The Consumer Duty Annual Report

1 Introduction

Most firms will be well into preparing for the Consumer Duty Annual Report, due in July 2024. But in their haste to get the deliverable over the line, firms should be careful not to make this merely a box-ticking exercise. They should take a step back and consider the actual benefit of the Annual Report.

The guidance from the FCA states that the Annual Report 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, 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.

And firms should ensure they include these (box-ticking…) elements. But also consider what further value can be derived from this exercise.

Most Boards should have already seen Consumer Duty MI packs at least three times since July 2023, so the data shouldn’t have any surprises. And the Consumer Duty Champion should have been informing them on actions and progress, at each Board meeting. So, the governing body might want to challenge the business to go beyond these basic elements and provide them with a more practical and useful document, to help them understand:

• How is Consumer Duty being implemented in the firm?
• What are the key risks and constraints?
• What more needs to be done?

The following pages illustrate the range of inputs and information a firm can include, to enhance the Annual Report.

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2 Timeline

In the first Consumer Duty Annual Report, it will be beneficial to give the Board some historical context regarding how the firm has approached the implementation of Consumer Duty.

This provides a useful sense-check, as it was unfortunately the case that many firms did not land the project well. Common failings included:

• Incorrect scoping of the requirements, at the outset
• A milestone-led rather than outcomes-led project
• Inadequate assurance that the actual requirements were met
• Project teams disbanded too quickly, with limited oversight of day-2 issues
• Insufficient consideration of how Consumer Duty was going to be actually embedded within the firm, and transitioned into BAU

And if firms leave these errors unchecked, there is the potential that problems can grow over time, and leave the firm significantly non-compliant. July 2024 is, therefore, the right time to assess whether the foundations of Consumer Duty are sound.

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Questions for the Board

What changes have been made to our approach, as a result of external insights (Dear CEO letters, FCA guidance, industry feedback etc), and internal knowledge?

3 Governance and oversight

Effective governance and oversight are central to the ongoing delivery of Consumer Duty.

?3.1 Personnel

The Board should have a clear understanding of who is responsible for delivering Consumer Duty. This should include details on SMFs, Certified individuals and key personnel who can impact customer outcomes.

3.2 Committees

It should also be clear where Consumer Duty is discussed within the firm and how information flows upwards and downwards through committees and forums.

Questions for the Board

How does X achieve Y, if they are not a member of Z committee?

Are X’s Consumer Duty responsibilities documented in their job description, and do they form a part of their performance management assessment?

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4 Feedback and perspectives

A key portion of the Annual Report should be the perspectives and feedback of those within the firm who are responsible for delivering Consumer Duty and assessing performance. It is important that the Board knows who these people are and what their opinion is on the effectiveness of the firm’s approach.

The Board should expect to see a consistency of understanding and approach. Whilst the Champion, CEO, 1st line Senior management, 2nd and 3rd Line should all give their individual opinion and perspectives, there should be a consistent understanding of the objectives, issues, and next steps.

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4.1 Consumer Duty Champion

The Consumer Duty Champion should have been providing regular updates to the Board. But it is important that the Champion provide an overview of the Annual Report and give their perspective on how the firm has performed.

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4.2 CEO

The CEO should be describing how they have overseen the firm’s approach to Consumer Duty, and driven the embedding within the firm. Including details on:

• Outcomes – what outcomes have customers actually received?
• Culture – how have they developed and reinforced a culture of seeking good customer outcomes?
• Strategy – how has consideration for Consumer Duty impacted strategic decisions and business plans?
• Capacity and capability – what has changed, what needs to change further?
• Key risks and issues – what are the outstanding risks and issues that need to be addressed?

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The CEO should provide sufficient detail on the following key elements

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4.2.1 Culture and embedding

There is a clear expectation from the FCA that Consumer Duty will be part of the culture of the firm. And it is difficult so see how organisations can effectively transition the requirements into BAU, without building them into the norms, values and behaviours.

Therefore, the CEO should be articulating how they have taken these aspirations and used tangible elements (training, comms, role profiles, performance management etc), to embed them into the operational DNA.

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4.2.2 Strategy and business plans

The firm’s strategy and business plans should reflect the reality of the new Consumer Duty world. Firms that do not acknowledge changes in the regulatory landscape face significant risks of breaches, poor customer outcomes and potential redress.

It is therefore important that the CEO presents the Board with a clear and honest view of any constraints and challenges to future plans.

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Questions for the Board

How has the CEO satisfied themselves that the outcomes have been good enough? How are we ensuring the long-term embedding of the requirements?

How do we achieve [commercial objective X] while still aligning our approach to the requirements of Consumer Duty?

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4.3 The 1st Line

Depending on the size and complexity of the firm, a number of senior management personnel from the 1st Line may input into this section.

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4.3.1 Chief Operations Officer (COO)

The COO is likely to be more focused on the Consumer Support Outcome and the (post-sale) elements of the Consumer Understanding Outcome. They should be able to demonstrate how they have developed the capacity, capability and culture of their teams, in order to provide customers (including those with vulnerabilities) with the right level of support.

The COO should also be able to articulate their approach to the Cross-cutting rules:

• How they have prevented foreseeable harm through effective resource and capacity planning, and forward-looking metrics.
• Ensuring the firm behaved ethically during complaints handling, collections or claims.
• How the service delivery helped the customers meet their financial objectives.

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4.3.2 Chief Commercial Officer (CCO)

The CCO is likely to be more focused on the Product & Service and Price & Value outcomes. They should be able to describe how they are satisfied the target market has been set correctly, the distribution plan is suitable, and the features and pricing of the product (including the value delivered from the post-sale service).

The CCO should also be able to articulate their approach to the Cross-cutting rules:

• How they have prevented foreseeable harm through the product governance process, and product testing.
• Being able to demonstrate the product delivers value (to all customers in the target market) and that there are no ‘sludge practices’.
• How the product helps customers meet their financial objectives (at a fair price).

Path to green

Where there are issues, and areas where performance has not met expectations, 1st Line should highlight these. With a clear roadmap of how they are going to be resolved.

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4.4 The 2nd and 3rd Line

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4.4.1 Compliance

In most firms, Compliance will have been closely involved in the delivery of the Consumer Duty project, and should have a clear understanding of the firm’s alignment with requirements.

It is therefore important that Compliance have the opportunity to give the Board a fair and unvarnished opinion as to how the firm is performing. Any Board should be highly sceptical of an Annual Report which does not raise any issues and concerns – particularly in regard to a project as difficult to implement at Consumer Duty.

However, it is equally important that Compliance demonstrate how their approach has changed and developed, in order to better support the business in meeting the requirements. Including:

• The scope and scale of the Compliance Monitoring Plan
• The development of more proactive and forward-looking engagement
• The adoption of a more collaborative and business partner approach

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Questions for the Board

Are Compliance listened to by senior management and the business? Are Compliance ‘in the room’ when key decisions are made?

What value are Compliance adding, in providing a consultative and guidance approach?

What’s your honest opinion of how Consumer Duty has landed?

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4.4.2 Risk

The CRO should be articulating how the Risk function has approached the assessment of Consumer Duty and what changes have been made.

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Risk Appetite Statement (RAS)

Given the broad-ranging nature of Consumer Duty, and its impact on Regulatory Risk, Operational risk and Business Risk, it is highly unlikely the RAS hasn’t changed significantly. And the current round of s166 and FCA investigations provide a stark illustration of what can happen if firms think that historic (sharp) business practices can continue in a Consumer Duty world.

The CRO should be able to show how the RAS has developed and how these changes have fed through into:

• Business strategy
• Culture – how the framework of the RAS has flowed down, to provide ‘guardrails’ for staff behaviour.
• Control ?- how the controls have developed, in response to increased risk

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RCSA

The RCSA process should be a key element in the firm’s approach to delivering the Consumer Duty requirements. The CRO should be able to show how the RCSA process has developed, in response to the changing risk landscape:

• How has the process become more customer outcomes-focused?
• What additional KRIs have been identified?
• Where has the use of detective controls increased, in response to the need to mitigate foreseeable harm?

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Risk Register

As with the RAS, it is highly unlikely that the advent of Consumer Duty did not result in an increase in residual risk. The CRO should illustrate how the risk landscape has changed, what the key risks are, and what additional controls and mitigants have been put in place.

The CRO should provide examples of the key Consumer Duty risks and what the ‘path to green’ is to mitigate them.

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Questions for the Board

How confident are you that the Consumer Duty risks have been identified, quantified and controlled? What gives you that confidence?

How has the risk culture changed within the firm, over the past two years? What more needs to be done?

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4.4.3 Audit

As with risk, the FCA expects that the firm’s approach to internal audits will have been developed and enhanced in response to Consumer Duty requirements.

The Chief Internal Auditor (CIA) should be able to articulate how these changes have been demonstrated in:

• The Audit Plan – in terms of scope, scale, and approach.
• Individual audits – in terms of the greater consideration of forward-looking concerns, and the use of a more qualitative and subjective assessment.
• Focus – a clear demonstration that customer outcome is the lens Internal Audit is using.

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Questions for the Board

What additional training and development have Internal Audit undertaken, to ensure they have the capability to assess the firm’s approach to Consumer Duty?

What increases in resources have Internal Audit put in place to ensure they have the capacity to undertake the necessary audit activity?

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5 The Cross-cutting rules

For many firms, the implementation of Consumer Duty was over-focused on the 4 Outcomes, with insufficient consideration paid to the Cross-cutting rules. In reality, the Cross-cutting rules are the ‘principles of the Principle’ and are where the FCA is likely to base any enforcement activity—particularly around failures to prevent foreseeable harm or failures to behave ethically.

Therefore, it is important that firms can show how they have interpreted the requirements and how this has been embedded into BAU activity.

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6 The four outcomes

The bulk of the MI in the Annual Report will doubtless be focused on demonstrating how good customer outcomes have been achieved, across the four outcomes. And whilst this information is important, it is not sufficient to merely repeat MI and metrics which the Board should have seen before. The Annual Report should therefore provide sufficient detail on the more qualitative elements, and show how the firm has met the broad-ranging Consumer Duty requirements.

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6.1 The product and services outcome

The FCA are increasingly recognising that a key predictor of customer harm is in how products are designed, targeted and distributed. A product that is suitable for one customer can be entirely unsuitable for another.

And there is also an increasing recognition that service is integral to product. And it is in the service that firms make the product tangible to customers, and enable them to achieve their financial objectives.

6.2 The price and value outcome

Price and value has been one of the most contentious areas of Consumer Duty, and one where many firms have struggled.

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6.3 The consumer understanding outcome

Firms should ensure they have fully considered Consumer Understanding outcome. Particularly in terms of demonstrating that they can evidence sufficient testing and insight into whether or not customers understand the communications.

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6.4 The consumer support outcome

Most firms have focussed on the Consumer Support element of Consumer Duty. But it is important to demonstrate that all customers are getting a suitable level of support. It is equally important to show that the firm understands that customer service is a key determinant of customer value.

7 Vulnerable customers

Firms may wish to present evidence of how they are supporting vulnerable customers in individual sections of the report or include a separate section on vulnerable customers. There is not necessarily a right answer as to which approach is better.

However, firms should recognise that the FCA sees the fair treatment of vulnerable customers as central to Consumer Duty. This is not an addition to the firm’s approach; it is a demonstration and substantiation of how the firm has implemented Consumer Duty.

Firms should also be mindful of the fact that the easiest way for the FCA to assess whether they are compliant with the Consumer Duty requirements will be to do a thematic review of their vulnerable customers' support. The regulator (or Skilled Person) can consider the 4 Outcomes through the lens of vulnerable customer support, and arrive at a conclusion as to whether or not the firm is meeting the requirements.

With this in mind, the firm should ensure they present the Board with sufficient evidence to provide confidence that vulnerable customers are being adequately supported.

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8 Path to green

The Annual Report should include details of what additional work is required. There should be a clear project plan with timelines and owners. The Board should be able to understand resource requirements and operational constraints. There should also be clarity on deliverables and success criteria (outcome-focused not milestone-focused).

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9 Board response and next steps

A key element of the report will be the Board’s response. The firm should document and capture how the Board have considered the report, and what additional actions and directions they have given.

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