July 22 – Unpicking fair value

This article was originally published in TMA Magazine, the wording has been amended slightly now that the FCA has issued its Consumer Duty policy statement.

What do you think of when you hear the word ‘value’? It often conjures up images centred around cost. Consider the way supermarkets position their value food ranges: a low cost option where price, for the most part, rules over quality. However, if we look at the dictionary definition of ‘value’ it goes much wider than this, associating the word with phrases such as ‘relative worth’ and ‘utility’.

When it comes to financial services it’s important for firms, and consumers, to see value as more than just price. The FCA’s Consumer Duty has four outcomes to help firms deepen their understanding of the regulator’s expectations and to set out key areas of the firm-customer relationship. Out of all the outcomes, ‘price and value’ will likely be the most challenging for our sector – simply because it can be subjective and is a new concept for mortgage lenders and brokers to get their heads around. For mortgage intermediary firms that distribute GI and/or pure protection products, fair value should be more familiar, as fair value rules were introduced on these products last year as part of the FCA’s work on GI pricing.

The FCA view value as the relationship between the price the customer pays for a product against the benefits the customer can reasonably expect to receive. The ‘fair’ part is where the relationship between price and benefits is judged to be reasonable. The FCA’s hasn’t provided any further steer in the rules on the definition of fair value (as it wants to give firms flexibility to make their own judgments) but has included factors firms will need to consider as a minimum as part of their own fair value assessments.

Lenders will be required to assess fair value at every stage of the product approval process. For example, a lender could look at the overall price of a mortgage product including any initial discounted rate, fees and charges.

Whereas a mortgage intermediary firm, as a distributor, will be required to assess fair value when determining how it will distribute a product. This will be achieved by:

  • Ensuring it reviews the manufacturer’s value assessment to understand the value of a product. If at a lender/product level it does not feel a product provides fair value, then it shouldn’t distribute it.
  • Assessing the quality of the services it provides to customers.
  • Assessing the remuneration received. For example, does its broker fee represent fair value? This could be assessed by considering whether a reasonable relationship exists between the fee charged against the costs incurred, its level of involvement and contribution added as part of distributing the product.

Fair value should be viewed as an assessment undertaken at product and not individual contract level (i.e. point of sale), with assessments likely conducted at compliance/governance product level within firms and not by individual mortgage and protection advisers. Affordability and suitability assessments will remain, continuing as per existing MCOB rules (this includes the cheapest rule which should be seen as a separate assessment to fair value).

It’s important to note that firms will still be able to charge different prices for different customers and price based on risk. Fair value is not about the FCA controlling prices or margins. It’s about making sure customers can purchase products safe in the knowledge that fair value has been considered and ensure they receive value for their money.

The fair value requirements will necessitate lenders and brokers to work closely together and continue to develop strong relationships. Firms should expect an increase in information sharing between lenders and vice versa. AMI plan to work with lender trade body partners to develop interpretation and understanding of lender and broker responsibilities.

Stacy Penn, Senior Policy Adviser

July 2022