Understanding FCA Fair Value: A Broker's Perspective

Understanding FCA Fair Value: A Broker's Perspective

I’ve just finished a round of workshops and speaking slots around the country including the UKGI Seminars, the amii Health and Wellbeing Summit, and the Aviva Future Leaders Programme, and one of the key areas on everyone’s lips, particularly considering the recent move by most premium finance providers, is how brokers and intermediaries deal with the particularly thorny issue of Fair Value.

Interesting times ahead if you’re an intermediary…

In the ever-evolving landscape of financial services, brokers play a crucial role in ensuring that products and services provide fair value to consumers. The Financial Conduct Authority (FCA) has set clear expectations for brokers to assess and demonstrate the value of their offerings. But what does this entail, and why is it becoming so challenging when, as a sector, the general insurance market has been expected to have this nailed by now?

Having spoken to many firms of different shapes and sizes over this last year as part of our work on Consumer Duty, I can share the following insights which may start to help you answer these questions.

Assessing Fair Value

Brokers must evaluate whether a product or service offers value by considering several factors:

1. Nature and Benefits: The inherent qualities and benefits of the product or service, including what is provided or reasonably expected to be provided.
2. Limitations: Any constraints or exclusions within the product, such as limited coverage or high exclusion rates or differentiators in your segmentation.
3. Data Indicators: For example, General Insurance (GI) value measures data, early cancellation rates, significant numbers of mid-term changes to covers, complaints about the nature of the cover or failure or claims - all of these could indicate potential issues with the value of the product or the service that was provided when they were purchased.
4. Total Cost: The expected total price paid by the consumer, including all fees and charges over the lifetime of the relationship.

In addition, firms must not to seek to exploit customers’ behavioural biases, lack of knowledge, or characteristics of vulnerability in determining delivering fair value; moreover, firms must be able to prove clear consideration of these customer cohorts.

Challenges in Evidencing Fair Value

Currently, many firms have conducted high-level fair value assessments. However, the baseline information provided by insurers is often quite general, and ultimately the burden of proof is on brokers. Brokers must meticulously demonstrate that their remuneration, charges, and fees are justified and that they are providing fair value to all groups of customers through the products they offer; in many cases, the framework for conducting these reviews is simply not robust enough, at the outset and across the entire distribution model.

Resource and Data Struggles

One significant challenge brokers face is the lack of resources to conduct thorough reviews, be that data, segmentation, management information or physical resource within their workforce. It’s a time-consuming process. Access to detailed data is often limited, making it difficult to fully inform their assessments. Additionally, brokers must break down their overall business objective to deliver products and services that contribute to profits (directly or indirectly) in a sustainable manner.  But what does it cost and how do those costs, plus other non-monetary considerations, translate into fair value assessments? This process is essential for creating a road map or framework to determine fair value.

Inconsistent Practices

While some brokers have made significant strides in certain areas, many smaller brokers struggle with the more granular operational aspects like utilising timesheets and cost allocation. The focus tends to be on high-end commercial cases, which are more likely to be time-intensive, rather than on the fundamental reasoning behind insurance provisions and the service in relation to that product.

Commission and Fee Disclosure

Another area of concern is commission disclosure. Although there may be a push for more transparency, current rules do not require fully disclosing commissions upfront.  Some brokers have taken the initiative to use commission disclosure as a competitive advantage, but this requires a granular understanding of their cost structures. Have the premium finance providers opened Pandora’s Box?  What will the wider implications on brokers and their customer’s expectations be as a result of this? Only time will tell, but start to plan ahead.

Educating Customers

Are customers increasingly asking about commission disclosure? From what we have seen, it’s slowly on the increase but may gather speed with the fallout from commission transparency in the finance arena and as ‘fairness’ in value, as a concept, gathers interest with consumers. More importantly, are customers ready to understand what the core value of the service is versus the commission and fees earned? Ultimately, brokers need to recognise their ‘value-add’ across all customer segments and ensure relevant staff are trained and well versed to better educate customers about the services they provide and their associated costs, not just the premium for the product. Transparent commission and fee disclosure can help, but customers must also understand the breadth of services offered including the use of third parties to provide that product or service.

Conclusion

The journey towards fair value is complex and requires brokers to be diligent, transparent, and resourceful. By addressing these challenges head-on, brokers can ensure they meet FCA expectations and be in a strong position to demonstrate how they provide genuine value to their customers. Understanding the relationship between costs and pricing to achieve ‘appropriate profits’ is imperative and essential for vulnerable groups. A one size fits all framework is unlikely to be a perfect fit, but you have flexibility. Be prepared to do your sums, evidence your workings out, include the value of your service and advice, benchmark, seek sufficient information from manufacturers, retain the evidence and react when there is concern fair value is not being delivered. Seek additional support or assurance when this feels necessary.

UKGI continues to support and advise many firms in this area, and your consultant or the Technical Team are on hand to help if you need it.