It’s almost six months on from the 31 July implementation deadline – so what’s next?
In the words of Nisha Arora, FCA Director of Cross Cutting Policy and Strategy, “the Consumer Duty isn’t a once and done event”. The Duty remains a top priority for the FCA and is central to their transformation to becoming a more assertive regulator with an enhanced focus on the use of data.
In the coming months, the FCA will continue their work across all sectors of the market to test firms’ implementation and embedding of the Duty. For example, on 14 December 2023, they published their findings of the Retail Banking Consumer Duty multi-firm work with plans for a further survey in the new year.
With this in mind, you should already be gathering the data needed to demonstrate to the FCA that you’re delivering good customer outcomes. This should include your implementation plan, data and monitoring, your internal assessments and for those firms with closed products, how you are preparing for the July 2024 deadline.
However, there is one other critical milestone that a lot of firms have yet to consider – the first annual Board Report.
What is the annual Board Report?
Boards have a critical role to play in setting the strategy and assuring that your firm is delivering against the requirements of the Duty and the right customer outcomes as part of that strategy.
With this in mind, you should now be turning your attention to your first annual Board Report which is due no later than 31 July 2024. In accordance with PRIN 2A.8.4, at least annually Boards are required to review and approve an assessment of whether your firm is delivering good outcomes for customers. The FCA have been clear that “this isn’t an attestation but a really important part of your internal governance”. This change in language reinforces the message that the annual Board Report is not a one-off event to ‘attest’ to the actions taken to address a specific issue but an ongoing requirement to demonstrate the evolution and embedding of the Duty in firms.
What should this assessment include?
Like everything else about the Duty, the annual Board Report should not be a tick box exercise. Although the FCA has provided high-level guidance, there is no set template or one size fits all. Therefore, you will need to approach this in a proportionate manner, depending on the size, nature and complexity of your business. So, what should you be doing?
Based on our understanding of the FCA’s expectations and our extensive experience of working with a range of firms across various sectors of the market, the scope of your annual Board Report should, as a minimum, cover the following 10 principal areas:
- Executive Summary – qualitative commentary that explains the overall outcomes your customers are receiving, whether your firm is complying with the Duty and whether your firm’s current and future business strategy is consistent with Principle 12;
- Customer outcome monitoring – the metrics and the results of the monitoring your firm has undertaken to assess whether products and services are delivering expected outcomes in line with the Duty. This includes MI demonstrating compliance with the cross-cutting rules;
- Root cause analysis – any evidence of poor outcomes, including whether any group of customers (for example, those that are vulnerable) are receiving worse outcomes compared to another group, and an evaluation of the impact and the root cause;
- Actions – an overview of the actions taken to address any known risks or issues;
- 3LOD assurance – the results from 1st, 2nd and 3rd lines of defence assurance including how those results support the conclusions reached in the annual Board Report;
- Culture and purpose – how your firm’s culture and purpose align to the Duty – more on this in a moment;
- FCA engagement – any FCA engagement your firm has had relevant to customer outcomes, including any communications relevant to the implementation of the Duty. This should also consider relevant FCA portfolio letter risks as well as firm specific risks and issues;
- Consumer Duty Champion – qualitative commentary setting out how the Consumer Duty Champion has challenged your firm’s management on how it is embedding the Duty and focusing on customer outcomes;
- Business strategy – how your firm’s current business strategy is consistent with acting to deliver good outcomes under the Duty; and
- Board approval – a section for Board approval containing qualitative commentary setting out how the Board have concurred with the conclusions reached.
And before signing it off, the Board or equivalent governing body need to agree the actions required to address any identified risks or poor outcomes experienced by customers and agree whether any changes to your firm’s future business strategy are required.
So, what should you consider when drafting the annual Board Report?
Ownership
The annual Board Report will require collaboration by different stakeholders across your firm so early engagement with the Board, especially your Consumer Duty Champion and any Non-Executive Directors is key. There is an element of starting with the end in mind when determining how best to approach and structure the report. You should also consider who owns and is accountable for producing it. Typically, it is good practice for this to be owned by the first line, with independent oversight and contributions from the second and third lines of defence.
Format
The format and structure of the annual Board Report is key. Too much information may be difficult to digest and understand. Conversely, too little will undermine and challenge the robustness of the report. So, it needs to be detailed enough to enable the Board and the Consumer Duty Champion to understand the firm’s progress on embedding of the Duty, while being able to interrogate the report’s conclusions and its proposed actions. Therefore, it’s best to consider structuring the report with high-level statements and assurances supported by underlying data, metrics and MI. However you decide to structure and format your report, you need to remember that the FCA will likely want to see it and as such, it needs to ‘tell the story’ with robust evidence to back up the statements and conclusions reached.
Mindset
The FCA have made it clear that they expect firms to adopt a developmental mindset – that firms’ actions, assessments, testing and evidence need to be continuous. It has been over a year now since Boards scrutinised and signed off their firm’s implementation plans. With that in mind, you need to go back and review your implementation plan, and check you’ve made the changes you set out to make. Then ask yourself whether these changes go far enough. Make sure you are focused on whether you are delivering the outcomes you set out to achieve for the consumers in your target market, especially for customers with characteristics of vulnerability. Recording what your firm has done, and whether it has been effective, is an important part of your first Board Report.
Data
The same goes for your data and monitoring processes. Think about how you’re going to harness the information you have to improve your products and services and evidence the outcomes you’re achieving for your customers. Ask yourself whether there is any data that you are missing and you need to capture to test and challenge that you are achieving the right outcomes. You also need to think about the quantitative metrics that will drive RAG ratings and conclusions on monitoring customer outcomes. This data and the associated metrics will be a critical element of the Board Report and should be designed in such a way to enable effective decisions, supported by timely and accurate commentary.
Key Risk Indicators (KRIs)
Following on from the data point above, firms often fall into the trap of an over reliance on ‘lagging’ indicators. It is common to see firms build their reporting based on historic indicators that relate to poor customer outcomes that have already crystallised. While data such as complaints, persistency, claims and cancellations are important, you should also develop ‘leading’ indicators that also show trends and projections in order to provide an early indicator of where potential actions are required. For example, the cross-cutting rule of preventing ‘foreseeable harm’ has a clear expectation that firms take a much more forward-looking view of what could go wrong with your products and services. This could include data relating to customers in pre-arrears but before they have missed a payment, credit utilisation, revenue and commercial growth, the introduction of new products and employee turnover. The expectation here is that firms identify and prevent issues before they impact your customers. Achieving this will require a far greater use of KRIs that highlight problems and issues before they crystallise. As such, this needs to be a core part of your data suite and annual Board Report.
Breadth
As mentioned earlier, the scope of your annual Board Report should consider the 10 principal areas set out above. In doing so, it is important that the Board Report answers and evidences the following ‘exam questions:’
- How does your firm demonstrate compliance with Principle 12?
- How does your firm meet the cross-cutting rules?
- How does your firm’s products and services meet your target market and work as expected?
- Are your firm’s products and services sold at a price that reflects their value, including any fees?
- How are your customers equipped to make good decisions with information available at the right time and is understandable?
- How are your customer service and post-sale support teams equipped to be responsive and helpful without any unnecessary friction or barriers?
People and Culture
To meet the shift in expectations required by the Duty, you need to ensure that your customers’ interests are central to your culture and purpose, and that this is embedded in your strategy, governance, leadership and people policies. For example, aligning purpose and values to good customer outcomes and updating internal training materials to reflect this along with changes to reward and incentive structures to ensure they support delivery of the Duty. So, think about how you will evidence in the Board Report the cultural shift your firm has made to demonstrate compliance with the Duty.
Time
The annual Board Report will need a significant amount of time to prepare and do well. It also needs to be subject to robust and objective challenge by the Board or equivalent governing body. So, not only do you need to allow plenty of time to prepare the report, but also time for Board review and challenge, which may also result in numerous iterations before the report is considered final and approved.
Final thoughts
Your annual Board Report will be part of the evidence the FCA will use to assess your firm’s ongoing compliance with the Duty. You’ll need to be able to provide it, and the management information that sits behind it, on request.
In the coming months, the FCA will be reviewing a sample of firms’ Board reports and looking at the data that it includes, how it evidences customer outcomes, how effectively the Board has scrutinised your firm’s performance and what actions are planned to address any gaps. They will likely want to understand whether the Board Report is working effectively and that your firm is taking a data led approach.
The FCA have emphasised many times the need to start in good time so for those firms who aren’t so advanced in your preparations for your first annual Board report, you need to take steps now to make sure you’re on track. As directly referenced in a recent FCA speech, “preparing this report will take time to do well, so don’t delay!”
How can we help?
Our dedicated Consumer Duty experts have significant insight into the FCA’s expectations and industry good practice. We have a tried and tested approach to Consumer Duty implementation and embedding. This includes building board reporting and assurance reviews.
As part of our Consumer Duty toolkit, we have developed an annual Board Report template that aligns to the FCA’s guidance and the good practice principles set out in this blog. This includes helping firms to define their approach to the annual self-assessment to ensure that the appropriate steps are taken, with clearly established roles and responsibilities. These elements are important as the format of the annual Board Report and the evidential standards and processes needed to support it.
For those firms who have already created their annual Board Report or are advanced in their preparations for it, we can undertake a comprehensive assurance review of your proposed annual Board Report, to determine whether the work your firm has undertaken to-date is complete and aligned with regulatory expectations and industry good practice.
If you would like to discuss any aspect of your firm’s annual Board Report or any other Consumer Duty or conduct related issues you are facing, please get in touch at hello@sqaure4.com
Alternatively, you can contact Darren Fisher, Advisory Director at dfisher@square4.com
