Series 5 Episode 4: Consumer Duty - technology solutions in a Day 2 world

Transcript

Tessa Norman: Hi everyone and welcome to the latest episode of Risk and Regulation Rundown, the podcast where we share our views and insights on hot topics in financial services risk and regulation. I'm Tessa Norman, your regular host, and in this episode we're talking about the FCA's consumer duty. I'm delighted to be joined by two expert guests, James Williams, a senior manager in our financial services banking conduct team, and Lin Yang, a senior manager in our technology data and analytics team, who are going to share insights with us on how they've seen firms transition from project mode to BAU mode and all that that entails, where we're starting to see the FCA focus its supervisory efforts and how that's likely to evolve and finally to share their thoughts on how firms can use technology and data solutions to support ongoing compliance and deliver better customer outcomes.

James, do you want to kick off by talking us through what we've seen among our clients in the run up to the end of July implementation deadline?

James Williams: Thanks Tessa. We've supported a number of firms to attain compliance throughout the implementation period and we've typically seen similar approaches being taken across different industry sectors. The effectiveness of implementation and the speed of execution has often varied. This is depended on the robustness of the initial gap analysis completed, effectiveness in the programme governance and the level of resource made available including within supporting functions so, for example, HR, finance or data. The implementation effectiveness is also depended on the culture of the firm and the tone from the top. So, for example, from the board or the board champion.

Generally, this has required an internal communication strategy to effectively cascade the message downwards throughout the firm. The boards that we've worked with have demonstrated consistent interest in the duty and are acutely aware of the new responsibilities that are placed on them so, for example, the regular oversight of customer outcomes. Despite this, we've all found that attaining and evidencing compliance has been really challenging. For example, many firms have identified a number of internal and external dependencies particularly where there's been significant reliance on outsources or others in the distribution chain. Ultimately this has made sourcing the right data to monitor and oversee customer outcomes challenging and, in some cases, has even required updates contractually.

We've seen that challenges have collectively made meeting the 31 July deadline difficult for some firms, particularly where they are already resource constrained.

Tessa: Thanks James. I think those themes definitely resonate with the conversations that I've been having with our clients. You mentioned some of the challenges there and we're now almost two months on from that implementation deadline. How are some of those challenges and resource constraints playing out and how are we seeing firms managing that transition now that they should be in BAU mode?

James: So now that the implementation deadline of open products has now passed, a lot of these firms have already wound down their main implementation programmes. However, these firms are now typically standing up new programmes to manage any de-prioritised or day two activity. So, for example, many still need to agree the structure and the content of their annual board report of customer outcomes, and some are still making further enhancements to their custom outcome MI. Other firms that we're currently working with are remediating any lower risk instances of poor customer outcomes that were not addressed during the implementation period. Firms with a back-book are also simultaneously completing their product reviews and their firm value assessments ahead of the 31 July 2024 deadline for closed products.

To streamline this, some firms are using technology platforms to perform these reviews which leverage advanced data analytics to assess product performance. We've seen this to be particularly helpful where there's an extensive back-book to work through. Throughout these reviews, firms are identifying poor customer outcomes that will obviously need to be remediated both on a tactical and strategic basis before the next deadline. There will be other activities that come out in the wash, now that we're past the 31 July 2023 deadline as well. For example we saw several firms undertake in-flight insurance during the implementation period to assess the effectiveness of their programmes and the extent of alignment of any changes to the new duty standards.

These firms are currently working through any remedial action that's spilled over in to the go live period. Some firms are also planning additional independent assurance either through their own internal audit functions or through third parties now that the 31 July 2023 deadline has passed. These activities are typically centered on whether new processes and controls have embedded as expected, are being executed appropriately and are delivering the desired customer outcomes. Firms are certainly recognising that this is an ongoing journey that will evolve over time.

Tessa: There's still a very busy to do list then for firms. Lin, what would you add to that in terms of what you're seeing firms focus on now?

Lin Yang: Yes sure, thanks Tessa. I absolutely agree with James that this is such a transition journey from getting the duty over the line to really embed a customer centered culture and it is certainly not an overnight job. For example, in reaching all the data points needed would require a significant time and effort and certainly our regulators are aware of this transition and are expecting companies to come with questions. While the companies are scrutinising the compliance with the duty, the regulators will also be looking for them to meet the higher standards of the duty of other issues and requests because the duty will be a key part of this supervisory approach. For example, in August, FCA has requested quite a number of banks and building societies to submit their account closure data for the last 18 months. For example, things like accounts being closed, terminated and what's the reason behind those.

This data exercise really shows how important it is for these firms to have a robust and established process when it comes to the customer outcome of monitoring. For example, can they extract the data needed to demonstrate this substantive compliance, as James just mentioned? Is the data granular enough to cover old product, not just the types of the product? Do they have maybe, like, a quality control in place to ensure that the data produced are robust and accurate, and also in a timely manner? For us it won't be a surprise if we see such data exercise come back again in the coming months for other consumer duty related requests. It actually sends a very strong signal for firms to gear up for the monitoring process.

Things to be considered for the companies such as are they investing sufficiently on the research and analysis that is needed to improve customer outcome? Is there any review? Still we're heavily focused on those revenue generating KPIs rather than customer experience insights and also it is quite important for all of the company to remember now that they're not alone in this journey. Coming back to the data summation example we discussed, they are encouraged to have this open dialogue with the regulators, any potential data quality issues and, more importantly, to discuss how to really enhance any gaps that we've seen going forward. The nature of the consumer duty requires old companies to go out and collaborate with each other, and the same distribution chain especially, so that they can jointly focus on a single group of customers. That's my take on this.

Tessa: Thanks Lin and yes, I absolutely agree, that bank account closures request has sort of put firms through their paces and would have tested some of their data capabilities very early on from the duty being introduced. So that's been an interesting exercise. You spoke to their interactions that firms might be having with the regulator, and we know that the regulator are taking a very pro-active approach to supervision so far as it promised it would. James, what would you add to that in terms of how you’re seeing the regulator focus its supervisory efforts initially and how do you expect to see that evolve?

James: Yes, I think particularly over the kind of twelve or 24 months, I think the FCA will likely scrutinise whether there is sustained focus and attention from SMFs, particularly on whether firms are actually delivering good outcomes across the firm, across its different product sets and whether there's evidence of challenge from the board and the board champion, you know, out of those discussions. I think we'll also see increasing interest in the embeddedness of new and updated policies, procedures and processes within the first line and whether any new controls have been designed and are being executed effectively. We'll also see the FCA focus on whether any instances of poor customer outcomes have actually been appropriately identified, remediated and responded to including where these are delivered by outsourced service providers or third parties.

We've already seen the FCA publish a fourteen-point action plan within the cash savings market which highlighted ongoing issues under the price and value outcome. I think they'll be further, similar publications in due course and we'll expect that any issues identified will be actively managed through regular dialogue with supervisors. In some cases, we may even begin to see enforcement activity now that we're past the 31 July deadline. Any firms which fall below regulatory expectations may find themselves subjected to section 166 skilled person reviews, for example, including potential fines off the back of these. We'll likely see the FCA request the annual board reports of customer outcomes from most firms in due course, when these become available in order to monitor how effectively the duty is embedding across the industry.

Tessa: Thanks James. I'm sure those initial interactions, but with the FCA, are going to be driving firms activity in terms of where they are prioritising and focused next and I think you've both referenced the fact that this is going to be an ongoing journey for the industry and I think as we go forward we're going to start seeing firms make better use of data and technology solutions so that they can make sure that the solutions they're putting in place are sustainable in the long term. Lin, what are you seeing in terms of those data solutions and how they are starting to evolve?

Lin: Yes, that's absolutely right, Tessa. Technology and data analytics in general we see is playing a more and more important role in helping companies to accelerate this transition journey to be BAU as discussed. One example, we can talk about is the advanced forecasting model. As we know, the traditional forecasting model, when it comes to credit risk decisioning will largely rely on basic demographic data, for example two customers with the same age group, income level, might be offered the same kind of product. The model itself would not consider how customers plan to spend the money or whether those credit limit offered suits their real credit needs.

Now the improved forecasting model will integrate customer's behaviour data, and other financial data that could be shared by third parties, so that model can get deeper insight into customer's spending pattern, their risk appetite etc. The product service it recommended will be much more bespoke and appropriate to suit their financial needs. I guess the best part is that this kind of tailored service will be made widely available for all customers rather than nowadays, if we think about it, it will be only a certain small group of wealthy customers who can afford it at a premium cost. Secondly, as we just talked about earlier, this July deadline certainly doesn't mark the end of this transition so on an ongoing basis, the MI metrics, they really need to demonstrate now that the firms are consistently generating good outcomes for their customers.

For example, when we evaluate a credit card, the metrics should not just focus on how profitable it is. It should also address how well this product serves their customers. For example, we can look at how much revenues are generated from fees and charges comparing to the things generated from interest. If this credit card revenue is largely from fees and charges then it's for banks to re-think the design of this product, whether it has the good customer outcome to start with. Another example I have seen in the market is the voice analytics tools. That is commonly used in the call centres to help them to give much more insight during their interactions with customers. Traditionally those note taking at the call centres can be quite labour intensive. You can imagine there will be a large amount of data to be processed and the quality of the note taking can be sometimes quite inconsistent.

So the voice analytics tools can help them to quickly process the data that is captured from their conversations using the help from AI, machine learning and some other real time analytics tools. On average we can see the time of note taking will be reduced from 75%. So that really frees up agent to focus on building a meaningful conversation and relationship with their customers rather than being busy at making notes.

Tessa: Some really interesting examples there and I think that 75% really stands out and, as you say, that's sort of the whole kind of focus of these kind of tools, is to really free up staff time to focus on really supporting customers and hopefully taking out some of that more manual processing. James, are there any other technologies that you are seeing in the market to support compliance?

James: Yes, absolutely. We've recently seen some firms beginning to explore intelligent customer experience technology to drive better engagement across the distribution channels. This involves processing real time product and operational data to deliver a dynamic customer experience. AI is used to predict the next based action for customers, ultimately enabling firms to deliver a hyper-personalised experience based on past customer behaviour. We're also seeing some firms beginning to consider different AI powered customer support options. These are typically in the form of AI chat bots that can resolve customer's queries directly or alternatively directly or intelligently route them through to the most appropriate department. Finally, from a monitoring perspective, some firms are using dedicated platforms to manage their product reviews and their fair value assessments.

These platforms extract data from different source systems and automatically assess product performance against pre-agreed assessment criteria in line with their risk appetite. Over time, I think we'll see firms start to develop more advanced, forward-looking models so by integrating new data sources and real time capabilities, firms can more accurately forecast any changes required to improve customer outcome delivery across different product and operational journeys. I recently attended an FCA techsprint where we explored how firms could use open banking data to more effectively identify poor customer outcomes. For example, this could be by identifying financial hardship through a deteriorating financial position across their different accounts even when these are held with other providers and proactively offering pre-arrears for forbearance or another example is using open banking data to identify cases where customer's money is not working hard enough for them and we can show them alternative products that may be better suited for their circumstances.

Firms should be mindful though of the need to explain how data is processed through, you know, appropriate data privacy disclosures, particularly opt-in but also within the terms and conditions and the privacy statement and ensure that customer consent is captured in line with the UK GDPR.

Tessa: Really positive to hear how the FCA is supporting firms in that journey and in developing some of those open banking data solutions. That's great to hear and fascinating to hear about some of those AI powered examples. Of course, a really hot topic at the moment, and we're hearing and seeing lots of debate around this. Lin, what would you add to that in terms of potential use cases for AI in terms of consumer duty? What are you starting to see firms explore there?

Lin: Sure, thanks Tessa. I guess there's no difference comparing to all the other industries that AI is here to shine for our financial services as well. James also already gave so much good examples on the use cases. Another example we can take a closer look at today is how Gen AI or AI in general to help vulnerable customers as we know that the FCA is quite keen to ensure that those customers receive equally good customer experience as others. Therefore, recently there are more and more apps that are based on conversational AI technology that offer so much different benefits for those individuals with hearing and/or visual impairments. For example, the features such as speech to text transcription, image recognition, voice recognitions. All of these features can help customers to engage more effectively during their day-to-day interactions with companies. It is worth to mention that, however, those technologies are not new.

It has been around for quite some time and the challenges that we see in the market is how companies really ensure that their technology operating model or infrastructure are mature enough to integrate with those features. For example, can our day-to-day banking app fully support and launch those features? That perhaps those features are provided by another third-party tech firm. What sort of adjustment is needed to make it work? How to build that bridge behind the two sides and really does the bank know how to manage the risks when something unfortunately went wrong? I guess all these questions need to be addressed and here we can see those dependencies have been fully reduced and allow customers to truly experience those benefits.

Tessa: Absolutely, and are there any other challenges that you're seeing firms grappling with in terms of some of these potential AI solutions and what are the kind of issues and areas that firms need to think about in order to overcome those barriers?

Lin: That's a great question Tessa. So yes, embracing those opportunities is definitely exciting but we also must have to exercise with caution particularly in the context of consumer duty because it has such a profound impact on a wider range of customers. One fundamental limitations about AI models, in my understanding, is that the model itself can be only as good as the data that we feed them. They may struggle to offer advice in those unexpected situations beyond their training data. I'm sure many of us have experienced those chat bots just fail to answer our questions or simply say, 'Sorry, I don't understand what you asked.' Secondly, these algorithms, they are still deemed to be too complex and not transparent enough to explain to the majority of customers who may not be a tech expert. It is difficult for the companies to communicate to them what factors are really used in our calculation and how they contribute to this outcome.

For example, the bank may not be able to pin down the exact reason for a credit application rejection so as a customer I can't really appeal for this decision and banks may struggle to redress or remediate the problem if this problem can't be unravelled themselves. I guess another point I want to make is around ethical concerns around the AI adoption. More specifically, the risks around potential buyers and discriminations when offered products based on algorithms. As we discussed earlier, those calculations rely on the data that it was trained to and imagine if the data themselves are not sufficient enough or it's inherently bias, the outcome can lead to further confusions or issues. For example, one of the credit card providers used to offer higher credit limit to men comparing to women even though they have the same income.

It's unfortunate but this bias has been around for the past decades and, in this case, they'd have this inherited flaw. So those challenges we just discussed here today is really urging companies to find where's the balance between embracing this exciting opportunity and being responsible so that they can build this open and trustworthy relationship with customers.

Tessa: And James, how does that resonate in terms of the clients you work with and how you're seeing those strike that balance as they look to progress their technology ambitions?

James: So off the back of the duty, many firms that we work with are currently re-evaluating their technology road maps and some firms are also taking a technology maturity assessment in order to identify functions that would benefit from moving up that maturity curve. A consumer duty overlay is typically being applied to identify any areas which would benefit from adopting technology, particularly where customer pain points were identified during the implementation period. So as Lin mentioned, some of our clients are also currently looking at how generative AI could be used for more customer-facing applications rather than back-office ones, both to enhance customer experience but also to optimise resources.

Many firms are currently enhancing their omni-channel customer experience so that customers can transfer seamlessly between different customer options and others are thinking about how they use customer experience analytics to more effectively measure product and service design and performance. However, without understanding their existing technology road maps, these firms are at risk of not identifying potential overlap with other technology changes that are happening across the firm so this may ultimately lead to a general lack of co-ordination and inefficiencies in executing the firm's technology change agenda. We're seeing many firms undertake a detailed scoping and planning exercise to determine sponsorship, ownership, success criteria and any known dependencies. These plans are also capturing any execution risks associated with technology implementation activity. Firms are also identifying mitigating action or controls to prevent risks crystallising. Firms are generally being mindful to develop executable plans predicated on realistic timelines and achievable milestones to ensure this implementation is a success.

Tessa: It's really interesting and I think to me that really speaks to the fact that it's important that firms think about consumer duty as part of their broader strategy and firms are still, kind of, working through some of those strategic implications now that they're over the implementation deadline. I mean I think it's really clear from our discussion that firms have been on a significant journey with consumer duty so far and there's certainly more change to come. It'd be great to end by getting both of your reflections on how you think the conversations are likely to evolve in, say, six to nine months’ time. James, I'll come to you first.

James: Yes, I think in six months’ time, I think the conversation will be really around how effective ongoing information sharing is across the distribution chain. Manufacturers obviously need to share their fair value information with their distributors and distributors likewise need to share sales information with manufacturers and any other relevant information. I think that's going to be a really key piece particularly where you've got quite long distribution chains in the market. I think firms will obviously be submitting their inaugural annual board report, customer outcomes, fairly soon and I think this will ignite further discussion around the potential need for a strategy refresh, like you say Tessa, to demonstrate compliance with the duty.

Some of our clients are already considering product rationalisation following their product reviews and fair value assessments. Some of them are needing to take really difficult financial decisions to balance both commercial success with ensuring their products provide truly fair value and actually deliver good outcomes to their customers. Finally, I think we're likely to see firms having ongoing engagement with the FCA supervisors and certain firms will be making PRIN 11 notifications where they fall foul of the new requirements.

Tessa: Lin, what would you add to that? How do you see the conversation evolving in six months’ time or so?

Lin: I think in six months’ time it would be quite interesting to take a look at how companies can leverage on data and technology innovations, as we discussed, to achieve this operational excellence in their BAU mode and the duty. For example, currently we see a large amount of manual approach are still in place from data extractions to monitor the customer outcome using the traditional type of dashboard. As you would imagine, maintaining those reporting flow can be quite manual and labour intensive. What it really does is to leave very nice time and resources for the companies to focus on delivering better customer outcomes and address potential harms which is what the duty is really about. In my mind it might be a shift in a focus from tactical solutions to strategic solutions such as things that can be automated and streamlined to achieve this better efficiency overall.

Tessa: Thank you both. Some really interesting food for thought to finish with there about what the road ahead looks like. Thank you very much. I think it's been a great discussion. It's been really interesting to hear about the journey that firms have been on so far and what the future looks like. I think a lot of the technology solutions that you've talked about are really exciting and I know they are front of mind for our clients as they look to demonstrate ongoing compliance with the duty in a way that is sustainable but also creates value for the business. One of the things that I'm really interested to see as we look further ahead is what firms can use the duty as a catalyst to differentiate their offering, to deliver enhanced customer experience outcomes and to potentially gain competitive advantage.

To our listeners, I hope you've enjoyed this conversation and thank you very much for listening. As always, please subscribe to future episodes and you can also rate and review this series as it really helps other listeners to find us. If you'd like to hear more from us on risk and regulation, please look out for our regular publications on our website which we'll link to in the show notes and we'll be back next month with our next episode.