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.