The FCA has warned that some consumer finance firms are falling short when it comes to evidence supporting their conclusions of fair value.
The regulator said that “fair value is a simple yet important principle at the heart of the Consumer Duty.”
Fair value is the principle that says the price customers pay should be reasonable, relative to the benefits they get. But applying that principle in practice requires judgement, the FCA said, adding that some firms need to strengthen their evidence.
Alison Walters, director of consumer finance at the FCA reported that the regulator has recently reviewed how firms across the consumer finance market assess, evidence and monitor fair value.
Ms Walters said: “Many firms are getting it right, building fair value into how they design, price and monitor their products.
“Others are missing things that, in hindsight, could have been avoidable. Where firms fell short, a recurring issue was the evidence supporting their conclusions.”
She said stronger fair value assessments showed a clear, evidenced relationship between what customers paid and the benefits they could reasonably expect to receive. Weaker assessments tended to rely on assumptions rather than actual customer data.
She said some firms treated their whole target market as a single, homogeneous group when testing fair value. Ms Walters said: “This made it difficult to spot if some customers were quietly paying more, or getting less, than others, which is exactly the kind of thing a fair value assessment is supposed to identify.”
She said consumer finance firms must challenge their approach to assessing and monitoring fair value, adding that a common feature of stronger approaches was that firms supported their conclusions with evidence rather than relying on assumptions.
Ms Walters said: “The good news is that this doesn’t need to always require complex modelling or new data. Smaller firms may be able to draw on information they already hold, including complaints, arrears, customer feedback and product usage.”
She added that the regulator expects firms to read the FCA’s full findings.