Consumer Duty: Annual Board report

The report must be available for the Financial Conduct Authority (FCA) to assess from July 31 2024. From this point firms are required to review progress against the CD guidance, in order to understand what has worked, and just as importantly, what has not worked, and what steps will be taken to resolve these issues.

The areas each firm needs to assess, document, and evidence, broadly fall under the following 8 points:

1. Can the firm demonstrate with evidence that CD obligations are being met?
2. Evidence of poor outcomes or harms
3. Concerns, gaps, or key risks identified. How are these being mitigated?
4. Key changes, initiatives, or good practices introduced
5. Key CD implementation challenges
6. Evidence that the firm’s strategies complement and support CD compliance
7. Record if there has been any FCA engagement with the firm regarding CD
8. Evidence that the firm’s culture is aligned to Consumer Duty (PRIN12 & IC6)*

*PRIN 12 is the new CD principle that requires firms to act to deliver good outcomes for retail customers. It replaces Principles 6 & 7. Individual Code of Conduct 6 reflects the new, higher standards for individuals under CD and expects all staff to deliver good outcomes for retail customers.

The CD sets out 4 outcomes that every firm must provide:

1. Products & Services
2. Price & Value
3. Consumer Understanding
4. Consumer Support

The FCA will expect to see detailed information and evidence to demonstrate each of the above, and how the firm is managing the cross cutting rules against each outcome:

• Act in good faith towards retail customers
• Avoid foreseeable harm to retail customers
• Enable and support retail customers to pursue their financial objectives

These rules, if adhered to, should emphasise good outcomes, transparency, and customer support. The key is having the empirical evidence to demonstrate this and, just as importantly, show where there may be gaps, and what is being done to rectify them.

So, what information should be included?

• Quantitative and qualitative data of whether good customer outcomes are being delivered for each outcome under each of the cross cutting rules
• Monitoring being undertaken and the results delivered
• Risks, gaps, and harms identified, and actions taken to address them
• Risks, gaps, and harms identified, which have not yet been mitigate or addressed
• Treatment of vulnerable customers
• Performance of any tasks outsourced to 3^rd parties
• Redress and/or remediation regarding complaints received

Governance of the firm’s CD obligations is key. Smaller firms will struggle if they do not have an appointed CD Champion. The board must be given sufficient time to read and absorb the report. Minutes of the presentation meeting and eventual ratification meeting must be kept.

The FCA has advised that there is no leeway on the date. Boards must have the report by the cut-off. Given it has requested information on CD within four weeks of the implementation date - do not consider this an idle threat.

It is worth noting how and where the report could/should be enhanced going forwards. This exercise has already demonstrated how CD is evolving and changing, so monthly updates are not unwarranted.

The FCA review of vulnerable customers will require firms to show:

• The firm understands the customer’s needs
• Skills and capabilities of staff
• Product and service design plus service flexibility
• Communications, customer understanding and service
• Overall culture

Vulnerability

This review will need to show if customers with vulnerabilities experience different outcomes from other customers. Their additional needs may mean they are at a greater risk of experiencing harm. If so, has this been identified and which strategies are being implemented to mitigate or remove this risk?

The FCA has ) communicated its assessment that some sectors and firms have not appropriately identified the proportion of their customers that are likely to be vulnerable, and have not accommodated them.

The FCA believes that firms are taking too narrow a view of who their vulnerable customers are, and why they are vulnerable.

The report will need to be able to show, and have evidence that the firm:

• Understands the nature and scale of vulnerabilities in the customer base
• Demonstrate that consideration has been given to whether products and service have features that could cause harm
• Encourage customers to share information about their needs and circumstances
• Set up systems and processes to record vulnerability
• Offer flexible and exceptional support options
• Support staff in supporting vulnerable customers
• Monitor the treatment of vulnerable customers and act where issues are identified
• Report regularly to the board so they may consider vulnerable customers when developing the firm’s strategy

Customer Documentation Review

The report should be able to evidence that all staff have been trained in their writing style to ensure documents are easy to read and understand.

All documents must make sense regarding format and structure. An option is to use tools such as Flesch-Kincaid in Microsoft Word, or Grammarly to check how documents stack up.

The view is that all documents should have a low reading age score, no jargon and are ‘broken up’ by use of colour and infographics.