FCA provide feedback on firms’ fair value frameworks
The Financial Conduct Authority (“FCA”) has published feedback after the regulator undertook a review of regulated firms’ approaches to their fair value assessments required under the impending Consumer Duty.
There are four consumer outcomes set out in the Consumer Duty which include;
- products and services
- price and value
- consumer understanding and;
- consumer support.
The regulator reviewed the fair value assessment framework of 14 firms. The review focused on a range of firms in the retail banking, consumer investments, payment services and consumer credit sectors. However, the feedback holds key insights for all firms across the regulated financial services spectrum.
The FCA found that the firms they reviewed are making significant efforts with their fair value frameworks. Although, the FCA did highlight some elements of the frameworks which firms may need to work on further. Some key themes within their feedback included:
- Understanding and assessing fair value.
- Collecting and assessing data and management information (MI) to evidence fair value.
- Obtaining practical oversight and accountability for remedial actions where fair value outcomes are at risk.
- Contextualising analysis of outcomes across different consumers and not just looking at broad averages.
Understanding and assessing fair value
The FCA observed that firms have set frameworks to establish overarching principles for how they apply the concept of fair value. However, the FCA identified some frameworks that placed an over reliance on unevidenced arguments that firms’ business models were inherently fair value. In some cases, the regulator found that firms had not established a clear map of responsibilities between manufacturers and distributors. The FCA found that firms have not considered broader categories of non-financial costs and benefits in their assessments and that firms had not considered the complexities and differences of products or services across diverse target markets by implementing a single generalised template for assessing fair value.
Evidencing fair value
The FCA noted that some firms did not set out how they will undertake monitoring, assessment and evidence their fair value outcomes. Firms must ensure that within their fair value framework, they have set out details of the data and MI they collect, what this data will show, how it will be assessed and how they will ensure that any gaps or risks are identified and remedied.
Oversight and accountability
The FCA also highlighted a lack of structure around oversight and accountability when it comes to their fair value assessments. Decision makers need to have sufficient information to understand, review and challenge any data/MI including any potential limitations of the analysis or risks the data highlights. The FCA also reminded firms to ensure their fair value analysis provides decision-makers with sufficient understanding of outcomes received across different customer groups.
Contextualised analysis of outcomes across different consumers
The FCA called for firms to ensure that they have considered wider contextual factors when assessing fair value. This might include the overall fairness of a firm’s pricing structure or the information needed from firms in the distribution chain. This should also include tailored assessments of outcomes for different consumer groups, such as those with characteristics of vulnerability. The FCA highlighted that some of the frameworks they reviewed, relied on using average customer outcomes in their target market rather than showing a full distribution of outcomes across the group of customers they support.
The Consumer Duty comes into force on 31st of July 2023 for open book products and July 2024 for closed book products. The FCA have recently provided important feedback across a number of topics such as this. The FCA expects firms to obtain and sufficiently evidence their consumer outcomes to ensure that they meet their obligations under the Consumer Duty. The FCA have placed a lot of emphasis on firms to ensure that key decision makers have proper understanding of the MI and data they collect and analysis to ensure their firm is meeting all the necessary requirements. The FCA will not accept a ‘one size fits all’ approach and expects firms to ensure they are giving thought to their customers, products and wider contextual factors across their business.
