Consumers as Innovators and the UK Financial Conduct Authority’s Consumer Duty

We address the scope, purpose, and initial implementation from July 2023 of the UK Financial Conduct Authority’s (FCA) Consumer Duty. As an instance of financial regulation innovation, the Consumer Duty is having a major impact in the financial services sector and has impacted on the organisation of markets for financial services and in the interactions of consumers and providers.

The Duty brings to prominence the ways in which the production, marketing and use of financial services products and services are strongly interrelated. It highlights: (1) Consumers’ financial literacy; (2) Providers’ confidence that their products and services and communications about these are being understood; and (3) How providers are anticipating and coping with vulnerability among their customers.

Together, these recognise consumers as being active, engaged, adaptive and innovative. We position the paper in terms of active consumption and market and marketing channels so as to focus on active consumers, and consumer vulnerability. To illustrate how the Consumer Duty is shaping the development, marketing and uses of financial services, we explore a sample of cases reported by the Financial Ombudsman Service, in which the issues referenced are akin to the elements addressed in the Consumer Duty.

We find that consumer understanding is a prominent factor, which also impacts on a number of other categories and subcategories. We also see, through the perspective of Consumer Duty, a somewhat pacified or pacifying view of consumers and in some instances, tensions emerging between consumer adaptations and the contractual terms for financial products and services. This adds to our conceptual framing of market channel and its implications for consumer vulnerability.

The Consumer Duty at One Year – Can we have a more active and engaged view of consumers?

John Finch and Chuks Otioma draw on their research with the Financial Regulation Innovation Lab, arguing that the Duty would benefit from a clearer understanding of consumers being active, engaged and innovative

The UK Financial Conduct Authority held webinar at the end of July marking twelve months since introducing the Consumer Duty.  The webinar provides a welcome opportunity to reflect on the ways in which the Duty has changed our understandings of financial products and services as consumers experience these. While there are antecedents to the Consumer Duty, and it exists alongside other regulations such as Advertising Standards and General Data Protection, the simple force of the term Consumer Duty is remarkable. The landscape is changed.  Financial services providers have a duty to show how their products and services provide good quality outcomes for their consumers. We argue that the next steps for the Consumer Duty should embrace a more nuanced view of consumers as engaged, active, and co-developing, partners in innovation.

Outcomes-based regulation

The Consumer Duty is an example of outcomes regulation. In other words, regulation and corporate activity meet in compliance as much around how they have met performance expectations and have in place processes to continue to do so. The Consumer Duty sets out four dimensions or qualities of good outcomes for consumers: price and value, consumer understanding, consumer support, and governance of products and services. Additionally, providers should pay attention specifically to vulnerable consumers, that suppliers – often to include FinTechs – are included where having a material effect, and with the outcomes of understanding and support comes an implication for enhancing consumers’ financial literacy.

As engaged researchers, we have had an interesting year following the Consumer Duty. We have organised workshops internationally where researchers and practitioners have discussed their approaches. We also highlight presentations at the Market Research Society’s annual financial services research conference. The November 2023 meeting was particularly good.  Fair4All Finance focussed on financial inclusion and the more effective uses of market segmentation techniques to draw out consumer experiences in enchaining financial inclusion (https://fair4allfinance.org.uk/segmentation/).  Cowry Consulting reported on applying behavioural science to providers’ product service development in complex financial products, and in enhancing consumer understanding and support (https://2547826.fs1.hubspotusercontent-na1.net/hubfs/2547826/On%20The%20Brain%20-%20ESG%20Edition.pdf).

Both these themes (segmentation in support of financial inclusion, and applications of behavioural science) speak to a need for a more thorough integration of consumers’ experiences and practices, of how they go about engaging with and using financial services products. As the FCA webinar highlighted, one source of data is complaints and resolution through the Financial Ombudsman. This vital work is though something of a last resort for consumers and providers where things could have gone wrong. Otherwise, drawing in consumers and understanding their experiences, is a longstanding challenge, reflected in stakeholder theory, regulation, and responsible innovation and science, of how to gather consumers and consumer practices into groups in a way that has some comparability with service providers.

Insights can be gained by catching some of the hints about consumers’ process and capabilities reflected into providers through principles of outcomes regulation. If we accept consumers and consumption as active, requiring capability, literacy, understanding subject to behavioural bias, contending with complexity, and varied across individual – even if proxied through segmenting – this rich experience should find a way into the Consumer Duty and our reflections of its implementation.

Active, engaged consumers

Let’s sketch this in a little more detail. Consumer Duty implies a rebalancing of power towards that age-old principle in economics of consumer sovereignty. This is not easily achieved. The Consumer Duty has four dimensions of good outcomes, and only one is price and value. So, as with many consumer activities, outcomes of Consumer Duty are not simply of consumption being a purchase then ‘value sink’.  Consumers need to work hard to access the value designed into and intended in their financial products and services. Just as an example, and with relevance to FinTech too, financial inclusion is tensioned against the investments expected of consumers to participate in the market, in financial services, of a mobile phone with an up-to-date operating system and perhaps paid-for apps. Consumers co-invest and through their personalised adaptions in use, modify the digital infrastructure presumed for many financial services.

New technologies can support drawing insights from consumers. Leveraging AI solutions that provide capabilities for richer data, real time analysis and consumer insights, Fintech and financial service providers have a vantage potin from which to understand customer characteristics and preferences, engage with and offer personalised products that match consumer expectations. This way, financial products and services can extend beyond segmentation and stand a better chance to be directed towards good consumer outcomes. As a note of caution, sole deployment of cutting-edge technologies and data per se can narrow the scope for improved consumer experiences and good outcomes. This sounds the importance of business models that promote co-creation with consumers through product design, development and delivery that allow consumers to interact with and tinker around both products and services, and the platforms on which they are delivered.

Furthermore, consumers often make their own financial bundles and portfolios. With respect to financial inclusion and vulnerability, they do so with great ingenuity, in mind-occupying and time-consuming ways, through trial and error, shared experiences, and, crucially, cutting across providers and product categories. This can perhaps include juggling credit cards, short-term loans, welfare payments, and overdrafts. These are consumer experiences: innovative, imaginative, adaptive, ingenious, sometimes urgent and under pressure. Our challenge is to draw consumer experiences and actions into the view of the Consumer Duty. To vary our focus or unit of analysis to, of course, include individual products and services from providers, but also recognising the additional consumption activities among consumers, and how these vary significantly. This can also allow us to reflect on the definitions of, and contributions to, Consumer Duty categories of – taken together – price and value, consumer understanding, and consumer support. And such an approach can be part of and arguably improve the governance of products and services.

Professor John Finch and Dr Chuks Otioma are at the University of Glasgow’s Adam Smith Business School and the Financial Regulation Innovation Lab (a partnership between FinTech Scotland, University of Strathclyde, and University of Glasgow).  We can be contact at john.finch@glasgow.ac.uk, and chuks.otioma@glasgow.ac.uk.

We acknowledge funding from Innovate UK, award 10055559.

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