December 7, 2022
The price and value outcome of the FCA’s new Consumer Duty, focusses on ensuring that products and services offer fair value to consumers. For insurance products (as opposed to services), this is an existing insurance sector requirement following the FCA’s introduction of further product governance rules as part of its general insurance pricing practices remedies in 2021.
As a consequence, firms offering products or services that do not offer fair value are unlikely to be compliant with the other areas of the Consumer Duty. Offering poor value products would not be effectively enabling consumers to pursue their financial objectives. Customers are also likely to experience harm if a product or service does not represent value for money. Additionally, firms knowingly distributing such products would be in direct contradiction with the requirement for them to act in good faith.
By ensuring compliance with all other elements of the Duty, such as by effectively communicating with clients the benefits and limitations of a product and thereby allowing them the opportunity to choose an alternative and make good financial decisions, firms will be better positioned to ensure their products and services offer fair value.
Fair value is more than price
The price and value outcome does not stipulate specific pricing or require firms to only offer products and services at low prices. Fair value means that the price paid by customers must be reasonable when compared to the overall benefits of the product or service being provided.
In fact, low prices will not always represent fair value. If a product or service offers few or no benefits or even has unsuitable features which cause harm or frustration, it is highly unlikely to provide value, whatever the price. Conversely, a higher priced, innovative product or service may easily provide value if the features and benefits reflect the total price paid by the customer. Elements, such as the quality of the product, customer service level, potential pay-out and how well it meets consumers’ needs, may all determine the value of the product or service, against which the price should be assessed.
An example from the FCA:
Enhanced home insurance that covers additional risks or provides elevated customer service often costs more than a standard policy and this is likely to be reflected in the price.
Clients do not all need to claim under the additional coverage, or make use of the additional customer services, for the product to provide fair value. However, firms must ensure that there is a reasonable relationship between the price charged and benefits, and that there is a reasonable probability of a consumer in the target market claiming when the policy is designed and sold.
Distributors play an important role in ensuring the fair value of products and services. Although the FCA states that “firms are only responsible for the prices that they control” and do not require firms to re‐do or challenge other firms’ value assessments, they must still ensure that their or other charges or fees do not cumulatively result in the product ceasing to provide fair value for the consumer.
But how can firms assess the value of their products and services?
There are no prescribed criteria that products and services must be assessed against. As with much of the Consumer Duty, fair value assessments can be conducted on the basis of what is reasonable for the product or service, and the firm. Similarly, for insurance products under the existing product oversight and governance rules, there is no prescription about how value should be assessed. The regulator allows firms to make their own decisions about which factors they use, as long as they are able to demonstrate a reasonable relationship between the total price of the product or service throughout its use, and the benefits the customer receives. Additionally, providing it does not reduce a firm’s ability to review each product appropriately, a firm may be able to group similar products together when making value assessments.
The FCA suggests that key considerations should be:
- the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities
- any limitations that are part of the product or service (e.g., limitations on scope of cover for insurance products), and
- the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between customers and firms
Firms may also wish to examine:
- manufacturing and/or distribution costs. These may be a key consideration when explaining why similar products are priced differently or why pricing has changed over time
- market rates and charges for comparable products or services and whether they differ significantly to your product or service. A noticeable difference may indicate that other elements of the design or support should be checked to ensure they are functioning properly and provide reasonable benefits for the cost
- Whether a similar or better level of benefits can be received from a lower cost product
- Any accumulated costs and/or benefits for existing or closed products
Aside from using the data immediately available to them, firms may also wish to conduct customer research, such as through surveys or focus groups. This will allow them to speak to different groups within the intended target audience and understand how a product or service may provide fair value for them. Although, as always, firms should bear in mind that everyone will have different interactions with a product or service, and consumer research alone cannot determine fair value.
It is important for firms to remember that they must continue to monitor and assess the value of their products and services throughout their life, as well as reviewing their value assessment processes. ICS Consultants are well placed to assist clients with assessments and reviews of their insurance products and services.