Regulating the Digital Revolution: A Roadmap for Consumer Finance Firms

Key Messages:

As we highlighted in our comms earlier this year on the focus areas for 2024, AI and Technology are sure to be on the FCA’s agenda throughout the course of the year.

This has been reinforced early in 2024 by a speech that Nikhil Rathi (FCA Chief Executive) delivered on consumer-facing technology and how it can help keep consumer markets honest.

He highlights that the FCA wants to be at the forefront of enabling technological innovation and that they are open to engagement and debate as to how this area should be regulated, and so this is a chance for regulated firms to have a say in how this area should be regulated going forward.

The main message given in this speech is that promoting financial inclusion, innovation and security in technological advances is key and that debating these issues openly gives a good chance that the sector will advance and achieve the right outcomes.

Some insurance examples are used in this speech. For example, a case study is used where a person has lower insurance premiums because technological advances (Open Finance, Open Data and AI) have helped to slash fraud and detect financial crime. Technology such as advanced telematics have enabled that person to track driving habits and insurance coverage for this kicks in whenever their car is started and is priced according to the nature and time of their journey.

However, on the flip side he uses an example where another individual, who is a part-time working mother of two with a long-term condition that is not life threatening and who is meeting all her bills cannot obtain financial or insurance products due to the computer keeps saying “no” deeming her too high risk. There is no human she can phone to explain her one-time missed car payment was due to her ex not sending child support on time.

Nikhil outlines the key benefits of technology advances as being:

• Improvements in tailored customer products, services, and prices
• Fraud and financial crime dropping as there are more secure ways to prove digital identities lowers costs and the savings benefit consumers.
• Potentially more services and products for the previously financially excluded (because as tech begins to lower costs, the costs to serve higher risk consumers reduce)
• More intense competition – people are able to make their data and information available, so firms compete more for customers with products and prices tailored to their personal circumstances.

Now to the potential downsides:

• Hyper-personalisation could mean more groups become ‘too hard to bother with’ for firms, entrenching financial exclusion. Not least as huge gaps remain in financial literacy.
• The tech and banking giants gobble up the competition. Indeed, any of the Big Techs has the financial firepower to buy up all the UK’s major listed banks and financial services firms (he does point out that Competition and financial regulators would have something to say on this)
• New forms of fraud and harms are unleashed, and security of digital identities compromised, undermining trust in technology.
• The boundaries between gaming, gambling, entertainment, trading, and investing become so blurred as to endanger people’s long-term financial wellbeing.

What Firms need to consider:

It’s clear that the FCA are highlighting that there are real benefits to advances in technology, but these have to be managed correctly with the intention of the Consumer Duty always in the background as to whether such technology is always delivering the right outcomes for consumers.

Firms therefore need to ensure that any technology they are using or developing considers the principals of the Consumer Duty. Firms need to demonstrate that their products and services are designed to deliver positive customer outcomes (we have been familiar with these requirements in the insurance sector for some time now).

Firms should ensure that any investments in technology ultimately glean better understanding of customers needs and help with Consumer Duty compliance.

As well as the Duty, firms need to ensure that operational resilience and being alert to cyber crime and fraud are high up on their agendas (note the TSB of £49m in December 2022 for failing to address outsourcing risk for their planned IT upgrade leaving customers with patchy service for half a year).

Linking in with vulnerable customer requirements, hyper-personalisation of insurance should not lead to exclusion of those posing a higher risk and it is important that firms get the balance of this right.

As can be seen there are real benefits to technology in the insurance sector so long as this is managed correctly.

Should you wish to discuss any of this or have any technology solutions in the pipeline that you may need compliance assistance with, please do not hesitate to contact us.