New “consumer duty” rules introduced by the Financial Conduct Authority (FCA) aim to set clear standards for the protection of financial consumers. Banks, building societies, investment and insurance firms, as well as many other types of business, are being told to “put their customers’ needs first”.
The timing couldn’t be better. Amid a cost of living crisis, the UK regulator’s new rules should hopefully address the increasing recognition by consumer groups that people cannot always solve the financial problems they face. Consumers are under pressure and need more support. Yet, trust in financial services is low: the FCA recently found that just 36% of UK adults see most financial providers as honest and transparent in how they treat customers.
The new rules cover not only direct customers of products such as bank accounts, credit cards and loans, but also anyone that ultimately makes use of a product or service, including family members of a borrower who may benefit from the loan. Even if the provider does not have a direct relationship with the user, the rules still apply.
In future, companies will have to demonstrate to the regulator that they are proactively putting consumer needs first and preventing any harm. They will be expected to continuously review their operations to identify and resolve areas where they could be going against these needs – from product design and delivery to customer services and communications.
The new regime should lead to a step-change in how consumers are treated. And this may improve financial wellbeing in the UK, especially for those in vulnerable financial situations. The FCA has suggested financial service organisations will need to make fundamental cultural changes to be more aware of and responsive to consumer needs across their operations.
A major part of this responsiveness will involve listening to and understanding the real-life experiences of financial consumers. Research shows the ways in which financial service companies could improve how they deal with their consumers.
Preventing problems from escalating
Our recent evidence review on the connections between financial and mental health challenges highlights the negative effects of being behind on payments or in debt. Overly punitive approaches to dealing with these situations, such as the use of debt collection agencies, exacerbates financial stress. It also reinforces the stigma people can experience when dealing with both financial and mental health challenges.
An ongoing project by Aston University and Birmingham City Council explores gambling and housing security. It shows problem gamblers often turn to debt, including payday loans, to fund their betting activity. This limits their ability to pay rent and can result in tenancy loss, which negatively affects long-term wellbeing.
The stigma associated with problem gambling has encouraged most of those surveyed to try to control their habit or stop gambling altogether. But they had not received any support from their financial providers or from other agencies they were engaged with, such as their housing association.
Preventing negative escalations should be a priority when consumers in tough financial situations are unable to pay their bills and debt starts to mount. They also need appropriate support to help overcome the stigma of experiencing financial problems.
The government’s “breathing space” scheme gives people experiencing debt problems time to receive advice and find a solution without penalties. This is a positive step. Similar interventions could help relieve the financial stress of other experiences – for example, after a bereavement, when the burden of dealing with complicated financial matters can have a detrimental impact on relatives’ wellbeing.
Listening to feedback
Another strand of our research highlights the need to examine the impact of financial stress and debt across different groups of consumers. Disparities in income and wealth between men and women, for example, relate to different work and employment experiences and opportunities.
Financial products such as pensions and investment accounts often appear to be gender neutral, but do not actually align with different life experiences. A woman working part-time due to caring responsibilities may struggle to save in a traditional pension, for example. This can ultimately discourage women from using these products.
This is one of the reasons why it is important for consumers to give feedback directly to the firms they deal with, so they can create different products. The FCA’s consumer duty aims to encourage this interaction. Again, this is crucial because 7.4 million UK adults have struggled to contact their financial providers in the last year.
The consumer duty rules should help to facilitate this kind of feedback, resulting in financial products with a more diverse appeal and better outcomes. Support for those experiencing repayment problems and dealing with stress about their finances should also be more accessible.
In time, if followed correctly, these new standards should lead to a more equitable and trustworthy financial system. If so, this will improve financial wellbeing by reducing undue stress for many people.