Financial services companies are up against a July 31 deadline to meet tougher consumer protection standards being introduced by the UK’s Financial Conduct Authority (FCA) under its new Consumer Duty policy.
The new rules establish an obligation on firms to deliver “good outcomes” for retail customers, while taking into account the characteristics of those customers, including their vulnerabilities.
Christopher Colley, global head of industry advisory, financial services at experience management software company Qualtrics, says there is a range of levels of readiness for the new rules. “At one end of the scale are organisations that rely on legacy methodologies, such as surveys, to take the temperature of a limited sample of their customer base and use that as a kind of gauge to assess whether they're on track or not,” he says.
Many firms at the more foundational step are smaller organisations that have historically been able to fly under the radar of the FCA, he explains. “At the other end of the scale are typically larger organisations that often already have mature customer experience programmes in place.”
Mr Colley warns that the FCA is likely to pursue fines against institutions that fail to comply with the new rules.
“The volume of FCA fines rose 160% last year. We saw a larger number of smaller fines owing to improved regulatory technology enabling greater scrutiny. The FCA is now able to target a broader range of firms across the entire industry,” he says. “I’d therefore caution smaller firms against sticking their head in the sand and hoping that they'll manage to weather the storm.”
I’d caution smaller firms against sticking their head in the sand
Complaints in most banks are very manual processes, he says. “I know this from my time at Barclays, where I saw just how manual and labour-intensive the traditional complaints process is, where people must manually categorise the reasons for the complaint, which again is subjective.
“It can introduce errors and those errors then get propagated down to other teams downstream, who then are then obliged to take action to remove the friction that caused the complaint in the first place.”
He suggests the largest high street banks are in a better position to avoid falling short of the rules than smaller UK financial institutions. Qualtrics works with Lloyds Bank in its complaints function to enable it, with natural language understanding, to automatically categorise the reasons for customer complaints.
“This has enabled a higher level of accuracy,” says Mr Colley. “The net result of that has been a 50% reduction in reportable complaints over a three-year period. One of the metrics that we know the FCA is going to be looking at is upheld complaints.”
And, he stresses: “There is an opportunity here for organisations that seize this opportunity to make high standards for consumers a competitive differentiator. This could well be the definitive event that enables leaders in this space to establish clear water between the competition.”
Data advantage
Peter Lemon, a consultant at FICO, a data analytics firm focused on credit scoring, says a bank’s ability to ingest more types of data is key to developing an understanding of every customer’s characteristics, needs and vulnerabilities, as well as the subsequent reporting and testing of outcomes required by the new rules.
“Banks have a wealth of data on customers that they're not using at the moment,” he says. “Making that data available and responding to it in the appropriate way can be very helpful from the consumer’s perspective.”
He supports the elimination of silos, encouraging the avoidance of sharing information by different bank divisions often on the same customer. “Consumer Duty requirements will mean changes are needed across every sector of a bank,” he says.
“Silo thinking can lead to fragmented decision-making and fragmented customer treatments, which is contrary to the Consumer Duty rules. If you're working in the mortgage line of business, don’t just think about the relationship you have with the customer from a mortgage perspective, but across every single line of business such as how much they have in their current account, how much in their savings account and so on,” he continues.
[Banks] saying that they had the data but didn't use it is not going to be a good enough excuse
Yusuf Ozdalga, London-based partner at QED Investors, says banks have a vast amount of customer data, but many lack the ability to turn that data into actionable, insightful information that can create better customer outcomes. “This is something that fintechs should be better at compared to banks and therefore this is very much an opportunity for fintechs to overtake the traditional banks,” he says.
“Now there's an obligation for banks to use the data they have. In future, saying that they had the data but didn't use it is not going to be a good enough excuse,” he warns.
Naomi Muggleton, assistant professor at Warwick Business School, agrees that banks already have a trove of unexploited data to predict who will hit financial difficulties and meet new consumer protection standards.
Research from her Warwick faculty, in conjunction with the University of Leeds, the University of Nottingham and Lloyds Banking Group, suggests that many financial services firms have access to an under-exploited trove of transactional data that could be used to better understand customers and help discharge the firms’ regulatory duties.
“In the developed world, people spend a significant proportion of their lives online,” she says. “From grocery shopping to booking a holiday, work and leisure, banking to healthcare, our lives are mapped out in a trail of digital interactions.”
These details are a potential source of valuable information that many organisations fail to put to best use, she says. “For most companies, collecting and storing this information is part of the administrative routine of their business. The key to unlocking its value is understanding the right questions to ask and giving careful consideration to what patterns and associations might be hidden in the data.”
UK in the regulatory vanguard
Andrew Stevens, banking and financial services principal at business process automation company Quadient, says consumer rules such as those being introduced by the FCA do not yet exist outside the UK.
“The Royal Commission in Australia did something reasonably similar in recent years, because they recognised that financial institutions weren't putting the needs of customers first,” he says. The commission created a charter to address that, he explains, adding: “I've not seen anything that is deliberately worded in such a way as to also change culture”.
Mr Lemon says he does not believe anywhere outside the UK has specifically mandated a focus on better customer outcomes from a regulatory perspective. Mr Ozdalga goes further, predicting that “bankers reading this across the world should expect some version of this regulation to come to their neighbourhood, wherever they are operating”.
“This is pretty cutting-edge as far as regulation goes,” he adds. “For all its faults, I think the FCA and the UK regulators are very forward-thinking. A lot of the rest of the world tend to look at the UK and FCA when it comes to such things as open banking.”
Read more on the Consumer Duty
The imminent Consumer Duty rules are broadly seen by the industry as helpful both to consumers and banks. Tom Lake, policy and strategy director at financial inclusion specialist Fair4All Finance, says: “There's a serious issue when it comes to credit exclusion and the number of people who can't get access to credit from mainstream lenders.”
“[The] Consumer Duty should result in better customer outcomes and we are looking forward to seeing those improvements,” he continues. “But we also need to consider financial inclusion alongside these rules and we must ensure that there is not a contraction in product and service offers for certain customer groups who really need access to products such as credit, which we see as a potential risk.”
Mr Stevens says the imminent rules serve as a warning call to banks that they need to change the way in which they work. “Customers shouldn't need to change their expectations. Their expectations have always been the same: the bank is a financial expert, not the customer,” he concludes.
