Countdown to Consumer Duty Compliance: Board Reporting and Closed Product Implementation
The past 11 months have flown by since the Consumer Duty was first introduced for open products. During this time, firms have been actively working on embedding the Consumer Duty for open products, with some still addressing the residual actions from Phase 1. However, the focus must now shift to the preparation of the first annual Board Report. This coincides with the critical period of gearing up for the implementation of the Consumer Duty for closed products and services. Our latest blog offers valuable best practice tips for crafting your annual Board Report and poses pivotal questions that firms need to consider as they prepare for the extension of the Consumer Duty to closed products.
Good practice tips for the first annual Board Report
Many firms are currently immersed in the process of drafting their annual Board Report, this may be a particularly daunting task for those firms who have been selected to provide a copy of their Board Report to the FCA. To support firms with their report, we published a Board Report Template which has been well-received, offering a structured framework and a series of prompts that firms have found beneficial. In addition to the template, we have also provided support to numerous clients on their Board reporting efforts, including the review of draft reports, undertaking post implementation “health check” reviews and making recommendations for improvements.
Recognising that the first annual Board Report presents unique challenges, we acknowledge that some firms may find the task overwhelming. To assist in navigating these challenges, we have compiled some good practice tips for firms to consider as they write and finalise their Consumer Duty annual Board Report.
Focus on outcomes:
To align with FCA guidelines, many firms have enhanced their management information (MI) capabilities to better report and measure customer outcomes. It is vital that efforts in this space continue, ensuring that the MI presented at governance committees and the Board allow senior management to consistently apply a customer-focused perspective when evaluating processes and outcomes. This approach is essential for accurately assessing the delivery and appropriateness of customer outcomes. In preparing their Board reports, firms must scrutinize their data and MI through this consumer lens. For instance, tracking the incidence of missed initial payments can signal early financial distress, serving as a critical risk indicator. However, in many instances firms need to utilise data points such as this to measure how this directly affects customer outcomes or if the rate of missed first payments suggests a systemic risk arising from the quality of the original lending decision.
Additionally, firms should ensure that data is segmented effectively to differentiate between outcomes received across different customer cohorts. Regular review of this data is crucial to ensure that products and services remain aligned with customer needs and contribute towards good customer outcomes.
Assurance:
The purpose of the Board Report is to provide the Board with sufficient information of the firm’s ongoing monitoring activities to enable the Board to assure themselves that the firm is compliant with Consumer Duty obligations and that any gaps or weaknesses have been identified.
Firms must therefore, set out within their Board Report, what assurance processes are in place to test whether the changes that were made, and that have been embedding since July 2023 are actually delivering good customer outcomes in the context of the firm, its target market and the various customer segments.
The report should include a summary of identified issues where actual or potential harm was detected, the remedial actions undertaken to address instances of harm, the effectiveness of these actions, and how the firm monitors the reoccurrence of these issues or any unintended consequences on an ongoing basis.
Firms should also describe the groups of customers who have received poor outcomes including their characteristics, outlining the corrective measures and continuous monitoring strategies the firm has adopted to rectify identified harms and ensure good customer outcomes are being achieved going forward.
Manufacturers and Distributors:
When crafting their Board Report, firms that manufacture or distribute products within a supply chain should provide a comprehensive account of how they adhere to the Consumer Duty requirements. This includes explaining how information relating to customer outcomes has flowed within the supply chain. It's crucial to highlight any obstacles encountered in obtaining information through the supply chain and the consequences these challenges have had on customer outcomes and the firm’s ability to measure customer outcomes. Failure to share sufficient information in a timely manner has the potential to impede the ability for other firms in the distribution chain to properly assess the outcomes received by the end retail customer.
Moreover, the report should also describe the measures implemented to rectify instances of poor customer outcomes or foreseeable harm discovered through the supply chain and any steps the firm has taken to assess the impact of remedial actions on the end-to-end customer journey. This is important to provide assurance that actions are effective in preventing harm and do not inadvertently introduce new issues at different stages of the customer journey, such as creating barriers or introducing sludge practices.
Regulatory publications:
The report should articulate how the firm has engaged with relevant regulatory publications over the previous year including any actions taken to identify and rectify any gaps identified in the firms’ practices. For instance, the FCA have published an array of communications such as Dear CEO letters, Portfolio letters, cascaded surveys, Non-Handbook Guidance, and Multi-Firm Review findings.
These regulatory communications, while not part of the FCA’s Handbook, offer valuable insights into prevalent industry issues and further clarify the FCA’s expectations of firms. Effective processes must be established to promptly identify and evaluate these publications, ensuring the firm meets the FCA’s expectations or takes necessary actions to address any highlighted concerns.
It's crucial for the Board to be continuously informed of significant regulatory publications that affect the firm, along with measures undertaken to ensure compliance with the FCA’s expectations or to remedy any discrepancies found. The report should present a combined view of the firm's actions in response to each relevant publication throughout the year.
In instances where gaps have been identified but not yet rectified, it is imperative for the firm to have a well-defined action plan complete with explicit deadlines, assigned owners, and progress tracking. This proactive approach demonstrates the firm's commitment to regulatory compliance and continuous improvement.
Closed products:
Within their report, it’s important for firms to articulate not only the measures taken to embed and monitor Compliance with the Consumer Duty for open products and services but also to report on the progress made regarding closed products. Firms should provide a comprehensive summary of ongoing actions, including any expected to extend past the 31 July 2024 deadline, along with a rationale for any delays.
Firms should also transparently communicate in the report where additional steps are underway to deepen the embeddedness of Consumer Duty for open products. The FCA has emphasized that the implementation of Consumer Duty is not a ‘once and done exercise’ but an ongoing process. They anticipate that firms will continue to evolve, apply new insights and learnings, and continuously work towards adherence with the Consumer Duty. Therefore, it's advisable for firms to detail their continuous improvement plans, how they intend to address any challenges encountered, and the strategies they are developing to ensure that the Consumer Duty is thoroughly ingrained in their culture and operations.
Preparing for the closed product deadline
With the impending deadline for the implementation of Consumer Duty for closed products and services, the FCA has highlighted the importance for firms to make sure and be able to demonstrate that they are acting to deliver good customer outcomes. To support firms with the implementation of Consumer Duty for closed products we have compiled some questions for firms to assess their preparedness for the upcoming deadline.
What steps has the firm taken to understand and validate the full suite of closed products and services falling within the scope of the Consumer Duty, ensuring no products are missed?
Why did the product/service become a closed product in the first place? Were there issues/instances of poor customer outcomes? If so, were they resolved? Or could they still be impacting customers who are holding these products?
How has the firm risk rated its closed products and services to identify areas where there is a greater level of actual/potential harm? How can the firm demonstrate that it has prioritised making changes to areas posing the greatest risk of harm?
How has the firm utilised learnings (both internal learnings and learnings identified and published by the FCA) from the first phase of Consumer Duty implementation for open products to better inform the implementation of Consumer Duty for closed products ensuring that the same issues are not repeated?
What steps has the firm taken to establish whether customers' needs within the target market have changed over time and whether there are any cohorts of customers who may now be more at risk of harm? How is the firm able to evidence that it has undertaken these steps?
How is the firm evidencing that the MI presented to senior management and the Board has been adequately scrutinised and challenged to ensure the firm is ready for the deadline?
What steps has the firm taken to review historical pricing strategies of closed products and services to determine whether customers holding closed products are receiving fair value? What steps is the firm taking to establish whether instances of differential pricing are delivering good customer outcomes?
How has the firm considered whether there are any unreasonable barriers in place that are preventing customers switching to a more suitable product such as exit fees? What steps is the firm taking to identify these customers? And what support is the firm offering to these customers?
What steps is the firm taking to engage with gone away or disengaged customers holding closed products? What steps is the firm taking to ensure customer inertia is not adversely impacted customer outcomes? Where you have identified areas of foreseeable harm which may impact disengaged or gone-away customers, what steps are you taking to address the harm identified?
What type of internal or external assurance activity has been planned and how is this reflected in the implementation plan for closed products?
How we can help
If you’d like to discuss any of these topics and find out more about how Avyse can support you, our Compliance team are on hand for any queries you may have, so please reach out – ComplianceTeam@avyse.co.uk