How will the introduction of Consumer Duty change RegTech?

Consumer Duty

After over a year since it was announced, the Consumer Duty legislation finally came into effect in the UK this week. How will it impact the RegTech space? 

The new Consumer Duty regulation aims to ensure customers receive communications from financial services firms that they understand. It also ensures they are offered products that meet their needs. It officially came into effect on 31 July.

This new legislation, first and foremost, is about simplifying the experience for the customer in the financial services space – an area that can easily be fraught with jargon and bluster. In the area of RegTech, this is no different, with Consumer Duty expected to play a key role.

“The RegTech marketplace has always been responsive to regulatory change and the introduction of the new Consumer Duty at the end of July 2023 will be no exception,” said Theta Lake senior regulatory intelligence expert Susannah Hammond.

In the opinion of Hammond, the Consumer Duty is a significant shift in regulatory expectations and will apply to new and existing products and services that are open for sale or renewal. RegTech solutions need to not only help enable compliance with the new requirements, but also enable the evidencing of that compliance.

Back in June this year, in order to help businesses in the final stages of preparing for the Consumer Duty, the UK FCA published a ten-point checklist to help companies identify gaps or areas for improvement.

The FCA was clear that firms can expect to be asked questions like those in the checklist in their interactions with the regulator. Hammond explained that what is also clear is that the FCA has placed communications – and communications compliance – at the heart of how it expects firms to have built their strategic approach to the Consumer Duty.

“Specifically, firms need to not only have robust recordkeeping in place for all relevant communications but also the capacity to comprehensively evidence surveillance and the basis for any follow up actions,” she remarked.

The key challenges

While the new Consumer Duty law will provide opportunities for companies to clarify their products and offerings, the challenges are not to be played down – and in this, RegTech can help.

Hammond elaborated, “Dynamic unified communications (UC) tools such as RingCentral, Zoom, Cisco Webex, Slack, and Microsoft Teams are now an essential part of the modern business environment and as such will be used as part of a firm’s communication with its customers.

“Indeed, one can imagine scenarios where UC-powered consumer interactions encompass the use of video, screen shares displaying prospectuses and marketing materials, financial plans including whiteboard diagrams and collaboration, and the use of chat, polling, and Q&A to vet investment strategies and preferences. Equally if a customer sends a ‘very angry face’ emoji to a firm, that firm would need to be able to determine whether it should be considered a complaint.”

In the view of Hammond, the practical reality of the Consumer Duty is that businesses will need to be able to preserve a ever-growing range of content such as video, emojis, GIFs and more. Given the expectations around retrieval and surveillance, records need to be captured and preserved in their native context.

She continued, “RegTech solutions will need to keep pace with the evolving record keeping requirements. Native context preservation is essential to allow content to be retrieved in its original state and properly surveilled to provide not only the evidence regarding the effectiveness of communications, but also to form the results upon which a firm can take action.”

The role of AI

If there is one particular area of industry right now that is sucking up market interest it is that of AI. With the transformative technology of ChatGPT becoming ever-present within businesses far and wide, could AI be able to help in the area of Consumer Duty too?

“Robust, comprehensive record keeping is a prerequisite for the successful use of AI. The use of AI enables vast volumes of communications to be analyzed,” stated Hammond. “Our customers benefit from the ability to detect risks and breaches at scale, the provision of alerts at significant speed and prioritization of what to review. It also gives our customers the required evidence and audit trail needed for, among other things, the effectiveness assessments inherent in the Consumer Duty.”

She explained that many companies are likely to be working towards the use of industry specific detections to increase line-of-sight to potential risks and the qualitive elements of the Consumer Duty.

“The deployment of purpose-built, pre-trained AI-based risk detections which focus on specific conduct, compliance, or security risks has many potential benefits,” underlined Hammond. “Our customers can utilize models that are trained to detect specific the display, discussion, or disclosure of confidential or personal information including account numbers, email addresses, and birthdates, sensitive documents like customer lists or applications that are shown such as trading screens, HR or finance systems.

“These targeted detections use high quality expert sources and domain expertise, which means that the burden does not fall to individual organizations to train the AI models or verify the results.”

A key reason for the vast uptake of AI technologies has been its ability to understand specific risks and challenges as well as being able to bring more context to content that isn’t as clear without it. “Well trained AI will be invaluable in being able to use all elements of a communication to take a full context view with regard to compliance with the Consumer Duty,” stated Hammond.

She concluded, “With the right RegTech solution, the use of AI will enable organizations to not only evidence compliance with the Consumer Duty but also find the risks across its communications at speed while benefiting from significant efficiencies and cost savings.”

Offshoots of growth

As well as supporting adjacent sub-sectors of the financial world, the introduction of Consumer Duty may also enable there to be some areas of growth in certain segments of the RegTech market.

Evgeny Likhoded, president at Corlytics and CEO and founder of Clausematch – which is now part of the Corlytics Group – believes that the introduction of legislation could lead to this growth in areas of RegTech.

He remarked, “Under the new regulation, businesses are required to submit regular reports and go through audits in order to verify compliance with the new regulation. RegTech companies automating these processes can make it simpler for businesses to effectively fulfill their duties. GRC solutions that were successful when the accountability regimes were first introduced may find that these new requirements are drawing in new customers.”

Likhoded also stated the success of the Duty will depend on a strong, customer-centric culture. “A strong culture must be supported by efficient governance that sets the proper tone from the top. It is important to give employees the freedom to voice concerns and question company policies and procedures in order to improve customer outcomes as part of creating a customer-centric culture in line with Duty.”

With this considered, Likhoded stated that the growth may be seen through increased demand for RegTech tools that are able to assist in integrating Consumer Duty into governance frameworks that ensure clear responsibility, transparency and efficient oversight of consumer outcomes.

Suzie MacKenzie, head of Legal and Regulatory Analytics at Corlytics, also added, The new FCA Consumer Duty represents a huge change in the regulatory environment for UK retail financial services. The requirements are cross-sectoral and will be challenging for firms to implement. Firms must embed a culture in which good outcomes for consumers are central.

“A strong culture must be supported by an efficient and flexible governance structure. We expect to see greater engagement with regtech solutions such as ours as firms explore innovative ways which allow them, not only to streamline Duty frameworks, but also to demonstrate compliance with regulatory expectations.”

Increased demand

Also offering their input on the topic was Flagright growth manager Joseph Ibitola, who stated, “The introduction of the Consumer Duty is expected to have a significant impact on the RegTech market. This regulation aims to raise consumer protection standards in the financial industry, requiring firms to act in the best interests of their customers. As a result, there will likely be increased demand for RegTech solutions that help firms comply with the new obligations.

“RegTech companies will need to enhance their offerings to assist firms in meeting the requirements of the Consumer Duty. This may involve developing solutions for customer data analysis, personalized product offerings, complaint handling, and transparency. The Consumer Duty could also drive innovation and competition within the RegTech market as companies strive to provide value-added solutions that improve customer experiences and build trust. The full extent of the impact will depend on specific requirements, enforcement, firm readiness, and regulatory landscape.”

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