The latest FCA review of firm’s consumer duty implementation process has highlighted key concerns across a well-used regulatory tool that of proof of value (POV). Given that evidencing fair value across the Duty’s second outcome is highly subjective this was always going to be a big challenge for adviser firms.
The FCA are obviously concerned that firms may procrastinate, assume their current service and product proposition(s) already offer fair value, and thus think; why change? Given the fact that the FCA are now homing in on the Price and Value outcome and one of the key Consumer Duty directives is to ensure consumers pay a price for products and service that represents fair value and poor value products and services are identified and remove from markets, firms should now re-address their implementation process and re-assess their strategy and project planning across POV their services and products offer over the foreseeable future.
This means taking a holistic review of the business and incorporating behavioural science into their price and cost setting process so they can better evidence value for money and assess it on an on-going basis against good client outcomes.
At Model Office-MO®, we break the consumer duty down into constituent parts providing diagnostic assessment of a firm’s progress and algorithms that automate gap analysis and audit reporting to signpost challenges, provide resources for improvement and evidence firms actions to ensure a strong and consistent audit trail to showcase firms are progressing well against regulatory directives and a third line of defence.
When it comes to the second outcome price and proof of value, MO® offers a 7-step strategy to help firms establish and embed a proof of value strategy and framework to identify, monitor and manage product and service fair value:
- Identification of the target market(s)
Segmentation is crucial even if you are a single RI business with a smaller client bank. This will help assess different client journey’s needs, objectives and service requirements along with assessing the service costs ensuring they are appropriate for these client groups. Also, ensuring any vulnerabilities are included and client risk profiles, knowledge and experience are all included. Segmentation can also support client bias identification and management, highlighting client inertia or propensities to but certain products and how long they hold them and/or sensitivities to costs and charges.
- Calculate total product and service costs
Assess the total expected price the firm’s clients are likely to pay. This should also include an assessment of any cross-subsidies and service/product bundling, so for example a firm can ensure that the cost of a bundled service is not more than its constituent parts, which could represent fair value. Remember the FCA are not stopping firms charging different amounts across their services, they just want to ensure that they offer value at all times.
- Assess product and service nature and quality
This should cover all features and benefits of the products and services, mapped against each client segmented group to ensure they add value to on-going financial needs. It may sound basic, but an assessment of the distribution chain and who is/isn’t a product manufacturer/co-manufacturer and distributor is essential plus ensuring clear and uniform information flows across distribution chain participants is imperative to proof of value. European MiFID Templates (EMTs) can help here but adviser firms need to also ensure information such as a vulnerability policy, performance measurements and impact in client behaviours are included.
- Include additional areas
A cost benefit analysis will be really valuable in benchmarking the firms’ offerings against alternatives and looking at the price over the lifetime of the product and/or service comparing that to the benefits and making sure these benefits are commensurate with what the client is paying, again highlighting fair value. Also including non-monetary costs and how they are managed, such as client data acquisition, accessibility, opportunity costs. Firms will need to avoid status quo bias for example assuming their services already offers value and not addressing changes required to assess fair value over the foreseeable future.
- Assess activities that could undermine fair value
Poor risk management, conduct and competence can severely undermine client trust in a firm. The old adage that it takes a lifetime to build good reputation but you can lose it in a minute applies here, firms need to ensure they have systems, controls, policies and procedures in place to monitor and report on their distribution chain, use client segment data to ensure proof of value for money. Non, financial costs also need to be included such as time to distribute products, client decision making and cancelling procedures.
- Document outcomes
Evidence based practice is crucial to fair value, so firms need to ensure they document how they are assessing this area and remedying any identified issues. Templating the fair value process is a great idea ensuring it is kept up to date and all staff are included and on the same understanding for fair value assessment and maintenance.
- Monitor, review and report
Applying project planning and RegTech to identify, monitor and report on client data that supports fair value is essential. By integrating with third party software MO® can segment client data across the 4 outcomes and RAG rate the data to evidence data quality and if it supports price and value outcome requirements and client good outcomes overall.
There’s still time and plenty of firms are already conducting good work, but we have found it is those firms applying the above 7 steps are making good progress in meeting the Price and Fair value outcome and proving ongoing value their clients are attaining from their products and services.
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