Consumer Duty – governance and culture are your foundations

The introduction of Consumer Duty is designed to drive cultural change across financial services firms through a focus on outcomes-based regulation. This style of regulation places greater emphasis on management and compliance teams to make judgements and decisions on what ‘good’ looks like.  Judgements that senior management will be held to account against under existing Senior Managers and Certification Regime (SMCR) responsibilities. The introduction of the Consumer Duty offers an appropriate juncture to pause and take stock, not just on how effective your culture and governance framework is now, but more importantly what comes next.

Outcome-focused regulation is not a new concept

The concept of outcome-focused regulation has been around for years, treating customers fairly being a good example. Yet it is only in recent times that the Regulators focus on outcomes has really ramped up; as evidenced by the increasing use of the word ‘outcomes’ in enforcement notices, FCA publications and speeches. This can make it difficult to understand why the Consumer Duty is being hailed by the regulator as a ‘paradigm shift’, particularly for firms who consider outcome-based regulation to be embedded into their framework. In our opinion the reason is simple, the Regulator now expects more from the many not just the few, and this approach aligns with their own programme of transformation. Firms already demonstrating good practices are likely to have to do more to evidence the burden of proof under Consumer Duty.

A question of judgement

Despite the commitment to help firms, by providing some practical examples about how to meet the new standards, the very nature of this style of regulation means that the bulk of interpretation rests with firms. As a result, a wide range of judgements must be made by governing bodies. For those firms already considering customer outcomes or indeed dealing with the Financial Ombudsman Service you will know that this can be difficult. A one-line principle or outcome, although helpful, can become tricky to interpret when it is considered from the perspective of the complexity of real-world circumstances. You will need to take into consideration the type, size and scale of activities and the products and services you offer. Firms can expect every stage of the regulatory lifecycle to be challenged. Without a robust supporting governance framework this will be very difficult.

A call to action

The FCA remain clear in their intention that responsibility for Consumer Duty will rest with the most senior individuals in the firm and be underpinned by SMCR.  Now is the time for Directors, Board members and compliance functions to act. Your firm’s board or equivalent management body will be responsible for assessing whether it delivers good outcomes which are consistent with the Consumer Duty. Even if the Board is not doing the groundwork, they need to educate themselves to understand what is required so they have confidence when their judgement and assessment is required. The Board need to have the confidence that the governance framework is robust enough to manage the required change.

Time to take stock:

Getting governance and culture right is the key to success. Regardless of how much you may need to adapt, now is a good time to take stock and assess your governance framework and culture, to ensure you achieve Duty compliance in the future. Firms with strong governance arrangements will thrive in the world of Consumer Duty, and conversely those firms paralysed by their own governance arrangements will struggle further.

Practical questions to ask:

• Can you easily explain your Governance structure?

• Are the right people in attendance at management body meetings?

• Are statements of responsibility up to date and understood across the framework?

• Are committees talking shops or effective decision-making bodies with clear terms of reference?

• How do you get assurance that board members have the appropriate skills sets to provide effective oversight?

• Have you got appropriate representation of customer views and opinions at management level?

• Can you evidence clear customer and value focus in our MI framework?

• Is the management information you receive sufficient to discharge your duties?

• How would your employees describe your culture?

• Do your culture and values reflect where you are now or where you want to be?

• Is your culture realised or aspirational?

And for each question above, ask yourself:

• How do you know?

• How do you evidence it?

• Is anything likely to change this position in the near future?

Get in touch via contact@avyse.co.uk for expert advice and guidance.