What are the next big conduct challenges in retail banking and lending?

Who is this blog for?
 

Board members, Senior Executives, Risk and Compliance teams and Consumer Duty champions of retail banking firms¹.

At a glance:
 

• The FCA's active approach to supervising the Consumer Duty (the Duty), coupled with the retail banking sector's significant share of a rising number of complaints referred to the Financial Ombudsman Service (FOS), makes it highly likely that the FCA will increase its focus on retail banking firms.
• The material rise in FOS complaints (while FCA reported complaints from retail banking firms have remained stable) indicates that a larger number of customers are escalating their complaints to the FOS, suggesting that initial resolution attempts may be falling short for a significant number of customers. 
• To anticipate potential emerging issues, we analysed FCA and FOS complaints data, Payment Systems Regulator (PSR) and UK Finance fraud reports, and recent regulatory announcements. This analysis revealed three key areas of focus: affordability assessments for credit cards, fraud prevention and management in current accounts, and the fair treatment of SMEs. Our analysis excludes motor finance related complaints from its scope as we deal with this issue in a separate article here.
• Firms should prioritise robust affordability assessments for credit card customers, proactively identifying and supporting those facing financial difficulties. Equally crucial is a proactive approach to fraud prevention, including enhanced customer education and effective support for fraud victims.
• The increasing regulatory focus on SME treatment is a call to action for firms. Actions can include developing metrics to monitor SMEs outcomes, and potentially reassessing their business strategy and risk appetite related to the SME market.
• Some firms might take the view that increased claims management company (CMC) activity is the main driver behind the significant rise in FOS complaints. Even so, firms should still - at a minimum - investigate their complaints data to understand how relevant the issues identified in our analysis are to them and take action accordingly. This will either provide some reassurance or the necessary information to tackle any emerging issues before they become more entrenched.
• Finally, across all the areas above, outcomes monitoring is essential to evidence good customer outcomes under the Duty. In this paper we include some key metrics for monitoring credit card affordability issues and fraud journeys’ outcomes based on our previous research Evidencing Consumer Duty Compliance.
   

Introduction
 

Embedding the Duty in financial services remains a strategic priority for the FCA. This summer, the FCA set its sights on the insurance sector, publishing thematic review findings of general insurance and pure protection products and launching a market study on pure protection distribution. Importantly, the FCA has signalled that this is just the beginning, with more to come in a forthcoming roadmap of future Duty work. Given that retail banking firms consistently receive a substantial and growing proportion of complaints, it seems likely that the FCA will soon increase its scrutiny of the retail banking sector.

To identify emerging issues within the retail banking sector, we analysed various data sources, including FCA and FOS complaints data² , PSR and UK Finance Fraud reports, and recent regulatory announcements.

Our analysis revealed three key areas of focus:

• Credit card affordability assessments: are firms adequately assessing affordability before granting or increasing credit card limits?
• Current account fraud prevention and management: are firms doing enough to protect customers from fraud, and how effectively are they responding to incidents?
• Treatment of SMEs: are firms meeting the specific needs and challenges of SMEs, ensuring they are treated fairly?
   

The increasing number of FOS complaints: what lies behind it?

While the overall number of complaints received by firms and reported to the FCA related to retail banking and credit card products has remained relatively stable from 2021 to 2023 – averaging around 515,000 for current accounts and 200,000 for credit cards every six months (within a total of 1.8 to 2 million across all financial products) – FOS data shows a contrasting and concerning trend.

FOS quarterly complaints data indicate that, since Q2 2022, complaint numbers have risen significantly, with an especially sharp increase in the first two quarters of 2024, reaching a peak of 74,645 cases in Q2 2024. A growing number of complaints escalating to the FOS suggests that initial resolution attempts may be falling short for a significant number of consumers³.

From FOS analysis, credit cards and current accounts⁴ are among the top three product categories driving the surge in FOS complaints. Hire Purchase (Motor) complaints also contribute significantly to the overall increase, primarily driven by concerns related to Discretionary Commission Arrangements (DCAs). We previously explored this issue in depth in our blog: Motor Finance DCAs. This paper excludes analysis of the trends on Motor Finance driven FOS complaints.

We show the changes in complaints concerning credit cards and current accounts in the chart below (extracted from FOS data sources).

Both products have seen absolute increases since Q2 2022, with credit card complaints rising sharply in early 2024 to become the most complained-about retail banking product. FOS analysis reveals perceived irresponsible and unaffordable lending as the primary root cause for credit cards, while fraud issues, particularly authorised push payment (APP) scams, are the primary driver of current account complaints.

The picture becomes more complex as the FOS attributes part of the recent surge in complaints to a significant increase in cases brought by professional CMCs. These now account for half of all complaints received in Q2 2024, compared to just 17% in Q2 2023.⁵ This trend is particularly pronounced in credit card and motor finance commission complaints⁶ , with CMCs driving over half of complaints related to credit cards and 90% of motor finance complaints⁷.

Noticeably, only 25% of professionally represented claims were upheld, compared to 40% for direct consumer complaints⁸. Concerns over the quality of complaints brought by CMCs, particularly given their increasing volume, have prompted the FOS to consider implementing a case fee. An update on this proposal, expected in the coming months, could reduce FOS complaint volumes in the future.

There is an argument that the fall in upheld rates for credit card complaints from 43% to 31% between Q1 and Q2 2024 indicates that CMCs are pursuing claims that are often unlikely to succeed. However, this argument risks ignoring the preceding trend, with a 184% surge in credit card complaints from Q2 2022 to Q1 2024 (peaking at a 43% upheld rate). Similarly, the 59% increase in current account complaints since Q2 2022, seemingly unrelated to CMCs, also requires serious consideration.

Some firms might take the view that increased CMC activity is the main driver behind the significant rise in FOS complaints. Even so, firms should - at a minimum - still investigate their complaints data to understand how relevant the issues identified in our analysis are to them and take action accordingly. This will either provide some reassurance or the necessary information to tackle and emerging issues before they become more entrenched.
 

Addressing affordability challenges

The latest FOS quarterly data (Q2 2024) paints a concerning picture, with complaints reaching 18,175 cases, 85% (15,580 cases) of which the FOS categorises as issues relating to perceived irresponsible/unaffordable lending practices. Although CMC activity may have influenced overall complaint numbers in Q2 2024, the root cause - perceived irresponsible/unaffordable lending practices - remains a concern. This is evident in the stark rise of irresponsible/unaffordable lending complaints to the FOS, increasing from 26% to 56%⁹ of all credit card complaints between FOS’s financial years 2022/23 and 2023/24 (ending Q1 2024).

Issues relating to perceived irresponsible/unaffordable lending include:

• Lack of early intervention: customers believe providers should have acted sooner when credit card balances were increasing at a concerning rate. Firms should consider their compliance with persistent debt rules and how well their processes and controls identify and respond to these requirements.
• Lack of controls over credit limit increases: recent FOS cases suggest that providers do not always have the necessary controls around credit limit increases, potentially exacerbating affordability issues. 

These findings highlight the need for firms to revisit their approach to affordability assessments in the context of credit card products. This requires a proactive approach, developing and analysing MI to identify and support customers potentially facing financial difficulties early on and should be linked to the work done on fair treatment of vulnerable customers.

Action for retail banking firms to consider:

• Monitoring customers’ affordability: firms should ensure that they are able to support the ongoing monitoring of accounts and have clear strategies for customers who exhibit signs of potential financial difficulty. Key indicators to monitor could include the frequency of exceeding credit limits, missed payment history across all accounts, and the customer’s rate of increase in debt levels. 
• Affordability model assessment:  firms should consider reviewing their affordability models (current and historic) to determine if there are any systemic issues that may have led to poor outcomes. Such an assessment can help firms identify any improvements required as well as actions to remediate customers that have been provided with unaffordable lending historically due to limitations in the model.
• Justifying fair value in credit card rates: firms must be able to articulate why their credit card interest rates/fees and charges are fair value, going beyond simple competitor benchmarking. Evidence could include a detailed breakdown of ancillary charges, total fees customers pay over the whole lifecycle of the relationship, and the monetary value of benefits offered to cardholders.
• Planning ahead: firms should consider their resource and operational needs in the event that the surge in complaints in this area continues.
   

Managing Fraud

Fraud, particularly APP scams, is a major root cause of current account complaints. APP scams now account for over half of all fraud and scams complaints submitted to the FOS.¹⁰  Despite a decrease in the total value lost from APP scams, the number of reported cases continues to rise. PSR data highlighted a 12% increase in APP cases, reaching 252,626 cases in 2023. This trend suggests that, while the average amount lost per APP scam may be decreasing, the number of individuals falling victim to these scams is on the rise. 

Regulators have made changes to the remediation for fraud victims, notably with a new reimbursement limit of £85,000. However, it remains to be seen how the new limit will affect the overall volume of complaints. 

Most instances of fraud results in significant customer harm, leaving victims vulnerable and susceptible to further scams. Firms must prioritise both fraud prevention by enhancing their systems, controls and customer education and improve fraud remediation by providing effective redress and communication channels for fraud victims.

Preventing Fraud

Retail Banking and payment firms face a crucial balancing act: providing frictionless payment options while mitigating the inherent fraud risks. They must define and transparently evidence their risk appetite, addressing key questions such as: How many checkpoints are necessary for contactless payments? What level of fraud risk is acceptable? 

Firms need to ensure their systems and control are robust and adaptable enough to meet the ever-changing nature of fraud and scam risk. The FCA recently outlined its expectations on anti-fraud systems and controls in a Dear CEO letter. This should include regular reviews of the design and effectiveness of systems, controls and operations that are at significant risk, including reviewing how changes to customer behaviours and ways of accessing products and services can reduce the effectiveness of existing prevention mechanisms. 

Customer education is also a key element in the fight against fraud. Firms should prioritise the delivery of personalised fraud prevention tips through diverse communication channels, tailoring the message based on customer demographics, transaction history and potential customer vulnerabilities. 

Firms should actively test customer understanding and engagement. This can be achieved by monitoring key metrics such as customer response rates following fraud-related communications, gathering insights from customer focus groups on fraud awareness and prevention, and tracking click-through rates on relevant communications.

Remediating Fraud
 

Fraud victims are often left feeling vulnerable and distressed and need empathetic and efficient support from their retail banking firms. A smooth and effective fraud management journey, characterised by responsiveness and understanding, is essential to managing trust and mitigating the negative impacts of fraud. 

To demonstrate their commitment to treating fraud victims fairly and with empathy, firms should closely track key metrics related to the customer experience and  test fraud journeys’ outcomes. Crucial indicators include the number of times customers repeat their reasons for calling, call waiting times, the frequency of transferred customer calls between departments, and the total time taken to remediate fraud cases. By monitoring and improving these metrics, retail banking firms can ensure a smoother and more supportive experience for fraud victims.

In a recent letter, the FCA raised concerns about consumer awareness regarding lower protection levels for intra-firm APP fraud reimbursement¹¹. The FCA reminded firms of their Duty obligations and urged those offering such reduced protection to demonstrate clearly how this aligns with their Duty obligations.

Fair treatment of SMEs
 

The Duty's application to SMEs is driven by specific sectoral rules across the FCA Handbook and means that an SME customer could be under the Duty’s scope for one product but not others, even when provided by the same firm. This means that SMEs are subject to different outcomes, depending on the product, and this creates challenges for firms, particularly when some SMEs have similar financial knowledge and capabilities to retail customers. This challenge is amplified by the specialised nature of many SME financial products. While these products often have unique features requiring a high level of financial expertise which can be costly to deliver to customers , certain products targeted to SMEs may fall outside the scope of the Duty. In these cases, firms need not provide SMEs with the same level of protection, leaving SMEs at greater risk of purchasing an unsuitable product.

Some firms have voluntarily decided to bring all SMEs under the scope of the Duty in their implementation approach. Where this is the case, the FCA has stated  that firms will be required to demonstrate they are compliant with Duty requirements in relation to SMEs. As a result, it is crucial that firms choosing this approach are aware of the standard of compliance they will be held to by the FCA, even though this was a voluntary decision.

Evidence of poor customer outcomes for SMEs is mounting. A recent Treasury Select Committee Parliamentary report revealed that 140,000 SMEs were "de-banked" last year, often with little or no notice. The Committee also raised concerns about the demand for personal guarantees to support SME lending, a topic escalated to the FCA as a formal super-complaint by The Federation of Small Businesses (FSB). 

The reports and super complaint signal a clear shift towards increased scrutiny of fair treatment of SMEs within the banking and lending sector. Firms should anticipate heightened regulatory attention and be prepared to review their internal systems and processes to ensure they deliver an appropriate level of protection for SME customers. This may include: 

• Establishing definitions of what constitutes a vulnerable SME.
• Developing new metrics to identify SME customer outcomes, particularly for vulnerable SMEs.
• Ensuring transparency in all costs, charges, and fees linked to SME banking products, enabling SMEs to compare offerings from different retail banking firms effectively.
• Training of front-line support staff to address SME customer issues.
• Communicating with SMEs to explain clearly the features of their banking products, monitoring SME understanding, potentially through targeted interviews designed for SMEs, and developing metrics to identify cases where SMEs might have chosen the wrong product due to poor understanding of its costs and benefits.  

While the suggestions relating to systems and controls we provide are non-exhaustive, they raise concerns about the potential rise in operating costs for serving SME customers. Firms may decide to assess their SME Duty implementation strategy to ensure they leverage the know-how from implementing the Duty for their retail business. The assessment should also incorporate compliance and reputational risk appetite considerations to help firms make informed decisions about the scope of their services in this complex area.

Conclusion
 

The FCA has actively challenged all sectors over the last year on products such as GAP insurance, the treatment of cash interest by platform investment providers and interest rates on cash savings offered by retail banks. The recent upwards trend in FOS complaints is likely to turn the spotlight on the retail banking sector again.  In this paper we highlighted three clear areas of focus around credit cards, current accounts and SME services. Firms should use the data and expertise available to them to ensure they can identify areas of current or foreseeable harm and implement changes to improve outcomes with a focus on evidencing the impact of actions taken on the quality of customer outcomes.

As the FCA highlighted in its “Consumer Duty: 1 year on” webinar early in the summer, firms are expected to take a “continuous improvement” approach to meet Duty requirements. Learning from experience and analysing key trends and changes in customer behaviour are fundamental to ensuring continuous compliance and avoiding regulatory intervention later on.

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Footnotes:

¹ This includes banks, building societies and consumer credit firms engaging with retail customers and Small and Medium Enterprises (SMEs).

² Our analysis included FCA half-yearly complaints data from H1 2021 to H2 2023 (the latest available) and quarterly FOS complaints data from Q2 2022 to Q2 2024. 

³ FOS complaints represent a subset of FCA complaints, arising when consumers, after first raising a complaint with the firm, escalate unresolved complaints to the FOS. Firms are required to record and report all complaints to the FCA as part of the complaints reporting process. 

⁴ The "current account" category excludes overdrafts, mortgages, debit cards, and packaged bank accounts, each of which falls under a separate FOS data category.  

⁵ Source: New data reveals 70% jump in financial complaints – Financial Ombudsman Service (financial-ombudsman.org.uk)

⁶ We previously explored this issue in depth in our perspective: Motor Finance DCAs | Deloitte UK

⁷ Source: New data reveals 70% jump in financial complaints – Financial Ombudsman Service (financial-ombudsman.org.uk)

⁸ Ibid 

⁹ “Consumers brought 24,402 credit card complaints in 2023/24, of which 13,584 were due to perceived unaffordable/irresponsible lending. By comparison, in 2022/23, there were 14,504 credit complaints and just 3,723 were about this complaint issue.”  Source: Banking complaints hit a 10-year high – Financial Ombudsman Service (financial-ombudsman.org.uk)

¹⁰ Source: Fraud and scam complaints hit highest ever level – Financial Ombudsman Service (financial-ombudsman.org.uk)

¹¹ Intra-firm payment, also known as “on us”, is not within the scope of the new reimbursement limit. The PSR’s reimbursement policies for APP fraud only apply to payments routed through FPS or CHAPS.

¹² “Where borrowers are treated as if they have a regulated credit agreement, either by requirement or voluntarily, firms should be able to demonstrate they are meeting these standards.” Source: Dear Chair letter to firms on fair treatment of SME customers during collections and recoveries (fca.org.uk)