The FCA has announced that firms needed to take on further actions to meet their obligations to treat customers fairly under the Consumer Duty.
In February 2021, the Regulator issued ‘FG21/1 Guidance for firms on the fair treatment of vulnerable customers’, which sets out four main obligations for regulated entities:
- Assess the needs of their targeted customer base.
- Ensure their staff possess the skills and capability to identify and respond to the needs of vulnerable customers.
- Respond to the needs of said customers via adequate product design and flexible customer service.
- Monitor and improve their performance with respect to the obligations listed above.
Following an evaluation of the guidance’s implementation, the FCA has identified five critical areas to ensure the fair treatment of customers in vulnerable circumstances.
So far, the Regulator has reported that it had yet to come across any retail banking firms that successfully managed to meet all of their expectations under this new Consumer Duty.
Supporting retail clients affected by the inflation
Last May, Bank of England issued its annual forecast where it estimated the rate of inflation to peak at 10.25 percent by the end of 2022. In an attempt to contain the inflation, the BoE’s Monetary Policy Committee voted in favor of increasing the base interest rate by 1 percent, a never-before-seen measure since the early 1980s.
With 80 percent of adults in the UK reporting an increase in their cost of living and 27 percent of the public deemed to have low financial resilience, consumers will face significant hardship in keeping up with the payment of personal loans, credit card bills, mortgages, utilities, and other types of borrowing.
In response, the FCA expects firms to abide by an enhanced duty of care.
Focusing on positive customer outcomes
A key part of the Consumer Duty incurs upon firms to develop flexible customer service in order to cater to the needs of vulnerable consumers. The FCA expects all firms, regardless of their direct contact with retail customers, to implement measures to abide by this Consumer Duty.
In its policy review, the FCA has compiled the following list of examples:
- Using customer data to identify clients who are at risk of gambling problems, extending support, and restricting these consumers’ exposure to credit marketing.
- Opening safe spaces for victims of domestic abuse.
- Conducting training for linked brokers in their vulnerability strategies.
- Subjecting the product and service development process to consumer involvement via, for example, focus groups.
- Developing and implementing codes of practice on domestic and economic abuse.
Monitoring and improving customer outcomes
In its review, the FCA has found a number of inconsistencies in customer care, especially amongst retail banking institutions. As part of remedial action plans, firms are expected to collect customer feedback, behavioural insights, and observations from specialist support services.
The FCA has emphasized on the need for the governing body of regulated firms to review the collected data and to approve and monitor response measures. So far, it seems that no firm has sufficiently implemented proper customer outcome tracking such as to satisfy their Consumer Duty obligations.
Critical problem areas identified are as follows:
- Lack of data collection and monitoring across all business areas of the firm.
- Over-reliance on complaints data rather than taking a proactive approach by researching all potential sources of disadvantage for vulnerable customers such as borrowing rates, charges, and other fees.
- Failure to develop holistic measures to fully capture the needs and problem areas for customers in vulnerable circumstances.
- Lack of training for staff with regular contact with vulnerable customers.
- Failure to review and amend distribution and product governance based on the collected information.
Providing support throughout the customer journey
Beyond dedicated customer support, the FCA expects firms to design products and services which are intrinsically designed to meet the needs of customers in vulnerable circumstances, right from the development stage and onwards.
Vulnerability considerations should be embedded into the firm’s products and services, and should be formally documented. The development phase would ideally, as deemed by the FCA to be best practice, reflect approval and recommendations made by focus groups and customer consultation. Once again, the FCA expects firms to approach this issue in a holistic manner, across all business lines.
Consultation should also be a source of data to improve the treatment of vulnerable customers.
Implementing a top-down culture and driving strategy
Unsurprisingly, the FCA has reported that firms with better performance in terms of fair customer treatment tended to be governed by involved and hands-on senior management. Hence, an implied obligation for firms under the Consumer Duty is to implement a top-down culture.
The Regulator has announced that it expects firms to be in a position to demonstrate clear review and accountability procedures. Best practice in this area would refer to the ability to evidence the consideration of vulnerability features by the firm’s governing body or executive committee.
In its policy review, the FCA has hinted at a potential reporting obligation from individuals in charge of developing the firm’s approach to vulnerability to the governing body. In turn, senior management is expected to oversee the implementation of measures and mechanisms which have for aim to ensure the fair treatment of customers in vulnerable circumstances across all business units.
