Fair value tests require evidence beyond product features
Consumer finance firms need evidence linking customer costs to benefits, the Financial Conduct Authority (FCA) says. Three years into the Consumer Duty, its reviews found gaps in customer segmentation, supporting evidence and understanding of charges.
Evidence must connect costs and benefits
The FCA identified three areas distinguishing stronger fair value assessments: evidence of outcomes, customer segmentation and customer understanding.
One credit card provider quantified cashback, foreign exchange savings and other benefits against fees and interest.
Weaker assessments relied on assumptions or left evidence scattered across documents without explaining their conclusions.
Stronger firms assessed groups by credit risk, usage, distribution channel and vulnerability, with some also testing annual percentage rate bands and risk-based pricing groups.
Treating the target market as homogeneous made unequal outcomes harder to detect.
The work covered consumer finance, credit fees, consumer hire and third-party ownership of home energy infrastructure.
A price customers can understand
One firm contacted customers incurring charges to test their understanding rather than relying on readable disclosures.
For home energy equipment hire, the FCA warned that pay-as-you-save promotions risked implying guaranteed savings or affordability.
Results depended on equipment performance, customer circumstances and future energy prices over agreements lasting up to 25 years.
Its full findings also cover total costs and benefits, competitor benchmarking and controls against foreseeable harm from fees and charges.
Show the working
The FCA asks firms to show how evidence supports their conclusions and what they would do if it did not.
Smaller firms can use existing complaints, arrears, customer feedback and usage data rather than always building complex models.
The regulator will continue supervisory monitoring and share its findings.
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