Price and Value Outcome: Good and Poor Practice update

It is important not to consider the price and value outcome in isolation. It should be considered alongside the other outcomes and cross-cutting obligations under the Consumer Duty[1] (ie, products and services, consumer understanding and consumer support).

Firms should consider the types of customers who, by virtue of their circumstances or behaviours, are likely to get value from the product (inside the target market) as well as the types who are less likely to get value (outside the target market). If different products or services have different features or target markets, they should be considered separately.

The Consumer Duty does not prevent firms from adopting any business models which may have different prices for different groups of consumers. It also does not prevent cross-subsidies between different products or services. However, firms must demonstrate that all groups of customers get fair value from their products (and be particularly alert to risks that cross- subsidies may disadvantage vulnerable customers).

Assertions made in fair value assessments about the costs and benefits of the product or service, or any other contextual factors, should be backed by reasonable evidence. The extent or level of detail of the supporting evidence should be proportionate to the size of the firm and complexity of the factors being considered.  

The actions should be specific, and their success and impact should be monitored. 

As per PRIN 2A.4.12G[8], in ensuring that a product provides fair value, a manufacturer should have regard to how the cross-cutting obligations (PRIN 2A.2[9]) and the other retail customer outcome rules (PRIN 2A.3[10] to PRIN 2A.6[16]) are met in respect of the product.

Firms should take a holistic approach, both to the price and value outcome and to the Duty overall. A product or service that does not meet any of the needs of the customer it is sold to, causes foreseeable harm, or frustrates their objectives, is unlikely to offer fair value to that customer, whatever the price. Conversely, a product or service that meets all of the other elements of the Duty is more likely to offer fair value.

Poor practice: In our cash savings work, we found accounts regressive interest rate tiering, with lower interest rates paid as balances grew, which has the effect of disadvantaging customers that maintain high cash balances. We recognise that offering higher, more competitive rates at lower balances can be an effective way of attracting savers to start saving funds. However, in these cases, we found that the large majority of funds received lower rates. Had these accounts been inspected holistically with other outcomes in mind alongside this pricing structure, this would have suggested customers did not sufficiently understand the implications of the tiered rate, and/or were not initially offered savings products that better suited their needs, and/or were not sufficiently monitored and prompted to move to more appropriate accounts. We did not see sufficient evidence to indicate that the product was working effectively for customers, nor did we see mitigating actions to ensure good outcomes for consumers. 

Poor practice: We have seen examples where firms’ pricing structures are complex, raising the concern that consumers may not understand them. This can be a deliberate practice: opaque pricing practices can obfuscate information for consumers so that they may not understand how high the charges are or be able to effectively shop around. Looking at the price level alone and not asking questions about consumer understanding, for example, can miss the potential harm that the pricing structure can cause. Investment platforms and self-invested personal pension operators charged a platform fee on cash holdings as well as retaining some of the interest earned on customers’ cash balances, referred to as ‘double dipping’. Some of our concerns about double dipping include the extra complexity which the practice adds to platforms’ charging structures, and a lack of transparency in the disclosures given to customers, affecting their ability to understand the value of the proposition overall.

Considerations for firms

The examples above demonstrate a clear link between multiple outcomes of the Duty. There are links between the products and services outcome and the price and value outcome, in that the products and services outcome aims to make sure that products are designed according to the financial objectives of the target market. Those which are poorly designed, or do not meet the needs of the target market, are less likely to provide fair value for customers. There are also links with the consumer understanding and support outcomes and ongoing monitoring where things are not working as expected, particularly the need for effective communication.

In situations where there is a significant risk of consumers not receiving fair value, a firm should identify this risk and consider the appropriate mitigating actions. Depending on the nature and severity of the fair value concern, a firm may consider adjusting the core features of a product, ensuring there are alternatives available, effectively communicating with and supporting consumers so they are in the right products, and monitoring how these actions are cumulatively working together to ensure consumers are receiving fair value.

Small firms 

Smaller firms may find it more challenging to analyse and identify interactions between outcomes where they are tackling a fair value concern. As an example, small firms may not have the resources to commission supplementary customer analysis to help test for customer understanding and support concerns. A reasonable option could be to gauge consumer understanding and support through the nature and volume of complaints, feedback or enquiries, or an assessment of whether consumers are engaging with their products in unexpected ways.

Trade associations can also be a valuable source of research to help firms understand customers in their sectors and their sources of frustrations in general. Similarly small firms might want to make use of publicly available tools which can assess the transparency and accessibility of their communications.

According to PRIN 2A.4.1R[11], fair value is defined as a reasonable relationship between the amount paid by a customer for the product or service and the benefits they can reasonably expect to get from it.

A thorough fair value assessment would generally necessitate that the firm critically assess the proposition from the point of view of the retail customer. Firms should think critically about the ultimate customer outcomes, instead of seeking to justify the current approach to pricing or benefits of a product or service.

We have seen examples of good and poor practice regarding:

• grouping products or services (FG22/5 (para 7.19)[12])
• the identification of the target market for a product or service (PRIN 2A.4.2R(1)[13], FG22/5 7.22[14])
• consideration of the cost, benefits, and limitations of the product or service (PRIN 2A.4.8R(2)-(3)[15], FG22/5 7.9[16])
• evidence of appropriate benchmarking (PRIN 2A.4.9G(2)[17], FG22/5 7.51[18])

Grouping products or services

We set out in FG22/5 (para 7.19)[19] that, when carrying out fair value assessments, firms may group similar products or services together where the customer base, complexity, and risk of customer harm are sufficiently similar. This should not be done if it might hamper an adequate assessment of each product or service. If two products or services have significantly different features, or separate and distinct target markets, we expect firms to complete separate fair value assessments.

Good practice: In our cash savings work, one firm produced a combined analysis of the portfolio of savings products, analysing each individual savings product’s fair value. This firm mapped out how each of these products have a different target market, and the characteristics of those target markets, such as first-time savers. The extent of this wider multi-product analysis provided a much clearer explanation of how consumers were receiving fair value by demonstrating that the firm's product offerings and pricing strategies were aligned with the distinct needs and characteristics of different customer groups, and provided supporting evidence that more vulnerable customers or those with lower savings ability were not disproportionately contributing to overall profits. This example is also relevant to target market identification, and assessing customer groups and cross-subsidisation regarding differential outcomes. 
 
Poor practice: One example of poor practice we observed in our cash savings work was 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 material differences could significantly impact the quality of assessment.

Grouping products or services together can be done with the appropriate consideration. This could be where products or services share qualities of a similar customer base, complexity, and risk of consumer harm. Firms should take care to avoid the risk of oversimplified analysis concealing that some groups of consumers are not receiving fair value, for example if the product or service they are using is combined in the same assessment as a product or service that is providing higher value.

Target market identification

PRIN 2A.4.2R [19]requires that ‘A manufacturer must ensure that its products provide fair value to retail customers in the target markets for the product’. PRIN 2A.9.10R[20] and PRIN 2A.9.12R[21] further require firms to check if different groups of customers receive different outcomes and to take appropriate action. Firms should consider FG22/5 (para 6.20)[26] which suggests testing whether the target market is sufficiently granular by considering if it includes any groups of customers with whom the product or service is generally not compatible.

Good practice: Our observations included a firm using a tool to segment its target market for cash savings accounts into groups based on the customers’ objectives and needs. The groups included children and parents, those starting to save, more regular maintenance savers, and those wanting to maximise returns. The firm also identified expected and unexpected behaviours for each segment. They mapped the unexpected behaviours to potential risks of poor value and identified actions to mitigate these risks. This example is also relevant to grouping products and services, and assessing customer groups and cross-subsidisation regarding differential outcomes.

Poor practice: We saw poor practice through very broad target market definitions. When identifying the target market, general insurance manufacturers must identify if there are groups of customers for whom the product or package would not provide the intended level of value. But some providers of GAP insurance defined their target market as anyone who buys a car. This is too generic. For example, the product may not be appropriate for drivers of older or lower valued vehicles given the very small proportion of customers who make a claim on the product, which, combined with a relatively low depreciation of such vehicles, would likely result in a low expected pay out. GAP insurance firms also often failed to identify the needs, objectives, interests, and characteristics of the specified target market in their fair value assessments, which made it difficult to assess outcomes through the lens of a target customer.

Good practice: Target markets may develop over time. An example of where firms have incorporated this thinking well is in monitoring products on a regular basis, to identify whether the target market remains appropriate and taking action where the product is not being used as intended. A change in the target market is likely to amount to a significant adaptation requiring a firm to reassess the product (as per PRIN 2A.4.3R(2)[21])

The product or services’ fees, charges, benefits, and limitations

As per PRIN 2A.4.8R[22], a manufacturer’s assessment of fair value must include the expected total price to be paid, benefits, and limitations of the product to the customer. This should include all fees and charges and other costs that a customer would normally incur for their use of the product.

Fees and charges

Where products have different overall fees and charges depending on how the product or service is used, or how it is distributed, firms need to consider how best to assess the overall price.

Good practice: In our work on investment platforms, we observed a firm analysing their pricing models, detailing third-party fees and charges, and explaining how a governance committee oversees third-party services. This committee reviews and decides on the retention or removal of these third-party propositions from the platform.

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 different 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. 

Poor practice: One firm in our investment platforms work referred to the proportion of the overall charge made up by their product charges as part of their assessment framework, but stated that this proportion was fair value without any supporting analysis or evidence. Similarly, another firm concluded that customers received fair value across the value chain on the basis that all charges are disclosed and agreed between the adviser and the customer. The firm did not demonstrate the analysis necessary to conclude that these charges represented fair value.

Benefits and limitations

In relation to assessing the benefits and limitations of a product, some firms were able to identify and evidence the range of benefits their services provided to customers and evidence the value that customers placed on these services.

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.

Good practice: An investment platform included a section in their fair value assessment focused on fair value across the entire customer chain. It pinpointed how the distribution chain affects customer value in areas like customer experience, service reliability, and specific customer needs, providing risk ratings in each area.

Poor practice: In contrast, 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.

Poor practice: Another example from our cash savings work is a firm that referred to the benefits of holding both its savings account and another of its current accounts, but not explaining what these benefits were or providing evidence of how customers used and valued the offer.

Evidence of appropriate benchmarking

Firms can also consider benchmarking and outlier analysis to compare the price and value of their products and services across equivalent other options. As indicated in PRIN 2A.4.9G(2)[23], a manufacturer may find that it needs to consider the market rate and charges for a comparable product to ensure a thorough fair value assessment. Further, in FG22/5 7.51 [24]we say that firms should ask themselves what insights they have gained for their fair value assessments by benchmarking the price and value of their products and services against similar ones in the market.

Good practice: Good practice included a GAP insurance provider benchmarking its product against other similar products, using FCA published insurance value measures, such as average claim payout. This enabled a more objective comparison of the firm’s value proposition. 

Good practice: In another example, we saw some firms conducting thorough and relevant comparisons of their non-price benefits to reach informed conclusions. One firm used impressions data to assess how regularly customers used insights, tools, and guidance provided to assist investors. The firm also made use of third-party reports for customer satisfaction. It assessed some of its service levels against internal service level agreements and identified mitigating actions where needed.

Poor practice: Poor practice on benchmarking and outlier analysis included firms only examining their product against a favourable subset of the relevant market and/or portfolio, making positive assessment outcomes more likely. Some firms failed to take account of the effects of significant features of their products in their assessments, which then meant the firm could not fully capture how the product compared with others in the market. This made favourable conclusions on value more likely.

Considerations for firms

Firms should demonstrate through their fair value assessments a clear identification and understanding of the target market for the product (PRIN 2A.4.2R[27]), the expected total price to be paid, and the benefits and limitations of the product (PRIN 2A.4.8R[32]). We would also expect to see evidence of appropriate benchmarking to comparable products, where relevant (FG22/5 7.10[25]).

Defining the product group and the target market for a product are the basic building blocks of a good fair value assessment, and yet many of the firms’ fair value assessments that we analysed were not doing this at the right level of granularity. Products that have distinct features, fee structures or yield different benefits need a separate fair value assessment drawing out the combination of price and benefit for each product and assessing its fair value.

Equally, many of the fair value assessments we analysed defined a product’s target market at too high a level of generality. Product design will usually favour some types of customer over others depending on their circumstances, characteristics or behaviours. If it is not intended that a customer group use the product or there is an expectation it might not generate fair value from the product, a firm should consider how their target market is being defined accurately to ensure that customer is not in scope.

This will support thorough assessment of whether a product or service is providing fair value, by considering the needs, characteristics and objectives of the target market, the nature of the product or service itself, and how this compares to similar products or services. This can combine to show the real value proposition from the consumers’ perspective, and in particular the impact where the customers do not align with the target market.

Small firms

Value assessments must be carried out if there are significant adaptations to a product (see PRIN 2A.4.3R(2)[26]). Products and services for smaller firms may change less frequently, resulting in fewer significant adaptations. 

Small firms often have fewer customers than larger firms. This can give them a better understanding of the circumstances and behaviours of their target market, the different groups of customers and the benefits and outcomes that their customers receive. It may be possible for small firms to evidence this through case study illustrations of the different types of customer, the typical fees and benefits and outcomes.

For markets where many small firms operate, it may not be practical for a small firm to do a complete cross-market benchmarking exercise, and the pricing of alternative products may not be available. In these cases, small firms should use judgement to benchmark against a relevant sample of products including a range of different value propositions. 

As per PRIN 2A.9.10R(2)[27], monitoring must [enable a firm] ''to identify… whether for any product the firm manufactures or distributes, any group of retail customers is experiencing different outcomes compared to another group of retail customers of the same product.' 

This can be applied specifically to fair value; as per PRIN 2A.4.11G[28], In considering the value assessment and how it applies when manufacturers have different groups of retail customer in their target market for a product, they should have regard in particular to the following:

1. whether any retail customers who have characteristics of vulnerability may be less likely to receive fair value; and
2. whether the product provides fair value for each of the different groups of retail customer in the target market, including in circumstances where the pricing structure of the product involves different prices being charged to different groups of retail customers.

Assessing customer groups

We have seen a range of practices relating to the Consumer Duty’s requirement for firms to identify whether any group of retail customers gets different outcomes for the same products compared to another group of retail customers (PRIN 2A.9.10R(2)[39]). If so, firms should be able to explain why this is the case and assess whether each group of customers is getting fair value. However, as set out in FG22/5 7.37-43[29], this does not require firms to charge all customers the same amount. There may be differential pricing, for example, between new and existing customers in the form of clear, transparent, up-front discounts for either set of customers. But where different prices are charged, firms must ensure that customers in each pricing group are receiving fair value.

Good practice: A good example observed in our cash savings work is analysis which broke down a target market into segments. It looked at the average revenue contribution per customer within that group (broken down further into average contribution of vulnerable customers within this group), the expected behaviour of each segment (such as usage, withdrawals, deposit sizes) and the costs they are likely to incur. Analysis then examined whether the cost raised the likelihood of harm for each segment and considered mitigation strategies should these risks of harm materialise. This example is also relevant to grouping products and services, target market identification, and assessing cross-subsidisation regarding differential outcomes. 

Good practice: A platform provider conducted analysis to identify situations where fees paid made up over 1% of a customer’s total pot size. The firm broke down the reasons for this and opted to take mitigating action by introducing a cap of ad-hoc charges, therefore reducing the potential for harms such as the erosion of the customer’s pot.

Good practice: In other good practice examples, we have seen firms effectively evaluate the cost of providing products and services relative to revenue for various groups of customers. This provided evidence to support the assessment that each target group of customers is getting fair value, despite differential prices.

Poor practice: We have seen firms struggle to provide data and concrete evidence in relation to different customer outcomes. In our cash savings work, some firms cited costs to serve as the reasons for differences but did not undertake further work, such as examining how frequently different groups used additional services and features. One firm did not effectively consider the impact of its use of introductory rates and bonuses and provided no evidence to support its claim that consumers who did not opt in for bonuses, or those who received a lower bonus, still received fair value. Where such claims are made, firms should seek supporting and concrete evidence to back them up in a fair value assessment.

Assessing vulnerable customer groups

Particularly important when considering differential outcomes are customers with characteristics of vulnerability. As per PRIN 2A.4.8R(4)[36]: A manufacturer’s assessment of fair value must include any characteristics of vulnerability that retail customers in the target market display and the impact these characteristics have on the likelihood that retail customers may not receive fair value.

Good practice: Good practice we observed included a firm that had a ‘care flag’ in place for relevant customers’ accounts, so that when a customer reports a characteristic of vulnerability, all customer support staff will see it. The firm then makes additional provisions to improve the value proposition for these customers, such as help from the customer support team to fill out forms.

Poor practice: Poor practice observed included many firms not having adequate processes to proactively identify vulnerable customers. Relying solely on customers to self-report vulnerabilities can mean some characteristics of vulnerability are invisible to assessment, and customers would need to keep reporting vulnerabilities. Firms should have processes to proactively identify vulnerable consumers, as consumers themselves will experience barriers to effective identification and reporting. Individual consumers will not be able to undertake the analysis that firms would be able to about how vulnerable circumstances have the potential to impact their financial decisions, and may experience apprehension in reporting such circumstances. Firms should consider their processes from the potentially vulnerable consumer’s perspective.

Cross-subsidisation

The guidance in FG22/5 7.52[30] states: 'The Price and Value outcome rules do not prevent firms from adopting any business models which may have different prices for different groups of consumers, or prevent cross subsidies between different products or services. However, firms should be able to justify the fair value of each product or service offered to each customer group.'

Where a firm’s business model incorporates practices such as cross-subsidisation across their product portfolio, their fair value assessments may benefit from greater consideration of this pricing strategy. If the cross-subsidisation is between groups of customers holding the same product, this is a particular case of differential outcomes as discussed above. However, if it is between different products, firms may want to extend the analysis to consider those other products and build an overall picture of how the value proposition for the product subject to the fair value assessment may impact the value proposition of the other product.

Cross-subsidy occurs when higher margins on some products that a firm sells compensate for lower margins or negative margins on other products in its portfolio. Depending on the circumstances, cross-subsidies can benefit competition and consumers overall. However, this is very dependent on the particular context and cross-subsidies can also increase the risk that some groups of consumers do not receive fair value or that vulnerable customers are disadvantaged.

In their fair value assessments, a firm may refer to such pricing strategies as a contextual factor to explain why their overall proposition provides fair value.

Good practice: Alongside an analysis of each individual savings product’s fair value, one firm included additional analysis to show the average contribution that each savings product in their portfolio makes to overall profits, acknowledging that some products make a higher contribution than others. This firm mapped out how each of these products has a different target market, and the characteristics of those target markets (eg some products were designed for individuals looking to maximise returns). 

The extent of this wider multi-product analysis provided a much clearer explanation of how consumers were receiving fair value by demonstrating that the firm's product offerings and pricing strategies were aligned with the distinct needs and characteristics of different customer groups, and provided supporting evidence that more vulnerable customers or those with lower savings ability were not disproportionately contributing to overall profits. This example is also relevant to grouping products and services, target market identification, and assessing customer groups regarding differential outcomes.

Poor practice: During our Cash Savings Review, some firms pointed to the potential impact of increasing savings rates on the rates they could offer on their mortgage products, suggesting that higher mortgage rates might be required to subsidise the improved savings offering. In their fair value assessments firms did not undertake any analysis to explore how the relationship between savings and other products affects, and potentially benefits, savings customers and mortgage customers. As with all aspects of the fair value assessment, firms may support their claims with a wide range of appropriate analysis and evidence regarding the factors that affects whether consumers are receiving fair value.

Considerations for firms

Firms should identify and analyse varying outcomes across different consumer groups. This requires consideration of how consumers use products, the benefits they receive, and common customer segmentation characteristics. This analysis will support a thorough fair value assessment by evaluating a target market and relevant consumer groups. This is crucial when firms identify poor value for groups of customers, especially those with characteristics of vulnerability. Firms should be familiar with our Guidance for firms[27] on the fair treatment of vulnerable customers published in February 2021.

Small firms

For small firms, it may be costly to get evidence on differential outcomes for their customers. One option would be to benchmark the value of the product overall in the market by comparing it against similar products and then assess the risks that any groups of customers might be getting poor value based on complaints and enquiries they receive. 

Small firms may also be able to use management information to identify behaviours of customers who are at risk of not benefitting from the value a product has to offer. For example, customers that show no evidence of active engagement with their products for a significant period (logins, calls), or where contacts have not resulted in follow up actions, may be at greater risk of not receiving fair value.

Firms may consider the costs to manufacture and distribute a product in their value assessments (see PRIN 2A.4.9G(1)[28]). Incorporating cost and margin analysis with supporting evidence in a fair value assessment can provide necessary context to understand pricing decisions.

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, and so where funds might be benefiting from economies of scale and the potential for lower fees.

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. This lack of analysis is unlikely to enable effective challenge, such as at Board level.

Poor practice: The above examples are relevant to costs directly associated with the provision of a product or service. There are also practices that are relevant to other costs such as general business costs. Here we have observed poor practice from some firms explaining retention of interest earned on cash-holding facilities by stating, without adequate elaboration, that this helps with the costs of running their platforms, which are loss-making.

Good practice: In the same work we observed the good practice of one investment platform that linked the amount of interest retained to the costs to the firm of managing customers’ cash. The firm used illustrative examples of different types of customers (eg, with different holdings and different types of accounts) to demonstrate how much interest is retained and how much is paid to the customer. This example is also relevant to fees and charges.

Considerations for firms

There is no requirement that firms must include costs in assessments of value, but understanding the margins that a product earns can be useful context for Boards to make decisions on its value. If a firm seeks to justify higher prices on the products it offers, principally based on the costs it incurs to provide that product, we expect to see a clear rationale within the fair value assessment.

For some firms, understanding the total cost of supplying products and services is complex. However, some firms did choose to include a cost analysis in their fair value assessments. Across those fair value assessments that included an assessment of costs, we found the better assessments demonstrated a clear analysis of the relationship between the interest rate offered to customers and the relevant costs to the firm of providing the product. Other fair value assessments used the firm’s cost to serve without explaining its basis or providing any challenge as to how different customers might be affected. We consider these fair value assessments lacked sufficient assessment.

The degree of cost analysis within fair value assessments is for firms to consider, but where it is used the analysis must be sufficiently clear to enable the assessment of fair value to be undertaken.

Small firms

The Consumer Duty rules and guidance do not specifically require firms to undertake cost analysis, though consideration of costs can be useful for understanding pricing decisions. Detailed cost allocation and analysis can be complex, and it may be less suitable for small firms with more simple product offerings. However, this is something some firms may wish to do if they consider it to be an important part of the context provided in a fair value assessment. 

Where firms’ fair value assessments have identified fair value concerns, we have seen a range of practices in taking prompt action in response, and subsequently tracking how effective those actions have been.

Per PRIN 2A.9.12R[29], the Duty requires firms to take appropriate action if they identify that customers are not receiving fair value, or that any group of customers are getting worse outcomes than another for the same product.

Good practice: Good practice we have observed included a firm which used transactional data to identify customers who were not using the product in line with its intended use. The firm actively nudged those customers with targeted communications. Some customers have since transferred to more suitable accounts following the firm’s contact, and the firm is continuing to monitor the customers.

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.

Good practice: We have seen some examples of good practice of firms improving their value propositions, including:

• reducing or removing charges for some products or services where they were deemed too high relative to the benefits provided
• reducing or removing charges for some products or services where they were deemed too high relative to the benefits provided
• capping fees for long-term clients and waiving fees entirely where firms could not justify the total price paid by the customer for the product

Considerations for firms

Prompt action should be identified and taken by firms when their analysis shows that consumers are not receiving fair value. Firms should ensure that their fair value assessments include analysis of the root causes of consumers not getting fair value so that firms can identify appropriate mitigating actions to take. Firms should ensure these actions are specific and that they can monitor their impact and success.

Under the Duty, there are several obligations for firms to have an effective governance process to ensure they are delivering good outcomes for retail customers set out in PRIN 2A.8[30]. This includes preparing a report for governing bodies setting out the results of the monitoring of customer outcomes under PRIN 2A.9. In FG 22/5 (para 10.10)[44], we also state that we expect firms to have a champion at Board (or equivalent governing body level) and set out relevant questions that Board champions might consider asking about the price and value outcome in 7.51 of FG22/5[49].

These governance arrangements should be taken as an opportunity to gain senior-level challenge on whether fair value is being delivered. The fair value assessments are an opportunity to provide thorough management information that will enable a board to have assurance of good outcomes for price and value.
 

Good practice: Some firms referenced mature governance and committee structures in place to oversee and challenge the fair value assessments. They reviewed the fair value assessment’s quality and conclusions alongside fees, service quality, target market appropriateness and other factors within prescribed frameworks. These committees were attended by key business stakeholders and met on a monthly or quarterly basis.

Good practice: We have seen firms using robust product approval processes overseen by the Board in which senior managers provide real challenge. This enables products to be designed in a manner consistent with providing fair value.

Poor practice: We have seen firms that have identified material issues in their fair value assessments but have not been able to give examples of where and how they had escalated this to their governing body or Board. Examples of issues that should be escalated promptly include products where a risk of consumers not receiving fair value has been identified, and a mitigating action scoped and planned ready for approval.

Poor practice: We have seen poor practice such as firms’ fair value assessments appearing to place the responsibility on customers to act where they may be getting poor value. Firms didn’t evidence consideration of actions they can take to improve customer outcomes, or how they had considered the limitations of placing the onus on consumers to act and the adverse effects it might lead to.  

Considerations for firms

Firms should take advantage of their governance arrangements to ensure rich discussion and consideration of how they are abiding by the Consumer Duty. This includes the Board report required by the rules, and the Board champion role which FG22/5 10.10[24] sets as an expectation.
    
Firms need to review their fair value assessments on a regular basis appropriate to the nature and duration of the product (PRIN 2A.4.2R(2)[25]), including conducting a new initial assessment when there is a significant adaptation of a product or service (PRIN 2A.4.3R(2)[31]). 
    
Firms should conduct their regular reviews of fair value assessments in a reasonable and proportionate manner. We say in FG22/5 6.67[26] regarding the products and services outcome that, when deciding how regularly to review a product or service, firms should consider factors such as the nature and complexity of the product or service, the nature of the customer base, including whether there are significant numbers of customers with vulnerable characteristics, and any indicators of customer harm.

Small firms

As with all requirements under the Duty, this obligation should be interpreted reasonably in light of the relevant circumstances. In particular, we would not necessarily expect the same level of formality in small firms, with much simpler governance structures, as we would for large firms.