FCA Consumer Duty update: What financial institutions need to know

Practical considerations for digital channels

Following an extended period of consultation, the UK Financial Conduct Authority (FCA) announced last month that it would be introducing a new Consumer Duty to “ensure a higher and more consistent standard of consumer protection for users of financial services and help to stop harm before it happens” (source). The announcement was accompanied by a new publication (CP 21/36) with feedback on FCA’s earlier May 2021 consultation (CP 21/13) (source). The document also featured a fresh consultation, containing more developed proposals for new rules to tackle the causes of harmful practices, together with draft guidance, to help firms prepare for the new regime (source).

The new rules are intended to raise industry standards by placing a clear emphasis on firms to get products and services right the first time, every time. The new rules will also require firms to focus on supporting and empowering their customers to make good financial decisions and avoid foreseeable harm at every stage of the customer relationship. The FCA’s Chief Executive, Nikhil Rathi, told reporters that this would be one of his agency’s “top priorities” in future years, with a much tougher set of requirements for regulated firms ensuring they act in their customer’s best interests (source).

“The importance of digital for financial services firms continues to grow, along with the associated risks,” commented Rob Stubbs, head of research at RegTech Associates. “RegTech solutions are already enhancing the efficiency and effectiveness of digital channel compliance for institutions, and they will be a key plank in firms’ strategies for meeting the requirements of the FCA’s forthcoming Consumer Duty. This is an increasingly interesting and vibrant area of the RegTech space. However, firms will need guidance and encouragement as they push on towards full digital compliance.”

These measures go beyond the UK’s existing Treating Customers Fairly (TCF) framework, requiring firms to provide consumers with information they can understand, offer products and services that are fit for purpose and provide helpful customer service. By inviting regulated firms to “step into the shoes” of their customers, the FCA has let it be known it will use “assertive supervision” and a new “data led approach” to intervene more quickly when it identifies practices that do not deliver for consumers.

The final consultation period for the new Consumer Duty has closed, and the final rules are expected to land in July of this year. Although firms may currently lack the fine detail, there are things they can be preparing for to get ready for the changes to come as they await the publication of the formal Rules and Guidance. For instance, we know that digital is likely to be the major channel going forward where products will be sold and serviced, and will be watched carefully to ensure the FCA’s four outcomes are achieved (source). We also know that such compliance will need to be proved, and firms will need new tools and technologies to support their existing digital channel provision.

In this blog we look at some of the key features of the new proposed rules, and in particular what they mean for a firm’s digital conduct compliance.

Unpacking the new rules

In framing their proposed rules, the FCA points to the results of their latest consumer study that found worrying evidence of low consumer confidence and negative perceptions towards UK financial services providers (source). While the results show a slight improvement, Exhibit 1 shows that fewer than half (42%) of consumers surveyed by the FCA in 2020 agreed with the statement “I have confidence in the UK financial services industry,” with only 10% “strongly agreeing.” In contrast, more than a quarter of those polled (26%) “slightly” or “strongly disagreed” with the statement.

Exhibit 1: Level of confidence in the UK financial services industry (2017 vs. 2020)

Source: Financial Lives Survey 2020, FCA, February 2021

The FCA also found similarly low opinions concerning the probity of UK firms. As Exhibit 2 shows, only one-third (35%) of those surveyed “slightly” or “strongly agreed” that their financial provider was “honest and transparent,” while a near identical proportion (32%) “slightly” or “strongly disagreed” with the statement.

Exhibit 2: Agreement whether financial firms are honest and transparent (2017 vs. 2020)

Source: Financial Lives Survey 2020, FCA, February 2021

Given the lack of positive momentum in these results, it is clear that the negative impact of poor industry practises on UK consumers is a long term issue. And this, in conjunction with other pertinent data—such as the FCA’s latest complaints reporting for the first half of 2021 (source) and the concerning trend in customer complaints spotlighted in our previous blog—is encouraging the regulator to refocus its efforts on driving better outcomes for consumers.

The new rules are placing firms under greater pressure than ever before to get things right from the outset. So, within that context, what exactly will be changing?

According to the FCA, financial markets do not always work well for consumers, with a lack of both consistency and effort to prioritise good customer outcomes. This, says the regulator, all too often leads to customers not realizing the benefit or value they should reasonably expect from their financial products and services, with a notable lack of information and support offered at the point of need. Under the new rules, the new Consumer Duty puts the focus squarely on firms to do the right thing by always putting good consumer outcomes at the center of their business and focusing on the needs of their customers at every stage. In doing so, the FCA believes consumers will be better positioned to make good financial decisions going forward, which in turn will help to seal the breach in confidence and trust highlighted in past surveys.

What does the new Consumer Duty mean for digital conduct compliance?

The new rules cover the themes of fairness and value together with the suitability of products in what the regulator hopes will deliver a “cultural shift” in the industry and better outcomes for consumers. These changes will also impact the way firms provide digital services in two key ways:

1. The new rules will require firms to properly equip their customers to make effective decisions. Providing the information needed at the right time and in ways that can be easily understood through websites and apps will be central to delivering on this regulatory objective.
2. The new regime is also intended to deliver a step change in customer service quality, with responsive and accessible support available through all relevant channels (including webchat). In practice, this will require firms to provide effective means for customers to register complaints when things do go wrong.

In short, the new rules will change the way firms design, deliver and support their products, services and channels in fundamental ways, enhancing the way they communicate and deliver customer service. And, in order to evidence compliance, firms using digital channels will need to monitor and track what they’re doing in each customer interaction, creating several specific challenges:

1. Firms must ensure they create and maintain an accurate record of customer activity in digital channels – similar to recording phone calls. Firms must also continuously monitor digital channel activity to track behaviors and spot issues as they arise (e.g. a customer struggling with a particular process step or showing signs of a lack of comprehension). This will allow issues and flaws to be identified and eliminated at the earliest opportunity, before evolving into a complaint.
2. In the event a firm is required to demonstrate compliance with the new Consumer Duty regime, a record of a customer’s digital interactions, as well as the steps taken by the firm to dynamically address any issues they find, will provide valuable evidence for any related investigation. This is particularly important where complaints are escalated to the Financial Ombudsman Service (FOS), which can drive significant cost for firms.
3. In the context of promoting better decision making, monitoring systems can also help firms identify and track the risky behaviors of customers. For example, firms can develop an understanding of typical customer behaviors when buying a particular product or service and use technology to identify unusual patterns of behavior requiring additional oversight or intervention. The data collected from digital journeys can be used to perform outcome testing to evidence the consumer’s understanding or prove that customers are being serviced in their channel of choice to access products/services without undue hindrance. Access to data and behavioral insights can also give firms a much wider set of options for delivering precisely the kind of relevant, actionable advice and guidance needed by consumers to support better decision making in the moment.

It has never been more important to seize control of your digital channels

Financial institutions must capture their digital interactions in the same way they do customer phone calls. Firms need reliable tools that can create and maintain a complete record of every digital journey so that each can be discovered and replayed as needed and exactly as it happened. In addition, with the aid of artificial intelligence and machine learning, journey insights and struggle analysis can be generated automatically, allowing firms to be alerted more quickly to individual sessions requiring oversight or intervention.

Firms need the core capabilities of record keeping and monitoring to give them the tools and data needed to investigate and resolve complaints, evidence what has happened in-channel, undertake reviews and identify and support vulnerable customers. In this way, firms are also able to ensure that their customers receive the best outcomes and do not suffer harm.

The opportunities that the FCA’s new Consumer Duty present to reform and enhance the delivery of digital financial services are clear. However, for many firms, the pressing question now is how to deliver this enhanced level of service and support on digital channels?

With only six months to go before the new rules are introduced, the clock is ticking.

How Glassbox can help

Glassbox is designed for high-volume, data-sensitive environments. Our digital experience analytics platform provides the most advanced capabilities to ensure compliance with ever-changing regulatory standards. Learn more about Glassbox’s built-in tools for digital compliance.