Consumer Duty Board Reports: One size does not fit (sm)all (firms)

The FCA has updated its dedicated ‘good practice and areas for improvement’ webpage for the annual Consumer Duty Board reports. The updates relate to specific guidance for smaller firms to help them meet the FCA’s requirements, alongside the guidance published previously. The FCA has done this because “smaller firms have different challenges”. 

Below are five points of particular significance to smaller firms:

• Consider employing a ‘critical friend’: The FCA acknowledged that smaller firms do not have the same governance structures as larger firms. This means that equivalent challenge to a Board report by the Compliance/Audit functions in larger firms is less likely. The FCA reiterated its earlier suggestion “that smaller firms might consider asking a ‘critical friend’ with sufficient understanding of the Duty to provide impartial feedback on a firm’s approach and report.” Linklaters has a ‘critical friend’ service for smaller (and indeed larger firms alike). For more information, please see here.

• High quality data is important: The FCA said that Board reports need to explain the data and evidence that firms used to assess whether they achieved good customer outcomes. Linked to this is how firms can monitor – in a proportionate way – how they achieve good customer outcomes so that firms can feed this into their report to support their findings.

• Guidance on distribution chains: The FCA noted that it was aware that smaller firms can face challenges in showing effective oversight of third party relationships. However, the FCA said it expects smaller firms to demonstrate they took appropriate steps to communicate with other parties in a distribution chain where needed.

• Overcoming challenges relating to resourcing: The FCA refers to smaller firms having a more limited ability to undertake formal analysis on target markets for their main products and services, and lacking resources to adopt sophisticated data strategies or management information relating to monitoring different groups of customers. Both issues may be addressed by using practical insights, e.g. adviser experience, customer feedback and complaints data to monitor these issues. Smaller firms might be at a practical advantage to larger firms – they often have closer relationships with customers and bespoke solutions, e.g. home visits or video calls may be more common. So smaller firms should deploy these tools to assist with their monitoring of customer outcomes and to measure effectiveness of their strategies.

• Promoting an effective culture: The updated guidance considers good practice and areas for improvement on how a firm’s culture can help it to meet its Consumer Duty obligations. Staff in smaller firms often have more than one role, so identifying skill gaps and adopting appropriate training (and records of such training) is important to help reinforce understanding of the Consumer Duty. The FCA highlighted that scenario-based training using examples from real customer interactions might be helpful. Culture may also be driven through effective governance arrangements, e.g. monthly/quarterly reviews, which might include appointing a Consumer Duty lead to gather feedback (e.g. lessons learned from transactions), escalate risks and record these data points to help the firm demonstrate how it has delivered good outcomes to customers.

Comment

The FCA’s tailored guidance for smaller firms should be viewed as an encouragement to small firms to adopt more bespoke solutions when implementing their arrangements around Consumer Duty Board reporting. As mentioned above, Linklaters provides a ‘critical friend’ service that can aid firms in meeting their obligations, by reviewing and providing impartial feedback on a firm’s report. More information about this service, as well as our Consumer Duty Board Report Guidance document, can be found here.