Background

A key element of the FCA’s Consumer Duty Rules is that firms must monitor the outcomes that retail customers are experiencing from their products.  The Rules also require firms, at least annually, to prepare, review, and approve at governing body level (so at board / most senior management level) a report on the outcomes being achieved by retail customers.  This has become referred to as the ‘board report’.

The report, when provided to the governing body, must set out the results of the monitoring and any key recommended actions required as a result of the findings.  In reviewing and approving the report, the governing body must confirm that it is satisfied that the firm is complying with the Consumer Duty and assess whether the firm’s future business strategy is consistent with achieving good outcomes for retail customers.

What should firms think about?

Before signing off the assessment, the board or equivalent governing body should agree:

• the action required to address any identified risks;
• any action required to address poor outcomes experienced by retail customers; and
• whether any changes to the firm’s future business strategy are required.

This assessment will be part of the evidence the FCA uses to assess a firm’s compliance with the Duty. The FCA expects to be provided on request with the report and the management information (MI) that sits behind it.  The FCA’s approach is now more than just ‘tell me and show me’; the regulator now also expects firms to ‘prove it’.

All firms will be different and will need an approach that suits their own firm.  Firms must, though, think carefully about what and how they have changed to comply with the Consumer Duty and how they have met the requirements of the four outcomes, based on quantitative and qualitative information.

How should firms approach the report?

The FCA will use firms’ board reports to assess and evidence how firms have provided good outcomes for consumers under the Duty.

• Keep in mind what the FCA’s Rules require (as set out above)
• Monitor outcomes
• Gather the results of the monitoring, and the evidence about the outcomes (MI, data, qualitative findings etc.)
• Assess all of the information and decide whether the firm is meeting its ‘good outcomes’ obligations.
• Assess whether there are any risks of good outcomes not being experienced by customers and set out and agree how to address and mitigate them.
• Assess if there have been any examples of good outcomes not being experienced by customers, and set out and agree how they are to be addressed.
• Tell the story of the Consumer Duty journey that a firm has been on.
• For the first report, this could begin with an overview of the analysis the firm did in implementing the Duty; its gap analysis, its findings, the actions it identified and has taken, the progress against those actions and the difference that progress made.
• In future reports, this can be replaced with the progress since the last report.

Remember:

• The report is not merely some form of attestation.
• The FCA has stated repeatedly that Consumer Duty is not a ‘once and done’ nor a ‘one size fits all’ exercise; the same applies to the report.
• Although there is uncertainty over the right level of data that should be presented to boards and senior management (the FCA accepts that this is more of a challenge for small firms), firms should take a risk-based approach to prioritisation, should look at emerging trends, and decide what they are going to focus on.
• The board report should explain what has actually changed in terms of customer outcomes.
• The board report must set out any agreed changes to the firm’s business strategy to ensure that it remains consistent with meeting the firm’s obligations under the Duty.

Think wider than just MI and data:

• Consider a Consumer Duty review by any second or third lines of defence within your firms.  In smaller firms where these might not be in place, consider a review by your compliance consultants.
• Gather evidence about how you have kept up with the Consumer Duty, such as interaction with the FCA or attendance at webinars etc.
• If you have a Consumer Duty Champion, do you have any reports from the Champion in relation to your progress with the Duty?
• Ask yourself the FCA’s ‘ten key questions’ (see below).

The FCA has not, and will not, prescribe the format of the report, believing that firms are best placed to decide how to communicate the necessary information to their board or equivalent management body.  The FCA intends that this requirement is applied proportionately, as it recognises that the level and complexity of the report may vary between firms.

What are the key issues the FCA has commented on?

Price and fair value

The FCA has been critical of fair value assessments not having enough data and credible evidence behind them to justify the value to the customer.  The FCA has also recently reminded firms that benchmarking against the market in itself is not sufficient to demonstrate value.  Firms should avoid trying to justify the current position rather than looking at value objectively.  The general insurance sector has been trying to get this right since October 2021.

Data

The FCA has emphasised the importance of data as being key to showing that firms are meeting the Consumer Duty outcomes.  Data should be qualitative as well as quantitative, such as from customer focus groups, and should be the same data that is being used to run the business; they should not be separate things.

It is not just about repackaging existing data (although, for example, complaints data and root cause analysis is very useful).  Firms’ previous data has its place within the data used to support firms’ performance against the Duty requirements, but new measures will have been required.  For example, measuring the customer understanding and customer support outcomes may have provided the greatest challenge for insurance distribution.

Senior Management buy-in

Consumer Duty is not a compliance and risk management issue; the ‘tone from the top’ is key.  Consumer Duty should feature regularly on boards’ agendas to demonstrate that they are getting to grips with it and looking at things from a customer perspective.  This demonstrates the FCA’s increasing focus on firms’ cultures.

Culture is the key

The FCA, and the FSA before it when it introduced the ‘Treating Customers Fairly’ (TCF) initiative, has repeatedly stated that it wants to measure outcomes of firms’ activities and efforts.  As such, the FCA continues to focus sharply on firms’ cultures.  Firms would be wise to view their culture almost as a fifth required outcome under the Consumer Duty.

In its Consumer Duty Policy Statement, PS22/9 (see pages 75 and 76) the FCA included commentary on the importance of the right cultures driving the right behaviours:

• The FCA recognises that the benefits it expects will only be delivered by firms making lasting changes to their culture, behaviour and processes, which need to be driven from the top with strong senior championing and oversight.
• The annual board report is not intended to be the only mechanism for governance, accountability and oversight. To make this clearer the FCA introduced new requirements that the Duty should be reflected in firms’ strategies, governance, leadership and people policies, including incentives at all levels.
• Firms’ boards and senior management should ensure that they are embedding a culture in which good outcomes for consumers is central.
• People management policies and practices, including performance management, pay and bonuses will be critical.
• Firms should have appropriate oversight of customer outcomes through their systems and controls.
• Risk functions should pay attention to customer risks and they should also be a key lens for internal audit.
• Firms can expect at every stage of the regulatory lifecycle to be asked to demonstrate how their business model, the actions they have taken, and their culture are focused on delivering good customer outcomes.
• Firms can expect the FCA to request their annual report, and other supporting MI, and to publish an overview (not firm-specific) of its findings.

Recent FCA commentary, In relation to what ‘good’ looks like, is that ‘good’ is customer centric behaviour throughout the firm, from project phase, through business as usual and target operating models, three lines of defence involvement, and governance, to continuous improvement.

What should firms be asking themselves?

In the Finalised Guidance document issued alongside the Consumer Duty Policy Statement, the FCA set out examples of the type of questions firms can expect to be asked in their interactions with the FCA in relation to their governance arrangements and the Duty.  Firms’ Consumer Duty Champions and the Chairs of Boards could also use these types of questions to guide discussions by the firm’s board or equivalent governing body.

In total, there are 41 key questions under six different headings:

• Products and services
• Price and value
• Consumer understanding
• Consumer support
• Culture, governance and accountability
• Monitoring outcomes

These are set out in an Appendix to this Bulletin.

In June 2023, and re-iterated in October 2023, the FCA perhaps distilled these into ten key questions for firms to consider.

1. Are you satisfied your products and services are well designed to meet the needs of customers in the target market, and perform as expected? What testing has been conducted?  
2. Do your products or services have features that could risk harm for groups of customers with characteristics of vulnerability? If so, what changes to the design of your products and services are you making?   
3. What action have you taken as a result of your fair value assessments, and how are you ensuring this action is effective in improving customer outcomes?  
4. What data, MI and other intelligence are you using to monitor the fair value of your products and services on an ongoing basis?  
5. How are you testing the effectiveness of your communications? How are you acting on the results?   
6. How do you adapt your communications to meet the needs of customers with characteristics of vulnerability, and how do you know these adaptions are effective?   
7. What assessment have you made about whether your customer support is meeting the needs of customers with characteristics of vulnerability? What data, MI and customer feedback is being used to support this assessment?  
8. How have you satisfied yourself that the quality and availability of any post-sale support you have is as good as your pre-sale support?  
9. Do individuals throughout your firm – including those in control and support functions – understand their role and responsibility in delivering the Duty?  
10. Have you identified the key risks to your ability to deliver good outcomes to customers and put appropriate mitigations in place?

So what approaches can firms take in creating the report to the board?

It is vital that firms ensure that they can time the creation of the report with a scheduled Board / most senior management meeting, or that the firm can get enough Board members / senior managers together to form a quorum that can formally act on behalf of the firm in signing off the report, before the end of July.  The sooner this is done the better, in case firms want to make any amends to a final report before signing it off.  This is not a report due on 31^st July 2024, but by 31^st July 2024.

• Start with an assessment of the firm’s implementation of all things Consumer Duty – a summary of the analysis, of the gaps identified, of the actions taken to resolve the gaps and whether that action is completed or ongoing.
• Add in any details of how your firm and key individuals within it have kept up to date with Consumer Duty (webinars, seminars, internal training, external assistance, engagement with the FCA etc.)
• Remember that the report is about your firm’s monitoring of good outcomes – so consider summarising all of the sources of MI, data and information (in whatever form) you have used to make your assessments and prepare the report.
• Consider at all times the ‘ten key questions’ and either address them directly or ensure that, for each of the outcomes, they are at least considered.
• Although vulnerable customers should be considered at all stages of the firm’s assessment, consider some separate overview of your findings in relation to vulnerable customers and whether they are achieving outcomes as good as other customers.
• In line with the FCA’s requirements, include detailed commentary on your firm’s business strategy, whether it is helping your firm meet its obligations under the Duty, or whether it has been changed to ensure better outcomes for customers.
• Consider the four Consumer Duty outcomes, setting out how the MI, information and evidence gathered demonstrates good outcomes, or where the evidence indicates potential gaps which require action.  Then, set out the action required and who will own it, and when the firm will aim to complete it.
• Consider also any MI or evidence that demonstrates a customer-focussed culture.
• Draw the report to a conclusion summarising how well the firm has met the required customer outcomes, referencing any identified actions needed.
• Include an overall statement of the firm’s review of its Consumer Duty implementation.
• Include provision for sign-off, but make the report a living document by including an Actions Log, which can be risk graded (e.g., a RAG status) and which can record when actions are completed.
• In readiness for the next report, use this detail to create the opening section of the next report (so ‘how have we done since the last one?’).

UKGI can help

UKGI Group has developed a board report methodology which can be used as a starting point for the creation of the report.  Contact your usual UKGI Consultant, or the Technical Helpline on 01925 767888 or at helpline@ukgigroup.com.  We will be happy to happy to discuss how we can assist.

Appendix 1 – Bulletin 359

41 key Consumer Duty questions for firms to consider – taken from the Finalised Guidance FG 22/5, issued alongside the Consumer Duty Policy Statement.

Products and services

• Has the firm specified the target market of its products and services to the level of granularity necessary?
• For intermediaries, has the firm ensured that the specified target market matches the firm’s target customer base?
• How has the firm satisfied itself that its products and services are well-designed to meet the needs of consumers in the target market, and perform as expected? What testing has been conducted?
• How has the firm identified if the product or service has features that could risk harm for groups of customers with characteristics of vulnerability? What changes to the design of its products and services is it making as a result?
• Is the firm sharing all necessary information with other firms in the distribution chain, and receiving all necessary information itself?
• How is the firm monitoring that distribution strategies are being followed and that products and services are being correctly distributed to the target market?
• What data and management information is the firm using to monitor whether products and services continue to meet the needs of customers and contribute to good customer outcomes?
• How regularly is it reviewing this data and what action is being taken as a result?
• Where the firm is planning to withdraw a product or service from the market, has the firm considered whether this could lead to foreseeable harm? What action is it taking to mitigate this risk?

Price and value

• Is the firm satisfied that it is considering all the relevant factors and available data as part of its fair value assessments? Has it gathered relevant information from other firms in the distribution chain?
• What insight has the firm gained for its value assessments by benchmarking the price and value of its products and services against similar ones in the market? Have the price and value of its older products kept up with market developments?
• Can the firm demonstrate that its products and services are fair value for different groups of customers, including those in vulnerable circumstances or with protected characteristics?
• If the firm is charging different prices to separate groups of customers for the same product or service, is the firm satisfied that the pricing is fair for each group?
• What action has the firm taken as a result of its fair value assessments, and how is it ensuring this action is effective in improving customer outcomes?
• What data, MI and other intelligence is the firm using to monitor the fair value of its products and services on an ongoing basis? How regularly is it reviewing this material, and what action is it taking as a result?

Consumer understanding

• Is the firm satisfied that it is applying the same standards and testing capabilities to ensure communications are delivering good customer outcomes, as they are to ensuring they generate sales and revenue?
• What insights is the firm using to decide how best to keep customers engaged in their customer journey, whilst also ensuring its customers have the right information at the right time to make decisions?
• How is the firm testing the effectiveness of its communications? How is it acting on the results?
• How does the firm adapt its communications to meet the needs of customers with characteristics of vulnerability, and how does it know these adaptions are effective?
• How does the firm ensure that its communications are equally effective across all channels it uses? How does it test that?
• What data, MI and feedback does the firm use in its ongoing monitoring of the impact of its communications on customer outcomes? How often is this data reviewed, and what action is taken as a result?

Consumer support

• How has the firm satisfied itself that its customer support is effective at meeting customer needs regardless of the channel used? Does the firm test outcomes across different channels?
• What assessment has the firm made about whether its customer support is meeting the needs of customers with characteristics of vulnerability? What data, MI and customer feedback is being used to support this assessment?
• How has the firm satisfied itself that it is at least as easy to switch or leave its products and services as it is to buy them in the first place?
• How has the firm satisfied itself that the quality of any post-sale support is as good as the pre-sale support?
• What data, MI and feedback is the firm using to monitor the impact its customer support is having on customer outcomes? How often is this data monitored, and what action is being taken as a result?
• How effective is the firm’s monitoring and oversight of outsourced or third-party service providers, and is it confident that these services meet the FCA’s required customer support standards?

Culture, governance and accountability

• Does the firm’s purpose (whether publicly articulated or not) align with its obligations under the Duty? How is it embedded and understood throughout the organisation?
• How does the organisation’s culture support the delivery of good outcomes for customers?
• How does the organisation ensure that individuals throughout the organisation – including those in control and support functions – understand their role in delivering the Duty?
• Are staff empowered and do they feel safe to challenge and raise issues where they feel the firm might not be acting to deliver good outcomes for customers? Are those challenges listened to, and where necessary, acted on?
• Is the Duty being considered in all relevant discussions such as strategy and remuneration? Are customer outcomes a key lens for Risk and Internal Audit?
• How is the firm ensuring that its remuneration and incentive structures drive good outcomes for customers?

Monitoring outcomes

• Is the organisation prioritising acting to deliver good outcomes for customers? Are there any areas of concern?
• How is the external environment changing, and how will that impact on the organisation’s ability to deliver good outcomes for customers?
• Has the firm identified the key risks to its ability to deliver good outcomes to customers and put appropriate mitigants in place?
• How does the firm define good outcomes (over the short, medium and long term) for customers using its products and services?
• What data does the firm have about its customers and how they use its products? Are there any gaps in the data? What steps is the firm taking to address them?
• What outcomes are customers getting? Are they getting good outcomes which align with their reasonable expectations?
• Are certain groups of customers getting different outcomes, and if so why? What is driving any adverse outcomes?
• What actions is the firm taking to improve outcomes (so who is accountable for this work, what will improvement look like, and when will it happen)?