Consumer Duty finally came into full force this week, with the FCA publishing a
14-point plan to boost cash savings interest rates.
The aims of Consumer Duty are clear: a higher standard for customer protection across financial services. The FCA laid out that customers should expect:
- helpful and accessible customer support, so it's as easy to sort out a problem, switch or cancel a product, as it was to buy it in the first place;
- timely and clear information so consumers can make good financial decisions. This means important information shouldn’t be buried in lengthy terms and conditions;
- providers to offer products and services that are right for the consumer, rather than pushing unneeded products and services;
- products and services to provide fair value; and
- firms to consider a consumer is in a vulnerable situation.This could be due to poor health or financial troubles, for instance.
It seems that this regulation is sorely needed, as just last week the
FCA found that 7.4 million people unsuccessfully attempted to contact one or more of their financial services providers in the 12 months before May 2022. This figure shows that the banks have a long way to go in the putting the requirements of consumer
duty into practice.
Finextra looked to some organisations in the industry to understand their perspective on the new implementation.
Biggest shakeup in a decade
City A.M has dubbed Consumer Duty the most important regulatory change in a decade, and The
Guardian called it the biggest overhaul in 20 years. The changes are set to be significant, and this is something felt by those in the industry.
Chris Kneen, managing director of UK & Ireland at Provenir argued that "for financial institutions, it’s a complete mindset shift – they want to be seen as looking after their customers, not as loan predators. Reputational damage can be caused quickly, and
the impact of rumours and a bad reputation could easily tank their business."
Nick Mitchell, vice president and country manager UK&I at Celonis said: "Consumer Duty standard marks a fundamental change in how financial organisations work for their customers, and is the long-awaited catalyst for businesses to implement technological
change."
For Mitchell, he believes that moving forward, "technology has a crucial role to play in meeting the Consumer Duty regulations. Firms are required to demonstrate evidence on how they actively deliver good customer outcomes. Understanding every stage of the
customer journey will no longer be a luxury, but a mandate."
Suzanne Homewood, managing director, Moneyhub Decisioning mentioned that "for new and existing products and services feel like a major milestone - but it’s not just about today's singular date. We see the Duty as a vital part of the ‘lifecycle of customer
engagement’, where conscientious decisioning isn’t only used in a product’s application process, but as ongoing checks and support throughout the duration of the relationship with the customer."
She continued: "Whilst the new rules are a huge step forward in ensuring that organisations set higher and clearer standards of consumer protection, putting customer needs first is a process that inevitably began long before today - and one that should extend
indefinitely into the future."
Simon Healy, COO at Ashman Bank, reported on some of the steps that have already been made: “As an industry, we’ve recently invested significantly in improving products, pricing, and services, along with analytical diagnostics and reporting to comply with
the new Consumer Duty rules. This really is a significant regulatory change for the industry, and the FCA has recruited additional resources to embed it. […] On the whole banks appear to be prepared (despite some seeing it more as a tick box exercise), but
only time will tell what the true impact on consumers will be."
Healy also responded to critics who think that the "UK's regulatory-led approach to significant change can stifle pace and reduce incentives for creativity. It is often compared to the US's entrepreneurial, lighter touch method, which can see more immediate-term
progress, but with less standardisation and control it can act as a break over time. I am a strong advocate for the UK approach, although it remains to be seen if this delivers meaningful change and better outcomes. But, with a dedicated, passionate, customer-focused
team and a clear customer-led strategy, there will always be ways to stay ahead of the competition and really delight customers."
Despite all the planning which has gone into Consumer Duty, Mitchell has noted that some financial firms were not feeling prepared on the day of implementation. “While most finance firms have been doing all they can to ensure preparedness for Consumer Duty,
many have been held back by their current technological processes. Operational and regulatory teams have often found it difficult to monitor end-to-end customer journeys, struggling to connect disparate and siloed data. Setting up processes to collate multiple
data systems should now be a priority, as it allows companies to begin to piece together the many data points along a customer’s journey. By applying advanced technologies, such as process mining, businesses will achieve a holistic view of the processes that
serve their customers, shedding light on thousands of internal controls from end-to-end, helping to ensure they are audit ready."
Consumer Duty: customer benefits
The focus of this legislation is on the benefits and protections it can offer consumers. Many in the UK are struggling under the cost of living crisis, and the implementation of Consumer Duty offers to give them clarity in their banking decisions.
Neil Kadagathur, co-founder and CEO of Creditspring, commented: "Almost one in five households are reliant on their savings to pay
bills – but with rapidly dwindling savings pots, what happens when these run out? Millions of people will be forced to borrow to get by in the next six months and younger people are likely to be hardest hit - our research shows that three in ten 25-34 year
olds have no option but to rely on credit."
He continued: "If households are going to be more reliant on credit then lenders must become more transparent around fees, offering more affordable products to meet the rising demand. The FCA’s Consumer Duty is much-needed and will help to improve outcomes for borrowers but the industry will need to go above and beyond in order to step up its support for borrowers in this challenging period."
Jonathan Stallard, senior account executive at Backbase argued for the banks “it’s not just about providing a better product, consumers increasingly value a more transparent and conscientious banking. And although the new rules focus on fair treatment, banks should be thinking bigger and do things that their customers will really value and appreciate. For that, they need to stop thinking about providing products and start thinking about value.”
Stallard continued, “Banks can see how they can support customers with financial wellbeing, especially now we are in cost-of-living crisis. For instance, if people are using BNPL for groceries, that could be a problem that the bank should be mindful of and try to help with. Similarly, it’s important to give customers the access they need because touch points are often limited. Imagine needing to remortgage and the number to do so is only available 9-5. Banks need to think about a 24/7 client service model.”
Jonathan Barrett, CEO and co-founder at Comentis, raised the issue of vulnerability, which the FCA themselves have previously highlighted in what customers should expect: "Customer vulnerability is the thread that runs through all aspects of the Duty. Now
is the time for firms to sit up and make sure they are supporting their vulnerable clients. Any business which offers credit to pay for their goods and services is going to be affected. Therefore, whether a consumer is buying a car, a pair of glasses or a
sofa, if the consumer takes a credit agreement, the firm the consumer purchases from will need to understand if that customer is vulnerable under FCA definition. This poses a massive challenge for industries that have previously passed on such responsibility
to a credit provider. Consumer Duty now needs to be adopted across the whole distribution chain."
Healy argued that he is "hopeful that these changes will lead to a better deal for customers and eliminate unfair practices. Pricing is a crucial area where change is needed - many banks have relied upon customer inertia in switching accounts resulting in
paying derisory interest rates. I believe that products should be designed to work in harmony with customer needs and behaviours not against them and so consistently competitive interest rates should be a cornerstone."
Just the beginning
While the Consumer Duty came into effect on Monday, many commentators are seeing this as just the beginning of a long process for financial institutions.
Barrett commented that while the deadline was on Monday, this "should be seen as the firing of a starting pistol, marking the beginning of a broader conversation, and understanding on vulnerability. While some might have been looking forward to putting Consumer
Duty behind them this summer, the reality is that the topic of vulnerability is here to stay."
He continued that "Consumer Duty is really about continuous improvement, then once this deadline has passed the goal should be for firms to look at the measures they’ve put in place so far and ask how they can go a step further."
Craig Wilson, managing director of private sector at Sopra Steria, said: "While many financial service organisations may already be compliant, operators should continue to review and adapt the services they provide to ensure they are continuing to meet the
new requirements. Predicting how Consumer Duty will evolve in the coming months is difficult. However, we know the number of people experiencing financial difficulty will continue to rise, as will the number of customers needing support. Doing so will not
only allow organisations to plan ahead, but also remain compliant when the regulations inevitably change to further support those in need."
In response to the continuous task of Consumer Duty, commentators argued for the further embracing of the technology available to them.
Kneen argued that "to effectively implement this customer-centric approach, which envisions adjustments to the product offering at any given time in the customer journey, financial institutions will need to embrace advanced technologies such as artificial
intelligence and machine learning. These technologies will enable them to leverage large pools of data and anticipate when customers may be heading towards financial difficulty and step in with preventive measures."
Nick Delis, senior VP of international and strategic business, Five9 argued that: “New technologies such as artificial intelligence can help to meet these requirements - for example, helping banks use real-time data to identify the kind of interaction needed
with customers. They can prioritise high-emotion, high-stress contacts for customer service agents and route basic enquiries to intelligent virtual agents. During the interaction, agents can leverage data to give real-time insights to consumers, such as how their credit
is being used, while giving customers the empathy they deserve.
"Banks already hold a wealth of information on their customers and their own offerings, so feeding this data into customer service allows banks to react quickly and effectively, turning real-time data into real-time action."
Nikhil Lavanian, VP of risk and compliance at Bud Financial, added: "Data intelligence solutions, using first party or open banking customer data in combination with transaction AI, can help meet some of these obligations, and drive both compliance, and
valuable business outcomes. With the right technology, institutions can drastically improve consumers’ financial wellbeing and create good consumer outcomes."
Frode Berg, managing director for EMEA at Provenir, also said: "Lenders will need to invest in technology and processes that allow them to comply with the regulations at a product level and meet the new standards of support. The availability of credit may
be influenced by lenders' ability to adapt and comply with the Consumer Duty requirements, potentially leading to changes in the types of products and services offered in the lending sector."
David Morrey, financial services group partner, Grant Thornton UK, concluded that “ultimately, the FCA will measure the industry’s success in applying the Duty, not by the colour coding of its MI dashboards, but by the practical changes it sees firms taking
to improve products and services. This will place those businesses that have chosen simply to rebrand their current arrangements as Duty compliant at most risk.”
The implementation and reaction to Consumer Duty will continue to develop as the legislation continues to be fully realised. Consumer Duty does mark a milestone in banking legislation and customer protection in the UK.