• Tim Loo, Executive Director of Strategy at Foolproof at Zensar Company


• 30.08.2023 12:15 pm
undisclosed

The Financial Conduct Authority (FCA) has now begun its phased introduction of the New Consumer Duty guidelines, designed to enhance customer protection throughout their lifetime engagement with financial products and services. The FCA aims to drive improved outcomes by urging companies to offer fairer products, enhance support and communication, and stay attuned to evolving customer needs.

Its implementation is certainly well-timed given the UK’s challenging economic landscape. A cost of living crisis, ongoing recovery from the pandemic and now a major mortgage crisis have meant that maintaining financial stability has become increasingly difficult for many individuals.

In fact, according to PwC, nearly nine million people are experiencing ‘financial fragility’, with up to half of them being underserved by existing financial products designed to assist them in managing their finances. The latest research by the National Institute of Economic and Social Research (NIESR) estimates that the Bank Rate rising to 5 per cent will see 1.2 million U.K. households (4% of households nationwide) run out of savings by the end of 2023. It also suggests the current financial product experience seems to be falling short of helping people understand and manage their money more effectively or to seek the help and support they need. 

Challenges in adapting mortgage products

Financial products are often designed to meet specific needs at a given time, overlooking the fact that human behaviours and needs are not constant. Alongside a mortgage crisis, events including regular life milestones, such as relocating, expanding a family, changing careers or losing a job can also trigger an unpredictable shift in status, putting individuals at risk of entering a vulnerable position at any time.

With changes being permanent, temporary, or situational, products are often not inherently suitable throughout customers' lifetimes, as financial institutions lack a deep understanding of their evolving circumstances.

The resulting situation makes it difficult for the financial industry to adhere to the New Consumer Duty guidelines, all while the FCA have cautioned against firms failing to adhere to the new consumer protection rules, indicating potential "robust action" against non-compliant businesses.

Being effectively unable to meet the needs of their customers while maintaining a sustainable business model has caused some to temporarily pull their mortgage products from the market entirely. 

The landscape of regulations is ever-changing and varies across different markets. It presents known challenges in keeping pace with evolving requirements while simultaneously ensuring the protection of customer data and financial systems. Financial services organisations face the responsibility of ensuring their technology solutions comply with relevant laws and regulations, which can sometimes limit their flexibility to innovate.

Amidst financial difficulties and the introduction of Consumer Duty, banks must carefully consider what truly defines being "fit for purpose." To design for a mortgage experience of tomorrow, banks need to consider their mortgage products inside out, and remove or improve those that are not fit for purpose, or launch all new ones where a gap is identified. Using innovative approaches to problem-solving and combining this with execution can help create mortgage products and support levels of service to move them to the next level.

The mortgage industries’ inability to support customers during times of financial stress with suitable products and services is based on a number of issues. Technological limitations in banks limit innovation that supports customers’ changing financial demands. Developing and implementing new tech can also be expensive, and many may face constraints in terms of skills and resources as well as regulation. This means when integrating new solutions with existing systems and navigating the different processes for teams feasibility, viability and desirability and the value offered to the business and customers need to be considered and used as part of evaluating future solutions. 

On the flip side, the commission structure influencing mortgage deals further complicates the situation, leading to customers often being advised to opt for fixed-term mortgages spanning two, five, or ten years. While this brings greater flexibility for customers to explore better deals, it also carries the risk of increased renewal costs for mortgage customers during bear markets, like we’re seeing today. This shift, and the increased portability of mortgage deals, has detached them from the loan term, resulting in both favourable and unfavourable outcomes for borrowers.

Moreover, regulation aimed at providing a transparent understanding of charges results in confusing financial language and limits innovative products. All of this actually acts against the customer in the current market. 

Agile mortgage products

One way to address changing customer needs and enhance customer experience in line with the New Consumer Duty is through agile mortgage products. By incorporating machine learning and AI, there is the possibility of creating adaptive mortgage products that constantly monitor a customer's mandatory spending, including expenses like fuel and basic food allowance. This AI-powered system could assess potential financial challenges ahead, acting as an automated financial advisor, providing valuable insights and solutions based on individual circumstances.  

With this approach, mortgage payments could be dynamically adjusted to accommodate different scenarios. In times of low cost, the system could build a flexible offset reserve, providing customers with financial security and flexibility, helping them to prepare for poorer market conditions. During challenging periods, options like deferred payments, payment holidays, or loan period switches could be offered to provide relief and support.

Separating the loan from the service wrapper also becomes a possibility, allowing us to focus on true customer needs and deliver personalised mortgage solutions.

Moving away from the traditional model of mortgage advisors pushing repeat commission products to less-informed customers, this approach empowers customers to make informed decisions using cutting-edge technology solutions - all of which is much more aligned with the evolving financial landscape and the needs of customers.

What can be done to align with the New Consumer Duty? 

With this in mind, it’s clear that technology will play a pivotal role on the journey towards creating agile mortgage products that are able to evolve to changing customer needs, streamline operations and improve customer communications and experience.  

Examples include:

• Data analytics: 

By harnessing the power of data, financial institutions can gain valuable insights into customer behaviour, preferences, and financial profiles - for example, accessing creditworthiness and repayment capacity or identifying those that have become or have for some time been financially vulnerable. It is only with a data-driven approach that more accurate risk assessments, better understanding of market trends, and the ability to identify suitable mortgage options for individual borrowers can take place - all of which ultimately improves customer outcomes. 

Advanced algorithms can also help minimise bias and discrimination by considering a broader set of variables, leading to fairer evaluations - a key part of the New Consumer Duty. These technologies also support compliance and transparency, ensuring adherence to regulatory requirements and enabling robust monitoring and reporting across a customer lifetime with a product. 

• Automating back-end processes: 

Automation is a game-changer in streamlining operations within the mortgage industry. By automating back-end processes, banks can significantly reduce manual effort, minimise errors and expedite loan processing. For example, tasks such as document verification, credit checks, and income assessments can all be automated, leading to faster turnaround times and increased operational efficiency. 

Automation also enables seamless integration between different systems, potentially eliminating data silos and enhancing data accuracy and accessibility. This streamlined approach not only saves time and resources but also enhances the overall mortgage experience for customers, who would receive quicker responses and decisions on their mortgage applications. 

Of course, customers will need a channel through which to discuss their application with a human beyond the automation but with the efficiencies created more broadly should support this more targeted investment. 

• Designing personalised solutions and fostering proactive communication: 

Integrating the right technology can empower financial institutions to design personalised mortgage solutions that align with customer needs and preferences. Through advanced algorithms and machine learning, banks can assess customer data to offer tailored mortgage options that suit their financial goals and capabilities. 

Additionally, technology facilitates proactive communication with customers throughout the mortgage journey. Automated alerts, personalised notifications, and interactive platforms all enable timely and relevant communication, keeping customers informed about their mortgage status, payment schedules, and potential opportunities for refinancing or rate adjustments. This proactive approach would foster stronger customer relationships, enhance satisfaction, and ultimately lead to improved customer outcomes.

The introduction of the FCA's New Consumer Duty will no doubt cause a significant shift in the industry, but it also presents an opportunity for financial institutions to enhance customer outcomes, particularly within the mortgage industry. While factors including legacy systems, complex regulatory requirements, and concerns around data security have often slowed down the pace of technological adoption in banking, if financial institutions truly want to navigate the changing landscape - and ensure fair access, suitability, and long-term customer loyalty - now is the time to embrace innovation, leverage technology, prioritise customer experience and stay competitive in the digital age.

That being said, with technological advancements, it's important we don't lose sight of the customer. Granted, customer expectations have soared to unprecedented heights in the current age, with a desire for services that mirror the seamless digital experiences they encounter in other aspects of their lives. This includes features like biometric identification, digital signatures, real-time payments, and immediate information reporting. Customers now expect self-service to be the norm for onboarding and support, along with personalised features like custom alerts and tailored insights.

However, amidst the Consumer Duty Act, we mustn't forget the paramount importance of simplicity as a guiding principle. Although automation and personalisation offer numerous benefits, they can inadvertently lead to hasty decisions without a complete understanding of the implications. It is crucial, therefore, for individuals to feel empowered to make informed choices about their finances, ensuring technology complements rather than replaces their decision-making process.