Consumer Duty and Value Assessment: What Consumer Credit Firms Must Demonstrate

Consumer credit firms face particularly intensive FCA scrutiny under the Consumer Duty, and fair value assessment is the area where the regulator's expectations are highest. The FCA has identified consumer credit as a priority sector for Consumer Duty enforcement, reflecting the potential for significant consumer harm where credit products are poorly designed, unfairly priced or inadequately disclosed. This article provides practical guidance for consumer credit firms on conducting fair value assessments that meet the FCA's standards.

Why Fair Value Matters for Consumer Credit

Credit products carry an inherent risk of consumer harm. Borrowers commit to future payment obligations based on their understanding of the total cost, and unexpected fees, complex interest structures or inadequate affordability assessments can cause significant financial distress. The Consumer Duty's fair value requirement demands that the total price paid — including all interest, fees, charges and any additional costs — is reasonable relative to the nature of the product, the benefits it provides and the characteristics of the target market.

Fair Value Assessment Methodology

A robust fair value assessment for consumer credit products should address:

Total cost of credit analysis. Calculate the total cost to the borrower including all interest, arrangement fees, administration charges, early repayment charges and any other costs. Compare this to the APR and benchmark against comparable products in the market.

Benefit analysis. Identify the specific benefits the product delivers — convenience, speed of access, flexibility of repayment, additional features (insurance, reward programmes). Assess whether these benefits justify the total cost.

Segmented analysis. The FCA expects fair value to be assessed by customer segment. A credit product may deliver fair value for customers who repay on time but poor value for customers who regularly incur late payment fees or who carry balances at high interest rates. Firms must consider the outcomes for different customer segments and assess whether the product delivers fair value for each.

Distribution cost analysis. Where credit products are distributed through brokers, the FCA expects firms to assess whether broker commissions and distribution costs are reflected in the product pricing and whether they affect fair value for the end customer. The motor finance commission disclosure issues have heightened FCA attention in this area.

Ongoing monitoring. Fair value is not a static assessment. Firms must implement ongoing monitoring — tracking customer outcomes, analysing complaint data, reviewing pricing in response to market changes and conducting formal reassessments at least annually.

Common Compliance Failures

The FCA has identified several recurring fair value failures in consumer credit:

1. Benchmark-only assessment. Firms that simply compare their pricing to competitors without conducting an independent analysis of whether the total cost is proportionate to benefits.
2. Ignoring vulnerable borrowers. Assessments that do not consider the outcomes for vulnerable customers who may be disproportionately affected by fees and charges.
3. Static assessments. One-time assessments with no ongoing monitoring or review process.
4. Inadequate documentation. Assessments with insufficient documentation of methodology, data sources, analysis and conclusions.
5. Ignoring distribution costs. Failing to assess whether broker commissions and distribution costs affect fair value for end customers.

FCA Enforcement Focus

The FCA has signalled that consumer credit is a priority sector for Consumer Duty enforcement. Recent supervisory communications have highlighted concerns about high-cost short-term credit, buy-now-pay-later products, motor finance and credit broking. Firms operating in these areas should expect heightened supervisory attention and should ensure their fair value assessments are comprehensive, evidence-based and regularly reviewed.

What Firms Should Do Now

1. Conduct a comprehensive fair value assessment for each consumer credit product, using the methodology outlined above.
2. Ensure assessments are segmented by customer type and consider outcomes for vulnerable borrowers.
3. Implement an ongoing monitoring framework with at least annual formal review.
4. Document your methodology, data sources, analysis and conclusions in detail.
5. Review distribution arrangements and assess whether broker commissions affect fair value.

Regulatory Counsel advises consumer credit firms on Consumer Duty compliance, fair value assessments and FCA supervisory preparation. Contact us for a free initial consultation.