Taking control of your duty of care and financial health ambitions

From duty of care to financial health: where does your organisation position itself?

Financial institutions have the obligation to act in the best interest of their customers and the “duty of care”. They do not only have to adhere to their (extra-legal) regulatory duty of care requirements, but also to societal demands that keep increasing. The adequate fulfillment of these requirements is pivotal for society. Research indicates that in 2021, 50 percent of the Dutch population was either financially unhealthy or vulnerable. The outcomes for 2022 are expected to be even less favourable.¹ These numbers highlight the urgency for financial institutions to take more responsibility for their customers' financial health² , rather than simply complying with regulatory requirements.

Since the publication of the ‘In Balans’ report in 2021, the momentum to improve financial health in the Netherlands has grown significantly. Financial institutions are increasingly looking beyond their duty of care requirements and setting ambitions aimed at enabling their customers to improve their financial health. This trend is reinforced by the fact that ‘financial health and inclusion’ is one of the top three societal challenges as identified by signatory banks in the ‘2020 Principles of Responsible Banking (PRB) Collective Progress Report’. Financial health and inclusion also facilitate several Sustainable Development Goals (SDGs). For banks, prioritising consumer financial health aligns with responsible business, but also provides an opportunity to build sustainable customer relationships and improve customer loyalty.

Duty of care is the starting point of acting in the best interest of the customer and has a regulatory basis. However, there is no uniform definition of what it means to support customers’ financial health. Ultimately it can refer to all activities that are linked in support of that financial health, such as providing education or actively assisting with debt management. In the end, what a commitment to enabling financial health means, depends on the bank’s ambitions. To what extent does the organisation want to move beyond the regulatory duty of care requirements, and in what way? What we do know however, is that ambitions related to financial health go hand in hand with embedding it into the business and ensuring that all duty of care requirements are fulfilled.

Taking the lead

To proactively move the organisation in the right direction when it comes to duty of care and financial health, it is key to take control and make sure that every relevant part of the organisation is aligned with the ambition regarding this topic. This is not without obligation. It is crucial for ensuring a proper fulfillment of a bank’s’ duty of care, but one of the principles in the UN Principle of Responsible Banking (see above) is also aimed at ambition and KPI-setting.³ It all starts with an ambition that embodies the bank’s vision on duty of care/customer centricity and financial health. Linking specific goals and KPI’s to this ambition can serve as an anchor point for employees as well as management with regards to decision-making, prioritisation, and desired behaviour. Setting a clear ambition and corresponding KPI’s can be challenging:, as this process requires multiple steps. The question therefore is how duty of care and financial health ambitions, goals and KPIs can best be set and how progress shoul be tracked.

Defining ambition and related goals

Secondly, after the ambition has been determined, banks needs to set concrete goals and KPI’s to steer the organisation in the right direction and measure the progress towards these goals. Regarding the goals, banks have to keep in mind that the focus needs to be first to make the right steps towards the ambition. Additionally, they need a clear idea of what the impact of these goals should be. Do they want to decrease the amount of customers with detrimental debt, and if so, to what extent? Do they want to increase the financial resilience of customers or improve the financial skills of consumers? By taking these factors into account, banks can define specific goals in line with the ambition as to how they want to fulfil their duty of care and improve their customers’ financial health.

Establishing fitting KPIs

Next, it is time to set Key Performance Indicators (KPIs). KPIs are specific, measurable and time-bound metrics that organisations can use to track and evaluate their performance and progress towards reaching their ambition. KPIs must be regularly reviewed and updated, to make sure they remain relevant and aligned with the organisation’s ambitions and objectives. Formulating the right KPIs can be time-consuming and challenging. Especially in the area of duty of care and financial health, firms struggle with producing the right data on complex elements such as customer centricity. Next to that, duty of care and financial health are requirements which affect almost every part of an organisation, think of culture, product development and customer interaction. Starting with KPI-setting can therefore be a bit daunting. So it is recommendable to start with a small-scale pilot in a specific area. During this pilot, a small number of relatively simple KPIs is set and subsequently measured.

• Afterward, the relevant stakeholders can assess what parts of the KPI -setting process works well, and what parts may need improvement. For example, assessing whether the pilot KPIs were formulated well enough, and whether the available data was of sufficient quality to actually measure if the KPI is achieved, will advance the quality of the eventual KPIs In this stage, it is also useful to think about feasible timelines, as to when progress can be measured. This allows proper measuring and allows adjusting ambitions and KPIs if necessary. It will also avoid disappointment and demotivation with stakeholders when ambitions are not met because of unworkable data, processes, or timelines.
  
• Another challenge that banks can face during the KPI-setting, is the availability of the right data (see above). Banks must evaluate if status and progress can be measured with the available data before the KPIs are set. The same goes for the quality of that data, which should also be assessed beforehand. Fulfilling duty of care and financial health requirements are not measurable based on merely one or a few datapoints. Banks should therefore combine several data points to assess the status in a certain area. Examples of important core data points are percentages of customers with payment arrears, or customers who regularly overdraft from their bank account. Although these are very obvious data points, by themselves they do not paint a full picture of the financial health of customers. Financially healthy customers can have some payment arrears, or can sometimes overdraft on their account. However, combined with other datapoints, these factors can be an important indicator of financially vulnerable customers. Therefore, the data collection and visualisation should be discussed before and during the KPI-setting. Furthermore, proper data visualisation will enhance KPI measurement. A clear and concise dashboard will make it easier to combine certain data points in order to measure certain KPI’s, generate management information, or even provide an overview of financial health vulnerabilities in the portfolio.
  

1. See the report ‘In balans. Samen op weg naar een financieel gezond Nederland 2021’. Via https://www2.deloitte.com/nl/nl/pages/financial-services/articles/financiele-gezondheid-2021.html

2. Deloitte in cooperation with Nibud, ING and Leiden University defines Financial Health as: ‘the extent to which a person or household is able and feels like they can pay off all current financial obligations and the extent to which they are able to build up financial security to fulfill their life goals’

3. Principle 2: Impact & Target Setting: financial institutions must set targets aimed at increasing their positive impact and accessory KPI’s.