Customers must only be charged a reasonable cost for financial services that offer fair value, as part of the Financial Conduct Authority’s (FCA) Consumer Duty.
Low prices don’t always mean a good deal – a product that has no obvious benefit is poor value whatever the cost, the regulator said.
High exit charges are banned under the rules, as they are unlikely to be fair value, the FCA said.
Costs must be transparent and easy for consumers to compare and understand. And non-financial costs, such as time and effort taken to switch, are included in the guidance.
Prices are defined as the expected total cost customers will pay, including all applicable fees and charges over the lifetime of the relationship. In terms of mortgages, this will mean considering the reversion rate on offer, the regulator said.
In a guidebook on the Duty, the FCA outlined how firms should go about setting prices and assessing value.
The onus will be on firms to consider if their products or services are significantly higher than the market rate. If so, they must question whether their offering is fair value for money.
As an example, the FCA said “firms imposing a very high charge for customers with high credit risk must be able to satisfy themselves that the price paid is reasonable compared to the benefits the customer receives”.
And, ultimately, firms “should consider whether high prices to mitigate losses from high rates of default enables lending which exposes consumers to a high risk of harm”.
Under the Duty, mortgage brokers should have a summary of the benefits of the product to the target market, with information on overall prices or fees and confirmation from the provider that “benefits are proportionate to the total costs”.
Advisers must also ensure their own fees and charges “are fair value and that payment of these does not result in the product or service ceasing to be fair value overall”.
The regulator also said it had seen firms selling customer data but that these companies were unable to explain how this is fair value to the customer.
As part of the Duty, firms must now carry out value assessments at the design stage and should be asking:
- Are there elements of the pricing structure that could lead to foreseeable harm?
- Are there fees or charges or rates which appear unjustifiably or unreasonably high compared to the benefits of the product and other comparable products (either in the firm’s product portfolio or comparable products supplied by other firms)?
- Should/have any changes in the benefits of the product been reflected in the price?
- Should/have any material changes to assumptions that underpinned pricing (for example on costs of servicing) been reflected in changes to the price?
Firms must also consider whether there are cheaper comparable services or products in their portfolio.
The FCA said: “The quality of the product or service, level of consumer service, potential pay-out or return, how well it meets consumers’ needs, or other features that consumers find valuable, all determine the benefit against which the price of the product should be assessed.”
The value of products and services must be continuously monitored and if an offering becomes poor value for the customer, action needs to be taken to remedy the case.
Firms have 12 months to implement the rules.
