Embedding the Consumer Duty: Part three – governance challenges

The previous articles have explored the question of why ‘embedding’ the Consumer Duty is such a focus for the FCA, and hence for firms, as well as some of the practical steps firms can take to meet the FCA’s expectations.

This article explores some elements of ‘embedding’ relating to governance.

The FCA has been clear that boards are responsible not only for overseeing the implementation of the Consumer Duty in general terms, but specifically for embedding the Duty within their firms:

“A firm’s board or equivalent governing body is responsible for ensuring that the Duty is properly embedded within their firm, and we will hold senior managers accountable through the Senior Managers & Certification Regime.” FCA FG22/5

Yet, given that many board members are non-executive, and hence do not have day-to-day responsibility for business activities and functions, how can boards be confident that their firms have fully embedded the new requirements?

Firstly, it is helpful to recognise the distinctive role of the Consumer Duty champion. Firms are required to appoint a champion at board level, ideally an independent non-executive. The FCA describes their role as being to ensure that the Duty is being discussed regularly and raised in all relevant contexts.

Crucially, this doesn’t mean that the champion has sole responsibility for overseeing the implementation of the Duty. Rather, they have a vital role as a source of challenge – ensuring that the Duty, and the FCA’s expectations, continue to be a focus at the most senior levels within the organisation.

A second vital element of the board’s role in relation to the Duty is the use of appropriate management information (MI) in relation to consumer outcomes. Aside from the impact of the Consumer Duty, having access to accurate, relevant, and timely MI has always been a prerequisite of an effective governance and oversight framework.

Other than in the smallest of firms, board members, particularly non-executives, do not have visibility over all the activities of the firm. Hence, they are reliant on information provided by the business to be able to gain assurance that the firm is effectively managing the various risks it faces.

Identifying the right MI in relation to consumer outcomes has been challenging for almost all firms, and the FCA has been clear that it recognises that a proportional approach is required here, with some firms having far greater MI capabilities than others: “In general, we would expect firms with more sophisticated data strategies to have more detailed monitoring strategies.”

The FCA’s guidance provides a list of examples of the types of information firms may want to use to identify whether they are delivering good customer outcomes. The list is instructive since it includes standard MI (such as business persistence and the outcomes of file reviews), as well as less obvious examples such as training and competence records.

Interestingly, the list also gives the example of ‘allowing staff to feedback honestly’. Part two of the Embedding the Consumer Duty series explored this as a culture issue – specifically, the need for firms to build cultures in which employees feel safe to ‘speak up’, being confident that senior managers will ‘listen up’.

Even if we assume that a firm has a culture which actively supports employees speaking up, generating the relevant MI presents further challenges:

• How will a firm capture examples of staff giving ‘honest feedback’?
• Will such feedback have to be given through some formal means for it to be logged and reported?
• What if a team member flags a concern with a manager, who accepts the feedback and promptly takes steps to remedy the issue that has been identified? This would be a positive indicator in terms of firm culture, but it is unlikely to be captured in a form which would be incorporated into MI.

A further challenge in relation to speaking up is the (fine) line between speaking up and whistleblowing.

Firms have specific legal and regulatory obligations in relation to cases of whistleblowing (specifically, where individuals make ‘protected disclosures’ as defined by the relevant legislation). Indeed, many cases of speaking up may fall within the legal definition of whistleblowing yet, from a cultural perspective, firms may make a distinction between the two. A firm which was seeking to produce MI relating to speaking up (in line with the FCA’s guidance) would therefore need to give careful thought to the difference between the two, if any, and how such reports will be captured for data purposes.

Having already highlighted some of the general challenges associated with MI on consumer outcomes, it’s important to recognise the FCA’s specific expectations in relation to specific types of consumers.

The FCA states that it expects firm monitoring to “identify where distinct groups of customers, such as customers with characteristics of vulnerability or customers who share protected characteristics … get worse outcomes than other customers.

In other words, firms cannot rely on generalised statements, such as the fact that ‘most’ or ‘typical’ customers experience good outcomes. Instead, firms will need to analyse the available data, breaking it down into customer groups, to identify disparities between different groups, in particular those defined as vulnerable.

For many firms, identifying customers who fall within the FCA’s wide definition of ‘vulnerable’, and recording the nature of their vulnerability, will present additional challenges and yet, without this data, firms will be unable to meet the regulator’s expectations.

As has been noted, identifying and generating the right MI has been one of the major governance challenges associated with the advent of the Consumer Duty, and the FCA has recognised this:

“Whilst many firms will likely be able to build on their existing data and refocus it through the Duty lens, all firms should think deeply and afresh about the types and granularity of data they need to monitor and evidence outcomes under the Duty and drive further improvements in customers’ experience.”

The message here is clear. It is not enough for firms to simply recycle, or rebadge, existing data. Instead, they will need to carefully consider the types of MI which will provide evidence that they are indeed delivering good outcomes for their customers.

Of course, identifying the right MI on outcomes is not the end of the story – boards need to continue interrogating it, challenging it, and acting on it. Only then can they begin to be confident that the Duty has truly been embedded within their firm.

For more information on the Consumer Duty and related training courses available for compliance staff, Consumer Duty champions, senior management, and your front and back-office staff, browse our comprehensive range of Consumer Duty courses and tutorials. 

Nigel specialises in training boards, senior executives and other staff on the impact of regulation and regulatory change.

He is a CFA Charterholder and Chartered Fellow of the CISI, with over 15 years of industry experience.

With a background in compliance in private banking and wealth management, Nigel has a particular interest in effective corporate governance and the management of compliance and regulatory risk. His interests also include issues relating to ESG and climate risk, conduct and culture (including non-financial misconduct), and all aspects of financial crime prevention, as well as the impact of fintech on compliance and regulation.

Recent assignments have included briefing multiple boards and executive teams on senior management responsibilities, delivering compliance and ethics training for senior managers and front-office staff and creating a user-friendly risk and compliance handbook for a major bank.