Money Marketing features an article, “As Consumer Duty looms, over 38 million UK adults don’t understand financial T&Cs," written by Baringa's Zoe Young on the opportunity for financial services companies to realign their strategy and forge a closer link between customer service and corporate strategic objectives. The article is below.
The Financial Conduct Authority has signalled that the new Consumer Duty rules due to be published this week represent a “paradigm shift in its expectations” around consumer protection and preventing financial harm.
On the current timeline, firms will have until the end of April 2023 to implement any necessary improvements to their current practices. According to Baringa’s new research, this might be a tall order for many financial services firms.
Under the new rules, the FCA states that: “Firms will have to provide consumers with information they can understand, offer products and services that are fit for purpose and provide helpful customer service.”
This is a laudable aim, but is hampered by a lack of engagement. We recently surveyed 2,000 consumers and found that almost three quarters (72%) of consumers reported not fully reading or understanding the terms and conditions of a new financial product before purchasing it, and almost a third (31%) of consumers are not satisfied that providers clearly explain the expected value or outcomes of a financial product or service to them.
It is debatable, therefore, whether firms can confidently confirm that they are delivering good outcomes for their customers, according to FCA requirements.
The Consumer Duty arrives at a crucial time. As inflation mounts and a possible recession looms, many products, such as reliable insurance and secure investments, may become less affordable, yet more important. This increases the importance of financial firms ensuring their products are comprehensible to customers.
"Vulnerable customers should be of particular focus, particularly as the cost of living crisis is likely to exacerbate the problems faced by these consumers"
Firms therefore need to decide how they are going to clearly communicate the expected outcomes and stipulations, including T&Cs, of their products in a way which makes consumers pay attention.
A model might be the insurance industry’s ‘key facts’ documents, a version of which could be applied across the consumer finance industry, on a voluntary basis. Companies are advised to begin with pilot projects focussing on one area, before learning and iterating depending on project outcomes.
We also carried out further analysis on the opinions of vulnerable customers who answered our survey. The findings are equally indicative that the sector needs to up its game to meet the new rules: 73% of vulnerable customers – defined here as being unemployed, retired, or having a physical disability – don’t fully read or understand terms and conditions when purchasing a product or service, and 28% are not confident that their provider understands their needs and objectives.
Vulnerable customers should be of particular focus, particularly as the cost of living crisis is likely to exacerbate the problems faced by these consumers, and cause this group to continue to grow – recent numbers from the FCA suggest about 27% of the population has low financial resilience and that this number is likely to increase.
Firms and particularly IFAs need to ensure they understand the characteristics of vulnerability and review the FCA’s guidance on fair treatment, to ensure these people do not come to financial harm.
Firms should also step back and view these upcoming changes as an opportunity: the Consumer Duty is a chance for financial services companies to realign their strategy and forge a closer link between customer service and corporate strategic objectives.