Two months on from the final guidance on Consumer Duty, it dominates industry debate as firms work through completing their implementation plan ready for the October deadline. Having spent the last few years working with the industry on vulnerable customers, Consumer Duty draws many parallels. A regulatory imperative to deliver good outcomes, this time to everyone, rather than a specific cohort, but against a backdrop of complexity to articulate what it means at an organisation-wide level in both practical and behavioural/cultural terms.
The Consumer Duty brings in a new principle and cross-cutting rules, but I want to focus on the foundation of the Duty – the four outcomes. These four areas of focus – products and services, price and value, consumer understanding and consumer support – are not in fact outcomes. The outcomes are actually defined in the policy statement. Consumers must receive fair prices and quality, suitable products and services, good treatment and have good confidence and their needs met.
I have thoughts around all four Consumer Duty outcomes but none more so than price and value. The price and value outcome is asking the industry to make an objective judgement about something that is subjective. In fairness to the Financial Conduct Authority, the final guidance paper seeks to help and offer advice on objectively assessing value. Firms can look at their cost base, costs and charges for comparable products and services, and take some confidence if they are delivering the other three outcomes. Overarchingly, firms must convince themselves that there is a reasonable relationship between the total cost and the benefits.
Most fair-minded folk would consider that a perfectly acceptable request, as do I in some form; but as someone who supports free market economics, I feel equally uneasy about it. Take the example of Apple. Through the wave of innovation under Steve Jobs and subsequent management of Tim Cook, Apple have amassed $200bn+ in cash reserves. They achieved it through selling products that consumers value and have been rewarded by being able to set a price premium. Many more cost-effective smartphones do what the iPhone does, but if consumers see value because of brand, or perception of meaningful differentiation, why are we imposing a higher standard in financial services?
After all, we see this daily in other industries as consumers exercise their preferences that, from the outside, appear irrational. The supermarket industry and the car industry are useful examples. Many frequent budget supermarkets, while others gravitate to high-end brands, or farm shops. Food is food, right? Just as a bank, platform or investment is a bank, platform or investment? Many buy second hand hatchbacks every decade, while others buy a new Aston Martin every three years. Fundamentally in a utilitarian sense, they do the same thing. I am being somewhat confrontational, as the regulator clearly acknowledges that whilst things can superficially look the same, they carry nuances that feed into price.
Then you get to ‘price and value’. I am surprised the regulator has settled upon this term as, academically speaking, it is accepted that value is derived from consumer judgement on the trade-off between price and quality. Does an Aston Martin provide fair value? To some it does because they view the price, performance, and (perceptual) value to be in sync.
The issue for financial services relates back to the Consumer Understanding outcome. Financial education and capability are so limited, the regulator believes the average consumer is not aware of a Timex, so they continue paying for a Rolex when they are more firmly in Timex’s target market.
How do you make the subjective, objective? With great difficultly. The adjudications by the Financial Ombudsman Service may be required to give us clarity on how the principle of price and value will be interpreted. For me, if you create something that people want, why should there be impediment to selling based on supply, demand and a price level driven by market forces. Undeniably, the regulatory imperatives to make charges transparent and rid the industry of hidden and complex charging structures is crucial. Consumers must be able to look at the total price in the windscreen and conclude if, for them, it represents good value.
