In this post - aimed at boards and board members - we explain how the Consumer Duty can apply to companies whether or not financial services are their mainstay. We explain the key interventions risks. We explain the role of the Consumer Duty Champion. And we offer some key issues for NEDs to consider in relation to their companies' Consumer Duty implementation.
The Duty may apply to you
The Duty primarily applies to FCA-authorised firms and will come into play for groups involved in FCA-regulated business even where this is not their main activity. This is likely to be particularly relevant to consumer-focused businesses.
- Broadly, if a company targets financial products and services at retail customers, and needs Financial Conduct Authority (FCA) authorisation to do so, the Duty will apply. In addition:
The Duty applies throughout the distribution chain, and so applies to entities which don’t have a direct relationship with the retail customer. For example, a domestic appliance retailer selling white goods may offer finance to its customers as an FCA-authorised credit broker with the finance being provided by an FCA-authorised third party lender. In that case, the retailer may have Consumer Duty obligations in relation to the lending (as well as the broking).
- For FCA-authorised firms, the FCA could intervene – applying Consumer Duty principles – in respect of their unregulated financial offerings. In our example, the white goods appliance retailer might sell an extended repair warranty with a financial compensation element which falls short of insurance and is therefore unregulated. The FCA could intervene e.g. if the financial compensation did not meet its fair value expectations as communicated in the Duty.
Reasonable and proportionate
The Duty contains sweeping obligations for firms to deliver good outcomes for retail customers. There's more detail on our Consumer Duty webpage if you need it.
The obligations are tempered by a proportionality principle. The FCA requires only what can reasonably be expected. What this entails will depend, for example, on how great is the risk of harm to customers. Proportionality also means taking into account the extent that the company can actually materially influence customers’ outcomes. For example, the white goods appliance retailer as credit broker might need to clearly communicate to customers pre-sale the likely costs in some indicative scenarios, but not to closely tailor these to each customer’s situation. Questions of forbearance for distressed customers, meanwhile, would likely be left to the lender.
Boards are getting engaged
Boards have an important role in managing the key risks that flow from the duty. The risks include supervisory intervention and enforcement and associated reputational risk. The FCA could intervene swiftly by suspending sales of financial products, requiring your company to pay redress, and/or fining your company – all with reputational consequences. And the FCA could discipline individuals – including board members.
In particular, the Duty requires that at least yearly your board review a report on your company’s Consumer Duty compliance and make as-needed strategy adjustments.
Directors should be ready to demonstrate to the FCA, if called-upon, how they:
- fulfil their key role in setting a retail customer-focused culture;
- commit senior managers to embedding the Consumer Duty throughout the company;
- welcome and respond to constructive challenge.
Your board should consider:
- adjusting delegations (including to board committees) and reporting and escalation paths to support meaningful board decision-making on the Consumer Duty; and
- commissioning a risk management framework, and an assurance mapping exercise around compliance efforts.
What is the role of a Consumer Duty Champion?
Where a company is in scope, the FCA expects the board to appoint a Consumer Duty Champion. Usually this will be an INED, and it may be helpful if they sit on a relevant Board Committee e.g. risk. For group structures, the FCA expects the Champion to be at an appropriate level so that the Duty is discussed in a meaningful way – often this will involve appointing an INED of the FCA-authorised company, but it will depend on each group’s specific structure.
The Champion does not have executive responsibility for compliance. The role does not cut across the responsibilities of your executives or senior managers or affect the board’s collective responsibility or the duties of other directors, including NEDs.
Instead, a Champion’s role is to facilitate sufficient discussion (together with the Chair and CEO), and offer challenge, at board level and within board committees where appropriate. This may involve “kicking the tyres” on the board’s and senior management’s approaches and efforts, “stress testing”, sense-checking how well-founded assertions are that managers and board members make about compliance, and holding management to account where appropriate.
The Champion should meet with stakeholders within the business such as senior management to foster their “beyond the boardroom” understanding of Consumer Duty compliance efforts.
FCA Guidance sets out discussion questions the Champion might use. For example, how does the company:
- Set incentives to drive good customer outcomes?
- Promote relevant employees’ understanding of the duty (such as via training)?
- Gather, analyse and act on Management Information (MI) about customer outcomes?
- Monitor relevant outsourced providers?
- Ensure that post-sale and pre-sale service is equivalent in standard?
Your company's Consumer Duty implementation: six issues for NEDs to consider
- Board training: Consider whether you need training on the Consumer Duty and the additional responsibilities of the board and the Consumer Duty Champion.
- Sub-committee Terms of Reference: Consider whether to adjust the terms of reference of any relevant sub-committees to account for the new risk and responsibility associated with the Consumer Duty.
- Senior management implementation: Ensure you are comfortable with how senior management is implementing changes needed to comply with the Consumer Duty, including the escalation of potential issues to the Board.
- Regular agenda item: Consider including the implementation of the Consumer Duty as a regular agenda item to facilitate ongoing assessment and discussion of compliance efforts.
- Board paper considerations: Request that board paper authors indicate whether they have considered the Consumer Duty when drafting their documents.
- Documentation of Board reasoning: Maintain records of the board’s reasoning and decisions related to the Consumer Duty to demonstrate thoughtful and effective governance to the FCA if required.
Need to dive deeper?
Visit our Consumer Duty webpage for all our insights. And reach out to us or your usual Linklaters contact for support.