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First published on Thomson Reuters Regulatory Intelligence, March 2017
Value for money has long been an area of consideration for product providers and the FCA. For example, in recent years we have witnessed increased competition in the platforms market which has seen product charges fall to an all-time low.
There have also been various regulatory requirements introduced in relation to clearer and fairer charging models and increased transparency requirements in some areas of the market (for example, general insurance). Indeed, the FCA is increasingly using its competition objective to push for transparency and value within all markets and it aims to reduce the levels of information asymmetry, allowing for consumers to increasingly make informed decisions. However, it’s only since the FCA’s focus on long-standing customers that the spotlight has turned to legacy products – those that have been typically closed to new business for some time.
It’s clear that delivering value for money needs to go well beyond the current range of on-sale products in order to achieve a healthy and competitive market that works for customers. If firms do not have a robust methodology for measuring value for money, this can significantly limit the firm’s ability to deliver it.
Aside from the obvious risk of regulatory intervention, an issue that is often overlooked is the impact of getting this wrong in terms of a decline in customer trust and loyalty and, ultimately, the impact this could have on long term commercial success.
So what factors should firms consider when it comes to assessing value for money to ensure they meet regulatory requirements and achieve business goals?
Common issues and how to solve them
Where firms fall short, it is commonly due to the following limitations in their approach:
An unclear definition of value
Firms’ definition of value for money can vary greatly. It’s a subjective area and we regularly see it dividing opinions within a firm. For example, finance or actuarial teams will have a different perception than marketing or commercial teams.
How do you examine the impact of charges on product performance? It is important to recognise their impact on the subsequent investment return delivered to the customer, account for them in your own view of value and manage customer expectations around them effectively.
As well as this, clients’ views vary depending on their level of financial understanding; some look at the cost of charges to discern value, some take account of the overall performance of the policy irrespective of the charges, and some will give more weighting to the overall service they receive. Communications with customers can be an opportunity to better frame and set expectations on charges (and product features and services more generally) so that their impact is understood.
Lastly, when you recognise that certain charges are affecting the value delivered by a product, this should prompt a review of other products that carry the same charge to ensure any read-across is understood and acted on.
Lack of a robust framework to assess value
The frequency of product reviews is not always aligned to the risk profile of products, which can lead the firm to become disconnected from product performance and customer outcomes. Reviewing higher-risk products more frequently will allow firms to quickly intervene when they are underperforming – this is of course true of all elements of product performance and not just the delivery of value for money.
Aside from reviews of live products, there has been a long-standing view amongst some firms that measuring value for money is out of scope for closed-book products. If and when this is the case, we needn’t look too far to discern the regulator’s view on this assertion; the recent obligation for life and pensions firms to review their closed-book products to examine their treatment of long-standing customers can be taken as a clear indication of the FCA’s desire to protect customers with products which are no longer being sold.
Some practical considerations for your review framework:
- Do you have a methodology that uses a combination of different benchmarks to demonstrate how a product is performing? These could be financial or customer-based benchmarks, for example, fund objectives, performance against indices (e.g. RPI and CPI), satisfaction levels, persistency and complaint volumes. Do you reconcile all of these metrics to form an objective view?
- In some scenarios, customers are paying more than others for the same service. Are the terms of this cross-subsidisation fair on the customer groups paying more? How does it impact on value for money and the final return on investment, and are customers who are investing in the same product experiencing different results?
- Do you discern whether value for money is still achievable when all costs are included and an appropriate assessment of performance (benchmarks / actual pay-outs) is undertaken? ‘All costs’ refers to product, fund, adviser and ad-hoc charges, and any other costs pertaining to products. How easy is it for clients to discern the ‘what’ and ‘why’ around charges and their impacts?
- How do you examine whether the information needs of customers are being fulfilled? Customers should not only be engaged at the outset, but on a regular basis and at key trigger points during the life of the product
It’s not enough just to ensure controls are robust. The value of effective controls is only realised when firms commit to action when poor customer outcomes are found. The challenge firms have is establishing a set of thresholds, below which the performance of a product is classed as unsatisfactory – this not always easy in the subjective area of value for money, and is a challenge further exacerbated by the need to take a risk-based approach (i.e. the need to establish the level of risk inherent in each product and to react proportionately to manage it).
Define value and enhance outcomes
Firms are experiencing the challenge of ensuring their products are customer-centric, and this requires examination in many different areas.
When it comes to value for money, there are two key issues they need to contend with: inconsistent perceptions of value from client-to-client and the regulator seemingly asking firms to develop their controls to understand their customers’ priorities better, which may necessitate greater spend.
However, the principles behind the FCA’s focus on the fair treatment of customers are absolutely right given the trust gaps which still exist in some areas of financial services, and by ensuring firms consider and refine the outcomes they are providing, they are seeking to close these trust gaps. The firms that take this baton and run with it are likely to move ahead of those who don’t in terms of customer and brand advocacy and market share, which can clearly deliver commercial success.
When it comes to ensuring your firm is competitive and presenting compelling investment opportunities to clients on a consistent basis, value for money is key, and considering your definition of value – and reviewing whether it is being delivered on an ongoing basis – can help you deliver it.