For the first time, financial services providers will now have to monitor and evaluate the outcomes of all retail customers whatever their personal circumstances. What are you doing at your organisation to respond?
The countdown has now started as the Financial Conduct Authority’s (FCA) New Consumer Duty comes into force on 31st July 2023 for all new and existing products. The outcomes-based rules raise the level of care that retail customers should expect to receive from financial institutions in a bid to reduce financial harm and improve financial inclusion.
The rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met.
These rules come into being at a time when households and businesses face high inflation and the prospect of economic contraction. The UK Consumer Prices Index (CPI) rose by 9.4% in the 12 months to June 2022, up from 9.1% in May. Meanwhile, wage growth of 5.3% is in stark contrast to the year on year inflation rates of 53.5% for electricity and 95.5% for gas in April 2022.
Financial vulnerability can affect us all
The FCA defines financial vulnerability as a group of characteristics that apply to customers who, due to their circumstances, are especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care. Financial vulnerability runs on a continuum, and everyone is at risk of becoming financially vulnerable at different points throughout the life-course. The FCA surveyed over 12,000 UK adults and found that 53% of them show one or more characteristics of financial vulnerability. Between March and October 2020, the number of adults displaying characteristics of vulnerability increased by 3.7 million, reaching 27.7 million.
Too little, too late? Or a call to action?
In the face of a crisis of financial resilience, it is hoped that these rules will prevent future financial harm to individuals because financial institutions will now be required to take appropriate steps to protect their customers. Greater care will now have to be taken in the design of any financial product or service sold, the price and value of those services, customer understanding of the product as well as the support provided.
However, some may argue that these rules are ‘too little too late’ as millions are already struggling with the cost of living crisis. The Office for National Statistics recorded that 91% of adults in Great Britain reported an increase in their cost of living between June and July 2022. In its March 2022 forecasts, the Office for Budget Responsibility (OBR) expected household incomes after tax and adjusted for inflation to start falling in Q2 2022 and to not recover until Q3 2024.
Proactive monitoring, evaluating, and reporting vs reactive remedial actions
Financial institutions must act in good faith, take all reasonable steps to avoid foreseeable harm to consumers and take all reasonable steps to enable consumers to pursue their financial objectives. For the first time, financial services providers will now have to monitor and evaluate the outcomes of all retail customers whatever their personal circumstances. So for example, the impact of a financial product on a single-parent household with low financial resilience would be compared with more resilient customers to track the rate of financial harm in both groups.
The aim is to narrow the gap between customers with characteristics of financial vulnerability and those without through higher standards of care. The exact way this is done will vary depending on the process adopted by the financial institution. However, it will no longer be good enough to simply say “we’ve got a process for that” but this process should make a meaningful difference to the experience of the consumer, and be continuously monitored and reported to the Board.
Knowledge and understanding of vulnerability is low, but ignorance is no defence. Help is at hand.
The New Consumer Duty is far-reaching and its addition to the FCA handbook for regulated firms is a step in the right direction. Enforcement of the rules for new and existing products is due in 12 months and 24 months for products closed to new customers. The lack of fixed financial penalties for misconduct does make these rules less stringent than what some were hoping (or feared) but it is a good start. However, enforcement must be consistent and may prove to be a test for the regulator and financial institutions as the understanding of the concept of financial vulnerability is still low and significant training across all departments will be required to effectively implement the New Consumer Duty.
As firms review their services to comply with the rules, there will be some level of burden on organisations to implement additional internal monitoring and evaluation processes that are appropriate and meaningful enough that effective action can be taken by management teams.
This is why my team and I have developed a masterclass in conjunction with The London Institute of Banking and Finance (LIBF) in Financial Vulnerability that helps anyone working in financial services understand what is required of them in implementing the New Consumer Duty and the Fair treatment of Vulnerable Customers.
In addition to improving understanding of the concepts of financial vulnerability, the masterclass will also introduce the neuroscience of financial decision-making and provide frameworks designed to help attendees comply with the FCA guidance in their day-to-day practice. The FCA has made the importance of this very clear and everyone working in financial services must improve standards and customer vulnerability will no longer be a customer service issue.t is now everyone’s responsibility.
The Financial Vulnerability Masterclass consists of three interactive workshops, which will take place over three days. Each workshop will last between 2.5 and 3 hours and will be hosted through Zoom.
The first masterclass will begin on Wednesday 7 September 2022 at 3pm and costs £1,250. If you wish to make a group booking of five people or more, that price drops to £950 per person.
Masterclass programme schedule:
- Wednesday 7th September at 3pm
- Wednesday 14th September at 3pm
- Wednesday 21st September at 3pm
You’ll learn through a mix of group work, case studies and practical exercises. As you absorb your new knowledge, you’ll be encouraged to consider how it might apply to your own work and organisation. Our trainers have industry, as well as academic, experience to help you gain the practical skills you need, along with a deeper conceptual understanding.
If you wish to count this masterclass towards your continuous professional development (CPD), it’s worth 9 CPD points.
Kalgera, a London-based RegTech, is the first line of defence for financial institutions who want to actively support its most vulnerable customers. By helping the finance sector identify customer vulnerability through transactional data, Kalgera creates better outcomes for the customer and the financial institution itself.
We are committed to working with banks through several avenues to comply with the FCA's Consumer Duty Act. Kalgera’s state-of-the-art technology uses 11 parallel AI models to pinpoint vulnerability to financial abuse and low financial resilience with greater precision.