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Consumer Duty Rules and Holistic Corporate Governance

How holistic are the new rules?

by Nigel Kendall
image of the logo of the FCA (Financial Conduct Authority UK regulatory body)

Recently the Financial Conduct Authority has issued new rules to firms operating in the financial service sector, aimed at improving ethical standards. What are they demanding and how does this map on to our holistic approach to corporate governance?

Message from the FCA to the financial services sector

In preparation for issuing new guidance on consumer duty, the FCA commissioned Ipsos to carry out a survey of the financial services industry. The Consumer Duty Rules, effective from July 2023, were framed in the light of the information gleaned from this survey, and, of course, events in the industry over the previous few years.

The Introduction spells out the purpose of the new Rules, namely to set the standard of care that firms should give to customers in retail financial markets, and in doing so, to better protect consumers from what it calls drivers of harm, while supporting innovation, competition and new ways of serving customers.

It says that firms should put customers at the heart of their business, provide products which meet customers’ needs and focus on delivering good outcomes. All this while not exploiting customers, and monitoring outcomes to learn and build a culture of continuous improvement. And the Board should recognise its responsibilities for ensuring that the executive is managing according to these principles.

The only puzzle here is that these things need saying at all, as they are fundamental to running any business properly, and at the heart of good corporate governance in larger businesses.

Principles of Holistic Corporate Governance

The FCA is looking to the boards of financial services companies to ensure that the companies they govern are run appropriately. The legal responsibilities of directors under the Companies Act are to focus on the company achieving its agreed goal, looking after its long-term well-being, while also paying attention to the interests of wider groups of stakeholders affected by the company’s activities. So, while the Consumer Duty rules address the relationship of the service provider with its customers, they also allude to the company being run prudently, by which they seem to mean culturally sound as well as financially careful. This, of course, is the job of the management, under the supervision of the board, and management must ensure they have the resources and systems in place to achieve the company’s objectives through implementing a viable business plan, while complying with all the relevant rules, regulations and codes of conduct.

This is what we call holistic corporate governance, and to ensure that the board is properly informed, it must be served by appropriate information systems, which are not subject to ‘capture’ by the reporting officers with their own agendas. Additionally, to tackle the board’s vulnerability to being caught out by matters outside the conventional internal reporting systems, the directors need a system which is:

  • holistic and co-ordinated in the matters it covers, not limited to trading and accounting, and taking account of all the key stakeholders
  • forward-looking to pick up trends early
  • independent of internal management in collection and interpretation
  • current and on-going
  • structured to link to business objectives and current management structures.

Thus it needs to measure and monitor performance, above and beyond financial and operational results.

How do the FCA’s Consumer Duty Rules align with Holistic Corporate Governance?

The contents of the Final non-Handbook Guidance for Firms on the Consumer Duty, released in July 2022 are:

  1. Introduction
  2. Scope of the Consumer Duty
  3. Application to products and services sold before the Consumer Duty comes into force
  4. The Consumer Principle
  5. The cross-cutting rules
  6. The products and services outcome
  7. The price and value outcome
  8. The consumer understanding outcome
  9. The consumer support outcome
  10. Culture, governance and accountability
  11. Monitoring outcomes

The thrust here would seem to be on the required culture to ensure integrity on the part of management and an honest approach to customers. Clearly this requires a sound business plan and compliance with rules and regulations, but though all this is spelled out in some detail, it could be taken from any management book about any service industry. So the emphasis is on the compelling need for improvement in the culture of firms operating in this industry. Notably, it says it expects that this will require a significant shift in both culture and behaviour by many firms.

Thus, as an expression of holistic corporate governance, it is very limited, restricting itself, as it does, very largely to the relationship between a company and its customers.

What about systems to measure performance?

Here the FCA hints at a big stick, when it concludes by saying that it expects companies to have systems in place to measure their performance against the requirements of the Consumer Duty rules, and, moreover, it will be visiting companies to check that these systems are in place and that they are effective.

It promises to measure the success of its new Consumer Duty rules by monitoring key outcomes for consumers, and what products they are using and their levels of trust and confidence. The four outcomes it is going to be looking at are:

  • fair value: are consumers receiving fair prices and quality?
  • suitability and treatment: are consumers being sold suitable products and services and receiving good treatment?
  • confidence: do consumers have strong confidence and levels of participation in markets?
  • access: are the needs of diverse consumer requirements being met?

In assessing a firm’s performance against the Duty, it is going to examine the monitoring system that the firm uses to track consumers’ experiences, but also it will look at how the board reacts to the information coming out of the monitoring system. Particularly, the changes it makes to its policies in consequence of what it learns from the monitoring of customers’ experiences.

It refers to three components of Consumer Duty:

  • A Consumer Principle which reflects the overall standard of behaviour we want from firms and which is defined further by the other elements of the Consumer Duty.
  • The ‘cross-cutting rules’ which:
    • develop our expectations for behaviour through three overarching requirements that explain how firms should act to deliver good outcomes and apply across all areas of firm conduct
    • inform and help firms interpret the four outcomes
  • The ‘four outcomes’ which are a suite of rules and guidance setting more detailed expectations for firm conduct in four areas that represent key elements of the firm-consumer relationship:
    • the governance of products and services
    • price and value
    • consumer understanding, and
    • consumer support

The Consumer Principle derives from the so-called High Level Standards in the Handbook, and the three cross-cutting rules it refers to are:

  • act in good faith towards retail customers
  • avoid causing foreseeable harm to retail customers
  • enable and support retail customers to pursue their financial objectives.

To summarise, the FCA expects that when they make an inspection visit to a firm, they will be able to examine the results of the firm’s monitoring of customer experiences, and to test the management information systems supporting this monitoring. They will also expect to see the impact on policy decision making by the board and senior management, resulting from the information provided by these monitoring systems, and the Guidance refers to the accountability of these individuals under the Senior Managers Regime.

An effective answer to the FCA’s monitoring requirements

The chapter on Culture, Governance and Accountability in the Guidance says that the FCA expects that the firm’s board or governing body must review performance in regard to the Consumer Duty at least annually. It expects there to be a person on the board, or at board level, who, along with the chairman and CEO, is responsible for ensuring regular discussion and consideration of Consumer Duty.

The annual assessment of performance should include:

  • the results of the monitoring exercises
  • an overview of the actions taken to address issues arising
  • the impact on the firm’s future strategy.

Hence, an effective answer to the FCA’s monitoring requirements can consist of two surveys:

  • a Strategy and Duty Survey:
    • covering the board, senior and middle management
    • addressing culture and governance and customer outcomes
  • a Monitoring of Consumer Outcomes Survey:
    • covering a range of consumers from highly knowledgeable to the known disadvantaged
    • addressing customer outcomes.

Running these surveys on a continuing basis will demonstrate to the FCA inspectors that the experiences of the full range of the firm’s customers are being continuously monitored and that the management and the board are being effectively briefed and taking the appropriate actions. Moreover, in principle, the regulator could be given access to the monitoring systems to save everyone time and offer reassurance of truthfulness.

Conclusion

The FCA’s new Consumer Duty rules, if conscientiously followed, and if supported by sound management information systems and monitored by external surveys should signal a positive way forward for consumers of financial services.

The key elements are a culture of honesty and integrity, something not universally present in the past, coupled with effective systems and an inspection regime inspiring more fear and respect than hitherto.

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