Digital Conduct Risks: The FCA sets out its stall for digital and innovation

Digital risk and the uptake of innovative technology has been on the Financial Conduct Authority’s agenda previously. However, the recently released FCA Business Plan 2020/21 outlines that ‘delivering fair value in a digital age’ is one of the regulator’s four external priorities over the next few years. What are the key highlights you need to think about now?

What does the FCA mean by “fair value for customers in a digital age”?

The FCA reiterate that COVID-19 is prompting social changes that are accelerating the development of digital markets.

So in order to confidently embrace digital and innovative technology you must fully understand and have line of sight over the new conduct and customer risks introduced into your digital customer journeys, deliver fair value for customers and actively monitor those digital interactions both during this crisis and into the future.

The FCA’s focus on “fair value for customers”

The FCA highlight that recent investigations of pricing practices in General Insurance, Cash Savings and Mortgages show markets sometimes fail to achieve fair value for consumers, some of whom pay a loyalty penalty, which we note can easily be overlooked when cross-selling or renewing products through digital channels.

They will continue to develop their views on the economic and fairness aspects of price discrimination, and how fairness is considered, focusing on three outcomes:

1. Product suitability

The FCA expects consumers to be able to access, assess and act on available information through digital journeys to make informed buying decisions, and be confident that they are getting appropriate quality and service for the price they pay, and have the information to assess this.

For example, the FCA highlighted that customers taking out general insurance and protection products should be confident that they are suitable for their needs at the point of sale, and deliver on promises made at the time of claim. Customers should receive communications about products that are clear and not misleading both when they take out products for the first time and when they look to renew or switch.

2. Digital innovation and competition

The FCA sets out that digitalisation and innovation can foster competition and drive positive outcomes for customers. Open Banking, for example, is considered by the FCA to be a driver of high quality products for customers, as the initiative grows and embeds further.

The regulator will deepen engagement with industry and society on machine learning and artificial intelligence to foster a safe, appropriate and ethical use of new technologies.

It is important that firms recognise, and react to, the potential for artificial intelligence to generate bias towards customers and impact their digital journey (including in pricing). Within the business plan, the FCA specifically shines a light on the use of data algorithms in the general insurance and pensions sector which have been shown to automatically discriminate against certain customers. To combat this, generating robust strategies to ensure the use of innovative technology is ethical and considers the diversity of a firm’s customer base is crucial for consideration.

The FCA will also explore and focus on how best to expand their sandbox services to foster the uptake in disruptive technologies, most notably with RegTech providers. The FCA aims to highlight the capability of this sector with regard to generating a more developed relationship between technology and financial regulation.

3. Vulnerable customers

In a situation where increasing numbers of customers turn to digital channels, firms must maintain the fair treatment of customers who are vulnerable. This is especially prevalent in this time of crisis for those who may be ‘digitally disenfranchised’ and require special assistance when navigating a new digital environment.

Furthermore, the COVID-19 pandemic will require firms to consider whether their definition of vulnerability sufficiently covers customers that are temporarily vulnerable due to the pandemic (such as those subject to the government furloughed scheme), and to ensure that any revised definition is appropriately operationalised through digital journeys.

The FCA expects firms to reduce the risk that vulnerable customers are not treated fairly in pricing and other touch points during the digital journey. With the speed at which the current situation has manifested, there is the greater chance that firms have been unable to align their digital channels with the needs of their customers. Increased adoption of machine learning algorithms and artificial intelligence may decrease the likelihood of poor customer outcomes, however these require tailoring to ensure all customers, including those who are vulnerable, are treated fairly and receive suitable prices.

Steps that firms can take

As the COVID-19 situation continues to develop it is crucial that firms deliver realistic and effective responses to ensure their customers receive fair outcomes. Firms can take proactive measures to ensure that both they and their customers benefit from digital innovation and competition when developing their digital innovation strategy, designing their products and customer journeys, and implementing controls and monitoring techniques.

1. Digital innovation strategy

Identify a clear digital innovation strategy which supports greater value for customers and reduces potential instances of detriment, and is commensurate with the overarching strategy of the firm.

2. Product and customer journey design

Identify and map all potential conduct risks throughout your digital customer journeys to identify hotspots, and decide if existing controls require enhancing or additional controls need to be introduced. This includes controls to ensure the ethical use of data and to prevent potential bias in machine learning algorithms.

Develop a sufficiently varied suite of products to enable customers to choose the product that best suits their needs and circumstances at an appropriate quality and price. Consider if existing products require tailoring to reflect the realities of the current climate, for example where a customer is required to attend a branch to complete an application. Product Design and Risk and Compliance teams should stay sufficiently aligned to ensure that any new products consider the digital conduct risks that could arise before, during or post-sale.

3. Proactive controls and monitoring

Assess the use of data and machine learning algorithms to ensure that these are ethical and not to the detriment of customers. This specifically concerns pricing and value for money, for example through identifying and preventing potential bias in machine learning algorithms, and that these are aligned to regulatory requirements and expectations. You can also audit machine learning algorithms to continually monitor appropriateness and ensure these do not cause detriment to the customer.

Monitor the use of digital channels to understand emerging conduct risks and manage these where necessary through the adoption of machine learning and artificial intelligence, for example using Open Banking data and mobile application metadata as inputs to identify vulnerable customers in digitally-driven customer journeys.

Upskill and improve the expertise of individuals in Risk and Compliance functions by delivering enhanced training, focusing on fully understanding disruptive technologies.

In response to the current crisis, organisations that recover and thrive in the longer term will be those that take steps to quickly respond to these challenges to build digital advantage in the long run. Explore more in our Digital Risk framework.

Deloitte Conduct Risk Roadshow 2020

Deloitte is hosting its annual Conduct Risk Roadshow via webinar on Wednesday 6 May 2020 from 9:00 to 10:00am. Speakers including Nausicaa Delfas, Executive Director, International, at the FCA, will be sharing perspectives on the COVID-19 pandemic and its impact on customers and firms. For more information and to register for please click here.