Firms’ use of data will be critical to providing evidence that they are compliant with the price and value outcome of the regulator’s new Consumer Duty, the Financial Conduct Authority (FCA) has said.
FCA head of competition policy Ed Smith revealed the regulator wants firms to use three elements to evidence compliance for assessing fair value of products and services.
Speaking on the regulator’s latest podcast, Smith explained what the FCA will be looking for from firms in how they document and evidence value assessments and how the FCA will enforce the Consumer Duty where firms fail to comply.
Smith noted the first element of the framework is to look at the product and outline benefits the customer receives through the additional quality or through the expected returns and assess whether they are commensurate to the overall price of the product.
The second element of a good value assessment framework, Smith added, is at the level of different customer groups and the third element is to consider what is driving the price both at a firm and at the market level.
“What we want is that they use data that they have, be it in relation to how consumers use products, be it in relation to price and charges that they incur,” Smith said.
“Most firms will have that data, should have that data as part of either profit or loss assessments or marketing strategies.
“So, this is data that lots of firms will have, some of it may have to be developed specifically and developed a bit further but lots of that data can be used and recycled from data that they’ve got as part of their marketing, or as part of their revenue assessments.
“And what we want them to do is really look at that data in assessing what customers pay over the lifetime of their product, what charges a typical customer might pay.”
Smith added that firms should be looking at what different groups of customers might pay depending on how they use the product differently.
“Again, the data should be there to evidence that,” he continued.
“And equally on the benefits side, using data in relation to usage of the product, how consumers use the product over time, what use they are making of the additional services to really assess the benefits of the typical customer.
“But also different groups of customers and depending on how they use it, the benefits that they get from that usage pattern. So, we want them to evidence that through data using a framework for assessing fair value that I’ve just set out.”
Supervisory programme in development
Smith also warned that the FCA is developing a programme of supervisory practices and if necessary, an enforcement programme in the event firms do not implement the Consumder Duty correctly or meet the criteria of the fair value outcome.
He noted the regulator will be particularly interested in areas such as back-book charging, exit fees or low value products that have been under the FCA’s microscope regularly.
It will be looking to ensure firms have made the changes the FCA thinks are necessary to bring those products into line with a fair value framework.
“So, if firms aren’t conducting a proper assessment of the price and value of their products, if they haven’t used appropriate evidence to demonstrate that it’s fair value, if they haven’t thought about different cohorts of customers and the sort of value that they’re receiving,” Smith said.
“I think firms can expect us to take action, including enforcement action against them once the duty is in force.”