How this may work in practice
Firms need to conduct a fair value assessment for each product offered within its portfolio, considering whether they provide fair value to their target market and whether different groups of customers receive different benefits or pay different prices for the same product or service.
A fair value assessment must include at least:
- the nature of the product or service, including the benefits that will be provided or may reasonably be expected and their qualities;
- any limitations that are part of the product or service (e.g., limitations on the scope of cover for an insurance product); and
- the expected total price customers will pay, including all applicable fees and charges over the lifetime of the relationship between the customer and the firm.
A number of additional factors may be considered by firms to demonstrate that the price is reasonable compared to the benefits, the FCA has given examples of what it will consider when they assess the effectiveness of a firm’s value assessments:
- The cost firms incur to manufacture and/or distribute the product or service, including the cost of funding, e.g., for loans. Differences in costs may explain, for example, why otherwise similar products are priced differently and/or explain changes in the prices charged over time.
- The market rates and charges for comparable products or services and whether the product is a significant outlier to these. This may prompt the firm to look at whether there are deficiencies in design, issues with how support for the product functions, and/or confirm the price is still reasonable.
- Products within the firm’s own portfolio which are priced significantly lower.
- Any accrued costs and/or benefits for existing or closed products.
Different products and services will offer different benefits, which in turn will have an impact on the assessment of value. Characteristics can include the quality and scope of cover, level of customer service, sums insured as well as the overall price paid.
It is the responsibility of the manufacturer to conduct a fair value assessment at product design stage and to share certain information with distributors, including the nature of the product, its target market, any customers the policy is not suitable for, the overall benefits, limitations, exclusions of the cover provided and any circumstances where the product is not expected to perform.
Most insurers will have already completed their fair value assessments and should by now have commenced regularly sharing information with distributors. If you have not yet received this information, we recommend that you contact the product providers as a matter or urgency for further assistance.
In addition to the manufacturer’s assessment of fair value, distributors should also consider the following factors:
- the impact of their fee and charging structure to the overall price paid by the customer for the lifetime of the policy;
- any fees and charges that may be applied if the product is distributed via other brokers in a chain which, when considered together with their fees and charges, may not represent fair value;
- comparison with other products available in the market or their own portfolio;
- whether the method of distribution impacts price or value, i.e., online, telephone, face to face; and
- the value of products and services sold as part of a package or alongside the main contract, such as add-on products, and the impact of premium finance.
Where products and services are sold together as part of a package each component must be assessed both in itself and considering the value it provides as part of the package.
Firms may group similar products and services together for the purpose of completing value assessments where the customer base, complexity and risk of consumer harm are sufficiently similar. If firms choose to do this, they should ensure that it does not impair their ability to assess each product and service adequately or prevent them from making any necessary comparisons within their own portfolio.
Firms can use a number of different methods to support their assessment of fair value including customer research (surveys of focus groups) and/or testing scenarios and internal data review.
More information on Governance and Management Information in relation to fair value assessments can be found in Section H.3 Conduct Monitoring and Reporting (MI).
After the initial assessments required for implementation of the consumer duty on existing open and closed products, the fair value assessment must be conducted at the design stage and at the point any changes are proposed to the existing product or service (before they are offered to consumers).
We have put together a useful Distributor Fair Value Assessment template POG06, to assist distributors in completing their fair value assessments.