In July 2022, the FCA published its final rules for the Consumer Duty, kicking off what is widely seen, in its scale, breadth of scope and ambition, as the FCA’s most important regulatory intervention in a decade. The FCA’s purpose with the Duty is to set higher expectations for the standard of care that firms provide to consumers. Firms must put consumers at the heart of their business model — and critically, be able to evidence this through their governance and reporting processes.
The FCA sees the Consumer Duty as an integral part of its transformation to becoming a more “assertive and data-led” regulator. This suggests that there will be a heavy expectation of increased firm reporting as the regulator seeks to intervene (more frequently, and with greater powers) based on information that it has received.
The Duty is significant, because it marks a shift from a rules-based regulatory approach to one based on outcomes, which the regulator has termed a “paradigm shift” in its expectations. For many firms, this will require a significant shift in culture, governance, and behaviour.
Why do you need to act now?
The timeline for implementation is aggressive, and firms will have to be quick off the mark. The FCA is giving firms 12 months (to July 2023) to implement the new rules for all new and existing products and services that are currently on sale. However, the FCA expects boards to have signed off detailed implementation plans by 31 October 2022. This means that finalising a robust gap analysis and involving the board should be the top priority right now.
Where does the responsibility lie?
The FCA has been crystal clear that the board will be held fully responsible for ensuring that the Duty is properly embedded within the firm, and that all senior managers will be held accountable through the Senior Managers and Certification Regime (“SM&CR”), which is being amended to reflect the Duty. Furthermore, where the FCA identifies serious misconduct by firms, it will use its full range of powers to tackle it, including investigating and, where appropriate, using its “deterrent and remedial powers”. The Duty is just as significant as the SM&CR.
What does this mean for reporting?
Reporting is key to demonstrating compliance with the Duty. A report needs to be produced (along with supporting MI) for the board, at least annually, that reviews whether the firm is delivering good outcomes for its customers which are consistent with the Duty. The FCA expect this report to be “provided on request” and will use it as a key part of their assessment of compliance with the Duty. In addition, firms will need to regularly report on how their future business strategy, governance, leadership, and people policies ensure that the Duty is embedded in the firm’s culture.
But, interestingly, the FCA go on to give more detail…
They have set out key governance questions that firms need to address (and can be expected to be asked in their interactions with the FCA). They have also specifically said that they expect the board chair and duty champion (another board member) to use these questions to guide discussions by the board. What are these core governance questions?
- Does the firm’s purpose 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?
- Is the Duty being considered in all relevant discussions such as strategy and remuneration? Are customers outcomes a key lens for Risk and Internal Audit?
- How does the organisation ensure that individuals throughout it understand their role in delivering the Duty?
These questions should form the heart of every report, regardless of where it is written in an organisation — driving confidence that the board are having effective, compliant discussions that consider the Duty in all relevant contexts. Reporting processes should also be set up in a way which enables management to identify where the firm is not delivering good outcomes for its customers and demonstrate that a strategy is in place to understand and tackle the root causes.
It is evident that the Consumer Duty will be the primary policy focus for most FCA-regulated firms over the coming year, and it will be the focal point for both business change and conduct. Firms that fail to act in good time are more likely to face problems further down the line.