What happened?
The Financial Conduct Authority’s head of consumer policy, Jonathan Pearson, has outlined expectations for the third annual Consumer Duty Board reports. While acknowledging that firms have improved their governance and data usage between years one and two, the regulator is demanding a shift in year three from demonstrating compliance effort to proving actual outcome effectiveness.
Boards are expected to move away from simply reviewing prepared reports and instead demonstrate active, documented interrogation of data and management decisions regarding customer experiences.
Why does it matter?
The quality bar has risen significantly. The FCA expects reports to go beyond simple metrics dashboards to explain what the data says about customer outcomes. Furthermore, firms must prove how Consumer Duty insights are directly shaping strategic business decisions, including pausing or modifying underperforming products.
Oversight of third-party distribution chains and outsourced activities must also be sharpened, showing how outcome data is acquired and managed when visibility is weak.
Who is affected?
This regulatory update directly impacts boards of directors, senior managers, and compliance leaders across all FCA-regulated financial institutions preparing annual reports.
Key risks
- Unexplained metrics: Presenting data dashboards without context or explanation of what they reveal about customer outcomes.
- Invisible Board Challenge: Failing to document board interrogation, risk testing, or management challenges in official board minutes.
- Weak third-party oversight: Insufficient outcome monitoring across distribution chains, appointed representatives, or outsourced providers.
Actions to take
- Analyze Outcome Data: Ensure management reporting explains the real customer story behind the data, including actions taken for negative trends.
- Document Board Challenge: Formally record instances where the board has interrogated assumptions, requested deeper analysis, or rejected proposed actions.
- Secure Intermediary Data: Obtain and assess outcome-related data from third-party distribution channels and appointed representatives.
- Deepen Support Analysis: Utilize behavioral insights and interaction monitoring to evaluate customer understanding across full journeys.
Wider implications
This cycle represents the transition of Consumer Duty from a standalone compliance project to a deeply embedded cultural framework that actively influences strategic corporate governance.
Recommendations
Firms should secure independent, third-party reviews of their draft Board reports to ensure evidence and outcomes are robust enough to withstand intensive FCA scrutiny.
Supporting sources
Frequently asked questions
What is the key difference for year three Consumer Duty reporting?
Year three is less about showing implementation effort and more about proving the effectiveness of customer outcomes and active board-level challenge.
How should boards demonstrate challenge in the report?
The report must show visible evidence of board scrutiny, detailing where assumptions were tested, risks were questioned, and management was asked to adjust plans.
How should third-party distribution chains be handled?
Firms must demonstrate what outcome data is obtained from intermediaries, how it is assessed, and how they address areas of limited visibility.
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