Financial regulation can be more impenetrable than graphene, drier than the Atacama, as bewildering as nuclear fission, and as irrelevant to most of us as the billionaire space race. It is largely ignored outside of boardrooms and compliance corridors. After all, MiFID II, TCFD, AIFMD, Solvency II, and Basel III don’t exactly roll off the tongue.

And why should people be familiar with regulations that have only indirect impacts on their lives? These rules relate largely to the complicated plumbing that allows capital to flow through the market smoothly. And, like plumbing, people know it’s important, but don’t know, or need to know, anything about how it works.

There is a notable exception, however: the FCA’s Consumer Duty Act, which takes effect on 31 July. The Act sets new rules for consumer protection and represents the biggest shakeup of the retail financial services industry since RDR in 2012.

While you could count on one hand the number of people who are aware of a bank or insurer’s solvency requirements, recent research from Edelman Smithfield found that 33% of 4,000 adults surveyed in the UK are aware of this flagship piece of regulation.

The reason for this relatively new and increasing level of awareness may make for unsettling reading amongst the boardrooms of financial companies. While some have read about it in a news article or been told about it by a friend, a fifth of those who have heard about the Consumer Duty Act have done so from a claimant lawyer, claims management company or litigation funder.  

A Matter of Trust?

Make no mistake, the claims industry has the Consumer Duty Act in its sights. But why does the Consumer Duty Act have the claims sector licking its lips, ready to gorge itself on the fruits of perceived poor outcomes in a seemingly never-ending banquet of claims and redress? Partly it is because the FCA itself has promised ‘robust action’ against companies ill-prepared for, or actively infringing on, the new regulation. Partly it’s because they know that few people currently love their financial providers, meaning they can tap into this latent sense of dissatisfaction, apathy and mistrust to encourage people to pursue speculative claims.

They have cause for optimism. More than half (55%) of UK adults surveyed say that they would join a mass litigation case against a company if they felt an institution hadn’t provided them with good outcomes. Despite cost-of-living challenges, this willingness to join as party to a mass litigation claim is not simply driven by dreams of PPI-style compensation. The primary reason for joining a claim would be to “hold providers to account,” followed by a desire to “fight corporate injustice.”

The stark truth is that, according to the 2023 Edelman Trust Barometer, most people actively distrust financial institutions in the UK. Most do not believe that they offer “good outcomes,” a key phrase in the context of the Consumer Duty Act. Furthermore, dissatisfaction levels across every subsector of the industry are pretty high, ranging from 50% for current accounts to 22% in investment platforms.

Much of people’s dissatisfaction is driven by a poor perception of value, largely centred around service costs, low interest rates or a lack of transparency. Whether you’re facing higher premiums for your motor insurance, paltry rates on your easy access savings account or have a general sense that prices are going up for no discernible uplift in value, the current environment is not conducive to driving high trust and satisfaction levels.  

Planning for the Backlash

There is certainly cause for concern, but many of these threats can at least in part be mitigated by a range of strategies. Every institution should be conducting full crisis communications simulations, wargaming all plausible scenarios in immersive “live fire” exercises. These are designed to stress test protocols and the resilience of the organisation to exogenous reputation shocks.

  • Customer service teams and the legal function need to be appropriately scaled in anticipation of an increase in claims and complaints, as well as higher levels of interaction with the FCA and the Financial Ombudsman Service. Social media monitoring should be reviewed and enhanced as appropriate, to ensure all issues are flagged and escalated in real time. 
  • Financial institutions should harness and boost their brand power to promote the fair and high value services they provide. Owned and social media channels are the best channels for this, given the generally low level of engagement most financial companies have with their customers via traditional correspondence via email and letters. Fewer than half read most of these and they often don’t bring to life the ways that financial providers and their employees are working tirelessly for their customers.
  • Finally, companies should consider mobilising the power of their employees to better sell their brand on social and owned platforms. Financial services employees are the biggest advocates of their business relative to all other sectors, according to the Edelman Trust Barometer, so their passion and belief that the company they work for plays a positive role in society should be channelled as much as possible.

The Consumer Duty Act need not be a source of trepidation for financial brands. Rather, it should be seen as an opportunity to demonstrate what those in the industry already know: UK financial services providers, in the vast majority of cases, are innovative, caring, value-driven, and customer-driven entities. It’s time to tell everyone.

And sadly, it’s also time to prepare for mass claims. Those that don’t prepare for the worst may come to regret it.

Aidan Holloway is UK Head of Financial Services, Edelman Smithfield.

Photo by Parrish Freeman on Unsplash