In this latest Insights article, Colin Brown, CEO at Aryza takes a look at
In what can only be described as the most significant regulatory overhaul of the past two decades, the introduction of the Consumer Duty regime by the Financial Conduct Authority (FCA) marks a paradigm shift in consumer protection standards. This new framework compels financial institutions, spanning banks, insurers, and investment companies, to prioritise the delivery of good outcomes for their customers and proactively prevent foreseeable harm.
The regulations state that companies equip their clients with transparent and understandable information, offer products and services that provide genuine value, and extend unwavering support when needed. With an emphasis on helpful and responsive customer service, the goal is to ensure that using a product, resolving an issue, or exercising the right to switch or cancel is as seamless as the initial purchase. The Consumer Duty revolution is set to transform the landscape of financial services, redefining how companies engage with their customers and paving the way for a more ethical and customer-centric industry.
Balancing consumer protection in turbulent times
In today’s challenging socio-economic landscape, the introduction of the Consumer Duty regulations could not have come at a more critical juncture. The cost-of-living crisis, exacerbated by events such as the Covid pandemic, the conflict in Ukraine and the energy crisis has driven a surge in individuals seeking financial assistance from institutions. Whether that’s borrowers worried about the impact of higher mortgage rates or record interest rates, to people seeking breathing space on debt repayments.
With an increasing number of people struggling to pay bills, the number of missed bills or loan and credit repayments has risen sharply in the last year. However, the introduction of Consumer Duty means the terms and conditions of insurance policies become easier to understand, banks alert customers to better savings rates and lenders proactively help mortgage customers in financial difficulty with tailored support.
While the concept of treating consumers fairly is not novel, its significance was magnified during the pandemic. Banks and lenders have established a culture of helping those affected by offering forbearance measures, such as payment suspensions, to vulnerable groups.
Nevertheless, challenges persist, and the recent rise in interest rates presents a fresh set of complexities for both regulators and lenders. Striking the right balance between consumer protection and managing lending costs poses a triangle of pressure, where decisions made impact the consumers’ financial burden directly through increased interest and annual percentage rates.
Companies need to re-evaluate their behaviour
The spotlight on treating consumers fairly has intensified due to the outbreak of Covid, prompting banks and lenders to adopt a culture of assistance for affected customers during the pandemic. Measures like forbearance, exemplified by payment suspensions for vulnerable groups highlighted a genuine commitment to supporting those in need. However, the challenges persist, and lenders must now ensure their processes are attuned to customer needs, understanding not just how their products are used, but how they interact with customers throughout their journey, always keeping the end customer in mind.
The change in thinking brought about by Consumer Duty regulations means that financial institutions must adopt a customer-centric mindset, ensuring the suitability of products at different stages of their customers’ lives. The difference from prior regulations lies in the newfound emphasis on aggressively addressing breaches of Consumer Duty. Lenders are now expected to have comprehensive plans and implementation strategies to effectively transition into this new era.
As the financial landscape evolves over the coming months and years, institutions will undoubtedly adapt their product offerings. However, this process poses challenges as older products may not meet the new Consumer Duty standards, leading to their potential withdrawal from the market. For larger companies, navigating the complexities of applying the regulations and identifying its relevance to specific customers is a massive undertaking. Nonetheless, these challenges present an opportunity for the industry to reevaluate and revitalise its commitment to consumer welfare, fostering a financial services sector that is genuinely accountable and customer centric.
Automation and efficiency are the key to success
Beyond being a mere regulatory obligation, a thoughtful and conscientious adoption of Consumer Duty, made more efficient through automation, can yield substantial benefits for financial institutions. Not only does it safeguard their reputation, but it also fosters long-term customer loyalty and drives economic growth. Customers who receive genuine support during challenging times are more likely to become repeat customers, making it a strategic imperative for banks and lenders to swiftly integrate these principles.
The path to successful implementation lies in finding the right financial software solution that automates and streamlines processes with consumers, whilst increasing cost efficiency through time saved on manual tasks. With Consumer Duty now firmly in place, companies must seek software solutions that already incorporate the necessary features for regulatory compliance. The key lies in flexibility, allowing companies to tailor payment arrangements and decision criteria to suit individual customer needs. This ensures that the customer remains at the heart of every business decision.
Does it have the potential to become international?
The potential for Consumer Duty and the core principle of TCF (Treating Customers Fairly) to gain international acceptance and thrive is highly promising. Drawing parallels to the evolution of the General Data Protection Regulation (GDPR) in Europe, which has proliferated globally in various adaptations, offers a compelling case for Consumer Duty’s global adoption. Spearheaded by the UK, a leading market within the Commonwealth, the momentum it generates is likely to trigger a domino effect across other Commonwealth countries. Moreover, the universal relevance of financial inclusion underscores its importance as a significant global concern, ensuring that individuals facing financial hardships have access to viable options and an enhanced quality of life. As these principles continue to transcend borders, international collaboration becomes a key catalyst for a more equitable and customer-centric financial landscape globally.
The future holds a significant change in approach for the industry
Consumer Duty represents a significant shift in the FCA’s approach, signalling a resolute commitment to placing customers at the heart of all financial service engagements. By prioritising customer welfare, the FCA seeks to instigate a transformative change in mindset within the industry, fostering a customer-centric culture. This marks just the beginning of a journey, with continuous refinement and adjustments anticipated in the future.
The newfound authority vested in the FCA through Consumer Duty will enable swift action against companies or markets where customer-centricity falls short. This may herald an evolutionary phase in regulatory practices, offering companies a comprehensive framework to elevate their practices to the next level, as UK compliance typically involves nuances rather than clear-cut mandates. The FCA’s principles aim to inspire companies to integrate Consumer Duty into their organisational ethos, aligning policies and procedures accordingly. While regulators may not dictate specific do’s and don’ts, the industry may gradually receive enhanced clarity and guidance in upholding consumer-centric values.
As Consumer Duty permeates the financial landscape, it has the potential to reshape the industry’s foundations, fostering an environment where customers’ best interests are upheld, and companies are driven to deliver exceptional experiences. This progressive approach seeks to strike a harmonious balance between regulatory oversight and the industry’s adaptability, championing a future where responsible and customer-oriented practices thrive. With the FCA leading the way, the journey towards an increasingly customer-centric financial landscape is poised to yield lasting benefits for all stakeholders involved.