Introduction
In a review released by the FCA in 2021, it was announced that they had found evidence of firms within the financial sector “presenting information in a way that exploits consumers’ behavioural biases, selling products or services that are not fit for purpose, or providing poor customer support.”. Therefore, the aim of the consumer duty rules is to push firms to embrace a fresh perspective on how they deliver their products, whilst also increasing consumer trust through transparency and fairness. After the rules were finalised in July 2022, firms were originally given until April 2023 to implement the changes required to be compliant but this deadline was later extended to July 2023.
Consumer Understanding
Financial products can often be difficult to navigate for the everyday consumer as there are many foreign terms to consider and numbers that may not mean very much to someone who isn’t financially astute. Additionally, consumers are human after all, and so they are also subject to the behavioural biases and unconscious beliefs that make us human. Combined with information that is not easy to understand, consumers of these products are even more likely to make irrational decisions when deciding which mortgage lender or short-term loan product is best for them.
Therefore, one of the focuses of the consumer duty rules is for firms to assist their customers in making the best possible decision by providing accurate and meaningful information at each stage of the customer journey. Product information must be portrayed in a way that is understood by all, to give the customer a balanced view of the product that they are looking to purchase.
Within the consumer lending industry, this could mean that firms are more transparent about how quickly an application is processed and funds are transferred or simply making prospects more aware of the costs, fees, and charges associated with their products.
Did you know?! The most recent financial capability survey from 2018 found that 47% of people did not feel confident making decisions about financial products and services.
Price and Value
As with all products and services, consumers should be charged a fair price. Within the consumer lending industry, this relates directly to interest rates and administration fees.
Within the high-cost short-term space, there are already regulations in place to protect the consumer from excessive interest rates – lenders can charge a maximum of 0.8% interest per day. The same level of protection does not currently apply to the more prime sector of the market, so lenders at this end of the risk spectrum will need to be able to justify that they are charging a fair interest rate in line with the new rules.
As we move into this new era of regulation, technological advancements have made it easier to assess a borrowers’ creditworthiness and assign them a tailored interest rate. For example, The Money Platform’s latest product offering works on a rate-for-risk basis, giving borrowers an APR of 69.9% – 99.9% which is significantly lower than the APR’s currently offered on our short-term product. It is important to note that these APR’s are only available on longer-term products but do allow the consumer to benefit from a fairer price, depending on their risk profile.
Products and Services
Firms must ensure that their products and services meet the needs of the consumer. For example, an emergency loan should arrive quickly once the application has been approved. Furthermore, it’s sensible to assume that consumers do not all have the same requirements, so ensuring that there is a reasonable amount of choice for the consumer (if eligible) is also an important factor to consider.
The above can also apply to the lender directly by offering a range of different loan amounts and durations but also to the brokers, who supply lenders with new leads. Traditionally, ping tree models have been used to distribute leads to the partner prepared to make the highest offer for a lead, but this has not always resulted in the best consumer outcomes. Comparison tables are a newer innovation within the consumer lending space and allow the customer to view all of the offers available to them. They then have the choice to make their own decision given the information displayed to them and click through themselves. Not only does this make the borrower journey more accessible, easy to use and transparent, it also gives the customer more control over their finances by allowing them to formulate a balanced view.
Consumer Support
The new rules do not only require firms to review their processes before they make a sale but they have also been put in place to ensure that the consumer is treated fairly throughout the aftersales process too. Customers should not have to go through a tedious process to complain, cancel or obtain assistance for general queries. Whilst firms can achieve this through an easy-to-navigate user interface, it’s important to offer various support channels so that customers are never left in the dark. From webchat to phone, SMS or simply just by email, customers at The Money Platform can get in touch with us in more than one way to ensure that they are not left in the dark.
Whilst firms should be lending affordably, life does not always go to plan. It is therefore important for firms to show forbearance to those in difficulty by offering sustainable repayment plans and extra care to vulnerable customers. Our customer support team is trained to assist anyone who is going through a difficult time and may find it hard to explain that they have a problem with their repayments. So, ensuring that these customers are supported fairly is essential.
Did you know?! 60% of borrowers in financial difficulty had a positive experience with firms when they dealt with staff who were trained to deal with vulnerable customers.
Alongside offering support once the problem has arisen, a more proactive approach is to help customers by providing resources on financial education. Free knowledge on how to manage your finances or the key numbers to look out for when applying for a mortgage may help a customer to make a better decision.
Conclusion
Consumer duty rules will play a crucial role in safeguarding consumers within the consumer lending space. By promoting transparency, fairness, and responsible lending practices, financial regulators can ensure that consumers are protected from unscrupulous practices whilst being able to make informed financial decisions. It is essential for financial institutions to adhere to these regulations and to prioritize the needs of their consumers above their profits.
