Welcome to 2022 – a year of stress in retail banking and payments | Hogan Lovells

Omnipresent ESG

ESG is going to affect every market participant, even if that effect is simply to assess what it means for their business. A significant number of new ESG-related requirements for companies have been announced and/or developed in 2021, which looks set to keep corporate risk and compliance teams busy in the retail banking and payments industries for up to in 2022 and beyond. For example, in his Roadmap for green finance (October 2021), the government has indicated that it will require certain companies, including listed companies, to publish transition plans taking into account the government’s net zero commitment or to provide an explanation if they have not do. The government will expect companies to start publishing transition plans in 2023, so to mitigate reputational risk, it would be prudent for companies to start thinking about this in advance.

Don’t forget the “S” and the “G”

So far, the emphasis has been on the “E”; however, the “S” and “G” are equally important – although a little harder to grasp conceptually. In his update ESG Strategy, the FCA stresses that as society and the financial sector “look beyond the climate”, they need to ensure their ability to “provide a cohesive, cohesive and cross-cutting approach to ESG issues more broadly”. PSR’s focus on the importance of the social impact of payment systems and how payment systems are governed (as reflected in its recently released five-year report Strategy), and recent proposals empower HMT to introduce geographic access legislative requirements to ensure that cash access facilities remain close enough to a minimum percentage of the population.

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

It will be interesting to see how the consumer market reacts. In FCAs 2020 Financial Life Survey, nearly two-thirds of participants said they were concerned about the state of the world and felt personally responsible for making a difference, with four in five respondents considering environmental issues important and believing that businesses have a broader responsibility than the mere making of profits. However, historically, customers haven’t exactly been proactive in moving between service providers based on these types of factors. The oft-repeated statement that customers are more likely to switch spouses than bank accounts is no less true simply because it is so hyped. Will companies respond with the products, disclosures and incentives that will empower customers to make progress by putting their money where their heart is?

Consumer obligation certainly focuses on aspects of the financial services industry that could facilitate this:

  • Empower customers to make the best decisions based on their particular financial situation;
  • Target sludge practices to facilitate customer change of supplier;
  • A renewed focus on product design and customer value, with a particular focus on products working the way customers expect…

are all goals that complement an initiative to encourage companies to prioritize ESG-friendly outcomes.

… or be part of the problem?

And yet, there are clear tensions between these two regulatory pillars that arguably occupy many regulatory, compliance and legal teams. For example, if green real estate finance is to be expanded to focus on the ‘E’ of ESG, how should the industry (and individual lenders) manage the risk of leaving behind the most vulnerable, who are more likely to live in properties with poor energy efficiency but least likely to be able to afford upgrades? How does this square with the consumer obligation?

The FCA recently estimated that there are some 47,000 borrowers who could qualify for a cheaper home loan but are currently unable to move. Mortgage and insurance prisoners are not an outcome that one would associate with the entirely honorable intention of wanting to fight climate change. But less choice and increased costs could be an undesirable byproduct.

Similarly, products sold with an ESG angle should be better delivered to ensure that obligations under the consumer obligation to ensure customers get the products they want/expect are met. Failure in this regard (accidental or otherwise) can lead to a flurry of mis-selling claims.
Obviously, both areas require joint 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 world of financial services – the impact of fintech and the importance of data and real-time data. How can we determine if ESG/consumer duty efforts are working? A major challenge for existing players with legacy systems that don’t capture several hundred data points from customer interactions is monitoring the impact of projects, products, and campaigns in the field.

The accelerated digitization of financial services provides a wealth of raw data that businesses can mine. Challenger fintech service providers are well positioned to take advantage of this. However, technology companies are also focusing on supporting the financial services industry. Ask if 2022 sees even more activity in this space.

Crypto: what future for customer relations?

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

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

This is part of a broader regulatory focus on “crypto”, with momentum building in recent years to modify the existing regulatory framework to accommodate crypto-assets, reflecting the growing importance of crypto-assets in the UK financial services market (the FCA estimates that 2.3 million consumers hold crypto-assets).

With use and therefore the risk of harm to consumers increasing, the past two years have seen the FCA and HMT consult on what a regulatory regime might look like. 2022 will likely be the year the framework that will apply to crypto-assets will begin to take shape.

But, in the UK at least, all these measures seem intended to be accompanied by regulatory efforts to ensure that cash remains a meaningful alternative to ensure that consumers who are not equipped or do not have the digital minds are not left behind. (see above ‘Don’t forget the “S” and the “G”‘).

So yes – lots of exciting developments in the coming year. All are not necessarily aligned.

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