For firms subject to the Consumer Duty, the first annual report is on the horizon and a firm\u2019s 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\u2019s review process. This article sets out some points for boards to have in mind. Please note that it isn\u2019t an analysis of what reports should contain or how they should be prepared.<\/p>\n
To begin, it\u2019s worth setting out the requirements in PRIN 2A.8.3 R to PRIN 2A.8.5 R<\/strong>. The detail is important and informs what boards will need to consider. Some of the words appear in red because they\u2019re picked up later in the article \u2013 they don\u2019t appear like that in PRIN 2A.8.<\/p>\n PRIN 2A.8.3 R<\/em><\/strong> \u2013 a firm must prepare a report for its board of directors[1]<\/a> setting out the results of its monitoring under PRIN 2A.9[2]<\/a> and any actions required as a result of the monitoring.<\/p>\n PRIN 2A.8.4 R<\/em><\/strong> \u2013 at least annually, the board must:<\/p>\n (1)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Review and approve<\/span> the firm\u2019s report on the outcomes being received by retail customers<\/span>;<\/p>\n (2)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Confirm whether<\/span> it is satisfied that the firm is complying with its obligations under Principle 12 and PRIN 2A<\/span> [i.e. the Consumer Duty principle and the Consumer Duty rules and guidance]; and<\/p>\n (3)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Assess whether the firm\u2019s future business strategy<\/span> is consistent with its obligations under Principle 12 and PRIN 2A<\/span>.<\/p>\n PRIN 2A.8.5 R<\/em><\/strong> \u2013 when approving that report, the board must also agree<\/span>:<\/p>\n (1)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Any action required to address any identified risk<\/span> that retail customers<\/span> may not<\/span> receive good outcomes;<\/p>\n (2)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Any action required to address any identified instance where retail customers<\/span> have not received good outcomes; and<\/p>\n (3)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Any amendments to the firm\u2019s business strategy to ensure that it remains<\/span> consistent with meeting the firm\u2019s obligations under Principle 12 and PRIN 2A<\/span>.<\/p>\n 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 \u2018state of the nation\u2019 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.<\/p>\n 1<\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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\u2019s products and services.<\/strong> The purpose of this is to allow firms to identify whether there are any risks that they aren\u2019t meeting the requirements of the cross-cutting rules and the customer outcomes (and, therefore, that they aren\u2019t acting to deliver good outcomes for retail customers). This is broader than looking at the specific customer outcomes and whether they\u2019re being delivered and the monitoring work will need to reflect that. If it doesn\u2019t, the report won\u2019t cover all the relevant points and the board won\u2019t be in a position to meet its obligations.<\/em><\/p>\n 2<\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The board has to \u201creview and approve\u201d the report on the outcomes received by retail customers.<\/strong> This means that the board will need to:<\/p>\n \u2018Approval\u2019 suggests that the report needs to say that everything\u2019s fine and good outcomes are being received by retail customers. That might be the conclusion reached in the report, but \u2018approving\u2019 the report is about the board being comfortable that it describes the position accurately. It\u2019s 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\u2019s been identified that customers haven\u2019t received good outcomes.<\/p>\n 3<\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The report will need to consider different customer cohorts rather than look at retail customers as a whole.<\/strong> 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.<\/p>\n 4<\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The board will need to confirm whether it\u2019s satisfied that the firm is complying with its obligations under the Consumer Duty Principle and Handbook rules and guidance.<\/strong> 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<\/em> it\u2019s satisfied, not confirm that<\/em> it is satisfied, allowing a board to say that it isn\u2019t satisfied that all of the obligations are being met if that\u2019s 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.<\/p>\n 5\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The board also has to assess whether the firm\u2019s future business strategy is consistent with its Consumer Duty obligations.<\/strong> It should be clear to all directors exactly what the strategy is that\u2019s 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\u2019t specified and will vary between firms. Assume it\u2019s 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\u2019s high-level strategy and the detail that accompanies or supports that.<\/p>\n 6\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Boards are required to agree<\/strong>:<\/p>\n The specific points are considered below but the point to note here is that the board must agree<\/em> what\u2019s to be done. The agreement should be recorded in the minutes of the relevant board meeting (although a formal board resolution won\u2019t necessarily be needed).<\/p>\n 7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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.<\/strong><\/p>\n 8\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Where action is required to address any identified cases of where retail customers haven\u2019t received good outcomes<\/strong> the board will be responding to a situation that has already occurred. Again, there will need to be a clear picture of what \u2018good\u2019 looks like in the context of the firm\u2019s 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.<\/p>\n 9\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The board will already have assessed whether the firm\u2019s future business strategy is consistent with its Consumer Duty obligations \u2013 see paragraph 5 \u2013 and it might be that the business strategy isn\u2019t consistent with those obligations. In those circumstances, there will need to be remedial \u2013 or catch-up \u2013 action to align business strategy with obligations under the Duty and boards will then have to consider what\u2019s needed in order for the strategy to remain consistent with those obligations<\/strong>.<\/p>\n 10\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Boards will need to evidence the process, document discussions, evidence challenge and justify conclusions.<\/strong> Providing the outputs required \u2013 approval; confirmation; agreed actions \u2013 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\u2019s led to the board reaching decisions. Think of it as showing and evidencing the working out.<\/p>\n 11\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Reviewing and approving the report, carrying out the assessments and making the confirmations required will involve a lot of work<\/strong>, 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\u2019s important to show the steps that have been taken. Work should already be in progress and it\u2019s 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\u2019t a question of \u2018once and done\u2019.<\/p>\n <\/p>\n 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.<\/em><\/p>\n <\/p>\n\n
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