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Five tips for implementing the UK FCA’s consumer duty

Regulatory change programmes are no small undertaking. Failure to implement change thoroughly can lead to intensified regulatory scrutiny or, if sufficiently serious, investigations and enforcement action.

In less than six months, the UK Financial Conduct Authority’s (FCA) new Consumer Duty rules will apply to products and services designed and distributed to retail customers.

The FCA recently published the results of its review of the implementation plans of larger firms (those with a dedicated FCA supervisor) and noted that some firms are not meeting the standards expected by this stage of the implementation period. We have considered the FCA’s findings, as well as common root causes behind recent enforcement decisions, and identified five important areas to focus on during this implementation period.

  1. Plan properly. Effective planning is key to achieving successful implementation, but the FCA's review uncovered numerous instances where gaps in preparation left firms exposed to the risk of delayed or ineffective implementation of the new requirements.  For example, some firms’ gap analysis was at too early a stage, which meant that project requirements could not be properly scoped and also led to confused sequencing.  It is also important to clearly identify and record internal and external dependencies at an early stage so that mitigation strategies can be developed and properly implemented.
  2. Clearly allocate responsibilities. Criticism of firms’ failure to appropriately allocate responsibilities among senior managers increasingly features in FCA Final Notices. This expectation applies equally with regard to the Consumer Duty.  Implementation plans should include detail on who is responsible for, and who is leading, the overall implementation programme; as well details of those leading individual work streams. It is important to clearly delineate responsibilities to avoid confusion and enhance accountability.
  3. Identify and engage with key third parties. Another area of ongoing regulatory focus is outsourcing and third party dependencies. In the context of the Consumer Duty, the FCA expects firms to identify key third party relationships and the nature of any dependencies in those arrangements. Early engagement and communication will help firms adopt a robust approach to embedding the four outcomes underpinning the Consumer Duty. Firms should consider how best to ensure consistent engagement and information sharing.
  4. Maintain board-level scrutiny. Boards have a significant role to play both during and after the implementation period.  The FCA expects firms to be able to evidence that the board has properly scrutinised and challenged implementation plans.  For example, questioning resource requirements and interaction with other projects within the firm.  A champion must be appointed at board level to ensure the Duty is discussed regularly (during and post-implementation).  This role cannot be shared across the entire board and the individual appointed should be sufficiently senior to challenge effectively the firm’s approach to implementation.  Firms must also consider how they will engage with, and provide assurance to, the board post-implementation, particularly given the requirement for boards to assess whether the firm’s future business strategy is consistent with its Consumer Duty obligations.
  5. Actively manage the cultural shift. The success of a firm’s implementation plan relies on embracing the shift to an outcomes-focused approach across all areas of the business. Firms need to ensure that their culture and purpose aligns with the Consumer Duty requirements. The FCA’s review noted that this was an area where plans were particularly unclear. Firms should undertake a gap analysis of their culture, purpose and values against the requirements and identify tangible steps to manage the necessary changes. Actions should focus on staff engagement and understanding, whether through town halls, communications campaigns or training, with clear ownership from senior and middle management.

We continue to see a reflection of long standing enforcement and supervisory priorities in the FCA’s messaging around the Consumer Duty. The role of senior managers, management and oversight of third party relationships, robust governance and a customer-focused culture are likely to be areas of ongoing regulatory scrutiny during and after implementation. A holistic approach to embedding the Duty will be crucial in ensuring a firm’s success in managing the regulatory change process.

 

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