The all-pervasive ESG

ESG is going to affect every single player in the market – even if such effect is simply having to assess what it means for one’s business. A significant number of new ESG related requirements for firms were announced and/or developed during 2021, so this looks set to keep the risk and compliance teams of firms in the retail banking and payments sectors busy well into 2022 and beyond. For example, in its Greening Finance roadmap (October 2021), the government indicated that it will require certain companies, including listed companies, to publish transition plans which consider the government's net zero commitment or provide an explanation if they have not done so. The government will expect firms to start publishing transition plans in 2023, so to mitigate reputational risk, it would be prudent for firms to begin thinking about these beforehand. 

Don’t forget the “S” and “G”

So far much of the focus has been on the “E”; however, the “S” and the “G” are equally important – if a little harder to grasp conceptually. In its updated ESG Strategy, the FCA emphasises that as society and the financial sector ‘look beyond climate’, it needs to ensure its ability to ‘deliver a consistent, coherent and cross-cutting approach to ESG issues more broadly’. Recent examples of where social and governance issues are gaining greater prominence in the retail banking and payments spheres are the PSR’s emphasis on the importance of social impact of payment systems and on how payment systems are governed (as set out in its recently published five-year Strategy), and recent proposals to arm HMT with powers to introduce legislative geographic access requirements to ensure cash access facilities remain sufficiently close to a minimum percentage of the population.

How to win the hearts (and business) of increasingly ethical consumers: could the new consumer duty hold the key…

It will be interesting to see how the consumer market responds. In the FCA’s 2020 Financial Lives Survey, almost two thirds of participants reported that they worry about the state of the world and feel personally responsible for making a difference, with four out of five respondents considering environmental issues important and believing that businesses have a wider responsibility than simply to make a profit. However, historically customers have not exactly been proactive in moving between service providers based on these sorts of factors. The oft repeated claim that customers are more likely to change their spouse than their bank account is no less true simply because it gets bandied around so much.  Will firms respond with the products, disclosures and incentives that enable customers to make some headway in putting their money where their heart is?

The consumer duty certainly focuses on aspects of the financial services industry that might facilitate this: 

• Empowering customers to make the best decisions for their particular financial situation;
• Targeting sludge practices to facilitate customers switching providers;
• A renewed focus on product design and value for customers, with particular emphasis on products working in the way that customers expect... 

are all objectives that complement an initiative to encourage businesses to prioritise ESG friendly outcomes.

…or be part of the problem?

And yet there are clear tensions between these two regulatory pillars that are no doubt keeping many regulatory, compliance and legal teams busy. For example, if green home finance is to be scaled up to focus on the “E” in ESG, how should the industry (and individual lenders) deal with the risk of leaving the most vulnerable behind, who are more likely to be living in properties with poor energy efficiency but least likely to be able to afford improvements? How does that square with the consumer duty? 

The FCA recently estimated there were some 47,000 borrowers who could benefit from a cheaper home loan but are currently unable to move. Mortgage and insurance policy prisoners is not an outcome that one might associate with the entirely honourable intention of wanting to tackle climate change. But less choice and increased costs could be an unwanted by-product.

Similarly, products that are sold with an ESG angle had better deliver to ensure obligations under the consumer duty to ensure customers get the products they want/expect are met. Failure in this regard (accidental or otherwise) may bring with it a wave of mis-selling claims. 
Clearly the two areas require some joined up thinking between the respective project teams in the consumer banking space.

The race to harness the power of data

But the tension highlights another area of (continuing) development in the financial services world – the impact of fintech and the importance of data and real time data. How can one determine if efforts in the ESG/consumer duty realm are working? A major challenge for existing players with legacy systems that don’t capture many hundreds of data points from customer interactions is monitoring what the impact of projects, products and campaigns is on the ground.

The accelerated digitalisation of financial services provides a wealth of raw data that firms can use. Challenger service providers in the fintech space are well poised to take advantage of this. However, so too are tech companies focused on providing support to the financial services industry. Query whether 2022 sees even more activity in this space.

Crypto: what next for the customer relationship?

And of course, with more and more countries considering (if not launching) CBDCs, the move to a more digital economy seems ever closer. There is a certain enjoyable irony about central banks harnessing a technology that sought to disintermediate them and the next 11-12 months might well see some more concrete plans developed in this space.

The way banks and other participants react to this possible foray by the Bank of England into crypto will have a huge effect on their relationship with customers. What use would the digital savvy UK customer have for a bank account if they can simply hold Bank of England underwritten digital currency in an e-wallet?

This forms part of a wider regulatory focus on “crypto”, with momentum building over the past few years to change the existing regulatory framework to accommodate cryptoassets, reflecting the growing significance of cryptoassets in the UK financial services market, (the FCA estimates  that 2.3 million consumers hold cryptoassets).

With usage and, as a result, the potential for consumer harm increasing, the past couple of years have seen both the FCA and HMT hold consultations on what a regulatory regime might look like.  2022 is likely to be the year when the framework which will apply to cryptoassets begins to take shape in earnest.

But, in the UK at least, all such moves seem destined to be accompanied by regulatory efforts to ensure cash remains a meaningful alternative to ensure that those consumers who are not digitally equipped or minded are not left behind. (see above ‘Don’t forget the “S” and “G”’).

So yes – a lot of exciting developments in the year to come. Not all of them necessarily aligned.