Consumer Duty - Annual Report

Are you ready to report on consumer outcomes?

As firms start to prepare for their annual Board review, we look at some of the key points to consider and think about practical considerations as well as how smaller firms may want to approach their annual review. From the FCA’s perspective, a firm’s ability to evidence an effective approach will be a positive sign that they are successfully embedding the new rules.

How should I prepare the board to review consumer outcomes?

The FCA’s Final Guidance states that “A firm’s governing body should review and approve the firm’s assessment of whether it is delivering good outcomes for its customers which are consistent with the Duty and agree any action required, at least annually”. The FCA expects the annual review to focus on:

• 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, and an evaluation of the impact and the root cause
• an overview of the actions taken to address any risks or issues
• how the firm’s future business strategy is consistent with acting to deliver good outcomes under The Duty

The purpose of the Board Report is to ensure firms are using meaningful MI to identify gaps and progress actions on a regular basis. The Board report enables the Board to challenge the executive on progress in delivering agreed consumer outcomes, and that organisation shifts to outcomes-based approaches. The annual review provides the Board with an opportunity to decide what to do with the data and what decisions to make. From our work, we see stronger Board reporting also looking at future strategy and direction as well as an assessment of current consumer outcomes.

Each Board is different, therefore thought should be given on how best to engage. This includes the right timing in the board cycle, the right reporting format, and an optimal level of detail. Ultimately the report should enable the Board to assess the judgements made about the quality of outcomes and understand actions taken or due. Where appropriate, that should include preparedness for implementation of the Consumer Duty for closed books.

Firms will have had different approaches to Board reporting over the last year. Some may have engaged sub committees to scrutinise risks and actions related to consumer outcomes. Some may have had regular reporting, some smaller firms may have had less frequent reporting. Consolidating reporting with a final assessment may be a sensible approach.

The Board Champion role is key in the drive towards outcomes-based approaches, utilising data, the continual focus on customers and cultural change. The Board Champion should be engaged early to help shape and challenge the report, although remembering this is an executive report to the Board.

At our Consumer Duty Champions event earlier this year, we polled the audience about the preparation for the Board reports. 21% said that the Board Champion led engagement on reporting structure and focus, 21% said that they were utilising monitoring reports by second line, 13% said that were using independent assurance reviews, and 40% indicated that they were using all these approaches.

What ten questions should boards consider in reviewing consumer outcomes?

The FCA helpfully published ten questions Boards should consider asking to help focus the Annual review conversation. These questions consider purpose, culture, and governance as well as delivery of outcomes and actions taken. The structure of a report to the Board could reflect these questions and enable a structured discussion and this is an approach smaller firms might find helpful in preparing their Board report.

1. Are you satisfied your 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?
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 consumer 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 these 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 mitigants in place?

What is the role of Compliance, Risk and Internal Audit

Compliance, Risk and Internal Audit should scrutinise reporting, the quality of metrics, judgements made, and actions taken. This should demonstrate that testing is fully operational and effective, and act as a measure of how well consumer duty principles are embedding across the organisation. Finally, firms should allow enough time. An early ‘dry run’ might help flush out any unanticipated challenges, and the Board might appreciate a first review with further review once feedback has been addressed.

How we can help

Our FS Advisory Business supports clients through the challenges of a complex and highly regulated environment. Some of the challenges we have recently helped clients with include:

• moving to an outcomes-based assessment approach from a process-based testing process
• reviewing the breadth and types of metrics adopted
• sampling outcomes testing results to assess quality and calibration
• reviewing root cause analysis and governance
• providing additional specialist resource to increase customer file outcome testing.

Regulatory Compliance Consulting – our approach is designed to offer independent and expert challenge to the design and effective operation of business and regulatory processes. This is informed by our in-depth understanding of regulatory requirements of the Consumer Duty and specific sector knowledge. An independent review can give confidence to the Board about the quality of consumer outcomes.

Managed Compliance Services – our co-sourced or outsourced compliance service gives access to specialist compliance professionals to help manage, support, or deliver compliance monitoring, including outcome testing. We leverage best practice from peer firms, and insights from our interactions with the regulator.

Resource Augmentation – we can provide skilled and experienced managed resource on an interim basis, scaling operational capacity quickly during times of increased demand or crisis. This is across core areas such as complaints, remediation, and outcome testing.

For any matters related to regulatory compliance please contact Richard Barnwell today, Nicola Ball or Alison Barker.

richard.barnwell@bdo.co.uk; nicola.ball@bdo.co.uk; alison.barker@bdo.co.uk;