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Considering the critical next steps for the Consumer Duty

211 - Finance Digest │ Financial Literacy │ Financial PlanningBy Mark Collingwood, Managing Director of UK, Ireland and the Nordics at Provenir

As the UK grapples with the ongoing cost of living crisis and persistent inflation, the implementation of the new Consumer Duty rules on 31 July came at a critical time.

At the end of July, outstanding consumer credit lending stood at £216 billion, increasing by £855 million on the revised total for the previous month as people scramble for funds. However, at the same time, many financial firms have become more cautious about lending money, tightening credit standards and moving away from speculative deals, often making it harder for consumers to access the financial support they require.

The Consumer Duty is the cornerstone of the FCA’s three-year strategy and a key part of its work to set and test higher standards. It’s a proactive response to the challenges faced by consumers and will ensure that financial institutions adopt a more consumer-centric approach to credit. The new regulatory framework is set to usher in a range of positive changes. It will enhance affordability assessments, address the revolving line of credit issues, and prompt adjustments to product offerings throughout the customer journey.

For many financial institutions, it requires a complete mindset shift – they need to be seen as looking after their customers, not behaviour like unscrupulous lenders. Reputational damage can escalate quickly, and rumours can easily harm a business.

It’s also crucial they realise the implementation date was just the very start of a much longer journey towards the true prioritisation of better consumer outcomes. Three months on from the implementation date, here is what responsible lenders should be carefully considering:

  • Is their technology up to scratch? To effectively implement this customer-centric approach, which relies on adjustments to the product offering at any given time in the customer journey, financial institutions need to embrace advanced technologies, such as AI and machine learning.

These technologies will enable them to better leverage large pools of data and anticipate – and intervene – when customers may be heading towards financial difficulty. Advanced analytics will also enable them to assess the creditworthiness and affordability of borrowers more accurately and build more personalised offerings and safeguards.

  • Be mindful of the FCA’s assessment of Consumer Duty compliance. Since the publication of the new regulation, the FCA has been actively reviewing implementation plans and their outcomes.

The FCA’s assessment provides insights into the industry’s response to the rules, highlighting areas of successful implementation as well as those that require improvement. It’s therefore important that firms stay informed about the FCA’s findings and align their plans accordingly in order to meet the requirements.

  • Introducing prioritisation strategies for effective compliance. To effectively comply with the Consumer Duty rules, credit risk teams need to prioritise their activities. This helps to ensure that resources and efforts are effectively directed towards the areas of highest importance, increasing the likelihood of successful compliance.

Developing clear strategies for identifying and addressing compliance gaps is crucial. This may involve assessing existing processes, systems and policies – and making necessary adjustments to better align with the regulation’s requirements.

  • Collaborative engagement with relevant third parties. The Consumer Duty emphasises the need for collaborative engagement within the distribution chain. So this means that financial services organisations must start working more closely with intermediaries, such as brokers and price comparison websites, to ensure that information is effectively shared and implemented.

Building strong relationships and more open lines of communication with third parties is essential when it comes to truly achieving good customer outcomes and maintaining compliance with the new regulation.

Three months in, it’s becoming clear that the impact of the Consumer Duty on borrowers will be positive, especially in the long term. Thanks to the new rules, borrowers will have access to more suitable and more personalised products, whilst lenders will be required to consider affordability and vulnerability more closely when onboarding consumers – and indeed throughout the customer journey.

This means that borrowers will be better protected against potential downfalls, and lenders will have an increased responsibility to ensure that the products and services they offer are appropriate for each individual’s circumstances.

To survive and succeed in this new arena, it’s imperative that lenders invest in the right technology and processes that will allow them to both comply with the Consumer Duty at a product level and ensure that they are acting in the spirit of the new rules.

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