TURN Consumer Duty

Governance Frameworks and Structures

The new Consumer Duty emphasises the high standard of care that firms must provide to their clients. This expectation is designed to impact a firm’s culture and behaviours, particularly in terms of governance and decision-making processes. Governance structures are essential for achieving and maintaining compliance with the Consumer Duty. These structures must include seniority and expertise to make key decisions regarding pricing and business lines, monitor internal data such as customer complaints, and oversee necessary changes to ensure ongoing compliance. Some existing governance structures might need to take on additional roles, and committees like the product governance committee may already meet the necessary standards.

Key Elements of an Effective Governance Structure

  • Policies and Procedures: Establish clear guidelines to direct behaviour.
  • Risk Management: Implement systems to identify, assess, and manage risk.
  • Accountabilities and Delegations: Define clear responsibilities and document key delegations.

Enhancing Governance Committees

Review the membership and terms of reference of existing committees to ensure they have the expertise and time needed for Consumer Duty responsibilities. Depending on the firm’s size and complexity, it may be beneficial to introduce a ‘Consumer Committee’ to support the Board and Board Champion.

Performance Metrics and Reporting

Firms must decide how to measure business performance against the Consumer Duty. Establish metrics to indicate compliance with cross-cutting rules and achievement of the four consumer outcomes. Plan for regular reporting on these metrics and conduct oversight and assurance of Consumer Duty compliance across the three lines of defense. Throughout the implementation project, the second and third lines should provide independent oversight and assurance. Document assumptions and monitor them throughout the project.

Monitoring Consumer Outcomes

The designed framework should monitor consumer outcomes, focusing on vulnerable customers and different customer cohorts. It should assess differential outcomes between various groups of customers.

Best Practice Key Takeaways

  • Review and map responsibilities, objectives, capacity, and adequacy of existing committees to Consumer Duty.
  • Add Consumer Duty responsibilities where appropriate.
  • Consider whether additional committees are needed to support the Board and the Board Champion.
  • Design performance metrics for committee and Board reporting.
  • Focus on customer vulnerability.

SM&CR and Consumer Duty

SM&CR Responsibilities

Under the Senior Managers and Certification Regime (SM&CR), senior managers have clear responsibilities for compliance with regulatory requirements. The Consumer Duty raises this standard, creating a higher benchmark for senior managers. Solo-regulated ‘core’ firms may not have the granular allocation of responsibilities seen in dual-regulated and ‘enhanced’ firms. To meet Consumer Duty requirements, it must be clear which senior manager is responsible for each aspect of the business and control functions.

Conduct Rules and Accountability

The new Principle 12 requires firms to deliver good outcomes for retail customers, introducing an individual conduct rule that reflects this higher standard. Senior Managers (SMFs) must notify the FCA of breaches of Principle 12 or PRIN 2A if the firm does not do so. Training programs should be updated to reflect these new standards, tailored to the roles and responsibilities of staff.

Demonstrating Compliance

Firms must demonstrate compliance with both SM&CR and Consumer Duty requirements. This involves robust recording of decision-making processes, especially regarding pricing. Senior management must assess and document customer outcomes from products and services sold, ensuring they represent fair value. Management Information (MI) is critical to evidence that customer outcomes are being monitored and assessed by senior management.

Best Practice Key Takeaways

  • Allocate responsibilities at a granular level to demonstrate governance and responsibility for Consumer Duty.
  • SMFs should be aware of the requirement to notify the FCA of breaches.
  • Deliver tailored training to senior managers to help them understand their role in compliance.
  • Review decision-making procedures to ensure compliance can be demonstrated.
  • Ensure MI is appropriate for senior managers and Board members to understand and monitor customer outcomes.

Role of the Board

Setting the Firm’s Direction

The board plays a critical role in setting the firm’s direction, culture, and ensuring robust governance for good client outcomes and regulatory compliance. The board must take full responsibility for embedding Consumer Duty within the firm and ensuring senior managers are accountable for client outcomes.

Functional Board Assessment

Firms should ensure their board is functional and competent, addressing areas such as a domineering CEO, technically incompetent individuals in key posts, inadequate oversight of risk, and poor understanding of risk aggregation. The board should also promote a culture that encourages challenge to the status quo and avoids groupthink.

Strategy and Business Alignment

The FCA expects firms to align their business strategies with the goal of delivering good outcomes for customers. This may require significant shifts in culture and behavior. Firms should understand their client groups, the outcomes they aim to deliver, and whether their current operations meet these needs. Strategies should be reviewed and updated to ensure alignment with Consumer Duty, with specific consideration given to the needs of vulnerable clients.

Best Practice Key Takeaways

  • Align strategy with good outcomes for current and future clients.
  • Ensure Consumer Duty is considered in business prioritisation and investment decisions.
  • Give specific consideration to the needs of vulnerable clients.
  • Produce clear and thorough papers and strong minutes of discussion and challenge for compliance.
  • Ensure commercial viability is not driven by behaviours that do not align with good outcomes.

Consumer Duty Champion

Appointing a Board Champion

The Consumer Duty requires firms to appoint a champion at the board level who, along with the Chair and CEO, ensures the Duty is regularly discussed and incorporated into relevant decisions. The champion should be an independent non-executive director where possible and should not be the Chair of the board.

Role and Responsibilities

The Consumer Duty Champion should ensure board papers consider client outcomes, challenge board decisions that do not align with good outcomes, and receive regular updates on client outcomes. The role does not entail being responsible for delivering good outcomes across the organisation but providing oversight and challenge.

Best Practice Key Takeaways

  • Design and implement an assessment of whether the firm is delivering good outcomes and obtain Board approval annually.
  • Ensure strategy is aligned with good outcomes for the target market.
  • Embed Consumer Duty considerations in decision-making processes.
  • Appoint a Consumer Duty Champion with appropriate skills and independence.

In summary, the Consumer Duty places significant emphasis on governance frameworks and the responsibilities of senior managers and the board. Firms must ensure their strategies, governance structures, and business practices are aligned with the goal of delivering good outcomes for customers. By taking these steps, firms can meet regulatory expectations and enhance their reputation for fair and transparent customer treatment.