Price and Value Outcome: Good and Poor Practice

Good practice: In some cases, when we requested fair value assessments, firms provided supporting management information that had been presented to Boards and governance committees as part of their regular product review processes.

From this evidence, it was clear that senior decision makers considered a range of information as part of the annual review of the product. This extended beyond financial performance metrics that firms would typically consider. For example, alongside product level margins, one firm assessed whether the product was being used as intended, whether certain groups of customers were less likely to derive value, and whether pricing structures continued to be appropriate in light of customer behaviour and outcomes.

It was also apparent that senior stakeholders engaged with this material and challenged on the outcomes being delivered to customers, alongside consideration of commercial performance.

In some instances, this led to firms carrying out further analysis or reconsidering aspects of product design or pricing, and returning to subsequent governance forums with updated proposals. We saw evidence in later materials, including Board and committee minutes, of how this challenge had been addressed and what changes had been made in response.

This demonstrated that considerations of fair value were actively embedded within firms’ governance processes and decision making.

Poor practice: We have seen examples where fair value assessments were produced as retrospective analyses to demonstrate how existing pricing and product design meet the requirements of the price and value outcome. In these cases, the assessments appeared to be created after the event, rather than reflecting the analysis the firm did at the time key decisions were made.

This suggests that considerations of fair value were not sufficiently embedded within the firm’s governance and decision-making processes, including product design, pricing, and ongoing review.

We would expect firms to provide documentation that reflects the analysis undertaken as part of these processes, including how risks of poor value were identified and addressed, and how decisions were informed. This should include evidence that such analysis has been subject to effective oversight and challenge at Board or equivalent governing body level.

Poor practice: In our work across a range of retail markets, we have seen firms assess fair value primarily by reference to the price and stated benefits of a product. These have not sufficiently drawn on information about how the product is used in practice, whether customers understand it at the point of sale, and whether they are supported to use it effectively. Crucially, these considerations were not reflected in firms’ fair value assessments.

In some cases, firms’ own management information indicated that customers were not engaging with key product features, were using the product in ways not aligned with its intended purpose, or were not accessing benefits that formed a significant part of the product’s value proposition.

However, firms did not demonstrate that their fair value assessments had incorporated this information when assessing whether the product or service offered fair value to customers in practice.

Good practice: In our work on business current accounts, we saw some firms adopt a structured approach to grouping. They did this by producing an overarching fair value assessment for the core business current account product, supported by additional fair value assessments for key component parts. These components included, for example, payment services (such as card payments and transfers), overdraft facilities and other ancillary services. This approach enhanced the granularity of the assessment by enabling firms to assess the price and value of each component individually, rather than relying solely on a single high-level assessment. It also reduced the risk that poor value in one aspect of the product could be concealed by stronger value in another. At the same time, the overarching fair value assessment made sure that firms maintained a clear view of the overall product offering, including the expected total price paid by the customer and how the different components interacted to deliver value in practice.

Poor practice: In our work on cash savings[-10], we saw firms grouping products together in the same fair value assessment, despite material differences in interest rate structures and terms and conditions (eg instant access, restricted access and fixed term accounts). These differences were not adequately reflected in the assessment, creating a risk that the fair value of individual products was not properly evaluated.

Good practice: In our work on cash savings[17], we saw a firm segment its target market into distinct groups based on customers’ objectives and needs (for example, those starting to save, regular savers, and those seeking to maximise returns). The firm considered how different groups of customers were likely to use the product in practice and identified behaviours that could lead to a risk of poor value.

Poor practice: We saw poor practice where firms defined their target market too broadly. In some cases, providers of guaranteed asset protection (GAP) insurance[-24], which covers the gap between a motor insurance payout and the original purchase price or outstanding finance, defined their target market as anyone who buys a car. This target market definition did not reflect how the product operates in practice. For example, the product may not be appropriate for drivers of older or lower value vehicles, where depreciation is more limited and the potential gap between an insurance payout and the vehicle’s value is small, meaning the likelihood or value of a successful claim may be low. By defining the target market too broadly, firms did not demonstrate that they had considered whether the product would deliver meaningful value for different groups of customers. As a result, customers who were unlikely to benefit from the product could fall within the target market.

Good practice: We saw some commercial debt management firms recognise the potential risks associated with fee structures that do not include an explicit monetary cap, where customers could otherwise incur high total charges depending on their circumstances. In these cases, firms had designed their charging models to include appropriate controls to mitigate this risk. This included setting well-considered and proportionate repayment structures for fees, taking into account the customer’s circumstances and the overall impact of the charges.

Good practice: In our work on business current accounts, we saw a firm assess the total price paid by customers across the full range of services associated with the account, rather than considering individual charges in isolation. Recognising that costs can vary depending on how customers use the account, firms can use data on actual customer behaviour to estimate typical usage patterns, such as the frequency and type of transactions (for example, payments, transfers and cash deposits), use of overdraft facilities, and account maintenance activity. Combining these elements to calculate the overall expected cost of the account for different groups of customers, segmented by characteristics such as account usage and transaction volumes can give firms a more realistic view of the total price customers are likely to pay in practice.

Good practice: In our work on investment platforms, we saw a firm assess the full range of fees and charges within its pricing model, including those arising from third party services. The firm had governance arrangements in place to oversee these services, including regular review and challenge of their pricing. This enabled the firm to understand, challenge and justify costs across the value chain, ensuring third party charges remained appropriate relative to the benefits delivered.

Good practice: One firm used the average investment charge of the top 20 most popular funds customers invested in to estimate charges earlier in the distribution chain. They considered this together with the service fee, interest retained on cash balances, and brokerage-related fees to reach a single figure of total fees for each kind of investor (segmented by balance and top-ups).

Good practice: One investment platform firm was able to clearly link the amount of interest retained to the effective cost to serve the customer. The firm used illustrative examples of different groups of customers (with different holdings and types of accounts) to demonstrate the effective cost for each customer group, and therefore how much interest is retained and how much is paid to the customer. This example is also relevant to the consideration of costs to the firm (page 19 below).

Poor practice: We saw some firms apply commission-based fees for debt collection services. In some cases, these fees were paid by the instructing creditor, while in others they were charged directly to the consumer. Firms did not clearly explain how these fees were determined or the circumstances in which consumers would be liable for them. The approach also resulted in different outcomes for consumers in similar circumstances. Some consumers incurred significant additional costs while others did not, without a clear rationale for these differences. Firms did not demonstrate that they had assessed the impact of these fee structures on consumer outcomes, particularly where consumers were required to pay the fees themselves.

Poor practice: We saw investment platform firms retain interest on customers’ cash balances without clearly demonstrating how this related to the cost of serving those customers or the benefits delivered. Firms did not provide sufficient analysis or evidence to justify the level of interest retained or to support that it represented fair value. In some cases, firms relied on the fact that these charges were disclosed to, and agreed by, customers as evidence of fair value. However, we did not see sufficient evidence that firms had assessed whether the charges themselves were reasonable relative to the benefits delivered.

Poor practice: One pension consultancy used time-based charging to deliver a wide range of administrative activities to its customers. While the firm disclosed hourly rates for these activities, it did not provide customers with upfront information on likely total costs or cost ranges. This meant customers could not reasonably estimate the overall cost of the service. This approach gave the firm discretion over the amount of work undertaken and the resulting charges, without effective customer constraint. The firm also did not set any upper limit on charges.

Poor practice: In the wealth management sector, in firms’ fair value assessments, we saw firms apply multiple charges to a single client account without clarifying what each charge related to. This created a risk that customers are paying more than once for overlapping or duplicative activities. Firms’ fair value assessments did not adequately identify or assess this risk, or consider how it could be mitigated. As a result, firms were unable to demonstrate that the total charges paid by the customer represented fair value.

Poor practice: We saw some providers of business current accounts rely heavily on the account being free or low-cost as a basis for concluding that they provided fair value to customers. There was limited evidence that firms had assessed how charges may arise depending on how the account is used or the extent to which customers may incur non-financial costs such as time effort or complexity in using the product. As a result, firms’ assessments placed undue reliance on the absence of headline charges, without sufficiently considering the overall costs incurred by customers or how these may vary across different usage patterns.

Good practice: In our work on business current accounts, we saw firms use management information to track how customers were using different features of the account, to assess whether the benefits of the product were being realised in practice. This enabled firms to better understand whether the benefits they had identified in their fair value assessments were meaningful to customers. Firms used this analysis to take action where needed. In some cases, this included nudging customers to make better use of available features, or supporting them to switch to a more appropriate product where it was clear the existing account did not meet their needs. In some cases, we saw firms using these insights to adapt the design of their products over time, including making changes to pricing structures, refining or removing underused features and simplifying product offerings.

Good practice: One investment platform firm discussed intangible benefits such as flexibility and making investment accessible with low minimum investment amounts. The firm was able to show evidence that customers valued these features by referring to reputable third-party survey results.

Poor practice: Some firms in their fair value assessments referred to the ‘peace of mind’ that GAP insurance provides as a benefit of the product. Firms could not substantiate this claim with evidence, and we consider that the benefit is only meaningful if the cover is appropriate and there is a reasonable chance of making a successful claim. The evidence we saw in our insurance value measures, such as the very low proportion of premiums paid out in claims, suggested this was not the case for GAP insurance.

Good practice: A retail bank offering international payments undertook a comprehensive benchmarking exercise as part of its fair value assessment. To ensure a robust and unbiased comparison, the firm benchmarked its product against a broad and representative cross-section of the market. This included traditional high street banks, digital challenger banks and specialist international payment providers. This approach avoided reliance on a narrow or favourable comparator group and enabled a more objective view of price and value.

The benchmarking exercise compared transaction fees (by channel and amount), FX margins (mark-up over reference rates), pricing structures (fixed vs variable fees, tiering approaches), customer outcomes, including total cost of a standardised transfer and non-price factors such as transparency of pricing, ease of use, and speed of transfer. The firm used standardised scenarios to ensure comparability (eg common currency corridors and transfer values).

This benchmarking enabled the firm to identify outlier scenarios, particularly for higher-value transactions, where customers may be paying significantly more than in the wider market. As a result, the firm used these insights to shift from currency-based FX pricing to amount based tiering, improving outcomes for customers making larger transfers.

Poor practice: A lender offering high-cost longer-term loans conducted a benchmarking exercise as part of its fair value assessment. The firm asserted that there were no directly comparable products in the market, and instead selected lenders from a different consumer finance market as its primary comparator group. However, the firm could not demonstrate a clear rationale for the assumptions underpinning its approach, or why the comparison was appropriate. As a result, the benchmarking appeared to rely on assumptions that were not clearly evidenced and may not have reflected an objective assessment of comparable products and outcomes.

Poor practice: In our work on second charge mortgages, we saw firms placing significant weight on benchmarking their fees and services against firms in the market to demonstrate fair value. While benchmarking can be a useful starting point, it is not sufficient on its own to demonstrate fair value. Firms should also not assume that being in line with market practices is, by itself, evidence of fair value. In some cases, the market as a whole may not be delivering good value for consumers. In such circumstances, benchmarking against peers alone is unlikely to provide a meaningful assessment of value. This is particularly so where benchmarking is not supported by a broader assessment of the total price paid by the customer, the benefits and limitations of the service, and the needs and characteristics of the target market.

Good practice: In our cash savings[22] work, we saw one firm segment its target market and assess outcomes for each group separately. The firm analysed how different groups of customers used the product in practice, including metrics such as average deposit levels, withdrawal activity and account usage. It also assessed the charges incurred by each group to understand whether fees and charges fell more heavily on particular customers. Based on this analysis, the firm considered whether this could result in a risk that some groups were not receiving fair value. This enabled the firm to assess whether the product delivered fair value across different customer groups, rather than relying on a single overall assessment.

Poor practice: We have seen firms identify differential outcomes across customer groups without clearly explaining how those groups have been defined or why the chosen segmentation is relevant to assessing value. In some cases, segmentation appeared arbitrary or insufficiently linked to how customers experience the product or service in practice.

Good practice: We observed firms taking a structured approach to identifying and monitoring outcomes for customers with characteristics of vulnerability. In one example, a firm used a 'care flag' on customer accounts to record characteristics of vulnerability identified. This information was visible across the organisation, including to staff responsible for product oversight and customer support.

This allowed the firm to identify where these customers were at greater risk of poor outcomes, for example where they were less likely to engage with the product or more likely to incur certain charges.

The firm used these insights to inform its decision making, including reviewing product design, pricing and communications, and taking targeted action where necessary to improve outcomes for these customers.

Poor practice: We observed that many firms did not proactively highlight the support available to consumers, or train staff to recognise signs of vulnerability and to encourage and create opportunities for consumers to disclose their needs. This was reflected in fair value assessments which were not transparent about the framework or criteria used to recognise vulnerability or highlight support and encourage use where appropriate. This increases the risk that poorer outcomes for customers with characteristics of vulnerability are not identified or addressed.

Poor practice: In our cash savings[29] work, we observed firms applying differential pricing between on-sale and off-sale (back-book) accounts. New customers were typically offered higher interest rates on on-sale products. Customers holding off-sale accounts received significantly lower rates, despite holding similar balances and using comparable products.

In some cases, firms did not provide sufficient evidence to demonstrate that customers in off-sale accounts were receiving fair value. In particular, firms did not adequately assess whether lower rates for these customers were justified by differences in costs to serve, risk or the level of service provided.

We also saw that firms did not adequately consider the role of customer engagement in driving these outcomes. In particular, firms did not assess whether customers in off-sale accounts were less likely to review or switch products, and the extent to which this resulted in those customers remaining in lower-rate accounts over time.

As a result, firms were unable to demonstrate that their pricing approach lead to good consumer outcomes or that customers in off-sale accounts were receiving fair value.

Good practice: In the wealth management sector, we saw some firms providing both investment management and broader financial advice where delivering both services to the same customer reduced the overall cost to serve them. In these cases, firms reflected those efficiencies in the charges applied to customers.

Good practice: We have seen good practices from fund managers making use of activity-based methods to allocate their fixed costs between funds. This enabled a more informed assessment of how profitability varied between smaller and larger funds, including where economies of scale were being achieved. Firms were then better placed to assess whether charges remained appropriate.

Poor practice: We have also seen the poor practice of citing costs as important but not providing sufficient explanation of them and their relationship to fair value. This included explaining low interest rates on products by stating that the margins from accounts with lower balances are insufficient to outweigh the annual cost of providing a customer account, but with no elaboration or identification of the relevant cost and margins.

Poor practice: In our work on second charge mortgages, we found some  firms’ business models relied on high customer acquisition costs and low conversion rates. This meant the fees paid by the relatively small number of customers who took out a second charge mortgage covered the costs of a much larger number of customers who did not go on to take out a product. This resulted in higher charges for those customers who took out a second charge mortgage, without clear evidence that these charges reflected the benefits they received.

Good practice: In our work on premium finance, we saw firms take proactive steps to improve customer outcomes following their own assessments of fair value. In some cases, firms identified that the overall cost of credit, including interest rates and fees, may not have represented fair value relative to the benefits delivered to customers. In response, firms implemented changes to their pricing structures, including reducing interest rates, arrangement fees and late payment charges.

These actions were informed by firms’ ongoing monitoring of customer outcomes and wider market conditions, including changes in the UK base rate, and were aimed at ensuring that the total price paid by customers remained reasonable relative to the benefits of the product, such as the ability to spread payments and maintain flexibility in how premiums are paid. Firms were able to evidence how these changes improved outcomes in practice, including through reductions in the overall cost of credit for customers.

Good practice: In the wealth management sector, we saw some firms put in place controls to identify clients holding dormant cash balances within their investment accounts for prolonged periods. Where this indicated a risk that clients were not receiving value from an ongoing service, firms took action to improve outcomes. This included nudging clients towards more appropriate arrangements, such as reinvesting cash or moving into low-risk alternatives (for example, money market funds). It also included supporting customers to move to a more suitable service or providers where the existing service was no longer likely to provide fair value.

Poor practice: Poor practice included a firm which acknowledged potential risks of customers receiving poor value on their savings account. The firm proposed writing to customers to tell them they are getting a low rate on their savings account. The firm didn’t set out what actions the customer might want to take to receive better value, like considering alternative products in the firm’s portfolio that might be better suited to their circumstances. Where customer communications are used as a mitigating action, it is critical these are targeted and monitored for effectiveness.