Consumer Duty board reports: are firms prepared for the July 2024 deadline?
The UK Financial Conduct Authority’s (FCA) Consumer Duty, a new outcomes-based regulation for financial services firms, has now been in force for over six months. July 2024 will see the deadline for the first annual Consumer Duty board reports. We share our reflections on the importance of these documents and what the FCA requires from them, based on our experience of helping firms to implement the Duty.
Throughout this year firms have been working on embedding the Duty,1 the aim of which is to require providers of financial services to put the needs of their customers first in order to improve outcomes for consumers.2 There continues to be FCA focus on whether firms have robust fair value frameworks and assessments, and on firms’ reviews of communications and customer understanding.3 The FCA also requires annual reports on the implementation of the Consumer Duty to be prepared for Boards (or other governing bodies).
In this article we discuss the aims and requirements of the annual reports, and set out some of the key elements that should be captured.
A key milestone for firms, and for the FCA
This year’s reports will be the first annual Consumer Duty reports—providing a useful reference point for subsequent ones. It is therefore important that firms and their governing bodies get them right. They will need to be robust to scrutiny from the regulator, and enable each Board to satisfy itself that the firm is compliant with the requirements of the Consumer Duty.4
The regulator will be using these reports as a way of holding governing bodies to account for the embedding of the Consumer Duty within financial services organisations. The FCA has said that this will be one of its areas of focus this year: ‘reviewing a sample of Board reports, looking at the data used to monitor outcomes, what scrutiny there is, and what actions have been taken’.5
The FCA requires firms to prepare a report for their governing body setting out:6
- the results of the monitoring of consumer outcomes, and any evidence of poor outcomes;
- 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.
Many firms are already testing initial versions of these reports and underlying data with their governing bodies. But what exactly should the Consumer Duty annual report cover?
Marshalling the evidence of embedding the Duty: are firms delivering good consumer outcomes?
Boards will need to be satisfied that there is evidence of the firm embedding the Duty. This would include:
- a review of internal governance processes and policies to align with the Duty;
- evidence of previous Board engagement with the Duty;
- staff training, across each ‘line of defence’;
- a review of the approach to vulnerable customers, including whether customer support is meeting the needs of these customers;
- identification of possible consumer harm that could arise;
- improving data and monitoring strategies.
Two areas, in particular, continue to be key areas of focus for firms and the regulator, and will feed into the annual report. These are described in the box below.
The first is fair value assessments (FVA). Firms will be expected to have developed a robust fair value framework,1 and then to have implemented it in practice by conducting a FVA. The FCA will expect firms to then identify and action the appropriate steps to address any issues raised by the FVA. These FVAs will need to assess whether there is a reasonable relationship between the price paid and the benefits received by the customer.
It can be useful for firms to ask themselves a number of questions when developing, implementing and reviewing fair value frameworks.2 One important one is ‘how does the business (model) operate?’. We often encourage firms to ‘follow the money’ to understand what is driving profitability and whether this is sustainable.
Another way of showing that a firm is embedding the Consumer Duty will be to conduct a review of communications and customer understanding. There is now an expectation that firms will design communication that engages effectively with customers (enabling consumers to be in a position to make well-informed decisions). Good practice here involves testing customer understanding (e.g. through post-sales surveys), and conducting audits of online choice architecture (e.g. reviews of dark patterns/sludges).3 A robust approach to giving evidence of good customer communication will draw on insights from behavioural economics.4
Note: 1 We have developed a fair value framework that has been used by market participants across financial services providers. See Oxera (2019), ‘Fair ground: a practical framework for assessing fairness’, Agenda, 29 March. See also British Insurance Brokers’ Association (2023), ‘New Fair Value Assessment Framework launched exclusively for BIBA members’, 18 October. 2 Davies, T. (2024), ‘Consumer Duty: How to assess fair value?’, UK Finance, 21 February. 3 See Oxera (2021), ‘Bits of advice: the true colours of dark patterns’, Agenda, 26 November. 4 For example, see Oxera (2023), ‘Understanding and influencing behaviour: economics vs science’, May. See also Oxera (2022), ‘Interminable: who can read T&Cs?’, October.
Given that the Duty has been in place since the end of July 2023, firms will be expected to have progressed with these (and other) elements over the last six months.
However, for some firms there is still ‘room for improvement’.7 The Board report deadline will act as an incentive to accelerate the embedding of the Duty. For all financial services firms, it will be one of the most important ways of demonstrating compliance with the Duty. As mentioned above, this will require the right kind of evidence, including evidence that good consumer outcomes are being delivered. In practice, this will mean ensuring that the appropriate data, metrics and accompanying narrative commentary are developed.
Firms will need to ask ‘what outcomes are foreseeable?’. It can be useful to map out the harms that could arise, and what data can be used to monitor potential outcomes. When monitoring metrics and preparing management information, we suggest looking at:
- the distribution of outcomes (i.e. not just averages);
- outcomes for different customer segments (e.g. segmenting by product usage, or by customer characteristic;
- outcomes for vulnerable customers (recognising the FCA’s broad definition of vulnerability).
Firms will be expected to demonstrate robust implementation of the Duty (with supporting evidence). The FCA has made it clear that this is not a tick box exercise, and that it expects that it ‘will take time to do well’.8 The report will therefore need to explain where issues have been identified, and what actions have been taken or planned to address these.
Finally, a good report will include an overarching narrative setting out the firm’s purpose and future business strategy (and how these are consistent with good customer outcomes). An important element that is sometimes neglected is explaining how the firm contributes to—and is subject to—good market functioning. Where there is healthy, competitive market functioning, economics tells us that this will go a long way to ensuring good consumer outcomes (a message that is also in line with the FCA’s competition objective).9
This might seem like a lot of work to complete—and according to the FCA some firms still have areas for improvement.10 However, our experience is that for many firms a lot of this work has already been done. The annual report is therefore an opportunity for firms to set out the evidence on consumer outcomes, and the lessons that have been learned through the first year of the Consumer Duty.
1 The Duty is currently in force for open products. Firms have until 31 July 2024 to comply with the Duty for closed products.
2 https://www.fca.org.uk/firms/consumer-duty
3 See our blog post on how to assess fair value: Davies, T. (2024), ‘Consumer Duty: How to assess fair value?’, UK Finance, 21 February.
4 See Financial Conduct Authority, ‘PRIN 2A.8.4 Governance And Culture’.
5 Financial Conduct Authority (2023), ‘Consumer Duty: The next steps’, webinar, 6 December.
6 Financial Conduct Authority (2022), ‘FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty’, Finalised Guidance, July, para. 10.12.
7 Financial Conduct Authority (2024), ‘Consumer Duty: the art of the possible in a year’, speech by Sheldon Mills, Executive Director, Consumers and Competition, delivered at KPMG, 20 February.
8 Financial Conduct Authority (2024), ‘Consumer Duty: Not once and done’, speech by Nisha Arora, Director of Cross Cutting Policy and Strategy, delivered at Deloitte, 1 November.
9 Financial Conduct Authority (2017), ‘FCA Mission: Our Approach to Competition‘, December. See also Financial Conduct Authority (2024), ‘Investing in outcomes: a regulatory approach to deliver for consumers, markets and competitiveness’, speech by Nikhil Rathi, Chief Executive, delivered at the Morgan Stanley European Financials Conference, 14 March.
10 Financial Conduct Authority (2024), ‘Consumer Duty implementation: good practice and areas for improvement’, 20 February.
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