‘Embedding’ the Consumer Duty: Part one - understanding the challenge
If you have spent countless hours over the last year working on your firm’s implementation of the Consumer Duty, the end of July will bring with it a deep sense of relief. You will have reached the principal implementation deadline and, hopefully, will have completed all of the major tasks required to meet the new obligations.
This is not to suggest that every firm will have done everything necessary to meet the FCA’s expectations. Indeed, the regulator has recognised that, in some cases, it will be impossible for a firm to complete all the necessary work before the July deadline. Where firms have been unable to implement the required changes to their business (due to, for example, IT system constraints) the FCA expects them to prioritise those measures which will have the greatest impact on consumer outcomes.
What is different about the Consumer Duty?
Yet even those firms which have fully completed their implementation plan face a further challenge, which relates to the very nature of the Consumer Duty. The challenge can be summarised as follows: ‘How can we ensure that the Duty is embedded within our organisation?’. This question goes to the heart of what makes the Duty different to so many of the other regulatory changes which firms have had to navigate in recent years.
To take just one example, in the lead-up to January 2018, investment firms were busy implementing the changes required by MiFID II. As with other major regulatory changes, in preparation for MiFID II, firms within scope of the new rules made changes to their IT systems and internal processes and procedures. They trained their staff and informed clients about any revisions to the firm’s policies and terms and conditions. Yet, looking back at that time, I don’t recall any discussion of the need to ‘embed’ the MiFID II changes. Nor is this just my memory playing tricks on me – a search of the FCA’s main Policy Statement on MiFID II (PS17/14), which ran to over a thousand pages, reveals not a single mention of a requirement on firms to ‘embed’ the MiFID II rules.
By contrast, ‘embedding’ the Consumer Duty has been a consistent theme of the FCA’s communications around the new rules. This includes both the formal requirements articulated in the relevant policy statement and guidance to repeated references in webpages and speeches by the regulator’s senior leaders. A sample of these messages includes the following:
- “We want the industry to properly embed the Duty, so it makes a real difference to consumers.”
- “Firms should … ensure that the interests of their customers are central to their culture and purpose and embedded throughout the organisation.”
- “A firm’s board or equivalent governing body is responsible for ensuring that the Duty is properly embedded within their firm, and we will hold senior managers accountable through the Senior Managers & Certification Regime (SM&CR)”
This focus on embedding the Duty is exemplified by the following statement, which emphasises that the Duty applies across a firm’s entire business, from high-level strategic decision-making through to the day-to-day activities of business functions:
- “Firms should embed a focus of acting to deliver good outcomes in each of their business functions and put customer interests at the heart of their business model and culture. This ranges from high-level strategic planning to individual customer interactions, as well as product and service development, sales and servicing, distribution, support, and risk and control functions.”
One further example of ‘embedding’ language is particularly instructive, as it makes clear that, at least to some degree, the FCA will judge the success of firms’ implementation of the Duty on the degree of embedding which it finds.
- “We will also assess the embedding we see as part of the post‑implementation review and consider whether we need to add additional requirements depending on what we find.
In short, a widespread failure to embed the Duty will, it seems, prompt the FCA to consider adding further specific obligations on firms.
Why is the FCA so focused on firms’ embedding the Consumer Duty?
Two main factors appear to explain the regulator’s emphasis on the need for firms to embed the Consumer Duty. Firstly, the FCA’s recognition that the Duty represents a significant shift in regulatory approach. In October 2019, Christopher Woolard, then Executive Director of Strategy and Competition at the FCA, gave a speech entitled ‘Regulation in a Changing World’, in which he stated:
- “We [the FCA] are moving from a narrower compliance with the rules, to a focus on delivering the outcomes we want for the users of financial services.”
Even at this early stage in the development of the policy which, ultimately, became the Consumer Duty, it was clear that this was not a ‘tinkering around the edges’ of regulation, or simply a new rule set, but a different approach to regulation itself.
Secondly, there has been increasing recognition that, if the new policy was to achieve the FCA’s objectives, it would require more than a new approach on the part of the regulator – it would also need cultural change on the part of firms. As we have already seen, that message is clearly articulated in the FCA’s policy statement and guidance, and it was reinforced in a speech given in September 2022 by Sheldon Mills, Executive Director of the FCA:
- “Be in no doubt: the Duty will be a significant shift in what we expect of firms. It means making lasting changes to culture and behaviour to consistently deliver good outcomes.”
If we accept the need for firms to ‘embed’ the Consumer Duty, the inevitable question is ‘What does that mean in practical terms?’. Part two focuses on the practical elements of embedding the Duty.
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About the Author
Nigel specialises in training boards, senior executives and other staff on the impact of regulation and regulatory change.
He is a CFA Charterholder and Chartered Fellow of the CISI, with over 15 years of industry experience.
With a background in compliance in private banking and wealth management, Nigel has a particular interest in effective corporate governance and the management of compliance and regulatory risk. His interests also include issues relating to ESG and climate risk, conduct and culture (including non-financial misconduct), and all aspects of financial crime prevention, as well as the impact of fintech on compliance and regulation.
Recent assignments have included briefing multiple boards and executive teams on senior management responsibilities, delivering compliance and ethics training for senior managers and front-office staff and creating a user-friendly risk and compliance handbook for a major bank.