The Consumer Duty Board report – are you ready?

The first Consumer Duty Board report is due by 31st July 2024 (which is also the deadline for implementing the Duty for closed products). It’s clear that firms must focus significantly on the Board report between now and the end of July, as it will not be a simple box-ticking exercise.

In this article, Peter Haines, Consumer Duty trainer and a Consumer Duty Champion with experience in implementing the Duty within a financial services organisation, discusses the FCA’s expectations for the Board report and the type of MI firms should be obtaining.

The FCA has stated that the Board should review and approve an assessment of whether the firm is delivering good outcomes for its customers in line with the Duty. This assessment should include:

• the results of the monitoring that the firm has undertaken to assess whether products and services are delivering expected outcomes in line with the Duty;
• any evidence of poor outcomes, including whether any group of customers is receiving worse outcomes compared to another group;
• an evaluation of the impact and the root cause of these poor outcomes;
• an overview of the actions taken to address any risks or issues; and
• how the firm’s future business strategy is consistent with acting to deliver good outcomes under the Duty.

If your firm has been through an attestation process, this is not far from that in practice. With an attestation, the CEO, Chair or the whole Board has to attest to the quality of the processes and controls around a particular area of regulation. Whoever signs the attestation is looking for hard evidence that they are in a position to sign.

The Board review and approval, therefore, should not be a five-minute discussion with the Board. The FCA has made it clear that it may also request the assessment and MI behind it, and with a continuous spotlight on data over the recent months, it’s also clear that the FCA expects a meaningful, data-led report.

Good practice has suggested that most SMFs would have aspects of the Duty embedded into their Statements of Responsibility, and they will not want to be shown to have been negligent in holding the executive management to account in implementing the Duty.

Therefore, given the likely request from the FCA for copies of the report, Board members must obtain plenty of data and tangible information from management to ensure they have the confidence to approve the assessment and back up their statement of assurance. Firms must also be prepared for a long and challenging session when this is discussed.

We have had TCF MI for the best part of two decades and other elements of the Duty, such as vulnerability and product governance, have been around for a few years now.

Therefore, firms should not lack data, but the FCA has made it clear that existing data should not merely be repackaged.

“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.” - Nisha Arora, Director of Cross Cutting Policy and Strategy.

So, any existing data should be enhanced and augmented to reflect the requirements of the Duty. Several data sources are helpfully suggested by the FCA in FG22/5, published in July 2022.

My strong advice is that the suggestions for MI should not just come from the Consumer Duty Champion and the Compliance Department. You should be challenging the first line and business management to produce meaningful metrics. Best practice I have seen is for firms to have been providing MI to the Board since the end of October 2023, three months after the introduction of the Duty.

This enables the Board to challenge the MI on a quarterly basis until the Board report is due, enabling the July 2024 version just to be topped and tailed to create the final report.

Here are some key points to take into consideration on specific areas of Consumer Duty MI.

• As with any metric, the data produced must be tangible and justifiable. For example, on the Price and Value outcome, many firms are comparing the price of their products and services with those of their competitors. However, not all competitors’ products are identical.
• Some firms are looking at P&L by product as a metric for the price and value outcome. We need to consider the difference between open and closed products in this respect.
• Making a healthy profit does not necessarily mean that your firm is not providing value to its customers. Much depends on volume, for example. By the same token, low profits or even losses do not mean that the firm is providing value to the customer. Issues such as competition and efficiency can come into play.
• On Products and Services, one good question that the Board might ask is “when did we last provide a product or service to a customer outside of our target market?”. A second question, if the firm uses external brokers or sales agents, might be “how do we gain assurance that these agents/brokers are only providing products or services to the target market?”

As we know, vulnerability is a thread which runs through all of the Consumer Duty outcomes. Given that the Board report needs to cover any evidence of poor outcomes, including whether any group of customers is receiving worse outcomes compared to another group, you should be prepared to include vulnerability as a key part of the assessment.

The first challenge for firms it to identify its vulnerable customers, especially as the FCA views the industry’s efforts as materially undercooked. However, just focussing on MI, best practice I’ve seen is for the MI within each outcome to focus on each metric, applying first to all customers, and secondly to vulnerable customers. That shows a clear focus on vulnerable customers and enables the Board to apply itself to the question of whether certain customer groups are receiving worse outcomes. As this is best practice – and the FCA will see this MI being produced – don’t be surprised to see it becoming expected practice.

The final point worth considering concerns the logistics of Board approval.

Anybody who has sat on a Board, or indeed supported a Board, will know that the typical Board will want more than one bite at most cherries. If you schedule a Board meeting for 31^st July to sign off on your Board Report, having provided it five days before, don’t be surprised if the Board challenges it and asks you for a second look at its next meeting. Trying to get the Board together for an early August, unscheduled meeting could be a real challenge, especially during holiday season. Therefore, the very latest I would advise for the first review is end of June, which will give you a month to complete the report following challenge from the Board.

I’ve done a lot of work in the past on monitoring and assurance, focussing on outcomes testing and process testing.

• Process tests show that the internal controls are working, designed to produce the right outcome.
• Outcomes testing shows that an actual outcome has been achieved.

As a Consumer Duty Champion, I don’t just want to be told that controls are working and that I can therefore have a warm glow in the pit of my stomach that these controls are producing the right outcomes.

I want the outcomes testing to be predominant.

I want data-led conclusions that allow me to say with confidence that the outcomes have been achieved. The Board – not just the Champion – can be held accountable for the quality of the Board Report. Board members need to hold management to account to give sufficient, hard evidence that the outcomes have indeed been achieved.

As part of our 2024 Consumer Duty courses, we have developed a new MI & The Board Report Workshop to support firms in finalising their MI pack. We can review your Board MI with the Consumer Duty Champion and the Project Team and challenge you by saying “why have you not included this?” and “are you sure that this provides the necessary assurance?”

To find out more about our two-hour, in-house private workshop with Peter Haines, contact us.

Peter has over 35 years’ experience in the field of regulation and compliance. A chartered accountant, Peter spent 6 years working with the UK’s SFA (now the FCA) and has headed up regional and global compliance functions at Paribas, UBS Investment Bank and Bank of America.

Since 2006, Peter has specialised in training, focusing on boards, senior management and assisting the next generation of compliance officers. His coverage includes most areas of compliance and financial crime, corporate governance and risk management. His style is inclusive, interactive and based on practicalities, not just rules.

As Director of GRC Training, he works closely with our clients to ensure that our programmes are tailored to their exact needs and meet, or surpass, their expectations.

Peter is also a Consumer Duty Champion with experience of implementing the Duty within a financial services organisation.