FCA urges firms to challenge their approach to ‘fair value’

The Financial Conduct Authority (FCA) has called on firms to challenge their approach to assessing and monitoring ‘fair value’, three years on from the introduction of Consumer Duty.

Findings from the regulator’s consumer finance supervisory work has been published, which highlighted good practice and areas for improvement relating to fair value.

Under the Consumer Duty, a product represents fair value when the amount paid by the consumer is reasonable relative to the benefits of the product.

FCA director of consumer finance, Alison Walters, said many firms were getting it right by building fair value into how they design, price, and monitor their products.

However, other firms were missing things that could have been avoidable, with the evidence supporting their conclusions a reoccurring issue.

While stronger fair value assessments showed a clear, evidenced relationship between what consumers paid and the benefits they could expect to receive, weaker assessments tended to rely on assumptions rather than actual customer data.

“Some had relevant evidence, but it was scattered across different documents and never brought together into a coherent picture,” Walters said.

“This made it hard for anyone, including us, to see how firms had reached their conclusions.”

Walters highlighted that fair value was not one-size-fits-all, and firms that showed an understanding by segmenting customers were better at providing fair value.

Meanwhile, other firms that treated their whole target market as a single group when testing fair value made it difficult to spot if some customers were paying more, or getting less, than others.

“Fair value also needs to be considered alongside customer understanding,” Walters noted.

“Even a well-designed, fairly priced product can fall short if customers don't understand what they're signing up to.”

The FCA urged firms to use its findings to challenge their approach to assessing and monitoring fair value by asking themselves questions around evidence, target market characterisation, and consumer understanding.

“A common feature of stronger approaches was that firms supported their conclusions with evidence rather than relying on assumptions,” Walters said.

“The good news is that this doesn’t need to always require complex modelling or new data. Smaller firms may be able to draw on information they already hold, including complaints, arrears, customer feedback and product usage.

“If there's one thing to take from this, it's to show your working: what your evidence shows, how it supports your conclusion, what you'd do if it didn't.”

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