Introduction
The Policy Statement and the final rules for Consumer Duty came out in July 2022. There is one particular element of the FCA’s approach that firms have been struggling with since then – the requirement that by the end of October 2022, firms’ Boards “should have agreed on their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards”.
Firms are questioning the level of detail and granularity that should be presented to the Board. And unfortunately, in many cases, the approach they are taking is unlikely to be sufficient because it focuses too much on the plan and too little on the supporting documentation which needs to be provided with it. As the regulator notes, Boards will be expected to provide scrutiny and challenge, and they are unlikely to be able to do that if they have merely been presented with a Gantt chart.
In preparing for October, those firms operating under SMCR should also recognise that this process has the potential to attract personal liability for the SMFs. A prudent Board should treat this exercise as they would an attestation since they will be confirming that the implementation plan for Consumer Duty is sufficient and deliverable. As the FCA says in the Policy Statement – “Firms should expect to be asked to share implementation plans, board papers and minutes with supervisors and be challenged on their contents”. So if things were to go wrong in the future, the regulator is likely to use the sign-off as evidence of whether senior managers demonstrated ‘reasonable steps’.
The Plan
Therefore, it is important for firms to recognise that the actual implementation plan will be one element of the pack which will need to be presented for scrutiny and challenge to the Board in October. The amount of material required will differ from firm to firm. There is no one-size-fits-all approach, but firms should consider including some or all of the following elements.
Scoping
Firms relatively new to authorisation, or those with limited product lines will find the scoping element a simple process. But for others judgements will need to be made:
- What products and services are in scope for Consumer Duty?
- Which products are back book, and which are live?
- Is the firm acting as a manufacturer or a distributor?
- What constitutes ancillary activity?
Scoping is a key step and will require careful consideration. If it is not done correctly, firms may find additional products to review too late into the process in 2023.
Requirements setting
The Board should obtain a clear understanding of the Consumer Duty requirements for the firm, and what good outcomes will look like for their customers. This will require a clear assessment of the Policy Statement, the rules, and the Final Guidance, as they relate to the firm. The Final Guidance, in particular, contains a range of questions which are very useful for assessing the FCA’s expectations. For example:
- How has the firm satisfied itself that its products and services are well designed to meet the needs of consumers in the target market, and perform as expected? What testing has been conducted?
- Is the Duty being considered in all relevant discussions such as strategy and remuneration? Are customer outcomes a key lens for Risk and Internal Audit?
Gap analysis
Based on the scope and the requirements, the firm can then develop a gap analysis. This will highlight the areas where the firm currently falls short of the Consumer Duty standards, and areas where uplift is required. This analysis will provide the Board with clarity on the scale of the work required.
Implementation plan
The presentation of the implementation plan is the core element of the submission to the Board in October. Boards should expect to see detail at a sufficient level of granularity to give them confidence that all the requirements will be addressed – based on the agreed in -cope areas of the business, the understood requirements of Consumer Duty, and the assessed gaps within the business.
The Board should challenge the business and seek evidence that the plan is achievable within the timeframe, and that all elements have been included. For example:
- Mobilisation – firms have underestimated the time required at the outset of the project to educate staff on Consumer Duty and determine the uplift required. Without securing this understanding and buy-in from operational areas, project implementation will face significant headwinds.
- Assurance – time should be included within the plan for assessment of whether the project workstreams have delivered against the requirements, and confirmation that the business will be operating in line with the expectations of Consumer Duty. It is good practice for this assessment to include an independent review (e.g. Compliance or Audit) – so this will need to be factored into the timeframe. And equally, there should be an expectation that there will need to be a degree of rework and revision before the workstreams are finally signed off.
- The scope of the plan – for some firms, there has been an over-focus on changes to policies and customer documentation. These are important elements, but they are just a part of the overall scope. Meeting the requirements of Consumer Duty will touch all elements of the Three Lines of Defence (3LoD), as shown in the table below.
And beyond the 3LoD, firms should also consider the requirements for such areas as:
- Culture
- Strategy
- Governance
Roles and responsibilities
The pack presented to the Board should have clarity on the allocation of roles and responsibilities, both for the delivery of the project and for governance and oversight. The delivery will largely be the responsibility of the First Line, with senior management in operations overseeing and directing the work of subject matter experts. But there should be clarity on who will be undertaking oversight and monitoring too.
To support effective governance and oversight, the FCA expects firms will appoint a Consumer Duty Champion (likely to be an Independent Non-Executive Director) who will work with the Chair and the CEO to ensure sufficient time and focus is given to Consumer Duty. However, the appointment of a Consumer Duty Champion does not remove the expectation that the rest of the Board and senior management have their responsibilities too. And equally, it would not normally be expected that the Champion would be the senior manager sponsoring the project – that role may be better suited to the senior manager in the First Line.
When considering roles and responsibilities, firms should also be mindful of the SMCR requirements. In particular:
- That senior managers can demonstrate they have taken ‘reasonable steps’
- That the requirements under COCON are being followed:
Capacity and capability
Boards should seek assurance that the people given responsibilities to deliver the project have the capacity and capability to achieve the requirements. Assessment of capacity should give fair consideration to the existing BAU workload the staff have. This may result in a need to curtail or postpone existing planned projects in order to free up capacity.
In addition to capacity and capability, there is also the intangible element of culture – do personnel involved in the project have the right attitude and inclination to successfully deliver Consumer Duty?
Risks and dependencies
Within the presentation to the Board, there should be an honest articulation of the project risks and the dependencies required to deliver success. No project is undertaken without risk, and Boards should challenge the plan if there is insufficient consideration of what might go wrong, and how this can be mitigated. Risks can occur across all areas of the project, but there should be a key focus on areas such as: scoping, capacity and capability and embedding.
Monitoring and oversight
The project governance framework should be fully articulated – it should be clear from the plan who will be responsible for reviewing and signing off the project milestones, and also what regular updates the Board and senior management will receive during the project. As the FCA says, Boards “should maintain oversight of the implementation work to ensure it remains on track and meets the standards of the Duty”.
Achieving this will require a framework of updates, RAG statuses and risk MI, to enable stakeholders to be kept informed on progress and to have the necessary information to initiate corrective action if it is required.
Equally, there should be clarity on what sign-off is required for the completion of the individual workstreams and the overall project. It should be clear which elements require Board sign-off, and which can be delegated to functional heads in the business.
Embedding
An implementation plan will be insufficient if it does not consider how the changes will be embedded in the organisation. There is a clear expectation from the regulator that Consumer Duty will become a firm’s BAU approach to ensuring good outcomes for retail customers. Therefore, the firm’s implementation plan should demonstrate how this will be achieved.
The focus of the embedding activity will predominantly be within the operational areas. However, firms should also consider what other changes may be required. For example:
- Enhancements to MI and reporting
- Longer or more frequent meetings to ensure customer outcomes are fully considered
- Changes to attendees at meetings and forums
- Expansion of the role and responsibilities of the Risk and Audit function (and Risk and Audit Committees), to meet the FCA’s expectations
Next steps
Firms differ in size and complexity, but all organisations should recognise that the October deadline is a significant milestone. In submitting the plan, due consideration should be given to ensuring the Board can evidence that they have given the appropriate consideration of the risks, and made an informed decision regarding the adequacy of the plan.
Our combined Legal and Consulting team gives us a distinct approach to guiding firms through the regulatory and operational requirements for meeting the October deadline and delivering the implementation plans.
Authored by Frank Brown.
