As we approach the end of Q1 2023, the Consumer Duty countdown clock is ticking, with just four months until the 31st July deadline for implementation. Firms within scope of the new rules are busy executing their plans, ensuring that an array of process changes and outputs are completed on time.
Whilst implementation is the natural focus at this stage, it may benefit firms to loop back and reconsider the fundamental question: How can you be sure that the expected outcomes of The Consumer Duty Instrument 2022 will be adhered to within your firm?
The importance of how to respond to this could easily be overlooked. What information will be required, and who will need to be involved? Given Consumer Duty is focussed on outcomes, it is especially vital this is considered ahead of the deadline.
Ensuring that regulatory projects deliver compliant results
The traditional method of scoping and monitoring regulatory implementations has been through rule interpretation and ‘lineage’. Typically regulatory text is interpreted with the support of legal and compliance colleagues, concluding in a series of considerations and actions to be undertaken. These in turn are cascaded into policies, procedures and processes. Firms with a mature regulatory function will then map processes to controls, assigning control owners and responsibilities for attestation of completion or compliance.
The power of this approach is its ability to demonstrate how each element of the regulation was interpreted, how it was deemed to impact relevant areas of the business and what steps were taken to comply. Where a specific interpretation or action is challenged by the regulator, they are often more willing to work collaboratively with a firm that can demonstrate a systematic process has been followed and that the spirit of the regulation has been considered.
‘Lineage’ mapping of published rules onto a control framework works well for traditional input driven regulations which are prescriptive about what must be done, but it is a difficult approach to apply to outcome driven regulations.
How is Consumer Duty different?
Consumer Duty poses a tougher challenge, because rather than checking compliance against a set of rules, firms must get to grips with the infinitely messier problem of the wide range of likely outcomes that could result from their activities. This means the accommodation of a number of factors, including some that may not previously have been seen as relevant.
The challenges of managing and demonstrating compliance with Consumer Duty regulation will lean heavily on monitoring and control functions. Firms need to demonstrate the actions they are taking lead to positive results against the four outcomes, achieved reliably for all customer segments across all products.
Customer segmentation will need to be considered and analysed, defined not just by customer type or demographics, but potentially by differences in needs, including those of vulnerable groups. Having access to a ‘single view’ of customers will become increasingly important, especially for those holding multiple products or experiencing lifecycle events that may affect their needs, and thus whether a certain engagement should be considered appropriate.
Defining your customer segments and product matrix, and clearly documenting the reasons for measurements and indicators demonstrating good outcomes in the light of the new rules, will be essential. What is being measured, how it is being done, who is responsible and accountable for the metric or indicator, and the frequency of the control, will add into a rich assessment framework.
The Board is accountable – but needs the right information
The FCA expects the new regulation to bring about a significant shift in both culture and behaviours. It places responsibility on the leadership or Board of the firm, and has adjusted the Senior Manager and Certification Regime rules to underline this. This means the Board or management committee will need oversight of the approach, implementation and ongoing monitoring associated with the new rules.
It will be necessary to distil pertinent information, pinpoint risks or shortcomings, and outline remedial actions in a format consumable by senior leaders, so that they are well informed and can easily access the key data needed to make decisions. Aggregating a potentially wide range of monitoring controls into a suitably clear structure will take significant deliberation and effort.
What should the focus be on now?
With only months remaining until the implementation deadline, firms that have not already done so should dedicate time to understanding how their overall control environment accommodates the new Consumer Duty rules, perhaps consolidating their reporting on the measurements and indicators to be monitored, as well as the ownership, frequency and attestation of adherence to the new standards. Having a sound framework in place from the start will not only provide a level of assurance around compliance with the rules, but also enable firms to understand the impact of ongoing enhancements on the overall customer environment.
