Unintended consequences of Consumer Duty for Minority Groups

In recent weeks, We've been delving into Consumer Duty and its impact on FinTechs, particularly considering our founder's engagement with Project Nemo . This contemplation has unearthed some intriguing challenges.

Understanding Consumer Duty

The UK’s Financial Conduct Authority (FCA) introduced new Consumer Duty regulations on 27 July 2022. Its core components are:

• Consumer Principle: Firms must prioritise good outcomes for customers.

• Four Outcomes: Firms must ensure:

• Products and services are fit for purpose.

• Prices are fair and offer value.

• Customers understand the products.

• Adequate support is provided to customers.

• Cross-Cutting Rules: Firms must act in good faith, avoid foreseeable harm, and help customers achieve their financial objectives.

Key Implications of Consumer Duty

What are the implications for minority customer groups, such as the disabled community. Does Consumer Duty help or hinder them?

At first glance, the four outcomes seem favourable to minority customer groups. For instance, the regulation expects firms to design products and services to meet needs of all their customers, ensure customers only pay for the services they receive, be transparent about product limitations, and provide adequate support.

Let's consider a digital bank open to all customer groups, including people with disabilities. We'll call this bank ModernBank. To fully meet Consumer Duty requirements, ModernBank needs to ensure that all its customers have access to a consistent level of service. Like most neo banks focused on providing a digital offering and keeping operational costs low, ModernBank has chosen to provide in-app chat for customer support. This 24/7 chat service works well for most of its customers. However, relying solely on this channel may not be suitable for certain minority groups, such as visually impaired individuals who need voice-enabled chatbots or telephone lines, or neuro-diverse individuals who may require more in-person support.

To fulfil its Consumer Duty requirements, ModernBank now has three options to consider:

•  Option 1: Make its products and services fully inclusive, which means making required adjustments for minority groups like those with disabilities e.g., offering a telephony channel.

• Option 2: Clearly define its target group, excluding any minority groups requiring specific modifications, and focus on majority customer groups that are comfortable with a fully mobile based experience.

• Option 3: Create additional offering for the minority groups and charge them for the use of those additional services (e.g., in the case of ModernBank offer telephony service and charge for the use of that service).

So, do these options work for three stakeholder groups: ModernBank, majority customer group and minority customer group?

Dilemma:

While Consumer Duty aims to create positive outcomes, but has it swung the pendulum too far? Firms must carefully balance commercial viability with meeting all customer needs. To ensure target customer groups get positive outcomes, companies could choose to exclude minority groups if they can't guarantee the same outcomes for them. Alternatively, the majority customers could end up bearing the additional cost of serving minority groups, who still risk being underserved. Each option presents significant challenges: making services fully inclusive increases costs and raises prices for the majority, excluding minority groups leaves their needs unmet, and creating differential pricing for additional services creates a burden on minority groups for base level of services and for the same outcomes that majority customer groups receive without having to pay. This dilemma underscores the complex balance required to meet Consumer Duty while ensuring fairness and inclusivity.

Your Thoughts

We would love to hear your thoughts on solving this problem and where the pendulum should settle. How can we achieve a balance that serves both majority and minority customer groups effectively?

Additional context on Consumer Duty:

These regulations aim to ensure financial firms deliver positive outcomes for their retail customers. Here’s a concise overview:

Key Dates:

• 31 July 2023: Rules apply to existing products/services.

• 30 April 2023: Firms must review existing open products.

• 31 July 2024: Rules apply to closed products/services.

• Who It Applies To: UK-authorised firms providing services to retail customers in areas like investment, consumer credit, deposit-taking, payment services, e-money, and insurance.

Implementation Steps:

•  By October 2022: Firms should have implementation plans approved by their boards.

• By April 2023: Firms must review and update products to meet the Four Outcomes and share key information with distributors.

Governance:

• A new Individual Conduct Rule requires senior managers to ensure good outcomes for customers.

• Firms must appoint a consumer duty champion at the board level to oversee compliance.

• Additional Notes: The Duty does not apply to unauthorised firms, but authorised firms must understand the products they distribute from non-UK firms.