Fair Value Assessments: Why wealth managers must act now

The Price and Value Outcome has been occupying product managers’ minds since the Consumer Duty rules were first unveiled. And recent output from the FCA shows that it will continue to do so for some time. The need for firms to improve their Fair Value Assessments being a central theme in the ‘Review of Fair Value Frameworks’, as well as in ‘Dear CEO’ letters on Closed Products, and the ‘Product Oversight and Governance Thematic Review in General Insurance and Pure Protection’. The quality of Fair Value Frameworks that we have seen varies across all sectors and products.

For Wealth and Investment Managers, the nature of the products and propositions make conducting a good Fair Value Assessment especially challenging. Wealth Managers cannot afford to fall behind in getting these frameworks right. The FCA’s focus on the Ongoing Advice information request, and the Retirement Income Advice Thematic review mean that Wealth Managers need a good answer in place as to how their product and service propositions are providing value to all customers who use them.

We have experience supporting firms across all sectors to design and assure their Fair Value Frameworks, with those we have supported being identified as Good Practice by the FCA. From our experience, those who have not implemented Fair Value well tend to make one or more of the following three mistakes:

1. Trying to fit what they already had to meet the Price & Value requirements

The FCA commentary on the Duty is that it is a ‘step change’ in expectations. That means even for firms who had just been through insurance pricing practices it was expected to be a big effort to complete. However, many have tried to fit what they already looked at for Product Reviews with no uplift to evidence Fair Value. Make no mistake, Fair Value requires a change in approach and likely new measures and analysis that has not been completed or collected before. If a Fair Value assessment does not result in a list of new measures and analysis to be completed over the next year, then it has not gone far enough.

2. Shying away from difficult problems

Calculating expected total cost is an explicit requirement of the Duty, yet we see many organisations that have not done this. This was also a finding of the FCA’s ‘Product Oversight and Governance Thematic Review in General Insurance and Pure Protection’. In our own experience we have seen assessments that go as far as to lay out all the key components but stop short of adding them up.

Working out an expected total cost can be difficult, and it might not be perfect. But calculating it for different customers and segments is a great tool for illustrating how customer behaviours and distribution chain arrangements can impact cost. Firms should use this tool to establish whether their propositions align to the business strategy in practice and to drive leadership discussion and challenge on what is fair and where change may be required.

3. Forgetting the key rule: If you make an assertion, you need to back it up with evidence

Completing a Fair Value Assessment requires firms to articulate the customer value proposition and outline the benefits a customer is in effect ‘paying for’. However, where this has been done, some do not consistently evidence them. It is important to remember: all benefits must be monitored and evidenced across all segments within the target market. And the impact on the overall value for that segment must be understood. In the context of Fair Value, ‘evidence’ means measures with stated limits, and a documented rationale of what drives the setting of these limits at the chosen level.

Fundamentally leaders need to ask themselves if their assessments tell them: where they make their money, who they make it from, and if that feels fair. If they do not, then it is time to go back to the drawing board.

Now is the time to act as the FCA readies itself to publish their forward programme of Consumer Duty work in the coming weeks. Based on our experience of developing Fair Value Assessments for firms across sectors, we advise the following steps:

Revisit your articulation of the value proposition

The benefits and value that your proposition delivers for the customer are what justifies the cost. A failure to outline what good advice is and how it can be measured leaves assessments relying on the number of hours spent by an advisor preparing for a review to justify value. Organisations must think more widely about the value their service delivers within the distribution chain for the customer. They also need to establish where they consider the boundaries of value to be. For example, at what point does value from initial advice stop, and ongoing advice take over. And are there any gaps?

Understand how different groups of customers receive each of the benefits defined in your value proposition

You must know how you will measure and monitor each benefit that delivers value for customers. The measures you have in place must support adequate consideration of limitations (i.e. the point at which a product/service ceases to provide fair value for each customer segment as well as customers with vulnerable characteristics). Consider whether the measures used are adequate to equip leadership with the information needed for effective decision-making.

Put a number on expected total cost

If your Fair Value Assessment does not include an analysis of total cost for a variety of customer scenarios (based on objectives, characteristics, behaviours, and lifecycle stages identified in your Target Market Definition) you should make changes now. Total cost is a great tool for highlighting variations in value between customer groups and behaviours and what drives profitability. These numbers should drive discussions at senior forums as to what is appropriate.

Create a clear plan for improvement

It has been over a year since the introduction of Consumer Duty requirements for open book. In this time value assessments should have identified potential issues concerning value. There should now be clarity on what has, and what will be delivered as part of improvement actions and a clear timeline that includes what the impact has been to customers holding these products. In instances where no improvement actions have been identified, firms should challenge themselves and Wealth firms should ask whether their value frameworks help establish what represents good or poor advice.

Fair Value is a core tool by which the FCA will judge adoption of the Consumer Duty across all sectors. It has explicitly stated it will be a core focus of supervisory activity in the Wealth Management and Retail Investment sectors. For many, adoption has been a challenge, but when done well, it can be a powerful tool for refining customer propositions and delivering and evidencing good outcomes.