By Robert McKechnie, Director of Consumer Products at Equifax UK

After months of consecutive Bank of England base rate rises, with household bills on the rise, and mortgage repayments weighing on wallets, households across the UK are finding themselves anxious about their financial wellbeing.

According to the Financial Conduct Authority (FCA) almost a quarter of UK adults are in financial difficulty or would be if they suffered a financial shock1. Worse, 24 million people – or 45 percent of British adults – were already struggling to pay their domestic bills and fulfill credit commitments in May last year, with people who are unemployed, younger, female, gig economy workers, renters or in an ethnic minority group being among those with the lowest financial resilience2. 

The FCA’s new Consumer Duty rules, which come into effect at the end of July, are incredibly timely, reinforcing the principle of ensuring ‘good outcomes’ for consumers. Ensure is the key word. The onus has shifted and now financial services firms are being asked not just to be fair, but to be proactive in preventing harmful outcomes.

A longer regulatory shift 

For a casual observer the new Consumer Duty may appear to be just the latest in a series of attempts to make sure consumers, in a tricky financial landscape, are protected. 

There have always been questions over whether legislation goes far enough. We must recognise regulators only have so much bandwidth and financial services companies have a duty as well. 

The new standards are really part of a bigger shift. Firms have always had the concept of fiduciary duty to their clients. Then in 2003 the Financial Services Authority (FSA) introduced the MCOB rules to help consumers make more informed decisions in the mortgage market, followed five years later by ICOBS in the insurance market on how to treat policyholders. And in 2006 the regulator sought a better deal for consumers altogether through the Treating Customers Fairly framework. 

After the Global Financial Crisis it became clear the FSA itself needed to be revised, and in 2018 the FCA introduced PROD to improve firms’ product oversight and governance processes. Since the Consumer Duty rules were announced last year, lenders in particular have had work to do, with the incoming standards closing gaps the PROD handbook left behind. 

Each of these has been a move towards improved consumer outcomes. 

Data and proactive prevention

Consumer Duty expects businesses to consider the needs, characteristics and objectives of their customers, as well as how they behave at every stage of the customer journey. Responding to the changing circumstances of customers is important, but preemption is also becoming the new game in town – for example, how can the industry ensure consumers don’t overstretch and borrow more than they can afford in the first place? 

For different segments of the market this is likely to mean different things. For mortgage lenders, they will need to navigate the impact of rising interest rates on homeowners and buyers, using data to power more accurate decisions around affordability before repayments spiral out of control. Other creditors will need to make sure their lending is truly sustainable and does not create greater pain down the line. For anybody worried about their mortgage repayments, the Treasury alongside lenders and the FCA made a commitment to support navigating the situation, and as a step, they can contact their lender for help and guidance, without any impact on their credit file3.

Data is also critical when it comes to debt services. Only a nuanced and informed approach based on real-world customer insights will help firms balance recovery with the challenges faced by the most financially vulnerable in society. 

Meanwhile, as households struggle with domestic bills, insurers need to be prepared for those who, were it not for active intervention on the part of the insurer, might cancel their cover and leave themselves more exposed4.

Better outcomes for all

Consumer Duty raises the bar, and it is vital firms continue to respond to the needs of our times. 

Tools and services already exist to help financial services businesses deliver good outcomes for their customers. As the economic landscape shifts, peoples’ needs change and regulation evolves, businesses must keep up and develop solutions and processes that proactively work for the good of ordinary people across the UK.

We live in challenging times, but the call to respond – from the FCA, from government and most importantly, from millions of British adults – is clear. Move away from merely reacting. The tools to get on the front foot are there for the taking, and ultimately better outcomes for consumers will mean better outcomes for businesses too.

The data and insights available via Equifax’s product proposition covers the end-to-end credit lifecycle, from lending assessments with a focus on affordability and supporting customer management around vulnerability, to helping consumers to understand the impact of their credit score. For more information, speak to your Relationship Manager to see how we can support your business. 

SOURCES:

1: FCA October 2022: https://www.fca.org.uk/news/press-releases/millions-britons-struggling-bills-warns-regulator#:~:text=12.9%20million%20UK%20adults%20now,they%20suffer%20a%20financial%20shock.

2: FCA October 2022: Financial Lives 2022 survey: insights on vulnerability and financial resilience relevant to the rising cost of living | FCA 

3: HM Treasury July 2023: https://www.gov.uk/government/publications/mortgage-charter/mortgage-charter

4: FCA July 2023: https://www.fca.org.uk/publications/good-and-poor-practice/cost-living-good-and-poor-practice-general-insurance-market