Assessing vulnerability: How can firms help mitigate risks of DIY SIPPs?
Earlier this month, the FCA published the findings from its latest thematic
Earlier this month, the FCA published the findings from its latest thematic review exploring how firms are approaching their Fair Value assessments in the run-up to the new Consumer Duty launch on 31st July.
The research aimed to understand how businesses across different areas of financial services – including retail banking, payments and consumer investments – are implementing the Consumer Duty’s price and value requirements. The study was also intended to assess whether firms’ internal processes are in line with the regulator’s vision for the new legislation.
The results paint a revealing picture of the real-world implications of the FCA’s Consumer Duty agenda – and highlight some useful do’s and don’ts for firms looking to devise a successful compliance strategy.
Here’s what we’ve learned:
Lesson #1: There’s no one-size-fits-all approach to assessing value
The FCA found some frameworks relied too heavily on high-level arguments or assertions that their strategy is fair value without anything to back it up – suggesting a lot of firms are still failing to grasp the extent of evidencing required under the regulator’s ‘show me, don’t tell me’ approach.
However, whether or not a charge can truly be considered fair value ultimately depends on the nature of the product or service, as well as its unique characteristics. And so there’s no simple checklist for assessing value that works for every product or service – especially those that serve different target markets.
Benchmarking your charging structure against industry averages and competitor rates is a useful exercise, but it’s clear the FCA is expecting firms to dig deeper. You’ll need to gather data across the entire product lifecycle – accounting for contextual differences between manufacturing and distribution.
The exact type of data required will depend on the product being offered: profit margins will likely play a key role in all reviews. Some data will be product specific, for example, life and general insurance businesses will need to consider things like claims ratios.
The FCA specifically mentioned concerns about the use of templates in conducting value assessments. This highlights the importance of not using a ‘one-size-fits-all’ approach. However, templates can be helpful in conducing value assessment, but it is crucial they are tailored to the product or service being assessed.
Lesson #2: Fair value should be measured against the whole package
With so much attention being paid to fees and charging structures, it’s easy to forget that delivering true value to customers goes beyond keeping the cost of a product or service competitive.
Consequently, the review emphasises the need for firms to ensure fair value is reflected not just through the critical pricing assessment, but also non-financial elements across the wider customer journey, including the customer support offered past the point of sale.
For instance, consumers finding themselves being repeatedly left on hold when making a claim or complaint, or having difficulty cancelling or changing a product, can have a significant negative impact on the customer experience. As a result, firms need to take an honest look at their end-to-end customer lifecycle and remove any roadblocks that could dampen the quality of the service.
Not only will this help ensure customers are getting maximum value for money at every touchpoint in their customer journey, but it’ll stand you in good stead to abide by the Consumer Duty’s Cross Cutting Rules – which require firms to act in good faith, avoid causing foreseeable harm and proactively support consumers to pursue their financial goals.
Lesson #3: Fair value will look different for every customer
The FCA has made clear that the Consumer Duty aims to provide every customer with a personalised experience: one that both take their own situation and vulnerabilities into account, whilst helping them achieve their unique financial goals. And whilst there was evidence that some firms were looking into differential outcomes in sufficient detail, the review highlighted that others were relying too much on average outcomes.
Without accounting for different customer personas and segmented groups, firms may fail to grasp the full breadth of customer experiences and run the risk of neglecting outlier cases or missing signs of vulnerability.
The review also suggested many hadn’t considered the impact of cross-subsidies on fair value – including circumstances where these could negatively impact the end outcome for certain consumers. However, the report does clarify that ‘our price and value outcome rules do not require firms to charge all customers the same amount, or to make the same level of profit from all customers’.
This is perhaps counterintuitive as it confirms that the FCA will allow a degree of cross-subsidy in some instances, even if it inevitably leaves some customers financially worse off than they would otherwise be.
Nevertheless, it didn’t elaborate with examples of where these cross-subsidies are likely to cross the threshold into material customer harm – meaning firms should exercise caution when devising charging structures.
Lesson #4: Good governance will require good data
Despite the Consumer Duty’s emphasis on proactive, data-driven governance, the review found some firms’ assessments skimmed over exactly which types of data – as well as which data gathering methods – they’ll be using to monitor fair value. And in some instances, there was little information given on how current data gaps will be addressed ahead of the implementation deadline.
The review also revealed how numerous frameworks suggested using points-based or red-amber-green (RAG) ratings to guide fair value considerations. However, as the FCA’s own feedback noted, firms should be wary of relying on these too much in more complex cases, as they could wind up with an overly simplified view of the situation if these categories aren’t meticulously defined and scrutinised.
With so many potential data points to choose from – e.g. profit margins, claims ratios, defaults and early surrenders – it’s unsurprising that many firms are finding it challenging to pin down how they’ll evidence such a multi-faceted concept as fair value. And this is particularly true for markets and services where relevant MI may be harder to obtain in the first place, for example fund management.
But with data being critical in value assessments there’s really no shortcut: firms will need to invest the time between now and 31st July to iron out what data they’ll need – and which tools they’ll use to ensure it’s available to them on a consistent basis.
With the implementation date for the Duty now just weeks away, businesses will need to ensure they’ve answered the fundamental questions surrounding the Fair Value assessments – and make a plan of action to correct any areas where you’re falling short.
Now’s the time for an honest reflection on key areas, such as:
How to build a Price and Value oversight strategy that delivers for customers: