Consumer Duty and fair value: where are you now?
1. How will the FCA assess your firm’s Consumer Duty compliance?
The Consumer Duty and how it will regulate financial service compliance is being widely discussed across the industry. The changes are significant and given that the FCA is now leading with more assertive supervision – a ‘show me and don’t tell me’ approach, and assuming that you’ve already got it covered is a risky approach
The onus will be upon proving in practice that your firm is meeting all four outcomes of the Duty and that you can demonstrate a good understanding of your target market and the needs of their customers.
With this in mind, the practicalities of how the Duty will be monitored are significantly shifting – and this change should not be underestimated. It will no longer be enough for firms to simply have a theory and policy that meets the Duty’s four outcomes and cross-cutting rules.
Being able to demonstrate Duty compliance consistently, in real terms, across all your products and service processes throughout every customer journey is going to be the key. Firms will be required to show that they have a clear understanding of their target market and what a good outcome (and equally what a bad outcome) looks like.
With so much pressure on firms to demonstrate fair customer treatment, it’s unlikely that random sampling of customer calls or interactions will be enough to achieve Duty compliance. Firms will need to go beyond a small sample and a theorised policy when it comes to evidencing that they are achieving good consumer outcomes.
In simple terms, the board or an equivalent governing body.
The board (or an equivalent governing body) will need to make sure that the Duty is embedded in the firm’s culture and ensure that the four Duty outcomes are consistently achieved across the business and that this is clearly evidenced and continually monitored. It will be equally important that the board ensures vigorous measures are in place to tackle and correct any underperformance.
There is an expectation on boards to have a clear set of management information that underpins the Duty’s presence throughout your business model, with the ability to demonstrate at any given time that their business is doing the right thing by its customers.
A further requirement from the FCA is to select a Consumer Duty ‘champion’ that is an independent non-executive director or equivalent. It’s the champion’s responsibility to ensure the Duty is regularly included in relevant discussions in a significant way.
Should the board not take a proactive approach to the FCA’s Duty requirements and the firm fails to comply, this change in the FCA’s style of governance could result in increased scrutiny, reputational damage and brand equity risk for your firm.
And, although the Board have ultimate responsibility for ensuring the Duty is embedded, the FCA have also strengthened the requirements around governance and accountability to ensure senior managers and executives are held accountable, and added a new Conduct Rule 6 to reflect the new, higher standard of the Duty and the behaviour they expect of all conduct staff, so responsibility for compliance with the duty and delivering good outcomes for customers cascades to all levels within an organisation.
Firstly, the FCA may check your Consumer Duty compliance at any time.
If the FCA wants to check on your firm’s Duty compliance for any reason, they could do this in several ways. They might ask to see evidence of how you’re meeting the four Duty outcomes and conduct a deep dive audit of your firm’s products, services, policies and processes to assess this. Or they may do random spot checks and request specific management information that evidences a particular customer journey.
Another scenario may be that they conduct a thematic review, for example, focused on vulnerable clients. Thus, the FCA asks firms to evidence and explain how they identify vulnerable clients and how their firms support their additional needs in practice.
So, if the FCA were to ask to see the last 50 consumer conversations your firm had, and the steps and processes taken within such calls to identify vulnerable customers – would you be able to provide the necessary evidence? Firms in this instance may need to show who was identified as vulnerable and how this was decided upon – not only that, but the regulator will also expect to see evidence that your processes can be adapted to ensure that such customers receive a ‘good outcome’ as the Duty requires.
In other instances, firms may only be asked to provide certain data to evidence an outcome, within a short, deliverable timeframe. More than ever, The FCA will be relying on data-led techniques in their monitoring, so it will be critical for firms to be able to promptly prove that they are compliant.
If firms are unable to provide evidence of the required level of detail, then they may not be considered Consumer Duty compliant by the FCA. This could lead to increased scrutiny including further in-depth reviews, monitoring and reporting and considerable reputational damage.
The fact that most firms have been putting customers’ well-being first for many years is an excellent starting point.
However, under the new Consumer Duty, if you can’t provide clear evidence that this is the case and demonstrate your compliance, your firm could be classed as non-compliant.
As this is an overwhelming time for firms with their products and processes being re-examined, securing an independent opinion and validation of your Implementation Plan is a valuable and diligent way to prepare.
Subject matter experts, such as those at TCC, can identify gaps in your quality and assurance as well as recommend detailed, targeted, actionable next steps to delivering Duty compliance.
Our compliance experts can do this in several ways, depending on where you’re at in the Customer Duty journey.
Suppose you’re at the start of the journey and need help identifying your areas of focus. In that case, our Triage Review is an efficient and straightforward way to diagnose which areas to focus your gap analysis on.
Or should you need assistance in completing a detailed gap analysis, our Readiness Assessment considers a sample of customer journeys along with the associated live products and services evaluating your underlying process and framework to identify the gaps and provide corresponding recommendations.
If you’re ahead of the game, have conducted your own in-house analysis, and are seeking external assurance that your plan hits the mark, our Plan Validation is the ideal solution for your firm. Our bespoke, written report will provide board-level assurance that your Implementation Plan is effective and can be used as evidence to the regulators that you’ve taken the additional, proactive steps to be Consumer Duty ready.
TCC’s experienced compliance team can provide expertise to remedy and rectify the compliance gaps your firm has identified to help get Consumer Duty ready.
Download our Plan Validation guide to learn more.