Predicting the unpredictability of customer behaviour

January came in strong on the regulatory front, beginning early in the month with the publication of two long-awaited Financial Ombudsman Service (FOS) decisions on discretionary commission arrangement (DCA) complaints.

This was almost immediately followed by the Financial Conduct Authority’s (FCA) announcement of temporary rule changes which introduced a pause on DCA complaint responses until September. 

During that time work is being carried out by and on behalf of the regulator to determine the scale of the issue and the potential options for customer redress.

A DCA is where a broker can vary an interest rate – up or down – with the effect of influencing their commission. Under this model customers may pay more interest than they otherwise might have had the broker not been incentivised in such a way.

Incentives have always been noted by the regulator as a driver of conduct risk, so it is not surprising – almost predictable - that this model was challenged, eventually banned by the regulator, which came into effect in January 2021.

Alongside this came the introduction of disclosure rules, a further way of improving transparency in the transaction. With transparency comes trust.

The FCA announcement on the new temporary complaint handling rule changes on 11 January did make it onto the BBC website and every industry publication but only really last week has the matter taken off on any great scale in the mind of the public.

The catalyst? On Tuesday 6 February Martin Lewis’s programme featured DCA as its headline subject. The consumer champion was accompanied by Sheldon Mills, Director of Consumer and Competition at the FCA, a move heralded by some social media users as encouraging.

In conjunction with the programme, Martin has developed a tool to help consumers log their complaints with firms with relative ease and simplicity. These factors combined don’t make it difficult to believe the press reporting an estimated 260,000 commission complaints by the end of that week.  

Although Martin took time to highlight some firms never offered the model, the fact these firms are still experiencing high levels of enquiries is a sign that that particular message either is not understood, did not get through to some customers, or did get through and is being disregarded as untrustworthy.

The last option is a problem because trust isn’t just an expectation of behaviour, trust is a feeling and feelings are by their nature difficult to predict. What is clear though is that customers feel strongly about this.

Making things right for customer is a real opportunity to restore trust, but making things right may also be a long way off while the calculations are done behind the scenes and the legal approach to redress made watertight.

The difficulty for the industry is that the longer this goes on, the more unpredictable the situation is at risk of becoming.

So how do you estimate customer propensity to complain when there is no real precedent for the situation? There’s no bureau or consumer score for that, no definitive lead risk indicators.

But what you lack in data can be compensated by other good risk awareness measures, staying informed of developments at the FOS, keeping on top of regulatory communications and relevant industry news being good examples in this case.

The Martin Lewis programme also shows us that outside events can help start the conversation in firms about “what could happen if..?” Effective scenario planning can help firms swiftly, safely and effectively respond to a dynamic situation, ensuring plans can be in place and key steps identified before the need to take action.

We might not be able to predict what a customer will do but we can have a high degree of certainty in what our actions might be in response. This is a key feature of good operational resilience, another requirement on firms in an ever-evolving regulatory landscape.

Although we can’t always predict volumes easily – be it sales, calls or complaints - what we can do more effectively now, especially within a context of consumers who are far more aware of their rights and regulations like Consumer Duty than they ever have been, is predict customer expectations.

A fundamental customer expectation that routinely comes out top is that they want to be treated well and fairly.

They don’t expect perfection, they just expect firms to offer a good service when they need it and to act in good faith. In what some over the years have called a ‘Crisis of Trust’ and with the first anniversary of Consumer Duty on the horizon, this matters now more than ever.