A year after the final rules and guidelines were published, the Financial Conduct Authority‘s (FCA) Consumer Duty is now in effect.
The purpose of the new Consumer Duty is to ensure a better standard for consumer protection. Earlier this year, the FCA described Consumer Duty as a “cornerstone” to its three-year plan of improving standards across the UK. As a result of the new regulation, organisations must ensure their prices are fair, accurate and representative of value. In doing so, they will avoid foreseeable harm to their consumers, all the while improving their company culture and values.
Over the past year, a variety of organisations have announced how they are preparing for Consumer Duty. Though there have been concerns along the way, as highlighted by Moneyhub, we have also seen how organisations have successfully prepared for the deadline. Most recently, we saw Klarna, the BNPL provider, announce its partnership with the Money Adviser Network, allowing its customers access to free and impartial debt advice quickly.
Strong regulation is needed in the UK
We have steadily seen more and more organisations adjust to the looming regulation over the past year and a half. Now that it is here, the majority of banks are prepared for it, rather than being blindsided by an unexpected change.
Expanding on this, Simon Healy, COO at Ashman Bank, the challenger bank, said: “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. With the rules coming into effect today, 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 goes on to defend the FCA’s approach to regulating the UK market against the naysayers who favour a less standardised approach.
“Some critics argue 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.”
Fintech goes hand in hand with Consumer Duty
Nick Mitchell, vice president and country manager UK&I at Celonis, the data processing organisation, points out how the implementation of new technologies has helped many organisations ensure they are able to comply with Consumer Duty regulations.
“Coming into force today, the FCA’s Consumer Duty standard marks a fundamental change in how financial organisations work for their customers. It is the long-awaited catalyst for businesses to implement technological change. This is because 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.
“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.”
Looking after the financially vulnerable
Though it is true some banks are only seeing Consumer Duty as a tick box, as pointed out by Healy, some financial institutions are realising the impact abiding by the regulations will have on consumers. According to the FCA’s Financial Lives survey, 27.3 million people in the UK are classed as financially vulnerable, but through Consumer Duty, they will be better protected. Not only does this benefit the consumer, but it helps merchants in the long term too.
Andrew Gething, managing director of MorganAsh, the tele-healthcare provider, builds upon this saying: “After much preparation and much talk, it’s fantastic to see Consumer Duty finally come into force. There’s no question it will be a transformative piece of regulation, helping level-up all areas of the industry to eliminate foreseeable harm and ensure good outcomes for customers – especially for those with vulnerable characteristics.
“The FCA’s latest Financial Lives survey has demonstrated just how important this regulation is with 52 per cent of UK adults (27.3m people) classed as financially vulnerable. Without a consistent approach to identify, monitor and evidence vulnerability, it will be impossible for firms to ensure they are delivering good outcomes or meeting the new rules.
“Complacency has long been a challenge for Consumer Duty, with firms believing they already meet its requirements. In reality, the new rules expand the scope of vulnerabilities firms must now consider and the actions they must take. It also expands the monitoring requirement considerably to cover the lifetime of the product.”
Protecting consumers during the cost of living crisis and rising inflation
The introduction of Consumer Duty comes at a crucial time, according to Chris Kneen, managing director of UK & Ireland at Provenir. Especially as the nation grapples with a living crisis and rising inflation. He says: “Data shows that consumer lending, excluding student loans, reached over £28billion in January 2023, surpassing the previous peak in January 2020 before the Covid pandemic.
“However, financial firms have become more cautious about lending money, tightening credit standards and moving away from speculative deals, making it harder for consumers, and SMEs, to access the financial support they require.*
“Consumer Duty is a proactive response by the government to the challenges faced by consumers and ensures that financial institutions adopt a consumer-centric approach to credit. For consumers, the new regulatory framework will bring about a range of positive changes. It will enhance affordability, address revolving line of credit issues, and prompt adjustments to product offerings throughout the customer journey.
“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.
“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.”