Fair value in consumer finance

Some firms, including smaller firms, took a holistic and proportionate approach to assessing fair value. Rather than simply restating regulatory requirements or guidance, they applied those requirements to their products, services and customer outcomes.  

They also drew on information from the other Consumer Duty outcomes, including evidence about product design and customer support, when considering whether customers could realise the expected benefits of a product or service.  

A few smaller firms structured their assessment by reference to the 5 areas of focus in our May 2023 publication, Consumer Duty: Findings from our review of fair value frameworks[7]. These covered:

• the firm’s understanding of the fair value requirements
• assessment of costs and benefits
• contextual factors
• differential customer outcomes
• data and governance

Some firms mapped the end-to-end customer journey and assessed value at each stage, from initial engagement through to post-sale support. They scrutinised key customer interactions for potential fair value concerns, including:

• setting up an arrangement
• handling complaints  
• supporting customers through bereavement processes

Some firms had comprehensive and well-structured assessments, supported by appropriate governance, MI and customer outcome monitoring.  

Their assessments brought together relevant evidence and clearly explained how conclusions had been reached.

Some firms did not have a clearly documented approach to undertaking fair value assessments.

This made it more difficult for them to evidence that their products and services provided fair value or demonstrate effective governance, oversight and challenge.

Some assessments relied heavily on narrative statements or assertions, with limited supporting MI, quantitative analysis or customer outcomes evidence.

They did not always explain clearly how the price paid by customers compared with the benefits they could reasonably expect to receive or how product limitations, risks and mitigants had informed their conclusions.

In some cases, evidence and analysis were spread across multiple documents or sources, without being brought together to provide a clear and coherent view of fair value. This made the assessments more difficult to understand, oversee and challenge. 

Some assessments were based on incomplete or outdated information, creating a risk that the resulting fair value conclusion did not reflect the current product or charging arrangements.

Some firms gave little consideration to how value might change over time.

Developments such as renewal, changes to fees or benefits, customers falling into arrears, the sale of an account or a deterioration in customers’ circumstances could affect fair value over time.

Some firms considered the full range of relevant financial and non-financial costs that customers might incur over the lifetime of the product.

This helped them base their assessments on evidence rather than assumptions.

Rather than relying solely on firms’ costs, product features or market comparisons, some firms used evidence to explain and support their conclusions on whether the expected total price was reasonable relative to the benefits customers could reasonably expect to receive.

One credit card provider quantified product benefits including cashback, foreign exchange savings and other account benefits.

The provider then compared these benefits with the fees, interest and other costs customers paid.

Some firms provided breakdowns of expected customer costs that were linked directly to customer benefits and outcomes. This enabled them to assess whether the price paid was reasonable relative to the benefits received, including for different customer groups.

Some assessments focused mainly on firms’ costs as justification for pricing, without adequately considering whether the total price paid by customers was reasonable relative to the benefits they could reasonably expect to receive.

Some firms did not consider the full price customers might pay over the lifetime of the product. Assessments sometimes considered fees separately or omitted contingent charges, including charges arising when customers fell into arrears.

Some assessments did not reflect the firm’s current charging structure.

For example, one assessment included a fee that was no longer charged but omitted a fee customers could still incur. This increased the risk that the fair value conclusion was based on incomplete or outdated information.

Some assessments gave limited consideration to non-financial costs or the benefits customers could reasonably expect to receive.  

This was particularly evident where customers were not charged directly and firms relied mainly on the absence of a financial cost to support their fair value conclusions.

Some firms did not adequately assess whether products involving long-term commitments would continue to provide fair value where expected benefits depended on factors such as:

• future product performance
• ongoing maintenance arrangements
• market conditions

This included some firms offering consumer hire and third-party ownership agreements for home energy infrastructure. 

Some firms segmented their customer base using factors such as:

• credit risk
• product usage
• distribution channel  
• customer vulnerability

The firms then assessed fair value across those segments. 

Some firms assessed fair value across different pricing groups, including annual percentage rate (APR) bands and risk-based pricing cohorts.  

They considered whether customers paying different prices continued to receive fair value and whether pricing differences were supported by evidence, rather than relying solely on an overall product-level conclusion.

Some firms analysed fee-related indicators separately for customers with and without characteristics of vulnerability. 

This enabled them to compare outcomes and identify whether particular groups were disproportionately affected by fees and charges. 

Some firms analysed complaints, arrears, cancellations, claims outcomes, product usage and customer feedback.

This helped them base their conclusions on customer outcomes evidence rather than assumptions.

Some firms distinguished between customers who used their products through preference and those who used them through necessity. 

This helped them consider differences in customer needs, product use and outcomes. 

One firm identified that some closed-book customers were paying different prices for products with similar features because of historical pricing practices. The firm was undertaking work, overseen through product governance arrangements, to reassess, consolidate and simplify the portfolio. 

Some firms treated the target market as a single, homogeneous group. This made it difficult to assess whether different customer groups had distinct needs, paid different prices or received different outcomes.  

Some firms identified customers with characteristics of vulnerability but did not analyse their outcomes closely or compare them with those of other customers.  

In our fees and charges review, some firms did not compare fee incidence or the cumulative impact of fees between these groups.

In our fees and charges review, many firms did not consider which customer groups were more likely to incur repeat fees or experience a higher cumulative fee burden.  

This made the firms unable to identify patterns of charging that might result in different outcomes or affect fair value for particular groups. 

Some firms held target market or segmentation information but did not use it effectively in their fair value assessments. This included information about vulnerability, product usage, pricing and fee incidence.  

As a result, they were not evaluating or challenging differences in value and outcomes across customer groups.

Some firms applied differential or risk-based pricing but did not assess value for each pricing group. An overall product-level conclusion could therefore overlook material differences in the prices paid or outcomes experienced by different groups.

Some firms relied heavily on assumptions, hypothetical models or unsupported judgements, with limited use of customer outcomes data or MI to support their conclusions.

Some firms established clear monitoring arrangements, with defined indicators of good and poor outcomes. They also identified thresholds or triggers for further investigation, escalation or intervention.

Some firms combined quantitative and qualitative information to develop a more complete picture of customer outcomes and test whether their fair value conclusions remained appropriate over time.  

Depending on the product and target market, this included:

• complaints and customer feedback
• product usage
• customer service information
• arrears and forbearance outcomes
• cancellations
• renewals  
• use of product features or support services 

Some firms used sufficiently granular information to identify differences between customer groups that were not apparent from aggregate data.  

This included outcomes for:

• new and existing customers
• customers using different distribution channels
• customers in vulnerable circumstances
• customers experiencing financial difficulty

They used these insights to inform product design, pricing, communications and customer support.

Some firms combined information on fees, arrears, complaints and customer cases to identify customers at risk of harm.  

One credit card provider used an outcomes dashboard to identify repeat or consecutive fee payers.  

A smaller firm supplemented MI with monthly governance reviews and detailed analysis of higher-risk customer cases across the customer journey, from product origination through to any forbearance support. This provided a targeted and proportionate way to understand the experiences of customers at greater risk of harm. 

Some firms used monitoring findings to take prompt action where customers might not be receiving fair value. For example, one credit card provider identified customers paying more in monthly fees than they received in cashback and contacted them about alternatives. 

Some firms stated that they would monitor customer outcomes but did not set out a clear framework. Their assessments did not identify the:

• outcomes to be monitored
• relevant metrics and data sources
• ownership and governance arrangements
• monitoring frequency
• quality-assurance processes
• thresholds for investigation, escalation or intervention

Some firms did not use actual customer data or MI to support their fair value conclusions. They relied instead on general assumptions, hypothetical models or narrative assertions.  

Others identified potentially relevant data sources but did not adequately analyse or use the information to support or test their conclusions.

Some firms monitored outcomes only at an overall portfolio level and did not adequately consider whether outcomes differed between customer groups. This included firms monitoring total fee income, arrears or missed payments without examining:

• which customers incurred fees
• how frequently fees were applied
• whether charges accumulated
• the relationship between charges, customer balances and subsequent financial difficulty

Some firms relied on limited, incomplete, outdated or insufficiently granular data.

For example, some relied primarily on complaints, customer-satisfaction measures or case-level quality assurance without aggregating the findings or linking them to wider customer outcomes.

In other cases, firms did not explain the limitations of the available information or how those limitations affected their assessment. For example, some firms’ complaints root-cause analysis recorded only the primary reason for a complaint or excluded complaints that were not upheld. This risked overlooking fee-related concerns arising as part of wider payment, statement, service or technical issues.

Some firms did not clearly explain how they would use monitoring findings to assess whether their fair value conclusions remained appropriate over time.  

In some cases, it was unclear how firms would:

• investigate, escalate and address concerns
• decide whether further action was needed
• assess whether their interventions had improved customer outcomes

Some firms used benchmarking and outlier analysis to compare against other market offerings. This helped them:

• identify potential fair value concerns
• challenge internal assumptions  
• assess whether customers were receiving fair value

Where they identified material differences, they carried out further analysis to understand and explain them. 

Some firms used benchmarking as one source of evidence alongside analysis of the expected total price, product benefits and customer outcomes, rather than treating market comparisons as determinative of fair value. 

Some firms clearly explained how they had selected comparator products and considered whether those products were sufficiently comparable in terms of their features, benefits, target markets and service propositions.

Where firms’ products were priced above comparable market offerings, some analysed whether additional benefits, service levels, flexibility or other features provided an objective explanation for the difference.

Some firms relied on market comparisons without providing enough evidence to explain why:

•  the comparator products were appropriate
•  the comparison was reliable

Some firms found that their products were priced materially above comparable market offerings but could not explain whether customers received additional benefits, enhanced service levels, greater flexibility or better outcomes that justified the difference.

Some benchmarking exercises focused on headline prices without considering differences in product features, benefits, service standards, target markets, service propositions or customer outcomes. 

Some firms presented fees clearly and prominently across websites, pre-contract information and customer journeys.  

Key fee information was:

• easy to locate
• explained in plain language
• disclosed before customers needed to make a decision

One firm used customer research and comprehension testing to assess whether customers understood when charges applied and how they affected the total price, alongside analysis of customer behaviour and interactions.

Another firm proactively contacted customers who were incurring particular charges, to assess whether they understood when those charges applied and how they affected the overall cost. The exercise identified some potential misunderstanding, leading the firm to enhance the relevant communications. 

Some firms used manual and automated reviews of calls, emails and chats to identify potential barriers to understanding, including the use of:

• jargon
• unclear explanations
• inappropriate pacing

Firms used the resulting insights to identify trends, training needs and opportunities to improve communications. 

We saw firms disclose material fees relatively late in the application journey or give less prominence to the total amount repayable than to other information.  

Complaints data sometimes indicated that customers were surprised by particular fees or became aware of them only late in the journey, making it more difficult for them to understand the total price and compare products. 

Some firms spread fee information across several web pages or documents.

Although individual disclosures might be available, customers had to locate and combine them to understand the charges that could apply.

Some communications did not clearly explain:

• the amount of a fee
• when it would apply
• how frequently it could be charged

We also identified broad or open-ended contractual terms that made it difficult for customers to understand the charges they could incur.

Some consumer hire firms did not give sufficient prominence to the significance of long-term financial commitments. For example, some consumer hire financial promotions used 'pay as you save' claims without making it sufficiently clear that potential savings and affordability depended on factors such as equipment performance, changes in customers’ circumstances and future energy prices over agreements lasting up to 25 years.

Some firms gave customers time to make a payment and sent reminders before applying a charge for a missed payment.  

Some firms also limited the number of fees that could be charged within a defined period, helping to reduce the risk of repeat fees causing foreseeable harm.

Some firms waived, refunded or stopped applying fees where customers were:

• in financial difficulty
• engaging in forbearance discussions
• displaying characteristics of vulnerability

Some firms also regularly waived additional fees while customers were receiving forbearance support.  

This helped reduce the risk of charges accumulating during periods of financial difficulty.

One firm applied certain fee limits at both product and customer level.

This helped reduce the risk of customers who held multiple products incurring cumulative charges over a short period. 

Some firms’ controls did not provide sufficient assurance that customers repeatedly incurring fees would be identified and supported before charges accumulated or poor outcomes arose.  

This was particularly relevant where customers repeatedly moved in and out of arrears or otherwise used the product in a way that incurred significant arrears-related fees.

Some firms could not demonstrate that they had considered whether the level, frequency and cumulative impact of fees remained fair for customers in arrears, particularly those with lower balances or repeated missed payments.  

In some cases, firms had controls in place but could not demonstrate that these were appropriately calibrated to reduce the risk of fees making it harder for customers to recover from missed payments.

One pawnbroking firm could not demonstrate how it assessed whether customers who repeatedly used the product were at risk of poor outcomes or required additional support.  

This meant we did not have the assurance that the firm’s arrangements adequately identified and mitigated the risk of repeat charges or other foreseeable harm.