From 31st July 2023, the Financial Conduct Authority (FCA) introduced the new Consumer Duty rules – probably the most significant change to regulation in the last 20 years – applying to all financial service firms. So, what does this mean for customers of financial service firms, and how should firms use behavioural science to drive positive outcomes. Let's explore.

What does Consumer Duty mean for customers?

For customers, the new rules mean that financial service firms must ensure their products and services deliver good outcomes. While many firms already strive to do so, the Consumer Duty aims to strengthen consumer protection. It mandates that all firms must actively demonstrate their commitment to delivering good outcomes for retail customers on all open products. This goes beyond mere intentions or marketing claims; firms need to proactively work to avoid foreseeable harms and prioritise customers' best interests. These regulations aim to prevent potential future customer harms, similar to those seen from mis-selling PPI and payday loans products.

What does Consumer Duty mean for financial services firms?

The new regulation represents a significant challenge. In the past, they needed to show that they treated customers fairly, but now they must ensure 'good' outcomes throughout the lifetime of their products or services. Having started from 31st July 2023, new and existing renewable products will be covered, and from 31st July 2024, this will extend to closed products. Firms selling products like mortgages or pensions will face the task of conducting time-consuming and expensive reviews and continuous monitoring to avoid consumer harm and deliver 'good' outcomes.

Over an extended period, a lot can change in the external environment. What may be considered good today may not necessarily remain so in the future. For instance, in light of recent interest rate rises, there's a possibility of many homeowners facing negative equity, a situation last experienced in the 1990s. Furthermore, looking ahead, we must consider the potential health and technology impacts on a pension product over a period of 30 years. These uncertainties highlight the need for financial services firms to continuously monitor and adapt.

The FCA won't be lenient either. They expect firms to act swiftly and assertively to prevent harm to consumers. Governance must be at the Board level, and firms need to produce an annual report detailing their actions and outcomes monitoring.

The FCA has highlighted that it will be penalising firms that:

· Present information in unclear or misleading ways

· Offer products or services that do not meet reasonable customer expectations or fair value

· Provide poor customer support that prevents action and does not recognise behavioural biases or vulnerabilities.

Why should firms use behavioural science to drive good outcomes for customers?

The FCA has highlighted the importance for firms to employ behavioural and data science as an approach to help mitigate behavioural biases when customers make decisions to help reduce harm and deliver better outcomes. There are four key areas where the FCA now expect to see evidence of behavioural science being applied:

1. Understanding customer behaviour - what influences customer choices

2. Improving product design - making products easier and more intuitive whilst removing unnecessary friction. These are commonly known as ‘sludges’, such as difficult or complicated cancellation processes

3. Communicating more effectively - being clear, simple, and easier to understand

4. Encouraging better customer outcomes - helping customers make better financial decisions

Behavioural science has consistently shown that there is a big difference between what we say as customers and what we do, and we now have a much better understanding of the real drivers and barriers to better financial outcomes. Firms can no longer simply rely on second guessing what they think customers want - or what they say they want, which typically gives misleading answers because behavioural biases are largely unconscious. There is a key role for auditing and testing using behavioural science for communications, user experience (UX), products and pricing to ensure compliance – and deliver better outcomes for customers, plus corresponding benefits for firms.

Carrying out a COGNITION Audit – an important first step

With years’ of experience in successfully applying behavioural science in financial services, many organisations have benefitted from Gobeyond Partners pioneering COGNITION audit approach, which has consistently demonstrated the potential to deliver better outcomes for customers in financial services. Our clients range from global banking giants to challengers, as well as insurance, life, and investment firms.

Through effective understanding of customer behaviour via COGNITION audits, previous outcomes delivered include:

· Product design - Removing barriers to usage and friction in the UX of customer self-serve options for bank customers resulted in a 14% increase in customer usage.

· Customer communications - Addressing behavioural biases to make written and verbal customer communications clearer, simpler, and easier to understand led to an 11% reduction in average handling time and a 96% reduction in expected inbound contacts.

· Better customer outcomes - Optimising online customer journeys and turning customer intention into action resulted in a remarkable 54% increase in click-through rate for a finance website.

Beyond ensuring Consumer Duty requirements are being met, these outcomes also delivered real business benefits through better customer experience and cost savings. If your business could similarly benefit, get in touch with us to find out more.