With 31 July 2024 fast approaching, firms are entering a critical phase of preparation to ensure timely compliance with the first Consumer Duty (the Duty) annual board reporting deadline.

As a brief recap, the Duty mandates that firms must act to deliver good outcomes for retail customers, ensuring that products and services are designed to meet their needs and are sold in a manner that is transparent and offers fair value, and that customer service is held to a high standard. The Duty has been described as a fundamental shift in the financial services industry's approach to customer relations, requiring a proactive stance in safeguarding customer interests and ensuring clear communication. Firms must not only comply with the requirements under the Duty, but also embrace its spirit, embedding consumer protection into the fabric of their corporate culture.

What are the board reporting requirements?

All in-scope firms are required to demonstrate, through the annual board report, why or how they think they are complying with Principle 12 (deliver good outcomes for retail customers) and PRIN 2A of the FCA Handbook.¹

To comply with the requirements, each firm must provide a report to their governing body (i.e. the board of directors) setting out the results it has collated over the year to monitor the outcomes retail customers are experiencing from their products and services. The report provided to the board should explain whether there are any risks arising which would prevent the firm from complying with the Duty and whether any remedial actions are required.²

The board must then:

• review and approve the firm's report on the outcomes being received by retail customers;
• confirm whether it is satisfied that the firm is complying with its obligations under Principle 12 and PRIN 2A; and
• assess whether the firm's future business strategy is consistent with its obligations under Principle 12 and PRIN 2A.³

This involves the board providing robust and objective challenge. To ensure the review is sufficient and that good outcomes are being delivered, the board will need to assess evidence of any poor outcomes, including whether a particular group of customers is receiving worse outcomes compared to another group, and also evaluate the impact and the root cause of any identified issues.⁴ It is important to note that the absence of "bad outcomes" should not be treated and documented as equating to good outcomes.

The board should also agree on forthcoming action required to mitigate identified risks that retail customers may not receive good outcomes, address poor outcomes experienced by customers and consider amendments to the firm's business strategy to ensure adherence with the Duty.⁵

The FCA has reminded on several occasions that the Duty and board report is "not a tick box" or "once and done" exercise and firms must be able to evidence in their annual report that they are learning and continuously improving.⁶ It will be important to document any board engagement with the issues concerned rather than taking a "nothing to see here" approach.

While the FCA notes that it "will take time"⁷ to get this right, firms must be open and transparent, in accordance with Principle 11, when reporting on the materiality of issues to the FCA and be prepared to show the actions they are taking to remedy any shortcomings.⁸ Overall, boards need to be mindful that the report provided to the FCA testifies how the firm complies with the Duty.

The components of the board report

The FCA has not provided a template board report for in-scope firms, hence each firm must prepare its own report which is proportionate to the risk it poses to customers and the market. Based on the FCA Handbook's requirements, we recommend including the following information:

• Executive summary – this section should include a qualitative summary of the board's review, summarising the outcomes for retail customers, the firm's compliance with the Duty and the alignment of the firm's current and future business strategies with Principle 12 and PRIN 2A. It should also briefly describe any identified issues from the root cause analysis and the corresponding proposed recommendations.
• Governance arrangements – specify the role of the various lines of defence in the firm and the internal and external assurance process undertaken to monitor, comply and challenge compliance with the Duty.
• Deep dive into consumer outcome monitoring – include the metrics and the results of monitoring the firm has undertaken to assess whether products and services are delivering expected outcomes in line with the Duty, including MI demonstrating compliance with the cross-cutting rules. Firms can provide a "RAG rating" for each test area, such as fair value assessment, price benchmarking, complaints and vulnerable customer treatment. Firms should also list any identified risks and issues, and any corrective actions taken, to provide the FCA with a full picture of the firm's progress.
• Business strategy – explain how the firm's business strategy aligns with and supports the delivery of good outcomes under the Duty (and do not point to the absence of "bad outcomes" to demonstrate this).
• Board approval – each member must sign off on the report and conclude whether they are satisfied that the firm is complying with its obligations under the Duty. The board must also confirm whether it has taken any corrective action, or whether it will, in response to any identified risks and shortcomings in respect of meeting good outcomes and complying with the Duty.

Why is getting it right so important?

Firms will be expected to prepare the board report by 31 July 2024 and the FCA is unlikely to be sympathetic towards firms who miss this deadline, given firms have had ample notice.

Alongside the report, the FCA may also ask firms for the underlying management information and dataset used to stipulate the findings of the report. Boards must therefore be comfortable that the report and the underlying data is accurate, comprehensive and to a standard that the board would be comfortable to share this with the FCA on request.

The FCA has confirmed that when "supervising and enforcing the Duty", the board report will be used to "assess and evidence how firms have provided good outcomes for consumers under the Duty".⁹ Therefore, the upcoming annual board report is a critical reflection and measure of how well firms have integrated these principles over the past year and will form a benchmark for continuous improvement moving forward that can be used by the FCA's supervision team to monitor firm progress.

What should firms do now?

Early board engagement

• Firms that have not yet engaged with their boards should do this without further delay.
• Keep the board informed about impending deadlines, factoring in the summer holiday season and potential absences.
• Schedule regular updates and checkpoints to review progress and address any concerns.
• Emphasise that ultimate accountability for compliance rests with the board and senior management, as the FCA has highlighted the report should be a "top priority" for boards.¹⁰

Seek input from stakeholders – do a dry run!

• Allocate sufficient time for the board and stakeholders to review drafts, challenge content and provide feedback. Use this process to strengthen the report and ensure it withstands external scrutiny from the FCA. For some firms, financial services may only be part of the business and leaning on the board champion to increase engagement is no bad thing.
• Encourage a culture of constructive challenge to test assumptions and the robustness of the report. Involve stakeholders in this process to prevent the appearance of the consumer duty champion solely evaluating or "marking" their own work.
• Conduct a dry run to refine the report's presentation and delivery for maximum clarity and impact to the FCA.
• Showcase the firm's developmental mindset in the report by including examples of ongoing actions, evaluations and tests, including a review of the consumer duty implementation plan to measure progress and compliance with the Duty. 

Do not delay – make sure you are on track

• Prioritise tasks and allocate resources to ensure compliance with the deadline.
• Recognise that the FCA may respond unfavourably to late submissions, so it is crucial to stay on course for timely filing.

If you have any concerns or queries about the progress of your draft report, please do not hesitate to contact us for a confidential discussion.

1. PRIN 2.1.1 R, Principle 12 (Consumer Duty) FCA Handbook: https://www.handbook.fca.org.uk/handbook/PRIN/2/1.html ↩
2. PRIN 2A.8.3 R, FCA Handbook: https://www.handbook.fca.org.uk/handbook/PRIN/2A/8.html ↩
3. PRIN 2A.8.4 R, FCA Handbook: https://www.handbook.fca.org.uk/handbook/PRIN/2A/8.html ↩
4. PRIN 2A.9.10 R, FCA Handbook: https://www.handbook.fca.org.uk/handbook/PRIN/2A/9.html ↩
5. PRIN 2A.8.5 R, FCA Handbook: https://www.handbook.fca.org.uk/handbook/PRIN/2A/8.html↩
6. Speech by Nisha Arora (FCA Director of Cross Cutting Policy and Strategy) on 1 November 2023: https://www.fca.org.uk/news/speeches/consumer-duty-not-once-and-done ↩
7. Speech by Nisha Arora (FCA Director of Cross Cutting Policy and Strategy) on 1 November 2023: https://www.fca.org.uk/news/speeches/consumer-duty-not-once-and-done ↩
8. PRIN 2.1.1 R, Principle 11 (relations with regulators) FCA Handbook: https://www.handbook.fca.org.uk/handbook/PRIN/2/1.html ↩
9. Speech by Sheldon Mills (FCA Executive Director, Consumers and Competition) on 20 February 2024: https://www.fca.org.uk/news/speeches/consumer-duty-art-possible-year ↩
10. Speech by Nisha Arora (FCA Director of Cross Cutting Policy and Strategy) on 1 November 2023: https://www.fca.org.uk/news/speeches/consumer-duty-not-once-and-done ↩