The Financial Conduct Authority's consumer duty, introduced in July 2023, represented an extension of the regulator’s fair value rules from regulated funds to a broad array of new sectors and firms, and with it, the intensification of price regulation in the UK.
The FCA does not set pricing and does not generally describe itself as a price regulator. However, the price and value outcome has proved to be one of the most challenging components of the consumer duty for firms so far.
There are good reasons to expect that the regulator’s supervision of fair value will persist and, likely, increase over time.
Prior to the consumer duty, asset managers implemented COLL fair value assessments. This was something of a compliance 'journey' for many, with firms enhancing and building their processes over time, often in dialogue with the FCA.
Nevertheless, the net result is fair value reports, which are time-consuming to produce but may not always be heavily reviewed on firms’ websites. There is however an understanding in the market of the FCA expectations in this area following the Asset Management Market Study.
In contrast, the 'Dear CEO' letters and firm questionnaires seen following the implementation of the consumer duty may be evidence that there is still a gap between current market practice and expectations under the new consumer duty framework.
The consumer duty requires an intensive, and ongoing, data-gathering exercise. Compliance with fair value requirements is also a year-long process involving:
- Data and management information gathering.
- Reviewing, checking, and conclusions drawn from the gathered information, subject to regular governance check-ins.
- Senior manager and board oversight and challenge, followed by sign-off.
While this cycle continues, and is refined for, business-as-usual, the launch of a new product or service means that the same framework should be applied on a more intensive basis.
Less than a year into implementation, the FCA has helpfully outlined its opinions on good practice and areas for improvement, building on its earlier review of firms’ implementation plans and fair value frameworks.
The FCA takes account of implementation of the consumer duty for open products and services, with an eye to its application in respect of closed products and services from July 31 2024.
Looking beyond the FCA’s findings, there is increasing evidence that the regulator is taking a proactive and intrusive approach to supervising the consumer duty, with market-wide implications.
Consider first the FCA’s ‘Dear CEO’ letter to investment platforms and self-invested personal pension operators, issued on December 12 2023.
The letter contained a pre-Christmas surprise announcing a new policy on retained interest earned on customers’ cash balances held with the firm. The FCA explained that ‘double dipping’ is not in keeping with the consumer duty’s price and value outcome.
Even if a firm only just covers its costs of cash management through a combination of a fee and retention of interest, it is no longer permissible to charge consumers in this way.
The letter demanded a change in operational arrangements, terms and conditions, and communications with customers by the end of February 2024, representing a significant operational and logistical challenge for firms. The impacts of the letter were felt in market share prices.
