Embedding the Consumer Duty: Part two – management of people
‘Embedding the Consumer Duty: Part one - understanding the challenge’, explored the question of why ‘embedding’ the Consumer Duty is such a focus for the FCA, and hence for firms. This article considers some of the practical steps firms can take to meet the FCA’s expectations.
The FCA defines culture as “the habitual behaviours and mindsets that characterise an organisation,” and a key element of its communications relating to the Duty have concerned the need for cultural change.
In other words, embedding the Duty does not simply require firms to create new policies or update customer documentation. Rather, firms need to ensure that the requirements of the Consumer Duty, and particularly the focus on achieving positive outcomes, are reflected in the habitual behaviours and thought patterns displayed throughout the organisation.
But how do firms do this in practice? The subject of organisational culture, and cultural change, is a complex one and there are countless books, conferences and research papers dedicated to the topic.
Whilst exploring the topic in detail is beyond the scope of this article, the expectations articulated by the FCA’s provide some useful pointers for firms.
The Individual Conduct Rule
Under the new Rule 6 (for firms within scope of the Duty), all employees who are subject to the Individual Conduct Rules are required to ‘act to deliver good outcomes for retail customers’.
A useful starting point for embedding the Duty is therefore to ensure that all employees, not only those who have direct customer contact, understand the potential impact of their role on the firm’s retail customers. For some employees, the impact will be obvious. For example, a customer service team member who continually responds to customer queries has the potential to have a significant impact on the outcome experienced by a retail customer.
By contrast, an employee creating marketing material, or one testing features of the firm’s online platform, may not feel they have the same direct connection to customer outcomes. Yet in each case the employee’s work contributes to the overall outcome experienced by the customer, whether in terms of promoting consumer understanding by the provision of accurate and accessible product information, or ensuring that the platform allows a customer to access their account and complete transactions smoothly and efficiently.
A holistic view of how the firm works together to deliver good outcomes for its customers helps to ensure that all employees feel involved.
Rewarding and managing people
Employee awareness of the Duty is not sufficient, in itself, to ensure cultural change. One of the FCA’s four ‘drivers of culture’ is the firm’s ‘approach to rewarding and managing people’.
For the Duty to be embedded in the firm’s culture, the focus on delivering good outcomes must be reflected in every aspect of the firm’s approach to managing its employees - including, for example, performance management and its policies on remunerating and incentivising staff. The approach the firm takes to rewarding and recognising staff is a crucial example of a case where company culture is determined far more by practical actions than by board-approved ‘vision statements’.
To take a simple example, if employees are aware that the primary, or even sole, basis for decisions relating to annual bonuses or potential promotion is an individual’s financial performance (such as their contribution to revenue generation), they will absorb the message that this is what is most valued by the firm.
Such an approach reinforces a culture which emphasises the centrality of an employee’s contribution to the ‘bottom line’ over any other consideration. In such a context, bold statements about ‘putting customer outcomes first’ are likely to fall flat.
This problem isn’t new, and many firms have developed ‘balanced scorecards’, or similar approaches, to incorporate wider factors, such as complaints or compliance breaches, into decisions regarding remuneration and promotion. However, the implementation of the Consumer Duty brings with it a new focus on outcomes, and even those firms which have developed more balanced approaches to rewarding staff will need to consider carefully how to incorporate the employee’s contribution to outcomes into their decision-making.
Challenge and psychological safety
Whilst incorporating a focus on outcomes into the firm’s approach to managing people is important, it will not, of course, ensure that a firm will always meet its own (and the FCA’s) expectations.
A crucial further step in embedding the Duty is to ensure that all employees feel empowered to raise concerns regarding the outcomes being experienced by customers. Encouraging employees to ‘challenge’ the firm’s practices and policies where they deliver poor outcomes for customers acts as an important control on the firm’s activity and can identify issues which would not otherwise come to light.
Indeed, in its guidance on implementing the Duty, the FCA lists ‘allowing staff to feedback honestly’ as an example of information which firms can use to determine whether they are delivering good outcomes.
Yet, as with remuneration, this is an area where a firm’s actions will speak far louder than its words. Simply making some form of reporting mechanism available to staff is unlikely, in itself, to prompt disclosures.
Rather, senior leaders within firms need to work hard to create a culture in which employees feel comfortable to raise concerns – often described by the term ‘psychological safety’. Of course, employees will need to feel confident that their concerns will be taken seriously and that there is no possibility of any negative repercussion (formal or informal) for making such reports.
Yet this is only the absolute minimum standard – a culture of psychological safety requires firms, and specifically senior leaders, to take pro-active steps to encourage employees to speak openly and honestly.
For example, reporting back to employees on changes which have been made as a result of employees speaking-up and, where appropriate, recognising individual employees who have suggested improvements, both serve to reinforce the message that the firm welcomes honest feedback and challenge where things are going wrong. The FCA makes the point that employees speaking-up is not sufficient – senior leaders also need to ‘listen-up’ (Psychological safety | FCA).
Embedding the Duty effectively requires a firm to identify, and implement, the cultural changes required to reflect the new expectations relating to customer outcomes.
Whilst the management of people is a vital step that firms can take to achieve this, governance is also key. Part three of this article explores further steps relating to governance challenges.
Browse our comprehensive range of Consumer Duty courses and tutorials, including in-house courses and eLearning for front and back-office staff, and workshops and on-demand tutorials for compliance professionals, senior management and Consumer Duty champions.
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.