Mastering Fair Value Assessments under the Consumer Duty Framework
Mastering Fair Value Assessment under the Consumer Duty Framework
The main hurdle is the interpretive character of the concept, ‘value’
A thorough exploration of value evaluations is conducted within the context of the imminent Consumer Duty guidelines, to take effect from 31st July 2023
The Consumer Duty Framework prompts businesses offering Packaged Retail Investment and Insurance Products (PRIIPs) to retail consumers in the UK – along with other businesses within the Consumer Duty scope – to wrap up their value evaluation procedures.
Value evaluations are obligatory to ascertain that the cost incurred by a retail consumer for a service or product aligns reasonably with the holistic benefits provided by the product. However, as is the case with numerous regulatory issues, the hurdle is the interpretive character of the concept, ‘value’.
Although businesses possess the liberty to select the factors incorporated in their value evaluations, it is incumbent upon them to evidence a rational correlation between the product’s comprehensive cost and the benefits the retail consumer garners – spanning the entire duration of product ownership.
This examination is backed by insights drawn from the Financial Conduct Authority’s (FCA) recent scrutiny of fair value frameworks across a selection of businesses. The FCA’s findings delineate instances of commendable practices and potential improvement areas.
Charting the Course of a Subjective Evaluation
The initial point to note is that the evaluation of value must incorporate a future-oriented aspect. Producers must ascertain that their product offers ‘equitable value for a reasonably foreseeable period’. In the context of a PRIIP, this would correspond to the suggested holding period articulated in the Key Information Document (KID).
Equitable value transcends mere price. A product falling short of the customer’s requirements is unlikely to furnish equitable value, irrespective of its price. Similarly, a product capable of satisfying a customer’s needs need not necessarily be the cheapest on the market.
Businesses must also anticipate probable customer journeys and other costs likely to be borne by the end consumer. Given the impracticality of evaluating every possible scenario or the associated cost structures, it’s foreseeable that most businesses will hypothesise about the most plausible journeys and corresponding costs. This enables advisors and distributors, whose fees fall within those fee ranges (and journeys), to deduce that the products continue to embody equitable value. Nonetheless, advisors with higher charges may need to undertake their own evaluations!
Fund managers and other PRIIP producers should ponder both financial and non-financial benefits of their product, further complicating matters. Non-financial benefits could comprise straightforward access to product data, superior customer service, or the flexibility to switch products.
Competition plays a role: businesses must consider the expenses incurred to create and/or distribute the product, market rates, and fees for analogous products. Additionally, a business should examine whether it offers any other products that are priced considerably lower for an equivalent or superior level of benefit.
Businesses must also consider non-financial costs related to a product. These could include payment for the product with a retail customer’s personal data, limited redemption rights, inadequate product performance information, restricted customer support channels, a high-risk profile, limited recourse if issues arise, and lack of diversification.
Data used to validate fair value evaluations should be meticulously documented and where cited, contextualised.
Is a Value Evaluation a Singular Endeavour?
Businesses must evaluate value at the design stage; prior to product offerings to consumers; and throughout the product’s lifespan. Review frequency is not rigidly defined, but it is suggested that businesses review their value evaluation annually, or sooner in the event of significant product modifications, such as changes to its features, costs, or other pertinent factors that might affect its value to end consumers.
Should a business discern that a product fails to provide fair value, it is required to take suitable measures to rectify the issue, which could entail introducing strategies to augment the product’s value or removing it from the marketplace.
Exchanging Information among Managers and Advisors
All businesses in the distribution chain – including brokers, MGAs, Aggregators and advisors etc – are accountable for the value of the prices within their control. Hence, advisors must also ensure that their fees deliver fair value. In order to do so, they must gather pertinent information from producers to comprehend the intended value of a product and determine if their distribution arrangements might cause the product to cease providing fair value.
Although manufacturers must supply distribution channels with the results of their value evaluation, they are not compelled to share sensitive details such as margin breakdowns or other internal data. The FCA has clarified that the information exchanged with distributors can be a high-level overview of the benefits to the target market, data on overall prices or fees, and affirmation that the producer deems total benefits to be commensurate with total costs.
It is evident that value evaluations are demanding undertakings requiring the involvement of multiple stakeholders – with potentially significant strategic implications. Advisors and producers must recognise that the completion of the first round of evaluations does not signify ‘mission accomplished’ – given the continuous nature of the requirements.
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