AI and Consumer Duty in financial services
Consumer Duty, the Financial Conduct Authority’s (FCA) latest amendment to their existing Principles of Business, came into force on 31st July 2023. It marked a seismic regulatory shift within the UK financial services & insurance industry, by mandating that firms must act to deliver good outcomes for customers. While most financial services & insurance organisations will have already implemented FCA recommendations, as well as value customer experience more holistically, it is important to explore the impact that this continues to have on the FSI industry and the potential benefits of artificial intelligence (AI) with regulatory compliance.
The FCA emphasised that customers must be adequately supported, and that organisations must have processes in place to avoid harm. 'Sludge' practices, whereby a firm consciously or unconsciously creates friction points that deter their customers from taking actions. An example is making an insurance claim, where key claims information being hard to access for the customer, complex processes or inaccessible customer platforms must be avoided. FCA guidance called out bad practice in one case study where an insurer had a complex claims process where hard copies of evidence were required, as it did not allow customers to realise the benefit of the product without unreasonable barriers.
Consumer Duty is an outcomes-based approach and requires organisations to not only monitor the end-to-end experience of their customers but benchmark their outcomes in relation to FCA regulations. The industry caters to a wide range of customers with a variety of products and services which can be difficult to keep track of fully.
While Consumer Duty does not have a prescriptive set of rules, it is the responsibility of firms to define what good outcomes mean for them and measure their progress with data. The data should come from all customer touchpoints to ensure outcomes are fully met and recorded. Financial services organisations are particularly vulnerable to regulatory action because of the variety of customers they cater for with their products and services, therefore it is imperative for firms to clearly measure and monitor their progress.
When an organisation communicates the good and bad with their regulator, forming and acting on an improvement plan, this shows a willingness to support customers and build a sense of trust which has often been viewed as lacking within the industry. This short-term support of customers can act as a long-term retention strategy for insurers, reducing operational costs and supporting a good brand reputation.
With the various datasets which are produced through each customer touchpoint, artificial intelligence can be deployed as a regulatory tool, which monitors compliance and generates statistics for reporting purposes.
Artificial intelligence could also help your organisation with Consumer Duty in the following areas:
- Generative AI can be used to improve the experience of FSI customers at various touchpoints including onboarding, renewals, claims processing, payment transactions, customer service and more by enabling faster, more efficient and personalised services.
- AI can assess large data sets and develop regulatory responses for internal and FCA reviews.
- It can be proactive rather than reactive to regulations and market circumstances as and when they occur. This can drive new developments and create reflexive regulatory packages to aid compliance and sales teams in understanding challenges in near real time.
- AI can show how products are being managed and flag any regulatory issues
- It allows for more wide-ranging reviews of policies and procedures as LLM models can be tested against policy documentation, regulatory guidance, and internal procedures to search for potential improvements.
- AI can assess the likelihood of a customer switching to another FSI provider by analysing price rises in policies, services or products and supply mitigating information or a better assessment of customer needs.
- It can consider rising themes within the industry and internal data sets to cross compare with current regulatory thinking.
While FSI organisations did prepare for the implementation of Consumer Duty well before it came into force, the deadline did not mark the end of the conversation but rather kickstarted a wider conversation. As it is now inextricably linked with regulatory compliance, FSI organisations must evaluate the customer experience holistically to elevate their experience to regulatory standards and retain customers.
To learn more about regulatory requirements in financial services, the importance of a good data strategy and data ethics, download our FSI whitepaper: