricing between groups of customers, but not require firms to demonstrate how each group of customers receives fair value. Our rules and guidance require that firms are able to demonstrate this. 

Finding 5: Data and governance 

Under the Consumer Duty, firms are required to monitor and review the outcomes that their customers receive, using appropriate information or data to do so. Firms must also take appropriate action where their review identifies that a product or service does not provide fair value. 

Good practice 

Most of the frameworks we saw set out appropriate data-led plans to monitor and review customer outcomes and allow sufficient challenge and discussion in the firm’s decision-making. Most included clear timelines for when firms should conduct value assessments and most addressed the frequency of reviews, for instance, corresponding to the expected length of time a consumer would keep a product or the expected renewal pattern. 

A number of firms set out clear rectification processes, complete with named owners, that they must follow if they identify that a product no longer provides fair value. In some cases, these included triggers which may require a new assessment, such as movements in a certain data indicator, and allowed for discussion and challenge at an appropriate level of seniority.  

Areas for improvement  

Some firms did not identify how they plan to monitor fair value, what data they might want to use or how they would address data gaps. In these cases it was unclear how the firms would, beyond some high-level principles, be able to demonstrate that their products and services are fair value for different groups of consumers. Other firms had clearer data plans but their remediation steps were less clear, although we’re aware this information may be set out in other documents that were not part of this review. Under the Consumer Duty, we expect firms to monitor and regularly review their customers’ actual outcomes and take action to address any risks to good customer outcomes.  

A number of firms proposed points-based or red/amber/green-style approaches within their fair value frameworks. These appeared appropriate in many circumstances. However, firms may want to consider whether they are giving sufficient weight to critical analysis around the ratings, how thresholds between points/ratings are drawn and whether decision-makers have sufficiently detailed information to review and challenge the assessment of fair value. 

Similarly, some firms presented evidence relevant to fair value, without being clear about its limitations, so it was not apparent how decision makers would be able to critically review this evidence when assessing fair value. 

Where firms are using market-level benchmarks or information on comparators within their assessments, they should consider how they are delivering fair value for their customers in absolute rather than just relative terms. Relative comparisons can hide fair value issues that are prevalent within a wider market and are just one factor in the consideration of fair value.

Next steps

Firms should consider the findings from this review and whether they need to develop their approach to implementing our price and value outcome rules in line with good practice. They should consider these findings in conjunction with our Finalised Guidance on the Duty and expectations highlighted in our recent sectoral letters on the Duty.  

We will continue to support firms’ embedding activities in the run-up to, and beyond, the July 2023 implementation deadline for new and existing products and services. In particular:

• We have given all the firms involved in the review feedback on our findings where applicable. We will continue to engage with firms where we have questions about their plans or approach, and to monitor the progress they are making in embedding the Duty.  
• We are reviewing the findings of our survey of 1100 firms, to better understand the progress smaller firms are making in different sectors and on different aspects of the Duty. We will use the findings to carry out targeted engagement with smaller firms. 
• We will continue to update our dedicated webpages and host further regional in-person events for specific groups of small and medium-sized firms. 
• We will continue to monitor firms’ approach to ensuring customers receive fair value and this will include future reviews of firms’ fair value assessments of specific products and services. We will continue to feedback to the market on what we see on fair value and the other areas of the Duty.