How can the FCA’s new Consumer Duty benefit from Smart Data?
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What is the new Consumer Duty?
The Consumer Duty rules which will be finalised in July are really a package of measures from the FCA, rather than a single duty. They are looking to introduce a new Consumer Principle that sets a higher standard of consumer protection and requires retail financial markets to act to deliver and monitor good outcomes for retail customers.
The role of Open Finance
Open Finance solutions have an important part to play in significantly reducing the cost of complying with the FCA’s proposed Consumer Duty regulations. In addition, it opens new opportunities for firms to use consent-based consumer data to identify and develop new hyper-personalised products based on needs and behaviours. With ongoing engagement, it provides a means of identifying early warnings of issues and the ability to act to limit detriment using an evidence base. The list of behavioural insights provided would be significantly enhanced by the adoption and facilitation of Open Finance powered tools.
FCA’s Consumer Duty Consultation (CP21/36) makes a powerful case for the adoption of Open Finance as a key component of a regulated, customer-facing firm. In fact, it is difficult to imagine any new product provider or intermediary setting up without Open Finance data at the heart of its operating model.
Consumer consent at the forefront
Moneyhub believes that the continued development of Open Finance will have a positive and supportive impact upon better financial outcomes for consumers. It will also enable financial businesses to better understand, monitor and act upon the FCA’s Consumer Duty Structure – the main principle; the underlying cross-cutting rules and the four key outcomes.
While access to consumer consent-driven data has much improved in recent years, learnings from Open Banking show large incumbent providers must be compelled to make this easier and more secure for consumers by implementing open APIs that will enable their customers to improve their financial outcomes through access to their own data.
We believe that Consumer Duty should leverage the existing GDPR requirement for financial institutions to make customer data readily available through the adoption of Open Data standards. Providers across sectors – life and pensions, wealth management and general insurance – have the ability to provide secure and easy access to customer records. If product and pricing data were consistently available via API, it would further enable data aggregators to analyse value and encourage consumers to consider their options.
A win-win for businesses and consumers
The availability of data also brings benefits to providers. These include lower customer acquisition costs through data analytics; lower onboarding costs with automated and comprehensive fact finds; data-based suitability and capacity for loss checks and ongoing checks for changes in circumstances and progression towards intended financial outcomes. Increased revenue, lower costs and a compliance dividend.
As an Open Finance platform, we have seen increasing demand for us to integrate third-party propositions (from green energy to data vaults and ESG analysis to protection propositions). The idea is to use Account Information Service Provider (AISP) insights to ensure that notification nudges are directed to consumers for whom the proposition is relevant and useful. For example, we can track the capacity for loss, look at the total portfolio risks a consumer is running and help to compare funds that may be better suited to the customer. Equally, we can help to suppress inappropriate offers, which do not fit the profile and lifestyle of the consumer.
Our role is to improve personalisation and relevance as we have no direct interest in the outcome, e.g. product commission or asset accumulation.
Better informed consumers
We are also very supportive of the proposal to enable consumers to be able to compare prices and assess value for money. AISPs have an important part to play in enabling consumers and, indeed, advisers to see their entire financial affairs in a single view; to compare prices; assess fair value between existing providers and to explore alternatives in the market.
Examples of these Open Finance benefits include:
- More accurate, comprehensive and lower cost fact finding processes
- More efficient digital onboarding processes including KYC checks
- Gap analysis and both initial and ongoing suitability checks including changes in capacity for loss and customer vulnerability factors
- Highly personalised customer experiences, supporting customer communication and retention
- Improved decision-making by providing a holistic picture, for example, small pension pots may be considered for trivial commutation but when viewed in aggregate (and, potentially, consolidated) the importance and value for retirement planning is more obvious
- Leveraging data for better outcomes including using rent recognition to improve credit scores and enabling access to mortgages and other loan products
- Lower cost and frictionless payment mechanisms including automated sweeps to savings and investment products, pensions or protection or loan repayments etc.
As consumers are better informed and access better value and more suitable products as a result, we are integral to delivering a compliance dividend and satisfying TCF and Consumer Duty tests.
The future
It is our contention that consent-based Open Finance is the vehicle that financial institutions and intermediaries must adopt if they are to meet their business objectives and demonstrate their adherence (by design) to the Consumer Duty structure.
The value exchange between the consumer and the supplier lies in the sharing and use of data to understand and respond to the context and financial objectives of the consumer. Firms that fail to offer an Open Finance option to consumers will fail to provide a holistic, well informed and monitored service.
