Consumer Duty – Unintended consequences (part one)

We recently held a Consumer Duty roundtable with senior leaders within the retail banking sector.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

From discussions across the industry – including a recent roundtable with senior leaders – we have identified a number of potential unintended consequences of Consumer Duty. That said, we have also considered whether an opportunity may also be present. In this short series of articles, we explore some of these unintended consequences. Today’s article focuses on the problems facing firms specifically, and our second article looks at broader challenges across the industry.

Price convergence

There has been concern expressed by some firms that Price & Fair Value assessments will drive prices to a common point and create a ‘race to the bottom’.

Whilst more standardised products (such as basic savings accounts) may see this, we consider that we are unlikely to see price convergence across more complex products. Moreover, we know that customers value choice and many consider both service and price. The FCA has been clear that profit is not a dirty word, and Price and Fair Value assessments need not exclusively result in decreased prices. Rather, a strong pricing strategy can be founded on the value offered to customers and considering costs to deliver, benchmarking to peers and ‘risk adjusted’ profit margins.

Proactively acting upon FCA guidance and anticipating its expectations will assist you to articulate your service offerings in a compelling manner. Remember that this is the FCA’s first time regulating the Consumer Duty, and being honest and forthcoming can provide value and insights both to your firm and FCA learning together. When your hard work and insights from FCA combine, you may well end up with a more compelling – and a confidently compliant – product offering and pricing strategy!

Underserving higher risk customers

There is concern that the Consumer Duty could reduce competition to underserved members of society, and other higher risk customers, who require more frequent servicing, and ultimately exclude these customers from mainstream financial services.

This is definitely a valid concern. However, the counterargument to this would be that “whilst there may be fewer firms operating in that space, the quality of those firms will improve”. This is – almost certainly – the FCA’s hope. If firms have a specific focus on a customer type, they can better service and support them, and can justify a reasonable margin to build appropriately skilled and resourced teams to do so.

Opportunities may not be as obvious or well marketed for higher risk customers, and therefore finding products may take longer for them. Consumer demand remains for complex and near-prime offerings and therefore niches exist for incumbent providers and new entrants alike. Strategies will evolve based on target market selection, clear customer focus and understanding of the specific problem to solve for them. Why compete in congested waters when rich pickings are available elsewhere?

Increased differentiation

We have been hearing of the potential “great unbundling” for some time, but could the Consumer Duty be the catalyst to bring this to the fore? As understanding of specific target markets and customer profiles improve, cost to serve will decrease, and opportunities to scale may be prolific.

This represents an opportunity for smaller firms to specialise and offer greater customer choice and a credible alternative to the big banks. This is already evident in the Mortgage market where ‘mid-tier’ and challenger lenders are providing high value services in return for a higher margin to non-typical borrowers. Managing these risks will be challenging or firms, and undoubtedly create risks. However, successful management of these risks and firms can thrive. With sharp focus, strong customer identification and understanding and a clear view on the value you provide to customers – and how you price that – can provide economies of scale and a genuine USP in the market.

Our next article will explore some of the broader issues that are hitting the industry, so stay tuned.

Do get in touch if you would like to discuss any aspect of these articles, and you can see more of Johnston Carmichael’s views here.