Expert View: Consumer Duty: Reducing Financial Vulnerability

Consumer Duty: Reducing Financial Vulnerability 

The Financial Conduct Authority (FCA) is keen to promote a higher level of consumer protection through Consumer Duty. What does it mean for financial firms, and can it reduce the risk of financial vulnerability for customers? 

Consumer Duty requires organisations to do more to ensure good outcomes for new and existing customers. The aim is also to reduce financial vulnerability by ensuring customers have the appropriate information to make considered decisions on products, including insurance and loans. 

Let’s remind ourselves of the Consumer Duty Outcomes that financial firms should now commit to:  

1. Designing and developing products and services that are fit for best meeting the needs of target customers.
2. Ensuring the price of products is reflected in the direct benefit to customers, so it offers value.
3. Promoting consumer understanding by proactively providing appropriate options and details that enable informed decisions.
4. Supporting customers by giving them sufficient time to consider information and, if necessary, friction points that can reduce risks.

Consumer Duty is focused on firms acting in good faith, avoiding foreseeable harm and helping customers achieve their financial objectives. It seems a shame that an enforced standard is required to ensure customer-focused services. The targets represent reasonable and achievable good practices that we should expect from any company.  

Unfortunately, many customers are mis-sold financial products that aren’t the best match for their needs. Sometimes financial vulnerability, lack of numeracy skills or confidence in checking the details and questioning information is preyed upon or not picked up early enough in the conversations, even by FCA-authorised firms.  

In addition, the drive for digital interactions is a barrier to many customers who need the technology or digital skills to access services. Many people cannot access essential financial management services without other support channels. Things must change to avoid issues that put customers at greater risk of financial difficulty and harm. 

Friction Points in Financial Decision Making 

One of the Consumer Duty outcomes refers to the introduction of friction points. In a world where streamlined processes are desirable, friction points are generally reviewed as unfavourable, so why have they been included? 

The fact is that it is too easy for customers to purchase insurance products where they don’t fully understand the restrictions or conditions. 

The Consumer Duty includes friction points because they are a means of supporting product suitability. They might consist of firms requiring customers to look at pictures of door or window locks to ensure that customers can provide accurate information to the insurer, thus mitigating the risk of a declined claim. 

Firms often rely on customers to open and read the IPID and policy wording during the sales process to garner the key information for themselves. However, as an industry, we are all too aware that customers either do not open these documents or don’t have the time/capacity to read and digest them fully. Therefore, adding additional pop-ups before purchase that remind customers of any device registration requirements, for example, would be deemed an appropriate and, quite frankly, a necessary level of friction. 

The FCA is clear that friction points are not unreasonable barriers that prevent customers from knowing about or accessing services. They must always be in the customer’s best interests, focusing on ensuring informed decisions. 

Nudge, Sludge & Dark Patterns 

There are three unusual terms in Consumer Duty: nudge, sludge and dark patterns. The FCA wants to encourage nudges, which are actions that promote good decisions. In contrast, sludge refers to activities that discourage good decisions, and dark patterns are actions that encourage poor choices.  

Consumer Duty requires firms to review all retail financial products and services to ensure they fit into the nudge category. It is also necessary to use data and customer feedback to measure and examine the impact of changes to products and services to improve outcomes. 

Protecting Vulnerable Customers 

Consumer Duty is designed to help all customers to avoid financial vulnerability and prevent already financially vulnerable customers from getting into greater debt. I am interested to see this standard’s impact once it is enforced. 

To gain further insight into Helen’s expertise on vulnerable customers, please join us at our next GreenKite – Ask the Experts session on May 4th 

Further Information: 

Consumer Duty Information for Firms: https://www.fca.org.uk/firms/consumer-duty-information-firms 

How to check if a Financial Firm is authorised by the FCA: https://register.fca.org.uk/s/