Monitoring vulnerability over time is becoming a potential problem area for firms wanting to stay compliant.
Lenders are waking up to the fact that Consumer Duty is not going to be a ‘one and done’ project.
Unlike other aspects of financial regulation that they have had to adopt in the past, complying with the FCA’s latest regulatory advancement looks set to be a year-round challenge.
The reason for this is that consumer circumstances can change from day to day and therefore also the way to compliantly manage cases with ‘best outcome’ in mind.
Clients can be pushed unexpectedly and at short notice into a ‘vulnerable’ definition by a complex interplay of factors such as over spending, illness, divorce, redundancy, etc. And, from July 31, 2024, when Consumer Duty fully applies, financial services firms will be expected to ensure compliant outcomes across the lifetime of products.
Speaking at a PIMFA conference earlier this year, Lucy Castledine, FCA Director of Consumer Investments, reminded firms that it was an internal governance requirement that they needed to provide regular board level reports stating whether they were providing good outcomes. And, she added, boards should be challenging executives and driving them forward to deliver and evidence good client outcomes.
It is obvious that to do this effectively, comprehensive data monitoring regimes are a must for even the smallest of firms. All outcomes should be evidenced with data and management information, alongside the actions needed to deal with shortcomings. The FCA sees its role as examining how firms have identified the vulnerable and poor outcomes and what actions they planned and took as a result.
We know that for some firms getting adequate monitoring regimes in place to satisfactorily ensure Consumer Duty compliance is proving problematic. There are still many financial firms, often small players, who are way behind in their data sophistication. Lack of insight and available expertise make them particularly vulnerable to regulatory oversight.
Worryingly, the FCA has reported some firms just repackaging existing data in the hope that it does the job, or reporting few or even zero vulnerable customers in direct contrast to the FCA’s own Financial Lives survey, which shows around half of all UK adults are vulnerable in some way.
As the regulator has indicated, it is not necessarily having ‘poor outcomes’, per se, that will result in punitive action, it is not having the data monitoring regime in place to flag such outcomes in the first place that will be the problem for many.
The question regulated firms need to ask themselves is this: do we have an early warning system that anticipates harm by joining the dots across different data sources? If we haven’t already got something that, for example, overlays data on higher charges with levels of customer engagement to find a combination that indicates potential issues, we need to make sure we do.
There are no excuses. The FCA has given the industry a significant bedding-in period (final rules and guidance were published in July 2022). Furthermore, if they haven’t got the internal knowhow, third parties can be consulted.
There are a range of plug-and-play data orchestration platforms that can be up and running within days. Over time, such platforms can fine tune data sources and analysis to optimise compliance (and profitability).
The definition of ‘good outcome’ may well be escalated over time by the FCA, so having something in place that ‘learns’ as well as sources, filters and analyses data is essential.
Thankfully, the regulator has stated that it is not setting out to trip firms up by going after technical breaches. It will look favourably on firms taking ‘reasonable steps to identify and proactively address concerns’, even if mistakes are made. As stated, not having an adequate monitoring regime in place to identify and act is what is going to lead to punitive action.
The industry is still coming to terms with the morphing of financial regulation from specific and clearly set out requirements to ‘themed’ regimes, such as ‘good outcome’, open to interpretation or as some would put it mission creep. This is undoubtedly trickier and more susceptible to regulatory gold plating than those it replaces.
With the FCA giving every indication that it wants to expand regulation to ensure what it sees as optimal outcomes in a range of areas, data is going to become the only way to navigate a compliant, and profitable, course.
David Wylie is commercial director of LendingMetrics
