Data, outcomes monitoring and the Consumer Duty
A Spring 2023 FCA survey revealed that outcomes monitoring was one of the two key areas that firms said they would like more information on in the run up to the Consumer Duty coming into effect. Speaking in a recent podcast on this subject, the FCA's Head of Competition Policy, Ed Smith described how the regulator wants firms to harness the benefits of the data and technology they have to improve their services and understand and evidence the outcomes they achieve for their customers.
Here we look at key areas around current expectations for data in outcomes monitoring and, with the speed of technological change, the importance of having a data strategy for improvement over the longer term.
The right data and intelligence are essential
The Consumer Duty is outcomes focused and firms need to understand and evidence the outcomes consumers are receiving. Without these insights it is not possible for firms to know whether they are meeting the requirement or to evidence it to the regulator.
Strategies should be in place to ensure firms have the right data and intelligence. All firms should deliver good outcomes but the approach to the Duty and evidencing can vary between the client bases firms have, the products and services that they supply, and the different sizes of firms. Smaller ones can’t employ the same resources and larger ones with more sophisticated operations will have more data. Employing advanced technologies can assist both small and large firms with accessing data while reducing the burden of analytics and processing large-scale data sets respectively.
All firms can assess if they are using their management information capabilities consistently across all areas of their business, though, giving as much weight to evidencing good consumer outcomes as to product design and marketing, for example.
Identifying and rectifying issues
Another important part of having the right data and intelligence is to ensure firms identify any risks that exist to good outcomes for customers, can spot where customers are receiving poor outcomes, identify any potential breaches at an early stage, then drill down into the root causes of these. Processes need to be in place in order to adapt and come up with suitable changes to remedy poor outcomes, and firms must evidence any changes and the impact they have.
Increasingly, being able to harness Open Banking data, and processing and analysing conventional customer transactional data in a sophisticated and timely fashion, will assist with enhancing identification of outcome-related issues, reporting on them, risk profiling, and providing early interventions.
Vulnerability and different groups
When deciding what data to collect and analyse, firms also need to consider consumers with characteristics of vulnerability and different groups. Distinct groups of customers need to be monitored to see whether they may be receiving worse outcomes than other customers so firms can reassure themselves that they are all getting good outcomes. For example, long-standing or back-book customers, or those from different socio-economic backgrounds where a poverty penalty can mean customers pay more as they haven’t got as much available cash.
With the current cost of living crisis and high interest rates, firms and consumers are operating in a fast-changing environment. Having the most accurate up-to-date information will be increasingly important in making informed and responsible decisions and to detect potential vulnerability as early as possible.
Price and value outcomes
The FCA’s official guidance says firms don’t have to charge all customers the same amount but where there are differences in prices charged to different groups, they need to be aware of them and understand them to satisfy themselves that each of those customer groups is getting fair value. It is important for firms to identify different groups and be able to monitor them through data, and it goes wider than applying only to customers with characteristics of vulnerability.
Providing more transparency around credit decisioning and being able better to monitor customer situations and behaviour to ensure they are achieving the best value from products and not at risk of vulnerability can aid compliance and outcomes greatly.
A robust data strategy for the future is essential
The FCA stated firmly that it expected all firms to have the capability to monitor outcomes when the Duty came into force. At the same time, the regulator also recognises that firms will have longer-term ambitions to improve things like data capture and systems functionality and that the speed of technological change means firms will use more data and for better insights, reporting and outcomes over time.
The FCA is open to supporting firms to develop data and monitoring capabilities to help make data capture more sophisticated and granular to understand outcomes better. It is vital that firms have a strategy to develop the data they need for the future and boards should be considering if the future strategy is consistent with the Consumer Duty, which should be embedded throughout all decisions.
What does the future of data and outcomes monitoring look like?
Data and advanced analytics can help enable the review of products and services at regular intervals to determine whether or not they are suitable for the borrower throughout the credit life cycle, not just when an issue arises. Particularly in these less stable times of high inflation and rising interest rates, harnessing data to understand the issues that consumers are likely to face and planning ahead for them will be a huge boon to delivering good outcomes. As will the more widespread use of Open Banking and the real-time data it is possible to utilise from it.
With macro-economic factors having varying degrees of impact on certain demographics and income bands at different stages of the credit cycle, being better able to monitor, understand and categorise customers and identify potentially vulnerable consumers in advance using data and analytics will also aid good outcomes. Behavioural data can also be employed to stress test product durability and suitability and artificial intelligence adds a new level of possibilities to what can be done with data.
With increasing amounts of data available to harness and innovative means of doing so, it is vital to have a strategy for improving over the longer term. Real-time data, automation, machine learning and sophisticated analytics will increasingly help both smaller and larger firms understand their customers better, access greater insights from the data they hold, and develop new insights from transaction data and Open Banking, helping enable better consumer outcomes, monitoring and reporting. More accurate risk profiling will also help enable financial inclusion and aid vulnerability detection, so remedial action can be taken swiftly and even better outcomes achieved.