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The FCA will take immediate action on customer vulnerability; here’s how firms can prepare.

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Author: Jonathan Barrett, CEO and Co-Founder at Comentis

 

Identifying and supporting vulnerable clients has become a priority for financial services firms over the last few years. And it’s only going to get more important.

So much so in fact that new guidance has been recently issued by the FCA, alongside an open Dear CEO letter explaining that it will no longer wait for Customer Duty to take effect before taking action to improve customer outcomes. Bluntly, there’s no time to waste and firms need to act now.

Jonathan Barrett

Rarely does the FCA act so urgently. That being said, it’s plain to see what’s prompted this change. Last week’s communications from the FCA feature discussion of how more than 80% of adults reported an increase in their cost of living during March 2022, and how 27% of the population is suffering with low financial resilience.

As Richard Farr, our own Non-Executive Director at Comentis, explains, “the FCA’s direction of travel on vulnerable customers has been clear for some time, but the pressure caused by current inflation and the so called ‘cost-of-living crisis’ has brought the urgency of implementation into sharp focus due to last week’s FCA communications to lenders.”

While many firms are eager to be there for their vulnerable clients, there are plenty for whom this announcement will cause concern, not least due to the immediacy of the communication. The guidance has made clear that identifying and supporting vulnerable customers’ needs to be as systematic as it is consistent, and it needs to be done quickly, too. But, of course, even identifying who is at risk in the first place can be difficult. And then there’s the question of the various processes that need to be in place. Which systems should you choose? How can you ensure that every eventuality is covered? How can one ensure consistency?

If firms are struggling, we urge them not to panic. Help is out there, but they must not delay to seek help as changes do need to be made quickly.

Advisers will need to consider a number of factors to get up to speed with this.

First, they must identify, link and support. The FCA describes a vulnerable person as somebody whose circumstances make them “especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care”.

It also outlines four key drivers for advisers to consider:

  1. Health – conditions or illnesses that affect the ability to carry out day-to-day tasks.
  2. Life events – such as bereavement, relationship breakdown or redundancy.
  3. Resilience – low ability to withstand financial or emotional shocks.
  4. Capability – low knowledge of financial matters or low confidence in managing money.

These signs can be difficult to spot, especially when clients either hide their situation or don’t believe they’re financially vulnerable. This is particularly true for the more cognitive based triggers, resilience and capability. Likewise, what one adviser deems vulnerable might not be considered the same by another. But with the right tech and processes, a truly objective process can be achieved.

Secondly, they will need to understand the impact of the driver. Once financial vulnerability has been identified, the second step is to understand the link between the driver and the creation of a vulnerability. What’s imperative here is assessing the extent to which each driver impacts that person’s circumstances. In other words: which factors are making a tangible difference? The impact of the driver (or drivers) needs to be fully understood for the appropriate support to be adopted. What we have seen through the assessments carried out on our platform is that there are often a number of impacts to a single driver. For example, where bereavement is the driver, we are seeing multiple vulnerabilities identified, and these vary from person to person. What is clear is that one approach to bereavement for example, is unlikely to offer the right levels of support another client. It is really important to understand how the circumstance is affecting the individual and then support accordingly.

Finally, they will need to identify the optimum response pathway. They should ask: what is the temporal nature of the situation? A customer might only be at risk temporarily – perhaps they’re between jobs or have suffered a breakdown of their relationship. Others might be permanently at risk (for example, suffering from a terminal injury or condition), while some could be experiencing fluctuating fortunes dependant on a wide range of circumstances.

They will then need to determine where the vulnerability is rooted. The factors could be individual (personal health circumstances), environmental (redundancy), institutional (use of jargon, selective communication channels) or even a mixture of all of these.

Once advisers understand the situation, they can identify appropriate responses.

Firms must not approach this half-heartedly. There’s no scope to simply paper over the cracks here. A long-term solution is required; and indeed, one that will hold up to regulatory scrutiny.

There’s no doubt about it, identifying vulnerable customers can be daunting for firms. But help is available. Technologically driven assessment tools exist that can help to identify financially vulnerable customers and get the right systems in place to ensure consistency across a whole client base. For instance, our platform at Comentis combines clinical expertise from mental health experts and psychologists with hard data, to present a fact-based assessment of individuals and their circumstances, as well as how a vulnerable circumstance is likely to impact the client, removing the subjectivity from the process. Given what we have discussed above, arguably clinical led solutions are the only way to assure that all the vulnerability drivers are in scope, thereby giving firms reassurance that their systems and controls will be adequate to meet the scrutiny of regulatory requirements.

In the long run, this process will benefit everyone; clients and firms alike. If you’re struggling, or if you know that you need to bring in additional expertise, don’t delay. This needs to be done properly. And as of last week, it needs to be done now.

Business

How can businesses boost employee experience for finance professionals?

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By Martin Schirmer, President, Enterprise Service Management, IFS

Over the course of the last year, The Great Resignation has seriously impacted organisations across the globe. Staff are quitting in huge numbers, leaving companies unprepared and struggling to fulfil their workloads. In fact, mass departures are happening at all levels of the labour market, as employees attempt to adapt to the hybrid working model and growing socio-economic uncertainty.

In light of this, optimising the employee experience (EX) to attract and retain talent has become a top priority for employers. Organisations have come to understand the necessity of taking immediate steps to drive employee engagement and reshape workplace culture.

The financial services (FS) industry is no exception to this trend. From increasing employee burnout to growing career dissatisfaction, the pandemic has exacerbated the need for transformation across finance teams. This is exemplified by recent data from Spendesk, which found that approximately 40% of finance professionals are willing to leave their roles or already have concrete plans to do so.

Organisations looking to get ahead of the competition must put in extra efforts to retain their existing workforce. The fact is that employee expectations and requirements have irreversibly changed, with more workforces becoming increasingly distributed. Today’s hyper-connected workforce values flexibility and simplicity, and it is organisations which offer these experiences that will succeed in the long term.

As part of this process, finance companies must look towards the power of technology to create seamless user experiences across devices. From automating workflows to improving overall efficiencies, Enterprise Service Management (ESM) can help organisations to boost user satisfaction and go that extra mile for their employees.

How poor EXs are driving finance teams to quit

With over 40% of employees spending a significant proportion of their time carrying out mundane, manual tasks, it is not surprising that poor EXs are having a detrimental impact on job satisfaction. Finance teams in particular have been slower to digitise core processes, leading to a heavy reliance on manual tasks. This not only increases the amount of time spent on each task, but also impacts the engagement levels of finance professionals who cannot focus on more strategic aspects of their roles.

As a result of the pandemic, flexibility has also moved to the forefront of finance teams’ desires. Given the fast-paced nature of this industry, the conversation surrounding work-life balance has increased rapidly. Failure to offer flexible working policies, coupled with a lack of technology to facilitate this flexibility, has led to poor EXs across the board.

Most notably, the overarching move to omnichannel, digital-first approaches has dramatically reset both customer and employee needs. Finance is the third-slowest running corporate function behind legal and IT. Operating in a competitive environment, 73% of finance operations are facing pressures to speed up, improve efficiency, and prioritise automation.

Mitigating the problem using technology

ESM, an offshoot of IT Service management (ITSM), is the cornerstone of smart digital transformation for organisations. It can help finance teams to streamline and automate routine processes, such as monitoring the status of service requests, approving expenses, sending invoices, and tracking payments. In turn, this will free up employees’ time, reducing the burden of manual tasks and enabling them to focus on the more strategic tasks.

Another advantage ESM can offer finance teams is the ability to adapt to each department’s minimum requirements for data privacy. Accounting, for example, needs additional layers of compliance built into the system.

ESM can also facilitate cross-departmental collaboration, helping finance professionals to communicate with the wider business and perform tasks more effectively.  Organisations can use ESM to incorporate all internal services into a single platform, offering employees a well-rounded view of the business and promoting a sense of community across all levels of an organisation. This will boost productivity, whilst enhancing visibility and control.

Ultimately, the current job landscape has brought with it a new set of challenges. Organisations in the FS industry looking to navigate the storm and retain top talent must refocus their efforts on bolstering the EX. Embracing a new era of technological innovation that empowers employees and boosts engagement is a critical step in this process.

 

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CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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