Consumers around the world are facing a cost-of-living crisis. Those in vulnerable circumstances will be hit hardest. In the UK, 89% of adults reported an increase in their cost of living in August 2022. Sixty percent of those who reported a rise in the cost of living between August 3–14, 2022 say they are spending less on nonessentials as a result, 52% are using less energy at home, and 44% are cutting back on essentials like food shopping and nonessential journeys in their vehicle. Amidst rising interest rates, borrowers with variable rate mortgages (approximately 2 million people in the UK) — which account for a fifth of all UK mortgages — may struggle to afford increased payments, while fixed-rate borrowers are likely to face higher interest rates when they remortgage. Consumers will also face pressure from other types of borrowing such as personal loans and credit cards, and increasingly, alternative forms of credit like buy-now-pay-later.

Financial Services Firms Face Mounting Regulatory Scrutiny

On July 27, 2022 — a year after it published its guidance on vulnerability — the UK Financial Conduct Authority (FCA) introduced a new Consumer Duty of Care, which mandates financial services providers to raise levels of consumer protection and care. UK banks are required to put customers’ interests at the heart of their business and offer products and services that are fit for purpose, deliver fair value, and ensure positive customer outcomes. The timeline is tight: The FCA announced that firms will have until July 31, 2023 to implement the consumer duty rules for all new and existing products and services that are currently on sale. This represents a paradigmatic shift for the UK financial services industry. Leading firms will focus on meeting the Duty’s requirements by developing a technology-enabled, data-driven, and CX-focused business-wide strategy — others will take a narrower, more compliance-driven approach. Financial services firms globally should take a leaf out of the FCA’s playbook.

Banks Must Do Everything They Can To Earn Trust

In the UK and in the US, consumer borrowing in Q2 2022 was still strong across credit cards and personal loans, and mortgage arrears continue to be low — lower than before the pandemic. Consumers are not showing distress yet, but their financial health is declining and banks need to prepare now. To date, the range of responses from banks appears to vary widely: Some banks are proactively reaching out to customers, signposting financial support on their website like Nationwide Building Society does, or launching new features like CommBank did with its Fuel Finder; others are doing very little. Leading with empathy and acting benevolently is not just the right thing to do; it will help firms earn trust and benefit them further down the line. Financial services firms should provide tailored financial solutions that protect customers whose finances are being affected by the cost-of-living crisis, help them better manage their finances in this time of uncertainty, and reduce financial stress.

Banks should approach the current cost-of-living crisis in a similar manner to the COVID-19 pandemic, when many responded with empathy, flexibility, and creativity. They should use the pandemic response as a blueprint and further embed fair treatment and protection of customers into their products, processes, and policies by:

  • Demonstrating empathy and recognition of customer vulnerability in their communications with customers.
  • Researching the needs of vulnerable customers and using these insights to inform the development and improvements of their products and services.
  • Offering solutions specifically designed to provide adequate support to help vulnerable customers, such as alerts, spending trackers and controls, subscription management tools, income smoothing, and debt management solutions.
  • Pursuing pilot schemes for products like no-interest loans for customers in vulnerable financial circumstances.
  • Ensuring employees — especially those who operate at the front line — have the right skills and capability to identify and respond to the needs of vulnerable customers.
  • Implementing robust quality assurance processes and monitoring outcomes to understand where needs are not met and making improvements.

My recently updated report, How Financial Services Firms Can Better Protect Customers, offers guidance for financial services firms on how to build products and services and implement guardrails and processes that can help protect customers from harm.

You can also consult our financial well-being research hub here. To help executives in financial services develop their financial well-being strategy, we have compiled our financial well-being research into five categories: 1) consumer understanding; 2) strategy; 3) technologies; 4) design practices; and 5) maturity assessment.

Please connect with me if you have any questions or would like to discuss further.