Fair value

January 2024

Fair value is one of the four Consumer Duty outcomes that the FCA sees as forming the key elements of the firm-consumer relationship. As such, it sits alongside the products and services, consumer understanding and consumer support outcomes — but, as firms have experienced, it is the most integrated of outcomes. This is why the FCA holds it in such high regard as being illustrative of whether firms have culturally embraced the Duty.

Under the fair value outcome, the FCA has challenged firms to evidence that the total price paid is reasonable in relation to the benefits. The FCA has not provided detailed guidance (although some indicators are starting to be shared of good and poor practice) on how firms should go about undertaking this assessment, emphasising the outcomes-based approach to the Duty. It has indicated that firms can consider many factors, including costs, benefits, and utility to customers, as well as market rates for comparable products.

The FCA has been at pains to emphasise that fair value is not just about price, and that firms should look carefully at the benefits and features of the product and how these meet the needs of the target market and individual customer segments within that. Firms should ask themselves whether the product and service is performing as expected, and then whether the price is reasonable in the light of that performance. It's not about the lowest price solution being necessarily the best value. 

Obscure prices, unclear choice architecture, and unsuitable products are less likely to offer value. 

The FCA has left significant discretion to firms to decide how best to assess fair value on a sector-by-sector basis and what factors should be included in the assessment. This has led to some differences in approach as firms are familiar with the concept of benchmarking their prices to their competitors but are less familiar with assessing the reasonableness of prices in relation to the costs and benefits to consumers. Benchmarking alone (or over-relying upon it) will not meet FCA's expectations. 

Most firms have completed fair value assessments on their entire front book product suite, and FCA is reviewing a selection of these and we expect it to provide feedback in due course. But the FCA does not want this to become a tick box exercise. It wants boards to be looking critically at customer outcomes and providing challenge to the executive, and to have the right MI and data to do that. So there is still a lot of scope for firms to be creative about the kinds of data and metrics that they use to support their fair value assessments.

This brings both challenges and opportunities. On the one hand, the lack of prescriptive framework means that there is some uncertainty and ambiguity about what is necessary. But on the other hand, this presents a big opportunity to harness data flexibly and dual-purpose it to deepen consumer insights and leverage this insight for commercial purposes too. For example, analysis of customer transaction data to highlight patterns and trends in consumer behaviour can be overlaid with customer insights from surveys and focus groups to get a deeper understanding of what's driving that behaviour. This can help to design products and services that are more tailored towards the needs of specific customer groups, potentially increasing customer loyalty and retention, as well as meeting the Consumer Duty requirements more fullly.

The FCA is emphasising that the Consumer Duty is a journey and that it is looking to see firms making continuous improvements. In respect of fair value, it has stated that it is looking to see improvements in firms' approach and framework; execution of this approach and quality of data and MI; and in the actions that are taken as a result. The FCA has made clear that fair value assessments should be data-driven, and multi-dimensional — spanning product and service usage and performance, customer understanding, and price — and should enable consideration of outcomes for multiple customer cohorts including vulnerable customers. 

KPMG in the UK has reflected on where improvements can be made on the price & fair value outcome. 

1. Improve the fair value framework

• Consider whether your approach is sufficiently comprehensive, and whether it encompasses consideration of elements such as product and service usage, product and service quality, product limitations, and customer understanding — as well as pricing.
• Think carefully about how a product or service could lead to foreseeable harm, taking into account contextual factors such as:
  • Different market sectors and the needs of customer groups in these sectors.
  • Consumer characteristics and behavioural biases.
  • Interactions with other products held.
• Consider the pricing model and whether there are any elements of the pricing model and approach that could lead to foreseeable harm, for example to specific groups of customers depending on their use of the product and/or the complexity and opacity of prices.
• Ensure adequate consideration of the firms' profits margins as part of the assessment framework. This may require greater insight into the cost base (and how it can be allocated between products and types of fees. For a more in-depth exploration of costs, please see our previous fair value article.)
• Ensure you have taken account of the FCA's emerging best practice guidance on Fair Value.

2. Improve quality of data and MI

Many firms still lack a comprehensive suite of data and MI on which to base their assessments of fair value. This has meant that the execution of their fair value assessments has been partial, and many firms have not been able to conclude or evidence that products and services are definitively fair value. Enhancing the quality of data and MI and the analysis performed on it will deliver greater insights on your customer base and can be dual-purposed to satisfy regulatory expectations under the Consumer Duty as well to design products and services that are more tailored towards the needs of specific customer groups. There are some key areas for improvements to data and MI, including: 

• Customer level data
  This is needed to analyse how different groups of customers use and engage with products, how much they pay, and how they respond to calls to action and other stimuli. It's key to understanding customer behaviour and considering whether any changes are required to help customers get better value — for example to address behavioural biases, remove sludge practices, and design choice architecture to benefit consumers. KPMG professionals have observed that while customer level data can sometimes be obtained when requested, this tends to be a time consuming and resource intensive task, which is currenly not automated nor easily repeatable.
  
  
• Customer surveys
  Survey data is key to understand the customer viewpoint: how customers experience products and services, how well they meet their needs, how satisfied and happy they are, and whether they understand how to use it and derive the benefits promised. Firms need to significantly uplift their customer insights programmes to gather much more regular and representative customer feedback, including a larger range of customers of different types. This is contrast to current limited feedback mechanisms such as Net Promoter Score (NPS) or app-based surveys which tend to focus on a limited set of engaged customers who may not be representative of the wider customer base. Equally these existing tools generally only provide insight into customer satisfaction — rather than the appropriateness of the outcome generated. These do not amount to the same thing and firms should not conflate the two.
  
  
• Financial and cost data
  As the FCA has confirmed in its review of price and value frameworks, it is asking firms to consider margins as part of fair value reviews. This makes sense, but not always available at the level of granularity needed. For example, firms may have an idea of how profitable their current account, fund or insurance business is but won't necessarily have great insight into how profitable each underlying  product, fund or* account is. And how the revenue on each of those products is made up e.g. how much is interest, how much is fees and charges of one type or another. And then, at another level of granularity, which types of consumers are contributing the most to revenues and profits?

Combined, these three forms of data (when analysed well and in combination) provide you with deep insights into which customers are obtaining more, or less, value from their use of the product; their satisfaction and experience; and the costs and profits associated with providing services to them. KPMG in the UK believes that, as well as helping you to identify pockets of potential harm, you should use this data to identify pockets of opportunity to increase value. This could be, for example, through identification of opportunities to tailor products or pricing models towards customer needs more accurately.

3. Improve board reporting and monitoring

The nature of the reporting to the board, and the underpinning data and MI, is an important consideration under this heading. Some board assessments have been overly lengthy and have had a tendency towards justifying current business practices and pricing. Firms will need to get better at presenting a less defensive, more critical, analysis of pricing models, supported by selective, targeted, and insightful data and MI. This should facilitate high quality discussions at board level and enable judgements to be made on what improvement actions are required. The need to take actions to resolve issues with fair value is the final area that the FCA has called out in its `Consumer Duty — Next Steps' webinar. 

At this stage, firms have conducted fair value assessments based on incomplete data, using manual processes which are resource intensive and error prone. In our view, significant work is required to embed the Consumer Duty in business-as-usual structures and processes, and to make these work seamlessly, effectively and efficiently.  

Technology has a big role to play here. 

It is important that where problems are identified, firms are able to evidence that solutions have been implemented and that these solutions are effective at improving outcomes for the specific customer groups of interest. This requires ongoing testing and monitoring of customer outcomes.  A flexible `learning-by-doing' approach should be adopted so that solutions can be adapted as necessary — if they are not working as intended. 

The Consumer Duty is an opportunity for firms to review their product suites across the board to consider not only where harm may be arising but how they might improve value for their customers. For firms who do Consumer Duty well, there is the prospect of gaining competitive advantage, securing greater customer loyalty, and improving firm culture, all leading to an improvement in firm value.  More on this in due course…..