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From regulation to reality: Understanding Consumer Duty’s impact

While lenders get to grips with this new ‘outcomes-based’ regulation, the FCA’s gaze is likely to intensify on firms’ compliance over the coming year, writes Daniel Lanyon 

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This is an excerpt from the October edition of AltFi's new magazine The Financial Innovator, which is available for free here.

For decades, perhaps hundreds of years, it has been a summer routine for financial services firms to slow down while staff and customers head off on their holidays as the temperatures rise.  

This July, however, no such slowdown happened. Instead, firms scrambled to interpret and implement a vast and important new piece of legislation: the Consumer Duty.  

The new framework, which came into effect on 1 July 2023, had been well sign-posted.  

Sheldon Mills, the Financial Conduct Authority’s executive director on consumers and competition, had even encouraged the UK’s financial services industry some months earlier in a speech, using Mark Twain’s famous advice, to “eat the frog” and, well, get on with it.  

Its impact, however, is still being forged with lending one of the financial services sectors most affected by the change over the long term.  

 A Call Of Duty… For Consumers 

At its core, Consumer Duty is an ‘outcomes-based’ regulation aimed at improving the experience of retail customers. It has been more than three years in the making but has its ultimate origins in a number of scandals that hit consumers in the decade since the launch of the FCA. 

This includes the fall of Neil Woodford’s £8bn fund empire and the collapse of London Capital & Finance’s mini-bond platform. Both instances saw thousands, perhaps tens of thousands of retail investors lose substantial amounts of money with only a fraction recovered nearly five years later.   

It is a monumental “sea change”, Scott Newby, head of compliance at fintech Shieldpay said. 

The reason it's such a sea change, Newby adds, is that it takes firms away from what was a tick box approach to one that relies on “evidential standards”.  

“For the first time we have all different people and heads of compliance trying to understand well, what does good look like? What does the FCA actually want to see? How are they going to monitor what is a good outcome? What are these evidential standards?” he said.  

Both far-reaching but also somewhat ambiguous, the regulation has some key areas. An impetus for responsive customer service, clear communication, and enabling customers to make good decisions for their money. But it also mandates firms regularly review products or services that may have features that could risk harm to vulnerable customers. 

“It's all about building a better standard for consumer protection, and actually being able to evidence why you're doing it. That's the evolution of why Consumer Duty has come into effect. It's just raising the bar,” Newby said.  

“That's what the FCA has been doing, not just with Consumer Duty, but more generally, through their business plan. They openly say they're going to become more rigorous, they're hiring more people, and they're using data to understand that firms are acting to both not only regulatory standards but doing the right thing,” he added. 

Despite the long tail of issues that prompted the regulation, it has arrived at a very apposite time with the cost of living crisis in full swing and consumers becoming more and more reliant on credit to meet their basic needs. 

Lenders Beware 

The UK’s retail lending market, which encompasses mortgages., auto finance, loans, credit cards and overdrafts among other segments will likely be one of the most affected areas by Consumer Duty. 

Recent analysis by financial services digital marketing agency Balance found Consumer Duty guidance of marketing activity is not being followed. Building societies were the worst performing sector in the financial industry, according to Balance’s recent research, with banks not far behind. 

Desmond McNamara, chief risk officer at Zilch, a consumer lender offering buy now, pay later services, says the fintech has implemented the new consumer duty standards into its policies and procedures and has actively engaged with, and shared its implementation plans with the FCA. 

“Consumer Duty is a flagship programme of the FCA. Its creation will deliver new standards for regulated firms to abide by and show that they are putting the consumer first – Zilch was founded on the basis that we get regulated, putting consumers and protection for them first - and so we fully support this initiative,” he said. 

McNamara expects to see a huge change in the lending world as a result of the new regulation.  

“Consumer Duty will raise standards across the board. This is not a point-in-time project - it is a driver for long-term behavioural change. At Zilch, we believe it will challenge many current business models,” he said. 

“Firms that live on net interest margin rather than providing customers real value every day, will be particularly challenged by this framework.  Additionally, the practice of those that use teaser rates to roll customers into more profitable long-term revolving balances will also become more challenging to defend under the price and value framework,” he added.    

Keep reading? Get the full article in the October edition of AltFi's new magazine The Financial Innovator, which is available for free here.

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