Complaints and redress: meeting a higher bar

The FCA is subjecting firms to greater scrutiny on their complaints data, processes and governance, using the Consumer Duty to hold firms to a higher standard in how they identify and mitigate foreseeable harm.  

Meeting these evolving expectations brings challenges, which for many firms are exacerbated by rising complaint volumes and operational difficulties. 

So how can firms address these challenges and meet the FCA’s expectations, now and in the future, in a way which delivers operational efficiencies and reduces future costs associated with complaints and remediation? 

Rising complaint volumes

In the lending sector, firms active in the motor finance market are facing high and rapidly rising complaint numbers relating to discretionary commission arrangements (DCAs). Although the FCA has paused the eight-week complaint response deadline while it carries out a review of historic arrangements and sales, the consumer and media attention on the issue (1.2 million new complaints were submitted via MoneySavingExpert’s complaints tool in the first month since its launch in February 2024) is driving high volumes of customer contacts and complaints. 

Despite the pause, the FCA stated in a recent Dear CEO letter that firms should continue to investigate the complaints they receive involving a DCA, and ensure they respond appropriately to data subject access requests. Firms facing capacity challenges need to quickly address these and consider their ability to scale up customer support flexibly when needed, in line with the Duty’s requirement to manage unexpected surges in demand. The FCA’s review of DCAs is a live example of both the operational challenges and significant costs which high volumes of complaints can bring; the regulator’s Dear CEO letter reminds firms that they must maintain adequate financial resources at all times, and asks them to assess the risks and liabilities they are exposed to. 

Fraud and scams is another area of focus. The latest FOS data, for Q4 2023, shows complaints about current accounts are up by over a quarter year-on-year at 7,804, driven by a rise in fraud and scam complaints. New rules on reimbursing authorised push payment fraud claims, which come into effect in October 2024, are likely to add to these pressures, requiring firms to reimburse more customers and with accelerated response times. 

Firms are grappling with increasingly sophisticated and rising levels of scams and fraud, as well as greater regulatory scrutiny of the effectiveness of their anti-fraud controls and complaint handling. The FCA’s recent multi-firm review underlined its expectation that firms step up their efforts to deliver good customer outcomes, highlighting concerns such as inadequate resourcing of fraud and complaints teams. As we explore in our UK banking fraud sentiment index, resourcing issues can often frustrate customers from resolving queries at the first point of contact, which can be a major driver of complaints. 

Firms are increasingly looking to innovative, data-driven solutions to prevent fraud and improve customer experience and outcomes. This includes enhancing self-serve capabilities for digital channels, to enable customers to report fraud issues quickly and easily, and using chatbots to solve simple queries. 

Meeting ever-evolving standards

Against this backdrop of rising complaints, the FCA is carrying out a review of firms’ complaints data as part of its supervisory work to assess compliance with the Duty. It’s looking at whether firms deal with complaints fairly, and have robust mechanisms to learn from the root causes of complaints. 

Effective monitoring of complaints MI and root cause analysis (RCA) are important aspects of the Duty’s requirements to prevent foreseeable harm, and to act to deliver good consumer outcomes. And while the regulator’s current supervisory activity is centred on the greatest instances of harm (including areas where harm may have already materialised), as the Duty continues to bed in, we expect the FCA to evolve its priorities, placing greater emphasis on the prevention of foreseeable harm. 

The regulator has made clear that the Duty is not a ‘once and done’ exercise, and it expects firms to continuously learn and improve. In time, it believes the Duty will result in fewer costly remediation schemes, and reduced Financial Services Compensation Scheme levies, as Chief Executive Nikhil Rathi outlined in a recent speech. He also signalled that the FCA’s approach to the motor finance discretionary commission review is an indication of how the regulator intends to address future redress issues: with earlier, more transparent interventions, and faster resolutions.

Firms should be prepared for the regulator to make changes in line with this vision, including a move to more frequent and detailed data requests. It’s due to consult later this year on improved complaints reporting, and on guidance for dealing with redress more quickly and effectively.

Addressing the root cause

So how can firms meet the FCA’s evolving expectations on complaints and redress, in a way that maximises efficiencies and reduces future remediation costs?

Many firms are looking at more cost-efficient solutions for both front and back office functions. This includes enhancing self-serve functionality through digital channels, and using AI-powered customer support options such as AI chat bots, to enable more customers to resolve straightforward queries without needing to contact call centre or branch staff. Firms are also exploring technology solutions using natural language processing and advanced Machine Learning to improve complaints data quality and analysis, and to categorise complaints with greater accuracy and granularity, which enables more effective RCA and outcomes monitoring. 

Where face-to-face or telephone customer service and complaints handling support is needed, firms should ensure staff are properly equipped to meet customers’ needs, particularly the needs of vulnerable customers. Firms with outsourced complaints functions should review their oversight processes and governance, and assess whether the data they receive is sufficiently detailed and high quality. 

Next, firms should review RCA processes, quality and governance. The quality of firms’ RCA varies significantly, with common issues including lack of sufficient detail, a focus on predetermined issues rather than an open-minded and wide-ranging approach, and RCAs which are conducted too late or only for issues of a certain size. 

An effective RCA approach should accurately identify where risk of harm is occurring, informed by decision-useful MI mapped to each stage of the customer journey and the four outcomes of the Duty. Where firms identify issues, they should rectify harm proactively, quickly and effectively, ensuring they meet the Duty’s requirements to act in good faith and deliver good customer outcomes. Crucially, the regulator expects firms to be able to demonstrate how they’ve used MI and RCA to inform changes to processes, systems and controls, and to monitor whether those changes have resulted in better outcomes.

Finally, firms should have a plan for improving outcomes monitoring under the Duty. In time, we expect firms to develop more advanced, forward-looking models which incorporate more sophisticated data points and real-time monitoring capabilities, enabling them to identify and address potential harm at an earlier stage, and to more accurately forecast any changes required to improve customer outcomes.

There is a significant incentive to taking these steps now, before the regulator intervenes further. Prioritising data and technology-led, long-term solutions will enable firms to meet operational and regulatory pressures, and to better identify future issues before they become widespread - thus reducing the risk of costly regulatory interventions and remediation programmes, and delivering better customer outcomes.