The implementation of the Consumer Duty is fast approaching, with its enforcement scheduled for all open (currently active) products on the 31st of July 2023. One of the key requirements under this new Duty is for firms to undertake fair value assessments. However, many firms are currently struggling to understand how to calculate the “fair value assessment” in their product evaluations.
The aim of fair value assessments is to ensure that the price consumers pay for a product or service aligns with the overall benefits they can reasonably expect to receive. To provide guidance in this regard, the Duty refers to COLL 6, which outlines the frequency and considerations for authorised fund managers and Alternative Investment Fund Managers (AIFMs) (typically, the manufacturers of the product) when conducting value assessments. While these rules specifically mention authorised fund managers, firms can apply them as best practice guidelines for any product assessments they are required to undertake.
According to COLL 6.6.20R(1), firms and their appointed representatives must conduct an assessment at least once a year for each scheme they manage, including collective investment schemes, investment trusts, and investment trust saving schemes. In these assessments, firms are required to consider the matters outlined in COLL 6.6.21R:
- Quality of Service
Firms must outline the range and quality of services provided to unitholders. This encompasses the level of service, support, and benefits offered. - Performance
Firms should detail the product’s performance, taking into account the product’s (scheme’s) investment objectives, policy, and strategy. Performance assessment should consider an appropriate timescale and deduct all charges as set out in the prospectus. - AFM Costs – General
In relation to each charge, firms must disclose the cost of providing the associated service. When payments are made to associates or external parties, the cost refers to the amount paid to those entities. - Economies of Scale
Firms need to determine whether the manager of a scheme can achieve savings and benefits through economies of scale. This consideration encompasses direct and indirect costs related to managing the scheme property and takes into account the value of the scheme property and its growth or contraction resulting from unit sales and redemptions. - Comparable Market Rates
For each service, firms must identify the market rate for comparable services provided by the scheme manager or by a person acting on behalf of the manager when delegation of management or manufacturing occurs. - Comparable Services
Firms should disclose the charges imposed by the manufacturer/manager and its associates for comparable services provided to clients, including institutional mandates of a similar size and with similar investment objectives and policies. - Classes of Units
Firms need to determine whether it is appropriate for unitholders to hold units in classes subject to higher charges compared to other classes of the same scheme with substantially similar rights.
Understanding and implementing these considerations will play a crucial role in conducting fair value assessments and complying with the new Duty. However, it is worth noting that calculating fair value for liquid products poses certain difficulties. Firms must navigate the challenges of accurately assessing the value of products that may vary in price and demand.
As the 31st of July approaches, firms must prioritise familiarising themselves with these guidelines and ensuring their product assessments align with the principles of fair value. By doing so, firms can establish a transparent and trustworthy relationship with their consumers, contributing to a fair and balanced marketplace.
We hope this article has shed light on the upcoming changes and provided you with a deeper understanding of fair value assessments.
