The July 2023 deadline for the implementation of Consumer Duty is rapidly approaching. By the end of July, boards should assure themselves of the compliance with Consumer Duty obligations and ensure that any gap or weakness in compliance has been identified.
Therefore, the board should be taking a suitably sceptical approach, and challenging the information presented to them – “evidence this, as if it were a s166 review”.
Key areas of consideration could include:
- A reassessment of the project scope
- Assurance that the milestones have been met
- Identification of additional work required
- Detail on how Consumer Duty will be embedded in the BAU (Business as Usual)
- A timeline of next steps and activities
A reassessment of the project scope
As July approaches, many boards will be focusing on project assurance, and seeking to gain confidence that milestones have been completed. But there is an important step to take before that, in reassessing the project scope.
Firms should be asking themselves:
- Have the substantives issues impacting customers been addressed?
- Can the prioritisation approach be justified and evidenced?
- Did the project consider FCA guidance and other communications such as the sector specific Dear CEO letters?
Boards should watch for:
- Firms being over-confident in their existing controls – the all too common ‘Consumer Duty is just TCF2.0’ refrain.
- Taking a too inward looking view (the lack of effective engagement between distributors and manufacturers has been all too evident).
- For those firms who had implemented previous FCA requirements in recent years, missed opportunity to reassess adherence with existing rules (for example, firms that implemented Prod 4 for non‑investment insurance, COLL 6 for asset management, PROD 7 for funeral plans, FG21/1 guidance for the fair treatment of vulnerable customers
So, as we approach July 2023, if boards don’t consider this project reassessment step, any assurance activity undertaken may be based on a faulty premise.
Assurance that the milestones have been met
If the board is satisfied that the firm correctly scoped the Consumer Duty requirements the next step is to assess whether the project has actually delivered against those requirements.
Now the FCA has an expectation that the whole board (not just the Consumer Duty Champion) would have maintained oversight of the project, during the delivery phase, and taken appropriate action as required. But July 2023 is an appropriate point for Boards to formerly asses the project status and review the evidence that the milestones have been met.
In their recent guidance, the FCA highlighted ten key questions for firms to consider:
- 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?
- 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?
- 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?
- What data, MI and other intelligence are you using to monitor the fair value of your products and services on an ongoing basis?
- How are you testing the effectiveness of your communications? How are you acting on these results?
- 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?
- 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?
- 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?
- Do individuals throughout your firm – including those in control and support functions – understand their role and responsibility in delivering the Duty?
- Have you identified the key risks to your ability to deliver good outcomes to customers and put appropriate mitigants in place?
In answering these, and evidencing successful completion of milestones, the detail should be presented by senior management in the 1st Line, rather than 2nd or 3rd Line, or project management. 1st Line are the risk owners and it is important that they take responsibility for the delivery (and future maintenance) of Consumer Duty.
The role of 2nd and 3rd Line is to provide assessment and assurance on the deliverables, and provide confirmation that the expected outcomes have been achieved, to the satisfactory level.
Where there is disagreement between 2nd/3rd Line and 1st Line, this should be presented to the board, so they can seek further evidence and clarification, and come to a judgement on whether additional actions are needed.
In delivering this assessment and assurance, there is a clear expectation that 2nd and 3rd Line will fully understand the Consumer Duty requirements and know ‘what good looks like’. This may be easier for compliance, as in most firms they would have been fully involved with the scoping and ongoing monitoring of the project, and they are normally well versed in the expectations of Consumer Duty. However, this may not always be the case for Internal Audit. Traditionally the IA function have been more focused on the binary testing of adherence to controls rather than the more nuanced assessment of principles and the outcomes customers receive.
This is an important point for board to consider, as many firms are planning to test the firm’s alignment with the regulatory requirements via an Internal Audit assurance review. This assurance will give a false sense of security if Internal Audit do not appreciate the principles-based requirements of Consumer Duty, and the need for a qualitative, holistic and outcomes-focused assessment.
Identification of additional work required
Most firms will still be ‘on a journey’ when it comes to implementing the Consumer Duty requirements – as firms applied a risk based approach to implementation and put in place new controls and processes to embed customer outcome considerations.
But for some this ‘journey’ may be more fundamental and last well beyond July 2023. This may be a result of many factors:
- Misinterpretation of scope (as noted above)
- Insufficient resource devoted to the project
- Focus-pull from competing projects and initiatives
- A lack of capability within the delivery team
- Cultural failures (teams were resistant to change)
So it is important for firms to make an honest assessment of progress, and where further work (or rework) is required, to schedule that in, and consider how the further work will be overseen. And equally, for firms to make an honest assessment of why the project failed to deliver, and to consider and address the root causes.
For some firms, the extent of the additional work required may prompt them to consider whether a notification is required to the FCA. This is a tricky judgement, as the FCA also expects firms to have taken a risk-based approach, with prioritisation of implementation work likely to have the biggest impact on customers.
Any firm who finds themselves in that situation would be recommended to seek professional advice, as the response from the FCA could well be challenging. Interwoven within the Consumer Duty requirements is a clear expectation that boards (not just the individual Consumer Duty Champion) will be ‘on the hook’ for delivery and implementation.
But hopefully, as we reach the July 2023 deadline, it will be relatively few firms who have to answer questions from the FCA like:
- What information did you review in October 2022?
- What gave you confidence that the October 2022 Consumer Duty implementation plan was suitably scoped and resourced?
- What monitoring did you do during the project, and what action did you take to address issues identified?
- What assessment did you undertake to satisfy yourself that Consumer Duty had been successfully implemented in the firm?
Detail on how Consumer Duty will be embedded in the BAU
Alongside gaining confidence that the Consumer Duty project has met the requirements, thoughts should turn to the future. As July 2023 is merely the start of the Consumer Duty journey. The FCA have the expectation that Consumer Duty will be a fundamental shift in how firms operate and interact with their customers. Therefore, in order to successfully embed the requirements, firms should be making changes across the organisational structure.
Governance and oversight
Are the current forums, committees and ToRs fit for purpose? If new committees have been set up, are their reporting lines clear?
How will the firm define a culture aligned to Consumer Duty requirements (and how will this alignment be measured)? How will Consumer Duty be embedded into the firm’s norms and values?
MI and monitoring
MI should be generated bottom up not top down and be aligned to the risks and the outcomes sought. There should be a balance between leading and lagging indicators and quantitative and qualitative metrics – how can you measure adherence to outcomes-based requirement with MI focusing on process and controls?
The 3 Lines of defence
Much of the implementation requirements will fall to the 1st Line, but 2nd and 3rd Line should be making changes too. In particular, the Risk and Audit functions, who may not have been as close to the project as Compliance. The FCA have a clear expectation under 2A.8.1R that ‘A firm must…ensure that retail customer outcomes are a central focus of: (a) the firm’s risk control arrangements under SYSC; and (b) the firm’s internal audit function.’
A timeline of next steps and activities
Boards should also expect to see a clear timetable of post-July 2023 activity. This should include any additional post-project and embedding work and preparation for the back book coming within scope in July 2024 where this applies. But also detail on the firm’s BAU milestones over the next twelve months, and how Consumer Duty will impact them – e.g. the annual Audit Plan; yearly product governance reviews and the first annual Consumer Duty report at the end of July 2024.
When assuring themselves of compliance with the Consumer Duty obligations, at the end of July, it is important for firms to make an honest assessment of the project outcomes. Firms may not currently be where they want to be on their project plans, and others will have missed substantive elements of the requirements in their scoping.
Noting that Consumer Duty was always a journey not a destination, it is important to take the learnings from the July 2023 review and move forward with whatever remediation or implementation initiatives are required.
And in doing this, it is important to recognise that it is in the embedding and cultural change where Consumer Duty projects will succeed, not in the ticking off of delivery milestones. The real work starts now.