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July 24, 2023

Consumer duty – With big data comes great responsibility

We are now days away from the new consumer duty framework being implemented in the U.K. In effect, the new consumer duty framework is nothing short of a wholesale transformation of how financial service providers need to approach the provision of products and services to their customers.

Lots has been written about the new duty, but I find the following framework quite useful. In the not-so-distant past, say 30 years ago, financial institutions had lots of branches and capital. The regulators had a mandate to promote financial stability, but also to make sure customers were treated as fairly and transparently as possible.

Hence, there were lots of regulations around how branches were managed and how (and to whom) capital was dispersed. Again, one of the overarching goals here was that all consumers had access to branch networks and were treated fairly by the banks.

Fast forward to today, and in addition to capital and branches, banks also sit on enormous amounts of consumer data. In fact, we have very clearly seen over the past couple of decades how data increasingly became more important than the physical branches themselves. The rise of Capital One in the nineties is but one example of this phenomenon.

While it is not exactly publicized in this manner, the duty is in fact an early step towards regulating this data, or rather the entities that own and have access to this data.

In the eyes of the regulator, if you had a big branch network, that was a powerful thing, and somebody needed to make sure that access to this big network that distributed capital was fair and transparent.

Now, if you have a big pool of data, the regulator wants to make sure you are using this data to the full extent possible, in light of what is best for your customer. For example, if you have data on a customer that indicates their pay check in January is historically reduced significantly, you now need to take that into account when disbursing a loan. Don’t lend out the money and expect a customer to pay you back from a cash flow that may not be there based on past data

A simple way to think about this is that the regulator is now telling us that with access to great data, comes great responsibility. Hiding behind ignorance or incompetence will become ever so more difficult.

This of course, brings up several interesting questions and implications, the first of which is the distinction between data and information. A bank may possess the data which shows a customer’s pay check is typically reduced in January, but if they do not have the right people and the right systems in place, they cannot turn this data into actionable information.

Hence, said bank may make the loan, and expect a repayment where the customer has a gap in earnings. According to the duty, the bank should have known better. With big data, comes big responsibility.

Arguably, fintechs should have a distinctive edge in processing data into information, but it is clear that the FCA is not going to make excuses for being big or slow at processing data. If you have the data, you have the responsibility.  

So one implication is that all financial institutions better improve their ability to turn their data into information, and then turn that information into actions and new policies, customized right down to the individual level.

The second implication is that while fintechs may have an edge here, one should never underestimate the strength of banks, and their experience in dealing with new regulations. Arguably, banks will be better at internalizing the regulatory aspects of this, and fintechs run the risk of not fully grasping the implications of the change that is coming – of course vertically focused expert VC firms like QED are here to help and share thoughts as well as insights.

The third implication of this is more global. The U.K., and the FCA in particular, tend to be regulatory trendsetters more often than not, so whether you are in the United States, Brazil or Indonesia, you should expect a version of this type of regulatory thinking to come to your friendly neighborhood regulator.

And the best way to prepare is to make sure you have the right customer-centric philosophy (intention), are able to turn your data into insights (information), and can turn your insights into policies quickly and in a mass customized manner (implementation). In other words, you need to be good at heart, wise and nimble.

Surely these are good attributes for any organization, whether the regulator tells you so or not. With great power comes great responsibility, and we must all rise to the challenge of our respective positions in life and in business.