Fit for Purpose – Consumer Duty Compliance Remains a FCA Priority

It's been almost one year the Consumer Duty came into force, setting higher and clearer standards for consumer protection across the financial services industry. 31 July 2024 will be a milestone date, marking not just the anniversary of the Duty but also implementation for closed products and the first Board Report due date.

Culture, governance and monitoring are critical drivers of successful implementation

The FCA highlights in guidance to firms that the Duty sets a high bar for the consumer standard of care. Firms must have the right culture and governance to meet the heightened expectations. Good practices observed by the FCA so far in evaluating firm implementation of Consumer Duty Standards include:

• Ensuring responsibilities for outcomes are owned across the organisation and not just by risk and compliance teams
• Serious consideration from the board and senior managers around what implementation of the duty means at both the practical and cultural level
• Developing new metrics to better understand consumer impact
• Implementing policy to take corrective action when concerns are identified
  
  

“We do not want to see firms waiting to see if we will intervene to address an issue. Firms also need to get serious about their data and not assume they can just re-package existing information. And we want to see the Duty embedded across every firm at every level, with leadership from boards.”

— Sheldon Mills, FCA Executive Director, Consumers and Competition

Areas of improvement where firms have fallen short in their efforts to embed the Duty include:

• Implementations solely at the tactical or programme level without involving the Board and senior managers to guarantee consumer duty is integrated into all firm strategies and policies
• Waiting for regulatory intervention instead of taking proactive and corrective measures when issues are uncovered to address the risk of harm
• Failure to update data and monitoring strategies. The agency reminds firms that they should be giving serious thought to the information they need to understand customer outcomes as opposed to merely repackaging existing data

A cultural shift for many firms

“We will make the Consumer Duty an integral part of our regulatory approach and mindset - including authorisation, supervision and enforcement priorities and processes.”

-FCA Business Plan 2022-2023

The FCA has often noted that Consumer Duty requires a cultural shift for many firms. Firms will be measured by four drivers of culture outlined in Chapter 10 of the FCA’s Finalised Guidance FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty:

• Purpose consistent with Consumer Duty and understood across the organisation
• Leadership that is competent, accountable and aligned with Consumer Duty
• People who are trained, managed and rewarded for delivering good consumer outcomes
• Governance that includes policies, procedures and controls that identify red flags along with a strategy for tackling root causes and mitigating poor outcomes

Firms are required to provide reporting on Consumer Duty obligations and to review and assess policies, procedures and controls at least annually. Individual accountability and high standards of personal conduct will be measures to evidence that firms are meeting their Consumer Duty obligations. The agency also expects customer outcomes to be a "key lens" for other organisational functions like Risk and Internal Audit.

According to PwC, having the right governance to review data and identify and action concerns will be key, and firms should pay particular attention to the strengthened requirements on governance and accountability.

Consumer Duty will be an ongoing regulatory priority

In a recent speech, Nisha Arora, FCA Director of Cross Cutting Policy and Strategy, says firms must remember Consumer Duty is ongoing, not a one-time task. According to Arora, Consumer Duty isn't just a check-the-box exercise. Consumer Duty should create an enduring shift in policy along with culture across the organisation. This means firms should be assessing, testing, understanding and evidencing outcomes on an ongoing basis. 

"The Duty is now an integral part of our approach and mindset at every stage of the regulatory lifecycle - including authorisations, policy development, supervision and enforcement. So, you can expect it to be a golden thread that runs through all your conversations with us."

—Nisha Arora, FCA Director of Cross Cutting Policy and Strategy

Firms must be able to prove to the FCA that they are delivering good outcomes. Evidence of this includes an effective implementation plan, data and monitoring, and internal assessments. Has the firm implemented the changes outlined in the plan? And, importantly, do these changes go far enough?

The same goes for data and monitoring processes. How is the firm harnessing the information required to measure and evidence outcomes? Is there any data that’s missing?

Firms should think about their annual board report in the context of Consumer Duty. At least once a year, the firm's board or equivalent governing body must review and approve an assessment of customer outcomes. The evaluation should include monitoring results and self-identify any evidence of poor outcomes.

The report also needs to identify any required remediation to mitigate identified risks or poor outcomes and whether any changes to firm strategy are necessary to prevent future issues. As Ashora reminds firms, this will take time to do well, so don't delay!

Key Questions to Assess Implementation

Firms should ask themselves these questions to review their Consumer Duty implementation and identify gaps and areas for improvement. Firms should also expect that these are precisely the questions the FCA will ask them when assessing their implementation of the Duty.

• Are you satisfied that your products and services are well-designed to meet the needs of consumers in the target market and perform as expected? Who conducted the testing?
• How are you testing the effectiveness of your communications? How are you acting on these results?  
• Do individuals throughout your firm – including those in control and support functions – understand their role and responsibility in delivering the Duty? 
• Have you identified the key risks to your ability to deliver good customer outcomes and put appropriate mitigants in place?

According to Arora, "where we have seen firms doing this well, they have focused on the outcomes they are aiming to deliver. And they have identified the data they need to measure and monitor that these outcomes are delivered. Where firms are not meeting our expectations, it’s often because they are just repackaging existing data and haven’t thought seriously about what information they would need to really understand consumer outcomes."

Finalized Guidance Outlines New Standards of Care

The FCA released the final rules and guidance around consumer duty in July 2022. The new standards of care apply to Broker Dealers working in financial services firms and impact the regulated financial advice and recommendations that they give to customers. FCA Consumer Duty means firms will have to do more than just prove that they’ve caused no harm and truly sharpen their focus on ensuring positive consumer outcomes.

At the FCA’s 2022 Annual Meeting, Interim Chair Richard Llyod described the new consumer duty as groundbreaking, “setting higher standards and requiring firms to focus on meeting their customers' needs in everything they do. We think this will be a real game changer for the level of protection consumers receive in the UK.”

A key part of the agency’s three-year strategy, FCA consumer duty requires firms to review the pricing, value and suitability of products and services, and ensure there are policies and procedures in place to ensure consumer understanding and support.

Read more about how the FCA’s 2022-2025 Strategy Focuses on Data, Conduct Risk and Consumer Outcomes

According to the FCA, consumer duty will lead to a major paradigm shift in financial services. Sheldon Mills, FCA Executive Director of Consumers and Competition noted “The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards. As the Duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.”

Fit for Purpose

Under the FCA Consumer Duty rules, firms must offer consumers products and services that are fit for purpose and offer fair value and pricing. The FCA expects that financial products and services will be designed to meet the needs, characteristics and objectives of a target group of customers and distributed appropriately. Firms must also carry out ongoing assessments to ensure that products and services are continuing to meet the needs of the consumers, that recommendations are appropriate, and that the review process is valid and up-to-date.

Manually monitoring the suitability of products and services offered to customers brings significant risk. Automated compliance software allows firms to implement rules and workflows to monitor sales practices and adherence to customer suitability policies and procedures against consumer data and trading activity. See how MCO helps firms automate Customer Suitability Monitoring.

Consumer Duty Champions

Although not prescribed under the Senior Managers and Certification Regime (SMCR), the regulation requires that firms appoint a consumer duty champion. The role of the consumer duty champion is to support the firm’s Chair and Chief Executive Officer in making sure that the firm is moving forward with the proper policies, procedures and controls to ensure that the principles of consumer duty are embedded across the firms culture, strategy and business objectives.

The FCA has indicated that the champion should be at the board level, and at the Independent Non-Executive Director level where possible. The FCA expects that the champion should be at an appropriate Board level to insure that Consumer Duty is discussed in a meaningful way by the firm’s governing body and management.

Because the consumer duty champion role is not covered under SMCR, firms can set it up in the way that works best for the needs of their particular organisation. Firms will still need to attest however that they have someone in the role, and that the person in the role is fulfilling the duties of the Consumer Duty Champion.

See how MCO’s Role Monitoring and Assurance solution helps firms manage the allocation of responsibilities to accountable executives and attest to the quality of assurance frameworks.

Monitoring Outcomes

Most broker dealers are not bad actors, and most firms want to insure good outcomes for their clients. But, under Consumer Duty, good intentions alone aren’t enough. As FT Adviser points out, regulators are going to want to clearly see what steps firms have taken.

Firms must be able to demonstrate that they have the policies, procedures and controls in place to be compliant with consumer duty. They also need to ensure they have structured data and reporting capabilities in place to ensure they can easily provide proof of regulatory compliance.

According to FT Adviser, compliance with FCA Consumer Duty is as much about data management as it about culture. Firms that are able to measure how they are delivering on good consumer outcomes can turn management information requirements set out by the duty into a competitive advantage.

In Chapter 6 of the FCA’s Finalised Guidance FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty, the regulator lists questions that the Consumer Duty champion should be asking of the firm to guide discussions around implementing and optimising Duty principles across the organisation. These questions touch on topics including suitability, disclosures, data management and reporting. Firms should look at this list to measure their progress against meeting Consumer Duty obligations - and expect that these are exactly the types of questions that the agency will expecting that firms can answer and evidence to prove compliance.

Annual Board Reports

The FCA requires a firm’s governing body or board to create, review and approve a report on customer outcomes on at least an annual basis. The first assessment for firms with new and existing products and services is due by 31 July 2024. The agency updated guidelines on their requirements and expectations regarding the content of annual board reports. 

These requirements include:

• Monitoring results from assessments evaluating whether products and services are delivering expected outcomes in line with the Duty
• Any evidence of poor outcomes including an evaluation of the impact and the root cause 
• An overview of the actions taken to address any risks or issues 
• An explanation of how the firm’s future business strategy is consistent with acting to deliver good outcomes under the Duty 

In addition, before signing off the assessment, the governing body should agree on the following action items:

• Actions required to address any identified risks
• Actions required to address poor outcomes experienced by customers 
• Required changes to the firm’s future business strategy

Firms should be ready to provide their reports if asked.

Best Practices and Lessons Learned for Firms

The FCA has been providing guidance to firms as the duty comes into force. In February 2024, the agency published guidance on lessons learned, including good practices and areas for improvement. In June of 2024, the agency released key findings from a review of larger insurance firms’ approaches to outcomes monitoring under the Duty. The review contains examples of good and poor practice which may be useful to firms from other sectors, particularly in light of the annual board reports that are due on 31 July.

Overall, the review found that monitoring was an area where many firms were falling short:

• Some approaches were overly focused on process completion rather than on outcomes
• Some board or committee reporting contained limited insight into actual outcomes. This was often because of:
  • metrics/data not being comprehensive enough  
  • data which lacked analysis and explanation  
  • thresholds/standards in place which were not appropriately set and/or communicated. 

The scope of Consumer Duty is broad and regulatory focus will be enduring. How is implementation going for your firm? Are you ready for the upcoming July 2024 closed products deadline and for annual Board Reports?

To meet with our UK-based team to see how MCO is helping firms ensure suitability of recommendations, track and demonstrate executive accountability and manage attestations, click here to set up some time for a demo.