Understanding Consumer Duty and its Impact on Credit Risk for UK Lenders

The financial landscape has witnessed a significant shift towards consumer-focused regulations in recent years. In the UK, the Financial Conduct Authority (FCA) has taken a proactive stance to ensure that financial institutions prioritize the interests of consumers. This has been underscored by the introduction of the Consumer Duty, a comprehensive set of rules that aim to enhance transparency, fairness, and consumer outcomes.  

One area where this has a profound impact is on credit risk for lenders. In this article, we’ll explore what Consumer Duty means for UK lenders, how it affects their approach to managing credit risk, and how new measures are being implemented successfully in response to one of the biggest shake-ups of UK financial regulations in recent years. 

What is Consumer Duty?  

Consumer Duty refers to the set of rules and regulations that aim to ensure that financial firms act in the best interests of their customers. It includes a range of obligations, across four core outcomes – products and services, price and value, consumer understanding, and consumer support. The goal is to improve consumer outcomes and promote trust and confidence in the financial system, placing a responsibility on firms to deliver fair value on products such as mortgages, personal loans, current accounts, credit cards, commercial loans, investments, and insurance.   

The Consumer Duty came into force for open products and services on 31 July 2023, and the final deadline to apply the measures to products and services held on closed books is 31 July 2024. The FCA has been clear that there is no ‘one size fits all’ approach and that implementation plans should be tailored to each firm  

Impact on Credit Risk for UK Lenders 

The introduction of Consumer Duty has several implications for UK lenders, particularly in managing credit risk. Here are some key areas where Consumer Duty has an impact: 

  1. Responsible Lending: Lenders are required to conduct affordability assessments to ensure that customers can afford to repay their loans. This means that lenders must have robust processes for assessing creditworthiness and making responsible lending decisions. Failure to do so could result in regulatory action and reputational damage.
  2. Transparency: Under Consumer Duty, lenders are required to provide clear and accurate information about their products and services, including the costs, fees, and charges associated with borrowing. This helps consumers make informed decisions and reduces the risk of misunderstandings or disputes.
  3. Vulnerable Customers: Lenders need to take extra care when dealing with vulnerable customers, such as those with mental health issues or low financial literacy. This includes providing appropriate support and guidance, and taking steps to ensure that vulnerable customers are not unfairly disadvantaged.
  4. Complaints Handling: Under Consumer Duty, lenders are required to have effective complaints handling procedures in place, and  treat customer complaints seriously and fairly. This helps to resolve issues quickly and prevent them from escalating. 

What Firms are Doing Well, and What Can they do Better? 

For most firms, getting to 31 July 2023 marked the end of months of hard work. But, this was just the end of the first chapter. Far from relaxing into thinking that the job is done, firms need to maintain momentum and continue to build on their work to date. Last week (20th February 2024), the FCA published its latest implementation findings, with examples of good practice and remaining areas for improvement. Here’s a summary of some of the identified areas: 

The good 

  • Firms have developed new data and metrics to understand their customers better and have introduced appropriate governance to take action where problems are identified.
  • Improved the way they capture and record information about customer vulnerabilities. For example, introducing a data flag to identify and monitor outcomes for customers who have requested documents in an alternative format. One mortgage firm now allows brokers to pass on details about customers who may need help managing their home loans.
  • Refined their data and monitoring capabilities to track customers who may have bought a product or service despite falling outside  the target market. This allows firms to contact them or take other measures to avoid consumer harm. 
  • Reviewed customer journeys and removed negative obstacles and ‘sludge’ practices that make it more difficult for customers to act in their interests. In one example, a consumer credit firm removed specific incentives and changed how consumers take out credit online, to support better and more active decision making.
  • Updated pricing models for products and services. For example, reducing the rate of interest paid on certain credit products and/or for certain types of customers. 

The ‘not so’ good 

  • Failed to address identified process weaknesses to track vulnerable customers across multiple product sets and  data and servicing capabilities gaps.  
  • Not paying close enough attention to ensuring that their distribution strategies drive good customer outcomes.
  • Undermined customers’ trust by pushing products or services that are too high-risk or complex for them.
  • Not taking the time to understand customer circumstances where they are in financial difficulty. This may mean that customers do not receive a forbearance solution appropriate for their circumstances or advice about other relevant sources of help. 


The Importance of Credit Data to Help Meet Consumer Duty 

The FCA’s guidelines continue to highlight the importance of handling quality and accurate data to inform customer engagement, stating that collecting and processing consumer credit data must uphold the principles of transparency, fairness, and consumer welfare to ensure a clear understanding of a customer’s financial resilience. 

For firms that still need to complete implementation for new products and services, there is  a pressing urgency to re-evaluate credit data management, legacy processes, and lending risk considerations on both open and closed products. Firms must adhere to basic data governance, and lending risk models must safeguard against inherent biases. Lenders are also required to assess and, where necessary, enhance their affordability strategy to monitor changes throughout the customer lifecycle, not just at the point of origination. The collection and utilisation of credit data are key. 

Consumer Duty has rightly placed more accountability on lenders to scrutinise and evaluate existing systems and processes and demonstrate improved use of customer insights for credit decisioning across the full lifecycle of a product. It presents an increased opportunity for lenders to accelerate innovation strategies and align them to new credit risk processes – deploying new technologies to integrate richer data sources across customer acquisition, deliver personalized and frictionless origination journeys, and proactive customer management to power positive outcomes.  

Are you a UK lender looking to explore ways to deploy smarter lending processes to help deliver consistently positive customer outcomes? Contact GDS Link today: 

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