Out of the four areas highlighted in the FCA’s Consumer Duty legislative proposals, areas where our industry must demonstrate conduct for good consumer outcomes, ‘price and value’ is especially notable.

It’s notable because value for money has been a focus for the regulator for a number of years now. Initially, the spotlight was on workplace pension schemes. It extended out to the asset management industry in 2021 with the FCA’s Assessment of Value.

Three years ago, the FCA published Fair pricing in Financial Services (FS19/04) which came up with a framework for how fair pricing would be embedded into its regulatory approach. This framework was most recently used when the FCA reviewed pricing practices in the general insurance market with the aim ‘to improve the way insurance markets function’.

Price and value is a core theme of the Consumer Duty

The Consumer Duty, set to become regulation early next year, is essentially a revision of the FCA’s Treating Customers Fairly (TCF) principles introduced in 2006. Yet the TCF principles don’t include guidance on price and value while the Consumer Duty proposals do – and it’s a core theme.

The FCA is making it clear that, along with products and services, customer understanding and customer support, price and value will be scrutinised across financial services once the Consumer Duty becomes regulation.

Price and value have always been core to the service advisers provide as they’re key to assessing suitability. Considering whether the advice fee justifies value for the client is at the heart of the advice process and the regulator recognises this.

Nevertheless, advisers will have to pay close attention to the ‘price and value’ part of the Consumer Duty when it comes into force. The proposals ask firms ‘to consider the overall cost to the customer’, this includes their advice services, ‘as well as all product and distribution charges in the distribution chain’.

It means the regulation will not only cover the advice fee but the price and value of all services the adviser firm provides such as, for example, discretionary investment management if this is managed in-house.

For years, advisers have been looking after their clients’ interests by considering total costs including advice charges, platform and product fees and investment management fees.

Under the Consumer Duty, firms will have to demonstrate whether total costs provide ‘fair value’ for their clients.

Demonstrating value doesn’t need to be an onerous task

Demonstrating value for money and documenting whether total costs provide ‘fair value’ could be one of the more challenging parts of the regulation to meet.

However, it doesn't need to be an onerous exercise. There are a number of ways it be approached and if a firm uses the services of a compliance provider, it should be able to help too.

Firms could look to break their proposition down and examine the value of each of the components. This should include the service, platform, fund or product fees as well as the communications and support the client receives.

A critical point is that price and value is not about the lowest charge possible and a race to the bottom. It’s about firms considering whether the price charged for the value of the total service offered to the client is fair. Also, if the firm offers various service or investment propositions, considering if the price should vary between different groups of clients.

As a simple, if extreme, example, it could be reasonable to charge a client more for an advice service that includes monthly face-to-face meetings as opposed to an annual online, video call.

A useful starting point should be firms’ target markets, already defined under the regulator’s Product Governance (PROD) rules. They can be used to document and differentiate the proposition for each segment – there may need to be a justifiable difference in charges to demonstrate ‘fair value’ as to the benefits received between each target market.

Engage with the Consumer Duty’s proposals soon

Advisers could also look at ‘value for money’ best practice in other markets for help.

As one example, in 2015 the regulator introduced rules requiring organisations that manage workplace pensions to establish Independent Governance Committees. The aim is to ensure schemes deliver value for money by the monitoring of transaction costs, service and communications.

It has to be said, however, that most markets continue to grapple with demonstrating price and value where this rule has been introduced by the FCA.

As I see it, the most effective controls to demonstrate price and value are likely to focus on just a few key factors - firms could choose to pick three key factors initially.

The trick is deciding which three these should be.

Whatever the method used, it would be a pragmatic move for advisers to engage with the Consumer Duty’s legislative proposals soon.

Ensuring good outcomes is at the heart of advice

The Consumer Duty has brought value for money and fair value to the fore and the advice industry will need to pay close attention to the FCA’s policy statement when it’s released this summer.

But at its core, the Consumer Duty is about good governance to lower risk and clients understanding that the fee they pay for the advice service and total costs - platform, product and investment management fees - is fair and value for money.

Although the Consumer Duty will be a step change in terms of regulatory compliance when it comes out next year, most advisers are already well placed and absolutely get to the heart of good outcomes for clients through the individual suitability reports they carry out for them.

The Consumer Duty is ultimately about doing the right thing and being comfortable demonstrating doing the right thing. As such, advisers have nothing to fear.

The Consumer Duty’s final policy statement will be published by July 31, 2022. For more information on the second consultation, visit here.

Read Alastair Black’s first article on the Consumer Duty.

The value of investments can go down as well as up and your clients could get back less than they paid in.

The views expressed in this blog should not be regarded as financial advice.