From compliance to culture: fair value assessments

The FCA has consistently highlighted in its publications that fair value assessments are closely interconnected with the other Consumer Duty outcomes. If firms are not delivering good outcomes in areas such as consumer understanding, product suitability, or customer support, it is unlikely that their fair value assessment will be considered appropriate.

For example, organisations must segment their customer base where relevant to ensure that customer needs are properly understood and reflected in the value delivered. This means linking the benefits customers receive, such as service quality or product features, with the costs they incur, including fees, charges, or interest rates. Without this alignment, firms risk overlooking disparities that could undermine their fair value proposition.

Another consideration is whether customers are receiving the level of support implied by the benefits factored into the fair value assessment. Recent regulatory findings suggest that some firms have failed to adequately evaluate the level of support given to customer conditions, leading to outcomes that fall short of expectations under the Duty.

Identifying the right products, services and peer firms for comparison is essential to conducting a robust fair value assessment. Equally important is documenting the rationale behind these selections and securing appropriate internal approval. This process should align with the methodologies already used to evaluate product or service performance against competitors.

However, it’s critical to recognise that an analysis deemed satisfactory from a business performance perspective may not automatically translate into good customer outcomes. Firms must go beyond commercial metrics and assess whether customers are genuinely receiving fair value, balancing the benefits delivered with the costs incurred.

For smaller firms it may not be practical to conduct a complete cross-market benchmarking exercise, especially when pricing data for alternative products is limited or unavailable. In such cases, firms should apply informed judgment to benchmark against a relevant sample of products, ensuring the selection includes a range of different value propositions. This approach helps maintain the integrity of the fair value assessment while recognising the operational constraints smaller firms may face.

The costs incurred by a firm to deliver a product or service can provide useful context on value. While it may be appropriate to include relevant costs in the evaluation, firms must ensure these are directly attributable to the product in question and not simply general business overheads. This requires a thoughtful approach to cost allocation, distinguishing between core delivery expenses and broader operational costs.

For example, distribution costs may be included, but firms must assess whether these are reasonable and proportionate. Excessive or poorly justified charges can undermine the credibility of the fair value assessment. The Supreme Court’s ruling in the Motor Finance case has reinforced the importance of scrutinising fee structures, highlighting that the size and appropriateness of charges must be carefully considered to ensure they reflect genuine value for the customer.

While there is no regulatory requirement for firms to include cost analysis in fair value assessments, the FCA has noted that where costs are used to justify pricing, the rationale must be clearly articulated. Understanding the margins a product earns can be useful context for Boards when making decisions about value.

Complete, appropriate and accurate data are essential to the fair value analysis. Many firms have struggled with this area, particularly due to the availability of benchmarking data. Multiple systems and teams may be responsible for maintaining the data used in the assessment. It is therefore essential to identify all data providers, document the measures taken to ensure data completeness and accuracy, and specify relevant cut off dates. This will ensure that there is an appropriate process to consolidate the data before the assessment takes place.

Another critical area is the process used to carry out fair value assessments. Many organisations are still refining their approach and experience suggests that these processes can be more effectively documented, particularly in relation to the frequency of assessments, the triggers for initiating a new review, the designated owners, and the governance arrangements surrounding sign-off and oversight.

Clear documentation not only supports internal consistency and accountability but also provides the FCA with evidence that fair value is being assessed systematically and proportionately. Firms should ensure that their processes are embedded within their broader product governance framework and are responsive to changes in customer needs, market conditions, and regulatory expectations.