Increased focus on affordability could open up opportunities for incumbents to work with FinTechs on ways to spot vulnerable (or potentially vulnerable) customers

One of the biggest impacts of the cost of living crisis is affordability. Regulated firms are starting to examine their existing debt and forbearance measures, with a number of important issues to consider:

• Whether an approach to forbearance adopted during the COVID-19 pandemic still works.
• Approaches to forbearance and enforcement must continue to meet fairness requirements in times of increased economic stress.
• There will be increased scrutiny on whether decisions to lend (both historic and going forwards) are based on proper affordability checks.
• Actions taken against  defaulting customers are more likely to be subject to challenge from customers and scrutiny from the regulators.
• There is a need to ensure sufficient resources to assess individual circumstances and to offer appropriate and sustainable solutions to consumers.

A recently published Innovate Finance/EY report on how FinTechs have responded to the cost of living crisis includes some case studies on FinTechs using greater analytical focus to spot vulnerable customers as early as possible, an area which is a key focus of both the UK and Irish regulators.

The Central Bank of Ireland (CBI) in its Consumer Protection Code (CPC) notes that vulnerability is not static; consumers may move in and out of states of vulnerability. They may be vulnerable in respect of some categories of transactions but not others. The FCA’s vulnerable customers guidance makes similar points.

Recognising vulnerability could be a big challenge for incumbents, who may not necessarily have the technology/systems to do this in an efficient way. There may be a possibility, privacy obligations permitting, to partner with a Fintech on vulnerable customer identification and treatment.

Disruptive effect of cost of living crisis is inspiring development of innovative tools to support customers

Social and/or market upheaval can create opportunities for innovative offerings to disrupt existing business models, the most recent example being the COVID-19 pandemic with its  boost to e-commerce and acceleration of the rapid transition of certain sectors such as telehealth, online learning and, of course, remote working.

Several players in the money management space are continuously seeking to innovate and enhance their product offering by offering ever increasing product lines and functionality to consumers. As well as offering peer-to-peer credit transfers, many FinTechs are offering solutions to customers which can assist them during the cost of living crisis by providing a holistic overview of their financial activity and assisting with budgeting and more efficient financial management.

Many of these innovations are built on the concept of open banking, which was enabled at EU level under the Second Payment Services Directive, PSD2. One of the European Banking Authority’s proposed amendments to PSD2 under the upcoming PSD3 is to move from 'open banking’ to ‘open finance’. This would mean expanding the current open banking regime from access to payment accounts data towards access to other types of financial data such as savings and investments.

There are many other examples of innovations which can help consumers through current challenging times, including:

• Savings: Innovative savings products can encourage customers to develop better savings habits.
• Credit scores: Some credit builders have been offering free credit reports and advice on how to improve scores for some time now.
• Investments: Many FinTechs will also provide users with access to a variety of investment products, from more low risk retail fund products to more diverse investment opportunities including access to crypto. Here, product suitability is important and FinTechs should be aware of ways that consumer investment products can draw scrutiny from regulators, e.g. in relation to commission free trading models based on payment for order flow type arrangements (which are unlikely to be consistent with regulatory requirements such as the MiFID conflicts of interest rules) and the evolving regulatory requirements applicable to cryptoassets.
• Buy-Now Pay-Later (BNPL): BNPL providers have enabled customers to spread the cost of purchases over numerous payments. There has been significantly increased interest in the BNPL space, both from new entrants and from regulators. Irish consumer credit law has been updated to specifically cover BNPL providers, and the proposed updates in the second EU Consumer Credit Directive (CCDII) will expand the scope to capture BNPL providers. In the UK, the government is consulting on draft legislation that will bring BNPL within the FCA’s regulatory perimeter (see our article Buy-Now Pay-Later: UK government consults on draft legislation).

It will be interesting to see what further innovations FinTechs and traditional financial institutions will develop off the back of such developments in due course.

Regulators have already started to remind regulated firms of their obligations under existing financial services legislation and guidance

In Ireland, the regulator has issued a Dear CEO letter to all Irish regulated firms reminding them of their consumer protection obligations in the context of the challenging economic outlook. For more on the letter, take a look at our Engage article Central Bank of Ireland Dear CEO letter - consumer protection in challenging economic times.

Similarly, the FCA has written a Dear CEO letter on the rising cost of living which also reminds firms that:

• Tailored Support Guidance (TSG) for mortgages, consumer credit and overdrafts which was issued during the COVID-19 pandemic, “is also relevant for borrowers in financial difficulties as a result of the rising cost of living.”
• Borrowers in financial difficulty should be given appropriate tailored forbearance that is in their interests and takes account of their individual circumstances.They should consider what more they can do to encourage mortgage borrowers to think about switching to a less costly option where that is available.
• Fees and charges levied on customers in financial difficulty must be fair and do no more than cover the firms’ cost.

There will continue to be regulatory scrutiny on fairness, including regulators being focussed on lessons from the past, such as the CBI’s tracker mortgage examination. There are a number of takeaways that retail financial institutions should be mindful of:

• Just because  industry peers are taking a particular course of action, it doesn’t mean it’s defensible.
• Even if your terms and conditions are robust and permit a particular course of action, are they fair? And are they transparent?
• There has been a sea change towards outcomes-based regulation in retail financial services, such as the Consumer Protection Code review in Ireland and the upcoming FCA Consumer Duty in the UK.

Irish Consumer Protection Code review and UK FCA Consumer Duty: what areas will be relevant for regulated firms in dealing with the cost of living crisis?

In October 2022, the CBI published a discussion paper detailing developments in the retail financial services market, identifying important trends and setting out its key priorities and areas of focus. Key among these are Fintech and the changing nature of how financial services are delivered to consumers. The discussion paper also looks at specific themes in detail, and solicits feedback and input from stakeholders which it will use to inform future policy considerations. These include consumer vulnerability, innovation and disruption (e.g. evolving business models based on disintermediation and open banking), and digitisation.

The CBI discussion paper is the first phase of the review process, and will be followed by a more targeted consultation paper (expected in Q4 of this year) with a view to revising the CPC in 2024. For more on the discussion paper, see our article Central Bank of Ireland launches review of its Consumer Protection Code 2012.

In the UK, 2023 sees the move into the Consumer Duty world for financial services. The new Duty demands something over and above the FCA’s existing TCF (treating customers fairly) requirements, with an overarching obligation to avoid “foreseeable harm”. This will involve monitoring outcomes for customers, including showing requirements to monitor and ensuring that MI is being received and assessed at the right level. On the plus side, many more data points are now available in real time as services become digitalised, which makes assessment of customer outcomes and customer circumstances possible. Likewise in relation to the focus on spotting vulnerable customers as early as possible.

In-scope firms will need to apply the Consumer Duty to new and existing products and services that are open to sale (or renewal) by 31 July 2023 (or 31 July 2024 for products and services held in closed books). Our Consumer Duty hub provides a number of useful resources to help firms with their implementation of the Duty.

The cost of living crisis will likely increase regulatory scrutiny on pricing

It’s likely that the cost of living crisis will amplify regulators continuing on a path towards price scrutiny, particularly if competition/switching isn’t providing the customer benefits that it should do. In light of this, it’s key for firms to understand the way products and services are priced and paid for (which aren’t necessarily the same thing) and to have a clear rationale for this with an audit trail.

In Ireland, while the CBI doesn’t have a role in setting price, it will most certainly intervene where there is a legal basis to do so and where it sees firms engaging in unfair, hidden or discriminatory practices, which seek to take advantage of customer vulnerabilities. Regulated firms should be mindful of this.

Banks and retail credit firms in Ireland should also be mindful of their obligations under section 149 of the Irish Consumer Credit Act and its requirement to notify the CBI in respect of any new customer charges or increase in any charge previously notified to the CBI,

The CBI has intervened on price in the area of retail insurance, where it introduced regulations on pricing practices in the home and motor insurance market to ban the practice of charging loyal customers higher premiums relative to the cost for the insurer.

In the UK, the FCA Consumer Duty also very much encourages transparency and disclosure in this space. Under the price and value outcome, firms will also have to assess whether the fees that they charge customers represent fair value for the customer. The FCA has confirmed that the specific focus of the price and value outcome rules is on ensuring that the price the customer pays for a product or service is reasonable compared to the overall benefits (the nature, quality and benefits the customer will experience considering all these factors). The FCA has been clear that their intention is not to set prices and that their rules do not have this effect, but it’s clear the expectation is that some pricing changes will need to be made by firms.

In terms of what firms can do more generally on pricing, transparency and disclosure is key. Consumers should be able to understand what they are paying for a product so that they can easily compare the market and choose the product that is appropriate for their needs and which represents the best value for money for them.

Next steps

A recording of the latest FinTech Fundamentals webinar on the impact of the cost of living crisis on the financial services sector in the UK and Ireland can be viewed on demand here.

If you would like to discuss any of the issues raised above, please get in touch with any of the Hogan Lovells contacts listed.

Authored by Eimear O’Brien, Jen Staniforth, Bill Laffan, and Virginia Montgomery.