Tom Cuppello, Director of Risk at leading independent financial services consultancy Broadstone
The Consumer Duty annual report deadline has been and gone, giving lenders across the industry the opportunity to take a breather following a busy year of ensuring all of the requisite frameworks and relevant documents are ready to go.
Yet, despite brand-new monitoring systems, committees, process improvements, and other adaptations, lenders have not ‘achieved’ Consumer Duty. In fact, the Financial Conduct Authority (FCA) is expected to take a dim view of any such attitudes.
Instead, it marks the beginning of a journey that will see Consumer Duty become a deeply embedded mindset across the financial services industry.
A Journey Not a Destination
The new Duty represents an important shift in the world of financial services. It is not a box-ticking exercise but a steadfast commitment to customer welfare, whether that’s fairness or transparency, and the FCA are likely to encourage this new ‘mantra’ through annually revising roadmaps and processes.
So, what areas should lenders be looking out for in the coming months and years?
1) Keeping Track
Continuous monitoring and accurate reporting are critical. Lenders must ensure that their systems can track outcomes on customer experiences effectively and transparently, investing in well-structured reporting suites that allow easy access to detailed data and identifying customer trends with thoughtful processes.
Systems must also be both C-suite and analyst friendly, enabling a combination of top-level and granular insights.
2) Ensuring Customer Value
Gearing pricing processes around customer value and by extension individual customer risk profiles is a pillar of the reforms.
Pricing at origination through both interest rates and fees must be clear, structured, tailored and justifiable, ensuring fairer value and more accurate risk management for lenders. This requires advanced data analytics and a nuanced understanding of customer segments.
3) Identifying Vulnerability
Early identification of customer vulnerability is vital when it comes to preventing financial distress and offering best-in-class support for those in difficulty.
Pre-delinquency models, utilising monthly bureau data and other predictive indicators can help lenders take proactive measures. This not only protects consumers but strengthens the lender’s portfolio by mitigating potential losses.
Transforming Organisational Culture
Consumer Duty goes beyond technical adjustments; it requires a cultural transformation.
Consumer welfare must be prioritised at every level. Whether that’s training staff, aligning benefit incentives with customer outcomes or constantly evaluating and fine-tuning practices to ensure they meet the highest standards of fairness and transparency.
However, if Consumer Duty is considered just a checklist exercise within the business, a lender may miss the true goals of the regulations. While in the short-term a superficial compliance may be achieved, a lack of genuine cultural change could result in the need for a more significant overhaul in the future.
Asking for Help
This is why it’s so important that lenders should strive to embed Consumer Duty principles into their operational DNA, ensuring that every decision, process, and product is evaluated through the lens of customer welfare.
However, achieving this degree of integration is no small feat, so calling on external support, guidance and advice can play a valuable role in helping to build robust frameworks and improve existing processes.
Moreover, it permits internal teams to focus on business-as-usual tasks without compromising on the quality and comprehensiveness of Consumer Duty initiatives. In short, it creates a more efficient, effective team with a laser focus on achieving specific end goals.
While many firms may have taken the July 31st deadline for the annual report in their stride, there may still remain pressure points around successfully delivering all of the initiatives on the board roadmap.
In light of this and the evolving Consumer Duty expectations we expect to see from the FCA in the coming years, we stand ready to support lenders as they travel the Consumer Duty path, helping them navigate it with agility and efficiency whilst conserving their competitiveness.
