The expectation setting in the ‘Dear CEO’ letter emerged from an earlier FCA survey of firms’ practices. Another example of this method is currently underway: the FCA has requested that selected financial advisory firms provide information on how they will deliver their ongoing services in compliance with the consumer duty.
It is too early to preempt the results of this survey, and the FCA states that it wishes to consider whether further regulatory work is merited. However, the FCA’s concern is that some customers might be paying a recurring fee for ongoing advice but not receiving full ongoing services from their adviser.
It is conceivable that formal processes need to be put in place to refund charges where consumers fail to take up their entitlement to ongoing service moving forward, and in addition remediate consumers retrospectively where these services have not been provided in the past.
What is clear from these examples is that the FCA is willing to take strong action to force change in pricing practices across the market.
Soft, principles-based, or to use newer terminology 'outcomes-based', regulation still results in clear lines being drawn around regulatory expectations. These expectations no longer appear as prescriptive rules in the handbook subject to consultation.
Now, one might say, there appears a blurring between policy and supervision functions, with statements or clarifications delivered bilaterally or to the market via letters and supervisory statements.
The pendulum may have swung away from prescriptive rule-making following the financial crisis back to principles-based regulation but these are the principles 'with teeth' that the FCA promised.
The approach to price and value is unsurprising on one level looking at the wider macroeconomic picture.
The FCA has publicly stated its intention to ease the cost of living, particularly for the individuals most effected. While inflation eases, to the extent that growth and wages stagnate, and economic inequality persists, the FCA’s action is likely to continue too.
Arguably a second and related policy driver is an aim to drive down prices. Indeed, price clustering was one of the FCA’s primary concerns in its 2016 Asset Management Review, and it cites ongoing evidence that firms are pricing to the market, rather than to the inherent value of a product or service.
How might firms adapt to the new normal?
Robust data and MI are required, showing that multiple factors govern the firm’s pricing methodology. Firms should be ready to show the FCA their granular MI on pricing and explain how this data feeds into sophisticated conversations on pricing at senior level.
