Consumer Duty: What, why and how to comply

What is the new Consumer Duty?

The Financial Conduct Authority’s (FCA’s) new Consumer Duty regulations are due to be published at the end of July 2022. FCA regulated businesses have been given notice that between then and April 2023, when the rules come into effect, the FCA will be looking for evidence of progress towards compliance.

The regulations aim to raise the bar on Consumer Outcomes beyond Treating Customer Fairly and will require businesses to deliver appropriate communications; suitable products and services; good quality after-sales care; transparent pricing and value for money. Businesses must demonstrate suitability from the point of sale and throughout the lifetime of the contract.

Why are updated Consumer Duty regulations needed?

An important driver of change for the FCA is the continuing divide between the knowledge of the seller and the buyer - the asymmetry of information - and the exploitation of this by some businesses. Not only is this not good for the consumer but it is also bad for the provider and could collapse a market if unchecked. However this opens up significant opportunities for businesses who can differentiate themselves with much more targeted propositions.

In the financial services market, consumers are not well informed on the whole and providers have limited knowledge of the circumstances and appropriateness of what they sell.  Despite fact find and risk assessment processes, consumers are often still mis-sold and end up mis-buying. Even the minority using financial advisers are affected. 

With Financial Ombudsman Service complaints up over 90% year on year in investments and pensions and 66% for banking and credit, the market certainly looks headed for something similar to a collapse.

What do businesses need to do?

The first of the four key consumer outcomes the FCA wants to address is ‘Communications to equip consumers to make effective, timely and properly informed decisions about financial products and services’.

Consultancy Hymans Robertson highlighted that the biggest challenges for businesses in implementing and demonstrating compliance are:

• Accessing data on historic product sets

• Identifying the characteristics of end customers without direct connection

• Having the right skills, experience and resource to implement the changes needed

How can Open Finance help?

During the FCA consultation on Consumer Duty, Moneyhub identified Open Finance as the solution to help prevent a market collapse, bridge the disclosure gap, and to significantly reduce the cost of compliance. 

In addition, it opens new opportunities for businesses to use consent-based consumer data to identify and develop new hyper-personalised products based on needs and behaviours. 

With ongoing engagement, it provides a means of identifying early warnings of issues and the ability to act to limit detriment using an evidence base. The list of behavioural insights provided would be significantly enhanced by the adoption and facilitation of Open Finance powered tools. 

Moneyhub’s Open Finance Technology can:

• Aggregate account information from the widest range of sources in the UK - 200 UK financial institutions and 700 products plus international account aggregation

• Analyse and categorise income and expenditure and create a net worth position from both connected and manually input assets and liabilities

• Evaluate historic transactions, build budgets and forecast cash flows

• Identify vulnerability of potential consumer through behaviours, transactions and financial decisions

• Detect changes in personal circumstances through connected accounts such as cash movements, changes in income and payment commitments or account closures etc

• Provide content and notification nudges to consumers to improve outcomes and address changes, as well as alerting the client’s trusted advisers if intended outcomes are no longer relevant or achievable

A fair and ongoing value exchange

The value exchange between a consumer and an adviser or product provider is not a one-off event at the point of a product sale - it is the foundation of a relationship and requires ongoing suitability checks. Users can share their data with advisers, solicitors, accountants or family members (especially valuable with vulnerable customers). They can connect accounts and consume personalised content in multimedia forms, from texts to pension rap videos!

Holistic financial wellbeing can really only be achieved through Open Finance and the two-way exchange of information and insights aimed at improving consumer outcomes.  The dividend for the supply side of the market comes as lower acquisition costs; higher retention levels; reduced compliance issues; improved data gathering; visibility of advised and non-advised assets and liabilities and productivity gains from the automation of suitability checks and helpful nudges.

A bright future with Open Finance

By adopting Open Finance, businesses can ensure that they are exercising appropriate governance across the value chain. Moneyhub’s Open Data powered technology has Consumer Duty compliance baked in. And, the added benefit of unlocking opportunities for businesses to develop hyper-personalised products based on consumer needs and behaviours to fuel growth. It’s win-win!

Worried about complying with the new regulations? Check out our Consumer Duty resources or get in touch to explore our solutions.

Open Finance - The journey from insight to value

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This article was originally published in The Paypers Open Banking report 2020. To read the full report, please download it from The Paypers website. 

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Moneyhub was born out of frustration. Frustration at not being able to see accounts in one place; repetitive data entry; obstacles to financial planning and, above all, financial institutions withholding data as if it was theirs and not the customer’s. This was in 2014 – before Open Banking, but in the thick of the hype around Big Data.

Data is the new oil

Data is called the fuel of the Fourth industrial Revolution. Like oil, data needs to be extracted and reservoirs tapped, but concerns have grown that this can be at the expense of consumer privacy. It was soon clear that the data also needed refining if insight was the goal, but the processing was still exploitative. In financial services, it seemed that the asymmetry of information between provider and consumer was ever-widening.

Key to your data processing strategy, and your customer experience design, is how you get to know the people you’re interacting with quickly, effectively, and in context. This isn’t about extracting data upfront, it’s about progressively sharing, reciprocating and proving your trustworthiness.

Trust: the sum of transparency and consistent value delivery¹

But the value was still elusive and Moneyhub could see why. The industry needed to focus on the value it creates, rather than the value it takes. By focusing on doing this consistently, people will trust you to deliver - and trust also compounds over time.²

“The industry needed to focus on the value it creates, rather than the value it takes. ”

It means focusing on the value, meaning, and engagement you create for the people you serve. When utilising people’s data to create value for them, it means making sure they understand how their data is being used to create that value - and that goes beyond consent-based data sharing.

The role of financial services in building trust

But an industry obsessed with pushing products still has lessons to learn when it comes to the difference between leveraging insight and selling it.

We need to accept that people should control who accesses their data and for what purpose. We need to think of organisations as data custodians or information fiduciaries. That means that providers need to be relevant and useful and Moneyhub provides that missing link.

It aggregates, organises, and enriches data and then monitors it on behalf of the customer. Then, with an understanding of the customer context, actionable insights (or ‘nudges’) can be introduced to coach the user towards better outcomes. This might be through prompts, alerts, or new options being surfaced - it’s about helping people and for what exchange of value.

Harnessing insights to enable Open Banking payments

Insight is not an end in itself and the consumer needs the means to put in action decisions, simply and cheaply. Moneyhub uses money to savings, investments, and pensions, or to pay bills and reduce debts.

By being a trusted partner of the customer, the insight from income and expenditure analysis combines with navigation towards improved financial wellbeing. Helping customers by being the everyday financial coach, means that wellbeing is not a goal but a by-product of improved customer outcomes. Here are some of our practical examples of that in practice:

• Expenditure analysis shows that the customer is paying rent. There is no sign of contents insurance - so is there an awareness of the risk associated with that? Or could that rental payment history be used to support a mortgage application?

• An employer provides a range of employee discounts from retailers – as one of our clients has shown, by personalising offers based on past expenditure, the average Moneyhub user can save over GBP 70 per month, with no change in spending habits.

• Consumers are keen to invest ethically and sustainably but, in addition to aggregating and scoring their investment portfolio, expenditure analysis could be used to create nudges towards greener lifestyle options or a carbon footprint offset savings plan or donation.

• Impulse spending can be converted to impulse saving with an unplanned treat being accompanied by a self-imposed rule to sweep the same amount into an ISA or a pension.

• Variable recurring payments can be set up when goals are met or a budget is tracked.

• By adding a house price feed combined with mortgage repayments, customers can be alerted to new financing deals becoming available as the loan-to-value ratio comes down.

• With 80% of employees not sure if they are saving enough and the self-employed still outside of auto-enrolment, the adequacy of pension saving can be forecasted and nudges made to help towards a better outcome, referencing current expenditure and in-retirement lifestyle.

• Despite companies often having substantial customer data available, they continue to require customers to go through time-consuming and inaccurate fact-finding processes. With consent, the consumer can share their data, containing verified assets, income, and expenditure information.

• Consumers can self-police by using ‘appropriate friction’ such as alerts around budget overshoots or comparing the effect of saving an amount rather than spending it.

Privacy & personalisation: a mutually inclusive relationship

By never selling customer data or taking a third-party commission on product sales, Moneyhub and its enterprise clients have always respected customer interests and balanced privacy against personalisation. The value exchange is always fair and controlled by the consumer.

Open Banking is useful but ancillary to the benefits derived from holistic Open Finance.

Critically, value creation from insight is organic and relationship- based, a far cry from crass product pushing. If a product solution is involved, it is more likely to be bought than sold and more likely to be retained as it is suitable and affordable. From here, customer centricity becomes a reality rather than a slogan - and the path from insight to value is lit by Open Finance adoption.

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References

1 and 2: Greater Than X's work on Data Trust: www.greaterthanexperience.design and video.

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Author

Vaughan Jenkins

Vaughan is an experienced Sales Director with senior industry experience in financial services, especially the life and pensions, asset management and wealth sectors. He co-authored ‘The Insurtech Book’ and has worked as an associate and consultant to a number of businesses.  

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