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Customer Insight & Conduct Risk How Customer Insight can help YOU manage Conduct Risk, not the FCA

Customer Insight & Conduct Risk

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Customer Insight & Conduct Risk

How Customer Insight can help YOU manage

Conduct Risk, not the FCA

Why should you listen?❖ Created and lead customer insight teams for all the major

insurance brands, products & channels used by Lloyds Banking Group over 13 years

❖ Added over £11m incremental profit to bottom line annually

❖ Pioneered LBG work with FCA on Behavioural Economics testing insurance communications

❖ Developed capability into a team of 44 & mentored next generation of leaders

Paul now leads Laughlin Consultancy, a specialist business:

“Helping businesses make money from customer insight”

Laughlin Consultancy helps companies maximise sustainable value from their customer insight, for example by growing their bottom line, improving customer retention and demonstrating

to their regulator that they treat customers fairly.

© Laughlin Consultancy Ltd

Customer Insight & Conduct Risk

❖ Why should you care? 

❖ FCA’s Consumer Spotlight segmentation

❖ Behavioural Economics impacts your comms

❖ The diverse challenge of Vulnerable Customers

❖ How analytics & research can keep the FCA doctor away

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Breadth not Depth

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WHY SHOULD YOU CARE?Why Conduct Risk should matter to every marketing & sales leader

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Did you care about eating horse-meat?

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FCA model of Conduct Risk

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5 Pillars of Conduct Risk

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Business Model & Strategy

The risk of unfair outcomes for

your customers

Culture, Govern & Control

Product design & approval process

SalesPost Sales

handling

Strategy Process

Conduct MI

Formal meetings

Cultural transform

Product development & review processes

Formal sign-offs

Decision Science (esp. BE & comms)

Post-Sale processe

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FCA Fines are growing

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FCA Fines

@ May 201510

Company & Fine Reason for Fine ‘Pillars’ Impacted

Chase De Vere (IFA) Ltd - £560K

Sold Keydata products to customers but didn’t understand or research the products themselves to understand the potential risks to customers. This led to them failing to disclose features and it was found that their communications to customers didn’t meet the clear, fair and not misleading criteria.

Product Design Sales

Swinton – Group fined £7.4M and 3 former directors £928K

A culture of aggressive sales and focus on profit was considered evident which led to the miselling of monthly add on insurance policies. It was found that the company or senior directors did not put the customer at the heart of the business.

Culture & Governance Sales

Yorkshire Building Society - £4.135M

It was found that Yorkshire BS did not act quickly enough to identify and act upon customers who were encountering payment difficulties. Even though the Yorkshire BS correctly used repossession as a last resort the delays in understanding problem cases and identifying future financial prospects of customers led to increases in fees etc. Included a lack of training for staff and issues with complaint handling.

Sales Post Sales (vulnerable customers)

Stonebridge (Aegon) - £8.4M

Stonebridge targeted low and middle income customers with low levels of qualifications but sold them expensive polices and also actively discouraged cancellations. Issues where found with outsourcing controls, governance and complaint handling.

Business Model & Strategy Culture, Governance & Controls Product Design (target market) Sales Post sales

Credit Suisse International - £1.429M

Emphasised the maximum return for its Cluquet Product in its literature even through the chances of obtaining this maximum return was close to zero. This was given undue prominence in literature etc. This was despite complaints and warnings from groups such as WHICH.

Culture & Governace Product Design (comms) Sales

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Would you want your Nan to have it?

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FCA ‘CONSUMER SPOTLIGHT’What their segmentation means for FS firms & their target markets

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Understanding Spotlight

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Understanding Financial Consumers

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Sex

Age Ethnicity Religion

Marital status/ lifestage

Rule breaking Risk appetite

Optimism

Well-being

Present vs future orientation

Life priorities

Confidence

AffluenceState vs individual

responsibilityWorking status

Social grade

Family networks and support

Trust

Money management

Last purchase experience

Debt and use of credit

Windfall/ inheritance

Level of responsibility for personal finance

Employment and job security

Advice seeking

Life Events

Financial products held

Access to services

Literacy / numeracy

Complaints and disputes

Mis-selling

Planning ahead/ resilience

Tenure

Health and disability

Media usage

Proactivity vs inertia

IncomeTowards financial services

Switching

Experience

AttitudesPersonal characteristics and

lifestyle

Behaviour / decision making

Channels

How FCA is using Spotlight

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‘Proofs of Concept’ initiatives

Customer Contact Centre Profiling FCA consumers to build a more effective picture of the types of ‘customer’ the FCA has, and customer management

Authorisations

SupervisionThematic projects Taking firm customer lists; profiling the customers; examining potential for risk and mis-match with marketing intentions

Enforcement

Consumer Credit – Consumer journey Using segmentation model to explore differences in use of credit and personal risk, to inform emerging organisation strategy PRR Insight Papers and Reports Using the segmentation model to identify the consumer segments most likely to be affected by a particular emerging risk

Victims of Financial Crime Profiling victims to segments; interviewing a sample from key segments to build an understanding of how they got caught, and use the insight to help inform enforcement and communications strategies

Policy, Risk & Research

Communications

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Defining your Target Market

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Total Market

Potential Market Inappropriate (never sell)

Target Market

Vulnerable Target Market

BEHAVIOURAL ECONOMICSWhy you need to test your comms don’t exploit unconscious biases

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Academic & Political credibility

Behavioural Economics

Why is this relevant to you?Even when you treat them as individuals & target them accurately, your customers could be vulnerable to making poor decisions due to these biases.

Do your customers…

1. …find your propositions complex & boring?

2. …need to make decisions based on assessing risk or uncertainty?

3. …need to make trade-offs between the present and the future?

4. …find these decisions emotional or fearful?

5. …lack opportunities to learn by making these decisions?

10 irrational biases (FCA)

Reference DependenceAssessing gains or losses in comparison to a subjective reference point, one example ifs other propositions on the market or purchase at same time. (Also termed ‘anchoring’)

10 irrational biases (FCA)

Projection BiasThe expectation that your current feelings, attitudes & preferences will continue into the future. So, you underestimate the potential for change.

10 irrational biases (FCA)

Mental Accounting & Narrow FramingThe behaviour whereby people treat money or assets differently according to the purpose assigned to them. Considering decisions in isolation not overall impact.

Spotting the ‘Dark Side’FCA clearly signalled BE will form a key part of its policy, enforcement & supervision toolkit. FCA have stated they will use these as early warnings: • Rip-offs: Uncompetitively high margins • Suckers: Concentrated profits in small customer group • Bargains: Innovative propositions that appear very cheap • Traps: Contract features that often target BE biases • Regret: Reported or potential regret • Folly: Choices out of line with common sense • Confusion: Observed or likely confusion

VULNERABLE CUSTOMERSHow diverse they can be & how to respond to the FCA’s challenge

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Vulnerable Customers

“A vulnerable consumer is someone who, due to their personal circumstances, is especially

susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.” (FCA)

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Dimensions of Vulnerability

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❖ Worth reading FCA Occasional Paper 8

❖ Dimensions they expect to be considered are profiled in their Infographic

❖ Not identified explicitly through Consumer Spotlight segments

❖ Research can help marketers understand differing needs of groups

❖ FCA may want to see how mitigate risks for vulnerable groups through product/comms design, processes or training

© Laughlin Consultancy Ltd

Scenario Test your products

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CUSTOMER INSIGHTHow use of analytics & research can keep FCA Doctor away

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Holistic Customer Insight

CustomerData

Customer Research

Customer Analysis

Database Marketing

Feel Experiences

Test Hypotheses

ConvergeEvidence

© Laughlin Consultancy Ltd, not to be used without permission.

Insight-led Good-Conduct Marketing

Business Strategy & Segment

Participation Strategy

Customer Strategy

(inc. Brand Promise)

Channels & Categories

(Strategies)

Customer Propositions

(Concepts)

Product, Price,

Promotion, People, Place… (Build)

Marketing Campaigns

(Design, Target,

Execute)

Marketing Measurement

(inc. ROMI)

Communication Approval

Annual Product Reviews

New Product ApprovalInsight evidence:

Consumer Segmentation

Target Segment Understanding

Insight Generation

Insight guided design:

Marketing Measurement

Targeting Promotion

Consumer Segmentation

1. Cross functional teams review data, research and analysis to answer a set of

core questions about their target customer and “map the evidence”

2. Those “Evidence Maps” are reviewed to identify key

customer themes

3. Structured questioning techniques are used to dig deeper to develop insights

A “Customer Insight” is:

A non-obvious understanding about your customers, which if

acted upon, has the potential to change their behaviour for

mutual benefit

4. Insights are prioritised & converged with opportunity

areas. to generate ideas

Insight Generation Workshops

Marketing TargetingPropensity

to Buy Product

Propensity to Product

Loyalty

Propensity to Repeat Purchase

Propensity to Brand

Response

Propensity to Channel Response

TimingEvent

TriggersLife Stages

Suppressions & Permissions

Optimal Aggregation

Optimal Brand

Optimal Channel/Media

Target Segments

Regional Focus

Personalised Comms

Attitudinal Offers

© Laughlin Consultancy Ltd

Eye tracking Comms Testing

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Model for designing BE tests

Identified Customer Need

Bias 3? Bias 2?

Bias 1?Rational Behaviour

Analyse Actual

Behaviour

Use Eye Tracking to spot issues

Test Mitigations (field trials)

Refine Behavioural Experiments

(panels)

Hypothesise Biases at work &

Design mitigations

Review BE biases that could explain

irrational behaviour

Comms

Project Innovate

linkedin.com/in/paullaughlin

[email protected]

+44 (0)7446 958061

Contacting me:

customerinsightleader.com

laughlinconsultancy.com

@LaughlinPaul

© Laughlin Consultancy Ltd, not to be used without permission.