Everything Counts

“Everything counts in large amounts”. So sang synth pop band Depeche Mode in their 1983 hit – a thinly veiled critique of corporate greed. In the age of an outcomes-focused regulator, however, does everything still count, in what amounts, and does it all add up to ‘fair value’? 

Does anybody really know yet what fair value is?

Back in 2014 the FCA published their first ever market study, which looked at GI add-on products. This was probably the first time that the GI industry had been confronted with the FCA’s impression of ‘value’. Fast forward to July 2023, and we see the implementation of the Consumer Duty, with “price and value” being one of the outcomes that firms need to demonstrate. 

Given that value has long been a theme occupying the regulator’s thoughts, nonetheless, earlier this year, they still issued a scathing report and a simultaneous Dear CEO Letter, which delivered the verdict that “the information and evidence provided to us by most firms was not sufficient to consistently demonstrate that the products reviewed were offering fair value to customers”.  

So, I think it’s fair to say that the industry as a whole is still grappling with the concept of fair value. This was underscored earlier in August, when the regulator published its latest finding that “many (insurers and brokers) still cannot show how they are providing fair value to customers”. 

You can read the full report, here.

What is ‘value’ ? How do you ‘measure’ it? How do you decide what is or isn’t fair value? And can we predict the way things may develop by looking at the regulator’s past approach from the rear-view mirror?

From that initial mention of value 10 years ago, the FCA has now published CP 24/16, which may be the first substantial insight into what value means to the regulator. CP 24/16 outlines a Value for Money framework for pensions. Several chapters of this CP bear no direct relevance to the GI market, areas such as Investment Performance and Asset Allocation disclosures can be skipped over. In chapters such as Costs and Charges and Quality of Service, however, you can see how some of these factors could easily be relevant to a GI product.

Whilst the FCA acknowledge “the measurement of service quality is very challenging due to the multiple factors involved”, it nonetheless sets out the criteria by which service can be measured in a regulated context. In CP24/16, the regulator has proposed a core set of customer metrics. Broadly speaking, the regulator thinks that regularly reviewing customer data is an indicator of service as a key metric – more than annually, annually or less than annually. 

Clearly this is very important in a pension context, but it could equally be applied to GI products and their annual renewal cycle. Reviewing customer data at least annually will ensure that the products they have purchased remain suitable for their circumstances, which will clearly change over time and should, in theory, reduce the risk that customers continue to pay for products that aren’t appropriate.

The next metric is Quality of Service; defined as the promptness and accuracy of transactions. As customers we can all understand why this is important. The metrics proposed for pensions are not entirely appropriate for GI, but it does beg the question of what metrics could we use to measure this? Certainly, the claims resolution time would be a good indicator, but I do wonder what else could be captured here?

The next metric is Customer Satisfaction. Whilst much makes sense, there is one proposal that may prove to be a little more controversial. Negative indicators of service largely revolve around complaints, which makes perfect sense. 

The positive indicators of satisfaction, however, involves a proposal for firms to issue a standardised customer satisfaction survey; this risks turning something that is often a useful information-gathering exercise for firms into another regulatory process, which may come with costs attached depending on the capability of the firms expected to do these surveys. Alongside carrying out the surveys, firms would also have to report the number of surveys issued and the percentage of replies received.   

Finally, we see the rather broad topic of customers being supported to make plans and decisions to achieve their financial objectives. Surprisingly, but also sensibly, given the world we live in, one of the metrics proposed is the level of use of apps and online portals by customers. If these proposals are adopted, it would be interesting to see what sort of numbers are reported by the industry. The metrics cover registration and use of online portals, as well as contact by more traditional methods such as telephone and email. 

The FCA has also stated that firms should compare their offering with a minimum of 3 other offerings by different firms. There are some requirements about how these comparators are selected and some of these won’t be directly relevant to the GI market. But it certainly feels like a clear signal of the FCA’s intent to ensure firms choose appropriate comparators. 

The assessment of how these metrics indicate that a product is offering fair value is largely being left up to firms, but the regulator has proposed a traditional Red, Amber, Green (RAG) rating methodology. Where a product is rated Green, it has been assessed as providing fair value. Where a product is rated as Red it means it cannot or will not be able to offer value for money, with the requirement that the product should be closed to new business. An Amber rating means that the product does not currently offer fair value, but it is capable of doing so in a short(ish) period of time, perhaps as a result of some adjustment to the product. This assessment feeds into the FCA’s stated disappointment that not enough products have been removed from the market in the slipstream of the Consumer Duty.

This paper is aimed at product providers, so it doesn’t address issues such as how to prove the value of advice. It does, however, provide insight into how the regulator expects firms to assess the value of their services. For advice firms, some of these measures may also be useful in trying to hold product providers to account. 

CP24/16 is a consultation paper, and as such it may change before the requirements turn into mandatory rules. My experience suggests that any changes will be superficial, however, and then we will just be waiting until these requirements ‘trickle down’ to the GI market.

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