No straight answer on what is fair value under consumer duty

And the answer, inevitably given by regulators and consultants, is that the FCA is not prescriptive when it comes to assessing fair value: it is largely up to the firm itself to implement fair value frameworks ahead of consumer duty implementation in July. 

The follow-up question is usually "What is fair value?".

The argument always put forward (again, by regulators) is that advice firms demonstrate value through the quality of their advice, clear communications and positive client outcomes, year after year, review after review. 

Entrepreneurial advisers wanting to go it alone are going to have to work doubly hard.

This is despite (and taking account of) all the changing scenes of life that affect clients, often from quarter to quarter, which will need to be factored into how advisers assess the continuing appropriateness of products and past advice.

And we can only guess as to how fair value assessments will develop as we get into the world of simplified advice or AI advice, or what will happen the government decides to change the UK's regulatory framework post-Brexit.  

So trying to grapple with how you will assess fair value and how often you will have to do it, depending on changing client needs and unexpected events, seems to have no straight answer.

What we do know is that companies will have to present their fair value assessments to the regulator in line with what the FCA said in May that it expects, namely: 

• A sufficiently broad view of the overall costs to the consumer
• Fees and charges
• Any non-monetary costs
• Any potential distribution costs to consumers.

That's all well and good, but then you need to factor in how to gather input from other firms (good luck with that, given how some providers can't even get their AI to answer the phone), or to pass on information to other firms in the distribution chain.

And you'll need to provide different templates for different client segments and market sectors.

As the FCA said: "Firms who provide a wide range of products and services across different market sectors may need to consider further how they adapt their approach to assessing fair value across these different market sectors."

Sole traders vs national companies

It's a big task for a sole trader, although many would say they have always done something similar to this as a matter of course, but have they done it well enough to satisfy the regulator after the settling-in period post July 31? 

Have sole traders got flexible templates in place already that can adapt to different client segments, products and services?

Is the technology in place smart enough to be able to pull charges and other relevant information from third-party providers, such as platforms and discretionary fund managers, to keep fair value assessments up to date? 

Can sole traders who are business owners find time to test their templates and see if the information is correct? 

All would-be firms are now expected to provide a financial forecast that illustrates that products are of fair value

But as one adviser from a vertically integrated firm suggested to me, assessing fair value across all services and all client segments, is going to be much easier for large companies than it is for sole traders. 

She said: "Large companies have big compliance departments and complaints teams, specifically set up and trained on how to assess client outcomes and handle communications and complaints in line with consumer duty. 

"They also have large market research teams who are able to spend time balancing their own services and products against their competitors to improve their value assessments and highlight any significant, unexplainable variances."

Big companies with more resources can also more easily create a range of templates for assessing fair value when it comes to products or services with different characteristics and which may serve different target markets. 

Cost

As always, because we're being non-prescriptive and coy about making hard-and-fast rules on fair value, I suspect this will come down to cost.

Those of you who have read FTAdviser long enough will remember that, in 2013, shortly after the then FSA brought the RDR into effect, I wrote a story after an interview with senior executive Sheila Nicoll.

She told me at the time: "The regulator is not a price-setting regulator". 

But despite repeated comments that the regulator does not dictate how advisers or companies should price products and services, consumer duty states there will be an emphasis on pricing.

For example, sole traders and other firms seeking authorisation will have to show how they expect to fund their growth.

As I said in an editorial in February this year: "The regulations stipulate that while different information will be required depending on a firm’s business model, all would-be firms are now expected to provide a financial forecast that illustrates that products are of fair value."

Consumer duty states there will be an emphasis on pricing.

Moreover, the FCA will use the consumer duty to ensure that "additional costs and charges are price-reflective rather than being used to generate profit".

Again, a large company can afford to compete on volume, shaving costs and charges where necessary to bring them into line with (or just half a basis point cheaper than) their competitors. 

Sole traders do not have that luxury - either the time to assess what other similar advice companies are charging customers in their region - or the ability to shave off costs. 

The FCA also keeps sending out 'Covid questionnaires' to see whether firms are making a healthy profit. 

Either profit is good - it keeps businesses afloat, enables them to support the FSCS levy and serve customers - or it is bad, because it's not in line with the fair value assessments required under consumer duty. 

Whichever it is, it is clear that entrepreneurial advisers wanting to go it alone are going to have to work doubly hard.

They will need to make enough of a profit to prove to the FCA they are a viable business, but keep costs and charges as minimal as possible to pass the fair value assessment test. 

Whatever that is.