Don’t underestimate Consumer Duty changes to fair value

In days gone by, assessing the value of a service was a simple equation for advisers and wealth managers, largely based on time spent on a client. Under the Consumer Duty, things have become rather more complex.

Despite the Financial Conduct Authority’s ever-greater focus on fair value – including October’s Dear CEO letter, which set out expectations for advisers and investment intermediaries – many advisers and wealth managers have struggled to get to grips with the changes.

Still more are underestimating how the Duty has fundamentally changed the financial-services landscape.

Key challenges

So, what’s the issue? Too often, firms are stumbling over the same pitfalls when assessing ‘fair value’.

First, many are trying to get by with previous product reviews, simply mapping the content of previous reviews to requirements of the Duty. But this overlooks the Duty’s ‘step-change’ in approach, which calls for new measures and analysis (such as how benefits are experienced across different customer segments) that have not previously been completed.

Second, it is tempting to shy away from difficult problems. We see assessments often start out asking the right questions but stop just short of providing an answer – for example, failing to put a number on expected total cost for different customer groups.

Third, too many firms are failing to provide evidence. Under the new rules, firms need to identify specific measures that demonstrate how each product or service benefit is received and valued by customers, ideally divided by customer segment.

For example, evidencing the importance of a benefit to a customer with lower reserves when approaching retirement age, compared to a customer in their 30s with high disposable income. And the impact on the overall value for that segment must also be understood.

Ultimately, wealth managers need to evidence a better answer to the question of what customers are paying for and the benefits their advice brings. And the FCA’s expected update later this year following their Ongoing Advice information request means this is needed sooner rather than later.

How to fix it

A helpful litmus test is as follows: if a fair-value assessment does not result in a list of new measures and analysis (which may need completing over the next year), then it has not gone far enough.

To tackle this, turn attention back to the benefits of the service, as this forms the foundation of the value assessment. Advisers and wealth managers provide a whole host of benefits, from time saved and personalised service, to education, level of returns and the reduced risk of poor decisions (including on tax, unnecessary fees and investments).

But a failure to articulate and measure the benefits delivered by each party in a chain leaves assessments relying on the number of hours advisers spend on a client to justify cost – which will always be a race to the bottom.

Next, re-consider the target market analysis and identify how different customer needs, objectives and characteristics – including those of vulnerability – influence the total potential value of advice for a customer.

Putting a number on expected total cost is also key. Total cost is a great tool for highlighting variations in value between customer groups and behaviours, pinpointing what drives profitability and finding the limits of what is fair. In other words, it helps put guardrails around what ‘good advice’ is for various customer scenarios and what is reasonable to charge.

For individual advisers, all these questions and steps are just as relevant as they are for firms, although obviously the scale of the response and the tools used will differ. Advisers must apply the questions through the lens of the specific role that they play in the distribution chain, and the value that this delivers.

The assessments will ultimately alert the regulator to cases where firms are not appropriately justifying transfers from other providers; not holding yearly review meetings where a fee is charged; or charging customers widely different amounts for the same, or less, benefit. Or at least, an absence of evidence to the contrary will.

The FCA has explicitly stated fair-value assessment will be a core focus of supervisory activity in the wealth management and retail-investment sectors.

For many, adoption has been a challenge. But now is the time to get it right. Make no mistake about it, the Consumer Duty has ushered in a new era for financial services, and nailing fair-value assessments is a powerful tool in refining customer propositions, delivering good outcomes and transforming into a future-fit firm.

Thom Hart is risk and regulation expert at PA Consulting