UK Consumer Duty: Lessons learned

The above marks a significant cultural shift for many firms by requiring them to actively define good outcomes in the context of their individual business model, and to identify specific risks that could prevent the delivery of those outcomes. Firms need to have defined appropriate metrics and designed their monitoring arrangements in a way that enables them to evidence that they are meeting the requirements of the Duty in practice.

In the below article, we share some of the key learnings that we have identified through working with clients on implementation projects and post-implementation reviews. The issues discussed below are relevant for firms who are continuing to embed the Duty following implementation, as well as firms who are hoping to expand into the UK and will be less familiar with the new regulatory expectations.

Tick box compliance

Some firms took an activity based approach to implementation which primarily focused on uplifting policies and processes to align with the new requirements. Activities were often undertaken in silos with limited consideration of the end to end journey. Given the scope and scale of required enhancements within a relatively short timeframe, it is easy to see why firms felt that this was likely to be the most effective approach. But the challenge with a tick box approach to implementation is that it typically doesn’t give sufficient consideration to embedding the required changes.

The FCA has repeatedly affirmed that Consumer Duty goes beyond a firm's documented policies and processes, which only evidence intentions as opposed to reality. The requirement under Consumer Duty is to evidence a customer-centric culture that delivers good outcomes for customers in practice. Consequently, the FCA is likely to be as interested in a firm’s MI and reporting as it is in its written policies and processes.

MI and monitoring

Demonstrating good customer outcomes starts with identifying ‘good’ outcomes, but can only be evidenced through monitoring arrangements that are fit for purpose. However, effective monitoring arrangements are a double edged sword. On the one hand, they provide an essential mechanism for firms to evidence that they are getting it right. On the other hand, they create exposure by promoting visibility of any significant issues and risks that exist within an organisation. Whilst this is not a new challenge, it is compounded by Consumer Duty as a result of the cross-cutting requirement to avoid foreseeable harm to customers.

Once an issue is identified, firms need to act swiftly as any unnecessary delays in the delivery of actions are likely to undermine a firm’s ability to demonstrate that its culture is aligned with the Consumer Duty expectation to prioritise the delivery of good customer outcomes. Firms will also need to be able to demonstrate the rationale for decisions made and the effectiveness of actions taken to address identified issues. 

As soon as a firm becomes aware of actual or potential harm, any subsequent harm to customers is foreseeable and risks a breach of the Duty. Again, the requirement to address identified issues is not new as it has been a longstanding regulatory expectation. However, there’s been a tendency from firms to focus on rectifying the root cause of issues with limited consideration of harm that has already occurred and any interim harm that may occur while the issue is rectified. The effect of this is to create potential exposure in terms of remediation exercises.

Reducing the potential impact of identified issues requires an approach to remedial activity that not only fixes the identified issue, but also considers proactive remediation for customers who have already been harmed and interim actions to mitigate the risk of harm while the issue is resolved.

Reporting

Reporting is an invaluable source of information for senior managers who are often removed from daily operations and thus reliant on the information provided by the business. However, in our experience, there can be a reluctance from the business to proactively highlight identified issues to senior management. Such challenges frequently occur in organisations with a blame culture where the business fears that it will be held accountable for any failings. As a result, reporting paints a falsely positive picture that does not promote visibility of issues and concerns.

The challenge with the above approach to reporting is that ignorance is not bliss when it comes to senior knowledge and understanding. As a result of SM&CR and the enhanced accountability it has created, senior managers must demonstrate not only awareness, but also that they are scrutinising and challenging the information provided to them. They cannot do this if the information provided to them is not an accurate portrayal of the key issues and risks facing the organisation.

For reporting to be truly effective, the business needs to feel comfortable highlighting concerns to senior management. In our view, the best way to achieve this is for firms to foster an open and transparent culture where the focus is on resolving issues in order to do the right thing for customers as opposed to assigning blame when things go wrong. Firms who do this will be best placed to demonstrate a customer-centric culture that is aligned with Consumer Duty requirements.

Next Steps

For firms who are already subject to the Duty, cultural change doesn’t happen overnight. In our view, the key is for communications from senior managers to consistently make it clear that the delivery of good customer outcomes is paramount. This should be coupled with a recognition that whilst firms won’t always get it right, it is what they do when they get it wrong that distinguishes firms with good cultures from those with poor cultures.   

Firms planning to expand into the UK can learn a lot from firms who have already implemented the Duty. A good culture starts with a product or service that is genuinely designed to meet the needs of the customer base and an intention to deliver good outcomes.

To speak to us about any questions or challenges that you have in relation to Consumer Duty, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

This article is part of our Financial Institutions Horizons 2024 publication. To read more on related topics, click here.

Authored by Lisa Davey.