The Financial Conduct Authority’s Consumer Duty has come into force today, requiring firms to be open and honest, avoid harm, and support consumers to pursue their financial goals.

The new rules for financial services firms in the United Kingdom set a higher standard of consumer protection, including better support, communications, as well as products and services that meet consumers’ needs and offer fair value.

The FCA will be closely monitoring how firms are putting the new rules in place and will take action against those that aren’t following them.

According to the UK’s financial watchdog, consumers should expect:

helpful and accessible customer support, so it’s as easy to sort out a problem, switch or cancel your product, as it was to buy it in the first place;

timely and clear information you can understand, so you can make good financial decisions. This means important information shouldn’t be buried in lengthy terms and conditions;

providers to offer products and services that are right for you, rather than pushing products and services you don’t need;

products and services to provide fair value. This should mean you won’t be ripped off or have to pay costs you didn’t expect. But while your provider should offer you a fair price, it doesn’t mean it will be the best deal for you, so you should still shop around;

firms to consider if you’re in a vulnerable situation when dealing with you. This could be due to poor health or financial troubles, for instance;

These rules apply to all new and existing products and services that are currently on sale. For older products that are no longer on sale, the rules will apply from 31 July 2024.

Two executives from Provenir, a data and credit decisioning software for leading fintechs, have commented on this regulatory milestone in the UK.

“For financial institutions, it’s a complete mindset shift”

Chris Kneen, Managing Director of UK & Ireland at Provenir, said: “As the nation grapples with a living crisis and rising inflation, the introduction of Consumer Duty comes at a crucial time. Data shows that consumer lending, excluding student loans, reached over £28 billion in January 2023, surpassing the previous peak in January 2020 before the Covid pandemic. However, financial firms have become more cautious about lending money, tightening credit standards and moving away from speculative deals, making it harder for consumers, and SMEs, to access the financial support they require.

“Consumer Duty is a proactive response by the government to the challenges faced by consumers and ensures that financial institutions adopt a consumer-centric approach to credit. For consumers, the new regulatory framework will bring about a range of positive changes. It will enhance affordability, address revolving line of credit issues, and prompt adjustments to product offerings throughout the customer journey. For financial institutions, it’s a complete mindset shift – they want to be seen as looking after their customers, not as loan predators. Reputational damage can be caused quickly, and the impact of rumours and a bad reputation could easily tank their business.

“To effectively implement this customer-centric approach, which envisions adjustments to the product offering at any given time in the customer journey, financial institutions will need to embrace advanced technologies such as artificial intelligence and machine learning. These technologies will enable them to leverage large pools of data and anticipate when customers may be heading towards financial difficulty and step in with preventive measures.”

“Lenders will be required to consider affordability and vulnerability when onboarding”

Frode Berg, Managing Director for EMEA at Provenir, added: “With the new rules in place, lenders will need to change their standards of support and provide consumers with protection to promote good outcomes. This may result in lenders being more cautious and thorough in their assessment of applicants, which could potentially lead to stricter lending criteria. As a result, some individuals who may have previously qualified for credit may now face more difficulty in obtaining it.

“Conversely, it is also an opportunity for lenders to adopt advanced data and analytics technologies, which will enable them to better assess the creditworthiness and affordability of borrowers throughout their credit journey and build more personalised offerings and safeguards for consumers and businesses alike.

“Consumer Duty will have a significant impact on lenders’ credit risk assessment processes. To comply with the new rules, lenders will need to have a more holistic and accurate understanding of applicants and customers. This will require them to gather more data and insights into borrowers’ financial situations, including their affordability and potential signs of distress. Lenders will also need flexibility to quickly adapt their policies and the ability to test and deploy models quickly. Legacy systems will create challenges to bringing in new data sources and being able to make changes to processes and models in an agile manner.

“The impact on borrowers is likely to be positive, especially in the long term. With the new rules in place, borrowers will have access to better and more tailored products. Lenders will be required to consider affordability and vulnerability when onboarding customers and throughout the customer journey. This means that borrowers will be better protected against potential downfalls, and lenders will have a greater responsibility to ensure that the products they offer are appropriate for each individual borrower’s circumstances.

“The new rules will require lenders to prioritise customer outcomes and put the interests of their customers first. This will mandate a shift in the lending industry towards a more customer-centric approach. Lenders will need to invest in technology and processes that allow them to comply with the regulations at a product level and meet the new standards of support. The availability of credit may be influenced by lenders’ ability to adapt and comply with the Consumer Duty requirements, potentially leading to changes in the types of products and services offered in the lending sector.”