Putting consumer duty into practice

Putting consumer duty into practice

Tokens. Cryptocurrencies. Digital wallets. Reverse mortgages. As words, these terms sound simple enough. However, as financial services, they can be baffling to the average consumer. Moreover, everything appears to be a “limited-time offer” which forces consumers to hastily make decisions about things they don’t fully understand.

In fact, as recently reported by Experian , one of the leaders in consumer credit services, the level of misunderstanding is shockingly high. Specifically, 80% of consumers in the United Kingdom (UK) do not understand their financials as presented in their bank’s financial management software. And 70% of those buyers want guidance when they are purchasing financial products and services online. Whoa!

Those numbers represent just about every banking customer. No wonder the Financial Conduct Authority (FCA) made it its mission to gather information and then enact the new Consumer Duty guidelines . The authorities cited how the increased pressure on consumers with respect to inflation, a looming recession, the growing complexity of financial products, and other factors were making it more challenging for consumers to make a timely, informed decision. Without added consumer protection, consumers remain at risk of making financial decisions that have the potential for disastrous consequences like personal bankruptcy. And nobody wants that.

To this end, the Consumer Duty, now being abbreviated across the industry to “the Duty,” puts the burden of responsibility on the financial firm to essentially “do right by the customer.” For some firms, that’s a loaded request. What makes that request even more challenging is the urgency and short turnaround time mandated to come into compliance with the new policies for all existing products and services by July 31, 2023.

Back to the Duty and its key elements. Vendors are required to act in good faith, avoid causing foreseeable harm, and provide the support required to enable consumers to make informed decisions as well as the support required to intervene early and remediate whenever foreseeable or actual harm is detected. Indeed, applause-worthy regarding consumer protection but the Duty is a little harder to get excited about as the vendor who must put it into practice. “The devil is in the details” as they say. Truly, it's all about execution.

Everyone is outcomes-based. Four key outcomes are the focus of the Duty. These include:

  1. offering products and services that are relevant to consumers and accessible to a broader segment of the population;
  2. fair pricing and good value for products and services offered;
  3. increased efforts to communicate with consumers more clearly so that they understand;
  4. improved consumer support at the point of sale and after.

Four outcomes. Sounds simple enough, right? But there’s a host of questions that vendors are now facing. Can firms prove that they are not asking?for unnecessary charges and fees from customers? Are they making it just as easy to switch or cancel a product as it is to sign up to buy it? Customer service may very well become the differentiator and the factor that offers a competitive advantage as firms get shaken up and then resume jockeying for consumers. Perhaps the industry should consider an award for “Best execution of the Duty.”

Here's where things may become tricky and go deep into the weeds. Promotional efforts, marketing campaigns in general, and public disclosures are bound to get a little muddy. Especially when you consider the multitude of languages of consumers which has a direct effect on marketing materials and the costs of translating them. The FCA expects firms to track communications with consumers all the way through pre- to post-sale across the full lifecycle of the product or service purchased – or not purchased. And it doesn’t stop at tracking: the guidelines specify that the financial firm making the offer must analyze to fully understand how the customer is responding to the information provided about the offer. Dicey territory, indeed.

There is now added responsibility of tracking consumer complaints. Formally responding to those complaints has two sides to it. One involves replying to the consumer and addressing the complaint directly. The other involves taking whatever action is necessary – and demonstrating what’s been done – to refine or remediate the complaint so that other consumers are not affected by the same issue in the future. Some have raised the concern of “sludge practices” where bankers deliberately introduce friction into the customer journey to force a direct conversation versus a text exchange and hence, have a higher likelihood of generating a sale through coercive dialogue.

And just like that, Pandora’s box is opened wide. Firms need to see more and know more so that they can solve more. They want a “magic button” that can help them read between the lines of what’s being said to deduce what’s NOT being said. Obviously, the latter is of greater interest to compliance officers who are on the hunt to thwart market abuse even before it happens to protect consumers, their brand, and themselves. Monitoring communications, analyzing them, reporting suspicious activity, and archiving all correspondence are already the hallmarks of numerous financial regulatory policies, so no changes there. However, the level of urgency just went up.

Here are some best practices highlighting how financial firms can make their programs more robust and better aligned with the obligations of the Consumer Duty:

  • Ensure all communications (regardless of which channel they are conveyed on) are properly captured and retained – this includes social media marketing and the messages/posts exchanged with followers
  • Create a customer journey – map out all the touchpoints with the typical consumer and what information gets shared at which point, where customers drop off, and where they get confused
  • Enhance and simplify all marketing materials
  • Overhaul disclosure information – determine what is relevant and when it should be shared so that information can be doled out a little at a time as well as all at once to improve the likelihood of consumers understanding the contents ?
  • Actively monitor filed complaints – be transparent and be prepared to document bad outcomes which can then be paired with remediation plans and followed up with future assessments to demonstrate that the issue has been properly addressed
  • Monitor communications throughout the full cycle of a product or service – do this from the moment it is first introduced to consumers
  • Monitor trading activities – for example, which ones are solicited and what is their relative risk

The FCA was clear on the value of data analytics. In fact, they reference “analysis” 22 times in the guidelines.

Analytics can be used to cross-reference communications with complaints. Social media can provide a treasure trove of information related to where there may be confusion and can also uncover retention risks. Artificial Intelligence (AI) is particularly valuable here as it can offer a Consumer Duty detection model which would flag non-compliance.

Whatever your plans include for becoming compliant with the Duty is entirely your choice. However, if you have not yet begun planning for the July 31, 2023, deadline, the FCA will impose those choices on you.

Lee Werrell Chartered FCSI

Compliance Doctor ? FCA Regulatory Specialist ? Guiding UK Businesses to Achieve Seamless Compliance ? Chartered FCSI ? Solicitor's & Accountants ? Payment Services API/EMI ? Regulatory Compliance Consultant, London?

1 年

Thanks for publishing this wake up call for members. We have tried to help firms by creating a Q&A page at "What You Need To Know: FCA Consumer Duty Q&A" - https://complianceconsultant.org/what-you-need-to-know-fca-consumer-duty-qa/ and we can also do a Consumer Duty 13 point audit of any preparations, to make sure they are on the right track - book a free 30 minute call on the above page by clicking the banner.

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