The introduction of the Consumer Duty by the Financial Conduct Authority (FCA) marks a significant shift in regulatory expectations for firms in the financial sector. This new framework emphasizes the need for firms to prioritize the standard of care they provide to their clients, which will inherently influence their culture and behaviours. One of the most critical aspects of achieving and maintaining compliance with the Consumer Duty is through robust governance frameworks and structures.

Understanding the Consumer Duty

The Consumer Duty is a comprehensive package of measures that includes a new Consumer Principle, requiring firms to act in a way that delivers good outcomes for retail customers. This principle is supported by three cross-cutting rules and four outcomes that define the key elements of the firm-consumer relationship. The aim is to provide firms with a clear understanding of the standards expected of them, and for consumers to know what they can expect from firms. The FCA wants firms to adopt a customer-centric approach, ensuring they act in the best interest of their clients and assess the effectiveness of their actions continuously.

The Importance of Governance Structures

Governance structures are essential for firms to achieve and maintain compliance with the Consumer Duty. These structures provide the necessary oversight and decision-making processes to ensure that firms meet regulatory requirements and deliver good outcomes for their customers. Effective governance frameworks encompass various aspects, including risk management, accountability, and performance metrics.

Key Components of a Good Governance Structure

1. Appropriate Policies and Procedures: Firms need to have clear policies in place that guide behaviour and decision-making processes. These policies should be designed to ensure that all actions taken by the firm align with the principles of the Consumer Duty.
2. Risk Management Systems: Effective risk management systems are crucial for identifying, assessing, and managing potential risks. These systems should be robust and capable of adapting to new regulatory requirements and market changes.
3. Clearly Defined Accountabilities: There must be clear documentation of responsibilities and key delegations within the firm. This ensures that everyone understands their role in achieving compliance and delivering good customer outcomes.
4. Monitoring and Oversight: Governance structures should include mechanisms for monitoring internal data, such as customer complaints, and overseeing any necessary changes to ensure ongoing compliance. Regular reporting and review processes are essential to maintaining transparency and accountability.

Enhancing Existing Governance Structures

Many firms may already have governance structures in place that partially meet the requirements of the Consumer Duty. However, these structures may need to be enhanced or adapted to fully comply with the new regulations. For example, existing committees, such as product governance committees, may need to take on additional roles or responsibilities to ensure they meet the necessary standards.

Implementing a Consumer Committee

Depending on the size and complexity of the business, as well as the effectiveness of the existing governance structure, it may be advisable to implement a dedicated Consumer Committee. This committee would focus specifically on ensuring that the firm meets the requirements of the Consumer Duty. The committee would be responsible for:

• Reviewing and mapping responsibilities, objectives, and the capacity of existing committees to ensure they align with the Consumer Duty.
• Adding Consumer Duty responsibilities where appropriate.
• Designing performance metrics for committee and board reporting.
• Focusing on the needs of vulnerable customers and other customer cohorts.

Senior Management and Certification Regime (SM&CR) Responsibilities

Under the Senior Management and Certification Regime (SM&CR), senior managers have clear responsibility for compliance with regulatory requirements. The Consumer Duty raises this standard, creating a higher expectation for senior managers to meet when performing their duties.

Allocating Responsibilities

To meet the requirements of the Consumer Duty, it should be clear which senior manager is responsible for which aspects of the business and control functions. Conduct rule 4 requires staff who fall within the scope of the rules to pay due regard to the interests of customers and treat them fairly. This is broadly consistent with the wording of Principle 6 of the FCA’s Principles for Businesses. The new Principle 12 introduces a higher standard, requiring firms to act to deliver good outcomes for retail customers.

Training and Demonstrating Compliance

Training is most effective when tailored to the role being carried out. Firms should update their training programs to reflect the roles and responsibilities allocated to staff in different areas of the business. A cornerstone of both the SM&CR and the Consumer Duty is the need to demonstrate compliance. Firms should review how decisions are made and recorded, ensuring that the process is robust enough to meet the requirements of the Consumer Duty.

Role of the Board

The board plays a critical role in setting the direction of a firm, shaping its culture, and ensuring robust governance to align with good client outcomes and regulatory expectations. The board or equivalent governing body must take full responsibility for embedding the Consumer Duty within the firm. Senior managers are accountable for the outcomes their clients experience, consistent with their accountability under the SM&CR.

Developing a Strategy Aligned with Consumer Duty

Firms need to ensure their business strategy is consistent with delivering good outcomes. This may require a significant shift in culture and behaviour to align with the needs of clients. The strategy should include:

• Understanding the range of client groups and their needs.
• Defining the outcomes aimed at delivering to clients over the short, medium, and long term.
• Assessing the external environment and how it may impact client outcomes.
• Reviewing current delivery to identify areas for improvement.

Embedding Consumer Duty in Business Operations

To embed the Consumer Duty throughout the firm, the strategy must be aligned with good outcomes for clients. This involves:

• Maintaining and developing systems and controls to prevent risks that could harm clients.
• Ensuring risk, compliance, and internal audit functions provide oversight focused on client needs.
• Clear ownership and accountability for delivering the strategy.
• Developing governance frameworks that consider client needs and outcomes.
• Providing training to develop technical and leadership capabilities.
• Embedding the Duty in people policies and leadership practices.

Consumer Duty Champion

The Consumer Duty requires firms to have a champion at board level to ensure the Duty is regularly discussed and considered in all relevant decisions. This champion should:

• Ensure board papers consider the impact on client outcomes.
• Provide challenge during board discussions to ensure client outcomes are considered.
• Receive updates on client outcomes from an SME in the business.
• Familiarize themselves with FCA questions and ensure their intent is considered in discussions.

Conclusion

The new Consumer Duty represents a paradigm shift in regulatory expectations, requiring firms to adopt a customer-centric approach and deliver good outcomes for retail customers. Robust governance frameworks and structures are essential for achieving and maintaining compliance with these requirements. By enhancing existing governance structures, implementing dedicated committees, and ensuring clear responsibilities and accountability, firms can align their operations with the principles of the Consumer Duty. The role of senior managers and the board is crucial in setting the direction and culture of the firm, ensuring that all actions taken are in the best interest of clients. Through effective training, clear documentation, and ongoing monitoring, firms can demonstrate their commitment to delivering good outcomes and maintaining compliance with the Consumer Duty.