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Unpacking Consumer Duty:
what is fair value?

Published: 24/02/2023

As we fast approach the implementation of Consumer Duty on 31 July, Steve Allibone, Group Compliance Director for Vitality, explores one of its core underlying outcomes – ‘price and value’ – and considers what the industry can do to ensure it is being delivered in the right way.

Building on the existing Financial Conduct Authority (FCA) Consumer Principles and adding a 12th overarching principle of delivering ‘good’ client outcomes, Consumer Duty is intended to drive improvements in financial products and services for consumers.

At a time when budgets are stretched and consumers are rightly paying close attention to how and where they spend their money, the ‘price and value’ outcome within Consumer Duty is especially significant for our industry.

“It is our belief that insurance products should deliver clients immediate value from day one, not just at the point of claim”

- Steve Allibone, Group Compliance Director for Vitality

As an insurer, we take a shared-value approach to insurance, while elsewhere across the market we see varying interpretations of what delivering ­value looks like for consumers, through what are often known as ‘added-value’ benefits.

More than ever recently there has been a spotlight on value given the ongoing cost-of-living crisis. But what though does the regulator mean by ‘price and value’? How does this impact advice? How do insurance products deliver value? These are no doubt some of the questions advisers are asking themselves in the run up to the Consumer Duty deadline. We certainly are as an insurer.

A less transactional approach to advice

A good place to start is the FCA definition. The regulator defines value as the price the client pays for the product or service being reasonable, relative to the overall benefits they receive. The outcome is that products and services deliver fair value to consumers.

Fair value will mean different things to different clients and doesn’t just mean the lowest premium or how many extra benefits a product offers.

Determining what we might consider as fair value for a client requires an understanding of their individual needs and how an insurance recommendation delivers on those needs. The client therefore needs to be treated as more than just a sales transaction.

I see this as being a big part of fulfilling the Consumer Duty requirements. It’s about adopting a more holistic advice process. Treating the client as an individual and moving away from a one-size-fits all approach.

Client needs are not static either. Their circumstances change over time, so too might what they deem valuable from a product or service.

Under the new Consumer Duty rules, it’s less likely to be enough to just set up a policy and forget about that client. Maintaining regular contact, to ensure the continued suitability of any insurance products they have in place, is going to become increasingly important.

Alongside a more thorough, holistic approach to advice, meaningful post-sale contact is a key area where the industry can and must demonstrate compliance with Consumer Duty.

Product design is key

Of course, delivering fair value to clients is more than just the advice process. As a product provider, we have a responsibility to ensure our products and services also deliver fair value to clients.

On the one hand this is about having the right governance structures in place. For example, at Vitality, our product governance committees scrutinise the suitability of products and ensure we’re continuing to offer fair value to clients.

We saw the effectiveness of these processes in action during the Covid pandemic, where circumstances dictated that we needed to quickly make changes to some of the Vitality Programme rewards and partners, following the lockdown restrictions that were imposed.

More broadly, though, to deliver the best value outcomes for clients the fundamental nature of insurance needs to change. The more traditional, transactional approach – where the client pays a premium and see little value beyond the promise of a pay-out if they claim – will carefully need to be re-evaluated in a post-Consumer Duty world as products continue to evolve.

In order to meet the needs of customers, insurance products can – and should – remain relevant by responding to wider trends and developments happening in the world, while offering enough flexibility to move as their life changes. It is through this that we can unlock real value for consumers and ultimately deliver better outcomes overall.

Take private medical insurance (PMI), for instance. The growing challenges of preventable illnesses placing excessive strain on healthcare systems means that health insurance is well positioned to place as much emphasis on the prevention of illness as the treatment of illness. This is what underpins our Prevention 2.0 concept, which is broadening the scope of PMI, whilst arguably delivering the ultimate value to clients: a longer, healthier life.

This need to deliver real value and to remain relevant to clients is also reflected in our recent Life Launch and many of the changes we unveiled.

Our view is that products should help drive regular engagement from our members in a way that ensures they get value from day one and on an ongoing basis thereafter. This can support advisers in maintaining better long-term relationships with clients, whilst also helping with retention. Our own experience highlights that more engaged clients are less likely to canceland therefore loss out on valuable cover that they might at some point need.

As we innovate as a sector, advisers will also need to ensure they keep themselves up to date on new products and product changes. Delivering value to clients clearly requires a level of product expertise, which is why we provide extensive resources, such as our Vitality Academy, to help advisers fully understand the products and propositions.

Evidencing fair value

As well as this, to ensure we’re meeting the Consumer Duty regulations, all of us in the industry will need to adequately evidence that we’re delivering fair value to clients. 

The whole point of Consumer Duty is putting the client at the heart of your business and whilst most firms would probably state they are already doing that, they will need to consider whether evidence bears that out.

Aside from the obvious things like having rigorous compliance processes in place, or the gathering of comprehensive management information (MI) to monitor performance (such as lapse rates), the culture of an organisation is also key.

We can’t hide from the fact that advice is to some extent the sale of a product or service to the client, however an excessively sales-focused culture may be detrimental to ensuring those clients are receiving fair value.

Adviser performance reviews and internal meetings for example shouldn’t just focus on sales targets and revenue generated through commission or fees. These offer a good opportunity to discuss and scrutinise the value of products and services, alongside whether the needs of their clients are still being met.

Product providers can indeed play an important supporting role here, particularly in the surfacing of data to assess distribution quality. At Vitality, for example, through our approach to Distribution Quality Measurement (DQM), we work closely with our adviser partners to deliver data and insights that allow advisers to grow business in a bid to improve client outcomes.

This might include ensuring cover stays in place, encouraging clients to engage so they stand a better change of staying healthy, as well as supporting the process from the outset to make sure claims can be paid at the moment of truth. This in turn helps to build trust and drives up the overall standards in our industry. Ultimately so that everyone wins.

Working towards better client outcomes is good for everybody – and this includes you and your business.
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1 Vitality Claims & Benefits Report 2022