Scott Newby shines some light on the new FCA Consumer Duty regime, covering what it is, what it means for financial services in the UK as well as the impact on customers.
Financial services is one of the most rapidly developing sectors in the global economy. With technology constantly advancing, the relationship between financial institutions and their customers has transformed beyond recognition in the last twenty years.
The rise of digital banking to the unbundling of financial products has necessitated a fundamental shift in the regulation and governance of the sector. Nowhere is this more clear than the introduction of Consumer Duty Law.
The Financial Conduct Authority’s (FCA) new rules, brought into effect at the end of July, seek to better protect consumers in this brave new world of modern finance.
At its core are the values of transparency, trust and ethical responsibility. Just over a month on from its introduction, let’s look at what it is and what it means for financial institutions and their customers.
Consumer Duty: An overview
Put simply, Consumer Duty is a regime that is aimed at changing the culture at regulated firms by putting customer needs first. The duty sets higher and clearer standards of consumer protection to ensure fair, ethical, and sustainable consumption in financial services.
This duty holds significance as it plays a pivotal role in shaping the future of the industry and how it treats its customers. Financial services firms need to act in good faith toward their customers, avoiding foreseeable harm and enabling them to pursue their financial objectives.
Consumer Duty is segmented into four quadrants: products and services; price and value; customer support and consumer understanding. By addressing each quadrant comprehensively, financial institutions can create a more customer-centric environment that prioritises the needs and expectations of consumers. Compliance to these areas should be viewed as an opportunity.
Practising Consumer Duty can lead to the development of a healthier marketplace, where both firms and consumers thrive in a mutually beneficial manner. Ultimately, Consumer Duty fosters a sense of accountability among firms, driving positive changes in the market and contributing to a more sustainable future.
Better access to customer support
The FCA’s latest Financial Lives survey found that an estimated 7.4 million people unsuccessfully attempted to contact one or more of their financial services providers in the 12 months before May 2022. Coming up against such challenges has resulted in less than half of UK adults having confidence in the UK financial services industry. Consumer Duty will ensure that going forward financial institutions will provide accessible multi-channel customer support solutions, so that people don’t have to wait an extended period of time to receive help.
In recent years, there has been a notable escalation of consumer protection and rights within financial services. Financial misconduct, increasing customer awareness, and the realisation that a customer-centric approach is not only ethical but essential to ensure firms have a sustainable future.
Financial institutions bear a significant responsibility to ensure the well-being and protection of their customers. As such, this duty signifies a departure from the traditional profit-centric approach, to one that places customers at the centre of financial service operations.
More than a box ticking exercise
One of the distinguishing features of this duty is its ongoing nature. It transcends isolated actions or superficial gestures and requires a continuous commitment to ethical and responsible practices.
It goes beyond a box-ticking exercise of one-off requirements, demanding that financial institutions instil the concept of monitoring and evidencing customer outcomes into their organisational structure and decision-making processes. The focus is on a continual process of assessing product performance and customer insight, through reviewing customer outcomes, listening to the voice of the customer and root cause analysis of complaints.
Initiatives to ensure good customer outcomes range from creating user-friendly interfaces for digital services to offering financial literacy programmes to enhance consumer understanding. For instance, Klarna recently announced a partnership with the Money Adviser Network to help consumers access free and impartial debt advice quickly.
Such initiatives not only showcase a commitment to Consumer Duty but also provide tangible benefits to customers to ensure they can make informed decisions.
Where Consumer Duty fits in the regulatory framework
Consumer Duty doesn’t exist in isolation; it is closely interlinked with the existing regulatory framework by the FCA. Principle 6 says: ‘A firm must pay due regard to the interests of its customers and treat them fairly’. While it aligns with the broader objectives of consumer protection, Consumer Duty enhances the requirements on financial institutions to be able to evidence they are acting in good faith toward their customers – avoiding any foreseeable harm and enabling them to meet their financial objectives.
However, this doesn’t come without its risks. A potential challenge that financial institutions may face is legacy systems and disparate data sets coming under increased scrutiny. This means these players need to adopt technology that allows firms to derive data-driven insight into how the consumer is using their products as well as whether it is meeting changing consumer needs and enabling access to services through an omnichannel set of journeys.
Effectively integrating Consumer Duty into operations requires a significant shift in mindset and practices. Nethertheless, embracing Consumer Duty can lead to a cascade of benefits, including enhanced reputation, stronger customer loyalty, and sustainable growth.
A catalyst for change
Consumer Duty is a landmark piece of regulation. In simple terms, it puts customers first, provides better access to support services and ensures financial services providers have a continuing responsibility to ensure good outcomes for the people they serve.
Rather than seeing the new rules as a cost of doing business, forward-thinking financial institutions will recognise it as an opportunity to provide better financial experiences and enduring customer relationships. To steal a quote: Who escapes a duty, avoids a gain.
----------------------------------------------------------------------This article was first published in Finance Digest, you can find it here: https://www.financedigest.com/consumer-duty-what-is-it-and-how-will-it-impact-financial-services.html