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Is the FCA’s Strategic Review of Retail Banking Business Models the Next Source of Regulatory Change for UK Banks?

Jon Luton

Senior Manager, Financial Services Consulting, EPAM UK
  • Financial Services

In a speech delivered to the Future of Retail Banking Conference in November 2017, Christopher Woolard, the Executive Director of Strategy and Competition at the Financial Conduct Authority (FCA), stated, “As the economic, technological, social and regulatory change of recent times continues to gather pace, the regulator must keep up with the rapidly evolving landscape.”

Just as banks are struggling to keep pace with regulatory change, regulators are struggling to keep up with innovation in banking. With the aim of getting a handle on to what extent tech innovation is transforming the industry, the FCA has launched a review to understand how these changes are impacting banks’ underlying business models and how this might affect conduct and competition in the sector.

It’s not surprising that the FCA has decided to take stock and evaluate its future role when you consider the level of change brought about by phenomena such as digitization, ever more sophisticated consumer behaviors, changing demographics (the increasing importance of the “grey pound”), economic and political forces (“lower for longer” interest rates, Brexit, etc.), regulatory interventions like ring-fencing, and the opportunities for increased industry disruption encouraged by PSD2 and Open Banking.

The FCA’s Strategic Review of Retail Banking Business Models was initially announced in May 2017, with a purpose and scoping document published in October 2017. In summary, the Strategic Review seeks to understand:

  • Retail banking business models in greater depth
  • How free-if-in-credit banking is paid for and whether it leads to concerns about the distribution of profits from different types of consumers or different products
  • The impact of changes such as increased use of digital services and reduced use of branches on banks’ business models and the potential consequences for the FCA’s consumer protection and competition objectives

The FCA has recognized the increasingly prominent role of technology and innovation in driving the financial services sector forward and the potential impact on its role as a regulator. By example, the pace of technological integration and innovation could challenge the ability of regulators to adapt to growing competition from new entrants.

There are clear concerns emanating from the regulator about banks needing to find the right balance between technology-driven strategies and providing fair equitable treatment for all customers. Two examples follow:

  • With the future and purpose of the branch-based model very much in debate, there are fears that all customers will not have equal access to their banks. Banks should look to harness technology to ensure that they provide bespoke customer journeys with a level of “face-to-face” interaction to servicing, for example, vulnerable customers (including the elderly). This is a priority consumer group for the FCA.
  • For consumers who prefer to access banking products and services digitally, banks need to ensure that their customers make the right purchasing decisions. The appropriate controls need to be in place along the digital customer journey to ensure that product features and conditions are explained (and accepted) in both an easily consumable and compliant manner. Billions of pounds have been paid out by UK banks due to product misselling, and the regulator will require firms to provide higher levels of consumer protection along with meeting the behavioral preference for increased speed of access and service.

The first sign of the direction that this review is heading, and hence any regulatory implications, will be available by the end of Q2 2018, when the FCA is due to publish findings from its initial “discovery” phase.

Ahead of this, firms operating in the retail banking space should find a trusted technology partner with domain expertise in financial services and RegTech. Together with this partner, firms should be reviewing their digital roadmaps and assessing whether they are fully exploiting technology to not just meeting but exceeding their FCA obligations to “treat customers fairly.” Delivering innovative customer solutions in this area could well become a differentiator in the increasingly disruptive UK retail banking environment.

EPAM has extensive experience in supporting our financial services clients in both defining and operationalizing their digital transformation roadmap, along with helping firms meet regulatory obligations through inventive solutions. In combining these capabilities, we can support clients to deliver digital transformation at both a strategic and functional level to realize business goals and objectives.

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