Digital conduct risk in the time of COVID-19

Crises, no matter their cause, tend to expose vulnerabilities, act as a catalyst for change and intensify existing risks. COVID-19 is no exception and in this blog, we explore the impact the coronavirus pandemic is having on the adoption of digital financial services, how this exacerbates digital conduct risks and changes regulatory expectations, and we offer some suggestions for mitigating and managing these risks. Without wanting to state the obvious, digital channels are enabled by technology and need the help of technology to manage them—and that includes compliance.

Digital adoption of finance — coronavirus as a catalyst

Christopher Woolard, the Executive Director of Strategy and Competition at the UK Financial Conduct Authority (FCA), said in a speech in October 2019, “We’re moving from an era of digitization—services moving online—to a truly digital industry … This digital transformation is reflected in the new products finding their way direct to consumers over the internet (some good, some bad, some downright fraudulent).”

Coronavirus is accelerating this long term shift to digital as demonstrated by our research into the increase in digital traffic during the pandemic. Specifically in financial services, McKinsey showed in a survey conducted in April 2020 that digital engagement levels in European banking have increased by 20%. HSBC and Lloyds in the UK have reported significant increases in digital deposits and some FinTech companies are reporting significant upticks in their usage. There is a similar story in the US, where 45% of respondents stated they have changed how they interact with their bank since the outbreak of the pandemic.

Regulatory priorities — reoriented by coronavirus

With levels of digital adoption in financial services only set to increase further, regulators around the world have been both encouraging of this innovation but also mindful of their duties to protect consumers. But as the adoption of digital channels increases and the range of products and services delivered via digital expands, so the risk and complexity of monitoring these channels increases. Regulators including the UK Financial Conduct Authority (FCA) and the Monetary Authority of Singapore have led the way in offering safe spaces for experimentation with innovative technology.

However, the FCA also needs to fulfill its statutory objective of consumer protection, including the risks to consumers posed by the digitization of finance. High on this list is the treatment of vulnerable customers (including the ‘digitally disenfranchised’) and the ability to deliver fair value to consumers who access products over digital channels. These issues are now even higher on the regulator’s agenda because of the increased use of digital financial channels in lockdown and the economic hardship being experienced by many people because of COVID-19.

In their 2020/21 business plan, the FCA state specific outcomes for ‘delivering fair value in a digital age’:

• Consumers can choose from products that meet their needs, at a suitable quality and price
• Digital innovation and competition supports greater value for customers
• Vulnerable customers are not exploited or targeted with poor value products and services and access to key products and services is fair

This sets out clear regulatory priorities for the year ahead, as Dr Sian Lewin, co-founder at RegTech Associates, comments:

“The inclusion of such specific wording on the increased digitisation of financial products and delivering fair value is a strong indication that we will see more stringent regulatory monitoring of how firms demonstrate this. Additional regulatory guidance and even mandatory regulatory reporting requirements might well follow in the next year or so. Firms should be thinking now about how best they can tackle this.”

Digital conduct risks — intensified by coronavirus

Conduct risks arise in financial services irrespective of the channels used to deliver them—from traditional bricks-and-mortar branches through to the niftiest mobile apps. In the UK, conduct risk regulations centre on the principle of ‘treating customers fairly.’ Products sold to consumers must be suitable, all the necessary information to allow customers to make informed decisions must be disclosed clearly, products must be priced fairly and customers have the right to complain without being penalized. And if that isn’t challenge enough, you have to keep all the necessary records—a subject we’ll return to in the future.

For digital channels, where there is little to no human interaction, traditional methods of ensuring and demonstrating fair customer treatment (such as voice recording, records of email communications, etc.) are irrelevant.

So how has the COVID-19 pandemic exacerbated these conduct risks further?

Dr Sian Lewin highlights three specific factors:

“Firstly, the changing demographics of customers who are using digital channels for the first time (such as the over-65s) makes suitability assessments even more critical without introducing bias into the personalization of customer journeys.

Secondly, the economic hardship that many are suffering as a result of the pandemic (for example, if they have been furloughed) will test how firms define vulnerability, especially if this is likely to be a more temporary state of affairs.

Finally, even if customers do not fit the vulnerability criteria, the additional stress of balancing many different priorities under lockdown means it is even more important that the information provided when consumers are making decisions about financial products is clear, accurate and unambiguous.”

With these factors now in play, COVID-19 has made it more critical than ever that firms are actively monitoring and managing the conduct risks in their digital channels.

Tackling digital conduct risks

Currently, regulated businesses are doing their very best to support and service their customers during this difficult time, but this does need to be done in line with regulatory expectations. How can they do this? Digital problems require digital solutions, and Glassbox can be deployed rapidly to give firms immediate help. With the ability to monitor and record all digital interactions, Glassbox enables the following:

• Ensuring and evidencing fair treatment by keeping complete records of every session exactly as the customer experienced it to prove what happened, resolve complaints and disputes, and provide evidence to the regulator that they did what was asked and expected of them.
• Protecting vulnerable customers by monitoring activity in real-time, so if, for example, customers are struggling, alerts can be generated allowing human intervention where necessary.
• Delivering fair value by maintaining forensic records of every step in every customer journey to prove the delivery of fair value and the right outcomes, especially when technologies such as AI are being used to deliver personalized journeys, information and services.

In the time of COVID-19 and beyond, as digital financial services continue to grow at a fierce pace and expand their customer base, the need to manage digital conduct risks and ensure fair outcomes will only increase in importance. Firms can start that journey today using Glassbox, reassured that they and their customers are protected no matter what may happen in the future.

In our next blog, we are going to drill down to look at some of these issues in more detail—starting with vulnerable customers.