Advisers will need to work out value of advice, says FCA

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Advisers will need to work out value of advice, says FCA
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Speaking at a press briefing yesterday (July 26), Mills said an assessment is needed of the fair value exchange when it comes to fees and charges for advisers.

When it comes to incorporating the time and cost of the adviser into the assessment, Mills said: “What those advisers will need to do is work out what the cost of providing that service is over the frame of that contract and then what is being provided and the value of it to the customer. 

“For all segments of the industry, it will be important they find a way to mechanise that fair value construct of looking at what the cost is, and what is the value to consumers over time.”

He said it is possible to work that through in charging base multiple models where advisers have charges which continue over a period of time but they need to look through what the utility of that is for the customer.

In its policy statement published today (July 27), the FCA said it wants “all consumers to receive fair value”. 

“Value is about more than just price, and we want firms to assess their products and services in the round to ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it,” it wrote.

The FCA said in response to the consultation, many firms asked if the regulator could be clearer on how it expects them to carry out value assessments and asked if they could provide more detail on how it intends to supervise against this outcome, and further examples of good and poor practice in different sectors. 

A few firms asked for further guidance on how they should consider a product’s non‑monetary costs and benefits and others asked for further clarity about how this outcome would affect differential pricing practices or cross‑subsidies between products. 

The FCA said: “The focus of the price and value rules is to ensure there is a reasonable relationship between the price a consumer pays for a product or service and the benefits they receive from it. 

“We are clear in our guidance that a product or service that meets all of the other elements of the duty (for example, which is designed to meet the needs of its target market, is transparently sold, and for which consumers are properly supported) is generally much more likely to offer fair value.

“This is both because of the benefits customers get and because they have the information they need about the benefits and limitations of the product or service they are buying, and the ability to pick something else if they prefer.”

Fees

But the FCA stopped short of banning exit charges currently payable by consumers.

FCA head of department - consumer & retail policy Ian Searle, said: “It's much more likely to be unreasonable if there's no link between the price the customers pay and the cost of firms actually incurring to break the contract. 

“That's the sort of key rule to apply. And that's what will be in the guidance.”

Searle said consumers will need to have understood this and firms will need to show consumers have understood.

The FCA also said that it will need to expand on its resources and hire more staff which raised concerns about how this will be funded.

Mills said the regulator will be bringing in additional resources, but argued that the FCA board “looks very closely” at the value that it provides and the terms of those fees.

He explained that the main costs for firms, certainly the firms that complained to him, is around the cost of failure in the Financial Services Compensation Scheme.

“The new consumer duty and other aspects of our three year strategy - in relation to tackling firms and ensuring they have the right prudential setting for their business - should, if it goes well, hopefully have an impact on those other costs which firms are facing because firms will be getting it right first time,” he said.

“Consumers won't need as much compensation and our efforts to make sure that firms have good capital, good solvency or fail well will have less impact on the FSCS.”

He added: “You have to see this duty in the context of our overall strategy as the FCA, it's not just this duty, but a whole host of other work that we're seeking to do.”

sonia.rach@ft.com

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