The latest guidance from the FCA focuses on Consumer Duty board reports and how firms handle complaints and root cause analysis.

By Becky Critchley and Charlotte Collins

On 11 December 2024, the FCA published two pieces of feedback on the Consumer Duty, setting out good practices and areas for improvement in relation to Consumer Duty board reports and complaints and root cause analysis. These publications have been compiled to share the FCA’s insights on how different firms have started to embed the Consumer Duty across the financial services industry. The FCA aims to assist firms in meeting their Consumer Duty obligations by conducting a range of post-implementation work, as outlined in its Consumer Duty workplan.

Firms will find it particularly helpful to receive guidance on the FCA’s expectations regarding board reports. Previously, firms did not receive a prescribed template and found compiling their first reports challenging, both in terms of form and content. Firms will be keen to understand how they can improve their next board reports and meet FCA expectations.

Key Messages

The key messages provided by the FCA in relation to board reports are outlined in the following diagrams.

Five Key Aspects of Good Reports

Five Areas for Improvement

Many of the aspects from the Consumer Duty board reports feedback overlap with the themes arising from the FCA’s complaints handling review. The latter highlights producing effective management information and having clear governance structures as key areas of good practice. The complaints handling review also highlights areas for improvement and include: (i) analysing data for different customer types, especially those with characteristics of vulnerability; (ii) taking action based on these insights; and (iii) assessing and measuring the impact of these actions.

Governance   

Both reviews emphasise that the FCA expects firms to have effective governance structures in place to ensure collaboration between multiple stakeholders. The FCA underlines that the compliance team should not be solely responsible for compiling Consumer Duty board reports; this exercise should include participation from key business units, forums, and committees. Additionally, firms should be able to evidence participation from the second and third lines of defence, who should provide assurance in relation to the content and conclusions of the board report. Similarly, the FCA promotes cross-departmental collaboration, such as the complaints team identifying an issue and then front-line agents and the risk team acting upon the issue. In one firm, the FCA recognised the value of the complaints team demonstrating how it was integrated into the compliance team. The FCA stresses that firms should ensure accountability across the stakeholder chain and have clear escalation routes available.

Monitoring Data

The FCA notes the effectiveness of firms using a range of internal and external data sources to develop dashboards, which set out the firm’s management information to track Consumer Duty outcomes and identify potential harm. However, the FCA identifies developing clearer definitions of “good outcomes” across different products and services, and being able to demonstrate testing against the available management information as areas for improvement in relation to board reports. The FCA spotlights poor practices as: (i) making limited references to the types of data being used; (ii) showing an imbalance between the use of qualitative and quantitative metrics; (iii) failing to provide the board with sufficient information on target markets and relying on high-level claims such as “products are designed to meet the needs of the target market”, without stating what these are; and (iv) lacking evidence to show delivery of good outcomes by outsourced providers.

The FCA examines the price and value outcome and builds on the feedback published in September 2024 (for more detail, see this Latham blog post). In particular, the FCA suggests that data for the price and value outcome may be presented in different ways in board reports. Examples of good practice include showing how a firm evaluated fees against the cost of providing services, or dedicating a section of the report to price and value. Similarly, the FCA found that a firm was able to analyse data effectively by using the “five whys” problem-solving technique, which involves a firm asking “why” five times in a row with each question building on the previous answer. The FCA suggests that this framework would enable firms to develop deeper thinking and challenge assumptions about the root cause of a problem.

Vulnerable Customers

The FCA found that firms have been able to proactively monitor different groups of customers and assess whether they were receiving different outcomes, especially vulnerable customers. In relation to board reports, the FCA identifies that some firms have been working with specialist teams that use the “TEXAS” model — Think, Explain, eXplicit consent, Ask, Signpost — to identify vulnerability. Also, it notes that firms can offer different ways for customers to self-disclose vulnerability and this can be facilitated by technological solutions. Another example of good practice was a firm setting out their approach to quality assurance and using results to measure the effectiveness of the firm’s vulnerability framework.

Poor practices include board reports using a “catch all” category for vulnerability rather than assessing the needs of specific groups. The FCA is critical of a large firm making only a fleeting reference to vulnerability in its board report. In relation to complaints handling, the FCA found that metrics and data should be more granular to capture outcomes for customers with characteristics of vulnerability. The FCA underlines that management information did not always align with the statements and conclusions reached. The FCA provides the example of a firm giving a detailed outline of its work with vulnerable customers, but the management information indicating that fewer than half received good outcomes.

Taking Effective Action

The FCA emphasises that there should be meaningful discussions about the Consumer Duty at board level, and this should not be seen as simply a rubber stamp exercise. The FCA notes board requests being monitored through a tracker and assessing actions to rectify poor outcomes as being examples of good practices. In relation to complaints handling, the FCA warns firms that it has seen a lack of action to remedy any issues that had been identified by the board. Also, the FCA reminds firms of the importance of having a Consumer Duty Champion on the board to ensure that these issues are discussed fully, and encourages all board members to challenge compliance with the Consumer Duty. The FCA acknowledges that Consumer Duty discussions may not be fully reflected in records but encourages such discussions to be documented if they are happening in practice. This can only help firms to demonstrate to the FCA their appropriate consideration of the Consumer Duty going forward.

In the complaints handling review, the FCA recommends that firms should have effective mechanisms to ensure that action is taken to consider complaints data, such as including the Consumer Duty as a standing item at risk committee meetings. Also, the FCA found that one firm sent weekly management information alerts that enabled real time oversight and the FCA identifies reviewing the effectiveness of solutions as a good practice that firms may wish to emulate. However, a theme that the FCA found in both reviews was that some firms were not effectively monitoring customer outcomes on an ongoing basis. Furthermore, there is an emphasis on the importance of producing data to proactively identify trends and systemic issues, and making this available to decision-makers.

The FCA comments that when a Consumer Duty assessment has concluded and a firm is not meeting customer needs, then effective actions include removing the product from sale, or changing the customer journey or the product to maximise value for the customer. Moreover, the FCA highlights examples illustrating how firms can enhance their communication strategy with customers. For instance, a retail bank included a side-by-side comparison of how its communications had changed following a review. The FCA cites the example of a large retail bank reviewing more than 650 operational and servicing communications and finding that 99% of them required adjustments.

Firm Culture

The FCA reiterates that firms should recognise the importance of fostering a Consumer Duty culture. A key thrust of this is tailoring training to the Consumer Duty outcomes, including vulnerability specific training. The FCA also suggests that firms could provide interactive examples of common customer scenarios that arise with examples of the most appropriate way to help a consumer with different needs. The FCA also highlights the need to set a positive “tone from the top” such that senior leaders demonstrate the importance of the Consumer Duty and its integration into the firm. In addition, firms should ensure that remuneration practices and performance management should be consistent with the Consumer Duty. The FCA gives examples of Consumer Duty outcomes featuring in executive score cards, or introducing a consumer outcomes objective for each employee when relevant.

What Should Firms Do Now?

Going forwards, firms should use this feedback to facilitate internal discussions about potential improvements, and, when necessary, conduct a gap analysis and prepare a plan for implementing changes. Firms should focus on areas for development such as looking at governance structures, the way Consumer Duty data is processed and evaluated, and ensuring vulnerable customers are proactively monitored. The FCA will expect to see how firms have taken on board its messages, therefore, firms should ensure they can evidence to the regulator how they have digested and acted upon this feedback and future feedback that is expected from the FCA in accordance with its Consumer Duty workplan.

This post was prepared with the assistance of Gregory Slevin in the London office of Latham & Watkins.