Consumer Duty Board Report

November 2023

Background

Firms are at different stages of Consumer Duty implementation. Many are still finalising their drive to achieve full compliance on their open products. Others are addressing the specific and unique challenges with the impending closed product deadline whilst simultaneously seeking to fully embed the Duty. Whilst these respective challenges are explored further here and here — there is another impeding deadline that is (rightfully) gaining more and more focus — the annual assessment report that must be reviewed and approved by the firm's governing body. As directly referenced in a FCA speech on 1 November, “this will take time to do well, so don't delay!”

Therefore, to help expedite, KPMG in the UK has produced this article to explore how best to approach, design, build and execute the annual assessment report to maximise its usefulness and, critically, align to FCA's expectations.

Approach

Developing an effective framework to deliver the report should specifically consider: 

• Accountability: The ownership and associated accountability for the generation of the report must be explicitly clear. It should be owned by first line, for example by operations or product team(s). There is a real risk that if the responsibility is allocated to second line, or the board champion themselves, it will be disconnected business, and consequently may not fully align with FCA expectations. However, regardless of where the accountability is allocated within the first line, the report will need to factor in all aspects of first line activity — as well as contributions from the second and third lines of defence. 
• Cultural mindset: The firm will need to ensure that it approaches the annual report with a developmental mindset — seeking to objectively check and challenge the report. Non-execs should reinforce this challenge. The firm (and board) should expect to identify issues and areas for further enhancement. A report presenting a sea of green metrics or one that adopts a tick-box and/or simplistic attestation approach is unrealistic and can indicate a poor cultural approach to the Duty. Instead, KPMG in the UK anticipate that many firms will conclude that, although their strategy and business models are aligned to the duty, at individual product or operational level there are gaps that are being proactively addressed. Indeed, as stated by the FCA in the above speech, "the Duty is not once and done. Firms’ actions, assessments, testing and evidence need to be continuous."
• Stakeholder Engagement: Whilst we expect that much of the report's content will be driven from the bottom up (in terms of summarising the evidence supporting good customer outcomes), there is also merit in ensuring that it has the right top-down approach too. As such, early engagement with the board, especially the board champion and NEDs, on specific areas of focus and/or concern will be critical. As such, there is an element of starting with the end in mind, when determining how best to approach and structure the annual report. In some instances, firms have already had an early dry run of the report designed to test whether it meets the board's needs. This approach helps to maximise the efficiency and effectiveness of the firm's approach to the report. 
• Proportionality: Although the FCA has provided guidance on the annual report contents, there is not one set template. There is a not a `one size fits all' solution. Each firm will need to approach the report differently depending on the size, complexity and nature of the business. For example, the monitoring obligation will apply proportionately to a firm's role in the distribution chain. Further, it is very likely that the firm's existing approach to conduct reporting will fundamentally shape the report. 
• Timing: The report needs to be reviewed and approved by end of July 2024. However, this is not an explicit or exact date — firms can choose an earlier date that suits. Some firms are aligning the report to their year-end, other formal reporting mechanisms, or even to their board strategy away day(s), where the report (and next steps) can be explored in more depth. 
• Data capture: To support the presentation of relevant metrics, firms should begin considering how the relevant inputs will be gathered and collated in practice, and the accountability for this (see above), to ensure data gathering and analysis can be performed accurately and efficiently.
   

Report Design principles

• Metrics: The report will need to include appropriate quantitative metrics that drive the summary ratings and conclusions on monitoring outcomes. The report should be designed to enable effective decisions, supported by accurate, timely, relevant and consistent data with supporting commentary. As flagged above, where there are identified gaps, this should be highlighted. This will enable effective challenge by the board. 
• Qualitative commentary: Whilst firms may not yet have a full suite of MI to evidence all outcomes, the report should be designed to include an appropriate array of examples, anecdotes and case studies to support the above metrics and provide a qualitative commentary on the nature and scale of some of the changes that have been made by the firm to comply with the Duty. This is critical to the overall narrative of the report and will help move the mindset out of the theory and any tick box mindset into the practical, and facilitate a broader, holistic discussion. 
• Report scope: The report should cover all aspects of the Duty, designed to ensure that, alongside the four outcomes, there is appropriate consideration of the overarching Principle, the cross-cutting obligations and embedding of vulnerable customer considerations. Only by having this more holistic consideration, will the report meet regulatory expectations — including delivering on the FCA's four outcomes and covering off the prescribed requirements:
  • Whether retail customers are being, or have been, sold products that have been designed to meet their needs, characteristics and objectives; 
  • Whether the products that retail customers purchase provide fair value and appropriate action has been taken to address products identified as not providing fair value; 
  • Whether retail customers are equipped with the right information to make effective, timely and properly informed decisions; and 
  • Whether retail customers receive the support they need.
• Layering: The clear structure and presentation of data and information will be critical to ensure that the discussion is taking place at the right level. As such, the report will require hierarchy so that the high-level statements and assurances can be substantiated via the underlying reported metrics and case studies. However, this requires careful balancing. Too much information will be difficult to navigate and blur the overarching position, whilst having too little will challenge the robustness of the report.
• Escalation: Aligned to the layering point above, firms will need to ensure that the report includes detailed information on areas that merit escalation and remediation. Aligned to the `warts and all' mindset captured in the above section, the report will need to clearly escalate matters that warrant either further investigation or remediation. For example, the report should be definitively written for the board, but firms should be mindful that the FCA is going to want to see it. Firms will need to be comfortable that it addresses, in sufficient depth, existing, inherent, relevant FCA portfolio letter risks as well as firm specific risks and issues.
• Builds on previous reports: A good report should be built upon the solid foundations of the implementation activity the firm has already delivered. As such, firms should design the report from a `no surprises' principle, leveraging and further developing the MI and reports that the board has been receiving to date. Many firms have been updating boards on a monthly or quarterly basis and therefore, in aggregate, this will amount to significant volume of information already. Further, the annual report will need to build upon (and make material reference to) the firm's 'Day 2' plans in relation to further embedding and evidencing against the Duty, alongside other key priorities of the firm.