What do the FCA’s rules on ‘fair value’ mean?

A few months ago the Financial Conduct Authority’s measures came into effect to make insurers demonstrate that they provide ‘fair value’ to customers. But what does this really mean and how will it affect you?

What is ‘fair value’ and what is the change?

In simple terms, ‘fair value’ the FCA’s way of saying that the price you pay for insurance should be proportionate to the service and quality of product that you receive in return. All sounds very sensible, right?

The measures mean that insurers must attest that they are explicitly examining all of the products they sell on a yearly basis to ensure that they still represent fair value to customers. Where they find this is not the case, they should make necessary changes or stop selling the product.

Is this a new idea?

Not at all – it was implemented in October 2021 but has been discussed for several years before that. For some companies, this review process has already occurred previously but often in a more implicit way. Unfortunately, the regulator found that many companies had insufficient focus on the customer and their outcomes when evaluating their products which could lead to potential harm to customers.

The other difference this time round is that there needs to be an explicit process to evaluate and demonstrate the value of a product and it must be redone every year.

Why is this necessary?

Beyond the general issue that insurers have been shown to prioritise profits over the value to customers, there have been specific scandals where harm has occurred. One example is the CPP mis-selling of card protection and identity theft policies, who were fined £10.5m by the regulator in 2012. In this instance, the product was cheap, the service was good, and it was sold to over 7 million people; but importantly, very few customers ever managed to successfully claim on the product. As such, the main reason for the fine was that the product represented no value and it was deemed that those selling it should have realized this.

What does it mean for me?

In all likelihood, you won’t notice any direct changes from this. However, what should happen is that because providers have to demonstrate this extra level of diligence when creating new products and continuing to sell old ones, you will have some reassurance that products are being priced fairly and that there is more scrutiny being applied to make sure policies work as you would expect.

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