In this fourth blog in our series on the new Consumer Duty (CD), I will focus on what I believe the ‘Price & Value’ (P&V) challenges will be for firms under the new CD rules as well as providing some suggestions on the steps firms can take.
Price & Value
P&V is the second of the four outcomes required under the new Duty and it promises to be one of the most challenging areas of the new regulation, as firms prepare for the implementation date next July. The principal problem with the in-coming regulation is this. Whilst the FCA sets a clear expectation on firms that the price they are setting for their products and services represents fair value, they are not providing detailed and absolute rules on how firms go about this. However, through the recently published FG 22/5 a specific chapter is devoted to P&V which shares some helpful examples that will give firms further insight into this area. Even with the examples and positive/negative indicators that they have published the onus remains squarely on firms to work out how they are going to go about this. And, just as importantly, what evidence set they will use to make both their P&V decisions, linked to their ability to explain these decisions to the FCA if requested. And to add to the difficulty, with so much information about firms’ product pricing (for different consumer groups) and evidence of consumer behaviour available in the public domain, paired with the FCA’s growing data analysis capabilities, firms will be put firmly in the spotlight. Hence my earlier comment about P&V being a challenge!
For several years, the FCA has been talking about P&V and been guiding the industry towards making more considered P&V decisions. For example, whilst the GI Pricing Practices Market Study, PS21/05, was published in April ’21, the FCA’s research leading to PS21/11 had been going on for several years. Similarly, whilst the final rules on providing better P&V in the Asset Management sector, PS18/8, was published in April ’18, the research first started in 2015. Consequently, the FCA’s ‘direction of travel’ (excuse the cliché) has been evident for some time, so the industry can hardly say it hasn’t been warned. Now that may have spurred some firms into a comprehensive re-evaluation of their P&V justifications across their product set, but I suspect most firms will not have taken their thinking this far.
So, if that’s the challenge, where does that leave firms? The FCA’s work in recent years on P&V will have alerted most firms to the fact that they need to develop a broader set of metrics for calculating the price of their products and services. Standard marketing practice also means firms will already be calculating product costs as well as benchmarking competitor products when proposing product prices.
To get to a ‘fair value’ assessment of a product or service, firms must now build on these basic principles to become even more data driven, i.e., multi-dimensional, in their data collection and rigorous in their analysis. Perhaps breaking this down into its component parts will help:
- Costs: Deciding what the costs of providing a product or service should be mostly straightforward for most. However, firms will need to consider not only the direct costs such as manufacture costs, distribution costs and after sales costs. They also need to consider other, more indirect, costs, e.g., costs shared across different products, ‘free’ product add-ons, etc., and how cost types will be apportioned This will be particularly relevant when considering product support post-sale, e.g., contact centres supporting multiple products.
- Price: Again, in principle, this should be straightforward in most part, however, firms need to be careful. For example, what about ‘free’ products, e.g., bank current accounts when in surplus? Shouldn’t overdraft charges or the lost interest customers could’ve accrued be included in the calculation? Another example would be products that have a reduced fee as an introductory ‘offer’, e.g., initial reduced interest rates on mortgages and/or wider lending products?
Less obvious, but also important, factors to be considered in the ‘value’ equation are:
- Risk: How will the risk associated with certain customer groups be factored in (justified) when explaining charges, e.g., overdraft charges on bank accounts marketed to certain customer groups, or APR on credit cards marketed to consumers with poor credit profiles etc.?
- Consumer Usage: How will consumers usage of a product or service be reflected in the prices they are charged, e.g., home insurance users in the same post code but with different claims histories?
Firms may have this information already but including this to broaden their evidence-set is key. Ultimately firms will need to be able to explain their pricing decisions based on factors like those listed above.
A good test is using customer satisfaction data to shed light on the question; ‘did consumers enter into their purchase voluntarily, was the price fair, did they really know what they were buying (letting themselves in for), and were they free to leave if that is what they chose to do?’ Hard data is key here, e.g., cancellation rates, but soft data like satisfaction surveys, net promoter scores, external ratings agency scores, e.g., Defaqto, also need to be part of the firm’s justification of a product’s fairness for that group of consumers. And to develop this broader dataset, firms may need to employ multi-disciplinary teams, such as economists, behavioural scientists, data analysts and finance professionals. A question many smaller firms will ask is “Is this really realistic for the smaller enterprise?”
For large firms, with large numbers of individual products across multiple product areas, it is a potentially daunting prospect to have to gather all this hard and soft data to conduct an evidence-based assessment. And even once assembled, it will take time for a broad group of executives to make the quantitative and qualitive judgements required to ensure products meet the ‘fairness test’ required by the P&V outcome in time by July 2023.
But that is the challenge, how ready will the industry be is anyone’s guess.
In my next, and fifth blog, I will turn my attention to the third outcome, ‘consumer understanding’.