Fair Value Assessments
In a speech made on 1 November 2023 the FCA’s Director of Cross Cutting Policy and Strategy made clear that the Consumer Duty is not a “one and done” exercise, and that the regulator is shifting to checking that firms are learning and improving continuously.
With the Duty such an obviously integral part of the FCA’s approach, it is going to influence everything the regulator does. They have signaled an immediate success in the news that the Duty has already enabled them to intervene in markets quickly and take “robust action where consumers are not getting good outcomes.”
The biggest example is the recent scrutiny of the cash savings market. The project is currently ongoing, but the most recent review, published in July 2023, proved that the FCA are serious about fair value assessments. In this case, savings products that offer very low interest rates in comparison to contemporary interest rates were concerning the FCA, with the regulator investigating whether they provided fair value for customers. As a result of those early reviews, the FCA asked to see the fair value assessments of the firms offering the lowest rates.
The review did note ‘recent progress’ in increasing savings rates in line with the current interest rates but was concerned that “significant action is required to ensure that the savings market delivers the best outcomes for consumers.” Part of this is the expectation that, in line with the good customer outcomes expected of the Duty, firms should “review savings rates quickly following base rate changes.”
Although a savings review could technically take place outside of a fair value assessment, the FCA required, in this case, that firms offering the lowest rates provide the regulator with their fair value assessments within the month, with a view to the FCA taking “robust action against those who cannot demonstrate fair value.” With this in mind, it pays to make sure fair value assessments are up to date, re-assessed where there are significant changes to the market or to the product, and in any case, a timeline for regular review is in place and implemented, based on the nature of the product.
Fair Value Assessments need to be completed “on a regular basis appropriate to the nature and duration of the product.” Regular, then, isn’t defined, but what is abundantly clear is that a one and done approach to the assessment is not going to be enough.
In the fair value assessments we’re seeing, one of the most commonly overlooked areas is the assessment of whether costs are fair and reasonable. The FCA requires that firms understand the costs incurred in manufacturing and distributing the product to be able to accurately assess the true value to the customer.
These assessments need to be based on good quality evidence. Suitable evidence includes accrued costs, profit margin, competitor pricing, similar in-firm products, the value received by back book customers and whether it differs to the value received by new customers, etc.
Taking just competitor pricing as a guide, research and assessment does not need to be exhaustive, but it does need to be sufficiently comprehensive to demonstrate that a reasonable range of competitor products have been considered, and that similarities and differences between the products, price and ultimate value are accurately defined and assessed. Cherry picking competitor products should be avoided.
All firms – regardless of sector – need to make sure their fair value assessments are fit for purpose and up to date. We have recently updated our Fair Value Assessment Templates – for Manufacturer and Distributor – to give more detailed guidance and to streamline the assessment. Including handy guidance, the templates are now available online.