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Delivering good customer outcomes: the role of corporate and social governance

In July 2022, the FCA confirmed its plans to introduce a new Consumer Duty, with the aim of setting higher and clearer standards of consumer protection across financial services. The Duty isn’t about ticking boxes on a checklist; as Sheldon Mills, FCA’s Executive Director, Consumers and Competition, stated during a speech in September “…it means making lasting changes to culture and behaviour to consistently deliver good outcomes.”

Implementation of the Duty requires firms to meet several deadlines; starting with the recently passed October deadline for Board approval of implementation plans, April 2023 for value assessments for open products, and of July 2023 for implementing the Duty for open products. Closed products must be added by the end of July 2024. The FCA also requires Boards to appoint a Consumer Duty champion, to work alongside the Chair and CEO; as well as for the Duty to be embedded in Board strategy, impacting across governance, leadership, and people policies.

How does the new Duty interact with the Senior Manager and Certification Regime? What impact could it have on firms’ business models and strategies? How should Boards satisfy themselves on progress towards meeting the Duty? Join us at the ABI Annual Conference Conduct Breakout Session to hear from an expert panel on these questions and more.

Adding to the complexity, where the same product is sold to both retail and non-retail customers, firms will be subject to the Consumer Duty for their retail customers and any SMEs in scope, but to for their non-retail customers. So, the FCA still requires firms to be clear, fair, and not misleading, and to follow the TCF requirements, on top of which they must ensure good customer outcomes for retail consumers. As well as having the management information to show that firms are doing all this successfully.

Fortunately, Boards and governing bodies are not starting from scratch as the regulatory focus on culture and governance has a lengthy history. Listed firms have been required to follow the UK’s Corporate Governance Code on a comply or explain basis ever since the Code was instituted in 1992, following the BCCI and Maxwell scandals. Even for firms that are not listed, the Code has come to represent the standard against which to assess the corporate maturity of a business.

The Code gives clear directions that Boards should include an appropriate combination of executive and non-executive directors, so that no single individual or small group dominates the Board decision-making. There should be a clear division of responsibilities between the leadership of the Board and Board executive leadership of the company’s business. Non-executive directors should have sufficient time to meet their board responsibilities and should provide constructive challenge and strategic guidance.

The FCA’s Systems and Controls requirements have been in place since the inception of the FCA’s predecessor body. Failure to exercise appropriate oversight has, in the past, resulted in Enforcement cases and fines. Then, in December 2018, the FCA and PRA extended the Senior Manager and Certification Regime (SM&CR) to include dual-regulated insurers and from December 2019 to FCA solo regulated companies as well. The SM&CR replaced the Approved Persons Regime and the PRA's Senior Insurance Managers Regime.

The SM&CR introduced statements of responsibility for senior managers, put the onus for assessing the fitness and propriety of staff onto firms rather than the regulator through introducing Certification staff and introduced new and enforceable Conduct Rules intended to improve standards of individual behaviour in financial services from the top down and the bottom up.

From next year we will also have the Consumer Duty, which is of course much broader than just being a governance initiative, but which without effective governance and tone from the top is unlikely to deliver the regulator’s hopes for it. The Consumer Duty impacts on all regulated firms in the distribution chain that have a material influence on the customer outcome, regardless of whether they have a direct relationship with the retail customer. It also removes some of the conduct rules where the Duty applies and replaces them with new ones related to good customer outcomes.

The FCA does not intend to prescribe exhaustively the information that firms should use to monitor customer outcomes as this will vary depending on the type of firm, its role in the distribution chain, the nature of the product and the target market. However, the FCA has amended its Guidance to give more information about the types of data firms could use to monitor outcomes.

The FCA has confirmed that authorised firms are responsible and accountable for meeting all their regulatory responsibilities even when they outsource or use third-party arrangements.

Where relevant existing requirements for insurance meet the FCA’s outcome rules, then the associated monitoring requirements will be sufficient to meet the monitoring requirements of the Duty for that outcome. The FCA expects the monitoring that firms already carry out to feed into their overall assessment of whether the firm is acting to deliver good outcomes.

The FCA expects firms to identify whether distinct groups of customers, such as those with characteristics of vulnerability or those who share protected characteristics, are receiving worse outcomes. The FCA has clarified that it does not expect firms to systematically gather sensitive data from all their customers on protected characteristics. In addition, the FCA expects firms to monitor whether any distinct groups of customers (for example customers who purchased a product through a specific distribution channel) are getting worse outcomes or experiencing foreseeable harm.

In addition to an annual Board report, which the FCA expects firms to consider within 12 months of the rules coming into force, the FCA has introduced new requirements that the Duty should be reflected in firms’ strategies, governance, leadership, and people policies, including incentives at all levels. Firms’ senior management should ensure that they are embedding a culture in which good outcomes for consumers is central.

Any firm, but particularly the largest firms and any that come within the FCA’s sights for other reasons, can expect the FCA to request their annual Board report, the results of their monitoring and other MI. The FCA will consult on any future proposals to introduce a regular reporting requirement.

The FCA is proceeding with its proposal to amend the SM&CR individual conduct rules in its Code of Conduct sourcebook to reflect the higher standards of the Duty. The FCA has made some minor changes to the guidance to provide greater clarity about how the scope of a person’s job and their seniority may affect expectations under the Duty.

So, for both executive and non-executive Board members, the Duty brings not just another regular item on Board agendas, but fundamental challenges about what a ‘good outcome’ looks like for their customers. With the rise in the cost of living, proposed tax rises and public spending restraint, this is also an opportunity for product providers and platforms to improve their standing with the public and their customers just when that rebuilding of confidence is most needed. The potential societal gains from the Duty are significant and it is the responsibility of boards to Board that it is delivered.



Last updated 17/01/2023