For firms subject to the Consumer Duty, the first annual report is on the horizon and a firm’s board of directors will need to review and approve the report, provide confirmations, carry out assessments and agree actions. The process involves more than simply reviewing and approving a document. The Financial Conduct Authority (the FCA) will expect to see the report, on request, along with the management information that sits behind it. There might also be a request to see evidence of the board’s review process. This article sets out some points for boards to have in mind. Please note that it isn’t an analysis of what reports should contain or how they should be prepared.
To begin, it’s worth setting out the requirements in PRIN 2A.8.3 R to PRIN 2A.8.5 R. The detail is important and informs what boards will need to consider. Some of the words appear in red because they’re picked up later in the article – they don’t appear like that in PRIN 2A.8.
PRIN 2A.8.3 R – a firm must prepare a report for its board of directors[1] setting out the results of its monitoring under PRIN 2A.9[2] and any actions required as a result of the monitoring.
PRIN 2A.8.4 R – at least annually, the board must:
(1) Review and approve the firm’s report on the outcomes being received by retail customers;
(2) Confirm whether it is satisfied that the firm is complying with its obligations under Principle 12 and PRIN 2A [i.e. the Consumer Duty principle and the Consumer Duty rules and guidance]; and
(3) Assess whether the firm’s future business strategy is consistent with its obligations under Principle 12 and PRIN 2A.
PRIN 2A.8.5 R – when approving that report, the board must also agree:
(1) Any action required to address any identified risk that retail customers may not receive good outcomes;
(2) Any action required to address any identified instance where retail customers have not received good outcomes; and
(3) Any amendments to the firm’s business strategy to ensure that it remains consistent with meeting the firm’s obligations under Principle 12 and PRIN 2A.
The board is responsible for ensuring that the Consumer Duty is properly embedded within the firm and the obligations in PRIN 2A.8.3 R to PRIN 2A.8.5 R require the board to review, take stock and respond to a ‘state of the nation’ report. The obligations are similar to the board attesting to the outcomes being received by retail customers and agreeing action to be taken in response to those.
1 The report is the starting point and it must set out the results of monitoring the outcomes that retail customers are receiving from the firm’s products and services. The purpose of this is to allow firms to identify whether there are any risks that they aren’t meeting the requirements of the cross-cutting rules and the customer outcomes (and, therefore, that they aren’t acting to deliver good outcomes for retail customers). This is broader than looking at the specific customer outcomes and whether they’re being delivered and the monitoring work will need to reflect that. If it doesn’t, the report won’t cover all the relevant points and the board won’t be in a position to meet its obligations.
2 The board has to “review and approve” the report on the outcomes received by retail customers. This means that the board will need to:
- Consider the report and supporting MI and other documents referred to in the report; and
- Approve the report; the requirement isn’t to comment on it.
‘Approval’ suggests that the report needs to say that everything’s fine and good outcomes are being received by retail customers. That might be the conclusion reached in the report, but ‘approving’ the report is about the board being comfortable that it describes the position accurately. It’s then up to the board to agree what action is needed to address any identified risk that retail customers may not receive good outcomes or where it’s been identified that customers haven’t received good outcomes.
3 The report will need to consider different customer cohorts rather than look at retail customers as a whole. The board should receive an explanation of how each cohort has been defined and challenge any lack of clarity, inconsistency or other weakness in relation to the explanations and the cohort definitions. Boards should pay particular attention to how vulnerable customers are referred to in the report and in how cohorts are set.
4 The board will need to confirm whether it’s satisfied that the firm is complying with its obligations under the Consumer Duty Principle and Handbook rules and guidance. This is a wide range of points to consider and the report should put the board in a position where it can reach a view. The board is required to confirm whether it’s satisfied, not confirm that it is satisfied, allowing a board to say that it isn’t satisfied that all of the obligations are being met if that’s the case. The confirmation requirement is similar to an attestation and boards should prioritise accuracy and be specific about where there are any gaps or points to note.
5 The board also has to assess whether the firm’s future business strategy is consistent with its Consumer Duty obligations. It should be clear to all directors exactly what the strategy is that’s being considered and that should be documented for future reference (and provision to the FCA, if requested in the future). The period covered by the strategy isn’t specified and will vary between firms. Assume it’s the longest period a firm has a strategy for unless the board can justify (and document reasons for) taking a different approach. Assume, too, that the board will need to consider the firm’s high-level strategy and the detail that accompanies or supports that.
6 Boards are required to agree:
- Any action needed to address any identified risk that retail customers may not receive good outcomes or where it’s been identified that customers haven’t received good outcomes; and
- Any amendments to the firm’s business strategy to ensure that it remains consistent with meeting the firm’s obligations under the Duty.
The specific points are considered below but the point to note here is that the board must agree what’s to be done. The agreement should be recorded in the minutes of the relevant board meeting (although a formal board resolution won’t necessarily be needed).
7 The first of these points for the board to agree is any action required to address any identified risk that retail customers may not receive good outcomes.
- This is about risks that retail customers may not receive good outcomes. This will require a risk assessment from the perspective of customers and cohorts and an assessment of whether good outcomes may not be received. The report should set out where these risks arise – note that this is about identified risks – which is likely to require input from the Risk function.
- The board will need to consider whether any action is required to address a risk. The standard to be achieved is that customers receive good outcomes, and so a board will need to be clear what that means in the context of the firm’s business, its customers and cohorts and its products and services. Boards will need to have that picture of what ‘good’ looks like when considering what action should be taken. Input is likely to be needed from the Risk function, as well as the business, but the board is responsible for deciding when action is needed and what action is required.
- Action required to address identified risks could include root cause analysis, remedial action, training (and/or adjustments to current training), review of complaints, monitoring (to establish whether risks are increasing or decreasing), notification to the FCA and other steps. Timelines should be set for actions to be completed and there should be provision for reporting to the board on progress and, perhaps, a governance framework to support the work.
8 Where action is required to address any identified cases of where retail customers haven’t received good outcomes the board will be responding to a situation that has already occurred. Again, there will need to be a clear picture of what ‘good’ looks like in the context of the firm’s business, customers and cohorts and products and services. Actions could include root cause analysis, (possibly) review of other areas of the business to see if action needs to be taken there too (although that should have been picked up within the report to the board), a redress programme, remedial action, training (and/or adjustments to current training), review of complaints, notification to the FCA and other steps. Timelines should be set for actions to be completed and there should be provision for reporting to the board on progress and, perhaps, a governance framework to support the work.
9 The board will already have assessed whether the firm’s future business strategy is consistent with its Consumer Duty obligations – see paragraph 5 – and it might be that the business strategy isn’t consistent with those obligations. In those circumstances, there will need to be remedial – or catch-up – action to align business strategy with obligations under the Duty and boards will then have to consider what’s needed in order for the strategy to remain consistent with those obligations.
10 Boards will need to evidence the process, document discussions, evidence challenge and justify conclusions. Providing the outputs required – approval; confirmation; agreed actions – is only part of what boards need to do. The process of delivering those outputs is important too and the FCA might ask to see or understand what’s led to the board reaching decisions. Think of it as showing and evidencing the working out.
11 Reviewing and approving the report, carrying out the assessments and making the confirmations required will involve a lot of work, particularly the first time the exercise is carried out. And boards need to get it right: as already mentioned, this is similar to an attestation process and it’s important to show the steps that have been taken. Work should already be in progress and it’s likely that there will be at least one review, by the board, of a draft report and draft approvals and confirmations before the final versions are presented. The process should be more straightforward in subsequent years but, to adopt a phrase used by the FCA, this isn’t a question of ‘once and done’.
This article is intended to provide general information about current and expected topics and perspectives that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.
[1] References in PRIN 2A.8.3 R to PRIN 2A.8.5 R are to “governing body” but, because this article is about points for boards to consider, I’ve altered it to “board of directors” or “board”, a form of governing body.
[2] In short, monitoring under Principle 12 and PRIN 2A the outcomes that retail customers are experiencing from their products.