The clamp down on conduct

Lenders will face tough new standards for customer interaction from 1 April 2013, when the UK’s new financial services regulator, the Financial Conduct Authority (FCA), will begin to apply measures to reduce ‘conduct risk’, placing customer needs at the heart of finance strategy, aiming to make certain that a company’s behaviour will result in good outcomes for consumers.

Several elements of this concept are already being dealt with by banks as part of other disciplines, such as the Know Your Customer regulations; operational risk; and the Treating Customers Fairly initiative. Bringing them together under one umbrella will require firms to take a more active role in creating what the British Bankers Association (BBA) calls “a stable, customer-focused banking system that can regain public trust”.

Lenders’ reputations at stake

Whilst these procedures and guidelines are in place for good reason, there is a reputational risk for lenders. The FCA will be seeking to act in a more preventative manner; able to announce that it has begun formal disciplinary proceedings against a firm or individual by publishing details of a ‘warning notice’, if it considers it appropriate.  The warning notice will be published at an early stage of investigation and, most worryingly for lenders, before they have been proven guilty of misconduct. In doing this, the FCA aims to improve transparency about its enforcement processes.

It will also have the ability to intervene on products prior to their sale and ahead of concerns being raised by third parties. That makes it imperative for regulated firms to protect themselves from such actions and get checks in place for both established products and new product sales, in a way that minimises disruption to the customer experience. Firms will be expected to be able to demonstrate that decisions are made in the interest of consumers and reviews of governance, culture and controls will be carried out periodically.There is a way to reduce risk significantly, by monitoring and spotting the warning signs of pre-delinquency and acting early enough. The longer lenders wait to take action, the less likely customers are to recover. Signs of pre-delinquency can be easily recognised, by understanding and using the right indicators.

Knowing your customers is key

Providing the best possible services and creating stronger relationships with customers is key; and opportunities exist to develop systems using customer data that helps predict requirements and changes in personal circumstances.

There are three strands to this: sales will require a detailed Know Your Customer exercise, to avoid the potential for mis-selling and not just a fraud and anti money laundering check, but a full detailed suitability check; the online marketing of products will have to be managed carefully, with the right rules applied to each customer; and the lender must ensure the on-going suitability of products for consumers, even as circumstances and products change.

Managing the pros and cons

Getting tough with the sales process could make things slower and more expensive. Managing existing relationships more closely will require greater administration. Clearly, regulators are not trying to reduce the scope of products available to the consumer, but recent experience of mis-selling suggests that lenders will have to think more carefully about applying greater rigor to client interactions if they are to maintain revenues from current lines of business and avoid large fines and damaging publicity.

To develop a system that will minimise the cost of compliance, providing certainty for the bank with processes that can be integrated into the existing sales and client management process; will make conduct risk something that is more easily manageable for lenders. The way forward is a system that encapsulates the financial sophistication, risk attitude and affordability of a consumer or business into a series of indexes. Used together with product eligibility rules, they could allow initial product suitability assessment prior to progressing with the product application process.

Protection for lenders and their customers

By taking the approach used for credit rating and identity verification purposes, lenders could take an automated, score-based view of customers’ suitability for services/products. Suitability is likely to be measured in terms of their affordability, the customer’s attitude to risk, their financial sophistication and a more detailed understanding of circumstances through effective implementation of a thorough Know Your Customer strategy.

All of which will need regular reviews for changing customer circumstances, which lenders will be required to act on, protecting themselves and their customers.

Jonathan has over 25 years of experience working within the banking industry as well as consulting for financial institutions. Jonathan has been with Experian for nine years, setting up a consulting function within the Consumer Information business (CI), then leading our Product Management teams for two years before taking on overall responsibility for (CI) as Managing Director. Prior to working for Experian, Jonathan worked with Abbey for 10 years and spent five years with consulting firms CGI & FICO.