How to prepare for the Consumer Duty’s Price and Value outcome

What happened?

With the Consumer Duty’s implementation date of July 2023 approaching, this article sets out the FCA’s expectations under the price and value outcome and what distribution firms need to do to prepare.

A value assessment should start with calculating the cost of a service, from initial design through to ongoing reviews, and should include non-financial costs such as additional staff needed to service clients. Firms are also expected to benchmark their charges against peers, not to match them, but to understand how they compare.

The FCA has taken a “show me, don’t tell me” approach, meaning firms need to demonstrate a reasonable relationship between the price charged and profitability, and be ready to explain why they charge what they charge.

Why does it matter?

Higher charges do not automatically mean poor value, and lower charges do not automatically mean fair value. What matters is whether a firm can evidence the cost of its service and demonstrate the value it provides, including for percentage-based charging models where clients with larger portfolios may pay more.

Firms with tiered service levels, such as gold, silver and bronze options, need to understand the cost of each tier and evidence that value is delivered at every level, linking this back to the value assessment.

Who is affected?

Distribution firms, including wealth management and financial advice firms, that set their own charges or operate within a wider distribution chain involving product manufacturers and platforms.

Key risks

• Being unable to evidence how the cost of a service was calculated, including non-financial costs.
• Percentage-based charging models that are not justified by additional work or services provided.
• Failing to assess the cumulative impact of charges across the distribution chain, including platform costs.
• Value assessments that are not ready to submit to the FCA on request.

Actions to take

1. Calculate the full cost of each service, including design, ongoing review and non-financial costs such as additional staffing.
2. Benchmark charges against peers to understand relative positioning, without assuming charges must match.
3. Evidence why any percentage-based or tiered charging structure delivers proportionate value at each level.
4. Assess the cumulative impact of charges across the distribution chain, including platforms and manufacturer products.
5. Prepare a value assessment for every service offered, ready to share with the FCA if requested.

Wider implications

Distribution firms are not required to carry out value assessments on manufacturers’ products, but they do need to obtain enough information from manufacturers to understand the value those products provide, and factor this into their own assessment of the full distribution chain.

Recommendations

Firms should ask themselves whether their value assessments cover everything the FCA would expect, whether every service has been assessed, and how they can demonstrate that all clients receive value. Firms unsure of the answers should seek independent assurance ahead of implementation.