FCA Outcome 2: Price and value

What happened?

In this second article in a series spotlighting the Consumer Duty’s four outcomes, Neil Dethick, Associate Director at TCC, focuses on price and value ahead of the Duty Implementation Plan deadline.

Firms have long been expected to offer fair value, but under the Duty they must now explain and evidence how they determine a product or service’s worth and that the associated charge represents fair value. The FCA has indicated it will spot check firms and may scrutinise evidence where it has concerns about a firm’s level of compliance.

The FCA’s 2019 paper, “Fair pricing in Financial Services,” confirmed there is no simple formula for determining whether a price is unfair, meaning firms need to apply judgement supported by evidence rather than a fixed calculation.

Why does it matter?

Neil Dethick notes that a product or service should not exploit a consumer’s lack of knowledge to charge an unfair price. He also raises the question of whether a reduction in a product’s benefits should be reflected in a corresponding reduction in price, suggesting that firms need to keep pricing and benefits aligned over time.

A harmful outcome is one where a customer does not receive good value, is frustrated by unsuitable or unnecessary features, or experiences poor communication or support. The FCA does not intend to set prices or treat lower-priced products as automatically fair; instead, it will look at the overall relationship between price, features and benefits.

Who is affected?

Firms across financial services that design, price or distribute products and services within scope of the Consumer Duty’s price and value outcome.

Key risks

• Being unable to explain or evidence how a product or service’s worth was determined.
• Pricing that has not been reviewed following a reduction in a product’s features or benefits.
• Assuming a lower price is automatically fair value without considering the wider relationship between price and benefits.
• Ongoing value assessment processes that are not maintained beyond the initial design stage.

Actions to take

1. Document how the worth of each product or service was determined and how this links to the price charged.
2. Maintain an ongoing value assessment process, with continuous reviews and updates beyond the initial design stage.
3. Review pricing where product features or benefits have changed, to confirm the price still reflects fair value.
4. Prepare evidence ready for FCA spot checks, particularly where compliance concerns might arise.

Wider implications

The absence of a simple formula for fair value means firms cannot rely on a single test or benchmark. Evidencing a reasonable relationship between price and profitability, supported by clear reasoning, will remain necessary as the FCA continues to check compliance with the Duty’s four outcomes.

Recommendations

Firms should ensure their value assessment processes are genuinely ongoing rather than a one-off exercise at launch, and should be ready to demonstrate the reasoning behind their pricing if the FCA asks to see it.