The Financial Conduct Authority has introduced a number of concepts, some subjective, that firms need to assess and adopt a position on when implementing the consumer duty, according to the Consumer Duty Alliance (CDA).
In a report published by CDA, called The Consumer Duty and Retirement Income target market, it outlined areas which firms need to consider when it comes to complying with the new duty.
These include: fair value, added value services, reasonableness, behavioural bias and vulnerability.
The FCA states that “distributors do have an important role in products getting to market and so must ensure that their, or other charges across the chain, do not cumulatively result in the product ceasing to provide fair value”.
The report said: “Of course, fair value is more than just price, so it’s perhaps understandable that the FCA has avoided defining fair value, although it has stated that consideration should be given to unsuitable features that can lead to foreseeable harm or frustrate the customer’s use of the product or service, or poor communications and consumer support.
“The FCA has also referred to the fact that issues such as transparency and the ability of clients to easily switch and/or exit a product or service are more likely to offer fair value.”
When it comes to retirement income, the regulator has identified a specific area of concern in ensuring that ongoing fees are aligned to ongoing services when it comes to price, frequency and value.
The CDA report said defining value will naturally differ on a firm-by-firm basis, but could be summarised by the question, “Is the benefit the client is receiving reflected in the price they are paying?” or “Is there a reasonable relationship between the price the client pays and the benefits they get?”
Ultimately, firms need to be able to demonstrate this, which will involve working out what the cost of providing advice over the life cycle of the product or service is, and what is the value to clients over time.
It said firms will need to document how the prices of products or services provide fair value to customers in the target market.
“Firms will need to be flexible, yet consistent, in their assessments, when it comes to the different pricing and service models within their propositions,” it said.
Meanwhile, the report noted that additional non-financial benefits offered alongside products and services can help provide or add to fair value, which is something the protection sector has been doing for some time.
“Firms might consider value-added benefits, for example initially targeted at those in vulnerable circumstances using the FCA’s 'life events' driver of vulnerability — including additional support for those with caring responsibilities and care needs, those going through relationship breakdowns, or those in bereavement,” the CDA said.
In respect of the cross-cutting rules, the FCA also refers to firms taking “all reasonable steps”.
Consumer behavioural biases are also referenced throughout the consumer duty, requiring firms to understand how such biases can contribute to consumer harm, to be able to identify when and where this might happen, and to respond accordingly.
“This understanding needs to be applied to all customer interactions, to identify where they may be an impediment to good outcomes,” the CDA said.
The report explained that different consumer journeys and demographics present different risks and behavioural biases, which need to be addressed; for example present bias, loss aversion, decision-making bias, inertia, information asymmetry and framing.
“In the case of information asymmetry, or an imbalance between two parties in their knowledge of relevant factors and details, language is particularly significant when it comes to the retirement income market,” it said.
“In summary, the FCA will be looking for assurance that firms have engaged with the substance of the consumer duty, and will deliver against its requirements in a thoughtful and proportionate manner by July 31, 2023.
“Perhaps the biggest challenges this will bring for most firms, are the collection and analysis of appropriate data as well as making sure everything is documented clearly, so they are able to respond positively in the face of any robust challenge from the regulator.”
The key to good product and service governance within the scope of the consumer duty is appropriate establishment and understanding of the characteristics of target markets, according to the CDA.
It said the target market should be clear at each stage of the distribution chain and then robust oversight of the distribution of the products and services being sold.
In the report, the CDA outlined four steps it suggests firms should consider to understand the target market.
The four steps are segmentation, establishing client needs, mapping the customer journey and documenting the service proposition.
The CDA said one way to segment the retirement income target market could be by the varying needs. This would be:
Another way might be to segment could be in terms of initial approach to income needs.
For example:
It said: “Whichever way is chosen, firms need to segment to a level of granularity needed to identify the (changing) needs of typical consumers in each segment, and the products and services that meet those needs, perform as expected and don’t cause foreseeable harm, especially to those within the overall retirement target market, where many will be in vulnerable circumstances.”
sonia.rach@ft.com
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