In 2017, “vulture” advisers were involved in a misselling scandal in Wales, where bad advice led 8,000 steelworkers to transfer over £2.8bn of their pensions.
The Financial Conduct Authority (FCA), which regulates financial services and markets in the UK, says financial products should not be missold. Yet, the scandal exposed the cracks in regulation.
Questionable practices, like the steel pension scandal, pushed the FCA to introduce a new Consumer Duty mandate last year — which will be active next year — the goals of which are to put the customers’ wellbeing front and centre.
“There’s quite a history around the concept of treating customers fairly, which goes back a number of years,” says Vaughan Jenkins, director of business development at open data and payments platform Moneyhub. “With a number of different financial scandals, there’s enough evidence to show the FCA they wanted to set a standard.”
With inflation in the UK running at the highest rate since 2008 — and Russia’s invasion of Ukraine putting a further strain on world economies — consumers need financial services to have their back more than ever.
With a number of different financial scandals, there’s enough evidence to show the FCA they wanted to set a standard
We spoke to the experts about what the Consumer Duty mandate means for FCA-regulated businesses, for consumers, for fintechs and for the future.
A significant shift for FCA-regulated businesses
While the scope of the Consumer Duty mandate is not yet clear, the FCA says it will lead to a "significant shift" in the culture and behaviour of companies, removing exploitative advertising, selling services that are not fit for purpose and poor customer service.
The FCA has finished its consultation on the mandate and the new rules are expected in July, which will paint a much clearer picture to businesses on what they’ll need to do. But in the meantime, all FCA-regulated businesses in the UK should prepare themselves to:
- Ask themselves how they know they’re aligning their customers’ interest with their product and services;
- Figure out how to assess that a product or service is wholly suitable and appropriate for that customer at the point of sale and in the best interest of their customer’s plans;
- Act to enable rather than hinder these outcomes;
- Assess the effectiveness of their actions.
“The core principle defines what you need to do in terms of knowing your customer, checking the suitability of what you’re doing and continuing to monitor whether that product remains suitable for your customer,” says Jenkins.
The challenge for the industry is that unless we can build the right financial wellbeing framework, it’s difficult to achieve a good outcome for a customer
He describes it as a “further stiffening of what’s expected” and “raising the bar”. Colin Williams, managing director of pensions and savings at finance and insurance company Standard Life, agrees, adding building financial services that prioritise wellbeing will be the only way to comply.
“This duty means that firms will focus beyond simple ‘compliance’ against the rulebook,” he tells Sifted. “The challenge for the industry is that unless we can build the right financial wellbeing framework, it’s difficult to achieve a good outcome for a customer.”
Raising the bar for the customer
But the bar is going to remain on the floor if people are still being mis-sold or receiving poor customer support. That’s why the FCA says the bar should be higher, putting customers in a position where they can rest assured that products and services sold to them always have their best interests baked in.
“While many firms already act in their customers’ best interests, this emphasis on behaviour, culture and higher standards is meant to ensure consumers always receive the support, products and services they need,” says Sam Christopher, head of proposition, strategy and growth at investment advisers Fidelity.
This includes protection for vulnerable consumers, as well as consumers being able to trust financial services and feel in control of their money.
“We know from our research that those who plan their finances are much more likely to feel confident about the decisions they’re making and to suffer from lower financial anxiety,” says Williams.
The open finance solution: What does it mean for the fintech industry?
But while more control over our finances means better wellbeing, it also means more data — which can be complicated to untangle. Christopher says this is a golden opportunity for fintechs to leverage the mandate and help consumers to manage their financial lives.
“As the FCA mentions in its proposals, while digital and online services may offer consumers greater choice and convenience, they can also introduce complexity and risk,” she says. “Fintechs have an opportunity to help them navigate through this using the vast levels of data they have access to and the highly personalised experience they can offer customers.”
Jenkins says this can be achieved through open finance, where financial data is shared to different parties — with consent — in order to provide personalised services.
“The remaining part that is missing is the enablement of the evolution from open banking to a much broader remit afforded by open data which is scheduled for primary and secondary Parliamentary time. This will mean open finance and smart data can fill this gap,” he says. “We think that would be an enormous enabler of what the FCA is trying to achieve.”
Jenkins adds open finance can be used by FCA-regulated businesses to comply with the mandate by using data to get a “more complete and thorough understanding” of its customers, as well as to provide evidence that they are actually achieving outcomes that benefit their customer.
“There are strong links out there between debt management, financial management and mental health,” he says. “That ability to detect and respond to behavioural patterns is where open finance has an important part to play in Consumer Duty.”
There are strong links out there between debt management, financial management and mental health
And where businesses don’t have open finance capabilities, they can partner up.
“Using Moneyhub’s open finance capability gives us the opportunity to help our customers make better decisions,” says Williams. “For example the ability to create a personal balance sheet that shows all your assets, including any housing wealth, which is often overlooked in saving and retirement planning.”
Entire lives of data: What it means for the future
Christopher predicts the FCA’s requirements will accelerate the adoption of open finance.
“We’re likely to see significant growth in the number of organisations participating in open banking and open finance,” she says. “The power of seeing everything in one place and being able to make informed decisions could well transform the way in which consumers make decisions about their finances.”
She adds we’re also likely to see financial services providers looking outwards to other sectors in order to increase the wellbeing of their consumers.
We’re likely to see significant growth in the number of organisations participating in open banking and open finance
“We’re also seeing financial service providers looking and learning from other sectors. We’ve all come to expect more from our experiences as consumers, with technology making so many other areas of our lives easier and more efficient,” she says. “By applying these observations to their own tools and services, fintechs have a great opportunity to improve consumers’ level of engagement with their finances.”
For Jenkins, this will extend much further than the UK.
“It’s a global phenomenon,” he says. “Ultimately your entire life of data is something that you control — that can be used for your own benefit.”