The FCA has long been an advocate for firms taking a reasonable and proportionate approach to its requirements. From its recent publication, “Price and Value Outcome: Good and Poor Practice Update,” the implementation of the Consumer Duty into a firm's practices appears to follow the same approach.
The FCA has mentioned that it will continue to focus its communications on helping smaller firms effectively implement the Consumer Duty.
Below are some approaches smaller firms can take to further embed the Consumer Duty into their daily practices:
Holistic approach across the Consumer Duty Outcomes, including Price and Fair Value
Smaller firms may find it more challenging to analyse and identify interactions between outcomes where they are tackling a fair value concern. For example, small firms may not have the resources to commission additional customer analysis to help test for customer understanding and support concerns. An option could be to determine consumer understanding and support through the nature and volume of complaints, feedback or enquiries, or an assessment of whether consumers are engaging with their products in unexpected ways.
Trade associations (i.e. the Consumer Credit Trade Association for credit providers) can also be a valuable source of research to help firms understand customers in their sectors and their sources of frustrations in general.
Small firms might want to make use of publicly available tools which can assess the transparency and accessibility of their communications.
Fair Value Assessments and Target Market Identification
Fair Value Assessments must be carried out if there are significant adaptations to a product. Products and services for smaller firms may change less frequently, resulting in fewer significant adaptations.
Small firms often have fewer customers than larger firms. This can give them a better understanding of the circumstances and behaviours of their target market, the different groups of customers and the benefits and outcomes that their customers receive. It may be possible for small firms to evidence this through case study illustrations of the different types of customers, the typical fees and benefits and outcomes.
For markets where many small firms operate, it may not be practical for a small firm to do a complete cross-market benchmarking exercise, and the pricing of alternative products may not be available. In these cases, small firms should use judgement to benchmark against a relevant sample of products including a range of different value propositions.
Sections on a firms’ fair value assessment can focus on fair value across the entire customer chain and pinpoint how the distribution chain affects customer value in areas like customer experience, service reliability, and specific customer needs, providing risk ratings in each area.
Target markets may develop over time, and an example of where firms have incorporated this thinking well is in monitoring products on a regular basis (i.e. quarterly), to identify whether the target market remains appropriate and taking action where the product is not being used as intended.
Varying Outcomes across Different Consumer Groups
For small firms, it may be costly to get evidence on differential outcomes for their customers. One option would be to benchmark the value of the product overall in the market by comparing it against similar products and then assess the risks that any groups of customers might be getting poor value based on complaints and enquiries they receive.
An example where a firm analyses pricing models, the firm can include third-party fees and charges and explain how a governance committee oversees third-party services.
Small firms may also be able to use management information (MI) to identify behaviours of customers who are at risk of not benefitting from the value a product has to offer. For example, customers that show no evidence of active engagement with their products for a significant period (logins, calls), or where contacts have not resulted in follow up actions, may be at greater risk of not receiving fair value.
Cost Considerations for the Firm and Customer Vulnerability
The Consumer Duty rules and guidance do not specifically require firms to undertake cost analysis, though consideration of costs can be useful for understanding pricing decisions.
Detailed cost allocation and analysis can be complex, and it may be less suitable for small firms with more simple product offerings. However, this is something some firms may wish to do if they consider it to be an important part of the context provided in a fair value assessment.
Firms can evaluate the cost of providing products and services relative to revenue for various groups of customers. This provided evidence to support the assessment that each target group of customers is getting fair value, despite differential prices.
For customer vulnerability, firms can place a ‘care flag’ for relevant customers’ accounts, so that when a customer reports a characteristic of vulnerability, all customer support staff will see it. The firm can then make additional provisions to improve the value proposition for these customers, such as help from the customer support team to fill out forms.
Fair Value Concerns and Mitigation Actions
Prompt action should be identified and taken by firms when their analysis shows that consumers are not receiving fair value. Firms should ensure that their fair value assessments include analysis of the root causes of consumers not getting fair value so that firms can identify appropriate mitigating actions to take. Firms should ensure these actions are specific and that they can monitor their impact and success.
A firm can use transactional data to identify customers who are not using their product in line with its intended use. Firms can actively nudge those customers with targeted communications which may result in some customers transferring to more suitable accounts following the firm’s contact.
Examples of good practice of firms improving their value propositions include:
Reducing or removing charges for some products or services where they are deemed too high relative to the benefits provided.
Reducing or removing charges for some products or services where they are deemed too high relative to the benefits provided.
Capping fees for long-term clients and waiving fees entirely where firms cannot justify the total price paid by the customer for the product.
Governance and Senior Managers
Firms can implement good governance and committee structures to oversee and challenge the fair value assessments. They can review their fair value assessment’s quality and conclusions alongside fees, service quality, target market appropriateness and other factors within prescribed frameworks. These committees are to be attended by key business stakeholders and meet on a monthly or quarterly basis.
Firms can implement product approval processes overseen by the Board in which senior managers provide real challenge. This enables products to be designed in a manner consistent with providing fair value.
The FCA would not necessarily expect the same level of formality in small firms, with much simpler governance structures, as they would for large firms.
Contact us and schedule a free consultation to find out how Compliance Angle can assist with your Consumer Duty requirements. Call us on 07427792594 or send us an email at info@complianceangle.co.uk
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