From the 31 July 2023 the Financial Conduct Authority’s (FCA) new Consumer Duty guidelines set higher and clearer standards of consumer protection across financial services and require all UK regulated firms to put their customers’ needs first.
The rules will apply to all products and services provided to both business-to-consumer (B2C) customers and retail clients, including Small-to-Medium Enterprises (SMEs). The guidance also applies to ‘all firms who determine or have a material influence over customer outcomes – not just those with a direct customer relationship,' meaning that third-party vendors or partners may also fall under the guidance.
Consumer Duty is essentially a set of principles that requires firms to act to deliver ‘good outcomes’ for retail customers, as well as provide evidence that these outcomes are being met.
Around 11% of the population, or over 6 million UK adults, move home each year. And that’s just one of many ways your customer records might change regularly. Even conservative estimates suggest that customer data degrades at around 20% per year, and for B2B data it’s even higher. Incomplete, incorrect and inaccurate data can lead to myriad issues for firms including mistargeted or untimely communications to customers, offering inappropriate products or services, and even losing touch with them altogether. Incorrectly addressed physical mail is not only a cost burden but represents a potential fraud risk. “If you don’t hold current contact data across post, email and mobile for your customers, this restricts the ability to ensure good outcomes at every touchpoint,” says Alan Clay, Head of Data Strategy at LexisNexis® Risk Solutions. “A useful early step in preparation for Customer Duty is a data audit to establish your existing data quality connectivity with your customers.” To maintain data accuracy over time, firms must first consider an enduring data maintenance program. In this context the use of third-party reference data helps overcome the challenge of consumers changing their details and not letting your company know of this change.
Alan continues, “Through the use of external reference data, changes in customer details will be automatically flagged when these are reported as consumers’ circumstances change. This, in turn helps firms to identify and service customers quickly every time they need help, plus profiling them means you can match more tailored products and services to them.”
More accurate and reliable customer data could also go a long way towards helping businesses tackle the challenge of reuniting customers with the estimated £76 million laying in dormant financial services accounts in the UK, as well as the £26 billion tied up in lost pension pots.
Companies involved in the provision of consumer credit will need to ensure they’re doing everything they can to ensure good outcomes for customers, both in respect to those applying for loans and finance, and existing customers who may be showing signs of financial difficulty. Having access to sufficient credit reference data to make an informed decision on affordability will therefore be crucial, as will lenders’ ability to demonstrate they did everything possible to determine eligibility and make lending accessible to those that can afford to pay it back. Consumer Duty will likely also work the other way too, making firms more accountable when a loan approval isn’t the best outcome for that particular applicant. “Currently 7.1 million adults in the UK financially excluded from fair and affordable mainstream financial services and financial inclusion is a high priority for governments and regulators,” says Neil Allen, Head of Credit Risk Strategy at LexisNexis® Risk Solutions. “The potential certainly exists for Consumer Duty to help tackle this pervasive problem by encouraging firms to go the extra mile to ensure that, wherever possible, credit is extended to those who most need it – whether that’s banking services, lending or motor finance.”
In preparation for the new guidance, firms might consider enhancing their credit assessment decisioning using alternative data sets that go beyond traditional reference information, allowing them to build a more holistic picture of an applicant and get a better sense of who they are and their propensity to pay. “Alternative data enables lenders to consider those who lack a traditional credit footprint, such as people who are new to the UK, younger people and those who have not previously had control of their own finances, ensuring they’re treated as fairly as any other applicant, regardless of their credit history,” Neil continues. “Our analysis suggests more than 77% could be more effectively risk scored using alternative data sets. For those firms seeking to apply consumer duty principles in the credit decisioning process, alternative data can effectively supplement the gaps observed from traditional credit reference data sources.”
All firms regulated by the FCA have an obligation to carry out anti-money laundering and fraud checks at onboarding. Although these vary depending on the nature of the service being offered, in all cases, firms must strike a balance between speed and accuracy: checks should be carried out quickly and seamlessly to avoid customer drop offs, but they also can’t afford to miss something suspicious that could later turn out to be financial crime. After all, such checks are as much about protecting customers, as the business.
“In short, fast, effective and accurate risk assessments and checks at onboarding should be considered a natural extension of consumer duty,” says Nina Kerkez financial crime expert at LexisNexis® Risk Solutions. “To enable the most accurate and effective checks, businesses must first ensure they have the best possible data on their customers. Secondly, they need access to the latest global business intelligence and screening tools to accurately screen customers against watchlists.” The huge volumes of false positives that can be generated from these processes also pose a challenge and can significantly affect customer outcomes by slowing down speed to decision. Yet, here again firms need to strike a balance. “Taking a low-risk approach to false positives as a way to reduce volumes quicker may be at odds with consumer duty rules,” Nina explains.
“Rejecting an applicant due to a lack of certainty of the risk they pose, could be deemed unfair and not the best outcome. This may lead to a lot of extra work for firms.” Here again, technology can significantly reduce the burden. “Entity resolution engines built into some regtech tools, along with more accurate customer data, can both greatly shrink levels of false positives, allowing firms to get on with the important job of giving genuine customers the attention and consideration they deserve,” Nina adds.
“Risk is dynamic, so treating customers as fairly as possible and ensuing good outcomes at every touchpoint in the journey requires businesses to have a firm handle on customers’ evolving needs throughout their lifecycle,” says Chris Foye, Senior Director of Market Planning at LexisNexis® Risk Solutions. “Getting this right for the new Consumer Duty guidance requires customer data and processes to be brought together into a single, joined-up end-to-end management journey that can monitor changing customer needs and enable a tailored experience. Any such approach also needs to align with evolving regulatory requirements and the organisation’s ambitions to scale.”
Risk orchestration platforms are well positioned to support the new Consumer Duty rules for banks, financial services, lenders and other providers, by delivering an end-to-end screening and monitoring process that automates complex decision making, drawing from as many or few data sources as required. Platforms allow users to create unified rules and scoring processes that extend from customer onboarding throughout the customer journey, creating a fully auditable trail that records every decision and the reasoning behind it. Chris continues, “customer behaviours can be automatically tracked over time to quickly detect and flag anomalies – allowing firms to intervene with support if necessary. Orchestration software can also be scaled in line with the organisation’s growth strategy, without the need for specialist or technical support. Its ‘no code strategy’ allows financial crime experts to make required changes directly, without delays, reducing or eliminating the need to involve development resources to implement changes, and supporting agility across the organisation.”
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